SBA Inspector General’s Report on Implementation of the Paycheck Protection Program Highlights Inconsistencies Between the CARES Act and SBA Guidance

3 min

On Friday, May 8, 2020, the Inspector General of the Small Business Association (SBA) issued a "Flash Report" (found here) on the SBA's Implementation of the Paycheck Protection Program (PPP) Requirements. The Report was prepared in response to an April 24, 2020 request from Senators Chuck Schumer (D-NY), Ben Cardin (D-MD), and Sherrod Brown (D-OH), members of the Senate Committee on Small Business and Entrepreneurship, to immediately investigate reports that certain PPP lenders were prioritizing larger and wealthier clients to the detriment of smaller businesses, and to "provide recommendations on SBA's current rules, regulations, policies, and procedures to ensure small businesses get the money they need and are treated fairly by PPP lenders." That request followed an April 23, 2020 letter to the Inspectors General of the SBA and Treasury from Senator Elizabeth Warren (D-MA) and Representative Nydia Velázquez (D-NY), requesting a similar investigation (more on the implications of that letter here).

Although the Inspector General's Report did not conclude whether lenders were wrongfully prioritizing larger and wealthier clients over smaller businesses, the Report identifies several key areas in which the SBA has either failed to implement certain provisions under the CARES Act or implemented regulations that "fail to align" with the plain terms of the Act.

  • The Interim Final Rule added a requirement that 75% of the PPP loan must be used for payroll costs (the CARES Act did not restrict the proportion of funds for each allowable use) and shortened the loan maturity date to two years (the CARES Act provided for a maximum maturity of up to 10 years). As a result, the IG concluded, borrowers who use more than 25% of the PPP funds for nonpayroll expenses will be unable to have all of their loan forgiven and will be face additional burdens by having to repay the remaining loan in less than two years.
  • The SBA failed to issue guidance to lenders regarding the deferment process, despite an explicit directive to do so from Congress within 30 days of the enactment of the CARES Act. The Inspector General noted that the lack of guidance may cause borrowers and lenders to be uncertain about servicing and loan repayments for PPP loans with balances remaining after forgiveness.
  • The SBA failed to issue guidance to lenders to prioritize borrowers in underserved and rural markets, despite an explicit directive to do so from Congress in the CARES Act. The Inspector General expressed concerns that rural, minority-owned, and women-owned businesses may have already been left behind, despite clear congressional intent to the contrary.
  • The SBA failed to register PPP loans using borrowers' Taxpayer Identification Numbers (TIN) within 15 days after loans were made, as required under the CARES Act.

The Report notes that participating SBA lenders approved more than four million PPP loans in 33 days, totaling more than $525.6 billion.

The Report also notes that, as of April 30, 2020, the SBA had issued seven Interim Final Rules and 39 FAQs as of April 30, 2020 (additional guidance has been added since April 30). The Report includes a chart comparing key CARES Act provisions, the Interim Final Rules, and the FAQs – underscoring the complexity of these rules. Although it is unclear how or whether the SBA or Treasury will react to the Inspector General's Report, the Report may provide a helpful roadmap for borrowers or lenders, in the event they decide to challenge the SBA's PPP rulemaking and enforcement actions in the future.