Government Shutdown Impact on USDA and SBA Loan Programs: A Technical Briefing for Lenders

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Overview of Shutdown Effects on Federal Lending

In a shutdown, federal agencies face a lapse in appropriations – no funding to operate. Under the Antideficiency Act, agencies are prohibited from incurring new obligations in the absence of enacted funds, except for very limited circumstances (such as emergencies involving safety of human life or protection of property). As a result, program activities that are not deemed “excepted” must cease until funding is restored. Each agency follows an OMB-approved contingency plan that identifies which functions continue as excepted (with minimal staff) and which employees are furloughed. For federal lending programs like those of USDA and SBA, loan origination and guarantee issuance are generally considered non-essential and are suspended during the shutdown. Only certain servicing tasks or emergency actions (aimed at protecting the government’s collateral or supporting disaster relief) continue under exceptions for the protection of property or other authorized purposes.

USDA Rural Development Lending Programs During a Shutdown

Most U.S. Department of Agriculture (USDA) Rural Development (RD) program operations grind to a halt during a federal shutdown. USDA’s contingency plan indicates that the majority of RD staff (over 80%) are furloughed, and virtually no new loans, grants, or loan guarantees can be issued without an appropriation. Below we outline the impacts on major RD loan programs, including single-family housing (guaranteed and direct), multifamily housing, and Business & Industry loans:

Single-Family Housing Guaranteed Loans (Section 502 Guaranteed)

• No New Guarantees: The Section 502 Guaranteed Loan Program (USDA Single-Family Housing Guaranteed loans) cannot issue new loan guarantees during a shutdown. USDA will not process new loan applications or approve new guarantees as long as funding is lapsed. Lenders using this program will find the USDA’s loan processing systems offline and personnel unavailable to review applications.

• Closings with Conditional Commitments: If USDA had already issued a Conditional Commitment for a loan guarantee before the shutdown, lenders and borrowers may choose to proceed with the loan closing despite the lapse. In other words, if a homebuyer’s loan was pre-approved and USDA provided a commitment to guarantee (subject to conditions), the lender can close the loan at its own discretion. However, the USDA cannot issue the final Loan Note Guarantee until the government reopens. The lender would be assuming the risk during the interim period before the guarantee is formally in place. Many lenders will be cautious with this approach – proceeding only if they are comfortable with the credit risk – but it can prevent a rural home purchase from falling through while federal offices are closed.

• Impact on Lenders/Borrowers: Lenders should communicate with any borrowers in this pipeline about potential delays. Home purchase transactions may require extensions on closing dates if the guarantee cannot be finalized. In past shutdowns, some real estate deals were put on hold due to USDA’s inability to issue guarantees, unless lenders were willing to fund the loans without the guarantee in the short term. It’s a balancing act between keeping the deal alive and managing the lender’s risk exposure until USDA resumes normal operations.

Single-Family Housing Direct Loans (Section 502 Direct)

• No New Direct Loans: The Section 502 Direct Loan Program (where USDA directly lends to low-income rural homebuyers) ceases new loan approvals and closings during a shutdown. USDA cannot approve applications, issue new direct loan obligations, or disburse funds for direct mortgages without budget authority. Any pending direct loan applications will be in limbo until funding is restored by Congress.

• Pre-Approved Cases: Even if a borrower had been issued a Certificate of Eligibility (COE) or received initial approval for a direct loan prior to the shutdown, they will likely experience delays. Since the government itself provides the financing in this program, no closings can occur until USDA staff return to work and funding is available. In the 2018–2019 shutdown, for example, USDA’s Rural Housing Service had to reissue COEs to all Section 502 direct loan applicants who had valid certificates before the shutdown, essentially restarting the closing process once funds became available. Borrowers in this program must unfortunately wait out the shutdown; lenders (or intermediaries) should help manage their expectations and, if possible, preserve interest rate locks or other time-sensitive arrangements for these loans.

• Related Programs: Other single-family direct programs, such as Section 504 loans and grants for home repair, are similarly frozen. No new Section 504 loans or grants can be approved, although USDA may prioritize any post-shutdown closings for cases involving health or safety emergencies once operations resume.

Multifamily Housing Programs (Loans and Rental Assistance)

• No New Multifamily Loans or Guarantees: USDA’s multifamily housing programs (e.g. Section 515 Rural Rental Housing direct loans, Section 538 Guaranteed Rural Rental loans) will not issue new loan commitments or guarantees during the shutdown. Applications for new multifamily development loans or rehabilitation loans under these programs will be on hold. Likewise, other community facilities loans and grants are paused (USDA RD’s plan explicitly notes no new loan guarantees in housing or community facilities during a lapse).

• Rental Assistance Continues (Limited): A critical aspect of USDA’s multifamily portfolio is the Section 521 Rental Assistance (RA) provided to landlords of USDA-financed rural rental housing. According to USDA’s contingency plan, rental assistance payments for contracts already in effect will continue, but only to the extent funds were previously obligated. USDA will not have authority to renew RA contracts that expire during the shutdown. In practical terms, this means property owners will continue to receive subsidy payments only until the funding already in the pipeline is exhausted. If the shutdown persists and RA contracts start to expire without renewal, some owners could face shortfalls. (Notably, unlike HUD, USDA cannot renew rental assistance contracts during a lapse, which became a concern in the 2018–2019 shutdown.)

• “Excepted” Servicing to Protect Property: USDA will maintain minimal operations to protect its financial interest in existing properties. According to the contingency plan, servicing of existing loans will continue only as necessary to protect the government’s property interests. This includes activities like processing nightly updates to loan accounting systems, making insurance and tax payments from borrowers’ escrow accounts, and performing essential oversight to avoid jeopardizing collateral. For instance, if a USDA-backed multifamily property is in or near foreclosure, essential staff might continue a foreclosure proceeding or intervene to secure the asset. Similarly, disbursements on already-obligated construction loans (or grants) for housing projects will continue if stopping them would risk unfinished construction or wasted resources. These measures are legally allowed under the “protection of property” exception – they prevent harm to the government’s collateral during the downtime.

• Implications for Lenders/Owners: Lenders involved in USDA multifamily deals (or holding USDA-backed multifamily loans) should be aware that while cash flow subsidies to properties (RA) should continue for a time, any new loan closings or issuances of guarantees will not happen during the shutdown. Owners of properties under construction can draw previously obligated loan funds, but any oversight requiring USDA approval could be delayed. If you are financing a USDA 538 Guaranteed loan, for example, and had a closing scheduled during the shutdown, that closing will likely need to be postponed unless all USDA actions were completed beforehand. Lenders should stay in close communication with borrowers and USDA officials (to the extent possible) about any urgent needs to ensure property preservation.

Business & Industry (B&I) Guaranteed Loans

• No New B&I Guarantees: The USDA Business & Industry (B&I) Loan Guarantee program is also effectively on hold during a federal shutdown. Like other RD programs, it relies on annual appropriations. No new B&I loan approvals or guarantee commitments will be issued as long as USDA RD is unfunded. Lenders cannot receive a Loan Note Guarantee or any new conditional commitments for B&I loans during this period.

• Pipeline Impact: If a B&I loan application was in process or awaiting a conditional commitment from USDA, it will remain pending until the shutdown is resolved. For loans that had already received a conditional commitment prior to the shutdown, technically the same principle applies as with single-family: the lender could proceed to close the loan at their own risk. In practice, however, B&I loans tend to be large and carry significant risk, so most lenders will be reluctant to disburse funds without the USDA guarantee in hand. It’s more likely that B&I loan closings will be delayed. Lenders should communicate with the rural business borrowers or project sponsors in these deals and possibly seek bridge financing solutions if a delay would jeopardize the business (more on bridge strategies in Best Practices below).

• Ongoing Servicing: USDA will continue to service existing B&I guaranteed loans only for protective purposes. For instance, if there is an existing B&I loan that defaults during the shutdown, USDA’s essential staff may process loss claims or take action to protect collateral (just as they would for housing loans). Routine servicing requests that require USDA sign-off (like restructuring a B&I loan) will likely wait until after the shutdown. Lenders servicing B&I loans should proceed with any actions within their authority and defer those requiring USDA approval unless an emergency dictates otherwise.

• Associated Programs: Other Rural Business-Cooperative Service programs (such as Rural Energy loans, Value-Added Producer Grants, etc.) also cease new activity. Although not the focus of this briefing, lenders involved in those programs should assume no new grants or loan guarantees will be processed during the lapse in funding.

SBA Loan Programs During a Shutdown

A federal shutdown significantly affects the U.S. Small Business Administration’s loan guarantee programs, notably 7(a) loans and 504 loans. These programs depend on annual appropriations (for administrative costs and loan guarantee authority), so a lapse means SBA largely cannot operate them as normal. According to SBA’s own shutdown plan, the agency will stop approving new business loans and furlough the majority of its staff until funding is restored. Below is a breakdown of how the SBA’s primary loan programs are impacted:

SBA 7(a) Loan Program

• No New Loan Approvals: During a shutdown, the SBA cannot issue new 7(a) loan approvals or authorizations. This applies to all 7(a) loan types, including standard 7(a), SBA Express, Export Express, etc. SBA’s Capital Access financial systems (such as E-Tran and SBA One) used for loan processing are unavailable for new applications. Even lenders with delegated authority (Preferred Lender Program, PLP) cannot bypass the shutdown – they still need an SBA loan number to finalize a guarantee, and SBA’s systems will not issue new loan numbers during the lapse. In short, no new 7(a) loans can be approved or guaranteed until the government reopens and SBA reactivates its loan processing operations.

• Applications in Process: Any 7(a) loan applications or guarantee requests that had been submitted but not approved before the shutdown will remain in limbo. SBA does not maintain an official “queue” for unapproved loans during a shutdown; the process simply freezes. Once the SBA reopens, those applications will be taken up again in whatever order SBA manages, potentially alongside a surge of new applications. Lenders should be prepared for a backlog (as discussed later) and communicate to applicants that approval timelines will be extended.

• Existing Approved Loans: If a 7(a) loan was approved and an SBA loan number was issued prior to the shutdown, that loan is essentially grandfathered in. Lenders may proceed with closing and funding such loans despite the shutdown. The SBA loan guarantee is considered valid once the loan number/authorization is issued, so the guarantee will still apply. For example, if you got an SBA Authorization for a loan on September 28 (before the lapse), you can close that loan in October and have confidence that the SBA guarantee is in place. One caveat: lenders cannot obtain any modifications to that authorization during the shutdown. So, if post-approval you realize you need to increase the loan amount or make a material change, you cannot get SBA approval for that change until after the shutdown (SBA treats an increase as a new obligation, which is not allowed during the funding lapse).

• Servicing and Guarantees of Existing 7(a) Loans: Lenders can continue to service their existing SBA-backed loans during a shutdown, but with limitations. Actions that are entirely within a lender’s unilateral authority (according to SBA’s rules) can be taken as usual – for instance, routine servicing, collections, or deferments that don’t require SBA sign-off can continue. SBA’s E-Tran system has a servicing module that remains available for lender-initiated servicing actions (except those explicitly requiring SBA approval). However, any action that does require SBA’s prior approval cannot be processed during the shutdown. Examples include increasing a loan, adding a collateral release that’s outside of unilateral authority, or any action where the 7(a) program rules say “SBA consent required.” These requests will have to wait. Importantly, SBA has designated a very small number of essential personnel to handle emergency servicing issues that are necessary to protect the government’s interest in outstanding loans. This means if there’s a situation truly critical – say a need to prevent an immediate loss on a loan – SBA may consider making an exception. SBA’s contingency plan notes that such staff (e.g. at the National Guaranty Purchase Center and servicing centers) can work on liquidation or servicing actions that are critical to preserving collateral or recovering funds. For most routine matters, though, lenders will be on their own to the extent of their delegated authority until normal operations resume.

• Secondary Market Operations: The shutdown also disrupts the secondary market for 7(a) loans. Typically, lenders sell the guaranteed portion of 7(a) loans in a secondary market (through an FTA, currently BNY Mellon/Colson). During the shutdown, SBA staff are not available to facilitate new secondary market sales or to process actions like guarantee purchases. According to industry updates, SBA ceased processing new secondary market settlement packages as the shutdown began – only packages submitted before the lapse were handled. The Fiscal Transfer Agent (Colson Services) may remain operational for certain functions, but without SBA personnel, no new guaranteed loan sales can be settled. Lenders that were planning to sell loan participations will need to hold those loans on balance sheet longer, which could impact liquidity or capital utilization. Additionally, if a borrower defaults and a lender needs to put in a guaranty purchase request (for SBA to buy back the loan), that purchase request will not be processed during the shutdown. Lenders should thus plan for a temporary freeze in secondary market liquidity.

• Other Support Functions: Certain related verifications and support functions are also impeded. For example, verification of borrower tax returns via the IRS (4506-T transcripts) could become a bottleneck. During this particular shutdown, the IRS had some funding (from the Inflation Reduction Act) to operate for a short time, but generally in a prolonged shutdown, IRS income verification services might be unavailable. SBA loans often require tax transcripts to verify borrowers’ financials; if the IRS stops processing those, it adds another delay to closing even for loans that SBA had approved. Similarly, SBA’s system for verifying the immigration status of non-U.S. citizen borrowers (the SBA’s “verification of non-citizen status”) is down during a shutdown, meaning lenders cannot get clearance for borrowers who are lawful permanent residents, for instance. Lenders should document such issues and inform borrowers that these third-party dependencies are on hold.

SBA 504 Loan Program

• No New 504 Authorizations: The CDC/504 Loan Program is likewise curtailed. SBA will not issue any new loan approvals or authorizations for 504 loans during the shutdown. Certified Development Companies (CDCs) cannot get new 504 debentures approved, and the SBA will not guarantee any new debenture that wasn’t already green-lit before the lapse. Essentially, any small business or project waiting for 504 financing approval will have to wait longer.

• Closing Delays for Approved Projects: If a 504 loan was already approved (Authorized) by SBA before the shutdown, the situation is somewhat complex. The 504 loan process involves a temporary (interim) financing by a third-party lender and the CDC, followed by the sale of an SBA-guaranteed debenture that provides permanent financing for the CDC’s portion. During a shutdown, SBA personnel who normally review closing documents and facilitate the debenture sale are furloughed, so the final closing and funding of the 504 debenture is put on hold. Interim lenders (often the bank providing the 50% first mortgage) typically fund the CDC’s second-mortgage piece on an interim basis with the expectation that the SBA-backed debenture will take it out shortly. Those interim loans will now remain outstanding longer than planned. SBA’s contingency materials explicitly acknowledge this issue: the inability to complete 504 debenture closings during a shutdown places a burden on interim lenders and borrowers who were relying on the take-out financing. SBA indicated that if a shutdown were prolonged and 504 closings threatened to fall through, they might recall some legal staff as “excepted” to handle critical 504 closings as activities implied by law. But initially, all 504 closings are paused. Lenders that are funding 504 interim loans (or buying the debentures) should be prepared for extended holding periods. It’s wise to communicate with the relevant CDC on how they plan to schedule debenture sales once SBA reopens (there could be a backlog of deals to close).

• Servicing and Liquidation: SBA’s Office of Capital Access will keep a skeleton crew for certain 504 servicing and liquidation functions to protect the government’s interest. Notably, SBA is solely responsible for liquidating defaulted 504 loans, so the agency will ensure some capacity remains to handle urgent defaults or workout actions even during a lapse. Routine servicing that CDCs can do without SBA (such as minor modifications within their authority) can continue, but anything needing SBA approval (for example, a substitution of collateral on a 504 loan or a refinance of a 504 with SBA’s involvement) will be deferred. Lenders and CDCs should document any issues and be ready to present them to SBA when normal operations resume.

• Exceptions – Disaster Loans and Microloans: It’s worth noting that not all SBA lending stops. Two key exceptions are:

  • SBA Disaster Loans: The SBA’s Disaster Loan Program (including Disaster Home and Business loans and Economic Injury Disaster Loans) continues to operate during a shutdown. These loans are funded through a permanent indefinite appropriation for disaster relief and are considered essential for protecting life and property. Thus, if your borrower is in a declared disaster area and was seeking an SBA disaster loan, those applications will still be processed by the Office of Disaster Assistance, which remains open. This does not directly affect 7(a) or 504 lending, but it’s useful to know in case clients have parallel disaster needs.

  • Microloan Program: The SBA Microloan program provides loans to intermediary nonprofit lenders, who in turn lend to very small businesses. During a shutdown, SBA will not issue new loans to microloan intermediaries or new technical assistance grants, since those are new obligations. However, because intermediaries already have pools of funds from prior SBA loans, they can continue making microloans to entrepreneurs from their existing capital. In other words, the flow of funds from SBA to the intermediaries stops, but the flow from intermediaries to ultimate borrowers may continue normally. From a borrower’s perspective, microloan availability should remain, but from an intermediary’s perspective, they cannot get additional SBA funding until after the shutdown.

Timing and Procedural Risks for Lenders

A lapse in federal funding introduces significant timing and procedural uncertainties for lenders participating in USDA and SBA loan programs. Key risks and challenges include:

• Disrupted Closings: Loan closings that rely on a federal guarantee or direct federal funding can be suddenly derailed by a shutdown. For example, a rural homebuyer expecting to close with a USDA-guaranteed mortgage may find that the USDA cannot issue the final guarantee or answer last-minute questions, forcing a delay. In the SBA realm, a business acquisition or expansion financed by a 7(a) loan cannot close if the SBA hasn’t provided an authorization number. These disruptions can cascade: home purchase agreements might expire (the buyer’s financing contingency can’t be met), sellers of businesses or real estate may balk at extensions, and interest rate locks on loans could lapse. Lenders face not only operational headaches but also potential liability or relationship damage if closings fail. To mitigate this, some lenders might proceed without the guarantee (at significant risk), while others must negotiate extensions or provide temporary financing solutions. Every deal in the pipeline becomes a special case analysis of how to keep it alive during the pause.

• Inability to Obligate Funds: A core legal reality of a shutdown is that agencies cannot obligate funds without appropriation. This means no new government-backed loan obligations can be made. In USDA’s case, this stops the government from obligating direct loan funds or guarantee subsidy for new loans. In SBA’s case, it means no new guaranteed loan approvals. Lenders and borrowers have no choice but to await the restoration of funding authority. For direct loan programs, this also means that even if all paperwork is done, the federal agency cannot disburse the loan. This puts borrowers in a holding pattern, and lenders (in the case of guaranteed loans) cannot advance with assurance of coverage. The inability to obligate extends even to some functions like issuing new loan guarantee certificates or modifying existing obligations – effectively a hard freeze on financial commitments from the government.

• Pipeline Backlogs: Every day that USDA and SBA lending operations are inactive contributes to a growing backlog of loan applications awaiting action. Once the shutdown ends, a flood of pent-up demand hits the agencies. For perspective, the record 35-day shutdown in late 2018 to early 2019 delayed an estimated $2 billion in SBA lending, roughly 300 loans per day that went unapproved during that period. Those loans didn’t disappear – they piled up and had to be processed after reopening, on top of the normal volume. Lenders should brace for slower approvals even after the government reopens, as it may take time for agencies to dig out from under the accumulated files. This can affect rate lock expirations and business plans. Some borrowers might even drop out or seek non-SBA financing if the wait becomes too long, which is a lost opportunity for lenders. In addition, for USDA programs, the backlog could include not just loan applications but also construction inspections, payment approvals, and other admin tasks that were on hold. The post-shutdown period could be a hectic time with continued delays, so lenders should plan capacity for extra follow-up and monitoring.

• Timing Uncertainty and Lapse in Approvals: The timing of the shutdown’s end is unknown, which makes planning difficult. A short shutdown (a few days) might have minimal impact beyond minor delays. But a lengthy shutdown (weeks or more) can cause approvals or commitments to “time out.” Many loan approvals and appraisals have validity periods. For instance, an SBA loan authorization usually has an expiration date (often 90 days or 6 months out). USDA conditional commitments similarly are time-limited. A long shutdown could push some approvals past their expiration, requiring extensions or even re-underwriting in extreme cases. Additionally, documents like appraisals, credit reports, and title searches could go stale if too much time passes, forcing lenders to refresh them at additional cost. This uncertainty in timeline is itself a risk – lenders and borrowers are left guessing whether to wait, to arrange interim solutions, or to restart processes.

• Guarantee Gaps and Lender Exposure: If lenders decide to close loans before the guarantee is issued (which, as noted, is allowed in certain USDA cases and informally possible with SBA via bridge loans), they face a period where the loan is uninsured by the government. Should the borrower default during that window, the lender would have no guarantee to fall back on. Even though the shutdown may only last weeks, Murphy’s law can strike – a sudden borrower issue or even documentation error might jeopardize the eventual guarantee. In the USDA Single-Family Guaranteed program, USDA explicitly warns that the lender bears the risk if it closes during the shutdown without the final guarantee. Lenders must assess their risk tolerance and possibly hold higher loan loss reserves for any such loans. There’s also reputational and legal risk: if for some reason the agency later denies the guarantee (perhaps a condition wasn’t actually met), the lender is left holding a conventional loan to a borrower who likely qualified only under the government program’s more favorable terms. While these scenarios are rare, they are not impossible. Thus, proceeding without a guarantee should involve careful consideration and documentation.

• Collateral and Construction Risks: Some loans involve construction or project development that is time-sensitive. For example, in USDA Community Facilities loans or certain 7(a) loans for construction, work may be ongoing that depends on periodic government approvals or disbursements. During a shutdown, USDA has authority to continue disbursing previously obligated construction funds to protect property, which is a relief for USDA-backed construction projects – they won’t leave a project half-built solely due to the lapse. However, any required inspections or approvals by federal staff (say, a final inspection for a USDA construction draw) might be delayed, which can slow the project. In SBA’s case, if a 7(a) loan for construction was already fully approved and disbursed, it proceeds. If it was not fully disbursed or approvals for draws are needed, that could be an issue (though typically SBA loans give control to lenders for disbursements). Interim financed projects under 504 are at risk because the take-out financing is delayed – the interim lender may be stuck longer, and any issues that arise (like cost overruns) have to be managed without SBA funds until after the shutdown. Lenders with customers in the middle of construction should be proactive in ensuring financing remains in place and that contractors/subcontractors are aware of any slowdowns in payments to avoid liens or work stoppages.

• Regulatory and Compliance Considerations: Regulators (FDIC, OCC, NCUA, Federal Reserve) have in past shutdowns encouraged lenders to work with customers affected by the shutdown. For example, in 2019 the banking regulators issued statements that prudent efforts to modify terms or extend credit to affected borrowers would not be criticized by examiners. While this guidance often focuses on consumer borrowers (like furloughed federal employees), it can also apply to small businesses waiting on SBA loans or builders waiting on USDA funds. Lenders should document the extraordinary circumstances to justify any temporary accommodations. Additionally, compliance timelines (e.g., on closing disclosures in mortgages) might need careful handling if dates shift; lenders may need to reissue disclosures if closings are postponed beyond certain timeframes. These procedural nuances add to the burden of managing loans during a shutdown.

In summary, a shutdown injects unpredictability into the lending process. Lenders must navigate between pausing deals (and potentially losing them) or finding creative ways to advance them without the usual federal support. The risks span financial, operational, and compliance domains, but with foresight and open communication, many of these risks can be mitigated, as discussed next.

Pre-Approved Loans vs. New Applications: What Can Proceed?

One crucial distinction for lenders during a government shutdown is whether a given loan was already approved (or conditionally committed) by the agency before the shutdown, versus being a new or pending application. The status of the loan in the approval pipeline will determine what, if anything, can move forward:

• Loans Already Approved / Committed Before the Shutdown:For these loans, the groundwork with the agency is done, so they are closer to the finish line:

  • USDA Guaranteed Loans (Section 502 or B&I) with Conditional Commitments: If USDA issued a Conditional Commitment for a guarantee prior to the shutdown, that commitment is valid through its stated expiration date. Lenders have the option to close the loan during the shutdown relying on that commitment. USDA will then issue the formal Loan Note Guarantee after the shutdown, once staff return and can verify that all conditions (e.g. proper closing and documentation) were met. The key point is that the credit subsidy for that guarantee was essentially reserved pre-shutdown, so the guarantee will be honored as long as the lender followed the requirements. During the interim, the lender carries the loan without the guarantee (hence, at its own risk). Most lenders will make this decision case-by-case, weighing the borrower’s profile and the lender’s ability to absorb the risk if something goes awry. Lenders should document their rationale for closing under a commitment and ensure all commitment conditions are strictly satisfied, to avoid any hiccup when submitting for the final guarantee. (It’s worth noting this policy is most commonly utilized for single-family USDA loans, where timing is critical for home purchases. In the B&I program, such scenarios are less common due to larger exposure, but the principle would be similar if a commitment was in hand.)

  • USDA Direct Loans Approved Pre-Shutdown: Unfortunately for direct loans, even if an applicant was fully approved and just waiting on closing/funding, nothing can really proceed until the shutdown is over. The government must actually disburse funds for a direct loan, and that cannot happen without an appropriation. USDA in some cases can issue “soft” approvals (like Certificates of Eligibility), but those do not equate to obligated funds. If a direct loan’s funds were not obligated before the lapse, the applicant must wait. The agency may prioritize these backlogged closings once staff return. As noted, after the last extended shutdown, USDA revalidated approvals for Section 502 direct loans to ensure those borrowers could close promptly when funds became available.

  • SBA 7(a) Loans with SBA Authorization (Loan Number): If an SBA 7(a) loan has an authorization issued (i.e., an SBA loan number) prior to the shutdown, the SBA guarantee is effectively in place and the loan can be closed and disbursed. Lenders do not need further interaction with SBA to close an already-approved loan. Thus, pre-approved 7(a) loans are largely unaffected in terms of closing. The borrower can receive the funds, and the lender can book the loan with the SBA guarantee attached. The only caution is to avoid any changes to the terms that would normally require SBA’s consent – since that consent is unavailable until later, lenders should either stick to the originally approved terms or be prepared to hold off on disbursing any portion that is in question.

  • SBA 504 Loans with Prior Authorization: If a 504 project was approved by SBA (meaning the CDC has an authorization for the debenture guarantee) prior to the shutdown, the interim 504 loan can close, but the permanent financing (the SBA-backed debenture) will be delayed. In practice, the third-party lender (the bank funding the 50% loan) and the CDC can coordinate to close the project: the bank provides its loan as usual, and often also funds the CDC’s interim second lien (sometimes the CDC’s corporate funds or another source provide this interim financing). These interim arrangements assume that within a month or two, the SBA-backed debenture will be sold and the interim second lien taken out. With SBA offices closed, that take-out cannot occur until the shutdown ends and SBA processes the debenture closing. Interim lenders should confirm that their interim loan documents allow for an extended period before payoff. SBA has acknowledged that a prolonged inability to close debentures is harmful, and indicated it would call back legal staff to close 504 loans if absolutely necessary, but by default, approved 504 loans just wait in closing pipeline. Lenders involved should stay in touch with CDCs – possibly the debenture issuance schedule might be adjusted (for example, scheduling an extra debenture sale as soon as SBA reopens to catch up on missed closings).

  • Other USDA/SBA Programs (RA, etc.): In multifamily RA, an existing rental assistance contract that has been funded will keep paying until those funds run out, which is analogous to an “approved” commitment continuing. Similarly, if an SBA disaster loan was approved, it will disburse (since disaster operations continue). These are edge cases for most lenders but underscore that anything already fully funded or obligated tends to continue, whereas anything pending does not.

• New or Pending Loan Applications (Not Approved Before Shutdown):For loans that were in the pipeline but hadn’t reached approval, or new customers coming in during the shutdown, here’s the outlook:

  • USDA Guaranteed Loans – New Applications: Lenders cannot submit new applications for USDA loan guarantees during the shutdown because the USDA’s systems and personnel are not available to accept them. Any files in early stages of review with USDA will be put on hold. No new Conditional Commitments will be issued until after the lapse. Lenders should continue to process these files internally (credit analysis, obtaining documentation) so they are ready to go when USDA reopens, but they should not expect any movement on USDA’s side. Essentially, these loans are in a holding pattern. Borrowers should be notified that their approval timeline is slipping day-for-day with the shutdown’s length.

  • USDA Direct Loans – New Applications: Applicants who were about to apply or had applications in process for USDA direct loans (e.g. Section 502 or 504) will see a full stop in progress. USDA field offices will be closed or minimally staffed; no new interviews, home appraisals, or approvals will occur. For very time-sensitive direct loan cases (such as a pending home purchase), there are limited options – perhaps the borrower could see if they qualify for other financing (like an FHA loan) as a fallback, but that may not be feasible for very low-income applicants. Lenders like local banks or nonprofit intermediaries involved in packaging direct loans can only wait and keep the applicant engaged until USDA resumes work.

  • SBA 7(a) – New Applications: No new 7(a) loan applications can be submitted or approved during the shutdown. Lenders may continue taking applications from prospective borrowers and even underwrite them up to the point of SBA submission, but they cannot get an SBA loan number while the shutdown is in effect. SBA’s lending platform will reject new entries. Importantly, SBA has stated it will not queue up or partially process requests – it’s a hard stop. This means once the government reopens, all the new 7(a) requests will effectively arrive at once. Lenders should manage borrower expectations by explaining that even after reopening, there could be a first-come, first-served situation and some delay due to volume. For now, the best course is to get the application completely lender-approved (subject to SBA) and be ready to hit “send” to SBA as soon as E-Tran is live again.

  • SBA 504 – New Projects: Likewise, any new 504 loan requests (for example, a business buying a building and seeking a 504 loan) cannot receive SBA approval in a shutdown. CDCs will likely still accept and even process applications (they can do a lot of the groundwork), but they cannot get the authorization from SBA that is required to fund the debenture. For borrowers, this means potential delays in project start dates. If a purchase or construction project was contingent on 504 financing, parties may need to extend contract timelines. Some creative CDCs and bank partners might explore bridge financing (similar to the 7(a) bridge concept) where the bank could do an interim conventional loan for the CDC’s portion and refinance into 504 later – but that’s a complex workaround, and not common unless absolutely necessary.

  • Other SBA Programs – New Activity: During a shutdown, SBA will not issue new Microloan program grants or intermediary loans, as noted, and programs like SBA surety bond guarantees for contractors are also paused for new approvals. Lenders involved in those areas (or small business clients who depend on them) should be aware of the freeze. One exception: SBA’s Secondary Market Authority might allow some secondary market support transactions if already in motion, but no new sales will be approved.

In essence, pre-approved loans have a chance to proceed (with caution), whereas new applications will not advance until the shutdown is resolved. Lenders should segment their government-backed loan pipeline along these lines and handle each category appropriately, as we discuss next in best practices.

Best Practices for Lenders to Mitigate Shutdown Risks

When faced with a federal shutdown, proactive lenders can take several steps to manage the disruption and support their customers. Below are recommended best practices for banks, credit unions, and CDFIs dealing with USDA and SBA program interruptions:

• Pipeline Triage and Internal Planning: Start by conducting a pipeline review of all pending government-guaranteed or direct loans. Identify which loans are at risk due to the shutdown – for example, loans approaching closing that don’t yet have a guarantee issued, or applications that were nearly approved. Prioritize actions based on urgency. If a shutdown is imminent (forewarning exists), try to fast-track submissions to USDA/SBA for any loans that could possibly be approved before the deadline. Once the shutdown is in effect, categorize deals into: (a) those with commitments/approvals that might be closed during the shutdown, (b) those mid-process that must wait, and (c) new inquiries. Assign team members to monitor each category. It’s also wise to adjust your internal loan timelines and expectations – for instance, loans that you expected to book this month might slide into next month or beyond. Update your institution’s projections and work closely with secondary market or capital markets teams (if you sell loans) to account for the delay in sales of guaranteed portions. Essentially, create a game plan so nothing falls through the cracks during the chaotic period.

• Clear Communication with Borrowers and Partners: Proactive, transparent communication is one of the most important mitigants. As soon as a shutdown becomes likely or occurs, inform all affected borrowers about what it means for their loan. For loans about to close, explain whether the closing can proceed or must be delayed. Provide letters or emails that borrowers can show to Realtors, sellers, or other stakeholders explaining that the delay is due to a federal government shutdown’s impact on the loan program – this can help preserve earnest money or avoid defaulting on contracts. Encourage borrowers not to panic and to stay in close contact. Likewise, coordinate with other transaction participants:

  • Real estate transactions: Communicate with real estate agents, title companies, and attorneys involved in USDA-guaranteed home loans. They may need to draft addenda to purchase contracts extending financing contingencies, or simply be aware that closing dates are moving. Many real estate contracts have deadlines, and a brief note from the lender citing the USDA program’s temporary closure can persuade a seller to grant an extension. It’s often useful to invoke the concept of force majeure or unforeseen government closure as justification for extension – some contracts explicitly allow this, but even if not, parties can agree to amend.

  • Business loans: For SBA loans funding business acquisitions or expansions, talk to the buyer and seller. If an asset purchase agreement had a closing date tied to SBA financing, both parties should officially extend that date in writing. No one wants a good deal to fall apart due to an external event. Emphasize that the loan is approved (if applicable) and it’s just a timing issue. In some cases, a seller might agree to a seller financing bridge or temporary lease arrangement until the SBA loan comes through – creativity can bridge the gap if both sides understand the situation.

  • Internal stakeholders: Keep your credit officers, management, and secondary market partners informed. If loans aren’t closing as expected, adjust pipeline reports. If you have investors expecting loan sales or participations, notify them of delays. This communication ensures everyone is on the same page and reduces pressure on front-line staff.

• Utilize Interim Financing Strategies (Cautiously): In some cases, a lender can implement a bridge loan or interim financing to tide the borrower over until the government program is back online. This can be a win-win by not derailing time-sensitive projects, but it must be done carefully and in compliance with program rules:

  • For SBA 7(a) Loans: SBA regulations allow a lender to make a temporary loan and refinance it into an SBA-guaranteed 7(a) loan after the shutdown, but strict conditions apply. According to SBA’s guidance (SOP 50 10) and industry advisories, if the purpose of the loan isn’t new construction, a PLP lender may make a conventional loan during the shutdown and later roll it into a 7(a) loan, provided that the 7(a) loan is processed under delegated authority and an SBA loan number is obtained within 90 days of the interim loan’s approval. Essentially, the lender closes a short-term loan at its own risk, and once SBA reopens, immediately submits for an SBA number and refinances the borrower into the SBA loan. If done within 90 days, SBA treats it as an allowable same-institution debt refinance (given the special shutdown circumstance). It’s important to note this is only feasible for PLP lenders (since non-delegated would require SBA approval, which isn’t possible during the shutdown). Also, any interim loan for construction purposes is generally not eligible for this treatment – those would be considered new projects and refinancing them might run afoul of SBA rules, aside from normal refinancing policies. Lenders considering this should consult the latest SBA SOP and possibly inform SBA (after reopening) that the interim loan was made due to the shutdown. And of course, the interim loan should be sound on its own merits because if for some reason the SBA guaranty cannot be obtained later, the lender is fully exposed. All interim financing should be documented as such (with the intent to take out via SBA) in credit memos for clarity.

  • For USDA Guaranteed Loans: USDA doesn’t have a formal policy on interim loans analogous to SBA’s, but the concept can apply. If a USDA guarantee is not available, a lender could make a short-term conventional loan to enable (for example) a home purchase to close, and then refinance it into a USDA-guaranteed loan once the agency resumes operations. The risk and conditions are similar: the lender carries all risk in the interim, and the loan must be one that would meet USDA requirements when it’s time to refinance. One practical approach some lenders use for USDA 502 loans: close the loan with a slightly higher interest rate or with private mortgage insurance as if it were a conventional loan (to protect themselves), with the understanding that once the guarantee is issued post-shutdown, the terms might be adjusted. This requires clear communication to the borrower and likely a formal agreement or addendum outlining the plan to modify the loan after the guarantee is in place. Not all lenders will be comfortable doing this, especially for long-term loans like 30-year mortgages, but for a short horizon it might be feasible. Another scenario is using a warehouse line or partnership with a larger bank to fund interim if a small institution can’t hold the risk. In any event, interim financing should be seen as a tool of last resort and used only for strong borrowers or crucial deals, given the complexities.

• Embed Protective Clauses and Flexibility in Agreements: Lenders should work with borrowers (and their attorneys, if applicable) to add protective clauses in transaction documents that account for shutdown-related delays. This can include:

  • Force Majeure Clauses: If drafting or revising loan commitments and purchase agreements, explicitly list “government shutdown” as a force majeure event that tolls the performance deadlines. For instance, a commitment letter for a loan could state that the commitment expiration will automatically extend by the number of days of any federal government shutdown that impacts the loan’s approval or closing. Similarly, a real estate purchase contract can include a provision that if the buyer’s financing is delayed due to a government shutdown, the closing date is extended X days beyond the end of the shutdown. These clauses make it clear to all parties that patience is contractually required, reducing disputes.

  • Rate Lock and Fee Management: If a loan’s interest rate was locked based on an expected closing date, a prolonged shutdown might push it past the lock period. Lenders should consider waiving rate lock extension fees or extending locks for free in shutdown cases, as a customer service gesture and to avoid deals dying due to pricing. Alternatively, some lenders hedge their pipeline and can accommodate extended locks. The cost of a modest extension is usually much less than losing the loan or the borrower. Communicate this proactively: let the borrower know you are aware of the lock situation and will work to keep their rate unchanged if at all possible.

  • Documentation Validity: As mentioned, appraisals and other docs may “age.” Lenders might preemptively order extension letters for appraisals (appraisers can often update valuations with a letter if within a certain timeframe) or refresh credit reports if it looks like the closing will be delayed beyond standard validity. These small steps, taken in advance, can save time later and keep the file compliant when it’s ready to close.

• Maintain Readiness – Continue Processing Internally: A shutdown shouldn’t mean downtime for the lender’s staff. Use this period to prepare and polish loan files so that they are “submission-ready” the instant the agencies reopen. This was highlighted as a smart strategy by industry experts: build your “ready queue” of loans. Concretely, this means:

  • Continue collecting all borrower documentation (financial statements, tax returns, collateral information, etc.).

  • Complete your credit analyses and internal credit approvals for the loans.

  • Ensure all third-party reports (appraisals, environmental reports, title work, flood determinations) are in hand or in process.

  • Essentially, get every file to the point that the only thing missing is the government’s approval. By doing so, once systems are live, your team can immediately submit the applications and likely be among the first in line. Lenders who take this proactive approach could gain a competitive edge – when SBA starts issuing loan numbers again, for example, your loans might get numbers on day 1 post-shutdown, whereas less-prepared lenders might take several days to gather everything. This “hurry up and wait” approach turns the forced pause into productive prep time, and borrowers will appreciate that you kept working on their behalf. Just be careful not to inadvertently violate any rules – e.g., don’t disburse any funds or charge any prohibited fees during this period. But packaging and underwriting can continue full steam on the lender’s side.

• Stay Abreast of Agency and Regulator Announcements: During shutdowns, agencies sometimes issue FAQs or informal guidance, and regulators (like the banking agencies) issue statements. For instance, OMB or the White House may release updates on expected duration, and SBA or USDA might communicate through their websites or intermediary networks (like NAGGL for SBA lenders) about any changes. For example, if a shutdown were to drag on, USDA or SBA could decide to recall some employees to address critical backlogs (as SBA hinted for 504 closings). Or Congress might pass special provisions (as they have for the National Flood Insurance Program in past shutdowns) to alleviate certain pain points. Lenders should monitor sources like official agency shutdown pages, industry associations (NAGGL, NADCO, ICBA, ABA), and news outlets for any developments. Setting up Google alerts or checking daily briefings from these associations can ensure you don’t miss, say, an announcement that USDA will honor closings for certain loans or that SBA found a way to process some approvals. Additionally, pay attention to guidance from your primary regulator: as noted, they often encourage working with affected borrowers and could provide relief on things like reporting deadlines if needed. Knowledge is power – the more you know, the better you can advise your customers and adjust your strategy.

• Support Borrowers Facing Hardship: While the focus of this briefing is on new loan production, many lenders also have existing portfolios of loans to individuals or businesses that could be strained by a government shutdown. For example, a small business waiting on an SBA loan disbursement might run into a cash crunch, or a family expecting a USDA loan might need interim housing. Also, many lenders have customers who are federal employees or contractors that won’t be paid during the shutdown. Heed the call of regulators to adopt a flexible and empathetic approach to those affected. This can include offering short-term deferrals or interest-only periods on existing loans, waiving late fees for missed payments due to income interruption, or providing low-interest emergency loans to bridge income gaps (many credit unions and banks do this for furloughed employees). From a CRA and public relations perspective, helping your community through the shutdown is the right thing to do and builds goodwill. Just ensure any such measures are done consistently and in line with regulatory guidance (document the reasons for exceptions to normal policy, etc.). In the long run, borrowers will remember that their lender stepped up in a tough time, which can translate to loyalty and referrals.

By implementing these best practices, lenders can significantly reduce the negative impact of a government shutdown on their lending operations and their clients. The key themes are preparation, communication, and flexibility. While a shutdown is largely outside a lender’s control, the response to it is very much in our control.

Conclusion

A U.S. federal government shutdown presents a challenging scenario for lenders who rely on USDA and SBA lending programs, but with careful planning and responsive strategies, those challenges can be managed. In summary, during a shutdown normal operations of USDA Rural Development and SBA loan programs are interrupted: no new USDA rural housing or business loans can be approved, and SBA’s flagship 7(a) and 504 programs are frozen for new authorizations. Only excepted activities continue – primarily servicing of existing loans to protect collateral, and critical programs like disaster loans. Lenders are left navigating which deals can proceed and which must wait. Pre-approved loans with prior obligations (e.g. an issued USDA conditional commitment or SBA loan number) have a path forward, albeit with the lender bearing interim risk in some cases, whereas new applications will not advance until federal funding is restored.

For lenders, the operational reality includes potential delays in closings, an inability to obtain guarantees or disburse federal funds, and a backlog that can persist even after the shutdown ends. This uncertainty introduces timing risks and requires transparent communication with all parties involved. Distinctions between loans already in the pipeline versus new requests become crucial in deciding how to handle each case.

Critically, lenders can take proactive steps to mitigate shutdown-related risks. By triaging their pipeline, maintaining open lines of communication with borrowers (and other stakeholders), and even deploying creative solutions like short-term bridge financing or contract extensions, lenders can keep many deals from collapsing. Preparing loan files to be “shovel-ready” for when the government reopens is a prudent strategy to shorten the rebound time. Additionally, embracing flexibility – whether by adjusting internal processes or offering relief to affected customers – will not only protect the lender’s portfolio but also uphold the institution’s reputation and community responsibility.

In a nationwide scope, banks, CDFIs, and credit unions should all be aware that government loan guarantees are a partnership with the federal government, and that partnership comes with exposure to federal budget dynamics. A shutdown is a temporary obstacle. By understanding the administrative rules and contingency plans behind it and by planning accordingly, lenders can ensure they continue to serve their communities and borrowers with minimal disruption. Once the government resumes operations, those lenders who stayed prepared and engaged will be ready to secure the pending guarantees, close the delayed loans, and move forward with their mission of financing homes and businesses across America. The shutdown’s lesson for lenders is to expect the unexpected and control what we can – our response and service – in the face of what we cannot control. With that approach, we can weather the storm of a federal shutdown and emerge ready to fulfill the credit needs of our customers as soon as the lights turn back on in Washington.

October 13, 2025 by a Collective of authors at MMCG Invest, LLC, SBA feasibility study consultants.

Sources:

• Office of Management and Budget – Antideficiency Act Guidance

• Housing Assistance Council – Summary of USDA RD Contingency Plans

• National Association of Home Builders – Shutdown Impacts on Housing Programs

• NAGGL / SBA Communications – SBA 7(a) Program Shutdown Guidance

• SBA Lapse Plan (Sept 2025) – SBA 504 Program Details

• Sen. Mark Warner Press Release – 2019 Shutdown SBA Loan Backlog

• Independent Community Bankers of America – 2019 Shutdown Regulatory Guidance

• Windsor Advantage / Lender Resources – Strategies for Lenders During SBA Shutdown