20 12 Second White Paper EIDL Lessons
Summary
A white paper, Report Number 20-12, dated April 3, 2020, from the SBA Office of Inspector General to the SBA Administrator, on risk awareness and lessons learned from audits and inspections of Economic Injury Disaster Loans and other disaster lending. It notes that the CARES Act provided $10 billion for COVID-19 EIDLs and that SBA had received more than 94,000 COVID-19 EIDL applications as of April 1, 2020. The paper compiles prior OIG findings in three areas: loans issued without fully vetting credit or repayment ability, loans to businesses that did not suffer an economic loss, and staffing challenges during major disasters. Cited reports include OIG Report 16-18, 15-05, 14-20, 15-13, 18-19 and 18-10. It states that it is not an audit performed 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 AUDITS AND INSPECTIONS OF
ECONOMIC INJURY DISASTER LOANS
AND OTHER DISASTER LENDING
April 3, 2020
EXECUTIVE SUMMARY Report
Number
RISK AWARENESS AND LESSONS LEARNED FROM 20-12
AUDITS AND INSPECTIONS OF ECONOMIC INJURY April 3, 2020
DISASTER LOANS AND OTHER DISASTER LENDING
Why We Did This? Identified Areas of Risk
The Small Business Administration’s (SBA’s) Prior audits and inspections identified that SBA:
Disaster Assistance Program is the Federal
Government’s primary program for providing • Issued EIDLs and non-EIDLs without fully
disaster assistance to businesses. SBA provides up vetting the borrowers’ credit or their ability
to $2 million in Economic Injury Disaster Loans to repay the loans
(EIDLs) for substantial economic injury loss to • Issued EIDLs and non-EIDLs to businesses
small businesses and most private nonprofit that did not suffer an economic loss or to
organizations to help meet financial obligations businesses outside the timeframe of the
and operating expenses. disaster
• Encountered challenges with having
In response to the Coronavirus (COVID-19) experienced or well-trained staff to provide
pandemic, the Coronavirus Preparedness and accurate and appropriate assistance to
Response Supplemental Appropriations Act (CVPR borrowers during large-scale disasters
Act) deemed COVID-19 a disaster and authorized
SBA to provide EIDLs to businesses and nonprofits The expected increase in loan volumes and amounts
affected by COVID-19. In addition, the Coronavirus and expedited processing timeframes will place
Aid, Relief, and Economic Security Act (CARES Act) additional stress on existing controls. This
provided $10 billion to SBA to provide emergency document is intended to assist SBA with ensuring
EIDLs. This is a significant increase compared to program integrity, program goals and objectives are
prior major disasters. For example, SBA approved met, and managing lending risk.
approximately $1.1 billion combined in disaster
loans to businesses and nonprofits in response to Key Considerations for SBA
Hurricanes Harvey, Irma, and Maria. For Hurricane
Sandy, SBA approved approximately $527 million
In summary, to ensure program integrity and
in disaster loans to businesses and nonprofits. Only
mitigate the risk of financial loss, SBA should
a portion of the business and nonprofit loans for
ensure that loans are provided to eligible
these hurricanes were EIDLs. As of April 1, 2020,
applicants timely, that borrowers meet all
SBA received more than 94,000 EIDL applications
eligibility requirements, and that it has
for the COVID-19 pandemic.
experienced or well-trained personnel to provide
appropriate assistance and handle the increased
We prepared this memorandum to provide SBA
loan volume and expedited processing
information regarding lessons learned and
timeframes.
identified risks from prior audits and inspections
that it should consider in managing and mitigating
the risk of loss for COVID-19 related loans.
What We Reviewed
The Office of Inspector General (OIG) has regularly
conducted audits and inspections to evaluate
management controls and to assess program
integrity, efficiency, and effectiveness of the Disaster
Assistance Loan Program. We compiled findings
from those audits and evaluations that identified
significant issues and relevant risks.
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 Audits of Economic Injury Disaster
Loans and Other Disaster Lending
The Small Business Administration (SBA) Office of Inspector General (OIG) prepared this
memorandum to provide SBA with examples of prior audit and inspection findings that SBA should
consider in managing and mitigating the risk of financial loss for Coronavirus (COVID-19) pandemic
related loans. This memorandum provides an overview of applicable Federal statutes, regulations,
and guidelines for disaster assistance; the audit process and frequent audit findings; and key points
to remember when administering disaster loans.
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 Coronavirus Preparedness and Response Supplemental
Appropriations Act (CVPR Act) provided $20 million to SBA for administrative expenses and
deemed the COVID-19 pandemic a disaster. 1 The disaster declaration made economic injury from
the COVID-19 pandemic an eligible Economic Injury Disaster Loan (EIDL) expense. In addition, the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided an additional $10 billion
to SBA to provide Emergency EIDLs (COVID-19 EIDLs). 2
EIDLs and COVID-19 EIDLs for up to $2 million are to help small businesses, small agricultural
cooperatives, and most nonprofit organizations recover from substantial economic injury. The
CARES Act also expands access to EIDLs under Section 7(b)(2) of the Small Business Act to include
sole proprietors, independent contractors, and employee stock ownership plans (ESOPs). EIDLs are
for these entities who have suffered substantial economic injury in declared disaster areas.
Substantial economic injury means that these entities cannot meet their obligations or pay their
ordinary and necessary operating expenses. EIDLs provide necessary working capital to help these
entities survive until normal operations resume after the disaster.
SBA’s disaster loan programs suffer increased vulnerability to fraud and unnecessary losses when
loan transactions are expedited to provide quick relief and sufficient controls are not in place. The
1 Public Law 116-123.
2 Public Law 116-136.
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expected increase in loan volume and amounts, and expedited processing timeframes will place
additional stress on existing controls. Therefore, it is important to provide SBA with risk
information from prior audits and inspections related to increased loan volumes and amounts
processed in expedited timeframes.
In response to the COVID-19 pandemic, SBA is expected to quickly issue $10 billion—an amount
significantly higher than prior disasters—in COVID-19 EIDLs. For comparison, SBA approved
approximately $1.1 billion combined in disaster loans to businesses and nonprofits in response to
Hurricanes Harvey, Irma, and Maria. For Hurricane Sandy, SBA approved approximately $527
million in disaster loans to businesses and nonprofits. Only a portion of the business and nonprofit
loans for these hurricanes were EIDLs. As of April 1, 2020, SBA received more than 94,000 COVID-
19 EIDL applications; SBA received only 32,000 business and nonprofit loan applications, some of
which contained an EIDL component, and almost 8,000 EIDL applications for Hurricanes Harvey,
Irma, and Maria. SBA’s oversight of loan applications will be unprecedently stretched as a result of
the increased loan volume and expedited timeframes.
Prior Audit Findings
In fulfilling our responsibility to oversee the disaster loan program, we have issued numerous audit
and inspection reports. The following is a compilation of some of the significant findings and
relevant risks from the prior audits and inspections. Although SBA addressed recommendations
from these reports, actions SBA has taken may have since been revised due to program changes
over time. SBA must reevaluate the current effectiveness of its internal controls used to address the
risks to avoid a recurrence of these issues and to mitigate the risk of financial loss for COVID-19
EIDLs.
Lack of Repayment Ability/Creditworthiness
Our audit work found that SBA issued EIDLs and non-EIDLs without fully vetting the borrowers’
credit or their ability to repay the loans. Without full evaluation of the borrower’s credit and their
current financial situation, the risk of default on these loans increases. Specifically, 13 C.F.R. 123.6
requires that there must be reasonable assurance that a borrower can repay their loan based on
SBA’s analysis of their credit or their personal or business cash flows and they must also have
satisfactory character.
OIG Report 16-18: Early-Defaulted Hurricane Sandy Disaster Loans, August 2016.
In this report, we found that the overall early default rate on Hurricane Sandy loans was relatively
low when compared to loans made for other disasters. In 17 of the 21 loans reviewed, the Office of
Disaster Assistance (ODA) approved loans without verifying borrower’s eligibility, or approved
loans to borrowers who lacked creditworthiness or repayment ability. Due to the significance of the
errors in the areas of creditworthiness and repayment ability, we projected our results to the
universe of early-defaulted loans. As a result, we estimated that at least 361 of the 501 early-
defaulted loans, totaling $4.3 million, were not approved according to SBA or Federal requirements.
We noted borrower creditworthiness as the most prevalent area of concern on the early-defaulted
loans; in most loans reviewed, SBA approved loans to borrowers with unsatisfactory credit
histories. In addition, we determined that while ODA routinely analyzed disaster loan portfolio
risks, SBA could make improvements to reduce the rate of early defaults.
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OIG Report 15-05: SBA’s Evaluations of Principal’s Repayment Ability for Hurricane Sandy Business
Loans, February 2015
This report found that loan officers did not have guidance for performing the financial analysis to
determine whether Hurricane Sandy business loan applicants had repayment ability. SBA Standard
Operating Procedures (SOP) 50 30 7 stated, “. . . for business loans, we determine repayment ability
by the results of the financial analysis performed on the business.” The SOP, however, provided no
additional guidance regarding how to perform the financial analysis. In the absence of guidance,
loan officers used inconsistent methodologies when evaluating Hurricane Sandy business loans for
repayment ability. We estimated that SBA approved at least 537 Hurricane Sandy disaster business
loans, totaling at least $17.9 million, without sufficiently considering principals’ living expenses
when determining repayment ability. Therefore, SBA did not have reasonable assurance that the
borrowers had repayment ability, and these loans were at a higher risk of default.
Eligibility
We also found that SBA issued EIDLs and non-EIDLs to businesses that did not suffer an economic
loss or to businesses outside the timeframe of the disaster. SBA must ensure it provides the COVID-
19 related EIDLs to eligible businesses that have suffered economic loss due to the pandemic.
Specifically, 13 C.F.R. § 123.303 states applicants may only use EIDL proceeds for working capital
necessary to carry the applicant until normal operations resume for expenditures necessary to
alleviate the specific economic injury.
OIG Report 14-20: Controls Governing Economic Injury Disaster Loan Approval Need Improvement,
September 2014
One example from this report found that a borrower received a $384,300 EIDL loan but did not
demonstrate the business had experienced an economic loss. In fact, a review of the file showed
that the borrower experienced increased sales in the 27 months following the disaster, proving that
economic injury did not occur; sales increased by 19.8 percent in the first 12 months following the
disaster and continued to increase by 10.3 percent in the next 12 months. The applicant provided
these increases to SBA, but the Agency approved the requested EIDL. The Disaster Credit
Management System records did not contain adequate and supporting documentation to
substantiate the remaining financial needs, which SBA used to justify its approval. Therefore, the
report concluded that the business did not experience an economic loss and was ineligible for the
EIDL loan.
OIG Report 15-13: Hurricane Sandy Expedited Loan Processes, July 2015
On December 7, 2012, ODA issued Memorandum 12-47, Modified Phase II EIDL Processing
Procedures for Hurricane Sandy Loans, which expedited processing EIDLs for Hurricane Sandy. The
modified method was intended to reduce processing time spent estimating disaster related
economic injury losses.
In this report example, we found that 15 of the 40 modified Phase II loan applications reviewed
incorrectly applied the modified procedures used to determine the eligible loan amount. These 15
loans totaled $1,060,300. Specifically, loan officers approved loans for ineligible businesses that did
not suffer an economic loss or to businesses outside the timeframe of the disaster.
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Staffing Concerns During Major Disasters
Finally, prior audits found that SBA experienced challenges with having experienced staff to
provide the appropriate and accurate assistance needed to respond to large-scale disasters.
Experienced or well-trained staff are necessary to provide assistance and accurate counseling to
disaster victims in filing applications and providing the required supporting documentation to
facilitate timely and accurate disbursement of loans.
OIG Report 18-19: Inspection of SBA’s Initial Disaster Assistance Response to Hurricane Maria, July
20, 2018
One example from this report found that when Hurricane Maria made landfall in Puerto Rico, it
created an unprecedented demand for Spanish translation services. Although SBA hired staff, it
needed additional Spanish translation services to assist these staff in communicating with disaster
survivors regarding their disaster loan applications. The new translation service contractor SBA
hired could not handle the call volume from disaster survivors. As a result, some survivors
experienced estimated wait times longer than 45 minutes or dropped calls.
OIG Report 18-10: Inspection of SBA’s Initial Disaster Assistance Response to Hurricane Harvey,
January 2018
This report found the SBA Customer Service Center (CSC) significantly increased its staff from 17 to
146 to respond to calls related to Hurricanes Harvey, Irma, Maria, and other disasters. Despite
continuously increasing the number of available agents, a significant number and percentage of
calls went unanswered. Specifically, from September 2, 2017, to October 28, 2017, the CSC weekly
call volume ranged from 11,051 to 65,160. For this same period, the weekly percentage of
unanswered calls ranged from 14 percent (6,957 of 49,864) to 37 percent (15,847 of 42,789). We
also found the longest wait time was approximately 26 minutes.
Key Points To Remember When Administering EIDLs
In summary, to ensure program integrity and mitigate the risk of financial loss, SBA must ensure
that loans are timely provided to eligible applicants, that borrowers meet all eligibility
requirements, and that it has experienced or well-trained personnel to provide appropriate
assistance and handle the increased loan volume and expedited processing timeframes.
Fraud Hotline
The 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 the SBA should consider to ensure program integrity
and to mitigate lending risk for COVID-19 related loans. It is not an audit performed under
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Generally Accepted Government Auditing Standards and is not an inspection, evaluation, or review
performed under the Council of Inspectors General on Integrity and Efficiency 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: James Rivera, Associate Administrator, Office of Disaster Assistance
Nina Levine, Acting General Counsel
Martin S. Conrey, Attorney Advisor, Office of General Counsel
Michael A. Simmons, Attorney Advisor, Office of General Counsel
Tami Perriello, Chief Financial Officer, Office of the Chief Financial Officer
Tonia Butler, Internal Control Analyst, Office of Internal Controls
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