Law360 (June 28, 2021, 4:08 PM EDT) --
Loans that are not fully forgiven are guaranteed by the Small Business Administration, or SBA, the governmental agency appointed by Congress to oversee and administer PPP loans.
PPP loans are made under the SBA 7(a) program, which was already in existence prior to the CARES Act. SBA 7(a) loans are made directly by lenders to qualified borrowers, but are fully or partially guaranteed by the SBA. Being guaranteed by the SBA means that if there is a default on the loan, the SBA will reimburse the lender for the remaining balance once certain conditions and requirements set forth in the SBA regulations have been as satisfied.
PPP loans are different than other SBA 7(a) loans in that the application process is much more streamlined, the loans are unsecured and the principals of a business entity borrower are not required to execute a personal guaranty. If the borrower uses the PPP loan proceeds for qualified purposes, in many cases, all or part of the PPP loan will be forgiven.
However, not all PPP loans will be forgiven, or at least will not be forgiven in full. When this happens, the borrower will be required to repay the PPP loan to the lender.
Since other SBA 7(a) loans are secured by collateral, if a borrower defaults, the lender must make its best efforts to liquidate the collateral and/or collect from the guarantor. However, because PPP loans are unsecured and do not have guarantors, a lender's duties in the event of a default are less clear.
Lenders under the SBA 7(a) program are required to make their best, reasonable efforts to collect on defaulted PPP loans, just like they would with any other SBA 7(a) loan or any other unsecured, non-SBA loan.
Lenders should consider taking the following actions if a borrower defaults under a PPP loan before requesting payment of the SBA guaranty or requesting that the PPP loan be charged off.
Just like any other unsecured loan of the same size and type, if a borrower begins to miss loan payments, the SBA lender should attempt to work with the borrower to cure the default.
Research Borrower's Assets
Lenders need to determine whether obtaining a judgment would likely result in any monetary recovery.
Site visits are not mandatory with PPP loans under the SBA 7(a) regulations because the loans are unsecured. However, depending on the loan amount and specifics of what the lender knows about the business, site visits may still be important to determine the assets of the business.
Performing asset searches at this stage is also important to determine whether it would be worthwhile to seek a judgment against the business to try to collect the debt.
Lenders should also identify any property or assets that the borrower has recently transferred out of its name or conveyed for less than fair market value because these are signs of fraudulent conveyances which may be able to be set aside and recovered.
After prudent attempts to help the borrower cure the default are unsuccessful, if the loan remains unpaid for 60 consecutive days, the lender should accelerate the loan, send a demand letter to the borrower, and inform the SBA that the loan is in litigation status.
Once the PPP loan — or any SBA 7(a) loan — is placed in litigation status, the lender must submit a litigation plan to the SBA. The litigation plan template can be found on the SBA website. The placement of a PPP loan in litigation status does not mean that the lender will be required to litigate the collection of the loan. The elements to be considered are as follows.
Site Visit Findings
If the lender did not perform a site visit, the lender must provide an explanation regarding why it did not conduct a site visit. A typical explanation may include, among other things, that (1) a site visit was not required because the loan is unsecured, or (2) the asset search did not reveal any collectable assets.
Feasibility of Workout With Borrower
How likely is it that lender will be able to reach a settlement with the borrower, or that the borrower may be able to repay the loan if provided with a loan modification, etc.
Expected Recovery of Unencumbered Assets
The site visit findings and asset search will assist with this explanation.
Disclosure of All Other Non-SBA Loans Borrower Has With Lender
The lender is not allowed to collect on other loans it has with the same borrower to the detriment of the SBA loan. This can sometimes lead to a conflict, and a clear understanding with the SBA regarding how recovery from the borrower will be allocated between the loans must be determined.
SBA approval of the litigation plan is not required for (1) routine, uncontested litigation; (2) routine, uncontested foreclosures; and (3) routine, uncontested bankruptcies as long as the expected fees are under $10,000. All other litigation plans must be approved by the SBA.
Request Charge-Off by SBA
The lender can request that the PPP loan be charged-off when:
- All reasonable efforts have been exhausted to achieve recovery from: voluntary payments on the note; compromise with the borrower; liquidation of the collateral; and enforced collections.
- Estimated cost of further collection efforts will likely exceed the anticipated recovery.
- The only remaining avenue of recovery is from borrowers who cannot be located or are unable to pay the remaining balance.
- The loan balance is uncollectible due to some legal reason, such as discharge in bankruptcy or expiration of statute of limitations.
Guaranty Purchase Package
A guaranty purchase package can be sent to the SBA to request the purchase of the guaranty prior to completing the liquidation and request for charge-off. However, the SBA specifically encourages all lenders to liquidate all available assets first. The SBA website has a guaranty purchase package template.
Lenders and lenders' counsel should be aware that lenders are required to represent the SBA's interest in the event a borrower files bankruptcy or files any action which could affect the ability to collect on the PPP loan before the SBA pays the guarantee and accepts responsibility for collection of the PPP loan.
Even though PPP loans are unsecured and not guaranteed by the borrower's principals, and are 100% guaranteed by the SBA, the administration still expects lenders to make every effort to collect on such PPP loans that have gone into default, if unforgiven, just like a lender would do on a non-SBA unsecured loan. The requirements for payment of the SBA guaranty are the same as any other SBA 7(a) loan and are outlined above.
Harriet P. Wallace is a partner at Fox Rothschild LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 The Charge-off Checklist can be found on the SBA website at https://www.sba.gov/document/sba-form--sba-charge-tabswrap-report-test.
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