For the 3 fiscal years preceding the COVID-19 pandemic, U.S. banks underwrote approximately $75 billion in loans through the SBA's flagship 7(a) loan program to small businesses. Although the SBA has authorized guarantees up to a certain portion of these loans – somewhere in the ballpark of $25 billion – should small businesses ultimately default on them due to COVID-19, the U.S. economy is headed for a dismal crash that will have lingering effects for a long, long time – no matter who wins the U.S. Presidential Election come November 3, 2020.
Despite the federal government’s stimulus efforts to stymie the economic fallout initiated by the pandemic through the passage of the SBA CARES Act, the PPP and EIDL loans will do nothing to protect the billions of existing SBA loans to small businesses incapable of surviving this crisis.
There is a tsunami of SBA 7(a) and 504 loans currently held by banks and investors who own securities in these small-business loan portfolios that will go into immediate default shortly after the 6-month deferment payment made by the SBA through the CARES Act’s Small Business Debt Relief Program ends without loss mitigation efforts from the lenders or additional federal stimulus from Congress.
Come October, which is the expiration of the 6-month deferment period where the SBA paid monthly principal and interest payments on behalf of small businesses eligible for this CARES Act program, it is anticipated that these small businesses will not be able to just pick up and resume these payments given the significant drop in revenue stemming from COVID-19 and its exacerbated effects due to the lack of a nationally coordinated response from the Trump administration.
Many of these SBA loan balances are in a state of uncertainty and risk of default as tens of thousands of small businesses face insolvency and permanent closure in the fourth quarter of 2020 and the first quarter of 2021.
Banking analysts and credit agencies downgraded the outlook for the entire U.S. banking sector to negative and have predicted widespread job cuts and branch closings, citing the strains already in place with near-zero percent interest rates and the impending stress to come for SBA lenders who primarily work with small businesses.
The current environment due to the COVID-19 pandemic has created unprecedented challenges, and it is uncertain whether SBA lenders will even work directly with their small business customers if additional federal stimulus relief fails to pass Congress.
If SBA lenders refuse to assist small businesses in this upcoming quarter through a range of loss mitigation efforts and loan modification options, you can bet that small businesses will have no other choice but to shut down with many owners, obligors and personal guarantors looking to resolve their personal liability exposure through out-of-court settlements such as an SBA Offer in Compromise, Structured Workouts and Forbearance and/or Bankruptcy protection in order to counter foreclosure, liquidation of pledged collateral and litigation.
Protect Law Group has proven, nationwide experience resolving SBA loan or Treasury collection cases for individual debtors.
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