-------------- ----------- ---------------------------- ---------------- ----------------
  **TO:**        All SBA                                  **CONTROL NO.:** 5000-1017
                 Employees                                                 

  **SUBJECT**:               Publication of Final         **EFFECTIVE:**   5/10/ 2007
                             Regulations for Liquidation                   
                             and Debt Collection                           
                             Activities                                    
  -------------- ----------- ---------------------------- ---------------- ----------------

On April 12, 2007 SBA published in the Federal Register final
regulations addressing servicing, liquidation and guaranty purchase
activities for 7(a) lenders and Certified Development Companies. These
regulations were published as proposed rules on November 3, 2005 (70 FR
66800) with an initial comment period that ended on January 6, 2006. The
comment period was later reopened and extended to February 24, 2006. A
number of comments were received, as indicated in the "comment summary"
to the final regulations, and the regulations were revised to address
these comments. You may access the regulations at
[[\[TEXT\]]{.underline}](http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/E7-6946.htm)
[[\[PDF\]]{.underline}](http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-6946.pdf).

The final rule is not effective until May 14, 2007. Key provisions are:

1.  The term "Loan Program Requirements" is defined to make clear what
    SBA directives 7(a) lenders and CDCs must comply with for their SBA
    loans. In this regard, see the definition of Loan Program
    Requirements in section 120.10, and also refer to section 120.180 in
    which the responsibilities of 7(a) lenders and CDCs for adherence to
    Loan Program Requirements are explained. Loan Program Requirements
    in effect when a 7(a) lender or CDC takes an action on a loan govern
    that specific action. Some provisions of the new regulations apply
    only to loans approved on or after May 14, 2007 as discussed below.

2.  For loans approved on or after May 14, 2007, section 120.520(a)
    provides that all 7(a) lenders must liquidate business personal
    property securing a loan prior to requesting SBA to purchase the
    guaranteed portion of the loan. There is an exception to this
    requirement if the borrower files for bankruptcy.

3.  Section 120.520(b) makes explicit that SBA will not process a
    guarantee purchase if the lender does not supply adequate
    documentation.

4.  For secondary market loans that SBA purchases, section 120.520(c)
    requires lenders to submit loan status reports within 15 business
    days of SBA's purchase of the guaranteed portion. Lenders are also
    required to submit sufficient documentation to enable SBA to conduct
    post-purchase reviews. A lender's failure to do so may lead to a
    recovery action by SBA for the secondary market disbursement. Also,
    the lender's future participation in the secondary market may be
    restricted.

5.  Section 120.522 limits interest to 120 days on loans approved after
    May 14, 2007 that are purchased by SBA from the lender. This does
    not apply to secondary market purchases.

6.  Section 120.536 standardizes across various loan programs the
    particular servicing/liquidation actions that require prior SBA
    approval, and reminds 7(a) lenders and CDCs to maintain in their
    loan files supporting documentation for actions taken in connection
    with a loan that do not require such approval. This documentation
    will be crucial to SBA's review of the lender's handling of a loan
    if it is submitted for guaranty purchase and to SBA's determination
    as to whether the lender's actions were prudent and commercially
    reasonable (see section 120.535 for an amplification of these
    standards).

7.  Section 120.540 discusses when liquidation and litigation plans are
    required to be submitted to SBA. After May 14, 2007, only 7(a) loans
    made under a lender's authority as a CLP lender and CDCs must submit
    liquidation plans to SBA prior to initiating liquidation action.
    However, all 7(a) lenders and CDCs must obtain SBA's prior approval
    of a litigation plan before proceeding with any Non-Routine
    Litigation (see definition of Non-Routine Litigation in this
    section).

8.  Section 120.546 addresses loan asset sales of both 7(a) and 504
    loans. In this regard, SBA is currently exploring the feasibility of
    coordinating with the FDIC in conducting periodic loan sales.

    a.  For loans approved on or after May 14, 2007, if SBA purchases
        the guaranteed portion of a 7(a) loan from the secondary market,
        the lender is deemed to have consented to the sale of the whole
        loan (lender and SBA portion) in an asset sale conducted or
        overseen by SBA. However, the lender may submit a request within
        15 business days of SBA's secondary market purchase requesting
        that the loan not be sold and explaining the reasons for the
        request. SBA may then decide, in its sole discretion, to delay
        the sale of the loan pending the completion of certain lender
        actions or to proceed with the sale of the loan. For loans
        approved prior to May 14, 2007, SBA must obtain the lender's
        consent to sell the loans.

    b.  Following the purchase by SBA of a non-secondary market 7(a)
        loan, SBA will not sell the loan until nine months from the date
        of the purchase if the lender has not completed its liquidation
        actions for the loan.

    c.  Subsequent to the purchase of a debenture, SBA may sell a PCLP
        504 loan after providing at least 90 days notice to the CDC. For
        all other 504 loans after SBA's purchase of a debenture, SBA may
        sell the loan at any time. In neither situation is the CDC's
        approval needed for the sale.

9.  Section 120.975 explains the authority of CDCs to conduct
    liquidation and debt collection litigation as an Authorized CDC
    Liquidator, subject to SBA's approval of a liquidation and/or
    litigation plan for a defaulted loan.

    a.  Under existing regulations, section 120.848(f), PCLP CDCs are
        required to liquidate and conduct debt collection litigation for
        loans approved under their PCLP authority. For all other loans
        in their portfolios, PCLP CDCs are considered to be Authorized
        CDC Liquidators if notified by SBA that either of two
        requirements are met for such designation: (1) the CDC has one
        or more employees with at least two years of acceptable
        liquidation experience who have completed a suitable liquidation
        training program, or (2) the CDC has entered into a contract
        with a qualified third party contractor whose qualifications and
        contract terms have been approved by SBA.

    b.  All other CDCs may apply to become an Authorized CDC Liquidator
        if the CDC meets the criteria set forth in subsection (b)(1) and
        (2). The application process is described in subsection (d).

    c.  CDCs may receive compensation for their liquidation activities
        as explained in Section 120.542(c) of up to 10% of the realized
        net recovery proceeds from a loan up to a fee of \$25,000, and a
        lower percentage (not to exceed 5%) of the realized net recovery
        proceeds above such amount. Authorized compensation percentages
        will be published in the Federal Register. If the CDC uses an
        SBA-approved contractor to handle its liquidations, the
        contractor may be compensated at these same amounts. In
        addition, SBA will compensate CDCs for reasonable, customary and
        necessary out-of-pocket expenses incurred in liquidation
        activities.

If you have questions, please contact Walter Intlekofer in the Office of
Financial Assistance (202-205-7543) or Bill Gery in the Office of
General Counsel (202-401-2803).

Janet A. Tasker

Acting Director

Office of Financial Assistance