Government loans in pandemic plagued by potential $ 260 billion fraud – Reason.com

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All in all, Congress has authorized about $ 5.9 trillion in spending to deal with the social and economic fallout from the pandemic, of which $ 4.32 trillion has already been disbursed or committed. Right now, more than a year after the start of this unprecedented spike in spending, there is enough hindsight to assess the federal response to the pandemic, and the early results bode ill for supporters of the “big one.” government ”.

In a new Caton Institute Legal Policy Bulletin, I describe the chaotic implementation of the Small Business Administration (SBA) of two famous pandemic policies. The first is the $ 813 billion Paycheck Protection Program (P3), involving federal loan guarantees, set at a low interest rate (1%), which could be canceled if the borrower spent a certain percentage (about two-thirds) of its payroll. The second is the $ 367 billion Economic Disaster Lending Program (EIDL), which includes concessional loans that are disbursed directly by the government.

Both of these pandemic programs reflect blatant expansions of struggling executives. The PPP is an extension of the SBA’s “section 7 (a)” loan guarantee program, which in the years leading up to the pandemic was on the Office of Management and Management’s list of “high priority” programs each year. budget that justify greater because of their mismanagement of taxpayer money.

Likewise, guard dogs had rang alarms over fundamental aspects of the EIDL program (including the SBA’s assessment of the creditworthiness and eligibility of applicants) long before COVID-19 afflicted us. Despite these repeated warnings, the EIDL program reported its highest improper payment rate on record of 11.98% in the fiscal year leading up to the pandemic, among the government’s worst rates.

From this sub-optimal baseline, both programs were further stressed by a significantly increased workload. For example, in a “normal” year, the SBA provides about 62,000 loan guarantees, for a total of $ 16.7 billion, under the Section 7 (a) program; in the first year of the PPP, by comparison, the agency issued more than $ 9 million in loan guarantees worth $ 746 billion. The EIDL program also exploded: in the first year of the pandemic, the SBA disbursed around twice more direct loans that the agency had made in its 67-year history before COVID-19.

Overwhelmed, the SBA cut corners to facilitate the flow of public funds to the door. For PPP, the agency relaxed underwriting controls for lenders, forgoing basic documentation requirements such as financial statements and tax returns. The Government Accountability Office blamed this decision, among others, in a report whose direct title says it all: “COVID-19 loans are unchecked and are susceptible to fraud.”

Regarding the EIDL pandemic program, the Inspector General determined that the SBA has “lowered the guardrails”, which “greatly increases[ed] the risk of fraud. His office also reported that the SBA has “ignored” for months a contractor’s system to report suspicious loans.

To recap, these already struggling programs have loosened their existing safeguards to deal with their unprecedented workload. It’s a recipe for disaster and, as you might expect, the results have been disastrous.

Around halfway through the PPP program, the Inspector General warned “widespread fraudulent activity”. At the end of September 2020, his office has received over 77,000 hotline complaints for potential fraud, and since then “the numbers keep rising”. In addition to the risks posed by scammers, there is the associated risk posed by administrative inefficiency at the SBA. In December 2020, an independent auditor of the financial statements reported as potentially abusive payments, over 2 million approved PPP loan guarantees, valued at approximately $ 189 billion.

With regard to EIDL, the Inspector General has warned of “generalized fraud” and a preliminary assessment conducted by his office reported more than $ 77 billion in approved loans that showed “strong indicators of fraud” – nearly 46% of EIDL applications that had been approved up to last October ($ 169 billion ). Of course, the SBA has continued to grant loans since then, and as a result, the Inspector General warned that “potential fraud in the EIDL COVID-19 program has continued to grow.”

For both programs (EIDL and PPP), the SBA’s response to criticism was illustrative. Over the past year, various public and private watchdogs have released a series of reports that all agree that the SBA’s management failures have put huge amounts of taxpayer dollars at risk. . In response, the agency effectively buried its head in the sand. Last October, for example, the Inspector General observed that “the SBA leadership continues to insist that its controls are robust despite overwhelming evidence to the contrary.”

In sum, over $ 260 billion (and more) of taxpayer dollars have been put at undue risk due to an administrative mess at the SBA. Of course, the federal government faced an extraordinary challenge. Due to the very nature of Congress’ intention to quickly help those affected by the pandemic and its economic effects, federal relief programs were at increased risk of inappropriate payments. Yet while some level of waste may be acceptable in an emergency, the SBA’s miserable performance is beyond pallor and starkly reminiscent of the limits of “big government.”

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