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SBA to Honor Guaranty of PPP Loans

SBA to Honor Guaranty of PPP Loans
Written by Publishing Team

SBA recently released a file procedural notice At the time the lender may require the small business agency to honor its guarantee of the PPP loan. The PPP loan program has been in place for more than a year and has provided billions of dollars in aid to small businesses across the United States. Not surprisingly, some PPP borrowers face ongoing financial difficulties, in some cases leading to bankruptcy, dissolution, closing their doors, or discovering fraud-related issues. What is a lender to do?

Under Program 7(a) (PPP loans are a special part of the 7(a) Loan Program), a lender needs to service the PPP loan, just as if it were to service its other loans. When an SBA 7(a) loan defaults, the lender typically needs to liquidate the collateral, pursue guarantors, obtain provisions, or seek recovery through bankruptcy proceedings before requiring the SBA to honor its security for the loan. These steps don’t make sense for an unsecured loan, particularly a loan that may qualify for 100% forgiveness. Fortunately, the SBA recognized this in its latest guidance for PPP loans.

The lender must continue to service the PPP loan.

The lender must continue servicing the PPP loan until the loan is paid in full, forgiving in full, or the SBA purchases the surety and deducts any remaining balance. The procedural notice specifies a number of actions the lender must take to service the PPP loan.

When can a lender require the SBA to honor its guarantee?

A lender can require the SBA to make a security purchase and write off the loan under the following circumstances:

  • The loan is more than 60 days past its due date and has not been processed, but only after making a request for payment;

  • Borrower is permanently closed and will not apply for exemption;

  • The borrower has filed for Chapter 7 bankruptcy, but only after the lender has provided proof of the claim (except that proof of claim is not required for Chapter 7 bankruptcy with no assets);

  • the borrower is a self-employed individual, a sole proprietor, a single member with limited liability or an independent contractor, and the owner is deceased;

  • The borrower or any owner of 20% or more has been convicted of a felony related to the PPP loan; And

  • It has been 60 days since the borrower filed an appeal of the final SBA loan review decision to the Office of Hearings and Appeals.

In these cases, the lender does not need to exhaust remedies or incur the expense of going after the borrower. Alternatively, the lender may require the small business agency to honor its guarantee of the PPP loan.

What if a PPP borrower files for Chapter 11, 12, or 13 bankruptcy?

When the borrower files a Chapter 11, 12, or 13 reorganization proceeding, the lender must file a notice with the SBA, provide evidence of the claim, and continue to monitor the bankruptcy; But it is not required to take other steps in bankruptcy other than to provide proof of claim. The lender may then require the SBA to honor the guarantee only when bankruptcy is filed more than 60 days after the payment deferral ends or At any time after entering the order confirming the plan if the plan does not provide for the full repayment of the PPP loan. There is a provision in the order confirming the plan: if the confirmed plan calls for full payment of the PPP loan, the lender must continue to service the PPP loan until it is paid in full or forgave in full or, in the event of a later event allowing By bidding to the SBA, the SBA buys the loan and agrees to a discount.

The procedural notice confirms that a borrower who has filed for bankruptcy may file an application for pardon. However, the procedural notice does not address whether a lender should file an objection to the sale of a bankrupt borrower’s property or the sale of more than 50% of the assets in liquidation. Under Small Business Administration Change control of procedural noticeIn certain circumstances, the borrower must provide sufficient cash to repay the PPP loan in full or make the buyer assume the obligations of the PPP loan.

What does a lender need to submit to the SBA?

The lender of the registry must use the existing PPP platform to request a security and charge purchase. The SBA encourages lenders to process PPP loans with first and second draws at the same time. The procedural notice details the information and documentation a lender is required to provide through ETRAN, the lender’s certifications required, the lender’s documentation retention requirements, and how security purchase payments are made to the lender.

At this time, there are no new guidelines on the timing of the SBA’s respecting its guarantees. The procedural notice indicates that the SBA will pay interest during the deferred payment period plus up to 120 days of additional interest due to the default. This may indicate that the SBA intends to process these requests within 120 days.

According to the procedural notice, the SBA guarantee will expire 180 days after the loan due date. This may present problems in some bankruptcy proceedings, where it is possible that the bankruptcy reorganization plan will not be confirmed until more than 180 days after the loan due date.

What if the borrower applies for forgiveness?

It is possible for the borrower to apply for forgiveness after the lender has requested the purchase of a security. In this case, the lender is obligated to process the pardon request. If you do not complete the SBA after purchasing the security and writing off the discount, the lender must withdraw the application immediately and not resubmit it until after the SBA has completed a tolerance review. If the SBA has already completed the purchase and fee withdrawal process, the lender will still have to process the waiver request, but the SBA will not transfer the waiver payment to the lender, and instead will apply the waiver amount to reduce the loan amount owed to the borrower.

What if the lender receives a payment from the borrower after the purchase?

The lender may receive payments from or on behalf of the borrower after the SBA completes the purchase by guarantee and draws the fee. This can happen, for example, not only in bankruptcy proceedings but also in probate proceedings, other proceedings, or voluntarily. In this happy event, the lender has to transfer these payments to the SBA using Pay.Gov.

What if the lender suspects fraud?

The procedural notice directs the lender to report fraud, waste, or abuse to the Office of Credit Risk Management and to the Office of the Inspector General. However, it does not provide any guidance on processing a pardon request when fraud is suspected, let alone when a lender asks the SBA for a purchase and shipment guarantee.

© 2022 Miller, Canfield, Paddock & Stone plc National Law Review, Volume XI, No. 202

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