Authority

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Chapter 19.

Expenses and Recoveries
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A.

Classification of Expenses
Expenses are classified by SBA as either recoverable or non-recoverable. When
reviewing payment requests, SBA may determine that an expense is recoverable or
non-recoverable in whole or in part.
1.

Non-recoverable Expenses
Non-recoverable Expenses are the costs associated with liquidation of a loan
that cannot be added to the principal balance. For example:
a.

The portion of fees or costs incurred that were not necessary,
reasonable or customary;

b.

Expenses that are not related to collection of amounts due under the
Note or to preservation or disposal of the collateral for the loan;

c.

Interest and service fees on expenses incurred after SBA purchased its
guaranty;

d.

Legal expenses incurred in asserting a claim, cross claim, counterclaim,
or third-party claim against SBA or in defense of an action brought by
SBA against a 7(a) Lender or CDC, unless payment of such fees or
costs is otherwise required by federal law;

e.

Legal expenses incurred in connection with the performance of
liquidation activities that do not require the services of an attorney,
unless preauthorized by SBA;

f.

Legal expenses incurred by taking actions for the sole benefit of the
7(a) Lender or CDC, as determined by SBA;

g.

Legal expenses incurred in the defense of, or payment of any
settlement or adverse judgment resulting from a suit, counterclaim or
other claim by an Obligor or other Person seeking damages based on a
7(a) Lender's or CDC's alleged wrongful action unless SBA expressly
directed the 7(a) Lender or CDC to take the alleged wrongful action;

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2.

h.

Expenses incurred by a 7(a) Lender or CDC that failed to liquidate the
SBA Loan in accordance with prudent lending practices including
those pertaining to promptness; or

i.

Expenses incurred by a 7(a) Lender or CDC that failed to liquidate the
SBA Loan in accordance with Loan Program Requirements, including
those pertaining to Liquidation or Litigation Plans.

Recoverable Expenses
As set out in Chapter 2 (Definitions), Recoverable Expenses are the SBA
approved, necessary, reasonable and customary costs incurred to collect
amounts due under the Note, to enforce the terms of the Loan Documents, or
to preserve or dispose of collateral. Although Recoverable Expenses can be
added to the principal balance of the loan, they should be treated as a side
obligation to avoid: (1) violating the Secondary Participation Guaranty Agreement,
which prohibits Lenders from adding Recoverable Expenses to the balance of
a loan sold in the secondary market; (2) inconsistencies with SBA Form 1502
reporting; and (3) inconsistencies in the transcript of account required for
guaranty purchase. Recoverable Expenses include, for example:
a.

b.

c.

Searches
(1)

U.C.C. lien searches;

(2)

Title reports; and

(3)

Credit and asset search reports on Obligors.

Appraisals
(1)

Post-default Appraisals;

(2)

Post-default Environmental Investigation Reports; and

(3)

Site visit reports prepared by contractors.

Litigation Expenses
(1)

Attorney fees; and

(2)

Costs such as court filing fees.

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d.

Collateral Care and Preservation
(1)

Utility bills;

(2)

Insurance premium payments;

(3)

Caretaker fees;

(4)

Repair bills;

(5)

Real estate and personal property taxes; and

(6)

Expenses related to non-tax senior liens, including Third Party
Loans.

Note: Recoverable Expenses related to REO and acquired personal property
collateral cannot be added to the loan balance and must be kept separate from
expenses related to the original loan.
B.

Recoveries
1.

General
Recoveries are the proceeds obtained through liquidation of the SBA Loan.

2.

Application of Liquidation Proceeds
Unless the terms of a workout agreement or some other legally binding
document, such as a court order, specify otherwise, recoveries should be
applied in the following order:

3.

a.

Recoverable Expenses;

b.

Principal balance of the loan; and

c.

Accrued interest.

Remitting Recoveries to SBA
SBA's share of the net proceeds recovered on an SBA Loan should be
remitted to SBA via www.pay.gov within 15 business days of receipt. If
SBA’s share is not remitted in a timely manner, SBA may charge interest on
the late amount.

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