SBA watchdog reports ‘pervasive’ fraud in disaster loan program

A federal watchdog reported Tuesday that it has identified $250 million in taxpayer-subsidized coronavirus loan funds given to “potentially ineligible recipients,” pointing to a strong likelihood of widespread fraud in an important but troubled economic assistance program.

The Small Business Administration’s Office of Inspector General has launched numerous investigations into more than a thousand hotline complaints it received about potentially fraudulent transactions. It also criticized the agency for failing to put in place internal controls to prevent abuse of funds.

Among the potentially fraudulent transactions detailed in the report: $1.9 million in pending SBA transactions were made to accounts outside the United States; a banking service provider identified $73 million in roughly 3,000 “suspicious” transactions; and a federal credit union told the Department of Justice that 59 out of 60 SBA deposits it received appeared to be fraudulent.

“We are alarmed by these reports, but they are consistent with our investigations, which indicate pervasive fraudulent activity,” the report reads.

In response to questions about the report, an SBA spokesman said the agency proactively carried out fraud prevention measures that prevented thousands of invalid applications being processed. The fraud prevention measures include automated fraud-prevent tools, internal “system rules” and checks designed to catch fraudulent applications.

In a response that was included in the inspector general’s report, SBA administrator Jovita Carranza said IG’s finding’s were “unexpected.” She disputed the assertion that the SBA has insufficient anti-fraud measures in place.

“The reality is that SBA has developed and implemented a comprehensive, rigorous, end-to-end infrastructure to reduce the risk of fraud in the EIDL COVID program,” Carranza wrote.

The Economic Injury Disaster Loans program, known as EIDL, was the federal government’s first small business assistance program activated to fight the economic crisis caused by the coronavirus pandemic. It is different from the $660 billion Paycheck Protection Program in that it has fewer restrictions on how the loan funds can be spent, and loans are processed by the government rather than private banks.

The program offers loans at a 3.75% interest rate, higher than PPP loans but still much lower than what most business could find on the private market. It also offers cash advance grants worth up to $10,000.

Although it eventually processed millions of disaster loans worth more than $150 billion, the EIDL program’s rollout was defined by bureaucratic delays, poor transparency on the part of public officials overseeing the program, and concerns of widespread fraud.

EIDL was activated on March 12 when small businesses were just beginning to come to grips with state closures. It received several million applications in a matter of days.

At first, the program failed to address loan applications in a timely manner. Although it advertised a loan processing time of 21 days, it took the SBA six weeks to work through the first 38,984 loans, amounting to less than 1% of the agency’s backlog at the time.

Later, as business organizations and members of Congress raised concerns about the delayed loan applications, the SBA quickly worked through the bulk of its backlog in May and June. It did so by hiring about 1,200 loan evaluators, outsourcing much of its work to Rocket Loans and other consultants, and streamlining internal loan approval processes. As of July 15, the agency had approved 2.6 million loans for a total of $150 billion, according to an SBA document.

The report released Tuesday described roughly 6,100 disaster loans and about 20,000 advance grants sent to potentially ineligible businesses. They include businesses that were registered after the Jan. 31 application cutoff specified by SBA regulations.

The inspector general also identified hundreds of businesses that were given more than one disaster loan.

In its report, the IG noted that the duplicate loan receipts were made possible because the agency “does not have effective controls in place to determine if the applicants had previously applied for and received financial help.”