SOP 50 10 5(F), which was released by the SBA in September of this year and takes effect on January 1, 2014, significantly alters the collateral requirements for SBA loans with regard to the types of assets that principals of borrowers must pledge or mortgage. Under the new SOP, principals are only required to pledge their personally owned real estate if their loan is not otherwise fully secured. In addition, there is no longer any requirement that principals pledge their publicly traded securities or other non-real estate assets. As a practical matter, when combined with the proposed repeal of the resources test, this means that individuals and entities with substantial personal wealth may now serve as guarantors on SBA loans, and SBA lenders may be in a position to pursue and collect significant unsecured assets when litigating against those guarantors. Simply put, guarantors will have more at stake, and they will have the resources needed to secure litigation counsel, defend their assets and possibly assert claims against their lender.
Fortunately for lenders, the SBA's new SOP also makes a remarkable change to the way that SBA lenders can prepare their agreements with their loan guarantors. Under SOP 50 10 5(F), lenders will, for the first time, have the option to use their own customized guarantee agreements instead of using SBA Form 148 (or Form 148L), so long as their agreements are "equivalent" to the terms found in the SBA's Forms. This means that SBA lenders are now able to include clauses and terms in their guarantee agreements that were not previously included in the SBA's standard forms.
SBA lenders should strongly consider taking advantage of this opportunity to craft more effective terms in their guarantee agreements before they find themselves litigating them against a well-financed and motivated opponent. For example, Section 9.A. of SBA Form 148 contains an attorney's fee shifting provision that states as follows: "ENFORCEMENT EXPENSES. Guarantor promises to pay all expenses Lender incurs to enforce this Guarantee, including, but not limited to, attorney's fees and costs." That provision could be improved significantly by making it clear that the attorney's fee shifting applies regardless of who sues first or the type of action filed, by expressly stating that the right to fees accrues at the inception of the matter, and by affirming that the lender is entitled to fees regardless of whether any litigation is eventually settled or taken to verdict and judgment. It could also be improved by defining in advance what a "reasonable attorney's fee" will be, that is, the hourly rate that the parties will consider to be reasonable. Finally, it can also make clear that the lender is still entitled to its fees in the event that the guarantor asserts counterclaims.
Similarly, Section 9.H. of SBA Form 148 contains a "no unwritten modification" clause that attempts to establish a contractual defense against many types of common lender liability claims. That clause states as follows: "ORAL STATEMENTS NOT BINDING. Guarantor may not use an oral statement to contradict or alter the written terms of the Note or this Guarantee, or to raise a defense to this Guarantee." The SBA's standard clause could be improved by adding a formal "integration" clause stating that the written guaranty is the entire agreement between the lender and the guarantor regarding its subject matter, as well as a "disclaimer" clause from the guarantor affirming that he or she disclaims any reliance upon any representations that were not expressly stated in the agreement. The SBA's clause could also be improved by adding a more formal "no unwritten amendment" clause that makes clear that neither the guarantee nor any of its terms can be modified, amended or waived without a writing signed by all parties expressly stating that the guaranty agreement "is to be modified, amended or waived."
Because state laws vary, SBA lenders should work with their legal counsel to develop guarantee terms that are effective and enforceable in the specific jurisdictions in which they do business. As noted above, these terms will likely become more important as lenders begin enforcing their guarantees against individuals who have the personal resources to retain counsel and defend the claims of lenders. SBA lenders who invest some time and energy into improving their contract terms now will likely receive substantial dividends in the future in the form of reduced litigation costs.
For more information about this recent change to the SOP or to discuss terms are effective and enforceable in your jurisdiction, please contact Jeff at [email protected] or at 215.542.7070.