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The Paycheck Protection Program is a Big Solution to a Big Problem, but it Needs Big Oversight

Posted  April 10, 2020

It’s no secret that our local bodegas, corner nail salons, and go-to restaurants are in trouble. The unprecedented nationwide stay-home initiatives may be flattening the curve, but they’re also threatening to bankrupt millions of small businesses and their employees. The Coronavirus Aid, Relief, and Economic Security (CARES) Act aims to address this problem with numerous programs, including the Paycheck Protection Program (PPP), funded at $349 billion in its first round, with subsequent funding added in later amendments. The PPP will provide low-interest loans of up to $10 million for small businesses and non-profits that meet specified conditions and agree to follow program rules. Under the program, employers who use the funds for approved payroll and overhead expenses and maintain their current workforce and wages over the next few months are eligible for loan principal forgiveness.

But the small businesses and their employees aren’t the only ones who stand to benefit: the program also offers SBA-approved banks and credit unions interest rates between 1% and 5%, depending on the size of the loan, and potentially billions of dollars in underwriting fees to administer the loans.

While PPP lenders take on virtually no credit risk (the loans are 100% federally guaranteed), they are responsible for determining the eligibility of borrowers and ensuring compliance with applicable regulations such as the Bank Secrecy Act (BSA). As with the 2008 TARP funds, there’s a risk that PPP funds may be used for unintended purposes, issued to ineligible companies, or caught up in garden-variety fraud schemes.

While the damage that can be caused by one PPP borrower may be limited, lenders who fail to adhere to program requirements can become — to borrow a term from the current pandemic — “superspreaders” of loss to the government, with improper lending practices magnifying losses.  The 2008 housing crisis illustrates this well: fraudulent activity by banks resulted in in direct financial loss to the federal government when mortgages guaranteed or insured by the federal government defaulted.  Avoiding fraud in the issuance of PPP loans is a critical step to reducing government exposure to bad loans.

CARES provides a number of oversight and enforcement mechanisms to prevent fraud in programs such as the PPP.  The Pandemic Response Accountability Committee (“PRAC”), which includes the Inspector General of the SBA, is charged with preventing and detecting fraud, waste, abuse, and mismanagement in all federal COVID-19 spending and lending.  PRAC has authority to conduct investigations and issue subpoenas, and is to alert the special inspector general for pandemic recovery (“SIGPR”) to suspected fraud or other misconduct.

In addition, under the False Claims Act (FCA), private parties can file qui tam actions on behalf of the government to report fraud or misconduct against the government. These cases are filed under seal and investigated by the Department of Justice before they are made public. Violators of the FCA are liable for up to three times the amount of money they falsely claimed from the government, plus thousands of dollars in civil penalties for every false claim they submitted. The whistleblower(s) who bring the case may receive an award of up to 30% of the total recovery to the government.

In the aftermath of the 2008 housing crisis, the FCA was an effective mechanism for punishing banks that facilitated bad, non-compliant, and fraudulent loans. While oversight through PRAC and SIGPR will be critical, whistleblowers will remain and important line of defense to counter small business stimulus-related fraud.


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