Jason Milleisen, a former workout officer for the biggest SBA lender in the U.S., answers your questions about SBA loan default and the offer in compromise process as a result of the coronavirus.
Back in 2008, when I worked for the largest U.S. Small Business Administration (SBA) lender in the country, out of nowhere, the economy collapsed. I was hired as an underwriter and in under a month, I was moved over to the workout department because our huge portfolio of SBA loans was on life support. Twenty-five percent delinquency on any loan portfolio is tremendously high – typically you're looking at less than 5%. Obviously, five times that amount was something of an anomaly, which many people in the office had not seen before.
As a result of such high rates of delinquency, of course, what followed was an onslaught of closed businesses and, ultimately, personal guarantors who were seeking 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 snowball's chance in hell to get approved, but my manager insisted that we forward it to the SBA anyway in order to get their opinion. Several weeks later, to my surprise, they approved the OIC. I was flabbergasted.
The SBA had settled for pennies on the dollar and set a precedent for the next several years. About 1.5 years after I started that job, I quit and started working for myself, and for the following four years, the OICs poured in, and the SBA approved more than I can recall.
It's deja vu all over again
So here we are, again, in a financial crisis of a different kind, not as a result of subprime lending, but rather a virus that requires 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 now they can only do takeout, it's not hard to imagine what's going to happen to their business. The same goes for the dress shop around the corner. Sure, they can have an online store, but that's not what they had ever planned for, and at best, will only allow them to tread water for so long.
What's changed, and what's still the same when it comes to SBA loan default?
The purpose of this article is to answer some common questions that I'm getting about the coronavirus and how it relates to SBA loan settlements (aka the SBA's offer-in-compromise program).
Will the SBA be forgiving loans given these extraordinary circumstances?
As of the writing of this article, I am unaware of any SBA plans to offer blanket forgiveness on SBA 7(a) loans. Yes, they have given people Paycheck Protection Program (PPP) loans that are potentially forgivable, but that's not what we're talking about here. I'm talking about 7(a) loans that were taken specifically for business purposes prior to the start of COVID. These loans are typically used to purchase a business, purchase equipment or purchase real estate.
Yes, the SBA did give people some relief for six months, but there are currently no plans to completely forgive them. I wouldn't anticipate that they will forgive them. I see no way the government would simply write off billions of dollars of loans.
Am I more likely to have my settlement approved because of COVID-19?
If history is a guide, then I would say yes, you're probably more likely to have a settlement offer approved today than you would have been in 2019.
In 2019, we submitted an OIC for a client whose situation was not completely dire, but it was clear to me they lacked the resources to repay the debt in full. We submitted the settlement offer, 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 were only making $40,000 a year. Fast forward to 2020, I would expect that this sort of situation would result in a settlement.
So to answer the question, yes, I do think loan forgiveness will be more likely, but keep in mind, it won't be complete loan forgiveness. You will have to pay something, and it will need to be material.
If I do settle, will I get a better settlement because of COVID-19?
I believe that the SBA will become more flexible and accept settlement terms that they may not have pre-COVID. The proverbial pendulum of loan forgiveness always swings back and forth back. In 2008, the pendulum had swung all the way in the direction of being reasonable in their decisions. By 2019, I felt the pendulum had swung the other way, and they were being tougher on borrowers than they had been in a long time because of the coronavirus.
While my expectation is that settlements will be more favorable for borrowers than they have been in the past, make no mistake, it doesn't mean that the SBA (or the lenders) will give away the store.
Will the SBA be covering loan payments like they did in the spring of 2020?
That's a question I honestly don't know the answer to. There is a relief bill that's currently being discussed by lawmakers, but at this point, it's anyone's guess if it will include the SBA completely covering payments again as they did in the spring and summer of 2020.
I will tell you that as of October 2020, I've seen a drastic uptick in inquiries about my services. This is not surprising because of the fact that the SBA had been covering every SBA loan for the past six months. Businesses that were potentially teetering on the verge of closing were holding off just in case the government was willing to do more to help.
What is COVID-19 doing to the SBA time frame in terms of turnaround and decisions?
For a period of time, the SBA pulled resources from their loan workout teams to process PPP loans. According to my sources, they were processing OICs, but it was on a priority basis. Those who needed an answer immediately could get one. But unless there was some specific pressing matter, such as a real estate closing, settlement offers were put on the back burner. My expectation is that the SBA turnaround time is going to lengthen dramatically. I don't have a good sense right now for how long it will be – I've only started hearing back about settlement offers that were submitted in the spring of 2020.
What are other business owners who are facing SBA loan default saying?
Mostly what I'm hearing from business owners is that they've been hanging on as long as they could, but even if the SBA doesn't require payments, they still don't have enough revenue to cover basic expenses like rent.
As a result, many are going into default as of October or November 2020, and they see no reason to wait longer. Business owners are taking a hard look in the mirror and deciding that the business simply cannot hang on. Put another way, they don't have time to wait out the coronavirus.
Will the SBA give time to wait out COVID-19?
I don't see any indication that they will do that. The unfortunate reality here is that while it's difficult for many, many business owners, at some point, the banks and the SBA will have to start asking for payments. They can't wait forever. And don’t forget, even if your lender lets you skip some payments, interest is continuing to accrue. Once your deferment is over, your payment will likely be higher than it previously was before the deferment started.
How patient the SBA will be depends on the lender. Some lenders will be very aggressive. Some will be a little bit more lenient, but overall, at this point, if you're in default, I have no information to tell me that they're willing to give you more time or that there any additional grants or programs that will help. There are EIDL loans, but those are not free money.
Is there going to be more "free-money" assistance, such as the SBA covering loan payments or PPP loans?
I don't know what additional relief might come in the future, but as of now, there are none.
Can you settle while your business is still open?
This is an age-old question that I've gotten for years in the answer remains the same. No, the SBA is unwilling to consider a settlement. If your business is still open and operating, one of the first things the SBA needs to see is that business assets have been liquidated. Unless that happens, the SBA is not willing to consider a settlement offer.
Can I submit my settlement offer and then close the business if they approve it?
Unfortunately not. It's not a game of chicken for them. They need to see proof that the business has stopped operating. Otherwise, it's a non-starter – you have to decide that you're going to close the business before you can begin the process of settling the debt.
My bank says they will close their file and send it to the Treasury and that I can try to settle with them instead. Is that correct?
Not exactly. I can tell you from my time as a lender, that I didn't fully understand what happened once my bank closed their file, either. All they know is what they've been told, but generally speaking, they don't fully understand. Allow me to explain.
If a bank declines your offer or is not interested in entertaining an offer, they can close their file. They are supposed to commit to the SBA that they've done everything they can to collect from the borrower and guarantors and that no further expenditure of money would be worth it.
At that point, if they closed their file, it lands with the SBA. Now here's the step that most bankers don't understand. You will get a letter from the SBA that gives you 60 days to contact them. If you don't contact them with 60 days, in that case, it does go to the U.S. Treasury, where it's very unlikely to ever settle.
While the COVID crisis is unprecedented, much of the SBA OIC process remains the same as it did pre-COVID-19. It requires full disclosure, good communication and concrete proof that you are truly unable to repay 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 settlements is becoming more favorable than it has been for several years.