Behind on a Payment?
504 Loan Delinquencies and Defaults
Over the past few years, CDC Small Business Finance has seen proven business owners, some with decades of management experience, struggle with cash flow due to the impact of the recession. If your company is facing this situation – you are not alone. CDC has worked diligently with hundreds of our borrowers on mutually beneficial solutions to their repayment challenges.
Borrowers who have trouble meeting their debt obligations for their SBA 504 loan should contact their CDC and lender as early as possible to discuss the situation and options that may be available to assist them. Our experience has found that keeping communication channels open yields the best results for the borrower as well as the lender.
Here are a few common questions that our borrowers pose when their loan becomes delinquent or defaults:
- Is there a “grace period” on my loan?
- What is the role of CDC?
- What is a loan deferment?
- What is a short sale?
- What is a foreclosure?
- If I default on my loan, what will happen?
- What can I do to avoid these serious issues?
- How can I reach CDC?
Your loan is due on the first business day of every month. The terms of your loan agreement require the payment to be made by Automated Clearing House (ACH) transfer from your bank to Wells Fargo Bank, N.A. Corporate Trust Services, also known as the Central Servicing Agent (CSA). If your payment is rejected when the ACH transaction occurs, you may wire the funds as an alternative. To avoid any late fees, your loan payment must be posted at Wells Fargo Bank, N.A. Corporate Trust Services by the 15th of the month. To discuss this further with a CDC representative, contact:
CDCs are contracted by the SBA to serve as an intermediary for your loan. When you secured your loan, the second trust deed portion was packaged, underwritten and funded with CDC’s management. After your loan funds, CDC is responsible for monitoring your repayment and loan covenant(s) compliance. Your loan is an obligation to the U.S. Small Business Administration (SBA), an Agency of the U.S. Government – not CDC. CDC makes recommendations to the SBA on actions associated with your loan, which SBA reviews and either approves or denies.
When borrowers provide CDC with financial statements (tax returns, personal financial statements, interim business financials, and other requested information) that indicate their business is operating with historically lower revenues and tighter cash flow, a loan deferment may be offered. A deferment typically provides a lower monthly payment amount to provide cash flow relief. The principal and interest obligations remain in force, but the payment amount is adjusted for the “deferment period”. When that period ends, the “catch up period” commences and the monthly payments increase. The full amount of the deferment must be repaid within 5 years, or no later than the end of the existing term of the loan if the loan has a maturity date of less than five (5) years remaining. For more information about a deferment plan, contact:
For questions on a deferment checklist, contact:
When a property is sold for less than what is owed on it, it is referred to as a short sale. All owners, lenders, and/or parties holding a valid lien on title must agree to the transaction before the sale can occur. The borrower remains obligated for the outstanding balance owed after the sale is completed and works with the lender(s) to develop a repayment plan for the balance due. For example, if a borrower’s debt on a building is $500,000 and the building is sold for $450,000, the borrower remains obligated on the outstanding $50,000 loan balance and may repay that amount either in a lump sum or over a period of several years. For more information or consideration of a short sale on your building contact:
When a borrower does not pay as agreed to in their loan note, the lender has the right to sell the property without the borrower’s consent through a foreclosure process. Foreclosure processes vary from state to state.
If the property is located in California, a borrower will typically receive notice through a “Notice of Default” filing that their loan is past due and/or completely due and payable within a short period of time. A Notice of Default is a document of public record that identifies that a loan is past due. Borrowers should immediately contact their lender if this occurs to develop alternative strategies to foreclosure that will not impact their credit history, future financing capability or ability to keep the property.
If a borrower does not cure a default, the lender may have a “Notice of Sale” filed. A Notice of Sale is a document of public record which identifies a date and place (typically a courthouse, civic center, etc.) where the property will be sold on behalf of the foreclosing lender. Once a foreclosure sale occurs, the property immediately transfers ownership and the borrower is no longer an owner of the property, although the debt may still exist.
If the property is sold at the foreclosure sale for a value less than what the borrower owes on the property, the borrower will remain liable for the outstanding loan balance on all junior lien holders and the borrower typically no longer has rights to the property (depending upon the type of foreclosure action filed). All guarantors remain liable for any outstanding balance as well. CDC strongly recommends that borrowers work with their lenders to avoid this situation as it has long term credit implications that will impact their ability to conduct business for many years.
When you received your SBA loan, you agreed to repay the entire balance. Most SBA loans have several “obligors” or “guarantors” that signed the note. Each obligor or guarantor is solely responsible for the entire outstanding balance of the loan. For example, if two business partners secured a loan for $100,000 and the loan defaults, both partners are responsible for the outstanding balance until the loan is paid off. The debt obligation is not divided among responsible parties. If the debt is not repaid or compromised, the loan file is referred to SBA and then to the U.S. Department of Treasury (DOT). The SBA has the right to impose Administrative Wage Garnishments on all parties until the balance is paid. DOT has the right to withhold future income tax refunds, social security benefits, veteran benefits and other means of collection available to them, including legal action until the full balance of the loan is repaid. These actions may be imposed on all obligors and guarantors on the note. Additionally, the loan default is reported to all credit agencies which impacts credit scores and ability of obligors and guarantors on their ability to secure conventional and SBA financing in the future.
We suggest that you contact CDC and your first trust deed holder (bank) as early as possible and work collectively toward alternatives to default and foreclosure. CDC has the right to work with all debtors on their SBA 504 loan toward a warranted repayment strategy or compromise which is then presented to the SBA for their consideration and is formally approved or denied. We have successfully completed justifiable loan deferments as well as long term repayment strategies on outstanding loan balances after short sale or foreclosure, which are manageable for borrowers and allows them to fulfill their loan obligation without impacting their long term credit.
CDC has found over and over again that the earlier a borrower, obligor or guarantor informs us of their challenges – the better the options available for resolution. Lenders and borrowers enter into debt obligations in good faith and the extension of credit is based on the promise by borrowers to repay. It is important borrowers act in good faith when negotiating solutions with your lenders as this allows the lenders to review all repayment options at borrowers disposal. Keep in mind lenders have the same objectives a borrowers does – to resolve the matter in a respectful and expeditious manner to the satisfaction of all parties.
You can always call us at 1-800-611-5170. We do our best to have a real, live person answer your calls so you are helped quickly and efficiently. We are open Monday through Friday from 8am to 5pm PST.
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