On September 21, 2020, the U.S. Government Accountability Office (GAO) released a new report regarding its oversight of the federal government's COVID-19 pandemic response. The report, Federal Efforts Could Be Strengthened by Timely and Concerted Actions, includes an assessment of the Small Business Administration's (SBA) administration of the Paycheck Protection Program (PPP), supplementing the GAO's June 25, 2020 findings. The new GAO report sheds additional light on the SBA's plan for reviewing loans and discusses the GAO's – and lenders' – concerns about lender responsibilities in the still unfolding loan forgiveness process.
SBA's Loan Review Plan
The GAO report includes additional details regarding the SBA's loan review process, though the report notes that the SBA has not yet finalized the process. The GAO report indicates that:
- The SBA confirmed that it intends to review all loans of more than $2 million.
- The SBA will "focus" on borrower good faith certifications concerning the economic necessity of the loan request.
- The SBA will conduct an "as necessary" review of these loans for "compliance with general program requirements."
- The SBA will be working with outside contractors to conduct the reviews.
- For loans over $2 million:
- A contractor will use an "automated review tool" to review all loans and will perform additional manual loan reviews "based on risks detected by the automated review tool."
- The contractor will also review the borrower's economic necessity certification.
- After the contractor completes its review, the SBA will also review all of these loans with a team of "SBA contract and federal staff."
- A separate, independent contractor will then undertake a quality assurance review of a sample of loans.
- For loans under $2 million:
- All loans will "undergo an automated review to flag potentially questionable loans."
- "Selected" loans will be manually reviewed to assess, for example, whether a borrower:
- Was eligible for the PPP loan;
- Correctly calculated the loan amount;
- Used the loan proceeds only for allowable purposes; and
- Was entitled to forgiveness in the amount claimed.
- The SBA will review loans identified "through specific reports of potential noncompliance or fraud" – a process that had already begun – and through statistical sampling "based on various loan characteristics."
- In addition, SBA officials advised the GAO that "SBA will put all lender decisions granting full or partial loan forgiveness through the automated review tool provided by one of its contractors."
- For loans over $2 million:
- The SBA will refer questionable loans to the SBA Office of the Inspector General or to the U.S. Department of Justice for further investigation, a process that has already led to the filing of more than 40 fraud-related cases.
After outlining the process by which the SBA intends to review PPP loans, the GAO reiterated a prior recommendation advising the SBA to "develop and implement plans to identify and respond to risks in PPP, including risks of fraud and improper payments." While noting that data analytics is "one of the leading practices in managing fraud risks," the GAO registered its concern with the reliability of SBA loan-level data, and the use of incomplete or flawed data in managing fraud risks.
Concerns Regarding Lender Responsibilities in the Forgiveness Process and Other "Loan Forgiveness Challenges"
The GAO report highlights several questions and uncertainties regarding the PPP loan forgiveness process. The GAO noted questions about the role of lenders and the SBA in the forgiveness and decision processes.
- The GAO report states that "[u]nder SBA's interim final rules, the lenders make the final decision about loan forgiveness."
- The GAO wrote that, even with the various interim final rules (IFRs) that the SBA has provided regarding the forgiveness process, "uncertainty remains about some aspects of lenders' role in the process."
- Particularly unclear is "the extent of lender review required." The GAO noted that although the IFRs and a procedural notice contemplate a "good-faith review" by lenders of a borrower's calculations and supporting documents, the "rules and procedural notice do not clearly define the extent of review required." According to the GAO, representatives of two lender associations have expressed concern about this lack of clarity.
- The GAO highlighted the one example from the IFRs regarding the scope of lender review: the SBA's explanation that payroll reports prepared by a recognized third-party payroll provider would necessitate "minimal review" by a lender, but payroll costs that are not documented by a recognized source would warrant a "more extensive review of calculations and data."
- The GAO also recognized that the SBA's guidance "state[s] that an accurate calculation of the loan forgiveness amount is the responsibility of the borrower and that lenders may rely on borrower representations."
- The GAO reported that lenders and the SBA had arrived at starkly divergent estimates regarding the complexity of the forgiveness process.
- The SBA estimates that borrowers will need 3 hours to complete the standard forgiveness application, and 20 minutes to complete the EZ application.
- Lenders estimate that "it could take 15 hours for some borrowers to complete" the standard application, and "50-75 hours for lenders to review a complex forgiveness application and the supporting documentation."
- SBA and Office of Management and Budget officials commented that "it makes sense for the loan forgiveness process to take longer than the application process to ensure the necessary accountability to warrant forgiveness and prevent fraud."
- All of the lender associations consulted favored a simplified forgiveness process for smaller loans.
- According to the GAO, representatives from one lending association "stated that it was a conflict of interest for lenders to be heavily involved in loan forgiveness because it was in their best interest for the loans to be forgiven." Representatives from two of the lender associations commented that "the resource demands and the lack of clarity surrounding the application and forgiveness processes have led to lender fatigue with the program," which served as a disincentive for lenders to participate in further rounds of the program should they be authorized by legislation.
- The GAO noted that, as of August 14, 2020, "SBA was still developing its processes for reviewing lenders' forgiveness decisions," and as of September 8, 2020, the SBA had received approximately 56,000 loan forgiveness decisions from lenders.
The GAO indicated that it has "additional work" under way regarding PPP borrowers and "the safeguards SBA has implemented to help ensure that lenders and borrowers complied with program requirements."
The GAO report provides helpful insights into the SBA's plans for its PPP loan review and loan forgiveness processes. However, in many areas, the report highlights the need for additional guidance and clarity from the SBA.