SBA Lenders are responsible for liquidating the SBA loans in their portfolio. "All lenders must service and liquidate their SBA loans in a diligent, commercially reasonable manner that is free of conflicts of interest and Preferences, and is consistent with the Loan Authorization, prudent lending practices and the SBA Loan Program Requirements in effect at the time the action is taken."  (SOP 50 57, Page 7).

Lenders are frequently asked by the SBA, either in connection with a guaranty purchase request or after the guaranty is honored, to charge off a loan that remains in liquidation status. When a loan is charged off, it is "reclassified from "liquidation" to "charge-off" status, and the outstanding balance of the loan is removed from the Agency's accounting records." (SOP 50 57, Page 163). Unless discharged in bankruptcy or released, the obligors remain liable for the debt. Charge-off is required "within 90 calendar days of completing all reasonable and cost-effective recovery efforts or upon receipt of a request from SBA, whichever occurs first." (SOP 50 57, Page 163). A loan that has been charged off by the SBA is referred to the U.S. Treasury, which seeks further collection by means that include garnishment and  administrative offset of funds (such as tax refunds) otherwise due to obligors.

Because a charged-off loan is no longer in liquidation status, a loan should not be charged off if additional liquidation is contemplated. Often collateral remains, but the lender believes it would not be cost-effective to pursue. If that is the case, and if the lender can justify abandonment by showing that no Recoverable Value (as defined in SOP 50 57) remains, charge-off may be justified.  Personal property may be abandoned if its Recoverable Value is less than $5,000, and real property may be abandoned if its Recoverable Value is less than $10,000.

Tab 2 of the Charge-Off Tabs (available here: Charge-Off Tabs) walks the lender through a series of questions to determine if charge off is appropriate. Those questions are as follows: 

• Is the loan pending post purchase review?
• Is there ongoing liquidation and/or litigation?
• Is there an open bankruptcy?
• Is there a possibility of further recovery?
• Is there a workout that the borrower is complying with?
• Is there an approved performing term offer in compromise?
• Is billing owed to the SBA?
• Does the loan have paid-in-full status?

If the answer to any of the questions is "yes," the loan is not ready for charge-off. As the SBA further indicates in SOP 50 57 and on Tab 2, charge-off is appropriate when:

• the lender has exhausted all reasonable efforts to recover from:
• (i) voluntary payments on the Note, 
• (ii) compromise with the borrower, 
• (iii) liquidation, and 
• (iv) enforced collection;
• the estimated cost of further collection efforts exceeds the anticipated recovery;
• the only remaining avenue of recovery is from unlocatable obligors, or obligors who are unable to pay the loan balance; or
• the loan balance is uncollectible due to bankruptcy discharge or a legal defense to enforcement.

If the conditions for charge-off have been met, the lender should submit completed Charge-Off Tabs (together with CPC tabs for any remaining reimbursable expenses). 

For more information regarding guaranty purchase, liquidation or charge-off, please contact Amy at abrownstein@starfieldsmith.com or at 267-470-1187.