20 11 White Paper Lessons Economic Stimulus Loans
Summary
A white paper from the Office of Inspector General of the U.S. Small Business Administration, Report No. 20-11, dated April 3, 2020, addressed to the SBA Administrator. It compiles findings from prior audits and reviews of economic stimulus loan programs, including the STAR loan program and the Recovery Act, to identify risks for COVID-19 related loans. The paper notes that the CARES Act created the Paycheck Protection Program with $349 billion in fully guaranteed SBA loans and provides $17 billion for SBA to pay 6 months of loan payments. It summarizes past reports, such as OIG report ROM 11-07, which estimated at least $869.5 million in inappropriate or unsupported loan approvals. It closes with recommended considerations, including a quality assurance plan to prevent and detect improper payments, and states it is not an audit under Generally Accepted Government Auditing Standards.
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S B A I N S P E C T O R G E N E R A L
WHITE PAPER: RISK AWARENESS AND LESSONS
LEARNED FROM PRIOR AUDITS OF ECONOMIC
STIMULUS LOANS
April 3, 2020
EXECUTIVE SUMMARY Report
No. 20-11
RISK AWARENESS AND LESSONS LEARNED FROM
April 3,
PRIOR AUDITS OF ECONOMIC STIMULUS LOANS 2020
Why We Did This Identified Areas of Risk
We prepared this memorandum to provide the Our review of prior audits and reviews of economic
Small Business Administration (SBA) information stimulus loan programs identified areas of risk in
regarding lessons learned and risks identified in SBA’s 7(a) loan program. Specifically, delays in
prior audits and reviews that SBA should consider promulgating regulations caused confusion among
to ensure program integrity and mitigate the risk of program participants about economic stimulus
financial loss for COVID-19 related loans. loan program requirements. In addition, we found
SBA did not require program participants to
The President signed the Coronavirus Aid, Relief, and submit documentation, which resulted in
Economic Security (CARES) Act into law on March 27, inappropriate or unsupported loan approvals.
2020. The Act contains several provisions intended to Further, we determined that SBA should establish
provide economic relief to our nation's small proper controls, such as clear and consistent
businesses. One of the Act’s largest provisions created guidance and training for new stimulus programs
the Paycheck Protection Program under section 7(a) before disbursing funds. The controls should also
of the Small Business Act. This program provides ensure that program requirements are updated.
$349 billion in fully guaranteed SBA loans, which can Finally, inaccurate or unreliable data did not allow
be forgiven if used properly, for small businesses for proper measurement of economic stimulus loan
to cover payroll, rent, utility payments, and other program performance.
limited uses. SBA’s 7(a) loan program is the
Agency’s primary method of facilitating capital to While SBA has improved controls related to existing
eligible small businesses. SBA offers guarantees on loan programs, we note several risk areas that may
loans made by participating lenders to help present SBA with challenges while issuing and
expand capital to small businesses that face administering requirements under the COVID-19
challenges getting loans through conventional related 7(a) stimulus loan programs.
financing methods.” Another significant provision of
the CARES Act provides $17 billion for SBA to pay 6 Key Considerations for SBA
months of principal and interest payments for current
SBA loans. In summary, to ensure program integrity and the
timeliness of loans to eligible small businesses and to
SBA’s 7(a) loan is a deferred participation loan mitigate the risk of financial loss SBA should:
made between the lender and SBA, with the lender
providing the funding to an eligible small business. • Issue clear requirements and ensure timely
SBA will honor its guaranty on the 7(a) loan if the communication to lending partners
lender demonstrates it originated, serviced, closed • Establish and monitor performance measures
and liquidated the loan according to SBA • Establish proper internal controls
requirements. As of December 31, 2019, the total • Establish a quality assurance plan to prevent and
unpaid principal balance of SBA 7(a) loans was detect improper payments
approximately $95.4 billion.
• Track program data to support accurate
measurement and reporting
What We Reviewed
The Office of Inspector General (OIG) regularly
conducts audits and inspections that evaluates
management controls and assesses the program
integrity, efficiency, and effectiveness of the 7 (a) loan
program. We compiled findings from those audits and
reviews that identified significant issues and relevant
risk.
Office of Inspector General
U.S. Small Business Administration
DATE: April 3, 2020
TO: Jovita Carranza
Administrator
FROM: Hannibal “Mike” Ware
Inspector General
SUBJECT: Risk Awareness and Lessons Learned From Prior Audits of Economic Stimulus
Loans
We prepared this memorandum to provide the Small Business Administration (SBA) information
regarding risks identified from prior audits and reviews, in addition to lessons learned, that SBA
should consider in managing and mitigating the risk of financial loss for loan programs funded as a
result of the Coronavirus (COVID-19) pandemic.
Background
Like other nations, the United States is dealing with the devastating effects of the COVID-19
pandemic, which has significantly impacted countless small businesses across the country.
Temporary business closings and layoffs could have a lasting negative impact on local economies if
these entities don't survive. The President signed the Coronavirus Aid, Relief, and Economic
Security (CARES) Act into law on March 27, 2020, to provide economic relief to our nation's small
businesses. 1 One of the Act’s largest provisions created the Paycheck Protection Program under
section 7(a) of the Small Business Act. This program provides $349 billion in fully guaranteed SBA
loans, which can be forgiven if used properly, for small businesses to cover payroll, rent, utility
payments, and other limited uses. Another significant provision provides $17 billion for SBA to pay
6 months of principal and interest payments for existing 7(a), 504, and 7(m) loans.
Increased guaranties from SBA reduces the risk to lenders, who, as a result, may not exercise due
diligence in originating loans, thereby increasing the risk of potential financial losses to SBA. In
addition, increased loan volume, loan amounts, and expedited loan processing timeframes may
make it more difficult for SBA to identify red flags in loan applications. Therefore, we are providing
SBA with key risks and lessons learned from past large-scale stimulus packages for its
consideration. Without sufficient controls in place, SBA’s programs suffer increased vulnerability to
fraud and unnecessary losses when SBA and its lending partners expedite loan transactions to
provide quick relief. The most recent large-scale SBA-administered stimulus is the combination of
“The American Recovery and Reinvestment Act of 2009 (ARRA) and the Small Business Jobs Act of
2010 (JOBS Act). We refer to these acts collectively in this analysis as the Recovery Act.
1 Public Law 116-136.
1
Applicable Federal Statutes, Regulations, and Guidelines
Section 7(a) of the Small Business Act empowers SBA administrator to make loans to any small
business concern. These powers are subject to restrictions, limitations, and provisions as defined in
the Act.
Title 13, Part 120 in the Code of Federal Regulations contains the requirements for SBA’s business
loan programs.
SBA Standard Operating Procedures (SOP) 50 10 5 (K) provides specific policies and procedures
governing 7(a) business loan programs including Standard 7(a), the Preferred Lenders Program,
SBA Express, and the Agency’s Pilot Loan Programs.
The CARES Act contains provisions related to SBA’s loan programs. The Act requires SBA to
implement these provisions, which include:
• Section 1102: creates the Paycheck Protection Program under section 7(a) of the Small
Business Act, which has a covered period from February 15 through June 30, 2020. This
program provides $349 billion for SBA loans—with a 100-percent guarantee—to cover
payroll, rent, utility payments, and other limited uses. The Paycheck Protection Program
waives many standard 7(a) requirements, including the associated fees, consideration
of credit elsewhere, collateral, and personal guarantees. In addition, these loans will
have deferred payments for 6 to 12 months.
• Section 1106: provides the requirements related to the forgiveness of the Paycheck
Protection Program loans under section 1102.
• Section 1112: provides $17 billion for SBA to pay 6 months of principal, interest, and
expense payments for existing 7(a), 504, and 7(m) loans starting on the next payment
due or on the first payment due date of any such loans made between March 27 and
September 27, 2020.
Prior Audit Findings
In fulfilling our responsibility to oversee past stimulus programs, including the Supplemental
Terrorist Activity Relief (STAR) and the Recovery Act, we issued 27 reports and memorandums that
included 89 recommendations. In addition, other entities responsible for oversight, including the
U.S. Government Accountability Office (GAO) and congressional committees, issued reports on
SBA’s implementation and oversight of past stimulus programs. Following are some examples of
the significant findings and relevant risk from the prior audits and reviews. We restricted our
review to stimulus packages issued since fiscal year 2000.
Stimulus Program Implementation
Prior audits and reviews determined that SBA did not implement key stimulus loan programs
within statutory deadlines. In addition, SBA did not implement clear guidance for lending partners.
These findings demonstrate that to ensure program integrity and effectively mitigate the risk of
financial loss, SBA must implement stimulus loan programs in a timely manner, provide lending
partners with clear requirements, and ensure public communication from SBA officials is
appropriate and consistent with the established requirements.
2
Office of Inspector General (OIG) report 6-09: Audit of SBA’s Administration of the Supplemental
Terrorist Activity Relief (STAR) Loan Program, December 2005.
In this report, we found that SBA did not implement adequate internal controls and oversight of the
STAR loan program to ensure that only eligible borrowers obtained STAR loans. SBA directed loan
officers not to question the lenders’ justifications for these loans. Further, to promote the program
and encourage lender participation, senior SBA officials made several public statements that
broadened the scope of eligibility for the program and provided assurances that SBA would not
second guess lender eligibility justifications.
GAO Report 10-298R: SBA’s Economic Stimulus Provisions, January 2010.
GAO found SBA experienced challenges implementing the America's Recovery Capital (ARC) Loan
Program. The report stated that emergency rulemaking authority required SBA to issue regulations
within 15 days of ARRA enactment for the program; SBA did not meet the statutory deadline. GAO
identified several factors that may have contributed to SBA’s delay in implementing these
administrative provisions, including challenges related to the creation of new and complex
programs. Some market participants said that while interest in the ARC loan program among many
potential small business borrowers appeared to be high, there was significant confusion about the
program’s eligibility requirements. Market participants GAO interviewed also cited that some
lenders were uncertain about the definition of a viable business, as defined by SBA regulations, and
how to determine immediate financial hardship. SBA subsequently issued revised guidance for
determining borrower eligibility under the ARC loan program.
Stimulus 7(a) Loan Approvals
These findings demonstrate SBA’s need to provide lending partners with clear requirements and to
clearly communicate the need to originate, close, and service loans according to program
requirements to ensure program integrity and effectively mitigate the risk of financial loss.
OIG report ROM 11-07: Origination and Closing Deficiencies Identified in 7(a) Recovery Act Loan
Approvals, September 2011.
In this report, we identified documentation deficiencies in 24 (or 40 percent) of the 60 7(a)
stimulus loans reviewed, resulting in inappropriate or unsupported loan approvals. Based on the
sample results, we estimated that at least 1,996 of the loans in the universe were not originated and
closed in compliance with SBA's policies and procedures, resulting in at least $869.5 million in
inappropriate or unsupported loan approvals. The projected volume of inappropriate or
unsupported loan approvals demonstrates the inherent risk of these loans and the importance of
careful review by SBA.
OIG report ROM 11-03: America's Recovery Capital Loans Were Not Originated and Closed in
Accordance with SBA's Policies and Procedures, March 2011
In addition, in this report, the OIG identified material origination and closing deficiencies in fifty-six,
or 47 percent, of the 120 7(a) stimulus loans reviewed, resulting in inappropriate loan approvals of
approximately $1.8 million. The documentation in the loan files was inadequate. Based on the
sample results, we estimated that 2,228 of the 7(a) stimulus loans were not originated and closed in
compliance with SBA's policies and procedures, resulting in approximately $66.5 million in
inappropriate loan approvals.
3
Stimulus 7(a) Loan Purchases
We also identified findings regarding loan purchases that demonstrate SBA’s need to communicate
clear guidance to lenders and to provide adequate training to loan purchase center staff. Ensuring
that lenders know the program requirements and providing training to staff will minimize the risk
of improper payments due to erroneous purchases resulting from improper documentation
provided by SBA 7(a) lenders.
OIG report 12-11R: High-Dollar Early-Defaulted Loans Require an Increased Degree of Scrutiny and
Improved Quality Control at the National Guaranty Purchase Center, March 2012
We found that SBA and its lenders originated, closed, and purchased 11 of the 25 sampled loans
according to SBA rules and regulations and commercially prudent lending standards. We identified
material deficiencies, however, in 14 of the 25 early-defaulted loans selected for audit. Of these 14
loans, we identified material deficiencies in 10 loans and SBA identified material deficiencies in the
remaining 4 loans. These deficiencies resulted in questioned costs or recoverable guaranty
payments totaling approximately $10.7 million. We noted that loan specialists did not always
review high-dollar, early-defaulted loans with the level of scrutiny necessary to identify all material
deficiencies.
OIG report 6-09: Audit of SBA’s Administration of the Supplemental Terrorist Activity Relief (STAR)
Loan Program, December 2005
In this report, we found that SBA did not ensure that only eligible borrowers obtained stimulus
loans. The lender files did not contain sufficient information to demonstrate that borrowers were
adversely affected as required by SBA loan program policies and procedures. As a result, eligibility
could not be determined for 50 of the 59 (or 85 percent) of the loans reviewed. We recommended
that SBA provide more definitive guidance to its purchase centers to determine what constituted an
inadequate adverse situation, thereby making the loan eligible for stimulus provisions.
After we issued our report, the Majority Staff of the United States Senate Committee on Small
Business and Entrepreneurship conducted its review of the STAR loan program (“Small Business
Administration’s Supplemental Terrorist Activity Relief Loan Program, September 6, 2006“). The
report found that only 26 percent of the loan files reviewed contained adequate documentation
demonstrating recipient eligibility to receive a STAR loan. Of the files reviewed by committee staff,
74 percent contained either questionable, inadequate, or no documentation.
Stimulus Data Reliability and Program Reporting
Prior reports found SBA did not ensure that data from Recovery Act investments was reliable. The
report findings demonstrate the need for SBA to establish and continuously monitor specific
outcome-oriented performance measures, modify existing loan systems to track key stimulus
program information at the loan level, and implement internal controls to ensure the integrity of
the recorded data to support accurate program measurement and reporting. Without reliable and
specific program measurements, SBA cannot ensure program integrity, nor can it confidently
measure the performance of stimulus 7(a) loan programs.
4
OIG report ROM 10-04: Review of Controls Over Job Creation and Retention Statistics Reported by
SBA under the American Recovery and Reinvestment Act of 2009, December 2009
We found SBA did not ensure that data from ARRA investments was reliable. Specifically, SBA may
have overstated its reported number of jobs created or retained by at least 16 percent. The errors
that made up the overstatement were statistical outliers, negative job numbers, and jobs that were
double counted for businesses that received multiple loans. The report found these errors occurred
because SBA did not establish reasonableness checks and did not have the necessary system
controls and lender guidance.
OIG report ROM 10-15: Review of SBA’s Job Creation Data Under the Recovery Act, April 2010
In this report, we found SBA did not ensure that program performance was accurately reported.
Certified Development Companies (CDCs) reported job creation and retention statistics consistent
with 504 program guidance. SBA did not define or provide lenders guidance on how jobs retained
were to be measured in the 7(a) program, however, lenders were generally reporting all existing
jobs at the applicant’s business as jobs retained. As a result, SBA’s reporting of 7(a) job retention
was unclear and misleading. The risk of confusion was compounded by the fact that “jobs
created/retained” for the 7(a) and 504 loan programs were reported side by side, even though they
were not comparable.
SBA’s Improvements
SBA addressed the recommendations included in the issued reports, and we closed the
recommendations after review of the supporting documentation provided. In addition, after we
reported on the Recovery Act, SBA improved its processes and the underlying internal controls.
These improvements include, but are not limited to:
• Updating loan program requirements
• Providing training to loan specialists
• Enhancing loan review checklists to determine lender compliance
• Modifying production standards for loan specialists to evaluate complex early defaulted
loans
• Developing and implementing a quality control program for all its loan centers to verify and
document compliance with the loan process, from origination to closeout
• Reducing improper payments and improving the accuracy of improper payment reporting
Although SBA addressed recommendations from these reports, actions SBA had taken may have
since been revised because of program changes over time. SBA must reevaluate the current
effectiveness of its internal controls to avoid a recurrence of these issues and to mitigate the risk of
financial loss for COVID-19 related 7(a) stimulus loan programs.
Key Points to Consider When Administering Stimulus Loan Programs
In summary, to ensure program integrity, the timeliness of loans to eligible small businesses, and to
mitigate the risk of financial loss SBA should:
• Issue clear requirements and ensure timely communication to lending partners
• Establish and monitor specific outcome-oriented performance measures
5
• Ensure public communication from SBA officials is appropriate and consistent with the
established requirements
• Establish proper controls in the loan approval phase to ensure eligibility of participants and
to mitigate the risk of loan default
• Establish a quality assurance plan to prevent and detect improper payments
• Oversee the program to ensure it is implemented as intended and that program goals and
objectives are met
• Modify existing loan systems to track stimulus program data to support accurate program
measurement and reporting
Fraud Hotline
SBA OIG also aggressively investigates allegations of fraud, waste, abuse, or mismanagement. Please
report fraud, waste, abuse, or mismanagement of Federal funds involving SBA programs,
operations, or personnel to the SBA OIG hotline. To submit a complaint, please visit
https://www.sba.gov/about-sba/oversight-advocacy/office-inspector-general/office-inspector-
general-hotline or call 1-800-767-0385.
Disclaimer
This White Paper contains findings from prior audits and reviews. It is intended solely to provide
risk information from those prior audits that SBA should consider to ensure program integrity and
to mitigate lending risk for COVID-19 related loans. It is not an audit performed under Generally
Accepted Government Auditing Standards and is not an inspection, evaluation, or review performed
under the CIGIE Quality Standards for Inspection and Evaluation.
If you have any questions, please contact me at 202-205-6586 or Andrea Deadwyler, Assistant
Inspector General for Audits, at 202-205-6616.
cc: William Manger, Chief of Staff and Associate Administrator, Office of Capital Access
Nina Levine, Acting General Counsel
John Miller, Deputy Associate Administrator, Office of Capital Access
William Briggs, Deputy Associate Administrator, Office of Capital Access
Dianna Seaborn, Director, Office of Financial Assistance
Jihoon Kim, Director, Office of Financial Program Operations
Susan Streich, Director, Office of Credit Risk Management
Martin Conrey, Attorney Advisor, Legislation and Appropriations
Tami Perriello, Chief Financial Officer
Tonia Butler, Director, Office of Internal Controls
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