Liquidation & Servicing: Post Debenture Servicing & …...PCLP billing AWG, litigation and treasury...

Liquidation & Servicing: Post Debenture Servicing & New SOP

Highlights

Sierra Grand Ballroom

Tuesday, June 17, 2014

1:45 pm – 2:45 pm

Fresno, CA | June 17-18

Thank you to our Alliance Partners


Speakers

Ray Kulina, Assistant Center Director for Servicing U.S. Small Business Administration

Gary Wamhof, Assistant Center Director Post Servicing Actions U.S. Small Business Administration Carmen Lauerman, Consultant Moderator: Rhonda Pointon, VP Regulatory Affairs, Training & Support National Association Development Companies

Liquidation - Servicing - Post Servicing Teamwork SBA Fresno

Contacting the Fresno teams Telephone Numbers:

Phone: (559) 262-4960

Toll Free: (800) 347-0922

Fax Numbers:

Servicing: (202) 481-0483

Liquidation: (202) 481-6481

Express Purchase: (202) 481-0663

Post-Servicing: (202) 481-1756

Email:

Servicing: [email protected]

Liquidation: [email protected]

Express Purchase: [email protected]

Post-servicing: [email protected]

Barbara Jung, Assistant Center Director for 504 Liquidation

[email protected]

1-800-347-0922 x2935

Ray Kulina, Assistant Center Director for Loan Servicing

[email protected]

1-800-347-0922 x2937

Gary Wamhof, Assistant Center Director for Post Servicing Actions

[email protected]

1-800-347-0922 x2912

Contacting the Fresno teams, continued

mailto:[email protected]



General Liquidation activities

All care and preservation of collateral reimbursement requests.

All legal expense reimbursement requests.

With exception of Offer in Compromise, all Administrative Actions (short sale, workouts, litigation) while a loan is in liquidation status.

PCLP billing

AWG, litigation and treasury referrals

504 liquidation team, roles following debenture purchase

A loan is removed from liquidation status for one of the following reasons:

Returned to Regular Servicing

504 Loans should be removed from liquidation status and returned to regular servicing when regular payments are resumed pursuant to an approved written workout agreement, bankruptcy plan, reaffirmation agreement, assumption, or other written agreement that provides for resumption of regular payments.

Paid in Full

SBA loans should be removed from liquidation status and classified as “paid in full” when the debt owed on the SBA loan has been satisfied. (Purchase of the Debenture by SBA should not be confused with payment of the loan by an Obligor or through liquidation recoveries.)

Charged-off

SBA loans should be removed from liquidation status and classified as “charged-off” when the remaining loan balance has been charged-off in accordance with the Loan Program Requirements set out in Chapter 28.

504 liquidation team, roles following debenture purchase

Workouts – see chapter 17 of the 50-55 SOP – for loans that have been in liquidation status (recycles).

Any regular servicing action such as subordinations, collateral release, guarantor changes, loan assumption, etc.

Monitoring of quarterly reports of loans that are 60 days past due.

Recommending return to liquidation

Loan Servicing team, roles when the loan is returned to regular servicing status

All Offer in Compromise actions.

For loans referred for charge off, all charge off actions.

For charged off loans, Treasury related issues.

For charged off loans, all Administrative Actions such as “short sale”, Modification of Repayment terms, release of redemption rights, additional protective bid analysis if lien in place.

Post Servicing Team roles, following debenture purchase

Collection activities, past due loans

ACL/PCL – CDC’s will be notified of delinquency

Non ACL/PCL – borrower’s will be contacted by SBA staff regarding delinquency.

(SBA staff may reach out to the CDC for borrower contact information or if we see that the CDC has been active in previous collection efforts).

Post Servicing Team roles, following debenture purchase, continued

This is an internal Administrative Action. The charge off moves the loan to non-accrual status. All liable parties are referred to Treasury for further collection. Per the 50-55 SOP chapter 28:

Under the Cross-servicing Program, in addition to offset, delinquent debt is collected through the use of a wide variety of tools such as administrative wage garnishment, skip tracing, negotiated repayment plans, use of private collection agencies, DOJ litigation, and preventing receipt of additional federal financial assistance. Prior to referral, SBA sends an automated letter to the Obligors giving them 60 calendar days to either pay the loan in full or negotiate an acceptable payment plan. (See Chapter 15 for information regarding referral for inclusion in the Treasury Offset Program at the time the Debenture is purchased.)

Charge off’s

Invite discussion for best practices

Servicing action on borrowers that are past due, don’t wait, do your field visits and collect financial information to determine if a borrower is viable

When in doubt and you can’t find it in the SOP, contact the SBA for guidance.

Best Practices

T RAI N I N G & E D U C AT I O N

Regional Workshop Liquidation & Servicing

Fresno, CA June 17-18, 2014

SOP HIGHLIGHTS 50-55 Presented by Carmen Lauerman


Definitions

• “Must” - Required action (or exception to policy)

• “Should” – Recommended but not required

• Obligor – means every person with direct liability for repaying an SBA loan, i.e. Borrower, any assumptor & every person with contingent liability such as a guarantor

• Recoverable value – starting with liquidation value, deduct balances owed on senior liens; recoverable expenses (i.e. taxes, foreclosure amounts); & recoverable expenses, remaining is recoverable value

• Wrap up Report – “must” be provided by all CDCs


Definition - Appraisal

• Appraisal (USPAP) – When required:

– Release of lien for consideration, inc. short sale

– Protective Bids (obviously Credit Bids, as well)

– Deeds in lieu of foreclosure

– Whenever it is apparent that there is equity


Appraisals

• A BPO type appraisal may be used to:

– Abandon real property if little or no equity

– “no cash out” subordination

– Substitution of collateral

• Shared Appraisals (normally with TPL) do not meet SBA program requirements (servicing or liquidation) other than for substitution of collateral – If CDC wants to rely on a shared appraisal or BPO it must be treated as

an exception to policy


Responsibilities/Authority

• All CDCs are responsible for servicing all loans in its portfolio

• All PCLP & ACL CDCs serve as primary contact for liquidation

• SBA Loan Centers are primarily responsible for liquidating loans that do not fall under ACL/PCL authority; however, SBA may authorize liquidation of specific loans (case by case basis)

• PCLP/ACL CDCs are responsible for litigation – (inc. c/o)

• All unilateral actions require SBA notification

• ACLs are responsible for liquidating all loans in its portfolio

• PCLP CDCs are responsible for liquidating all PCLP loans

• ACL/PCLP CDCs are responsible for liquidating all loans


Responsibilities/Authority

• All CDCs, regardless of ACL/PCLP should: – Serve as primary contact with Obligors;

– Obtain information concerning Third Party Loans;

– Enforce terms of Third Party Lender Agreement;

– Prepare Liquidation Plans;

– Conduce Site Visits;

– Immediate notify SBA of any foreclosure; bankruptcy, or action that could adversely impact the 504 loan;

– If requested by SBA; identify local appraisers/auctioneers/contractors

– Attend foreclosure sales on behalf of SBA

– Assist with care and marketing REO/acquired personal property collateral


Responsibilities - continued

• All CDCs should:

– Prepare Quarterly Delinquency Reports – (loans over 60 days past due) – before debenture purchase

– Prepare Quarterly Liquidation Status Reports – Note: Required for ACL/PCL CDCs only

– Prepare wrap up reports – Required for all CDCs

• File retention – 9 years if Paid in full; 10 years after loan C/O

• Insurance – “must” be in place throughout term of loan (exception – hazard on acquired collateral – on case-by case basis to adequately insure collateral to protect recovery)


Unilateral Authority – per Servicing and Liquidation Matrix

• PCLP CDCs have unilateral authority to: – Subordinate lien position

– Substitute Guarantor/Co-Borrower; substitute collateral

– Accelerate note, send demand letter, classify loan in liquidation and implement a liquidation plan

– Approve a litigation plan for routine litigation up to $10,000

– Approve a short sale with 100% of net proceeds to SBA

– Approve a permanent modification, including extend maturity, lower interest rate, defer payments, lower monthly payment


Servicing Requests & Deferments

• Servicing requests for loans in regular servicing that involve assumptions/substitution of collateral or obligors are subject to program requirements in effect when the loan was made

• If appraisal is sought from TPL to supplement the appraisal submitted it “must” provide free of charge

• CDC “must” obtain independent appraisal if servicing request involves collateral (subordination/release/substitution)

• Generally, a credit report should be ordered to verify financial information submitted in support of the proposed loan action


Modification of Collateral Requirements

• Subordination – to facilitate a new loan – must be necessary to satisfy a legitimate need and all other avenues of obtaining funds have been exhausted

• Substitution – collateral – must be needed to support the business operations with no more than a nominal increase

• Substitution – guarantor – may be conditioned on retention of original guarantor for transition period w/no material changes

• Assumption or Sale of Loan – terms of the assumption must include a “due on sale or death” clause that prohibits any future assumption of the SBA loan


Modification of Collateral Requirements

• Release of lien without consideration – CDC has to address eight requirements (i.e. seasoned loan, not interfere with business operation: doesn’t confer preference on TPL; recoverable value of remaining collateral should be enough to secure the loan; released documents must not impair SBA ability to foreclose, etc.)

• Release of Guarantor/Co-Borrower (loans in regular servicing) – cannot conflict with Loan Requirement that require Guaranties from specific person as a condition for SBA’s guaranty of the loan


Modification of Collateral Documents

• Release of Guarantor/Co-Borrower (loans in liquidation) – a. conditioned on receipt of consideration in an amount approximately equal to or greater than the amount that could be collected through enforced collection from Guarantor requesting the release; b. Guarantor should be required to provide the same documentation required for an offer in compromise; and c. should be reviewed, analyzed pursuant to requirements of offer in compromise


Deferments • If loan more than 90 calendar days past due AND the borrower’s problems

appear to be permanent or long-term, the loan must be classified in liquidation, the debenture purchased and more appropriate loan action initiated

• Loan payments during deferment period – full payments may be deferred, if justified, but partial payments should be required if borrower can make them

• Catch-up plan – Catch-up period should be prior to maturity date of the loan and no later than ten years from effective date of the plan

• Monitoring during Deferment/catch-up period - must obtain from borrower, review and analyze semi-annual financials and year-end tax returns and monitor the borrower operations such as phone calls and site visits to ensure that loan is promptly classified in liquidation if it becomes apparent that the borrower’s cash flow problem is permanent


Delinquent Secured Senior Loans

• Even if no bid position is justified for a senior lienholder foreclosure sale, the lien must not be released prior to the foreclosure sale, unless in conjunction with a short sale;

• No bid Position –Cannot be because CDC fails to conduct an environmental investigation and does not eliminate the duty to maximize recovery

• Payment Advance to Bring Senior Loan Current – Should be to maximize recovery if the goal is to: 1. to negotiate a workout; 2. negotiate a sale of collateral; or 3. foreclosure of the lien securing the SBA loan


Delinquent Secured Senior Loans

• Senior Loan Purchase or Payoff – particularly if the senior lienholder offers a discount and 1. risk is justified by appraisal and recoverable value analysis; 2. Purchase/payoff is consistent with any agreement regarding subordination of advances and default charges; 3. Obligors are given written notice of the proposed purchase/payoff and increased liability

• Protective bids – should be entered an a senior lienholder sale if recoverable value is 10% or more of liquidation value unless extenuating circumstances

• Order an Appraisal (generally cannot be older than 120 days)

• Estimate Recovery from All Sources


Classifying Loans in Liquidation • “Must” be classified in liquidation when the note accelerated

• Note “must” be accelerated whenever there has been an event of default and clear to a prudent lender that the obligor cannot or will not keep the loan current through regularly scheduled payments (e.g. borrower more than 3 months past due and no SBA approved deferment or catch up plan in place or borrower has closed business and delivers the keys to the CDC, who must accelerate the loan, place it in liquidation and request debenture purchase).

• Demand Letters – a creditor does not have the right to accelerate the note or liquidate collateral unless the debtor is in default


Liquidation Plans

• All CDCs – should prepare a liquidation plan within 30 calendar days of debenture purchase regardless of whether the CDC or SBA is primarily responsible for handling the liquidation

• Workout negotiations – A workout should be negotiated during the first few weeks following liquidation classification and debenture purchase

• Obligors’ Repayment Ability – Rather than wait until after the primary collateral has been liquidated, when it is apparent that the recovery from primary collateral will be insufficient to pay the loan in full, fair but aggressive action, including


Liquidation Plans

• filing suit to obtain a judgment should be immediately initiated against any obligor with the ability to pay the loan – see list of 8 items to be covered in repayment ability – page 90

• General Rule – CDCs, including ACLs must submit a proposed liquidation plan for each loan not made under its PCLP authority within 30 business days of SBA’s purchase of the debenture – copy of the Site Visit must be attached

• Assignment of Loan Documents – to commence litigation or take certain liquidation activities, e.g. lien foreclosure the person taking the action must be the holder of Note and relevant lien instruments


Debenture Purchases

• A CDC must promptly request that SBA purchase the debenture if the loan is classified in liquidation. Note: note must be accelerated in the event of default (i.e. past due loan)

• It must include the reason for the debenture purchase request and an explanation as to why a deferment or catch-up plan is not feasible


Impact of Debenture Purchase

• Existing fees are eliminated

• Prepayment fee eliminated

• If the loan was approved on or after 10/1/2009, the CDC may require that the Borrower pay the CDC a servicing fee as part of the terms of a workout agreement (less than or equal to the amount of the pre-Debenture servicing fee)

• New loan number assigned and must be used when requesting information or approval of proposed loan actions

• Referral to Treasury Offset Program – After debenture purchase, if loan is delinquent SBA will refer all obligors for inclusion in the TOP unless they have a valid legal defense


Workouts • The new installment amount must be sufficient to ensure that

the loan balance will be paid in full no later than ten years after the original maturity date

• If a workout is feasible, negotiations should begin immediately and final workout should be in effect within a reasonable time, e.g. 60 calendar days from debenture purchase, or the next step toward enforced debt collection should be taken

• Workout should include feasibility test – page 100

• Requirement – New Consideration from Borrower – for agreement to be legally binding debtor must provide consideration (in permanent modification agreement)


Real Property Collateral Liquidation

• If an acceptable workout agreement has not been implemented within a reasonable time after debenture purchase (e.g. 60 days) all collateral for the loan that has a Recoverable Value should be liquidated

• Short Sale Approval – the obligor-seller will remain liable for the loan balance, or approval of the short sale is part of a compromise agreement – (note-some states have laws prohibiting lienholders from collecting the deficiency if they consent to a short sale – consult counsel)


Short Sales

• Short Sale Approval – must be an arms-length transaction – purchaser must not be a close relative or any other Person with a close business or personal relationship with the Obligor-Seller

• Short Sale Approval - secured creditors who are asked to accept less than the full amount due them, can condition their approval of a short sale – i.e. can be conditioned on increasing the purchase price, reducing usual and customary sale closing costs such as commissions or receiving substitute collateral for the deficiency


Acquired Collateral • SBA, CDC employees, close relatives and associates must not

directly or indirectly, bid on, purchase or otherwise acquire title to collateral

• CDCs that anticipate reselling collateral, if acquired, within 120 days should take title in their own name (if not, consult SBA about taking title in SBA’s name)

• For closing costs, buyers should be responsible for all closing costs except in unusual circumstances where payment of the seller’s customary share is necessary to maximize recovery

• Acquired collateral should not be sold to obligors, associates or close relatives of the borrower for less than the full amount due SBA unless it is necessary to maximize recovery


Offer in Compromise

• Submitting the offer does not ensure that it will be accepted.

• It begins a process of evaluation and verification by the CDC and SBA.

• Acceptance of a compromise offer is considered to be a loss to the Federal Government and may adversely impact the obligor’s ability to obtain future financing from the Federal Government including another SBA loan.

• If an obligor is unwilling or unable to pay an acceptable amount for release and compromise, rather than extinguish the debt for a nominal amount, compromise negotiations must cease and appropriate action must be taken


Offer in Compromise

• Obligors do not have a “right to compromise” the amount owed on their SBA loan.

• In order to protect the integrity of the SBA loan program, Obligors who owe large sums of money should be referred to Treasury for further collection efforts rather than be allowed to compromise for a nominal amount.

• Unacceptable offers and Counter-offers should not be forwarded to SBA


Charge-off and Wrap-up Procedures

• A wrap-up report must be prepared and submitted to the appropriate SBA loan center within 90 calendar days of completing all reasonable and cost-effective efforts or upon receipt of a request from the SBA loan Center, whichever occurs first.

• If a CDC fails to submit a Wrap-up Report within the time frame above, in order to comply with the Debt Collection Improvement Act of 1996, SBA will charge-off the loan balance, refer the loan to Treasury, if appropriate

• If a CDC is unable or unwilling to properly liquidate its SBA loan portfolio, the matter will be referred to SBA OCRM


What’s Up Next 3:00pm:

Liquidation: Protective Bids, REO Management & Offers in Compromise

Sierra Grand Ballroom

3:00pm:

Servicing Update: SOP 50 55, Chapter 6 & Chapter 8 Overview

Mount Whitney Room

Liquidation & Servicing: Post Debenture Servicing & …...PCLP billing AWG, litigation and treasury...

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