US halts collection on some past-due COVID loans

But watchdog and Congress question plan

The US 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, Representative Roger Williams, a Republican from Texas, 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.

Senator Joni Ernst, a Republican from 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 spokesperson, 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.”