What would be the consequences of the following:
Participant defaults on loan and does not cure within the allowable grace period; TPA does 1099's at the end of the year; prior to 1099 being issued, participant decides to bring the loan current; TPA allows this and does not issue a 1099. Could this cause a problem for the plan or just the participant/Taxpayer if the IRS catches this on audit?

I would issue the 1099-R. There are penalties for failing to issue 1099's and complete the related filings.

The outstanding balance of the loan automatically became a deemed distribution at the end of the grace period and thus became taxable at that time. Subsequent repayment of the loan after it is a deemed taxable distribution is permitted, but the 1099 for the year of the deemed distribution must still be filed, taxes paid, etc. The repaid amount should be kept in an "after-tax" source, and the earnings only will be taxable when ultimately distributed.