Congress Directs SBA to Take Stab at COVID-19 Loan Fraud

President Biden signed two bills aimed at preventing fraud by participants within the Small Business Association on August 2, 2022. H.R. 7334 is titled the COVID-19 EIDL Fraud Statute of Limitations Act of 2022 (EIDL Act). H.R. 7352 is titled the PPP and Bank Fraud Enforcement Harmonization Act of 2022 (PPP Act). Both Acts establish a ten-year statute of limitations for fraud by borrowers under their respective programs. The head of the U.S. Small Business Administration, Administrator Isabella Casillas Guzman credited the Acts with a renewed ability to investigate and prosecute borrowers who committed fraud in SBA lending programs created to assist small businesses during the height of the COVID-19 pandemic.

For both programs, the main purpose is to put in place a a ten-year statute of limitations for fraud.

The EIDL Act, found at 15 U.S.C. § 636(b)(16), was created to help small businesses stay afloat during the worst of the COVID-19 pandemic. This program offered loans directly from the SBA that were low-interest, fixed-rate, and long-term. Loans under the EIDL Act are required to be repaid, but borrowers were permitted up to 30 years to do so. Loans from the EIDL act were to be used for business expenses such as payroll, utilities, and more. The EIDL Act began taking applications from small businesses in need of financial assistance due to the COVID-19 pandemic in March of 2020. SBA extended the deferment period to 24 months on September 2, 2021. As of January 1, 2022, the program ceased taking applications.

Much like the EIDL Act, the PPP Act, found at 15 U.S.C. § 636(b)(35), was also created to help small businesses during the height of the pandemic. However, PPP loans were available to a smaller pool of applicants due to size restrictions. Unlike EIDL loans, PPP loans were eligible for forgiveness if certain criteria for the use of the loans were met. Focusing more on keeping employees paid, PPP loans were eligible for forgiveness if employee compensation levels were maintained, the loan was used on payroll or other eligible expenses, and at least 60% of the loan was spent on payroll costs.

Unfortunately, along with the much-needed relief for small businesses that was offered by the EIDL Act and the PPP Act came the unscrupulous actions of some.  All you must do is Google “EIDL fraud cases” or “PPP fraud cases,” and you can find any number of cases exhibiting fraudulently obtained loans, or loans used for non-allowable expenses (one case even included the purchase of a yacht).

Seeing a need to combat fraudulently obtained or improperly applied EIDL or PPP loan funds, Congress took decisive action to establish a ten-year statute of limitations for both programs, and that is the primary effect of both laws. For instance, the EIDL law reads: “Notwithstanding any other
provision of law, any criminal charge or civil enforcement action alleging that a borrower engaged in fraud with respect to the use of an advance received under this subsection shall be filed not later than 10 years after the offense was committed.”

Updates to the EIDL Act and PPP Act are aimed at fraud committed by recipients of loans under both programs, with House Report 117-327 stating, “this legislation gives prosecutors more time to bring pandemic fraudsters to justice.”

In the House Report, the United States Inspector General, Hannibal “Mike” Ware stated he believes that investigating fraud related to both Acts “will be a decades-long effort” due to many of the EIDLs coming due near the end of fiscal year 2024. The potential for fraud reaches into the billions.

Now, there is at least a timeline for both borrowers, and the government, to go after potential fraud cases. That provides a clear line in the sand for all concerned.

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