SBA loan default during COVID-19 crisis

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In 2008, when I was working for the largest US Small Business Administration (SBA) lender in the country, the economy collapsed out of nowhere. I was hired as an underwriter and within a month transferred to the training department because our huge SBA loan portfolio was on life support. A 25% delinquency rate on any loan portfolio is extremely high – typically less than 5%. Obviously, five times that amount was an anomaly, something many people in the office had never seen before.

Due to such high delinquency rates, of course, what followed was an onslaught of closed businesses and, ultimately, personal guarantors who sought to settle their SBA debt. I remember the turning point like it was yesterday.

An Offer in Compromise (OIC) was submitted to us at the bank, and I didn’t think it had a hell of a chance to be approved, but my manager insisted that we pass it on to the SBA anyway in order to have his opinion. Several weeks later, to my surprise, they approved the OIC. I was flabbergasted.

The SBA had settled for a few cents on the dollar and set a precedent for the following years. About a year and a half after I started this job, I quit and started working for myself, and for the next four years, OICs poured in and the SBA approved more than I can remember.

It’s already seen

So here we are, once again, in a different kind of financial crisis, not from subprime loans, but rather from a virus that forces us to avoid most in-person interactions.

Of course, the virus has dropped the hammer on retail establishments, especially restaurants, unlike anything we’ve seen before. If a restaurant can seat 200 people and can now only offer take-out, it’s not hard to imagine what will happen to their business. The same goes for the clothing store around the corner. Sure, they can have an online store, but that’s not what they ever expected, and at best, it will only keep them stagnant for so long.

What has changed and what is still the same about SBA loan default?

The purpose of this article is to answer some common questions I receive about the coronavirus and its connection to the SBA loan regulations (aka the SBA’s Offer in Compromise program).

At the time of writing this article, I was not aware of any plans by the SBA to offer general discount on SBA 7 (a) loans. Yes, they’ve given people Paycheck Protection Program (P3) loans that are potentially forgivable, but that’s not what we’re talking about here. I’m talking about the 7 (a) loans that were taken out specifically for business purposes before COVID started. These loans are typically used to buy a business, purchase equipment, or purchase real estate.

Yes, the SBA has relieved people for six months, but there are currently no plans to fully forgive them. I wouldn’t expect them to forgive them. I do not see how the government would simply write off billions of dollars in loans.

Am I more likely to get my settlement approved due to COVID-19?

If history is any guide then I would say yes, you are probably more likely to get a settlement offer approved today than you would have been in 2019.

In 2019, we submitted an OCI for a client whose situation was not completely dire, but it was clear to me that they did not have the resources to repay the debt in full. We submitted the offer to settle and, to my surprise, the SBA turned it down. The SBA cited college savings for their children, despite the fact that they had no other savings and only earned $ 40,000 a year. Fast forward to 2020, I would expect this sort of situation to result in a settlement.

So to answer the question, yes, I think a loan forgiveness will be more likely, but keep in mind that it will not be a full loan forgiveness. You will have to pay something, and it will have to be material.

If I settle in, will I get a better settlement due to COVID-19?

I think the SBA will become more flexible and agree to terms of settlement that it may not have had before COVID. The proverbial loan forgiveness pendulum always swings back and forth. In 2008, the pendulum had swung in the direction of being reasonable in their decisions. In 2019, I felt that the pendulum had swung the other way and that they were harder on borrowers than they had been in a long time because of the coronavirus.

While I expect the regulations to be more favorable to borrowers than they have been in the past, make no mistake, that doesn’t mean the SBA (or the lenders) will give up. .

Will the SBA cover loan repayments as it did in Spring 2020?

This is a question I honestly don’t know the answer to. There is a relief bill that is currently being discussed by lawmakers, but at this point anyone can guess if it will again include the SBA fully covering payments like they did in the spring. and summer 2020.

I will tell you that in October 2020, I saw a drastic increase in inquiries about my services. This is not surprising due to the fact that the SBA covered all SBA loans for the past six months. Businesses that were potentially on the verge of shutting down waited in case the government was prepared to do more to help.

What is COVID-19 doing on the SBA timeline in terms of turnaround and decisions?

For a time, the SBA pulled resources from its loan restructuring teams to process PPP loans. According to my sources, they were dealing with OICs, but that was a priority. Those who needed an answer immediately could get one. But unless there is a specific urgent matter, such as a real estate fence, offers to settle have been put on the back burner. I expect the SBA turnaround time to lengthen considerably. I don’t have a good idea at the moment for how long this will take – I only started hearing about the settlement offers that were submitted only in the spring of 2020.

What Are Other Business Owners Saying About SBA Default?

What I mostly hear from business owners is that they’ve held on for as long as they can, but even though the SBA doesn’t require payment, they still haven’t. enough income to cover basic expenses like rent.

As a result, many are in default from October or November 2020, and they see no reason to wait any longer. Business owners look at themselves intently in the mirror and decide the business just can’t hang on. In other words, they don’t have time to wait for the coronavirus to end.

Will the SBA give time to wait for COVID-19?

I see no indication that they will. The sad reality here is that while it is difficult for many business owners, at some point the banks and the SBA will have to start asking for payments. They cannot wait forever. And remember, even if your lender allows you to skip certain payments, interest continues to accrue. After your deferral is complete, your payment will likely be higher than it was before the deferral started.

The patience of the SBA depends on the lender. Some lenders will be very aggressive. Some will be a little more forgiving, but overall at this point if you are at fault I have no information to tell me that they are willing to give you more time or that there are grants or additional programs that help. There are EIDL loans, but they are not free money.

Will there be more “free money” aid, such as the SBA covering loan repayments or PPP loans?

I’m not sure what additional relief might come in the future, but right now there isn’t.

Can you pay while your business is still open?

It’s an age-old question that I’ve had for years, but the answer remains the same. No, the SBA is not prepared to consider a settlement. If your business is still open and operating, one of the first things the SBA needs to see is that the assets of the business have been liquidated. Unless that happens, the SBA is unwilling to consider a settlement offer.

Can I submit my offer to settle and then close the business if they approve it?

Unfortunately no. It’s not a chicken game for them. They need to see proof that the business has stopped working. Otherwise, it’s a no-start – you have to decide that you are going to close the business before you can begin the debt settlement process.

My bank says they will close their file and send it to the Consolidated Revenue Fund and that I can try to settle with them instead. Is it correct?

Not exactly. From my time as a lender, I can tell you that I also didn’t quite understand what happened after my bank closed its file. All they know is what they have been told, but usually they don’t quite understand. Let me explain.

If a bank refuses your offer or is not interested in an offer, it can close its file. They are supposed to pledge with the SBA that they have done everything possible to collect the borrower and the guarantors and that no further spending of money would be worth it.

At that point, if they closed their case, he landed at the SBA. Now here is the step that most bankers don’t understand. You will receive a letter from the SBA which gives you 60 days to contact them. If you don’t contact them within 60 days, then it goes to the US Treasury, where it’s highly unlikely to be settled.

Although the COVID crisis is unprecedented, much of the OIC SBA process remains the same as before COVID-19. It requires full disclosure, good communication, and concrete proof that you are truly unable to pay off the debt in full over a reasonable period of time.

If you’ve been waiting for the right time to settle, consider taking action now, as the climate for SBA debt settlement is becoming more favorable than it has been for several years.

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