AmiSight 5/10: Borrowers in Default of Disaster Loans Face a Steep Collection Fee

Disaster loans disbursed by the Small Business Administration to millions of small businesses and nonprofits during the pandemic provided a much-needed lifeline during this unprecedented time of uncertainty. But now some borrowers who defaulted on their repayments are facing a larger than expected bill with significant fees. 

Of the nearly four million COVID disaster loans provided during the pandemic, the SBA is currently servicing about 2.2 million loans outstanding and has charged off roughly 20% of its $390 billion COVID disaster-loan portfolio, according to a Wall Street Journal article. 

The SBA has referred 860,000 delinquent COVID disaster loans totaling more than $59 billion to the Treasury Department for collection. The Treasury charges federal agencies a 30% collection fee for debts that have been delinquent for two years or less and a 32% fee for older debts—a sticker shock for many borrowers who are still struggling or have closed their doors. 

Following inquiries from The Wall Street Journal, the SBA said the two agencies had come to an agreement that releases the agency from a requirement to refer loans once they are 180 days past due to the Treasury for “cross-servicing,” a process in which they are assigned to a collection agency. Under the new plan, the SBA will conduct early-stage collection activities for up to two years before making a mandatory referral.

Borrowers are eligible for the new option even if their loan has already been sent to the Treasury, the SBA said. To enroll, borrowers must contact the SBA’s COVID disaster-loan servicing center.