When an SBA loan defaults, loan obligors sometimes propose that some or all of the business personal property collateral ("BPP") securing the loan be sold to reduce the principal balance due. SBA lenders faced with this scenario must cautiously balance their desire to liquidate the loan collateral promptly with the regulatory prerequisites and requirements imposed by the SBA.  In doing so, SBA lenders should consider the following:

1. Lender Liability.  In order to avoid lender liability concerns to the greatest extent possible, the lender should clearly communicate to all of the loan obligors that the Lender is not in a position to dictate or negotiate any sale terms, nor is it in a position to demand or require a particular sale price.  Instead, the lender's role is confined to exercising its right to approve or reject any formal written offers that the loan obligors and their potential buyers propose.
2. Know The Buyer.  If the proposed buyer of the BPP is an obligor on the SBA loan, or a "Close Relative" or "Associate" of any obligor (as those terms are defined in SOP 50 57), the sale can not proceed without prior written approval from the SBA.
3. Appraisal.  The SBA lender must have a current valuation of the BPP being sold prior to approving the proposed transaction.  The valuation should ideally be no more than 120 calendar days old at the time of the lender's approval of the sale.
4. Possession Or Control.  The obligor selling the BPP must have possession or control of the collateral being sold. This means that the obligor is be able to keep the BPP secure until the time of sale, and that the obligor is in a position, both legally and practically, to tender the BPP to the prospective buyer at the time of sale.
5. Consent Of Other Lienholders.  The lender should secure a current UCC lien search for the collateral and confirm that the loan obligor has provided it with written consents from all of the other lienholders for the BPP, if any, prior to consenting to the sale.
6. Recoverable Value.  The Recoverable Value of the BPP being sold must be established and documented using the Liquidation Values of the BPP from the appraisal.
7. Proceeds Of Sale Must Exceed Recoverable Value.  The agreement of sale being approved by the lender must provide the lender with cash in an amount equal to or greater than the Recoverable Value.
8. Reasonable Costs.  The costs of the sale must be reasonable, necessary and customary.
9. Lender Supervision Of Sale.  The sale must be supervised by the lender; or, in other words, the lender must be in control of the funds and the release of its lien. Under no circumstances should the lender allow sales proceeds to be paid to any loan obligor.
10. Reduction Of Principal.  All of the net proceeds received by the lender from the sale must be applied to the principal balance of the SBA loan.
11. Written Agreement With All Obligors.  Prudent lenders should have a written agreement with all of the obligors on the SBA loan confirming their agreement to the proposed transaction.

Lenders should always be sure to ask their legal counsel about any potential lender liability issues that might arise with regard to these situations, as well as any regulatory compliance issues that could potentially jeopardize their SBA guarantee.

For assistance with liquidating SBA loan collateral, please contact Jeff at jfeldman@starfieldsmith.com or at 267-470-1231.