Wednesday, January 20, 2021

Second round of PPP loans could be open to even more fraud

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On Monday, the Small Business Administration began accepting applications for new Paycheck Protection Program loans authorized in the stimulus package passed last month. The same day, the Inspector General of the SBAadthat more than 57,000 potentially ineligible borrowers recovered $ 3.6 billion from the program last year.

The Inspector General’s office came to this conclusion by comparing a list of PPP loan recipients with the Treasury Department’s Do Not Pay list, a compilation of individuals and entities ineligible to receive federal payments. The result was that 57,473 loans “corresponded to a DNP data source record, indicating the ineligibility of loans”, the Inspector General found. Intriguing but mysterious fact: Only 10 of 3,403 PPP lending service sites – bank offices, for example – “accounted for 49% of loans matched,” the report says. But he doesn’t disclose the 10 locations.

The SBA says that in Round 2, all claims will be checked against the Do Not Pay list. This is obviously a prudent measure, but far from sufficient. Abundantanecdotal evidenceand common sense suggests that many candidates who were never on the DNP list simply fabricated information about their candidacies – and the new stimulus law makes these fundamental frauds even easier to commit.

This is the result of well-intentioned new rules for getting PPP loans and getting those loans canceled. The CARES law, passed in March, urged the SBA to prioritize “small businesses and entities in underserved and rural markets,” including businesses owned by veterans, women, and the socially and economically disadvantaged. But the special House subcommittee on the coronavirus crisisfound last octoberthat loans went disproportionately to large corporations and borrowers who already had relationships with large banks.

In response, most of the money from Round 2 loans is earmarked for companies that have obtained a Round 1 loan, with tighter restrictions on the new loan. Round 2 applicants cannot have more than 300 employees (vs. 500 in Round 1) and must show that revenue was hit at least 25% in the first, second, or third quarter of last year by compared to 2019. Round 1 loans were not made such a requirement, so even successful businesses could get a P3 loan with forgiveness.

But in trying to make the process easier for hard-hit small businesses, the new law invites more fraud. For loans of $ 150,000 or less – the vast majority of PPP loans – the applicant does not need to document the 25% income required. Getting the SBA to forgive the first round loans required borrowers to complete three forms and a spreadsheet, supported by five pages of instructions, and potentially submit dozens of documents. Under the new law, borrowers of $ 150,000 or less can obtain a full pardon by submitting a one-page certificate. The experience of the first round shows that many people will find these cheating opportunities irresistible.

Large-scale PPP fraud was inevitable. Venture capitalist Alex Rampell posedthis rhetorical questionatFortunewhen the program started: “How many times in history has $ 350 billion been distributed without face-to-face verification and a few PDFs in two weeks?” The Justice Department set up a PPP team on the day the program was created, and the FBI has since opened hundreds of investigations. Florida couple allegedly used their fraudulently obtained loan to purchasea seven bedroom mansion; a man would have used hisbuy a Lamborghini.

For years to come, we’ll hear how billions of dollars didn’t go to the business owners who needed them. This is another reason to hope that we will never go through this again.

More political cover of Fortune:

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