Running the Numbers: SBA OIG Tallies Up Handling of PPP Loans

The SBA’s Office of Inspector General released an early report on SBA’s handling of the Paycheck Protection Program (PPP). The report identified some important areas where SBA has not quite hit the mark in matching the priorities of the Coronavirus Aid, Relief, and Economic Security (CARES) Act with SBA’s implementation and guidance for PPP loans.

The “Flash Report,” as the OIG calls it, came out much quicker than most OIG reports because a group of Senators asked for a rapid assessment of SBA’s implementation of the PPP and the related rules and guidance.

The amount of money that was disbursed in such a short time is amazing. In the initial round, lenders approved 1.6 million loans totaling $342 billion in 14 days. In the second round of loans, in 10 days up to May 6 lenders approved over 2.4 million loans totaling over $183 billion. As is apparent from those numbers, the second round featured smaller loans going to many more applicants. All told, SBA lenders in 33 days approved loans that totaled more than 20 times the amount of SBA loans ever done in a whole year.

With that much money going out in such a short time, it would be nearly inconceivable that some t’s and i’s may not have been crossed and dotted. The report identified four areas where the SBA’s implementation of the PPP didn’t align with the CARES Act. Some of these deal with administrative issues (such as registering loans using TIN), so I’ll focus on the items most important for small businesses.

For one thing, SBA failed at prioritizing lending for underserved and rural markets. The CARES Act stated the “Sense of the Senate” (as that section of the bill was titled) was that SBA

should issue guidance to lenders and agents to ensure that the processing and disbursement of covered loans prioritizes small business concerns and entities in underserved and rural markets, including veterans and members of the military community, small business concerns owned and controlled by socially and economically disadvantaged individuals . . ., women, and businesses in operation for less than 2 years.

SBA simply did not provide this guidance to lenders. Although it wasn’t exactly a requirement (based on use of the word “should”) it was certainly recommended in the CARES Act. Thus, the OIG recommended that SBA advise lenders that they are required to prioritize borrowers in underserved markets as detailed in the legislation.

The OIG also recommended a few other steps SBA should take to improve its oversight of the PPP. For instance, SBA could revise the application form to request optional demographic information on the principals of the companies. Similarly, the forms for loan forgiveness should request demographic information. The demographic information would allow SBA to know it was serving the markets that the CARES Act intended serve, such as rural markets.

The OIG also noted that SBA should address the negative impact to borrowers from what percentage of loan proceeds are forgivable. Basically, the CARES Act said the proceeds could be used for payroll, mortgages, rent, utilities, or interest, without any restrictions on the amount that could be used for payroll. And the Act allowed for repayment for up to 10 years.

In contrast, SBA rules dictated that 75% of the loan had be used for payroll or it would not be forgiven. Plus, repayment would be required within two years for any amount not forgiven. According to the OIG, these two rules, which were not dictated by the CARES Act, could leave tens of thousands of borrowers having to repay some portion of the loan for nonpayroll costs exceeding 25%, and repayment would come in less than two years.

In short, the OIG identified some serious concerns with the PPP, echoing some of the same issues we raised in an earlier post. If addressed, these concerns would benefit borrowers by directing loans to those who most need them and making loan forgiveness and repayment easier. We’ll keep you updated on how SBA addresses these concerns.

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