To Compromise or Not to Compromise (on principal)

Principal compromise is a viable option when an SBA 7(a) loan runs into trouble, and the only other option is SBA loan liquidation.

It’s helpful for the business owner, because it allows them to keep on keeping on.

But there are some significant risks and potential “gotchas” for the Lender, especially when navigating SBA SOP 50 57 guidance. Let’s take a look.

Mandatory SBA approval

SBA Approval is Mandatory – in advance

Principal compromise isn’t discretionary; it requires SBA approval before you, as the Lender, can give the go-ahead. This is true even in situations where you might think it could be assumed – such as bankruptcy court approval, or if you’re a PLP Lender with delegated authority.

You still always need SBA approval in advance.

And here’s another point to be aware of.

Principal compromise isn’t always obvious.

It sneaks into any change in structure that results in:

• Reduction of principal balance (that one’s obvious)

• Partial forgiveness of debt (similar but somewhat different from the previous)

• Economic loss because of restructuring terms

• And anything that reduces total principal recovery

  
  

In short, even when a proposal is called a “reorganization strategy,” if principal recovery is reduced in any way for any amount, SBA calls it principal compromise, and – yes, you know already what that means it must be reviewed and approved under the current SBA SOP 50 57 and SBA lender requirements.

Bankruptcy plans deserve special attention here.  When a plan proposes treatment of the SBA-guaranteed debt, it can easily result in reduced principal recovery or other economic loss, which means it may be considered a principal compromise under the current SBA SOP 50 57 and SBA lender requirements.  In these situations, SBA prior approval is required, and Lenders may need to consider voting against the plan confirmation, absent SBA approval, to remain complaint with SBA lender requirements and avoid increased risk during any future SBA loan liquidation or guaranty review.

Without prior SBA approval, lenders may face…

• Delay, reduction, or denial of your guaranty purchase

• Triggering post-purchase reviews

• Deeper investigation from SBA

Complexity clouds the issue.

It’s easy to get lost in details, especially when it’s a complex loan structure to begin with, or when you’re committed to helping a Borrower dig out from a tough situation. And sometimes the bankruptcy timeline can get away from you.

That’s where we support SBA lenders and their counsel. As SBA Lender consultants and specialists in SBA training for lenders, we help teams identify principal compromise scenarios early, interpret SBA SOP 50 57 guidance in context, and evaluate structuring options with an eye on minimizing unnecessary exposure during SBA loan liquidation or guaranty review processes.

If you’re working through a complex restructuring or would like a second set of eyes on potentially troubled loans, give us a call at 877-576-0819, or contact us through this link. We’re ready to help.