U.S. halts collection on some past-due COVID loans, sparking federal probes

The U.S. government has halted some efforts to collect an estimated $62 billion in past-due pandemic loans made to small businesses, concluding that aggressive attempts to recover the money — a portion of which may have been lost to fraud — could cost more than simply writing off the debt.

The Small Business Administration, which manages the program, adopted the policy last April, prompting the agency’s watchdogs to compute the potential losses in a September report that found the practice “risks” violating federal law. The internal directive since then has sparked an outcry on Capitol Hill, where House Republicans on Wednesday opened an investigation and joined their Senate GOP counterparts in demanding documents from the SBA.

At the height of the coronavirus pandemic, Congress created the COVID-19 Economic Injury Disaster Loan program, known as EIDL, which provided low-interest loans to cash-starved companies. From 2020 until it stopped accepting new applications in May 2022, the initiative disbursed roughly $380 billion to help firms stay afloat and maintain their payrolls amid the worst economic crisis since the Great Depression.

Unlike other pandemic-era programs, Congress required EIDL borrowers to pay back their loans, and some quickly appeared to fall behind: By March, the inspector general for the SBA projected that a subset of loans totaling about $62 billion were up to 30 days past due, or delinquent for longer, and that the number would probably grow.

Anticipating a wave of defaults, however, the SBA had already decided that it would not take the most aggressive actions possible to pursue borrowers who received loans worth $100,000 or less. The agency said it planned to send out stern letters demanding payments and threatening penalties, and it aimed to prohibit these borrowers from obtaining federal aid again. But the SBA opted against referring all unpaid and delinquent loans to the Treasury Department, which can garnish wages and initiate other collection activities, according to reports, letters and other materials prepared by SBA and its top watchdog that were later reviewed by The Washington Post.

Explaining its decision, SBA leaders said that the government at the time would be unlikely to recover most of the money anyway. They indicated they had few options because of decisions made under the Trump administration that limited debt collection, making the work to claw back money so costly that it would negate any potential federal savings.

The arguments did not satisfy the agency’s inspector general, Hannibal “Mike” Ware, whose office issued a scathing review in late September, warning that SBA’s repayment policy “could incentivize other COVID-19 EIDL recipients to stop paying on their loans.”

The fear about compounding losses also prompted Republicans in Congress to demand the agency turn over documents in connection with its management of EIDL as well as another pandemic initiative, the Paycheck Protection Program, known as PPP. If the SBA does not turn over some of the records, Rep. Roger Williams (R-Tex.), the chair of the House Small Business Committee, led 13 Republicans in a letter Wednesday that pledged his panel would “evaluate the use of compulsory process” — a subtle threat to obtain the materials by subpoena.

Sen. Joni Ernst (R-Iowa), the leading Republican on her chamber’s top small-business committee, similarly joined six other GOP lawmakers to request agency records Wednesday. In a statement, she faulted the SBA for a policy that appears to be in “violation of federal law based entirely on a faulty cost-benefit analysis.”

“It’s completely unacceptable that SBA is leaving taxpayers on the hook for $62 billion in EIDL loans,” she said.

The SBA declined to make top officials available for interviews, answer a set of specific questions or provide a fuller accounting about the state of its EIDL loans, including the number in default or written off as a loss.

In a statement, Han Nguyen, an agency spokesman, said that “borrowers need to repay their loans, and the agency will continue its collection efforts against all those who do not.” He added the EIDL program, in particular, uses the “most comprehensive set of legal and cost-effective tools to vigorously pursue repayment of loans, particularly those with legitimate fraud indicators.”

Otherwise, Nguyen said federal law allows the SBA to refrain from referring unpaid debts to the Treasury Department, since doing so could cost the government too much in staff, administrative hearings and mailings, while potentially harming mom-and-pop small businesses more than larger firms, which may be incorporated and benefit from other legal protections.

The new scrutiny underscored the growing discomfort in Washington over the SBA’s management of roughly $1 trillion in loans and grants during the pandemic. The troubles stemmed from the earliest days of the public health crisis, when the agency under President Donald Trump opted for haste over precision — rescuing millions of businesses in ways that ultimately exposed taxpayers to unprecedented waste, fraud and abuse.

“There was a real need to get the money out the door quickly,” said Liz Hempowicz, the vice president of policy and government affairs at the Project on Government Oversight, a nonprofit watchdog. “When it came to this balance between speed and accuracy, I think we miscalculated and put too much emphasis on getting money out the door quickly.”

Tasked to manage an aid portfolio larger than its annual budget, the SBA during the Trump administration did not incorporate basic safeguards, paving the way for scammers to steal real Americans’ identities and obtain scarce federal support in their names. In June, the agency’s inspector general said SBA’s main COVID relief programs may have lost about $200 billion just to potential fraud.

In recent months, federal watchdogs have grown newly concerned that the government could lose even more money if businesses don’t repay what they owe. Some of the delinquencies may reflect actual hardship; in other cases, aid recipients may be dodging debts, or their failure to pay back federal loans could suggest they obtained the money fraudulently. Nonetheless, the overall losses to taxpayers threatens to reach into the billions of dollars, compounding the government’s fiscal troubles as the deficit rises and interest rates soar.

Under federal law, the SBA is supposed to take every action possible to recover late payments, refer the matter to the Treasury Department or, alternatively, determine if the debts can’t be collected at all. To that end, the agency last April took the latter approach, finding that it would be financially unreasonable to pursue unpaid EIDL loans of $100,000 or less. The directive, which SBA Administrator Isabella Casillas Guzman did not announce publicly, mirrored a similar policy the agency applied that same year to PPP, a roughly $800 billion program that primarily issued loans that the government mostly forgave.

In data later furnished to its top watchdog, the SBA estimated in May that there were 1.3 million EIDL loans that were past due, in liquidation or charged off at the time. That added up to more than $33 billion, with some borrowers as late as 120 days on their bills. But the agency did not provide any additional information, nor did it provide monthly spending reports to the inspector general as requested — prompting federal investigators to conclude last month that they could not rely on SBA’s accounting.

“SBA has already ended, or will end, collections on these loans if they remain delinquent, and as additional loans become due, this number is likely to grow,” the watchdog warned in its report.

At one point, the SBA did consider alternative approaches, even hiring a contractor, unnamed in the inspector general report, to help assess its outstanding EIDL loans. The unpublished study, conducted in May 2021, included a recommendation that the agency sell off a portion of its debt to “ensure an exit strategy that would maximize the value of the portfolio,” potentially preventing the government from losing more money. But the SBA opted against such a sale as recently as February 2022, declining to say why.

In a written response to the report, dated Sept. 21, Jihoon Kim, the director of the agency’s Office of Financial Program Operations, primarily took issue with the assertion that the SBA had halted EIDL collections — pointing out, for example, that the agency continues to refer delinquent borrowers to credit-monitoring bureaus.

In another September report, though, the agency’s watchdog found further cause for concern, writing that the SBA failed for five years to submit timely loan data to Experian, one of the monitoring agencies that lenders consult when making a decision about a borrower. At least a dozen times in 2019 and 2020, Experian tried to reach SBA and alert them to the problem to no avail — leaving Experian no choice but to exclude the federal records from its commercial credit files.

SBA later said it has had “preliminary meetings” to address the issue.

“All these credit reporting systems help ensure that lenders have the data they need to make informed decisions about creditworthiness for individuals and small businesses,” acknowledged Sheri McConville, the acting director of the Office of Performance and Systems Management at SBA, in a follow-up letter to the inspector general.

The developments have infuriated Republicans in Congress, who for months have demanded — without success — that the SBA furnish data about the state of its outstanding pandemic loans.

Williams, the leader of the House’s top panel focused on small businesses, embarked on his own probe of the SBA’s repayment policies this spring, focusing first on PPP. Writing the agency again Wednesday, Williams joined 13 other Republicans in arguing the SBA had “failed to adequately justify either decision” with EIDL or PPP.

“The SBA should be treating these taxpayer-funded loans the same way as any business owner would who is owed a large debt,” Williams said in a statement. “The SBA should continue pursuing loans of all sizes rather than taking the path of least resistance.”