Government loans for pandemic suffer from possible $ 260 billion fraud – Reason.com

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In general, Congress authorized about $ 5.9 trillion to combat the social and economic impact of the pandemic, of which $ 4.32 trillion has already been paid or allocated. To date, after more than a year of this unprecedented spike in spending, there is enough retrospective analysis to gauge the federal government’s response to the pandemic, and early results do not bode well for big government supporters.

At the new institute of Cato Legal Policy BulletinI describe the Small Business Administration’s (SBA) indiscriminate implementation of two major pandemic policies. The first is the $ 813 billion Payroll Protection Program (PPP), which includes guarantees for federal loans at a low interest rate (1 percent) that can be forgiven if the borrower spends a certain percentage (about two-thirds) on the payroll. The second is the $ 367 billion Disaster Disaster Loan (EIDL) program, which provides loans on favorable terms that are paid directly by the government.

Both of these pandemic programs reflect a significant expansion of problem structures. The PPP is a continuation of the SBA’s Section 7 (a) Credit Guarantee Program, which in the years leading up to the pandemic was annually on the FDA’s list of “high priority” programs that require more scrutiny due to their mismanagement …

Likewise, watchdogs sounds worries about key aspects of the EIDL program (including the SBA’s credit rating and applicant’s eligibility) long before we were hit by COVID-19. Despite these repeated warnings, the EIDL program reported its highest rate of improper payments at 11.98 percent in the financial year leading up to the pandemic, one of the worst in government.

Based on this suboptimal baseline, both programs were further stressed by the significant increase in workload. For example, in a “normal” year, the SBA provides about 62,000 loan guarantees totaling $ 16.7 billion under its Section 7 (a) program; In comparison, in the first year of the PPP, the agency provided more than 9 million loan guarantees worth $ 746 billion. The EIDL program also exploded: in the first year of the pandemic, the SBA paid out about twice as much direct loans that the agency provided in its entire 67-year history before COVID-19.

A stunned SBA cut corners to ease the flow of public funds out the door. With regard to PPPs, the agency has loosened its underwriting controls for lenders by eliminating basic documentation requirements such as financial statements and tax returns. The Accounts Chamber of the Government accused this decision, in particular, of report whose direct name says a lot: “Loans for COVID-19 are uncontrolled and prone to fraud.”

Regarding the EIDL pandemic program, the inspector general certain that the SBA “lowered the barriers” that “significantly increased[ed] risk of fraud. “His office also reported that the SBA for several months “ignored” the subcontractor’s system of identifying suspicious loans.

As a reminder, these already problematic programs have weakened their existing guarantees to cope with an unprecedented workload. This is a sure way to disaster, and as you would expect, the results have been dire.

Around the middle of the PPP program, the inspector general warned about “widespread fraudulent activity”. By the end of September 2020, his office received more than 77,000 hotline complaints of possible fraud, and since then “the number has continued to grow.” In addition to the risks of fraud, there is an associated risk of ineffective SBA administration. In December 2020, an independent auditor of financial statements marked over 2 million approved PPP loan guarantees with an estimated value of $ 189 billion as potentially inappropriate payments.

Addressing EIDL, Inspector General warned “rampant fraud” and preliminary estimate conducted by his office, identified more than $ 77 billion in approved loans that showed “strong signs of fraud” – or nearly 46 percent of EIDL applications that were approved prior to October last year ($ 169 billion). Of course, the SBA has continued to make loans since then, and by extension the inspector general warned that “potential fraud in the COVID-19 EIDL program continues to rise.”

For both programs (EIDL and PPP), the SBA’s response to criticism was significant. Over the past year, various government and private watchdog bodies have released numerous reports in which all agree that the failures of the SBA’s governance have put huge amounts of taxpayer money at risk. In response, the agency actually buried its head in the sand. Last October, for example, the inspector general observable that “SBA management continues to insist on the reliability of its controls, despite overwhelming evidence to the contrary.”

Overall, more than $ 260 billion (and growing) in taxpayer money has been unduly at risk due to an administrative error in the SBA. To be sure, the federal government is faced with an extraordinary problem. Due to the very nature of Congress’s intention to quickly help those affected by the pandemic and its economic impact, federal aid programs were at increased risk of inappropriate payments. However, while some level of waste may prove to be tolerable in an emergency, the SBA’s pathetic work is out of bounds and serves as a harsh reminder of the constraints of “big government.”

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