When a lender makes an SBA 7(a) loan, there are certain actions that the lender cannot unilaterally take without first obtaining approval from SBA. This includes certain workout and settlement options that a lender may typically pursue in the process of liquidating and collecting a loan.

Pursuant to SOP 50 57 2, a lender does not have unilateral authority to accept any settlement or payment proposal that would waive a portion of the principal debt obligation unless it is approved by SBA through the Offer in Compromise process. In short, if an obligor would like to enter into a settlement or payment plan where the obligor would pay less than what is owed under the SBA 7(a) loan and obtain a release for the remaining balance, the obligor must submit a written proposal, known as an Offer in Compromise.

In general, the Offer in Compromise process may be appropriate for a loan in liquidation status, where there is no pending bankruptcy proceeding, there are no issues of fraud, misrepresentation, or financial misconduct, and the full amount of the loan cannot be recovered.

The Offer in Compromise process is commenced by the obligor submitting a written proposal payment/settlement offer using SBA Form 1150, along with financial documents including SBA Form 770, IRS Form 4506-T and SBA Form 2202 directly to the lender. Upon receipt of the completed Offer in Compromise, the lender must determine whether it is acceptable. To that end, the lender must review the submission and make a good faith effort to verify the accuracy of the financial disclosures made by the obligor. At a minimum, a current credit report should be obtained by the lender. Further, the lender must compare the current credit report and financial information submitted by the obligor in the past with the financial information submitted in conjunction with the Offer in Compromise.

In addition, the lender must determine whether the proposed compromise amount and terms are appropriate. Therefore, an analysis must be performed to determine the amount that could be recovered from the obligor in a reasonable amount of time through enforced collection proceedings, taking into account collection costs, litigation risks, and possible collective remedies available. The compromised amount should have some correlation to the amount that could be collected in a reasonable amount of time through enforced collection proceedings. In general, the compromised amount should be more than $5,000.00, but upon a showing of hardship, an amount of $5,000.00 or less may be acceptable.

A cash compromise made in a single lump sum, within 60 days of the Offer in Compromise approval date, is preferred. However, in instances where a lump sum is not feasible, a compromised amount paid in installments may be appropriate, but usually not more than 3 years.

When a lender determines that an Offer in Compromise is acceptable, the lender must obtain written approval from SBA before entering into an agreement which will result in less than full payment of the outstanding principal balance of the SBA 7(a) loan. Accordingly, a request for approval from SBA must be submitted by the lender. The lender should submit the request through SBA’s Offer in Compromise Tab System. SBA will review the submitted Offer in Compromise and notify the lender, in writing, whether the Offer in Compromise is accepted or rejected by SBA.

Should SBA approve the submitted Offer in Compromise, the lender and obligor should enter into a written agreement, providing a mutual release when the compromised amount is paid in full.

Overall during the Offer in Compromise process, it behooves a lender to remind the obligor that there is no right to compromise the amount owed under the SBA 7(a) loan. Likewise, acceptance of an Offer in Compromise is considered a loss to the federal government and may adversely impact an obligor’s ability to obtain future financing from the federal government, including another SBA 7(a) loan. Acceptance of an Offer in Compromise could have tax consequences on the obligor that he/she/it may want to consider.

If you have any questions about the Offer in Compromise Process, please contact Your SBA Legal Department® at Jellum Law