The general purpose of the Cares Act, including the Payroll Protection Program (“PPP”), was to provide needed financial assistance to small businesses struggling with the economic chaos created by the COVID-19 pandemic. The speed with which loan applications were received and processed, and loan proceeds disbursed, was unprecedented.
According to the SBA, as of August 15, 2021, there have been 11,492,021 PPP loans totaling more than $792 Billion. Applications for forgiveness amounted to $498 Billion, with forgiveness payments totaling $471 Billion. https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data.
In enacting the Cares Act, Congress recognized the importance of getting needed funds into the hands of small businesses as soon as possible. Lenders were asked, in essence, to serve as intermediaries, and dispense with customary underwriting practices which, if required, would have jeopardized the ability of countless small businesses to survive. Accordingly, the lending process was accelerated. PPP lenders were permitted to rely on the representations and documents provided by the prospective borrowers to determine the amounts of the loans for which the borrowers were eligible. Under the Cares Act, borrowers were required to certify that they were eligible to receive PPP loans under the rules in effect at the time they were applied for.
Due to the exigent circumstances, this accelerated process was forced to rely on the integrity of the applicant. It comes as no surprise that bad actors have taken advantage of the relaxed, expedited process to steal money from the Government. The New York Times recently reported on a study that estimates that 15% of all PPP loans have at least one indicia of fraud. https://www.nytimes.com/2021/08/17/business/ppp-fraud-covid.html. It is quite astonishing and frankly appalling that so many persons have taken advantage of the relaxed rules. In response, the SBA, the Department of Justice and other federal agencies have utilized all available resources to ferret out fraud, both in terms of the manpower needed for the investigations, and the aggressive use of both criminal and civil statutes to prosecute the wrongdoers and recover the ill-gotten gains.
There are literally thousands of open and ongoing investigations into PPP loan fraud. Throughout the country, investigators from the SBA, FBI, Treasury, Homeland Security, among others, along with state investigative agencies, are providing needed investigatory resources. Computer technology is being used to identify fraudulent loans. The undertaking appears to be almost as massive as the PPP loan program itself.
Fraudsters are being prosecuted criminally, and are being sued civilly by the Government. According to the Arnold & Porter CARES Act Fraud Tracker, https://www.arnoldporter.com/en/general/cares-act-fraud-tracker, there have been approximately 328 criminal cases filed to date for CARES Act fraud. In many of these cases, the Government is seeking forfeiture of the loan proceeds and assets of the fraudsters.
In addition to criminal prosecutions, the Government is bringing False Claims Act cases with its treble damages recovery provisions. It is also highly likely that qui tam False Claims Act cases have been filed by persons who have knowledge of fraudulent loan activity, with these cases remaining under seal until such time as the Department of Justice decides whether to prosecute the wrongdoers criminally.
The lesson to the lending community is clear. Integrity matters. While effective and vigilant underwriting of loans may be a painstaking process, it is a necessary private sector safeguard against fraud. With PPP behind us, Government agencies, including SBA’s OIG and OCRM, will likely provide a renewed focus on the behavior of SBA lenders, rather than the loan applicants. Fortunately, prudent underwriting will help protect SBA lenders, its small business applicants and SBA, whose 7(a) loan program depends on good lending partners. Prudent underwriting, combined with a culture dedicated to program integrity, will permit lenders to assist deserving small businesses which could not get credit elsewhere on reasonable terms and, significantly, it will help reduce the incidence of fraud in American lending.
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