Impact of EIDL Loan Defaults on Credit and Treasury Actions
Defaulting on a COVID EIDL loan can seriously affect your credit and trigger federal collection actions like the Treasury Offset Program. Learn what happens and how to protect yourself.
Discover actionable tips for small businesses facing COVID-EIDL problems. Contact us today.
Book a Consultation CallThe Small Business Administration (SBA) continues to grapple with the complexities of managing its COVID-19 Economic Injury Disaster Loan (EIDL) Program, revealing significant charge-offs and oversight gaps. As small businesses face mounting financial challenges and a Trump 2.0 administration looming in January 2025, understanding the evolving SBA landscape is critical for borrowers, obligors and guarantors.
The SBA reported $18.6 billion in charge-offs from its COVID-EIDL program for fiscal year 2024, reflecting 6.5% of the active portfolio. While this is a reduction from the $52 billion in charge-offs during fiscal 2023, it remains significantly higher than he charge-off rates of other SBA programs, such as 7(a) loans (below 1%) and 504 loans (below 0.5%).
This high rate has raised questions about the sustainability of the COVID-EIDL program and the adequacy of SBA oversight. Audits by the Office of Inspector General (OIG) and KPMG revealed issues such as monitoring deficiencies, financial reporting weaknesses, and outdated servicing policies. These gaps have fueled concerns about long-term accountability and the SBA’s ability to support struggling borrowers effectively.
To assist borrowers, the SBA expanded its Hardship Accommodation Program (HAP), which offers temporary payment relief. Key features include:
· Eligibility: Enrollment for businesses with loans under $200,000.
· Reduced Payments: Initial rounds require only 10% of monthly payments,increasing to 50% and 75% in subsequent rounds for up to five cycles.
· Loan Reclassification: Loans enrolled in HAP are reclassified as performing, potentially lowering default statistics.
However, critics warn that HAP may delay inevitable defaults as interest accrues during reduced-payment periods, exacerbating long-term debt burdens for borrowers.
With a Trump 2.0 administration taking office in January 2025, SBA policies could undergo significant changes:
· Tighter Oversight: High COVID-EIDL charge-offs may prompt stricter compliance requirements and loan eligibility criteria to prevent further losses.
· Program Reforms: Existing SBA loan programs like 7(a) and 504 could see restructuring to enhance sustainability and reduce taxpayer risk.
· Aggressive Collections: A more assertive approach to recovering debts, particularly from delinquent borrowers and guarantors, might emerge as a fiscal priority.
Trump’s business-friendly stance could also lead to broader access to capital and settlement options, but likely with enhanced scrutiny of borrower accountability.
Borrowers with 7(a), 504, or traditional disaster loans may experience indirect effects of heightened COVID-EIDL scrutiny:
· Increased Compliance: More audits and stricter documentation requirements could complicate loan applications and renewals.
· Less Leniency: Unlike HAP’s flexibility, non-COVID SBA loans may face stricter repayment demands or accelerated collection efforts.
· Treasury Referrals: Borrowers and guarantors with delinquent loans could see their debts referred to the Treasury Department, triggering aggressive measures such as administrative offsets, garnishments, referral to Private Collection Agencies, lawsuits or foreclosure actions by the Department of Justice's Financial Litigation Unit.
Given the financial strain on small businesses, the SBA’s willingness to approve OICs, workouts,and settlements might expand, particularly under a Trump 2.0 administration prioritizing efficiency and deregulation. Borrowers and guarantors could benefit from:
· Settlements: Cash or Term OICs could become more accessible for guarantors proving financial hardship.
· Structured Workouts: Extensions on loan terms, reduced interest rates, or deferments may help borrowers avoid defaults while keeping businesses operational.
· Streamlined Approvals: Simplified processes for small-dollar settlements could expedite debt resolution for both borrowers and the SBA.
However, the SBA might also tighten eligibility criteria for settlements, requiring more thorough documentation and good-faith efforts to repay – especially if Trump nominee, Kelly Loeffler, takes the same approach that Besty Devos did with the Borrower Defense Rule and delinquent Department of Education student loans that were procured due to fraud by for-profit educational institutions.
Borrowers should consider taking the following actions to prepare for potential policy shifts and protect their financial stability:
1. Review Loan Agreements: Ensure compliance with terms to avoid default or collection escalation.
2. Engage with the SBA: Monitor communications and respond promptly to notices or program changes.
3. Consult Qualified Experts: Seek Certified Public Accountants or Lawyers authorized to practice before the SBA pursuant to the Federal Agency Practice Act to explore options like OICs, workouts, or bankruptcy, where applicable.
4. Stay Informed: Track developments in SBA policies and broader economic trends to anticipate changes.
The SBA’s challenges with the COVID-EIDL program offer lessons for future disaster relief efforts and highlight the importance of robust oversight. With potential shifts in SBA policies under a new Trump administration, small businesses should be vigilant, proactive, and informed. Whether through expanded settlement options or stricter debt recovery measures, borrowers should plan and prepare for a changing landscape in 2025 and the next 4 years.
This blog post is intended to provide general guidance and is not a substitute for professional legal advice.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients' 7(a) loan was referred to Treasury's Bureau of Fiscal Service for enforced collection in 2015. They not only personally guaranteed the loan, but also pledged their primary residence as additional collateral. One of the clients filed for Chapter 7 bankruptcy thinking that it would discharge the SBA 7(a) lien encumbering their home. They later discovered that they were mistakenly advised. The Firm was subsequently hired to review their case and defend against a series of collection actions. Eventually, we were able to negotiate a structured workout for $180,000 directly with the SBA, saving them approximately $250,000 (by reducing the default interest rate and removing Treasury's substantial collection fees) and from possible foreclosure.
Clients personally guaranteed SBA 7(a) loan balance of over $300,000. Clients also pledged their homes as additional collateral. SBA OIC accepted $87,000 with the full lien release against the home.
Clients executed personal and corporate guarantees for an SBA 7(a) loan from a Preferred Lender Provider (PLP). The borrower corporation defaulted on the loan exposing all collateral pledged by the Clients. The SBA subsequently acquired the loan balance from the PLP, including the right to collect against all guarantors. The SBA sent the Official Pre-Referral Notice to the guarantors giving them sixty (60) days to either pay the outstanding balance in full, negotiate a Repayment (Offer in Compromise (OIC) or Structured Workout (SW)), challenge their alleged guarantor liability or file a Request for Hearing (Appeals Petition) with the SBA Office of Hearings & Appeals.
Because the Clients were not financially eligible for an OIC, they opted for Structured Workout negotiations directly with the SBA before the debt was transferred to the Bureau of Fiscal Service, a division of the U.S. Department of Treasury for enforced collection.
The Firm was hired to negotiate a global Workout Agreement directly with the SBA to resolve the personal and corporate guarantees. After submitting the Structured Workout proposal, the assigned SBA Loan Specialist approved the requested terms in under ten (10) days without any lengthy back and forth negotiations.
The favorable terms of the Workout included an extended maturity at an affordable principal amount, along with a significantly reduced interest rate saving the Clients approximately $181,000 in administrative fees, penalties and interest (contract interest rate and Current Value of Funds Rate (CVFR)) as authorized by 31 U.S.C. § 3717(e) had the SBA loan been transferred to BFS.
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