Big wave of Covid relief loans could be sent to debt collectors as lawmakers target program

Covid | Relief loans | Debt collections | Treasury | March 12, 2025

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The Small Business Administration would be mandated to send many loans made under the Covid Economic Injury Disaster Loan program to the Treasury Department for collections under legislation put forth by the Senate Small Business Committee.

The Complete Covid Collections Act would require the SBA to refer any loans made through the EIDL program that are eligible for collections to the Treasury Department, which would have the option to suspend, end or make collection efforts. That referral would essentially remove the discretion the SBA often has exercised when it comes to loans under its purview.

The agency drew heat from lawmakers during the Biden administration for saying it would not collect on Covid-related Paycheck Protection Program loans of less than $100,000. Lawmakers at the time expressed concern the agency also would not collect on smaller EIDL program loans.

Sen. Joni Ernst, R-Iowa, chair of the Senate Small Business Committee, sponsored the legislation.

The SBA last year did roll out a brief reprieve from collections efforts and also pulled back a tranche of EIDL program loans set for collection by the Treasury Department. Business owners who were not current on their loans but started making payments were allowed to enroll in the SBA’s Hardship Accommodation Program, allowing those businesses to stave off collections further. 

About $36 billion in EIDL-related loans were enrolled in the Hardship Accommodation Program as of October — spanning about 301,000 loans, according to data provided to The Playbook as a result of a Freedom of Information Act request to the SBA. It's a big chunk of the agency's overall portfolio. The SBA approved about 4.1 million EIDL-related loans across 2020, 2021 and 2022 for a total of $397.5 billion, according to numbers compiled by the agency.

Ernst said in a statement to The Playbook the legislation targets people who broke the law to get hundreds of billions in government funds.

“At $36 trillion in debt, we cannot afford to leave $200 billion sitting on the table, especially in the hands of fraudsters,” Ernst said, referencing the amount of money distributed through the program that has been flagged as potentially fraudulent. “We are marshaling all the resources necessary to recoup these funds and hold these criminals accountable. Con artists took advantage of small businesses’ pain. They will not get away with it.”

The legislation also would:

• Extend the life of the office of special investigator for pandemic recovery by five years, to 2030, and give law enforcement up to 10 years to file charges or enforcement actions for fraud under any of the Covid-19 small-business programs, including the Shuttered Venue Operators Grant program and the Restaurant Revitalization Fund program.

• Require the SBA administrator to testify annually about the implementation of collections claims and the improper payments they discovered.

• Require the Attorney General to submit a report to Congress 90 days after the bill becomes law on enforcement actions, number of prosecutions, amounts recovered and other items — and then monthly thereafter. 

The legislation would need to be passed by the House and Senate before being signed by President Trump, but Republican control of Congress could aid the act's advancement, whether as a standalone bill or packaged into larger legislation.

Senate Small Business Committee ranking member Ed Markey, D-Mass., said in a statement following the passage of the legislation out of committee this week on a party-line vote that the bill “unleashes debt collectors on struggling small businesses, including those making good faith attempts at repayment."

But it's clear that former Republican Sen. Kelly Loeffler, who has been nominated to be the next SBA administrator, will make recovering small-business pandemic funds a high priority. She said in a recent hearing the agency would have a “zero-tolerance policy” toward waste, adding she would be “continuing Covid collections” to ensure the greatest return to the taxpayer, although she did not specify what those collections could mean.

While some small-business owners have pressed the Trump administration to consider forgiving such loans, there currently are no efforts in Congress to do so. Experts previously have said such forgiveness is unlikely, given its cost to the government, but stressed the SBA could institute "offers in compromise" or other negotiated settlements of outstanding loans.

SBA's ongoing Covid EIDL challenges

The SBA has hit a number of obstacles servicing the massive portfolio of EIDL loans.

The SBA Office of the Inspector General, which serves as an independent watchdog for the agency, said in its annual report last year, released Oct. 15, that prior to the Covid-19 pandemic, the SBA typically serviced about 263,000 disaster loans totaling about $9.4 billion.

The agency now is servicing about 2.5 million disaster loans totaling $283 billion — a more than ninefold increase in volume. The SBA has taken steps to service such a massive portfolio, according to the report, including the establishment of a standalone Covid-19 EIDL servicing center in Fort Worth, Texas, with more than 1,500 employees.

Under the Trump administration in 2020, the SBA reduced or eliminated internal controls on its lending in order to expedite loans during the early days of the Covid-19 crisis, according to the report. The IG estimates the agency ultimately disbursed about $236 billion in fraudulent Covid EIDL loans. 

Meanwhile, many of the SBA's EIDL program loans are being charged off and considered in default. In 2021, the agency charged off $21.5 million in EIDL program loans. That grew to $198.2 million in 2022. In 2023, the agency charged off $52 billion in EIDL loans — about 17% of its portfolio. The agency charged off another $18.6 billion last year.

But as the agency deals with rising delinquencies, it is largely unable to sell off the collateral it required of businesses when it issued the EIDL programs loans, and it instead has been turning to those same business owners that put up the collateral for assistance.

The agency has asked owners of those business — companies currently in bankruptcy proceedings — along with other creditors, such as landlords, to draw on their "civic-mindedness and desire as a taxpayer" to spend time and money addressing the SBA's own lien-holder rights in regards to the collateral.

The number of impacted businesses is expected to grow, as the SBA finds itself among the top creditors for many small businesses declaring bankruptcy.

 
Credit goes to Andy Medici, Senior Reporter, The Playbook, The Business Journals, February 6, 2025

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This Week’s Author, Mark Bradstreet