Once an SBA loan is classified into liquidation status, as set forth in SOP 50 57 2 page 77, a lender will likely incur expenses relative to repossession and preservation of the collateral and seeking judgment under the loan documents. However, an SBA lender may not have to bear these expenses alone. Pursuant to the SOP 50 57 2, a lender may seek recoupment of many of these expenses from SBA. The key is to identify what expenses may be recouped and then timely requesting SBA review and approval of the expenses.

Expenses are classified by SBA as either recoverable or non-recoverable. As defined in SOP 50 57 2, recoverable expenses are approved, necessary, reasonable, and customary costs incurred to collect the amounts due under the note or otherwise enforce the terms of the note or to preserve or dispose of the collateral. These recoverable expenses include, among other things, costs for UCC searches, appraisals, attorneys’ fees and costs, and collateral care and preservation costs, such as insurance premium payments or real estate property taxes.

Conversely, non-recoverable expenses are costs SBA will not reimburse to a lender. For instance, costs that are not necessary, reasonable, or customary or fees incurred by a lender to have a third party perform routine loan serving or liquidating duties, such as preparing a demand letter or liquidation plan.

Upon incurring expenses that a lender will seek reimbursement as recoverable expenses, a lender must timely request review and approval from SBA. To that end, a lender must submit an electronic request to the appropriate SBA commercial loan servicing center. It is best practice that the lender utilizes the CPC Tab system to submit its request, as this will expedite the SBA review process. A lender should ensure that its request includes the summary of expenses, itemized invoices, and supporting documents, along with the lender contact information and the borrower’s name and loan number.

The recoverable expense review and approval request should be submitted either with the lender’s submission of its loan guaranty purchase request or its submission of its wrap-up report. However, it is not enough to simply include all expenses incurred by the lender during the liquidation of the loan, particularly as it pertains to attorneys’ fees.

Under SOP 50 57 2, a lender must have an approved Litigation Plan prior to any Non-Routine Litigation, such as when a lender wants to appoint a receiver, when factual or legal issues are in dispute, or when legal fees are in excess of $10,000.00. Therefore, prior to a lender incurring more than $10,000.00 of attorneys’ fees and costs, a lender must have an approved Litigation Plan in order for the attorneys’ fees to be classified as recoverable expenses. In short, if a lender seeks recoupment for attorneys’ fees and costs in excess of $10,000.00 in its CPC Tabs expense request, without an approved Litigation Plan, this request will likely be denied. Therefore, a lender should be particularly mindful of the amount of attorneys’ fees it has incurred, or anticipates, as the liquidation/litigation progresses and/or ensure that the lender has retained an experienced SBA liquidation and collection law firm. That way, both the lender and the law firm are well-aware of the requirements placed upon the lender in order to seek recoverable expenses from SBA. The law firm and lender can keep an open line of communication as to legal fees, allowing the lender to submit a timely Litigation Plan for SBA approval before the attorneys’ fees surpass $10,000.00.

In short, as expenses accumulate, a prudent SBA lender should evaluate whether the expense is recoverable and promptly gather the necessary documentation for submission for SBA review and approval. Reviewing expenses on a case-by-case basis allows a lender to have a firm grasp on expenses incurred to date and ensures that a lender submits timely and well-supported requests for reimbursement of recoverable expenses.