SBA OIC (Offer In Compromise) and Community Banks

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If I were to ever borrow money from a bank under one of the SBA programs (which, by the way, is unlikely after all the carnage I’ve seen), I would never borrow from a community bank or a credit union.

In many cases, obtaining a loan through your local community bank or credit union may be easier than going through one of the major national banks.  Decisions tend to be made locally (as opposed to being approved in an underwriting center hundreds or thousands of mile from you), and because of that, these lenders tend to be able to make faster decisions, and make exceptions that the larger lenders won’t make because their underwriters are not empowered to do so. 

So if they are easier to get a loan from, why am I saying that I’d never take an SBA loan from them?  Here’s why: When the you-know-what hits the fan and you can’t afford your loan payment, community banks and credit unions tend to be quite rigid and unwilling to discuss an SBA Offer In Compromise. While this is by no means an absolute, it has been my experience that larger banks are more willing to consider settlements. 

After recently having a very reasonable offer turned down by a community bank, I began thinking about similar experiences I’ve had in the past with other community banks around the country.  It became clear that when you are attempting to work out and SBA Offer In Compromise, you almost always want to be dealing with a larger institution.

So, why are community banks so unwilling to compromise?  Here’s what I think:

– The bank doesn’t do a lot of SBA lending, and is unaware that the Offer In Compromise process even exists.  Since they’ve never been through the process before, it’s much easier to say no to an offer than to take the time to muddle through the process.

– The bank is afraid to lose their SBA guarantee.  I’ve have a good number of smaller lenders sue borrowers, and claim that the SBA requires them to do it.  This is NOT TRUE.  While the SBA does require the banks to take steps to achieve the best possible recovery, there is nothing in the SBA SOPs (Standard Operating Procedures) that requires litigation in order for the SBA to reimburse a bank on a defaulted loan.

– Community banks tends to have lower default rates on their loans, and therefore take defaulted loans more personally, and give them much more attention.  Think about it this way:  If you had a portfolio that consisted of 1000 loans, and 10 of them defaulted, you would give those 10 loans lots of scrutiny.  You’d also tend to be more aggressive about collecting on those loans because there are only 10 in the entire bank.  Contrast that with a huge bank with millions of loans.  Even if the same percentage of loans are delinquent, that translates to thousands of loans.  That’s too many for the bank to “take it personally” that therefore they are more likely to develop the philosophy that not every loan warrants long and costly litigation.  It also allows them to gain experience with settlements so that they are not shocked when a borrower offers 25 cents on the dollar to settle.

– Community banks sometimes do not even have workout officers.  If there is nobody at the bank that is dedicated to working out defaulted loans, you may get stuck with a loan officer who has no experience (or interest) in figuring out how the settlement process works.

– When a bank doesn’t have much workout experience, they tend to refer defaulted loans to their attorney rather than trying to find a reasonable workout plan.  The attorneys usually have no experience with SBA settlements either, since their main job is to litigate (as opposed to negotiate).

– Finally, since community banks negotiate less often, then are hesitant to engage in meaningful discussions about why a settlement offer has been deemed to be insufficient.  Since they are afraid to say the wrong thing, they instead say nothing.  Without understanding why they feel an offer is not acceptable in the first place, it’s really difficult to revise the offer in a meaningful way and reach a mutually agreeable settlement.