The SBA's Implementation of Recommended Controls and the Economic Aid Act

Source document: The SBA's Implementation of Recommended Controls and the Economic Aid Act; document type: OIG audit report.

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THE SMALL BUSINESS ADMINISTRATION’S
IMPLEMENTATION OF RECOMMENDED CONTROLS AND
THE ECONOMIC AID ACT
REPORT NUMBER 21-19 | August 12, 2021
S B A   I N S P E C T O R   G E N E R A L   I N S P E C T I O N   R E P O R T

          EXECUTIVE UMMARY
S

THE SMALL BUSINESS ADMINISTRATION’S IMPLEMENTATION OF
RECOMMENDED CONTROLS AND THE ECONOMIC AID ACT
Report
21-19
August 12,
2021

What OIG Reviewed
The Economic Aid to Hard-Hit Small Businesses,
Nonprofits, and Venues Act (Economic Aid Act)
was enacted on December 27, 2020 to continue
assistance under the Paycheck Protection Program
(PPP) for small businesses financially impacted by
the ongoing coronavirus pandemic. Under the
Economic Aid Act, the PPP was extended to provide
over $284 billion in guaranteed SBA loans. The
additional funds under the Economic Aid Act were
available until March 31, 2021. The PPP Extension
Act of 2021 later extended the program to June 30,
2021. The PPP ended on May 31, 2021 and lenders
approved over $277 billion in PPP funds under the
Economic Aid Act.
On December 23, 2020, the Office of Inspector
General (OIG) issued a memorandum on key PPP-
related recommendations at the request of the
Small Business Administration (SBA) and in
anticipation of the Economic Aid Act. Based on
previous and ongoing reviews, OIG offered key
recommendations to strengthen internal controls
to prevent fraud and ensure only eligible
businesses receive PPP funds.
Our objectives were to determine if SBA 1)
considered prior OIG key recommendations to
strengthen controls for ensuring eligibility and
mitigating fraud and 2) implemented the PPP in
accordance with the Economic Aid Act. To
accomplish our objective, we reviewed the
Economic Aid Act, SBA’s Interim Final Rules and
Frequently Asked Questions. We also assessed SBA
Procedural Notices, a letter from the SBA
Administrator, and PPP applications.
What OIG Found
SBA implemented or initiated action on all of the
OIG recommendations to strengthen internal
controls related to the PPP, as outlined in the OIG
Key Recommendations memorandum. Overall, we
found SBA implemented the PPP in accordance
with the Economic Aid Act with two exceptions
relative
to
the
assessment
of
faith-based
organizations and the issuance of guidance for
farm credit system institution requirements. SBA
did not 1) require an assessment of affiliation for
faith-based organizations which contradicts its

internal control procedures and 2) issue guidance
regarding farm credit system institutions to ensure
requirements were met.
On February 22, 2021, the White House announced
changes to the PPP to target the smallest
businesses and businesses that were not helped in
previous relief efforts. SBA implemented four of the
five White House announced changes by issuing an
Interim Final Rule, Frequently Asked Questions,
and updated applications. However, SBA could not
provide sufficient evidence that it established the
$1 billion set aside as required to provide
additional
assistance
to
sole
proprietors,
independent
contractors,
and
self-employed
individuals located in low- and moderate-income
areas.
OIG Recommendations
We recommend SBA assess affiliation for faith-
based organizations to ensure only eligible faith-
based organizations receive the applicable PPP
loans. We are not making any recommendations
regarding the farm credit system institution
requirements and the $1 billion set aside because
the PPP ended on May 31, 2021. We advised SBA
that if future stimulus funds are made available
with such requirements, SBA should ensure it
implements the requirements accordingly.
Agency Response
SBA disagreed with the recommendation, stating it
committed to not assessing or requiring lenders to
assess the reasonableness of the faith-based
organization’s determination, which they believe
met the intent of Congress. However, SBA clarified
its PPP loan review plan and updated its affiliation
worksheet to reflect that affiliation rules do not
apply
for
faith-based
organizations.
This
recommendation is considered resolved and closed
upon issuance of this report based on SBA’s final
decision not to assess the reasonableness of faith-
based determinations and its revised updated
affiliation worksheet.

Office of Inspector General
U.S. Small Business Administration

DATE:
August 12, 2021

TO:

Isabella Casillas Guzman

Administrator

FROM:
Hannibal “Mike” Ware
Inspector General

SUBJECT:
Small Business Administration’s Implementation of Recommended Controls
and the Economic Aid Act

This report presents the results of our analysis of the Small Business Administration’s
Implementation of Recommended Controls and the Economic Aid Act. We considered
management’s comments on the draft of this report when preparing the final report.
Management disagreed with the recommendation.
We appreciate the cooperation and courtesies provided by your staff. If you have any
questions or need additional information, contact Teresa Gray, Director of Credit Programs
Group, or Andrea Deadwyler, Assistant Inspector General for Audits, at (202) 205-6586.
cc:
Patrick Kelley, Associate Administrator, Office of Capital Access
Antwaun Griffin, Chief of Staff
Arthur Plews, Deputy Chief of Staff
Peggy Delinois Hamilton, General Counsel, Office of General Counsel
John Miller, Deputy Associate Administrator, Office of Capital Access
Michael Simmons, Attorney Advisor, Office of General Counsel
Martin Conrey, Attorney Advisor, Office of General Counsel
Rafaela Monchek, Director, Office of Continuous Operations and Risk Management
Jason Bossie, Chief Financial Officer
Tonia Butler, Director, Internal Controls

Table of Contents
Introduction ............................................................................................................................................................ 1
Office of Inspector General Key Recommendations ............................................................................ 1
Economic Aid Act Requirements ................................................................................................................ 1
SBA Formal Guidance ................................................................................................................................. 1
Other Guidance and Resources ............................................................................................................... 2
Objective............................................................................................................................................................... 2
Results ................................................................................................................................................................... 2
OIG Key Recommendations ............................................................................................................................... 3
Updating Borrower Application.................................................................................................................. 3
Assessing Vulnerabilities in Internal Controls ...................................................................................... 3
Using Treasury’s Do Not Pay Database .................................................................................................... 4
Economic Aid Act Implementation ................................................................................................................ 5
Statutory Requirements ................................................................................................................................. 5
Assessment of Affiliation for Faith-Based Organizations ................................................................. 6
Farm Credit System Institution Requirements ..................................................................................... 6
Changes to the PPP ........................................................................................................................................... 7
Recommendations ............................................................................................................................................ 7
Analysis of Agency Response ....................................................................................................................... 7
Summary of Actions Necessary to Close the Recommendations ................................................... 7
Appendix I: Objectives, Scope, and Methodology ..................................................................................... 9
Use of Computer-Processed Data ............................................................................................................... 9
Appendix II: Prior Work .................................................................................................................................. 10
Appendix III: Comparison of the Economic Aid Act and Issued Guidance................................... 11
Appendix IV: Management Comments ...................................................................................................... 14

1
Introduction
On December 27, 2020, Congress enacted the Economic Aid to Hard-Hit Small Businesses,
Nonprofits, and Venues Act to continue financial assistance through the Paycheck
Protection Program (PPP) for small businesses impacted by the coronavirus pandemic. The
PPP had been established in late March 2020 by the Coronavirus Aid, Relief, and Economic
Security (CARES) Act.
Under the Economic Aid Act, the PPP was extended through March 31, 2021 to provide
over $284 billion in guaranteed SBA loans. The loans can be used for a small business’
payroll, rent, utility payments, and other limited uses and can be forgiven if loan proceeds
were used in accordance with the law. In addition, certain eligible borrowers who had
previously received a PPP loan could apply for additional PPP funds. The PPP Extension Act
of 2021 extended the program through June 30, 2021 although additional funds remain
available until September 30, 2021. However, the PPP ended on May 31, 2021 and lenders
approved over $277 billion in PPP funds under the Economic Aid Act.
Office of Inspector General Key Recommendations
In response to a request from the former Administrator of the Small Business
Administration and in anticipation of the imminent passage of the Economic Aid Act, the
Office of Inspector General (OIG) issued a memorandum, “Key Recommendations Based on
Lessons Learned from Prior COVID-19 Economic Injury Disaster and Paycheck Protection
Program Loan Programs,” on December 23, 2020. We offered SBA several
recommendations based on our previous and ongoing reviews to strengthen internal
controls to prevent fraud and ensure only eligible businesses receive PPP funds.
Economic Aid Act Requirements
SBA was required to issue PPP-related regulations to carry out certain provisions of the Act
within 10 days of enactment of the Economic Aid Act. The Act made several changes to PPP,
including the processes for making PPP loans, loan increases, loan forgiveness, additional
eligible expenses, loan eligibility, and conflict of interest disclosures.
The Act also allowed eligible existing PPP borrowers to access funds as a “second draw”
PPP loan. The borrowers were required to meet specific requirements, including having
300 or fewer employees and a decrease in gross receipts.
SBA Formal Guidance
As of March 12, 2021, SBA issued four Interim Final Rules to carry out changes made to PPP
by the Economic Aid Act, as follows:
1. Interim Final Rule on Paycheck Protection Program as Amended by Economic Aid
Act, issued January 6, 2021
2. Interim Final Rule on Paycheck Protection Program Second Draw Loans, issued
January 6, 2021
3. Interim Final Rule on Paycheck Protection Program – Loan Forgiveness
Requirements and Loan Review Procedures as Amended by Economic Aid Act,
issued January 19, 2021

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4. Interim Final Rule on Paycheck Protection Program – Revisions to Loan Amount
Calculation and Eligibility, issued March 3, 2021
In addition to the Interim Final Rules, SBA issued six Procedural Notices that addressed
implementation of the Economic Aid Act, primarily related to eligibility, PPP loan increases,
loan forgiveness, and loan reviews.
Other Guidance and Resources
As of March 12, 2021, SBA had also issued four borrower application forms, four lender
forms, and three loan forgiveness applications. The agency also updated existing
Frequently Asked Questions (FAQs) and issued guidance on how to calculate maximum
loan amounts. In addition, SBA provided informational slides and PPP platform user guides.
Objective
Our objectives were to determine if SBA 1) considered prior key OIG recommendations to
strengthen controls for ensuring eligibility and mitigating fraud and 2) implemented the
PPP in accordance with the Economic Aid Act.
Results
SBA has either implemented or begun taking action on all of the OIG recommendations to
strengthen internal controls related to the PPP, as outlined in the OIG Key
Recommendations memorandum. SBA updated the PPP borrower application to include a
field for the North American Industry Classification System code and borrower
demographic information. The agency established controls to verify that the loan amount
does not exceed the maximum amount per employee, the maximum number of employees,
or other applicable size standards. SBA also required verifying that businesses were
established before the mandated date and that loan applicants were not included on
Treasury’s Do Not Pay death records.
Overall, we determined SBA implemented the PPP in accordance with the Economic Aid
Act. SBA accomplished this by issuing guidance and providing other resources, including
informational slides and PPP platform user manuals, to clarify requirements and how to
perform related tasks. However, we determined that SBA’s guidance did not require an
assessment of affiliation for faith-based organizations to ensure these borrowers met
eligibility requirements. SBA also did not issue guidance for farm credit system institution
requirements to ensure these institutions met requirements.
We also determined that SBA generally issued guidance in accordance with the February
22, 2021, White House announcement of changes to the PPP.1 However, SBA did not
provide sufficient evidence that it created the required a $1 billion set-aside or that it
issued related guidance for eligible sole proprietors, independent contractors, and self-
employed individuals.

1 “Fact Sheet: Biden-Harris Administration Increases Lending to Small Businesses in Need, Announces Changes to PPP to
Further Promote Equitable Access to Relief,” Executive Office of the President, February 22, 2021. Accessed February 23,
2021.

3
OIG Key Recommendations
SBA implemented two recommendations on updating borrower applications and began
taking action on two recommendations to strengthen internal controls to prevent fraud
and ensure only eligible businesses receive PPP funds, as outlined in the OIG Key
Recommendations memorandum.
Updating Borrower Application
OIG recommended SBA update the PPP borrower application to include a field for the
North American Industry Classification System code for the business category and the
business description to prevent potentially ineligible loan approvals. SBA updated the PPP
borrower application to include a field for the code that can be used to identify the business
description.
OIG also recommended SBA revise the borrower application to include borrower
demographic information. SBA updated the PPP borrower application to include a request
for borrower demographic information.
Assessing Vulnerabilities in Internal Controls
OIG recommended SBA assess vulnerabilities in internal controls and strengthen or
implement necessary internal controls to address ineligible loans and potential fraud. OIG
found that, at minimum, it was critical for SBA to implement a process to ensure lenders
validate the following:
• The loan amount does not exceed the maximum amount per employee.
• The business was established before the mandated date. Verifying the date may
require coordination with the Treasury to confirm what dates the business
applied for and received a Taxpayer Identification Number.
• The loan amount does not exceed the maximum number of employees or other
applicable size standards.
SBA management began taking action by establishing controls to verify that the maximum
loan amount calculation did not include annual salary of any individual employee in excess
of $100,000. SBA also established controls to verify that monthly payroll costs were
accurately calculated and verified against supporting documentation.
In addition, SBA required lenders to validate that any self-employed individual,
independent contractor, or sole proprietor was established before the mandated date of
February 15, 2020. Through automated and manual PPP loan reviews, SBA verified all
businesses were in operation on or before February 15, 2020.
SBA established controls through Interim Final Rules, FAQs, and related guidance
documents to ensure borrowers met standards, such as having 500 or fewer employees
and SBA’s alternative size standards for borrower eligibility. Related guidance documents
included the Paycheck Protection Program Loan Review Plan, Forgiveness Review Guide,
and PPP maximum eligible amount calculator.
In addition, SBA established a hold code for disqualifying businesses not in operation
before February 15, 2020, and two hold codes for borrower eligibility size standard
requirements in an SBA Procedural Notice that was effective on February 10, 2021.

4
According to the SBA Procedural Notice, the hold codes are part of SBA’s front-end
compliance checks on PPP loans.
Using Treasury’s Do Not Pay Database
OIG recommended SBA coordinate with Treasury to develop a technical solution to enable
use of Treasury’s Do Not Pay database to determine loan applicant eligibility and prevent
improper payments before the release of any federal funds. SBA has taken steps to
coordinate with Treasury regarding access to the Treasury's Do Not Pay List.
In February 2021, SBA was able to obtain and use death source data sets in the Treasury’s
Do Not Pay database. SBA has continued to coordinate with Treasury to gain full access to
other data sets in the Do Not Pay database, including the Treasury Offset Program Debt
Check, which identifies potential borrowers who are delinquent on federal nontax debt and
child support obligations. An SBA Procedural Notice effective February 10, 2021,
established the following three hold codes related to the Treasury’s Do Not Pay List subsets
for front-end compliance checks on PPP loans:
• “46 – Death Sources” includes deceased records from the Department of
Defense, Department of State, Social Security Administration, and obituary and
probate death data.
• “47 – System for Award Management Exclusions” identifies persons excluded
from receiving federal contracts, certain subcontracts, and federal financial and
non-financial assistance and benefits.
• “48 – Treasury Offset Program and Credit Alert Interactive Verification
Reporting System” shows persons delinquent on federal nontax debts and other
debts owed to federal agencies, child support obligations, or in default on direct
or guaranteed federal loans.

5
Economic Aid Act Implementation
Overall, we found SBA implemented the PPP in accordance with the Economic Aid Act. SBA
accomplished this by issuing guidance and providing other resources including
informational slides and PPP platform user manuals to understand requirements and how
to perform related tasks. SBA issued Interim Final Rules, Procedural Notices, Frequently
Asked Questions, and seven updated applications that include the North American Industry
Classification System code as well as the applicant’s demographic information.
However, SBA’s January 6 Interim Final Rule did not require an assessment of affiliation for
faith-based organizations, which contradicts SBA’s internal control procedures. SBA also
did not issue guidance on farm credit system institution requirements to comply with the
Economic Aid Act.
We also determined SBA issued guidance in accordance with White House changes to the
PPP. However, we identified one area that SBA did not address to ensure additional
assistance was provided to eligible sole proprietors, independent contractors, and self-
employed individuals.
Statutory Requirements
As of March 5, 2021, SBA had complied with six statutory deadlines for the issuance of
regulations for the PPP. SBA met the deadlines by issuing Interim Final Rules, Procedural
Notices, a letter from the SBA Administrator, a Forgiveness Audit Plan, and an updated
forgiveness application. SBA also provided other resources, such as informational slides
and updated PPP platform user manuals to implement the PPP.
The Economic Aid Act required SBA to issue PPP related regulations by January 6, 2021.2
SBA met this deadline, issuing two Interim Final Rules on January 6. One of the interim
rules outlined key PPP loan provisions, including eligibility of applicants, the PPP lending
process, loan increases, and loan forgiveness. The second interim rule explained loan
terms, eligibility requirements, and application process for second draw PPP loans.
SBA also met the following deadlines to comply with the Act:
• established a one-page certification for loan forgiveness by January 20, 20213
• submitted a forgiveness audit plan to Congress by February 10, 20214
• issued guidance addressing barriers to accessing capital for minority,
underserved, veteran, and women-owned businesses by January 6, 20215
• issued guidance on eligibility for the full and partial returns of PPP funds by
January 13, 20216

2 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 303, December 27, 2020.
3 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 307(a)(3), December 27, 2020.
4 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 307(a)(3), December 27, 2020.
5 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 311(a), December 27, 2020.
6 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 312(b), December 27, 2020.

6
• issued guidance on PPP loan forgiveness related to Economic Injury Disaster
Loans by January 11, 20217
Assessment of Affiliation for Faith-Based Organizations
We determined that SBA met the intent of the Economic Aid Act requirement on faith-
based organizations by clarifying the eligibility of churches and religious organizations.
SBA’s January 6 Interim Final Rule states affiliation rules for faith-based organizations do
not apply, including any relationship to a parent or subsidiary and other applicable aspects
of organizational structure or form.
A faith-based organization applying for PPP loans may rely on a reasonable, good faith
interpretation in determining whether its relationship to any other person, group,
organization, or entity is exempt from the affiliation rules.8
SBA’s Paycheck Protection Program Loan Review Plan requires an affiliation check to
determine whether the borrower appropriately met PPP eligibility requirements. SBA’s
January 6 Interim Final Rule states it will not assess and will not require participating
lenders to assess the reasonableness of a faith-based organization’s affiliation
determination, which contradicts SBA’s internal control procedures. Without assessing the
faith-based organization's determination, SBA cannot provide reasonable assurance that
faith-based organizations meet affiliation exemption standards (See Appendix III).
Although SBA management stated the affiliation check will include faith-based
organizations, they did not provide support documentation as to how SBA will ensure it is
done.
Farm Credit System Institution Requirements
We determined that SBA did not implement the Farm Credit System Institution
requirements of the Economic Aid Act. The Act states, “with respect to the application of
Farm Credit Administration capital requirements, a loan 1) shall receive a risk weight of
zero percent and 2) shall not be included in the calculation of any applicable leverage ratio
or other applicable capital ratio or calculation.”9
An SBA official stated they did not issue the related guidance because the Farm Credit
Administration is responsible for regulating Farm Credit System Institutions. However, SBA
is responsible for implementation of the PPP and should have coordinated with the Farm
Credit Administration to issue guidance to ensure correct application of capital
requirements. We are not making a recommendation regarding this matter because the
PPP ended on May 31, 2021. If future PPP funds are made available with a requirement for
farm credit institutions, SBA should ensure it issues related guidance in coordination with
the Farm Credit Administration (See Appendix III).

7 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 333(e)(1), December 27, 2020.
8 Interim Final Rule – Paycheck Protection Program as Amended by Economic Aid Act, January 6, 2021.
9 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act; Section 314(b)(3)(A), December 27, 2020.

7
Changes to the PPP
On February 22, 2021, the White House announced five significant changes to the PPP to
target the smallest businesses.
SBA implemented four of the five changes by issuing an Interim Final Rule, Frequently
Asked Questions, and updated applications. SBA did not fully implement changes related to
providing assistance to eligible sole proprietors, independent contractors, and self-
employed individuals.
The Administration’s release called for additional assistance to sole proprietors,
independent contractors, and self-employed individuals. SBA was required to establish a $1
billion set aside for businesses without employees that are located in low- and moderate-
income areas.
According to SBA, it established the $1 billion set aside. However, SBA could not provide
sufficient evidence to support that a set aside was established and that it issued related
guidance for the eligible borrower’s awareness. As a result, SBA cannot provide reasonable
assurance that additional assistance was provided to sole proprietors, independent
contractors, and self-employed individuals in accordance with the White House changes.
We are not making a recommendation regarding this matter because the PPP ended on
May 31, 2021. If future PPP funds are made available with a requirement for set asides, SBA
should ensure it establishes the set asides and issues related guidance.
Recommendations
We recommend the Administrator direct the Associate Administrator of the Office of
Capital Access to:
1. Assess affiliation for faith-based organizations to ensure only eligible faith-based
organizations received the applicable PPP loans.
Analysis of Agency Response
SBA management provided formal comments to the draft report, which are included in
their entirety in Appendix IV. Management disagreed with the recommendation. We
considered management’s comments when preparing this final report.
Summary of Actions Necessary to Close the Recommendations
The following details the status of our recommendations and the actions necessary to close
them.
Recommendation 1
Assess affiliation for faith-based organizations to ensure only eligible faith-based
organizations received the applicable PPP loans.
Status: Resolved
SBA management disagreed with this recommendation stating the agency committed that
it would not assess nor require participating lenders to assess the reasonableness of the
faith-based organization’s determination. Management stated it allowed an exemption for
faith-based organizations and would rely on their reasonable, good faith interpretation to
determine if the exemption would apply. Further, management stated the exemption

8
properly met the intent of Congress by clarifying the eligibility of these organizations.
According to management, reversing course on this commitment would violate policies set
in Interim Final Rules and be challenged as contrary to the intent of Congress.
In the report, we acknowledge that SBA met the intent of Congress by clarifying the
eligibility of faith-based organizations. We also noted that SBA’s PPP Loan Review Plan was
not consistent with its Interim Final Rule regarding affiliation for faith-based organizations.
During our review, SBA indicated it would perform eligibility assessments of faith-based
organizations as indicated in its PPP Loan Review Plan. However, in management’s
comments, SBA reversed its position, stating it will not assess, nor require lenders to assess
the reasonableness of the faith-based organization’s determination. In subsequent
correspondence, SBA clarified its PPP loan review plan and updated its affiliation
worksheet in June 2021 to reflect that affiliation rules do not apply for faith-based
organizations, which is consistent with its Interim Final Rule.
This recommendation is considered resolved and closed upon issuance of this report based
on SBA’s final decision not to assess the reasonableness of faith-based determinations and
its revised updated affiliation worksheet that corresponds to the Interim Final Rule. We
will consider any potential risks associated with this decision as we plan and prioritize
future oversight work in this area.

9
Appendix I: Objectives, Scope, and Methodology
Our objectives were to determine if SBA 1) considered prior OIG key recommendations to
strengthen controls for ensuring eligibility and mitigating fraud and 2) implemented the
PPP in accordance with the Economic Aid Act.
To accomplish our objectives, we reviewed all relevant federal regulations, policies,
procedures, and guidance, including the:
• Economic Aid Act
• CARES Act
• Paycheck Protection Program and Health Care Enhancement Act
• Paycheck Protection Program Flexibility Act of 2020
• Interim Final Rules
• Frequently Asked Questions
• Procedural Notices
• PPP program forms
• PPP changes announced by the White House
We interviewed officials from the Office of Capital Access about implementation of PPP
according to the Act. We also reviewed OIG’s prior work on the PPP to determine whether
SBA took OIG recommendations into account when meeting the Economic Aid Act’s
requirements.
We did not validate whether controls established by SBA accomplished intended outcomes.
In addition, we did not test to ensure borrowers or lenders were complying with SBA’s PPP
guidance. This analysis does not take the place of audit follow-up for the key
recommendations of related OIG projects. We undertook this analysis of SBA’s
consideration of key OIG recommendations to meet the objectives of this project only.
Accordingly, to close recommendations from any related OIG reports, SBA must follow the
standard OIG audit process.
We conducted this inspection in accordance with the Council of the Inspectors General on
Integrity and Efficiency’s Quality Standards for Inspection and Evaluation. Those standards
require that we adequately plan and perform the evaluation to obtain sufficient and
appropriate evidence to provide a reasonable basis for our findings and conclusions based
on our objectives. We believe that the evidence provides a reasonable basis for our
conclusions based on our objectives.
Use of Computer-Processed Data
We did not rely on computer processed data for this review.

10
Appendix II: Prior Work
Inspection of SBA’s Implementation of the Paycheck Protection Program (Report 21-
07, January 14, 2021).
We found SBA’s hurry to lend capital to businesses was at the expense of controls that
could have reduced the likelihood of ineligible or fraudulent business obtaining a PPP loan.
In addition, aspects of SBA’s implementation of the PPP will prevent Congress and SBA
management from having the information needed to determine if program objectives were
fully met. We also determined some aspects of SBA’s initial implementation of the PPP
were not executed efficiently. We made six recommendations to improve SBA’s program.
Paycheck Protection Program Loan Recipients on the Department of Treasury's Do Not
Pay List (Report 21-06, January 11, 2021).
After receiving thousands of complaints of fraud, OIG collaborated with the U.S.
Department of the Treasury to identify high-risk transactions related to financial assistance
to small businesses. We found SBA needed to take immediate action to limit improper
payments. We made three recommendations to establish more effective oversight controls
related to the PPP and continue to work with SBA to resolve the recommendations.
Small Business Administration’s Implementation of the Paycheck Protection Program
Requirements (Report 20-14, May 8, 2020).
We found SBA’s Interim Final Rules for implementing the PPP and the Frequently Asked
Questions mostly aligned with the CARES Act. We found four areas that did not fully align
with CARES Act’s provisions:1) prioritizing underserved and rural markets, 2) loan
proceeds eligible for forgiveness, 3) guidance on loan deferments, and 4) registration of
loans. We suggested five actions to address our findings.

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Appendix III: Comparison of the Economic Aid Act and Issued Guidance
This comparison is based on the finding titled Economic Aid Act Implementation and does not include the entirety of the
Economic Aid Act.
Economic Aid Act Requirements
Interim Final Rule
Other Related Guidance
Section 311. Paycheck protection program second
draw loans.
(c) Eligible Churches and Religious Organizations.
(1) Sense of Congress. - It is the sense of Congress that
the interim final rule of the Administration entitled
‘‘Business Loan Program Temporary Changes;
Paycheck Protection Program’’ (85 Fed. Reg. 20817
(April 15, 2020)) properly clarified the eligibility of
churches and religious organizations for loans made
under paragraph (36) of section 7(a) of the Small
Business Act (15 U.S.C. 636(a)).
Interim Final Rule: Paycheck Protection Program
as Amended by the Economic Aid Act Effective
January 6, 2021 (IFR1) Section B.3.
c. Faith-Based Organizations
This rule exempts otherwise qualified faith-based
organizations from the SBA’s affiliation rules,
including those set forth in 13 CFR part 121, where
the application of the affiliation rules would
substantially burden those organizations’ religious
exercise. For the reasons described in 85 Fed. Reg.
20817, the SBA’s affiliation rules, including those
set forth in 13 CFR part 121, do not apply to the
relationship of any church, convention or
association of churches, or other faith-based
organization or entity to any other person, group,
organization, or entity that is based on a sincere
religious teaching or belief or otherwise
constitutes a part of the exercise of religion. This
includes any relationship to a parent or subsidiary
and other applicable aspects of organizational
structure or form. A faith-based organization
seeking loans under this program may rely on a
reasonable, good faith interpretation in
determining whether its relationship to any other
person, group, organization, or entity is exempt
from the affiliation rules under this provision, and
SBA will not assess, and will not require
participating lenders to assess, the reasonableness
of the faith-based organization’s determination.
SBA did not issue any additional guidance to
address Section 311 clause (c) of the
Economic Aid Act.

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(Continued from previous page)

Interim Final Rule: Paycheck Protection Program
Second Draw Loans Effective January 6, 2021
(IFR2) Section III.
B. Affiliation Rules
SBA also adopted a religious exemption to the
affiliation rules by regulation (See section (B)(3)(c)
of IFR1), which applies to Second Draw PPP loans.
(Continued from previous page)

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Section 314. Farm credit systems institutions.
(b) Facilitation of Participation in PPP and Second
Draw Loans
(3) RISK WEIGHT. —
(A) IN GENERAL. —With respect to the application of
Farm Credit Administration capital requirements, a
loan described in subparagraph (B)—
(i) shall receive a risk weight of zero percent; and
(ii) shall not be included in the calculation of any
applicable leverage ratio or other applicable capital
ratio or calculation.
(B) LOANS DESCRIBED. —A loan referred to in
subparagraph (A) is—
(i) a loan made by a Farm Credit Bank described in
section 1.2(a) of the Farm Credit Act of 1971 (12 U.S.C.
2002(a)) to a Federal Land Bank Association, a
Production Credit Association, or an agricultural credit
association described in that section to make loans
under paragraph (36) or (37) of section 7(a) of the
Small Business Act (15 U.S.C. 636(a)) or forgive those
loans in accordance with section 7A of the Small
Business Act, as redesignated and transferred by
section 304 of this Act, and subparagraph (J) of such
paragraph (37); or (ii) a loan made by a Federal Land
Bank Association, a Production Credit Association, an
agricultural credit association, or the bank for
cooperatives described in section 1.2(a) of the Farm
Credit Act of 1971 (12 U.S.C. 2002(a)) under
paragraph (36) or (37) of section 7(a) of the Small
Business Act (15 U.S.C. 636(a)).
SBA did not issue an Interim Final Rule to address
Section 314 clause (b)(3) of the Economic Aid Act.
SBA did not issue any additional guidance to
address Section 314 clause (b)(3) of the
Economic Aid Act.

14

Appendix IV: Management Comments

SBA RESPONSE TO INSPECTION REPORT

15

U.S. SMALL BUSINESS ADMINISTRATION

WASHINGTON, D.C. 20416
TO:

Hannibal “Mike” Ware, Inspector General

The Office of Inspector General (OIG)

FROM:
Patrick Kelley /s/ Patrick Kelley

Associate Administrator, Office of Capital Access

SUBJECT:
Response to OIG Draft Report entitled “The Small Business Administration’s
Implementation of Recommended Controls and the Economic Aid Act”
DATE:
June 22, 2021
Thank you for providing the Office of Capital Access the opportunity to respond to OIG’s Draft
Report entitled, “The Small Business Administration’s Implementation of Recommended
Controls and the Economic Aid Act”, dated May 25, 2021. The OIG’s audit objective for this
draft report was to determine if SBA 1) considered prior key OIG recommendations to
strengthen controls for ensuring eligibility and mitigating fraud and 2) implemented the PPP in
accordance with the Economic Aid Act.
The Office of Capital Access (OCA) has the following comments with respect to the OIG
recommendation:
OIG Recommendation – We recommend the Administrator direct the Associate Administrator
of the Office of Capital Access to assess affiliation for faith-based organizations to ensure only
eligible faith-based organizations receive the applicable PPP loans.
SBA Response: SBA did not concur with this recommendation because SBA committed that
SBA will not assess, and will not require participating lenders to assess, the reasonableness of
the faith-based organization’s determination.
On April 15, 2020, SBA published an Interim Final Rule (IFR-2) in the Federal Register, 85 FR
20817, to exempt faith-based organizations from the application of SBA’s affiliation rules for the
Paycheck Protection Program (PPP) where such organizations would “otherwise be disqualified
from participation in PPP because of affiliations that are a part of their religious exercise.” SBA
concluded that an exemption was required, or at a minimum authorized, by the Religious
Freedom Restoration Act (RFRA) (Pub. L. 103-141). To effectuate the exemption, SBA
authorized faith-based organizations to rely on a “reasonable, good faith interpretation” to
determine whether the exemption would apply. SBA committed that “SBA will not assess, and
will not require participating lenders to assess, the reasonableness of the faith-based
organization’s determination.” 85 FR at 20820 (emphasis added.)

16
SBA further explained in changes to its affiliation regulation, 13 C.F.R. § 121.103(b)(10)(ii), that
“[n]o specific process or filing is necessary to claim the benefit of the exemption….”
Congress addressed IFR-2 in section 311(c)(1) of the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act (Economic Aid Act), Pub. L. 116-260. In a Sense of
Congress provision, the Economic Aid Act states that IFR-2 “properly clarified the eligibility of
churches and religious organizations for [PPP] loans. . . .”
To implement the Economic Aid Act, SBA issued another Federal Register Interim Final Rule
on January 14, 2021. Addressing the provision that Congress had found to have “properly
clarified . . . eligibility,” SBA advised that SBA’s affiliation rules do not apply to the relationship
of any church, convention or association of churches, or other faith-based organization or entity
to any other person, group, organization, or entity that is based on a sincere religious teaching or
belief or otherwise constitutes a part of the exercise of religion. SBA reiterated the agency’s
commitment that “SBA will not assess, and will not require participating lenders to assess, the
reasonableness of the faith-based organization's determination.” 85 FR at 3699 (emphasis
added).
[To renege on its commitment not to “assess . . . the reasonableness of [a] faith-based
organization’s determination,” SBA would need to contravene policies issued twice through
public Federal Register interim final rules. Congress specifically called out IFR-2’s policy as
“properly clarify[ing] the eligibility of churches and religious organizations.” Therefore,
reversing course would be challenged as contrary to the sense of Congress, as well as thwarting
the legitimate expectations of borrowers that relied on SBA’s public policy statements.]
Enclosed: Federal Register 85 FR 20817 20-04-15 and 86 FR 3692 21-01-14

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