Liquidation: Protective Bids, REO Management & Offers in Compromise. Sierra Grand Ballroom Tuesday, June 17, :00 pm 4:00 pm

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Liquidation: Protective Bids, REO

Management & Offers in

Compromise

Sierra Grand Ballroom Tuesday, June 17, 2014

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Fresno, CA | June 17-18

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Fresno, CA | June 17-18

Speakers

Barbara Jung, Assistant Center Director for Liquidations

U.S. Small Business Administration

Gary Wamhof, Assistant Center Director Post Servicing Actions

U.S. Small Business Administration

Moderator:

John D. Evans, Executive Vice President, Credit Administrator

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Offer in Compromise (OIC)

Resources the CDC should be familiar with: *SOP: 50-55 Chapter 23

* CFR: The general requirements for

compromise of a debt owed on an SBA loan are based on 31 U.S.C. § 3711 and 31 C.F.R. Part 902 (Standards for Compromise of Claims – by an agency of the Federal Government).

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Chapter 23, 50-55 SOP, an overview

• When Offer in Compromise is appropriate, pages 137-138

• General requirements, pages 138-139

• Supporting documents, pages 139-140

• Review and analysis of offer, pages 140-141

• Adequacy of proposed amount, page 141

• Inadequate offers/counter offers, page 142

• OIC term, pages 142-143

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Topics of interest for CDC’s

• How to submit the OIC

• Do I need to submit an OIC we decline?

• In general, when is an Offer in Compromise appropriate?

• Parties submitting the OIC

• Global OIC for all loan parties or one OIC per obligor/guarantor?

• Are there unique requirements for a borrower that is an ongoing concern?

• What is the most common reason SBA has to “screen out” an OIC?

• Is there a minimum OIC amount?

• Will SBA compromise for the amount received on a “short sale” of project collateral?

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How to submit the OIC

CDC’s are encouraged to use the TAB system which can be found on the SBA banking website:

http://www.sba.gov/FresnoCLSC

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Do I need to submit an OIC we

decline?

Per the 50-55 SOP, page 142: Unacceptable offers and counter-offers should not be

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When Offer in Compromise is Appropriate

* Business Closed and Collateral Liquidated

SOP 50-55 pages 137 & 138

* Going Concern

SOP 50-55 page 138:

Compromise with a going concern is only appropriate when the viability of the business concern is at stake and acceptance of the offer will not harm the integrity of the SBA loan program. (See

Paragraph D below for detailed information on compromise with a going concern.) The offer in compromise process must not be used as a means for a business that is experiencing temporary cash flow problems to write down its debt. (See Chapters 6-17 for information on tools that can be used to help resolve temporary cash flow

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When Offer in Compromise is

Appropriate, continued

The Compromise amount must bear a reasonable relationship to the amount that could be recovered in a reasonable amount of time through enforced collection proceedings and is sufficient to protect the integrity of the SBA loan program.

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Parties submitting the OIC

For the most expeditious processing of the OIC package, please be clear on who the Offerors are. The information in TAB 1 (who is making the offer) should be consistent with the

remaining documentation in the Kit. Form 1150 must be signed by all Offerors.

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Global OIC’s

Generally, a global OIC for multiple individuals (unrelated parties) is not encouraged. An OIC will be accepted if it reflects the Obligor’s true ability to pay and will be rejected if the Obligor can pay more than the amount offered. One strong party could result in an OIC denial for an otherwise weaker party.

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Global OIC’s, continued

A compromise with one Obligor does not

release the remaining Obligors because each is jointly and severally liable, i.e., full payment may be requested from one or all of the Obligors. No attempt should be made to divide payment

responsibility between the Obligors or to use

the compromise amount with one Obligor as the basis for the compromise amount from another. (31 C.F.R. § 902.4)

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Global OIC’s, continued

If the business is defunct/closed/not

operational, it may make sense in some cases to add it the OIC package.

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Ongoing concerns

For a borrower that is an ongoing concern, pursuant to SOP 50-55 page 140, the following factors must also be addressed:

• 1. The compromise must be necessary to avoid closure of a small business, i.e., the business must not be able to continue operating under its current debt structure and all other options for remaining viable must have been exhausted including, for example, the sale of essential assets and the closure of

non-profitable locations;

• 2. The Borrower must pass the Feasibility Test for a successful workout set forth in Chapter 17;

• 3. The compromise must be part of an overall debt restructuring plan that involves all of the Borrower’s creditors;

• 4. The specific details regarding the Borrower’s secured and unsecured debt and debt reduction arrangement with each of its creditors must be set out in a written agreement signed by all of the Borrower’s creditors; and

• 5. The Borrower’s proposed treatment of the SBA loan must be fair and equitable in comparison to the treatment to be received by the Borrower’s other creditors. This includes, for example, the percentage of debt to be forgiven, whether collateral is provided or retained if the compromise amount is to be paid in installments, and whether other lenders are allowed to participate in an appreciation sharing agreement.

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Incomplete packages

The most common reason for a “screen out” of an OIC is due to

questions pertaining to the borrower’s financial statements, especially form 770. Please ensure:

• SBA form 770 or equivalent must be signed/completed.

• Please include SBA form 413 (personal financial statement from loan origination).

• Any discrepancies are resolved. Financial statements should be

closely scrutinized and all discrepancies resolved before submission of the package to SBA.

SBA must have full disclosure. The absence of full disclosure indicates a lack of good faith on the part of the offeror and therefore no basis for an OIC.

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Minimum OIC amounts?

SOP 50-55 page 141:

The compromise amount must be a reasonable relationship to the amount that could be recovered in a reasonable amount of time through enforced collection proceedings and must be

sufficient to protect the integrity of the SBA loan program.

Generally, the compromise amount should be more than $5,000. The compromise amount may be $5,000 or less if a larger

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Is a Short Sale an appropriate OIC

amount?

SBA will not generally compromise for the

amount it receives via a “short sale” of project collateral. The “short sale” transaction and the OIC transaction are two separate and distinct actions.

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Additional things to consider

Obligors do not have a “right to compromise” the amount they owe on their SBA loan. To protect the integrity of the SBA loan program, obligors should be referred to Treasury for

further collection efforts rather than be allowed to compromise for an amount that is nominal relative to their loan balance.

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Additional things to consider,

continued

Treasury offset includes:

• Federal or state income tax refunds.

• Federal salary, military salary or federal retirement pay.

• Federal or state contractor or vendor payments.

• Federal or state benefit payments, such as Social Security payment.

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Additional things to consider,

continued

What may happen if a loan is referred to treasury for servicing?

• Treasury may report debtors to credit bureaus.

• Treasury may garnish wages.

• Loan may be referred to a private collection agency.

• Loan may be referred to U.S. Department of Justice.

• Reporting of loan to IRS as potential additional income that may be subject to taxation.

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Additional things to consider,

continued

Acceptance of an OIC is considered to be a loss to the Federal Government and may adversely impact the Obligor’s ability to obtain future

financing from the Federal Government including another SBA loan.

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Additional things to consider,

continued

Whenever there is a concern that an Obligor may have engaged in fraud or other irregular activity in connection with an SBA loan, (e.g., made false

statements or submitted false documents), the matter must be reported to the Office of the

Inspector General. (Chapter 27). Prudent action under the circumstances may also include

consulting legal counsel to determine whether action under Title 31, Chapter 38, Administrative

Remedies for False Claims and Statements (31

U.S.C. § 3801-3812) is appropriate. (Managing Federal Receivables, Chapter 7, page 14)

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Questions????

For general questions:

United States Small Business Administration Fresno Commercial Loan Service Center

801 R Street, Suite 101 Fresno CA 93721 Phone: 1-800-347-0922

email: Fsc.postservicing@sba.gov

Web: http://www.sba.gov/FresnoCLSC

Gary Wamhof, Supervisory Loan Specialist

Gary.wamhof@sba.gov

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Fresno, CA | June 17-18

What’s Up Next

Wednesday, June 18:

SBA Servicing Center Roundtable and Q & A Session

Sierra Grand Ballroom

Tours of the SBA Servicing Center and Networking Event

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