For years and years, I’d told people that in general, if your lender wasn’t reporting to the credit agencies while you were current on your loan, there was usually no adverse credit impact as a result of settling their SBA loan. Then a month or two ago, I got a note from a client that their SBA loan settlement had resulted in a credit report entry, and subsequently killed their credit. Today, I heard the same thing from a different client. In both cases, the SBA OIC was negotiated DIRECTLY with SBA (not to say this won’t happen in other circumstances, but this was the case with these 2 clients). My first client was able to successfully challenge the information, and it was successfully removed. I recommended to the 2nd client to do the same, so time will tell.
Things tend to change over time when it comes to negotiating an SBA Offer In Compromise. This is a good example of why having someone who handles these situations often is a good ally to have. Since articles about such things as credit reporting in connection with an SBA loan settlement can hang around on the internet for a good long while, you can’t necessarily rely on articles alone to guide you through the process. If you found an old article that I have written, but not this article, you’d be misinformed.
The idea of credit reporting when it comes to commercial loans was originally a “no-brainer” to me. I worked for a commercial lender who reported personal guarantors of commercial debt to credit reporting agencies, so I assumed that all lenders did the same. Then I went to work for a different bank, and they had a totally different view. The way they saw it, a commercial obligation is just that, and should not end up on a consumer credit report. As the years have passed, I learned that more commercial lenders chose NOT to report to credit agencies. This meant that if you defaulted on the loan, a hit to your credit was not something that was likely, as long as you managed to settle without there being any litigation. The SBA also stayed out of it. They would ban you from taking another SBA loan, but that was as far as it went. Until now. So as of now, you should assume that the SBA will report your settlement to the credit agencies, and it will potentially hurt your credit. With that said, the first client this happened to was able to get that info removed. Whether my other client or future clients will fare as well remains to be seen.
Overall, I don’t think this revelation will change people’s attitudes towards settlements. After all, it’s quite possible that SBA could report defaults on borrowers regardless of whether or not they settle their SBA loan (I don’t know this for sure, just speculating). So while it’s another reason to pull your hair out, settling your SBA loan successfully can still save you a significant amount of cash.
