Senate Small Business Committee, "Oversight of SBA's COVID Economic Injury Disaster Loan Program," full transcript CH...

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[Senate Hearing 117-731]
[From the U.S. Government Publishing Office]

S. Hrg. 117-731

OVERSIGHT OF SBA'S COVID ECONOMIC INJURY DISASTER LOAN PROGRAM

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HEARING

before the

COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP

OF THE

UNITED STATES SENATE

ONE HUNDRED SEVENTEENTH CONGRESS

SECOND SESSION

__________

AUGUST 2, 2022

__________

Printed for the use of the Committee on Small Business and
Entrepreneurship

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Available via the World Wide Web: http://www.govinfo.gov
_________

U.S. GOVERNMENT PUBLISHING OFFICE

50-573 WASHINGTON : 2023

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED SEVENTEENTH CONGRESS

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BENJAMIN L. CARDIN, Maryland, Chairman
RAND PAUL, Kentucky, Ranking Member
MARIA CANTWELL, Washington MARCO RUBIO, Florida
JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho
EDWARD J. MARKEY, Massachusetts TIM SCOTT, South Carolina
CORY A. BOOKER, New Jersey JONI ERNST, Iowa
CHRISTOPHER A. COONS, Delaware JAMES M. INHOFE, Oklahoma
MAZIE HIRONO, Hawaii TODD YOUNG, Indiana
TAMMY DUCKWORTH, Illinois JOHN KENNEDY, Louisiana
JACKY ROSEN, Nevada JOSH HAWLEY, Missouri
JOHN HICKENLOOPER, Colorado ROGER MARSHALL, Kansas
Sean Moore, Democratic Staff Director
William Henderson, Republican Staff Director

C O N T E N T S

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Witness Prepared Statements
Panel 1

Page
Mr. Patrick Kelley, Associate Administrator, Office of Capital
Access, U.S. Small Business Administration, Washington, D.C.... 5

Questions for the Record

Mr. Patrick Kelley, Responses to questions submitted by Chairman
Cardin and Ranking Member Paul, Senator Shaheen, Senator
Duckworth, and Senator Inhofe.................................. 36

Additional Statements for the Record

New Jersey Business Alliance, Statement.......................... 65

OVERSIGHT OF SBA'S COVID ECONOMIC INJURY DISASTER LOAN PROGRAM

TUESDAY, AUGUST 2, 2022

United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 10:00 a.m., in
Room 428A, Russell Senate Office Building, Hon. Ben Cardin,
Chairman of the Committee, presiding.
Present: Senators Cardin, Shaheen, Hirono, Rosen,
Hickenlooper, Scott, Ernst, Young, and Marshall.

OPENING STATEMENT OF CHAIRMAN CARDIN

Chairman Cardin. The Small Business Committee will come to
order.
Before I give my opening statement in regard to today's
subject I do want to express all of our concerns about the
devastation that is taking place in Kentucky. The flooding has
been just horrible to see. We know these natural disasters are
very, very hard on a community, and our prayers are with those
that have been victimized by the flooding. And we recognize
there are many needs to how we respond as a nation to deal with
this natural disaster, and I know our country will do
everything we can. We see the resiliency of the people of
Kentucky.
I say that particularly knowing that our Ranking Member,
Senator Paul, represents the great state of Kentucky, and our
thoughts are with them.
I also recognize that small business relief is only one
part of that recovery, but I commend the SBA's announcement
yesterday to provide relief to small businesses, nonprofits,
homeowners, and renters in the region. The Small Business
Committee will work with the SBA to get this information out to
the affected areas to help the people of southeastern Kentucky
get back on their feet.
I want to thank Senator Paul for his cooperation in
arranging for today's hearing. It has been a challenge on
scheduling. Thank you, Senator Ernst, for stepping up and being
willing to take on the responsibilities. I know Senator Paul
had a conflict, and we certainly understand that, but he
cooperated with us and Senator Ernst is available, and I thank
her for being able to take on this position today.
And let me thank Patrick Kelley, the Associate
Administrator, Office of Capital Access, at the Small Business
Administration, for being here today and being willing to help
us understand where we are in regard to the EIDL program.
One of the most important functions of this Committee is
oversight. Yes, we want to pass the right policies and make
sure that they are adequately drafted and funded, that you have
the resources and the direction you need. But then it is our
responsibility to make sure these programs are being carried
out as effectively as possible. So we look at today's hearing,
which is to oversight the Economic Injury Disaster Loan Program
during COVID, and recognize that this was an incredible
undertaking.
On April 24, 2020, $50 billion of subsidy was provided for
the Economic Injury Disaster Loan Program under COVID. On May
7th, 2020, the Small Business Administration announced the
program and imposed $150,000 cap. Even though this program,
under law, allows for loans up to $2 million, the Trump
administration decided to limit that to $150,000 cap.
We were not happy about that, and members of this
Committee, as well as many members of the Senate, expressed our
concern that that $150,000 cap was arbitrary, and we wanted to
see that implemented at the full amount that Congress
authorized, at $2 million.
But by July 20th, the SBA had entered into 3.1 million
loans, for $169 billion. Now I will repeat that again--3.1
million loans by July 20th. On April 21st of this year, the
Biden administration increased the cap from $150,000 to
$500,000, and then, in September, increased it to the full $2
million. We were all very pleased about that announcement, and
we were very pleased that we were able to increase the total
amounts available to the $2 million limit.
The Biden administration deserves high marks for
implementing the congressional intent at $2 million. The SBA
administered the program and now there are almost 4 million
loans that have been issued under the COVID EIDL program. That
is quite a record.
Over the past two years, the SBA has transformed a
relatively small and unknown program, intended to support
communities following natural disasters, into one of the
Federal Government's primary tools to combat the economic
impact of COVID-19 pandemic. The 3.9 million COVID EIDL loans
the SBA has issued since April of 2020, are more than all the
loans that have been issued during the entire history of the
disaster loan program. That just tells you how much additional
responsibilities the SBA took over and how they delivered on
those programs.
The EIDL loan program is a source of hope for small
businesses. It is the critical capital they need during a
pandemic. It provides a fixed-rate, low-interest, long-term
capital that is absolutely essential for small businesses. They
do not have the resiliency. This gives them the hope of being
able to stay in business.
In December of last year, December 31st, no new
applications were allowed, under law, and the SBA basically
closed the process for new applications.
Here is where the confusion and frustration comes down, on
the winding down of the program, and here is where we are
really baffled as to the way, and information that we have
received from the SBA.
First, on May 6th of this year, the SBA said that funding
was exhausted. On April 28th, they had set the deadline for
loan modifications, appeals, and denials for reconsideration.
Yet on May 11th, we were informed by the SBA that it had $1.3
billion, a transfer of funds from the American Rescue Plan, and
$1.2 billion available in regard to cancelled loans. So we did
not understand that they gave the explanation on May 6th, the
SBA, that funding had been exhausted. They sent another notice
on May 16th that all workable files had been processed.
So what I am confused about, we have a large number of
small business owners that are in the process, with their SBA
EIDL loan, receiving information from the SBA that they have
exhausted funding and that all workable files had been made,
and yet they have not been notified in regard to their
individual cases.
On June 22nd, applications could still not be processed
because of lack of funds, another statement made by the SBA,
yet in June, on a staff call with Administrator Kelley, we were
informed that $800 million remained in the EIDL program.
There is frustration and anger out there. We have 41,000
applicants who have never received determinations. We have
125,000 applicants that have been approved that have not
received their funds.
Now I can tell you, I talk to my state workers all the time
that handle the calls from the small business community. They
are my frontline workers. And there are small business owners
that are really frustrated. They have gotten inconsistent
information from the SBA. They believe their applications have
never been litigated, never been completed, and they want to
know why. They want a straight answer. As I said earlier, the
small business community is the growth engine of our country.
It is where innovation takes place. But small business owners
do not have the same deep pockets and resiliency. They need to
know what is going on with their applications, and if they are
ineligible then declare them ineligible. Let them handle it or
take an appeal, but do not leave them in the lurch.
So I hope that this hearing will have an opportunity to get
answers to those questions and that we can have the completion
of the EIDL loan program done in a way that represents the
values of our Committee and a policy that we developed and the
values of the program that is so important to small businesses.
And with that let me turn it over to Senator Ernst.

OPENING STATEMENT OF SENATOR ERNST

Senator Ernst. Thank you, Senator Cardin, and I also want
to express my sympathies to those families and those
communities that were impacted in Kentucky. I think all of us
are watching and praying for the best but understanding that
this is a very difficult time for them, so thank you for
mentioning that.
And thank you, as well, Chairman Cardin, for holding this
important hearing to discuss the SBA's lending and disaster
assistance programs. And before we move forward any further on
this I cannot overstate how harmful inflation has been for
small businesses in Iowa and throughout the nation. As part of
my 99-county tour across Iowa I speak with those small business
owners who are continuing to tell me how record-setting levels
of inflation have created a significant financial burden across
their value chains.
The most recent Consumer Price Index report shows that
prices increased by 9.1 percent over the last 12 months, the
largest year-over-year increase in over 40 years. Over the same
period, the Producer Price Index increased by 11.3 percent,
indicating that most small businesses are experiencing
increasingly diminished margins, impacting their ability to
provide paychecks to working families, especially those that
reside in my rural communities.
Small businesses are the backbone of the American economy,
and despite being told otherwise, small business owners know
the impact of inflation on their businesses is not transitory
and it is proving not to be short term. This inflation crisis
has created a hidden value-added tax that has deeply impacted
their economic security, which is why it is deeply troubling to
me that the Democrats in Congress plan to move forward with a
reckless, partisan tax and spending spree focused on raising
taxes to pay for electric vehicles for the rich, hamstring our
manufacturers, and all sorts of other pet projects of far-left
interest groups.
The COVID Economic Injury Disaster Loan Program, or EIDL,
provided support for small businesses facing financial hardship
as a result of the COVID-19 pandemic. As the rush of pandemic
aid went out the door, bad actors took advantage of the
American taxpayer's generosity. We now know fraudsters bilked
millions and millions from SBA in fraudulent loans from this
program.
But as it transitions from supporting small businesses to
servicing loans, I am concerned about the SBA's lack of
attentiveness to ensuring law enforcement has everything it
needs to pursue those who have defrauded the taxpayers.
Wrongfully awarded dollars must be returned to the program and
returned to the American taxpayer. Timely action is needed in
order to do so.
In a similar vein, the SBA has unlawfully approved nearly
$100 million in forgivable PPP loans to Planned Parenthood
affiliates. To make matters worse, the SBA forgave 34 of these
loans, despite it being a clear violation of the affiliation
rule. Yet to date the SBA has not launched an investigation
into this issue or made any effort to recoup the ineligible
funds.
It is critically important to protect the integrity of the
capital access programs that are intended to provide support to
small businesses from fraud and ineligible distributions.
Mr. Kelley, thank you for appearing before us today. I look
forward to working together in the future to ensure that
taxpayer money is protected from fraud and that bad actors are
held accountable. Thank you.
Thank you, Senator Cardin.
Chairman Cardin. Thank you very much for, again, taking on
the responsibility today.
I want to ask consent to put into the record letters that
were written to Administrator Guzman on May 6, 2022, from
Senator Van Hollen and myself, and July 15, 2022, from a group
of Senators, headed by Senator Cornyn and myself, in regard to
our concerns as to why certain information as given to our
constituents when we were told that there was money available.
Chairman Cardin. Administrator Kelley, thank you again for
being here. As I had pointed out earlier we appreciate your
leadership on this program. The Office of Capital Access is
critically important to small businesses. The role of that
committee has quadrupled, maybe more than that, since COVID-19,
so we know that you have stood up an agency that was meant for
a certain purpose that was really tested to its limit. And we
thank you very much for your service and thank you for being
here, and you may proceed.

STATEMENT OF PATRICK KELLEY, ASSOCIATE ADMINISTRATOR, OFFICE OF
CAPITAL ACCESS, U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON,
DC.

Mr. Kelley. Great. Thank you, Chairman Cardin, thank you
Senator Ernst. I too want to extend my sympathies to the
Commonwealth of Kentucky. Obviously, 35 families to date no
longer have a loved one, and there are hundreds of others that
have not been found.
As Chairman Cardin mentioned in his opening statement,
President Biden declared a disaster area for the five counties,
and obviously we will work to expand that, if necessary, and
obviously work to help all of the survivors.
On behalf of Administrator Guzman, I am happy to be here
with the Committee today to answer any and all questions. My
name is Patrick Kelley. I am the Associate Administrator of the
Office of Capital Access at the SBA, and I have been since
March 1st of 2021.
First I would like to echo the Chairman's comments
regarding the work of the civil servants at the SBA. It truly
is a privilege for me to have a second opportunity to work with
people during a time when so much was asked of them for the
last 24 months. On balance, these are some of the best people I
have ever worked with, across the private sector and the public
sector, and I will continue to enjoy the opportunity to serve
the American people with them.
We oversee a bunch of different CARES Act and Economic Aid
Act programs, and COVID EIDL is certainly a focus today. That
particular program, as was mentioned by Chairman Cardin,
serviced about 4 million small businesses and roughly $400
billion in financing. Seventy-two percent of those loans went
to small businesses with 10 or fewer employees. Fifty percent
of the recipients were not able to access the PPP program. So I
think one of the great success stories about this, what I have
characterized as an uber-credit-not-available-elsewhere
program, is its success getting to all corner of our society.
In addition to the COVID EIDL program, just to provide an
update for you and the members, we are obviously working on
forgiveness in the PPP program. We are currently approaching
10.4 million loans out of the 11.4 million forgiven, and we
expect that the remaining 1 million will seek forgiveness this
fall as the April/May/June 2021 PPP loans hit their 10-month
mark and begin to make payments.
We have provided direct forgiveness to assist 1,500
lenders, which has amounted to 2 million loans being serviced
by the SBA on behalf of lenders and borrowers to assist with
that forgiveness. That particular program also coincided with
obviously the Restaurant Revitalization Program.
I do want to thank the Chairman's leadership on the
restaurant program. We worked diligently to roll that out, with
members of this Committee's staff as well as the House, and
101,000 businesses were supported, for $28.6 billion.
The last thing that I will add before we get to the
questions, which I am looking forward to hopefully helping
folks understand what we are trying to accomplish, is just to
provide some context to the breadth of what the SBA was asked
to do. The Office of Advocacy at the SBA estimated that in
2021, a total, for small business and medium-sized enterprises
receiving capital from any source, any private sector lender,
was $651 billion. In the COVID EIDL program, in 2021, we put
out $200 billion on top of the $167 billion that the Chairman
referenced in 2020.
So it is absolutely the case that the SBA has played an
outsized role, as Administrator Guzman has worked with this
Committee and the nation to provide. Thank you.
[The prepared statement of Mr. Kelley follows:]

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Chairman Cardin. Well again, thank you, and I agree with
your last statement. The SBA had played an outsized role, and
there is no question about it. It stepped up during the
pandemic, and I agree with you on the civil servants, and I
give our real thanks to the incredible amount of work that they
put out to help out quickly, both with the PPP program and the
EIDL loan program, the EIDL Advance program, and then later
with the Shuttered Venue and the restaurant program. So it was
an incredible effort, and it saved small businesses, that exist
today that would not have but for the ability to get those
programs out.
And as we point out, this has all been bipartisan. The
bills were developed bipartisan, and this hearing, in regard to
how the EIDL program is being wound down, there is bipartisan
interest to see it done right.
So I want to get the numbers right because we had like 3.9
million loans that were given out. We have, we think, 41,000
people who are looking for determinations that have not yet
been done. We have seen, at times, the SBA say that these are
unworkable, but to our knowledge those 41,000 small businesses
have not been informed as to their status. So they are sitting
out there hoping that they are going to get a positive
response, but they want a response. They want to move on with
their life. They want to know whether they can or cannot access
the funds, because they have to plan their businesses, and we
believe there are 41,000 that are in that status.
And then we had 125,000 small businesses that thought they
were going to get their funds, thought they had been approved
for the funds, and have not gotten their funds. And then they
get notices that there are not funds available, but yet we have
been told that there is money there. So the funds are there. So
it seems like they are not getting accurate information, which
is extremely frustrating. And they call our office, and they
call your office, and they call every Senator in this country
with legitimate concerns.
So can you clarify the numbers for us? How many
applications are still pending? Are they workable or not
workable? Why have the small businesses not been notified? And
are there applications that have been approved but have not
been acted upon, and for what reason would that be?
Mr. Kelley. Yes, I will get to all of that. So first I just
want to start off the top with the 125,000 first, so we can
address that. The 125,000 folks have obligated funds to them.
They could close those today with the assistance of an SBA
district office, directly themselves with the call center for
the specific COVID EIDL program. But that money is theirs. We
will not cancel those funds. Obviously, at some point, you
know, later this year we will send out notice and start to see
if folks want to seek this. Obviously, it is a loan product
that has to be paid back, obviously, very favorable terms. But
still, nevertheless, a loan product.
So at their discretion, each of those 125,000 can close
that loan. I welcome the opportunity to make sure that anybody,
in any of the offices, is clear that those folks have money and
can be funded.
Chairman Cardin. And those funds are there.
Mr. Kelley. Yes.
Chairman Cardin. There is no problem of collecting the
funds.
Mr. Kelley. Correct. And I start there to then move to the
41,000, because prior to--I believe my testimony in the House
was the week of May 16th, and during my testimony it was timely
because we were in the period of time where applications
received on or before May 6th, I indicated in the House that
there were roughly 61,000 of those, two-thirds of which were
roughly loan increase requests, and a third of those were
reconsiderations. And I said during that testimony that we
would get to all of those files prior to May 16th, and we would
decision those files.
So 38 percent of the two-thirds--so if we are keeping
track, 38 percent of 40,000 files were decisioned and were
approved and obligated funds and either sit in that 125,000
bucket or have already closed their loan and been disbursed.
With respect to the final third, the reconsiderations, I
indicated at that time, and it held true, that reconsiderations
are decisioned successfully, meaning you ask for a
reconsideration, the SBA reconsiders it and says, ``You know
what? On hindsight you are correct.'' Two out of 10 times the
SBA reverses a prior decision.
It is important to understand that 92 percent of the 41,000
did receive a loan and a prior decision in 2021, regarding
their increase request, or in 2022, had been indicated what
documents they were missing, which is one-third, or two-thirds
of that number--I realize I am throwing a lot of data here, but
as the Chairman asked to get into the numbers--two-thirds of
that number has either not filed taxes from 2019. So it is
important to understand that you could file an extension and
that the extension period tolled within the fall of 2020. So
these are 2019 tax returns with no filing.
There was a filing once in 2021, when the program resumed,
a historic practice at an SBA program. So to Senator Ernst's
comments about fraud, waste, and abuse, historically the SBA
has always validated tax verification through the 4506-T
process. The CARES Act required the SBA to forego that
provision, and the Economic Aid Act replaced that.
So in addition to not filing or filing late there is a
third category of filers who, upon learning that their increase
request was not validated by the filing that they put forward
for 2019, proffered an amended filing return that,
coincidentally, coincided with the request that they were
seeking. So it is really important to understand that yes,
there were communication challenges with trying to indicate,
first, we are seeking all comers in the five months following
the program's formal conclusion.
12/31/2021 was the last day that in the program, by law,
anyone could submit a new application. As Chairman Cardin
mentioned, since 92 percent of the loans, or 3.6 million from
2020, had from April of 2021 until May 6, 2022, to seek a loan
increase. And the reason I use the April time frame instead of
the September 2 million threshold is because the average loan
increase was $200,000.
So it is absolutely the case that these folks are
frustrated. It should be mentioned that 75 percent of the
41,000 files are from NAICS codes that Congress indicated were
not impaired by the pandemic. As you know, in the Economic Aid
Act, Congress designated specifically industry segments, which
was appropriate--hospitality, restaurants, et cetera. Seventy-
five percent of the remaining requests are from industries that
were not designated as significantly impaired by the pandemic.
I lent money for six years to small businesses for a
community bank based in Wilmington, North Carolina, and the CEO
of that company's line to us is the only two questions that a
borrower cares about is am I approved and when do I get my
money.
And so I understand that from a borrower's perspective
``no'' is a suboptimal outcome. But given the fraud, waste, and
abuse that this Committee has highlighted for the last year and
the reforms that the Economic Aid Act began, and the Biden-
Harris administration extended to address fraud, waste, and
abuse, we cannot extend loans to folks who have not paid their
taxes.
Chairman Cardin. I understand exactly, and we want you to
verify. But recognize that during COVID-19 we gave relaxations
on filing returns. So not all the documentation is there, and
it is not always the small business owner's fault. They may
very well be entitled. They just have not been able to because
of the pandemic, to dot every I and cross every T.
So I am interested in how many files today are there still
open, where the small business owner has not been informed. If
you reject, they can file an appeal, so they have that right.
But if you do not reject and they are in sort of an open
status, they do not know what the future has. How many EIDL
applications are still pending, where there has not been a
finite answer given by the Small Business Administration?
Mr. Kelley. So Chairman Cardin, every single person--and I
know this because we have worked with your staff, Committee
member's staffs on a daily basis, and my colleagues here from
Legislative Affairs work on a daily basis. We receive email
accounts, both your office and our office, and in those email
accounts--and I read them daily, so I read each one each day,
because it is an easy way for me, in public service, to have an
impact that day. It is directly tangible. I can either help
somebody unblock something or I can get to a solution.
In each of those email correspondences there is an
indication, by the borrower, of multiple instances, and several
different times over the balance of however long they have been
seeking a loan increase, of interaction and communication with
SBA employees, either at the district office or directly with
the loan officers themselves. To say that they have not been
notified of the challenges facing their files I believe
understates the totality of the circumstances.
Where, in the most recent cases--so since the program
stopped considering reconsiderations and loan increase requests
in May--the emails that come in are either, as I said, in the
obligated funded category, in which we work then to assist them
with how they can close that loan if they want to close that
loan, or they are almost entirely in the category related to a
tax issue.
So 41,000 is obviously a deafening amount of voices,
because if you took 50 states and divided it by that, that is
roughly 800 calls. So your colleague, Senator Van Hollen, on
that staff call that you mentioned, referenced 1,200 calls,
which, at the time, if you did 50 by 1,200, that is roughly
61,000 when we had the call.
And so it is totally understandable that your offices are
frustrated, that the borrower who, in 2020, the Federal
Government allowed them to seek a loan product without any
verification of whether they had filed taxes or could
demonstrate the gross sales receipts number and the cost of
goods sold number, integral to the economic injury calculation,
and they say to us, collectively, ``But you gave me money.
Therefore, I am eligible.''
And in the sense that their business is small--as I
mentioned, the overwhelming majority of these are 10 or fewer
employees, so they are, by anybody's definition, small--totally
true. But in the sense that we can make a reasonable
reassurance of repayment from the cash flow of the business,
and verify that they filed their taxes, we cannot do that.
Chairman Cardin. I understand what you are saying, and I
think we are like two ships passing in the night. We are
hearing from the borrowers that they requested additional
information, they supplied that additional information, they
did not hear back from the SBA, their application is still
pending. They get a notification that there is no money
available and now they hear that money is available. Then they
get notification that all files are unworkable, but they think
their case is still pending. That is where the frustration is
occurring, and we need to know the numbers.
I will come back on a second round. Senator Ernst.
Senator Ernst. Yes. Thank you, Mr. Chair. And just a quick,
easy--I hope it is easy--question for you. Do taxpayers deserve
an SBA that is transparent and accountable to Americans in how
it spends their money?
Mr. Kelley. Yes.
Senator Ernst. That is great. Thank you. I do agree with
that as well. And your office has received recommendations from
both the inspector general and the GAO on both PPP and COVID
EIDL, many of which are pretty common sense, including
continually assessing the COVID EIDL program and developing
portfolio-level data analytics to help identify fraudulent
loans and fraud risk factors. Yet these recommendations and
others have remained open for more than a year while watchdogs
have identified billions in fraud, and law enforcement
prosecutes fraud case after fraud case.
And I have heard from a lot of Iowans who said that PPP and
COVID EIDL loans were helpful for them in the early days of the
pandemic, but when we listen to Inspector General Ware, he is
right when he says that PPP and COVID EIDL have unprecedented
levels of fraud. So it has been helpful, but there is a lot of
fraud ongoing in these programs. And we have all seen this
story about the BMW with the license plate PPPLOAN. You know,
this is Manhattan, in New York. And we have seen so many of
these cases. I do not think the program was there for folks to
buy brand new Beamers.
But as the programs are winding down and they are shifting
to the fraud identification phase, I am concerned that it seems
everybody cares about fraud mitigation and prosecution except
maybe the folks in your office, and we really need the SBA to
step up on this.
So will you commit to implementing each of the
recommendations the OIG and GAO have made to your office so
that we can actually limit the waste, the fraud, and the abuse
of our taxpayer funds?
Mr. Kelley. Yes, and we have. What Inspector Ware also
mentioned in his testimony, specifically, is that under the
Biden-Harris administration we have made great progress on the
items you have identified. Specific to the COVID EIDL program--
and what I am going to do is list the choices made in the
previous administration during 2020, that were not in place,
and these changes were made in 2021, by the Biden-Harris
administration.
First, verifying business address. There is an easy, fast,
speedy way to verify a U.S. postal address through API. They
did not do that.
IP static address. Again, another automated--and the theme
that I will continue to come back to is this false distinction
that you could not have speed without certainty. We restored
speed and certainty. We made 6.1 million PPP loans in the same
amount of time, same amount of months, but we did that with a
fraud framework ahead of the E-Tran authorization.
In addition, we have talked about the 4506-T, which, again,
Congress corrected in the Economic Aid Act, and we instituted.
As was mentioned in the IG findings in 2020, in the RER
RAPID portal, borrowers were allowed to switch their bank
accounts. That is a red flag for any financial service company,
it is not something that is necessary for speed, and we
restored preventing that from happening. And you see that,
actually, in the comments regarding the ACH disbursements going
over to Treasury and some of the challenges with banks flagging
suspicious activity.
In addition, we restored the Rule of 2 and manual reviews
for all fraud flag related to individual loan files. This is
particularly important because the IG referenced, in the COVID
EIDL program, that there were bulk filings, where despite
having fraud flags fire on those particular loan applications,
they were waved through in 2020.
Specific to the PPP program and the challenges that were
highlighted in 2020 there, specifically the Secretary of the
Treasury at the time required SBA to process E-Tran
authorizations in real time. For any bank of financial service
company or payments company, that is near impossible. There are
three core accounting systems on Planet Earth that banks use--
Jack Henry, Fiserv, the FIS, and I am sure there are other
brands but those are the three that lead--they cannot process
in real time reconciliation. So by allowing E-Tran
authorizations to be granted in real time, which they never had
been before and will not again, it led to 50,000 duplicate
loans.
In addition, there were bulk processing choices that were
made in Phase 2 that were provided to banks to move through,
which the IG has correctly pointed out led to a host of issues
with respect to duplicate loans as well as challenges with
respect to the loan calculations.
I can keep going, but what I want to assure you, Senator
Ernst, is that under Administrator Guzman and under the Biden-
Harris administration we have worked with the IG every day. The
reason that this Committee does have the data that Chairman
Cardin has talked about, on both programs, on all programs, is
because unlike our predecessors who went to court to block the
access for the American people to the data of the programs, we
have made all data available.
So it is absolutely the case that we will continue to
prioritize fraud, waste, and abuse. It is something that we do
not have to sacrifice speed. So I want to assure the borrowers
out there, back to my points about am I approved and when do I
get my money, you can go fast in the 21st century but you can
go fast with sensible controls all through automated.
And the last thing I will say on this particular point,
with respect to PPP, is that we put in, beginning in January of
2021, for 6.1 million PPP loans, a fraud control framework
which enabled us to validate all manners of eligibility and
compliance as well as know-your-customer principles of
individual identity and business identity.
So before you could get a PPP-3 second-draw or first-draw
loan, whether or not the nonbank lender ran a fraud protocol,
the agency ran that fraud protocol. And but for the holds that
we place on loans, that lenders needed to work with us and
borrowers needed to work with us to overcome, where we did
manual reviews depending on the issue, those things went
through fast. And again, there were 5.1 million loans in 2020,
no controls in six months, 6.1 million loans in 2021 with
controls.
So the thing that I have been looking for, to talk to, and
I appreciate this opportunity today, is that speed and
certainty can coexist. You can do emergency relief.
And the last thing I will say on behalf of the civil
servants at the SBA, which is really important for them, is
that you would be hard-pressed to find an IG or GAO report
ahead of 2020, that has fraud, waste, and abuse featured
prominently in it. There are improper payments, for sure,
meaning the lender made a mistake on the eligibility or some
type of rule, but you would be hard-pressed to find that fraud,
waste, and abuse.
So 2020, there were choices made to prioritize speed at all
costs, that in my opinion did not need to be made, and are the
outlier event that has caused the challenges that we all
regret. And I say that completely admiring the prior
administration, both Congresses, and everybody that has been
involved, because PPP and COVID EIDL were unbelievable programs
to help Main Street small businesses. But it is absolutely the
case that fraud, waste, and abuse is a huge priority and we
will continue to do that.
Thank you for indulging me.
Senator Ernst. Yes. No, and I appreciate that, and I do
hope once the fraud, waste, or abuse has been identified then
we go that next step of either prosecution or recoupment. So
again, I will go back to my opening statements as well. We do
know that there was an error made with Planned Parenthood and
the affiliation rules. But we have not seen any attempt to
recoup those dollars.
So it is one thing that we can identify it, but then to
actually go back and correct problem, I think that is really
important. Because whether it is PPP or the EIDL program, the
loan program, obviously there are still those that have applied
that would like to see those dollars in their businesses.
And we can come back to that, certainly. I will have some
follow-on questions, because I do know that you have a Fraud
Risk Management Board, which is good. So I will want to know a
little bit more about that as well.
Thank you very much, Mr. Chair.
Chairman Cardin. Thank you. Senator Hirono.
Senator Hirono. Thank you, Mr. Chairman.
Whenever there is a natural disaster, SBA is among the
first agencies to step forward, and certainly Hawaii has had
its share of nationally declared disasters. And I want to thank
you and Administrator Guzman and all of the men and women who
work at SBA for being there as they have been.
It is clear that the prior administration did not set up
adequate protections against fraud, waste, and abuse, so I get
that you are doing everything you can to ameliorate those
deficiencies. The PPP and EIDL were massive, massive programs,
and, in fact, you have about 4 million loans that are coming
due. Did you not request additional resources for SBA so that
you can process these loans that are coming due?
Mr. Kelley. Yes. I believe the 2023 budget makes a request
for the servicing, and what you are referencing is beginning in
October, so less than 60 days from now, we will begin to
service payments. As the Committee knows and as you know,
Senator, there were 30 months of deferment. I am pleased to
report that a third of COVID EIDL recipients have already made
payments, even during the deferment, so that is encouraging.
But yes, we will begin servicing. That number, obviously,
as Chairman Cardin referenced in his opening remarks, is a
massive number, so we will need resources.
Senator Hirono. Mr. Chairman, I hope that we are going to
be supporting the Administration's request for additional
resource. Otherwise, you are going to have, I would say, the
word ``chaos'' comes to mind, as SBA does its best with its
resources to administer all these loans.
You have heard a lot about people in our own state, we have
all been getting phone calls, and the issue for me is that
there are people who applied for these loans who were told that
things were going well. They were following up on all of the
requested information, et cetera, and then finally to be told
by the SBA that the program ran out of funds.
And then the next thing they heard was that, no, the issue
for this particular applicant--I am talking about an applicant
called Maikai Health Corporation, which is a nonprofit
organization that takes care of the health care needs--but the
thing they hear is that they were actually in the situation
where they had made exaggerated projections of 2021 expenses
and did not file their 990 tax return. I do not know what that
is.
So they are getting two different pieces of information. So
what are they supposed to do? Because the second one sounds
serious. When you are exaggerating your costs, that sounds like
fraud. So what are they supposed to do, because originally they
were not told that they were in a situation where they had to
deal with what sounds like fraud.
Mr. Kelley. First off, yes, not filing your taxes is fraud,
yes. So it is a criminal offense. And for this particular
program, the 2019 return is the return that we are leveraging.
Those returns needed to be file, even with extensions, by the
fall of 2020.
And the reason there is a disconnect, I believe--and I work
on this every day, and I just want to say for the Committee,
and it is important just to say personally, I come from a town,
Manchester, Connecticut, where the median income is $61,000. It
is under the national average. In my community, behind us was a
dentist, across from us was a steak owner, and around the
corner was a franchise owner for Dairy Queen, obviously our
favorite.
So I want people to get capital, and as does the
Administrator. But the reason that they cannot get capital, and
believe that they are eligible in the first place, is because
they did get capital in 2020, even with those issues. And so it
is important to understand that that original choice, with
respect to the tax filings, has a ripple through the process.
Senator Hirono. Is there any way for this nonprofit agency
to remedy its situation? I mean, exaggerated projection for
2021. That is probably in dispute. But whether or not they
filed a 990, that is an objective criterion. Is that something
they can remedy, so that assuming they still need these funds
and you have funds, that they can pursue funds?
Mr. Kelley. Yeah. So first off, obviously, as I have
indicated, this is a credit-not-available-elsewhere program, so
we take extraordinary lengths together, and I think it is
appropriate for the public sector to, for example, originate
loans with a 570 credit score, which, of course, in the private
sector would be difficult to get.
On this particular issue, though, on whether or not you
filed, and the fact that the increase request that you were
seeking is not supported by the tax information or the
financial information that you provided, I believe that we need
to draw the line there, and I have recommended to the
Administrator that that is what we do.
And I guess the last thing I would say is there is no
comparable process in the private sector for appeal or
reconsideration, and I will say every time that I said yes when
I was lending--and I lent half a billion dollars to Federal
Government contractors across the country, minority, women,
veteran-owned--every time I said yes, I was the greatest banker
in the history of the world. And the next day when I said no, I
was the worst banker in the history of the world.
Senator Hirono. So with regard to this particular nonprofit
then, the answer is no because they did not file--they either
filed a 990 or they did not, and if they did not file it, this
disallows their increased request. That is my conclusion. They
just need to know one way or the other, I would say.
Mr. Kelley. Yeah.
Senator Hirono. Okay. So that is their situation. Thank
you.
I know, Mr. Chairman, that with the millions of loans and
everything that happened in the PPP and the EIDL program, there
were people that came out of the woodwork to take advantage of
this program. And my one last question is who is prosecuting
all the people who were engaged in fraud in these two programs?
Mr. Kelley. As you know, and Senator Ernst also referenced
this, the Biden-Harris administration designated a team at DOJ
to focus on fraud, waste, and abuse associated with the CARES
Act programs. And as I understand it, both the House and the
Senate are moving bills along to extend statutory limitations,
which obviously will support their efforts. Because as the
license plate shows, folks do need to be held accountable for
where it is appropriate.
Senator Hirono. Do you have any idea how many people have
already been indicted for these two programs?
Mr. Kelley. I do not. And I do want to clarify something. I
know this Committee knows, so many reaching across the
Committee out to the C-SPAN public. SBA is not an enforcement
agency. So unlike the SEC, unlike the bank regulatory bodies,
we administer program certifications for government, and I know
everybody knows this.
So we rely on the Office of the Inspector General
primarily, and then, of course, they work with Secret Service,
at Treasury, as well as DOJ, Department of Justice. So we can
assist the IG, and one of the primary ways to do that is
allowing inspector general personnel, on a daily basis, to have
access to any and all data related to anything across all these
programs.
And Administrator Guzman, upon being sworn in, actually
preceding her, when I took my position in March, we restored
that. And so the IG has daily access to anything and everything
they want. And obviously as Senator Ernst referenced, the
Administrator has designated a front-office person to
coordinate with those other bodies on this. She meets every two
weeks with the inspector general, and her directive to us has
been, and will continue to be, to be completely open,
completely cooperative.
I want fraudsters put in jail, because the 32 million small
businesses are the people that employ two-thirds of this
nation, and they were my neighbors and my friends and my
relatives growing up.
Senator Hirono. Thank you. Thank you, Mr. Chairman.
Chairman Cardin. I will point out that Senator Paul and I
have worked together. The legislation you refer to passed the
Senate this week and is on the way to the President for
signature, extending the statute of limitations. Senator Rosen.
Senator Rosen. Thank you, Chair Cardin and Ranking Member
Ernst today. And Mr. Kelley, thank you for being here and
testifying and the work you are doing.
You know, we are here today because a little over 2 2 years
ago Congress had to respond to a pandemic with the promise--a
promise to our small business owners that we would not let them
lose everything as a result of the global health crisis,
completely outside their control--completely outside their
control. We made this promise through programs like PPP, the
Restaurant Revitalization Fund, and, of course, EIDL.
EIDL has provided relief to over 40,000 Nevada small
businesses. Thank you. We are grateful for that. It was
particularly important for the smallest of business because it
allowed them to get support directly from the SBA without going
through a bank. And this program's ability to help struggling
small businesses is why I introduced the bipartisan EIDL For
Small Business Act. It is aimed to eliminate the borrowing caps
on EIDL loans, to fulfill our promise on EIDL advance grants,
and replenish the funding for this program, which I know the
Chairman supports. I am proud that my efforts lobbying these
two administrations resulted in raising EIDL loan cap up to $2
million.
But through all this, small business owners, of course,
they face numerous challenges. Over 90 percent of businesses in
Nevada are small businesses, and so working with SBA on EIDL
programs in the last two administrations, really important.
And after the current administration has corrected many
errors of the previous administration--I applaud you for that--
SBA seemingly reneging on its promise by ignoring many of the
qualified applicants who began their EIDL application process
prior to the May 6th deadline.
So I think that we have to restore trust. You aim to serve
small business. This is your mission. You come from a small
town. You know all of the business owners there, ice cream,
your favorite. I think that is a favorite for everyone in the
heat of the summer, for sure.
But how do we restore trust between the SBA and small
business owners who feel they have been unfairly boxed out of
this process? And I think that has to do with the
communication. Can you speak to the communication that you need
to have between SBA and the small business owners who applied
before May 6th?
Mr. Kelley. Yes, I can. First, they tell me that it is your
birthday.
Senator Rosen. It is.
Mr. Kelley. So happy birthday.
Senator Rosen. Thank you.
Mr. Kelley. I will communicate that first.
Senator Rosen. Thank you. Ice cream, maybe.
Mr. Kelley. Yeah. I mean, cherry-dipped at Dairy Queen,
pretty good.
Senator Rosen. Pretty good.
Mr. Kelley. What I will say about communication. So there
is no question that for 24 months there were peaks and valleys,
or plusses and minuses with the way that the programs were
communicated. We have talked about structural expectation
setting earlier in the hearing, and you referenced this, which
is to say you tell someone, in 2020, you can show up for
something. You do not need documentation to validate that you
filed taxes. We give you $150,000. We do 3.6 million in four
months. And so the expectation is set, okay, that this must be
something that I am able to access because I went to the
Federal Government and they gave it to me.
And then in 2021, when I come back and I am asked to
proffer evidence now of tax verification that goes to the
economic injury, by definition we have now changed the
expectations, right? So
So at the basis of communication, in anything, is what
expectations do you set, and if you change those expectations--
Senator Rosen. Do applicants receive an email, any kind of
opportunity, communication from you about this?
Mr. Kelley. Yes. So one of the silver linings to
communications--I will call this one of the plusses--has been
the open rate of email correspondence with borrowers. In the
private sector, if an email marketing campaign that I was
involved with got, you know, high single digits, we were very
excited, and during PPP it would climb into the double digits.
At SBA, for COVID EIDL programs, we were getting, in some
cases, each week, 60 percent open rates. So that is really
important, and we see this evidenced in the correspondence to
your offices and our offices, that they are understanding and
processing the requests and the communication.
But I think the other expectation about communication is
that in a loan product situation there is, yes, are you a small
business? That is a foundational principle. But then there is,
do you have reasonable reassurance of repayment? And it is
there, in the credit decision, that differentiates it, for
example, from PPP, where we did not have a credit decision. We
had a formula that the lenders executed, but we did not make a
credit score, which was one of the reasons that you will recall
that lenders were concerned, in Phase 1, about lending to
business borrowers who were not existing customers.
So I think one of the things that we improved, but was too
late, in terms of communication, certainly for a program that
had been open well over a year at that point, in August of
2021, we made reforms to the RAR RAPID portal to enable the
district offices to have direct access and transparency to see
whatever the loan officer or any other processing employee in
the DPC in Dallas-Fort Worth could see. That was really
critical because it helped expedite casework for your offices,
but it empowered them. And one of the mistakes prior to that
was the fact that a person could pinball from the call center
to the district office and back, in an infinite loop, and that
is deeply frustrating, and regrettable.
In September, we switched call center vendors. So the
vendor that had been selected, the contract staff augmentation
and call center system that had been selected in 2020, had no
service-level agreements or KPIs. So what that translates to
is, well, what was the call response time? How quickly did you
pick up the phone? We do not know. How quickly did you
disposition it in a favorable outcome? We do not know. And so,
again, choices made at the outset proved to be really
devastating across the span of time.
In addition, the portal itself had a two-step process,
which from a technology standpoint was inept, quite frankly. It
required you to come in, fill out the application form in an
intake, and then wait for a response. And in an emergency
situation, as you guys have told me and I totally agree with,
silence is deafening. And so if I am waiting to be invited back
into the portal and I do not know, I logically start a new
application. Well, the system then detected that you were
applying for two instances at the same time, so then, of
course, you are now on the call center line.
So again, there were choices made, in 2020, from a speed
standpoint and a design standpoint, that created systemic
issues that rippled forward, and it leads to this day, because
the constituency interactions that we receive are still trying
to make heads or tails out of all these, you know, disparate
signals that we sent them. And that is horrible, and from
Administrator Guzman's standpoint, it is never again. So the
Office of Capital Access is now charged with reforming all of
this in the core natural disaster programs.
Senator Rosen. Thank you very much, and I look forward to
seeing more streamlined communication and process.
Thank you, Mr. Chairman.
Chairman Cardin. Senator Hickenlooper.
Senator Hickenlooper. I was so glad to yield to the Senator
from Nevada on her birthday, to make sure she did not have to
wait.
Senator Rosen. Thank you.
Chairman Cardin. And we all wish you a very happy birthday.
Senator Hickenlooper. We try to do our best.
Mr. Kelley, Administration Guzman, I have tremendous
respect for, and I think you are acquitting yourself well
today. But whatever I am saying, whatever agitation I bring to
my questions is not a reflection on you. Recognize I view you
as a solution, not the problem. But it is hard to look at a
system like this where the communication and the system has
been so dysfunctional, and not feel tremendous aggravation.
Senator Risch and I introduced a bill to require the EIDL
program to meet exact timelines--I am sure you have probably
seen it--to make sure that it is communicating in a timely,
effective manner.
In March, the SBA started work on GAO's July 2021,
recommendation to develop a comprehensive strategy for
communicating with disaster loan program participants. And
obviously, the resilience in this country is insufficient.
These wildfires, these floods are going to continue.
Is the SBA's comprehensive communication strategy, does it
include the timelines that Senator Risch and I had in our bill?
Mr. Kelley. I apologize. I am not able to recall exactly
the timelines, but I will endeavor to state some timelines, and
you can tell me to speed up or, as Senator Cantwell did last
spring on RRF.
But with respect to what we are doing in the disaster
loans, 83 percent of disaster loans are under $50,000, and they
are consumer and EIDL loans for business but there is property
damage on the consumer side. Those are unsecured loans, and we
ought to be, in the 21st century, able to approve, decision,
and disburse within 72 hours or less. And I am sure right now
there is somebody online saying, ``Well, you know, Kelley, I
can do it in 24 hours.'' But 72 hours sending the disbursement
ACH list over to Treasury, we can get to that.
There is, historically, in natural disaster, challenges
between the way the FEMA systems and the SBA systems--they are
not as integrated as they could be. So we are working with FEMA
on a roadmap of application program interface to allow for
those systems to integrate with one another. That is important
because we often talk about a single point of entry so that I
do not have to go to multiple different places. But in the
modern technology architecture with API you can have no wrong
entry point but maximum reuse or optimal reuse of data that you
have put in.
So from our standpoint I would look to the Restaurant
Revitalization program as an indicator of how Administrator
Guzman intends to reform disaster lending in terms of
timeliness. In that particular program, we had APIs published
for private sector tools, point-of-sale vendors, Square, and
Toast. We enlisted other point-of-sale vendors for source-of-
truth data that went to the economic injury calculation. And we
were able to process 60 percent of those applications mobile,
at the discretion and election of the applicant, and we were
able to process those in less than 20 minutes.
And if you think back to RF, in particular, in terms of the
totality of Administrator Guzman's vision and execution, in
comparison to the shortcomings we are discussing today over the
two years, with respect to COVID EIDL or some of the legacy
issues with PPP, it is quite remarkable and promising, because
we did not have the tax issues that we see.
Senator Hickenlooper. No, I agree, and I think that is
exactly correct and one of the reasons I admire her and her
work.
Let me ask you another question, just a little bit
connected to that. You mentioned Square and Toast, is there--
and this is just kind of pie in the sky, future--a way that you
guys could work with the fintech. They claim that they now have
so much information about their customers that they can give a
more accurate loan. They can tell who is credit-worthy, and
that they are giving many, many loans that are turned down by
the SBA. Is there some way to partner with them to kind of use
that capacity and the increased accuracy and get a better
performance?
Mr. Kelley. Yeah. So yes, and that is underway. For
example, under the hood, so to speak, in the back end, for the
Restaurant Revitalization portal, we integrated a fintech
provider called Plaid. Plaid enabled us, at the election and
discretion of the borrower, to integrate, through API, with
Plaid, to validate their bank account. If you wanted to forego
that we did a manual review to validate bank account, again
going back to what was not done in COVID EIDL, where you could
switch your bank account, in 2020. So we were able to offer
speed with certainty.
In addition, we integrated the 4506-T process inline, in
the application workflow, leveraging DocuSign, electronic
signature. And so what people will tell you when they design
user experience for product in financial technology is that you
do not want to break the workflow. You do not want somebody to
go out of that experience. You want them to complete the task
on hand.
So those are two examples. But from the standpoint of
fraud, waste, and abuse, we were able to integrate Treasury Do
Not Pay, 4506-T, yes. Those are very important public sector
criteria. But we were able to access third-party databases,
like LexisNexis public records, research Plaid, et cetera.
So there is enormous opportunity in natural disaster, which
we are focused on right now, and into our core programs to do
that, yes.
Senator Hickenlooper. Great. Perfect. You made my day.
Thank you. I yield back to the Chair.
Chairman Cardin. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman, and thank you,
Mr. Kelley, for being here and for all of the work that SBA
does.
It is my understanding that SBA has argued that no funding
remains to continue to approve EIDL loan modifications or
previously denied applications. But in drafting the Bipartisan
Infrastructure Bill Congress very clearly intended that SBA use
transfer authority granted by that law to reallocate funds from
targeted EIDL grant program to the EIDL loan program so that
businesses that were eligible for that assistance would be able
to receive it.
Now in the past, SBA has used that authority. Why was the
decision made, in this case, not to use that authority again?
Mr. Kelley. As we have indicated to the Committee we did
use that authority, for example, to process applications that
were received on or before May 6th cutoff deadline. So we used
both cancellations, which I think Chairman Cardin referenced,
as well as funds that we moved in coordination with ONB into
that fund.
There is no question that communication from center-level
personnel on an individual basis about funding being exhausted
was confusing. However, when we speak to the inventory that we
are talking about today, the 41,000, it there are not any
instances that would be approved in obligated funds. Those
files have been looked at. There has been communication to
those borrowers about what was missing, what was insufficient.
And in two-thirds of the cases it is a tax-related issue.
At this point, we would not move fund because we do not see
the inventory of demand. And again, the reason that is the case
is 92 percent of that population has had a loan since 2020, and
as of April of 2021, with the average increase being $200,000,
they could seek a loan increase, and many did. But only 20
percent of those eligible for an increase ever responded over
the course of 15, 16 months, roughly.
So I understand--again, and I want to keep reiterating
this--I understand why they are frustrated with the outcome,
but in terms of the SBA's responsiveness to their petition for
an increase, we have given them multiple, in some cases,
reconsiderations or appeals, and we are not going to be able to
get to yes on their individual file.
Senator Shaheen. I appreciate the effort. I beg to differ
on a list of applications that we have worked with, our
district office, on. And while there are some--I do not want to
use the word ``questions,'' but there are some disparities, but
they are in, you know, in at least one case, as simple as an
email address that was different.
So I guess you have not convinced me. And while I recognize
that there are some cases that, you know, for various reasons,
human error, do not get reviewed in the same way that we would
all like, I am still concerned that we have businesses out
there that qualify, that are not being acknowledged by SBA.
So I do not know how to resolve some of those cases, but I
do think it is a concern, and it is an ongoing concern. And as
Senator Rosen talked about trust, I think that is a real issue
that many of our small businesses still have at this point.
I want to ask you about an issue that is not directly
related to EIDL but it is one that concerns me a great deal
because I think the district offices that SBA has around the
country are really important. I have lived through recession in
New Hampshire where the only thing that kept our small
businesses afloat was the SBA and the work of the district
offices, and particularly during the pandemic they were really
important.
And I am very concerned because I am hearing that there are
some at SBA who would prefer to see a smaller footprint in the
district offices, who would like to see more power consolidated
in Washington, and that data that we have seen shows that there
is a marked drop in operating budgets for some district
offices, including in New Hampshire, even as some of the other
programs that help our small businesses are being phased out.
To have a further reduction in the ability of our district
offices to help small businesses I think does not accomplish
the goal that we all share.
So can I ask you if you support the work that is being done
by SBA's district offices, and will you commit to resist
efforts to decrease staffing and operating budgets as long as
Congress appropriates sufficient funding for salaries and
expenses overall?
Mr. Kelley. Well first, yes, I enjoy working with the
district offices. I had five years during the Obama
administration where I traveled quite a bit more to those
district offices. I understand their value at the point of
sale. And one of the things that we have done, for example, in
Restaurant Revitalization program was we integrated 100
district office employees directly into the decisioning process
as a response to some of the shortcomings that were identified,
for example, in COVID EIDL previously, at that moment.
In addition, as I mentioned for COVID EIDL, one of the
things that we worked with the field on was getting them access
to the data regarding COVID EIDL files, so that they could
assist borrowers directly. So there is absolutely a place for
district office folks to help us success on the mission.
As to the second part of your statement, I think it is yes,
and I think what you are saying is a budget is about
prioritizing choices, and you are suggesting that the SBA would
have its funding to do its full suite of things. And quite
obviously, then, the district office should be, you know,
funded as it needs to be.
Those decisions, obviously, are above my pay grade, but I
think everyone, and certainly Administrator Guzman, to your
question, in her hearing this spring, I think indicated support
for the field offices.
Senator Shaheen. Well, she did, and I have had a chance to
raise that with her, yet we do not see a change in terms of the
information that we have been getting with respect to how the
money is being distributed. And the fact is that those district
offices are still being told they have to reduce their
operating budgets significantly, and I think that is a concern.
Mr. Kelley. My understanding on this particular issue is
that--so these guys are about to jump out of their seats--I do
not understand appropriations. I know there are appropriations,
but there is an Appropriations Committee, and what has been
related to the agency is that these things are going to be
sorted out as the process moves forward. That is not a very
informed answer, but what I took that to mean, in relation to
prioritization, is that there is an understanding that there is
a lot of opportunity, there is a lot of need across the SBA
footprint, given the balance of what we have to attack.
Senator Shaheen. Well, thank you. As an appropriator I am
going to be watching this very carefully, and I do not
appreciate having a budget submitted that is being done with
the idea that we are going to cut this area because we know
Congress is going to put that back so that we can fund
something else. I would hope that in the budget process we
would all be as honest as we can about what the priorities are
and what we should be funding.
Thank you. I appreciate your answers.
Chairman Cardin. I am going to follow up on some of Senator
Shaheen's points. I just want to acknowledge that we spent a
lot of time together in developing these programs, with Senator
Rubio and Senator Collins. And we really did want to get money
out quickly, and we recognized that the verification systems
would be lax, because if we had to go through all the
verification systems the businesses would be shuttered and
closed for good. So we knew that there was going to be some
challenges in doing this when we created the program.
I am also going to follow up on some of Senator Shaheen's
points about individuals that are not--they have followed the
rules and they have not gotten the clarity that you have given
us today.
But first let me just point out, on waste, fraud, and
abuse, because I agree. Look, we wanted to get money out
quickly. We did not want to see any waste, fraud, or abuse, but
we wanted to get money out quickly. And when you look at the
size of the PPP program and the EIDL programs and the
restaurant program and the Shuttered Venue program, the amount
of fraud is very, very small. So let us be clear about that. We
want to see it at zero percent, but the percentages are very,
very small.
And under waste, fraud, and abuse, or mistake, a lot of
this is not fraud, as you pointed out, and we should recognize
that small businesses do not have the same degree of capacity
that large companies have, and at times mistakes are made. They
are not intended, and we have to correct that. But let us not
call it fraud when it is not fraud.
So I just really wanted to clarify those points and also
compliment this Administration for having much more
transparency. We have gotten much more information. I note
Senator Ernst might get a little upset about this. It was not a
high bar to meet under the Trump administration because they
just did not make anything available to us. But we do
appreciate the fact that it has been a much more open process
under this Administration.
And in regard to Planned Parenthood, I did not know we have
to talk about that again. This is the affiliation rules.
Affiliation rules apply not just to Planned Parenthood but
other nonprofits. We clearly wanted nonprofits to be eligible.
We made nonprofits eligible. And the affiliation rule is the
same for Planned Parenthood as it is for the Y's, as it is for
Boys and Girls Clubs, et cetera. There was never a
determination made that money should have been returned.
So let us be clear about that. I know we will hear about it
again, but I just really wanted to clarify that for the record.
Now let me get to the main thrust of today's hearing. It is
clear that the SBA did send out communications saying that
applications were being denied because of lack of resources,
but as you have clarified today, that is not the case. Correct?
Mr. Kelley. Yes. In all of those instances, both of those
messages I believe were communicated to the borrower.
Chairman Cardin. So now we have 125,000 eligible small
businesses that have been informed that they are entitled to
receive additional loan money, and your testimony today is it
is up to those applicants to get the documentation in, in order
to complete the settlement of those loans.
Mr. Kelley. It is up to any borrowers to close a loan. So
they have to sign the note. They have to sign the ancillary
documents to the note. So they are not providing any additional
documentation for any approval or anything. So if you bought a
house and you remember the big closing table and the big stack,
that is what they have got to execute. They just have not done
that yet.
Chairman Cardin. I just really want to emphasize what
Senator Shaheen has said. We will give you chapter and verse--I
think we have already given you these cases. We have several
that have come to my attention where that is not the case. The
burden is on the SBA to complete the closing, not on the
person. They have done that and they are still waiting for
their checks.
Mr. Kelley. There is yet another issue with what you just
opened up. I agree that but for the borrower agreeing to take
the note--so they have to sign to be the borrower--we are
responsible for closing the loans in association with that. So
for the 125,000, including with the district offices, we are
executing the closing, and it is at the discretion of the
borrower to execute that.
And yes, we have seen, from your office and others, that
there was confusion for those folks who do have funding--and I
want to reiterate again, their money is there, they can execute
the closing, and we will assist them with that closing.
Once they have executed the documents the money goes on a
schedule over to Treasury for the ACH into the designated bank
account. There are issues with those bank accounts, where the
account is located are bouncing back our disbursements, and I
do not know the exact reasons from each institution. One of the
reasons that is cited most often is the opinion of the bank
that commercial activity for this account is not recognized,
and therefore they are flagging it as suspicious activity.
Chairman Cardin. I understand exactly what you are saying
and I recognize that, and that is one of the points that I
think some of our colleagues have mentioned. There are better
systems out there that would have dealt with this. And we are
dealing with two agencies, Treasury and SBA, and that is a
challenge also.
My plea to you is, provide the leadership and resources to
get these resolved. These are people that are frustrated. They
need their money. In one case it was the bank account only
accepted checks up to a certain amount, and they had a higher
check coming in so they set up a separate account, and it took
them forever, and they still have not completed getting that
routing into the system so the money actually could get there.
Mr. Kelley. Yes.
Chairman Cardin. You know, these are small businesses. They
need help. So please resolve these issues. Get the resources
and get it done. And they have been given inconsistent
information over time. At one point they thought the money was
not there, and many of them were giving up.
So please provide the services they need so we can get that
125,000, those that want to take out the loan, that they can
complete the loan process and stop calling our offices. That
would be very helpful. So I appreciate if you would follow up
on that.
Mr. Kelley. I understand. Yes, and I hear you. One hundred
percent we will redouble our efforts. And for all of those bank
account bounce, just like the closing, we will work those to
completion. So we will work with that particular borrower to
get that money. And that money remains theirs, even if it
bounced back.
Chairman Cardin. Now to the 41,000 potentials. We are
informed, either directly or through communications generally,
that these loans are unworkable, not that they were denied but
that they were unworkable, as I understand it. And I understand
that a lot of these they could not get the verifications that
are required, they had not filed their tax returns, all those
issues that have to be done for them to be able to get their
loans completed. I recognize that.
But unworkable is not denied. Many of these, according to
the case work notes that we have, they think that they have
given adequate information, or that they can supply the
adequate information, but they have not gotten that ability to
do that because of the way the system is set up.
So I would just urge you, to those that do have claims that
can be adjudicated in a positive way, either reconsideration or
increased loan amount or whatever they have filed, let us try
to get those resolved. The numbers are getting small enough
that it seems to me that we should be able to handle those with
the type of service that we would expect from the SBA. So I
just urge you to try to resolve that.
For those that are truly not eligible, you are going to
have to bite the bullet and give them a determination so that
they can move on or file an appeal.
So it would seem to me you have to complete these. I do not
want you to deny an application that has merit because you want
to get it off the books. I am happy to keep it open if there is
a possibility for successful conclusion for the small business
owner. But they need to know. There has to be a time.
Mr. Kelley. So understood. I understand the urgency. I
understand what the objective of the mission is. The one thing
that I do want to make the Chairman aware of, and members, is
that from the point of first disbursement a borrower has 24
months to seek a loan increase. So as of July, 80 percent of
that universe told. It is August 2nd today, so 80 percent of
that universe can no longer seek a loan increase. By October,
that number will be in excess of 90 percent, and by the end of
the year it will be zero.
So what is important to understand, too, is that, again,
the program did formally close, as you guys know, on December
31st, from taking new applications. So the combination of those
things makes it such that from our perspective we are moving on
to servicing, for which that begins in October. There will be
27,000 folks that are required to make their first payment, and
then it spikes up a half a million for multiple months
thereafter.
That is a huge lift. We are going to have to onboard the
staffing that we briefly scaled back when originations
concluded, to come back on board. Despite the fact that this
Committee and the Appropriations Committee made billions of
dollars available for COVID EIDL admin, the COVID EIDL RER
RAPID portal does not handle servicing. And so we have to stand
up a servicing solution at scale, which is a technology lift as
well as a people process lift.
So we are facing that in the next 60 days. I understand the
frustration that folks feel out there, as a part of that
41,000, but from the perspective of what I can assure you is
that we did work with these borrowers to find a yes. And it
should be mentioned that with your leadership, in 2021, we did
$200 billion of support, and we did those 400,000 loans
checking IP static address, checking business address,
validating tax information.
So we demonstrated that you can do 20 percent of the total
addressable marketplace of all lending in 2021, with 7,000
employees. We did that together, and yes, there are definitely
things that we would do differently and have learned from, for
sure.
Chairman Cardin. I would just point out that I have been
told the 24-month period is not statutory. You can waive that
24 months if you wanted to.
Mr. Kelley. Sure. I understand.
Chairman Cardin. Senator Ernst.
Senator Ernst. Yes, thank you, Chairman, and I appreciate
the discussion today. And I want to make it clear. I do not
care what administration it is, we should always be
transparent. I think that is just the best policy across the
board.
And with that transparency, again, I am going to go back to
the Fraud Risk Management Board. I am really excited. I know
that the SBA had announced in April that they were creating
this Fraud Risk Management Board. But again, when it comes to
transparency SBA has not really shared any details with
Congress or the public about its impact since it was created.
Can you maybe just visit with us a little bit, give us an
overview of what type of programs the board is looking at. Have
there been results from that? Maybe just share information with
us on how that board is going.
Mr. Kelley. The primary responsibility of the board today
obviously is to handle what amounts to I think somewhere north
of 60 total audit reports across GAO and OIG, in addition to
our annual audit with our auditor, KPMG, that is ordered by the
IG.
Within that, obviously, is demonstrating to those auditors,
and first and foremost to ourselves, that we have addressed the
shortcomings that were highlighted. You know, I mentioned in
PPP not making a core accounting system reconcile in real time
loan requests, which is not done on Planet Earth, so we can
avoid 50,000 duplicates.
There are issues with improper payments that had been
conflated to fraud, which, as you guys have addressed, small
businesses are not necessarily committing fraud. For example,
in the COVID EIDL program, the $80 billion number that is often
referenced is in large part due to sole proprietors who, in
2020, were required to demonstrate, for each $1,000 they were
seeking, up to $10,000 for the targeted EIDL advance that was
originally made available, they needed to demonstrate they had
an employee. In order to have employees as a sole proprietor
you have to have a registered EIN.
There are a great many sole proprietors that I have no
doubt believing have employees, were certified correctly that
they deserved $5,000 or $6,000, or whatever, but they did not
have a registered EIN on or before, I believe, the date is
February 15, 2020, when the pandemic was officially start date.
So the Fraud Review Board is focused on addressing the most
immediate issues. From a standpoint of how we do that, we have
to recognize--and Administrator Guzman has I think shared with
you and others--we have to recognize that we have to be timely.
We have to be fast. We have to be relevant. And so that means
making technology choices that contemplate both that speed and
certainty. So putting tools in the front end before you
disburse the money, to know your customer, those types of
things.
So across the board it has begun and is a daily event.
There is not a day since I became the Associate Administrator
on March 1, 2021, literally, that I have not spent at least,
minimally, a third, and there were some long days, focused on
fraud, waste, and abuse. So it is top of mind.
Senator Ernst. That is good. Now with all of the lessons
that we have taken away, that came out of COVID-19, and some
that have been identified by the Chairman and others through
their lines of questioning today, I am so hopeful that we
never, ever experience another COVID-19 type event in our
history, but it could happen.
So taking all of these lessons learned, are we able to act
on those in the future, have those suggestions, those solutions
been identified, and how can we put those into practice as we
move forward?
Mr. Kelley. Yeah. I too share the sentiment that I am good
for pandemics. I hope I do not have to have another one.
I want to take a second to commend the Office of Capital
Access, SES civil servants, because they were prescient. They
took the resources, the admin dollars that this Committee and
the appropriators made available for CARES Act programs across
PPP, et cetera, and that technology, specifically for fraud,
waste, and abuse, as well as call center support--we have
talked about communication--we were able to build,
successively, off of the initial portal that was launched
August 10, 2020, to support, ostensibly in the beginning, PPP
forgiveness.
From the private sector, watching that launch August 10,
2020, I was struck, as many were in the private sector, this
works. This is good. And Steve Kucharski and his team in the
Office of Capital Access deserve a heck of a lot of credit,
because it was that investment, again with the PPP dollars,
that led to a better experience for all applicants in the
Restaurant Revitalization, put the agency in a position to
facilitate 1,500 really small banks with forgiveness in
processing 2 million loans, and it is that foundation that is
going right into the natural disaster platform to address the
fraud issues that the IG highlighted, the call center issues,
and some of the challenges that we see in the individual case
files today.
Senator Ernst. Good. No, I do hope that we continue to
build upon that. And just in closing too, I do want to say a
well-deserved thank you to all of the folks at SBA, who really
had a huge, pressing job ahead of them when COVID-19 hit, and
they performed admirably, as did, I know, a number of our own
local banks and credit unions that really helped push those
dollars out to those small businesses that really did need that
assistance.
So thank you, Mr. Kelley, for coming in front of the
Committee today, and thank you, Mr. Chairman.
Chairman Cardin. Thank you, Senator Ernst. One more
clarification I need to get on the record so I understand. May
6th was the cutoff date for modifications, et cetera. It could
have gone up to July, if I understand correctly, and you could
have waived that date and made it later than that. And you put
on your website May 6th as the date, quote, ``due to lack of
available funding.'' We will not argue that when the judgment
was made you were projecting how much money would be available,
et cetera. You made that judgment.
But on the website today it still says as of May 6, 2022,
SBA is no longer processing COVID-19 EIDL loan increase
requests or requests for reconsideration of previously declined
loan applications, due to the lack of available funding.
I would suggest that you may want to modify that, just take
off that clause. You are not accepting them, fine. We recognize
you have used that date. We may disagree with that. We can have
that debate. But clearly funding is available now, and it is
misleading to keep that on your website.
The second point I would raise, you indicated during your
questioning here that most of the 41,000 will not be able to
get to yes, and that there is a concern that the funding could
be repurposed. We want to make sure that funding is not a
reason for determination as pending as of May 6th.
Mr. Kelley. Yeah, I apologize if I left that impression. I
either misspoke or was not aware. I am keenly aware that that
is an appropriations decision. It is a decision for OMB. My
position, and I want to make this clear, is that these files
were looked at, and I have seen them personally, I have been
involved in the day-to-day correspondence, and that we have
been responsive. And so I apologize for the confusion I may
have left you.
Chairman Cardin. So no one will be denied who had their
applications in prior to May 6th because of lack of funding.
Mr. Kelley. Correct. The denials, the decisions, beginning
with their initial denial, for most of these instances,
beginning way back in 2021, and at the heart of the denials is
a disagreement between that particular person about whether or
not filing taxes is appropriate or not. And I understand the
frustration here and I understand why that person--because
again, they got the loan originally with no taxes; they did not
file and they got a loan from the Federal Government in 2020.
I understand why when they speak to people, including me, I
receive emails where, when I read the initial email they
acknowledge the back-and-forth with their particular loan
officer, they acknowledge that there were some shortcomings at
first. Then they say a wrong has been done to them. And I came
back to serve to say yes, so that appeals to me, as I am sure
it does you and all the members. We are here to serve. And so
we then take action and we work with the civil servants in the
process centers to determine whether or not we can make an
action.
Chairman Cardin. I just want to make it clear that any of
the pending applications, if they are meritorious, they will be
funded. The money is there, that the funds are there.
We will save for another debate, at another time, whether
you had to use that May 6th date because of lack of funding. I,
quite frankly, do not agree with that. I think you could have
gone beyond May 6th if the funding was available, and that you
have the discretion to even go beyond July of this year if you
wanted to, under the authority, to waive the 24 months.
We will leave that for another debate for another time, but
it is clear that Congress intended EIDL to have adequate funds
to deal with the COVID pandemic, and we were prepared to make
funds available. It seems like a lot of the funds that we
specifically made available for specific purposes have been
taken for other purposes, not necessarily on the EIDL program
but on other programs, and we could have repurposed money to be
able to take care of all the needs that are out there.
I want to make sure we take care of the 41,000 and the
125,000, but it seems to me we could have had a longer offramp
on this on the applications for increased funds.
Senator Ernst, anything further?
Senator Ernst. I am good. Thank you.
Chairman Cardin. We very much appreciate your time and your
explanations and your service to our country. You have a very
challenging job, so thank you very much, and thank you for
appearing before the Committee.
The Committee record will remain open, I believe, for two
weeks, which is our normal process, for friendly questions that
may be asked to you for the record. We appreciate if you would
answer those questions as quickly as possible.
And with that the Committee will stand adjourned. Thank
you.
[Whereupon, at 11:43 a.m., the Committee was adjourned.]

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