SBA IG: More Indications of PPP Fraud

Program contested by credit union groups may have issued significant number of loans to fraudulent borrowers.

About 150,000 businesses that received Paycheck Protection Program loans have not yet applied for loan forgiveness—a sign that many of those businesses may have fraudulently received the funds, the Small Business Administration’s Inspector General said in a new report.

“Borrowers who fraudulently obtained a PPP loan are unlikely to apply for loan forgiveness because they have already obtained the funds with no intention to use them appropriately or to repay the loan,” the IG said, in a report detailing the most serious management and performance challenges facing the agency.

Congress enacted the PPP as part of its pandemic relief efforts. It was intended to help small businesses continue operating despite the economic problems the pandemic posed. If those businesses continued to operate, the loans were forgiven by the federal government. That essentially made the loans a grant.

“To quickly distribute funds during an economic crisis, SBA eased internal controls that could have helped to mitigate fraud and misuse of taxpayer funds,” the IG said. “We believe this is the tip of a much larger iceberg, and we are working to identify the full extent of PPP fraud.”

Credit Union Groups’ Concern Over Program

Credit union and other financial services trade groups complained throughout the process that the SBA was updating rules on the fly, was unable to answer lender questions and issued conflicting guidance.

The report states that as of May 30, some 150,000 loan recipients have not applied for forgiveness or made loan payments. More than 52,000 of these loans have defaulted and their guaranty was honored by the SBA.

“We believe these 150,000 loan recipients either did not spend the money according to Congressional intent and therefore knew the loans would not be forgiven, or they had always intended to default and let the taxpayer pick up the bill,” the IG said.

Inside the Report

The report delved further into certain instances of fraudulent activity, and noted specifically:

–Tens of thousands of loans matched a Treasury Department “Do Not Pay” record, indicating that the business potentially should never have received the loan.

–Thousands of businesses that were not in operation before Feb. 15, 2020 received loans, despite the requirement that they must have been operating before that date.

–Many businesses received duplicate loans.

–Changes to the program made by the SBA may have been exploited by unscrupulous businesses. In March 2021, SBA issued a rule that allowed people who filed an IRS Form 10410, Schedule C to calculate their maximum loan using gross income rather than net income. That, the IG said, resulted in a significant increase in the number of loans of $20,833 or less, the maximum allowable amount for a business with no employees.

As a result, several financial institutions have contacted the SBA about a significant number of deposits being made to personal accounts, the report stated. Further, many of those loans were made by lenders using third-party processing vendors, the reliance on which may make it difficult for the SBA to gain access to loan documents.

“Within the context of the PPP eligibility and forgiveness process, we believe it is important for SBA to focus targeted efforts on these types of loans and review appropriate documentation to ensure these smaller loans were made to eligible businesses and minimize the losses associated with forgiveness of fraudulent loans,” the IG said.

–Lenders were not always clear on how to handle PPP fraud or how to recover funds obtained fraudulently that remained in the borrower’s account.

What Comes Next?

The IG did conclude, however, that the SBA has implemented some safeguards that could reduce fraud risks and prevent further losses for the federal government.