Do you litigate? Quick answer: yes, you do – and if you haven’t yet, someday you will when a Borrower declares bankruptcy, or there’s judicial foreclosure, a death that impacts the loan, and so on.
And that means you need to know SBA’s updated litigation requirements, per the new SOP 50 57 3. As a point of reference, the Litigation chapter in that SOP grew from 9 pages to 13 – an almost 50 percent increase in their definition of terms, conditions, and requirements.
To start with, here are the key changes that jumped out at us:
Lenders must hire an attorney that maintains an office and practices regularly in the general locale or judicial district where the majority of the litigation will occur. It’s no longer enough to just be licensed to practice law in that state.
Exceptions can be made, but SBA must pre-approve. Save yourself some time and effort by hiring a local attorney.
And bear in mind that SBA will not approve fees and expenses for a non-local legal firm to manage or oversee the local firm's litigation actions. SBA may pre-approve this if they feel it’s justified, but will not reimburse fees if the pre-approval is not obtained. Again, save yourself time and effort – and expense! – by sticking with local firms. Lenders must, as always, obtain pre-approval for non-routine litigation. SBA will not reimburse for expenses incurred prior to the approval. This might appear to be a “no change” item, but there’s a new twist: you can no longer assume that $10,000 will be reimbursed if a loan moves from routine to non-routine litigation. SBA's new stance is that once it becomes non-routine, it was always non-routine, and should have had a litigation plan submitted for approval.
Lenders are now required to submit a Litigation Status Report every six months, starting six months from the date of the approval of the initial litigation plan. Note that requests to amend a litigation plan are not considered to be status updates. Unfortunately, as of the time of this writing, no guidance has been provided on what type of information is needed to satisfy this requirement. We do expect an amended SOP, 50 57 3.1, but there’s no projected date of publication so far.
Based on these changes, here are our additional recommendations:
First and foremost, we recommend – urge – beg! – you to read the full SOP 50 57 3 Litigation chapter to make sure you know the new expectations. Here’s the link: https://www.sba.gov/sites/sbagov/files/2023-06/FinalCloseoutSOP_50_57_3.pdf. Chapter 22, Litigation, starts on page 177.
This will absolutely require you to update your policies and procedures!
If you don’t already have a process for creating your litigation plan early and reviewing it regularly – now would be the time to implement it. And if you already do this, please make sure you actually are doing it. We’ve seen situations where policies were in place, but weren’t always being followed, or weren’t being followed completely.
Likewise, if you don’t already have a process for monitoring legal expenses, now would be the time to create one. The policy should include a trigger point (for instance, $6,000) for reviewing routine litigations to see if they’re likely to slip into non-routine territory with expenses potentially exceeding $10,000, so you can get the litigation plan to SBA early enough for them to review and approve.
Finally, keep a detailed action log, including any conversations and emails, for every loan in litigation, whether routine or non-routine. Then you’ll be prepared to recreate what happened in the event a team member leaves, and you’ll be ready to build your Wrap Up narrative and submit it for reimbursement.
Yes, there’s a lot to be aware of.
And you know we’re here to help! Policies and procedures are, in all seriousness (and they are serious!), some of our favorite things to work on with our clients. Plus, we can conduct training sessions for your team to bring everyone up to speed on what’s needed.
To learn more, schedule time to talk with us, no obligation, just discovering where you are and what you need. Click here to contact us – or call 877.576.0819. We look forward to talking with you.