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Mnuchin suggests Treasury, SBA should forgo verifying how small business loans were spent

Lawmakers question Trump administration officials over handling of $600 billion Cares Act lending program

In this April 28, 2020 file photo President Donald Trump SBA administrator Jovita Carranza and Treasury Secretary Steven Mnuchin in the East Room of the White House in Washington. (Evan Vucci/AP)

Treasury Secretary Steven Mnuchin suggested Friday that the government should consider forgiving all taxpayer-backed small loans under the federal Paycheck Protection Program without verifying how the funds were used, a decision that could wipe away debt for millions of small businesses but would also substantially increase the risk of fraud.

The Treasury Department and Small Business Administration are grappling with how to handle millions of applications for loan forgiveness, a process that includes verifying that most of the funds were actually used to pay employees as required under the Cares Act. But Mnuchin seemed to suggest during a congressional hearing Friday that a case-by-case approval process should be waived entirely for loans below a certain threshold.

“One of the things we’ll talk about is should we just have forgiveness for all the small loans … I think that’s something we should consider,” Mnuchin said when asked by Rep. Steve Chabot (R-Ohio) how the process might be simplified.

“We should obviously make sure there is some fraud protection,” Mnuchin added.

It’s unclear whether Mnuchin was referring to forgiving all loans under the PPP program or only a portion of them. The smallest loans tracked by SBA in regular reports about the program are $50,000 and under, which make up nearly 70 percent of all loans under the program. It’s also unclear whether a proposal to forgo verifying that businesses spent the money on payroll and other allowable uses as required is under serious consideration by the Trump administration.

Mnuchin’s remarks came as millions of small businesses are anxiously waiting word on whether their government-subsidized loans will be forgiven. Banks have been asking the government for clearer rules on how loan forgiveness will be handled.

In the oversight hearing Friday morning before a House committee reviewing the Cares Act small business program, lawmakers pressed Mnuchin and SBA Administrator Jovita Carranza for answers about PPP and a related emergency loan program.

In just a few chaotic months after the coronavirus economic crisis set in, the SBA scaled up to process more small business assistance than in its entire 67-year history combined, SBA officials have said. But committee chairwoman Nydia M. Velázquez, D-N.Y., said the programs could have done more to address the smallest and neediest businesses. And the chaotic way in which program rules and regulations were communicated has led some borrowers and lenders to step back from the program, she said.

In prepared remarks, Carranza pushed back on the assertion that her agency has been less than transparent, and detailed the SBA’s efforts to better reach small and disadvantaged businesses.

She also highlighted the unprecedented nature of the challenge the government is trying to address.

“We should not lose sight of the fact that this unprecedented program has emerged as one the most successful and consequential federal economic response efforts in history,” Carranza wrote.

Following messy start, enormous Paycheck Protection Program shows signs of buttressing economy

At issue is the federal government’s implementation of two federal programs meant to assist small businesses during the pandemic.

The $660 billion PPP allowed banks to offer low-interest, government-backed loans that are supposed to be spent primarily on employment costs, with an opportunity for loan forgiveness. The much smaller Economic Injury Disaster Loan program offers loans directly from the government that can be used on a wider array of costs, like rent and working capital.

PPP loans can be as large as $10 million at a 1 percent interest rate. EIDL loans were capped at $150,000 and carry a 3.75 percent interest rate. Both programs offer significantly better terms than what most businesses could find without government help.

Treasury, SBA data show small-business loans went to private-equity backed chains, members of Congress

In a memo distributed to lawmakers before Friday’s hearing, Velázquez described the SBA’s recent release of some loan data as “a welcome first step towards providing full transparency around the loan programs.”

The Washington Post is among 11 news organizations suing the SBA for records about companies that received loans from both programs after the agency failed to release the information following Freedom of Information Act requests. SBA has previously released data on its small business loan programs and states on the PPP form that the data is subject to FOIA requests.

Velázquez also wrote that there has been a “lack of sufficient, clear and complete guidance” in relation to the program’s rules. To address the economic crisis quickly, the government began processing loans before the regulations were in place, leading to confusion for banks and small businesses. In some cases, SBA and Treasury have sought to claw back funds after allegedly undeserving organizations received loans.

“While recognizing the implementation of these large lending programs is a steep challenge for a small, independent agency like the SBA, the publication of program guidance was fragmented and confusing for lenders and borrowers,” Velázquez wrote.

The SBA has faced harsh criticism for its decision to quietly cap the amount of each EIDL loan at $150,000, a fraction of its previous maximum, to preserve limited funding. The change was not communicated to borrowers until it was reported in The Washington Post.

“The one size fits all approach SBA took in this regard shortchanged millions of small businesses who are in dire need of economic relief and threatens their survival,” Velázquez wrote.

Faulty data collection raises questions about Trump’s claims on PPP program

And concerns remain about the government’s processing for handling PPP loan forgiveness, a critical component of the program. Recipients can have their PPP loans entirely forgiven, effectively converting the loan into a grant and wiping away any associated debt, if they can prove at least 60 percent of the loan funds went to payroll.

The SBA released detailed instructions June 16 showing how borrowers should petition their PPP lenders for loan forgiveness. But lenders have complained there is still a lack of clarity regarding the process lenders should follow. According to Velázquez’s memo, the SBA still had not provided a process or portal for accepting loan forgiveness applications from lenders as of Friday.

Velázquez also expressed concerns that the loan programs were not adequately targeted to the smallest businesses, including minority-owned businesses. She noted that 770,756 sole proprietors received PPP loans, just 3 percent of all sole proprietors in the United States, something she called a “significant gap” in the program’s coverage.

Carranza said the SBA has “administered this first-of-its-kind program with an eye toward equity, recognizing that this pandemic has been particularly harmful to socially and economically disadvantaged businesses.”