WASHINGTON–Some credit unions may find their small business lenders being hit with collections letters as the Small Business Administration has begun referring as much as $20 billion in delinquent COVID disaster loans with balances of $100,000 or less to the Treasury Department for collection.
Unlike PPP loans, the COVID disaster loans are supposed to be repaid.
Another 10,000 delinquent Covid loans involving larger sums have already been sent to the Treasury, according to the Wall Street Journal, which said the referrals highlight the continued challenges for the Covid loan program, which provided financing to nearly four million small businesses and nonprofits.
According to the SBA, it has charged off roughly 20% of its $390 billion Covid disaster loan portfolio, an accounting figure that includes Treasury referrals and other circumstances such as bankruptcy, fraud or the death of the borrower.
What Borrowers Can Do
“Borrowers in default whose loans haven’t been sent to the Treasury Department can avoid the collection process by immediately requesting hardship assistance,” according to the SBA.
The SBA says the charge-off rate for the portfolio is in line with projections, the SBA said.
The Journal noted that some of the troubled loans went to borrowers who never intended to repay the debts. More than $136 billion of Covid disaster loans, or about one-third of the total, showed signs of potential fraud, according to the SBA’s Office of Inspector General. The SBA says it believes the amount of fraud is lower, according to the Journal report.
Initial Deferrals
The SBA initially allowed borrowers to defer loan payments for up to 12 months, then extended the deferral period twice, to a maximum of 30 months, though interest on the loans continued to accumulate during that time. It has also rolled out a series of hardship accommodations for borrowers experiencing short-term financial challenges, the Journal reported.
Today, the report said:
- Borrowers who qualify can make monthly payments of at least 10% of the amount due, or a minimum of $25, for up to two six-month periods.
- Borrowers seeking additional relief can temporarily make payments equal to 50% and then 75% of the amount due before resuming normal payments after another year.
- In February, the SBA began allowing borrowers whose loans were more than 60 days past due to make hardship payments.
The Terms
The loans carry a 30-year-term and a fixed interest rate of 3.75% for small businesses and 2.75% for nonprofits. The SBA is currently servicing about 3.7 million outstanding disaster loans, roughly 15 times the amount the agency was managing before the pandemic, according to an October 2023 report by the agency’s inspector general cited by the Journal.