The SBA's guidance, however, is largely open to interpretation. While this provides the Lender with some discretion, the Lender should also be aware that its credit bidding decisions will be reviewed by the SBA at the time of guaranty purchase. Failure to heed the SBA's guidance could result in a substantial repair or denial of the guaranty. The prudent Lender should bid conservatively and remain comfortably within the SBA's guidelines to protect the real prize: the SBA guaranty.
The SBA's credit bidding guidance depends largely on the Recoverable Value (RV) of the collateral. The SBA defines RV as the Orderly Liquidation Value (OLV) of the collateral minus the amount of any senior liens minus the cost of any extraordinary recovery cost, such as remediation, minus ten percent of the remaining OLV as an estimate of the cost of regular recovery expenses such as foreclosure sale costs, appraisals, and environmental investigations. In other words, the collateral's RV is the equity available for the Lender.
When a senior lender is foreclosing on the SBA Lender's collateral, the SBA encourages the SBA Lender to credit bid when the collateral's equity exceeds ten percent of the OLV. The amount of the Lender's bid should be the lesser of: (i) the SBA loan balance; or (ii) the RV. The Lender may decline to bid on the collateral if the RV is less than either: (i) ten percent of the OLV, or (ii) $5,000.
When the Lender conducts a real property foreclosure of its own senior lien, the SBA's guidance is much looser then for credit bidding where the SBA Lender holds a junior lien. When the SBA Lender is in 1st lien position on real estate, the SBA encourages the Lender to make a credit bid after considering the following factors: (i) the RV, (ii) the loan balance, and (iii) the need or ability of the Lender to collect a deficiency judgment. In this type of sale, the SBA offers no bright line guidance for the Lender.
Similarly, when the Lender liquidates personal property collateral, the SBA's guidance is somewhat contradictory. The SBA discourages credit bids at UCC auctions because it could chill other potential bidders. Conversely, the SBA encourages the Lender to credit bid when personal property collateral is foreclosed by judicial sale. In a judicial sale, the Lender should credit bid based on the same factors relevant to real property auctions.
The biggest potential credit bidding pitfall for the Lender, regardless of the type of sale or type of collateral, is the potential loss of the ability to seek a deficiency judgment. In some jurisdictions, the Lender's ability to collect a deficiency may be cut off if the Lender is the successful bidder at auction. The rules regarding collecting on a deficiency vary from state to state. The Lender should consult counsel before entering a credit bid. If the Lender rashly credit bids and inadvertently cuts off its right to collect the deficiency from a solvent guarantor, the Lender not only loses the direct ability to collect the deficiency, the SBA will likely repair the guaranty for the amount of the deficiency as well.
The savvy SBA Lender should keep the big picture in mind when credit bidding because while it may win the battle at auction, it may lose the war at guaranty purchase.
For more information regarding credit bidding on SBA loans, contact Greg at [email protected] or
at (215) 542-7070.