On June 25, the United States Government Accountability Office (GAO) released its initial report examining key actions the federal government has taken to address the COVID-19 pandemic. Among three Recommendations for Executive Action, the GAO said the Small Business Administration (SBA) “should develop and implement plans to identify and respond to risks in the Paycheck Protection Program (PPP) to ensure program integrity, achieve program effectiveness, and address potential fraud, including in loans of $2 million or less.” The SBA has neither agreed nor disagreed, but GAO believes implementation of its recommendation is essential.
Overview of PPP
As of June 12, 2020:
Approved loans. Lenders made about 4.6 million loans totaling about $512 billion, using up about 76 percent of the available funds. This greatly exceeded all of SBA’s lending under the 7(a) program in fiscal years 1990-2019 combined.
Lenders. About 5,500 lenders made PPP loans. About 65 percent of the lenders were banks with less than $1 billion in assets, and about 17 percent were nonbanks.
Loan amounts. About 86 percent of loans (about $137 billion) were for loans of $150,000 or less; however, the almost 2 percent of loans greater than $1 million (about $180 billion) accounted for 35 percent of funds.
Distribution of funds. Businesses in six states received $20 billion or more in loans totaling 33 percent (or about $218 billion) of the appropriated funds.
Safeguards and Oversight
Federal internal control standards state that management should consider the potential for fraud when identifying, analyzing and responding to risks. Because of the number of loans approved, the speed with which they were processed, the limited safeguards and lack of timely and complete guidance associated with the PPP, there is a significant risk that some fraudulent or inflated applications were approved. In addition, the lack of clear guidance has increased the likelihood that borrowers may misuse or improperly receive loan proceeds.
Initial Safeguards. The SBA’s initial interim final rule allowed lenders to rely on borrower certifications to determine the borrower’s eligibility and use of loan proceeds, and required limited lender review of documents provided by the borrower to determine the qualifying loan amount and eligibility for loan forgiveness. Reliance on applicant self-certifications can leave a program vulnerable to exploitation by those who wish to circumvent eligibility requirements or pursue criminal activities.
Because of the limited loan underwriting, lenders and SBA have less information from applicants to detect errors or fraud.
Ongoing Oversight. The SBA has announced efforts to implement safeguards after loan approval. The GAO asked the SBA for additional details on the reviews it planned for loans of more than $2 million each and any reviews of the more than 4 million loans of less than $2 million each. The SBA declined to comment.
After the GAO’s cutoff date of June 15, 2020, the SBA stated that it expects to facilitate these reviews, in part, through electronic screening of borrower and loan characteristics that may confirm the validity of the certification. Regarding the agency’s reviews of loans of less than $2 million, the SBA stated that loan files may be selected through appropriate statistical sampling or in response to specific reports or evidence of fraud or noncompliance.
Delays caused by information technology problems. Issues with SBA’s loan processing system created delays for both new and established lenders trying to access the system. The SBA’s loan system for its standard 7(a) program was not built to process the volume of PPP loans.
Confusion caused by rolling rules and guidance. The SBA issued PPP rules and guidance on a rolling basis. The frequently updated guidance sometimes left lenders and borrowers confused. The agency also published answers to frequently asked questions on a rolling basis. The SBA did not release the loan forgiveness application until May 15, 2020, and delayed posting key regulations on loan forgiveness until May 22, 2020. More than four million loans were approved before borrowers received this critical clarifying information on loan forgiveness.
Lack of time stamp on responses to frequently asked questions (FAQs). The responses to FAQs are dated without any timestamp. The responses note that the U.S. government will not challenge lender actions that conformed to the guidance and rules in effect at the time. Without the timestamp, lenders cannot know the guidance that was in place when they made loans. Similarly, the SBA will not know what rules to apply during loan reviews.
Problems with loans to publicly traded companies. On April 23, 2020, the SBA issued guidance stating that borrowers should carefully review the required certification to ensure that they qualify. In the same guidance, the SBA reiterated that borrowers must self-certify that their PPP loan is necessary, and stated that it is unlikely that many publicly traded companies with substantial market value and access to capital markets will be able to make this certification in good faith. However, according to analysis by FactSquared as of June 1, 2020, more than 400 publicly traded companies were approved for about $1.4 billion in loans.
For more information about the PPP program, contact us. We are here to help. You can also access Weaver’s Resilience & Recovery Resource Center for more updates on PPP forgiveness, tax considerations, operational best practices and other guidelines to help you and your organization navigate the challenges of managing a business especially during difficult times.
Resilience and Recovery Resources
Read related articles and reference materials to help you equip your team and organization for recovery and resilience. If you need assistance in crafting your team's response to current market events, please contact our Weaver professionals as we are here to assist you during this time.
Read More Insights