This is a reprint of a news article about the billions of dollars of SBA loan default amounts and who ended up bearing the brunt of the problem loans. Sound familiar? Yes....bank bailout, auto industry bailout, home mortgage and collateralized debt obligations (CDO) bailout. Now...SBA loan bailout. SBA and AIG, as notorious acronyms actually share a common phrase - TAXPAYER BAILOUT
According to an independent investigation, lax federal oversight allowed lenders to repeatedly make bad loans to small businesses under a government program that has cost taxpayers $1.3 billion since 2000 on defaulted loans.
Some borrowers in the Small Business Administration’s largest federally guaranteed loan program defaulted so quickly that they paid nothing on their loans. Operators of national franchises such as Quiznos and Cold Stone Creamery collectively received millions of dollars in loans through the program despite extensive default histories by the franchises.
“Should we say the fox got distracted and quit watching the hen house?” said Pat Newcomb, director of the Ohio Small Business Development Center at the Entrepreneur Center in Dayton, Ohio.
“There were an awful lot of people who got small-business loans during this period 2004 to 2007 who should not have gotten them,” she said. “They were a bad loan when they were made. They just got worse.”
Since the beginning of 1990, lenders made more than 1 million loans guaranteed under the SBA’s 7(a) program, the agency’s largest, according to third-party analysis of SBA loan data. Excluding the 280,948 loans that are still active, more than 1 in 5 of the remaining 769,242 loans were discharged to the U.S. Treasury after they defaulted and the lender and SBA were unable to collect the money owed.
Those 168,324 charged-off loans totaled $8.6 billion in payments to lenders by the SBA. Once discharged, there is little chance the money will be recovered by the government. According to the SBA, the U.S. Treasury’s average annual recovery rate between 2010 and 2012 was 0.63 percent of all referred loans.
Default rates and taxpayer subsidies soared in the wake of the 2008 financial crash, the nation’s worst economic crisis since the Depression. But an independent investigation found that practices by the SBA and lenders made the already-risky small-business lending program a bigger gamble.
The independent investigation revealed:
• SBA loans were made by lenders who sometimes relied on inflated real-estate values, used lax lending standards or didn’t follow SBA requirements, according to SBA financial reports and the agency’s Office of the Inspector General.
• A large chunk of the bad loans resulted from lenders providing loans to franchisees for national companies despite histories of the franchise defaulting on SBA loans. The corporate franchisor is not held financially responsible for the operator’s loan failure.
• Many of the borrowers paid little on the discharged loans. More than half of the 168,324 charged-off loans failed before 20 percent of the loan was repaid. More than 1 in 3 repaid only 10 percent or less of the loan . More than 7 percent did not reduce the principal on their loan at all.
• In the Dayton, Ohio region alone, 4,419 SBA loans were made from the beginning of 1990 through the end of February of 2012. Of the closed loans — meaning those paid in full or charged off to the U.S. Treasury — 1 in 5 ended in failure. The SBA paid $36.4 million to the lenders for the defaults.
• Lenders had little to lose when loans went bad. Not only did the government guarantee up to 85 percent of the loan amount, the loans also could be sold on the secondary market, which further reduced lender risk.
“There were a lot of lenders that got into the SBA business and just grew it really fast. They took their eye off the ball,” said John Moshier, KeyBank’s senior vice president in charge of SBA lending. “They felt like because they had the guarantee, everything was good. The government was going to take care of it.”
Reacting to the independent investigation, Newcomb said it’s a huge red flag that one-third of borrowers paid 10 percent or less on the guaranteed loans that defaulted and were discharged.
Clearly those borrowers and their business plans were not thoroughly vetted by lenders, and the borrowers had “no commitment to making the lender whole,” said Newcomb, a former banker.
Steve Budd, president of City Wide Development Corp., a nonprofit development organization, said, “I think it’s fair to say that when a business hardly makes a payment, they probably shouldn’t have gotten a loan .”
By definition, the SBA 7(a) program involves more risk than a conventional loan. The program’s goal is to provide capital for small businesses, including those owned by minorities and women, that have had trouble getting conventional loans.
It is not meant, however, to be a license to write bad loans. Most borrowers repay their loans, and supporters call the government’s guarantee a crucial economic-development tool that helps fuel small businesses.
“The good news is, the SBA has helped lots of good businesses, particularly in the early stage of development, that have gone on to be successful and paid back their loans,” said Mike Van Buskirk, president and chief executive of the Ohio Bankers League. “The bad news is, because they are in a risky area, they will have, by definition, more defaults.”
What does that mean for you? It means that if you have defaulted on your SBA loan, your administrative window to file an SBA Offer in Compromise closes post-60 days from the due process 60 day referral letter warning. Once that 60 day period has expired, your SBA loan will be transferred to the United States Treasury Department.
From there, the Treasury Department, through the Bureau of Fiscal Service (a/k/a the Financial Management Service), will step up its collection efforts against your delinquent or defaulted federal agency debt.
So, before you are sacked with federal collection tactics by the DOT’s special Bureau of Fiscal Service – i.e., a TOP (Treasury Offset Program), AWG (Administrative Wage Garnishment) or, worse, DOJ (Department of Justice) collection litigation, you need to contact us at 888-756-9969 or through our contact Form in order to schedule a complimentary Case Evaluation to discuss your options.
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.
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.
Client personally guaranteed an SBA 7(a) loan for $100,000 from the lender. The SBA loan went into early default in 2006 less than 12 months from disbursement. The SBA paid the 7(a) guaranty monies to the lender and subsequently acquired the deficiency balance of about $96,000, including the right to collect against the guarantor. However, the SBA sent the Official 60-Day Due Process Notice to the Client's defunct business address instead of his personal residence, which he never received. As a result, the debt was transferred to Treasury's Bureau of Fiscal Service where substantial collection fees were assessed, including accrued interest per the promissory note. Treasury eventually referred the debt to a Private Collection Agency (PCA) - Pioneer Credit Recovery, Inc. Pioneer sent a demand letter claiming a debt balance of almost $310,000 - a shocking 223% increase from the original loan amount assigned to the SBA. Client's social security disability benefits were seized through the Treasury Offset Program (TOP). Client hired the Firm to represent him as the debt continued to snowball despite seizure of his social security benefits and federal tax refunds as the involuntary payments were first applied to Treasury's collection fees, then to accrued interest with minimal allocation to the SBA principal balance.
We initially submitted a Cross-Servicing Dispute (CSD) challenging the referral of the debt to Treasury based on the defective notice sent to the defunct business address. Despite overwhelming evidence proving a violation of the Client's Due Process rights, the SBA still rejected the CSD. As a result, an Appeals Petition was filed with the SBA Office of Hearings & Appeals (OHA) Court challenging the SBA decision and its certification the debt was legally enforceable in the amount claimed. After several months of litigation before the SBA OHA Court, our Firm Attorney successfully negotiated an Offer in Compromise (OIC) Term Workout with the SBA Supervising Trial Attorney for $82,000 spread over a term of 74 months at a significantly reduced interest rate saving the Client an estimated $241,000 in Treasury collection fees, accrued interest (contract interest rate and Current Value of Funds Rate (CVFR)), and the PCA contingency fee.
Clients personally guaranteed SBA 504 loan balance of $750,000. Clients also pledged the business’s equipment/inventory and their home as additional collateral. Clients had agreed to a voluntary sale of their home to pay down the balance. We intervened and rejected the proposed home sale. Instead, we negotiated an acceptable term repayment agreement and release of lien on the home.
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