SBA Guidelines on Requests to Honor the SBA PPP Loan Guarantee | Miller Canfield
The ASB recently published its Notice of procedure on when a lender can ask the SBA to honor its collateral for a PPP loan. The P3 Loan Program has been in place for over a year and has provided billions of dollars in assistance to small businesses across the United States. It is not surprising that some PPP borrowers have encountered persistent financial difficulties, in some cases leading to bankruptcy, dissolution, closure of their doors or the discovery of fraud-related issues. What should a lender do?
Under program 7 (a) (PPP loans are a special part of loan program 7 (a)), a lender has to service the PPP loan just as it would with its other loans. When an SBA 7 (a) loan is in default, the lender usually needs to liquidate a collateral, seek guarantors, obtain judgments, or seek collection through bankruptcy proceedings before asking the SBA to honor. its loan guarantee. These steps make less sense for an unsecured loan, especially a loan that may be eligible for a 100% discount. Fortunately, the SBA has recognized this in its most recent guidelines for PPP loans.
The lender must continue to provide the PPP loan service.
The lender must continue to service the PPP loan until the loan is fully repaid, canceled in full, or the SBA purchases the collateral and withdraws any remaining balance. The Notice of Procedure sets out a number of steps a lender must take to service a PPP loan.
When can a lender ask the SBA to honor their collateral?
A lender can ask the SBA to make a purchase of collateral and write off the loan under the following circumstances:
- The loan is 60 days past due and is not remedied, but only after requesting payment;
- The borrower has permanently closed and will not submit a request for remission;
- The borrower filed for Chapter 7 bankruptcy, but only after the lender filed a proof of claim (except that a proof of claim is not required for a “no assets” Chapter 7 bankruptcy);
- The borrower is a self-employed, sole proprietor, sole proprietor LLC, or independent contractor, and the owner is deceased;
- The borrower or any owner 20% or more has been charged or convicted of a crime related to the PPP loan; and
- 60 days have passed since the borrower filed an appeal against a final SBA loan review decision with the Office of Hearings and Appeals.
In these situations, a lender does not need to exhaust remedies or incur expenses to sue the borrower. On the contrary, the lender can ask the SBA to honor its PPP loan guarantee.
What happens if the PPP borrower files for Chapter 11, 12 or 13 bankruptcy proceedings?
When a borrower files Chapter 11, 12, or 13 reorganization proceedings, the lender must notify the SBA, file proof of claim, and continue to monitor bankruptcy; but he is not required to take any further action in the bankruptcy beyond filing the proof of claim. The lender can then ask the SBA to honor the collateral only when the bankruptcy has been filed more than 60 days after the end of the payment deferral. or at any time after entering the order confirming the plan if the plan does not provide for full payment of the PPP loan. There is a condition on the order confirming the plan: If the confirmed plan provides for the full payment of the PPP loan, the lender must continue to service the PPP loan until it is fully paid, canceled in full or , at an event that allows the bidding to be made to the SBA, the SBA purchases the loan and approves the write-off.
The notice of procedure confirms that a borrower who has filed for bankruptcy can file a request for remission. However, the Notice of Procedure does not specify whether the lender should file an objection to a sale of the bankrupt borrower’s property or to a liquidation sale of more than 50% of the assets. Under the SBA notice of change of control procedure, the borrower, under certain circumstances, must sequester enough cash to fully repay the PPP loan or ask the buyer to assume the obligations of the PPP loan.
What does the lender have to file with the SBA?
The official lender must use the existing PPP platform to request both a collateral purchase and a charge. The SBA encourages lenders to process both first and second draw PPP loans simultaneously. The notice of proceeding details the information and documents that the lender is required to file through ETRAN, the required lender certifications, the lender’s document retention requirements and how the collateral purchase payments will be made to the lender. .
At this time, there are no new indications as to when the SBA will honor its guarantee. The notice of proceeding notes that the SBA will pay interest during the payment deferral period, plus up to 120 additional days of interest in the event of default. This could indicate that the SBA intends to process these requests within 120 days.
According to the Notice of Procedure, the SBA’s guarantee will expire 180 days after the loan matures. This can be problematic in some bankruptcy proceedings, as it is possible that a reorganization plan will not be confirmed until more than 180 days after the loan maturity date.
What if a borrower files a forgiveness request?
It is possible that a borrower files a request for remission after the lender requests a purchase of collateral. In this case, the lender is required to process the request for remission. If the SBA has not yet completed the purchase of the collateral and the write-off, the lender should immediately withdraw the application and not resubmit it until the SBA has completed its remission review. If the SBA has already completed the purchase and write-off, the lender should still process the rebate request, but the SBA will not issue a rebate payment to the lender and instead apply the rebate amount to reduce the amount of the rebate. unpaid loan from the borrower.
What if a lender receives a payment from a borrower after the purchase?
A lender can receive payments from or on behalf of the borrower after the SBA has completed the purchase of the collateral and the write-off. This could happen, for example, not only in bankruptcy proceedings, but also in probate proceedings, other proceedings or voluntarily. In this happy event, the lender is required to remit these payments to the SBA using Pay.Gov.
What if a lender suspects fraud?
The procedural notice directs a lender to report fraud, waste, or abuse to the Office of Credit Risk Management and the Office of Inspector General. However, it gives no guidance on how to process a forgiveness request if fraud is suspected, much less when a lender can ask the SBA for a purchase guarantee and write-off.
We anticipate further developments as PPP lenders begin to ask the SBA to honor its guarantees.