US federal officials have initiated actions against small businesses and nonprofits to address the approximately 1 million delinquent government loans distributed during the pandemic, totaling up to $20 billion in face value.
The Small Business Administration (SBA) recently began referring neglected COVID disaster loans, with balances of $100,000 or less, to the Treasury Department for collection. Additionally, another 10,000 delinquent COVID loans involving larger amounts have already been forwarded to the Treasury.
Unlike private entities, the federal government has the authority to initiate debt collection without requiring court permission. It possesses the capability to garnish government benefits and tax refunds as part of the collection process. For COVID loans exceeding $200,000, borrowers are subject to a personal guarantee, obligating them to utilize personal assets to settle their debts.
The COVID loan program, operational from January 1, 2022, to May 16 of the same year, aimed to provide financial support to nearly four million small businesses and nonprofits grappling with the economic fallout of the pandemic. Despite the assistance, a significant portion of the funds has not been repaid to the SBA. Reports indicate that the SBA has already written off approximately 20% of its $390 billion COVID disaster loan portfolio as a loss.
According to reports, the charged-off amount encompasses various scenarios, including Treasury referrals and instances such as bankruptcy, fraud, or the death of the borrower.
The SBA has indicated that this figure aligns with its projections, as some defaulted loans were obtained by borrowers who never intended to fulfill their repayment obligations. Notably, the SBA’s Office of Inspector General highlighted that over $136 billion of COVID disaster loans, roughly one-third of the total, exhibited indications of potential fraud, although the SBA contests this assertion, arguing for a lower fraud rate.
Borrowers, on the other hand, have offered explanations for defaulting on their pandemic-era loans, citing ongoing financial struggles post-pandemic, business closures, or being in weak financial standing when they sought financing. Additionally, some borrowers have attributed their default to challenges stemming from inconsistent communication and policy changes by government officials, complicating their loan servicing experience.
Jason Milleisen, who provides counsel to distressed SBA borrowers, mentioned that he interacts with numerous individuals weekly facing challenges with the SBA’s loan servicing processes.
Indeed, borrowers have expressed significant confusion, often receiving contradictory guidance from various SBA representatives.
Initially, the SBA permitted borrowers to defer loan payments for up to 12 months, subsequently extending this deferral period twice, reaching a maximum of 30 months. However, interest on these loans, set at 3.75% for small businesses and 2.75% for nonprofits, continued to accrue during the deferral period, as reported by The Journal.
Unlike loans from the federal Paycheck Protection Program (PPP), which were forgivable under certain conditions, disaster loans were intended to be repaid, compounding the financial strain for borrowers.
To provide additional assistance, the SBA has introduced a range of hardship accommodations for borrowers facing ongoing challenges. Most recently, the agency expanded the eligibility criteria for its Hardship Accommodation Plan (HAP), encouraging defaulted borrowers to apply if their loans have not yet been referred to the Treasury Department.
Participation in the HAP allows borrowers to avoid the collection process, according to the SBA. Eligible borrowers with loans in repayment, including those past due or more than 120 days late, can enroll in the program. Once enrolled, small businesses and nonprofits can make reduced payments, as low as 10% of their usual installment or a minimum of $25, for six months, without the need to catch up on missed payments upfront, according to information provided by the SBA.