SBA Lien Release Considerations
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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Inspector General (OIG) and KPMG revealed issues such as monitoring deficiencies, financial reporting weaknesses, and outdated servicing policies.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 obtained an SBA 7(a) loan for their small business in the amount of $298,000. They pledged their primary residence and personal guarantees as direct collateral for the loan. The business failed, the lender was paid the 7(a) guaranty money and the debt was assigned to the SBA. Clients received the Official 60-Day Notice giving them a couple of options to resolve the debt balance directly with the SBA before referral to Treasury's Bureau of Fiscal Service. The risk of referral to Treasury would add nearly $95,000 to the SBA principal loan balance. With the default interest rate at 7.5%, the amount of money to pay toward interest was projected at $198,600. Clients hired the Firm with only 4 days left to respond to the 60-Day due process notice. Because the clients were not eligible for an Offer in Compromise (OIC) due to the significant equity in their home and the SBA lien encumbering it, the Firm Attorneys proposed a Structured Workout to resolve the SBA debt. After back and forth negotiations, the SBA Loan Specialist assigned to the case approved the Workout terms which prevented potential foreclosure of their home, but also saved the clients approximately $294,000 over the agreed-upon Workout term with a waiver of all contractual and statutory administrative fees, collection costs, penalties, and interest.
Client received the SBA's Official 60-Day Notice for a loan that was obtained by her small business in 2001. The SBA loan went into default in 2004 but after hearing nothing from the SBA lender or the SBA for 20 years, out of the blue, she received the SBA's collection due process notice which provided her with only one of four options: (1) repay the entire accelerated balance immediately; (2) negotiate a repayment arrangement; (3) challenge the legal enforceability of the debt with evidence; or (4) request an OHA hearing before a U.S. Administrative Law Judge.
Client hired the Firm to represent her with only 13 days left before the expiration deadline to respond to the SBA's Official 60-Day Notice. The Firm attorneys immediately researched the SBA's Official loan database to obtain information regarding the 7(a) loan. Thereafter, the Firm attorneys conducted legal research and asserted certain affirmative defenses challenging the legal enforceability of the debt. A written response was timely filed to the 60-Day Notice with the SBA subsequently agreeing with the client's affirmative defenses and legal arguments. As a result, the SBA rendered a decision immediately terminating collection of the debt against the client's alleged personal guarantee liability saving her $50,000.
Small business and guarantors obtained an SBA COVID-EIDL loan for $1,000,000. Clients defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for collection. Treasury added nearly $500,000 in collection fees totaling $1,500,000. Clients were served with the SBA's Official 60-Day Notice and exercised the Repayment option by applying for the SBA’s Hardship Accommodation Plan. However, their application was summarily rejected by the SBA without providing any meaningful reasons. Clients hired the Firm to represent them against the SBA, Treasury and a Private Collection Agency. After securing government records through discovery, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury. During litigation and before the OHA court issued a final Decision and Order, the Firm successfully negotiated a reinstatement and recall of the loan back to the SBA, a modification of the original repayment terms, termination of Treasury's enforced collection and removal of the statutory collection fees.
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