Last month, the Treasury Department had to warn well-capitalized, publicly traded businesses that they would probably not be eligible for the program after several national brand names reported receiving tens of millions of dollars in loans under the Paycheck Protection Program (PPP), while many small businesses without strong banking relationships struggled to get loans.
In the report, SBA Inspector General Hannibal “Mike” Ware listed the failure to incorporate guidance on lending to businesses in underserved communities among the possible SBA failures in complying with the Cares Act — although he concluded that the SBA has “mostly” been aligned with the legislation.
“Because SBA did not provide guidance to lenders about prioritizing borrowers in underserved and rural markets, these borrowers, including rural, minority and women-owned businesses may not have received the loans as intended,” the report reads.
A SBA spokesman declined to comment on the report. The SBA has not released comprehensive data that would show who has received federal loans, making it hard to tell whether there is a racial disparity in how the funds are being allocated.
Ware also criticized the agency for failing to require borrowers to report demographic data that would help the SBA track its progress.
“It is unlikely that SBA will be able to determine the loan volume to the intended prioritized markets,” the report reads.
Senate Minority Leader Charles E. Schumer (D-N.Y.), who was among three lawmakers who asked for a review of the program, said the Trump administration needs to make immediate changes in response to the report’s findings.
“SBA must do more to stop the special treatment for well-connected big business at the expense of legitimate small business struggling to stay afloat and support their workers during this pandemic,” Schumer said in a statement. The Treasury Department has given public companies that received money they do not qualify for until May 14 to return it.
The $669 billion PPP is a critical component of the government’s efforts to combat the economic crisis caused by the coronavirus. It is designed to allow small-business owners to keep paying their employees by giving them low-interest loans that can be forgiven if certain goals are met.
For the loan to be forgiven, SBA guidance requires loan recipients to spend at least 75 percent of the funds on payroll costs. The program relies on banks and financial technology companies to handle the work of accepting applications, evaluating lenders’ needs and handing out the funds. The SBA and Treasury Department play primarily a regulatory role.
Despite glitchy information-technology systems, occasionally poor cooperation from big banks and an overwhelmed bureaucracy, the program succeeded in quickly pumping billions of dollars into a struggling U.S. business community. An initial $349 billion tranche of funds was quickly absorbed within a few weeks.
However, concerns quickly arose about whether too much of the funding was being cornered by large businesses that could raise capital privately. Several hotel and restaurant chains received tens of millions of dollars in loans thanks to SBA rules that allow franchises to participate. Some of those companies, including Shake Shack and Ruth’s Chris Steak House, returned the funds. But others have declined to, saying there was nothing in the rules that prohibited them from applying.
There are also concerns that some bad actors could take advantage of the program through outright fraud.
“Unfortunately, we know that bad actors will seek any opportunity to exploit this historic federal funding for their own profit,” Sens. Marco Rubio (R-Fla.) and Ben Cardin (D-Md.) wrote in a letter released Friday. “The PPP funding was intended to be a lifeline for impacted small businesses and we believe it is critical that the federal government do everything in its power to prevent fraud and abuse within the program.”