This month’s court-ordered release of Paycheck Protection Program (PPP) loan data is expected to result in intense scrutiny of the loan forgiveness process, highlighting the need for recipients to proceed with caution when filing forgiveness applications.
Multiple news organization sued the Trump administration in May demanding that it release information on the businesses that benefited from federal pandemic relief programs. A federal judge ordered the administration to disclose the information and on the evening of December 1, 2020, the Small Business Administration (SBA) released data on every “small” business that received a loan from the more than $700 billion forgivable loan package approved by Congress.
The Original Purpose of the Loans
The loans were designed to help small businesses cover explicit allowable expenses such as payroll, rent and mortgage payments. In a statement that accompanied the data release, the SBA stated “small businesses are the driving force of the American economy and are essential to America’s economic rebound from the global pandemic.”
The Problems Exposed by the Data
As discussed in our prior article, PPP Loan Fraud Enforcement 2.0: Preparing for the Next Round of Scrutiny, a Senate subcommittee’s September 1, 2020 analysis of the more than 5.2 million PPP loans issued suggested a high risk for fraud, waste and abuse. The analysis cited issues including missing information on applications, incorrect information on applications, companies receiving more than one PPP loan, loans going to companies that had been debarred or suspended from contracting with the federal government and companies with known performance and integrity issues.
Much like the data that was released in September, this new round of data again revealed that many loan applicants omitted vital information about the borrower, including company names. For some companies that received over $150,000 in loans, the business name was listed as “Not Available.” Addresses were also omitted. Answers to questions regarding race, gender and veteran status were also left unanswered. In its statement accompanying the release of the December 1 data, the SBA appeared to blame the lenders for the missing information: “PPP loan data reflects the information submitted by lenders to the SBA for PPP loans. Approximately 75% of all PPP loans did not include any demographic information at the time of loan application. The loan forgiveness application expressly requests demographic information for borrowers so that SBA can better understand which small businesses are benefiting from PPP loans.”
The data released disclosed the exact amounts received by the top recipients, revealing that many large companies appeared to have gotten $10 million in loans despite the PPP’s original goal of helping small businesses in need of emergency relief. Some of the big businesses that received the large loans have ties to President Trump, according to media reports. Popular restaurant chains, large law firms and hotel operations also received millions of dollars in loans.
The troubling patterns revealed in the analysis of the December 1 and September 1 data releases mean businesses should expect a wide variety of government agencies to engage in more intense and far-reaching enforcement activity than previously expected.
Importantly, as businesses are gearing up to apply for loan forgiveness, they must proceed with caution. The December 1 SBA statement that was released with the new data explained that the listed borrowers were not necessarily eligible for loan forgiveness, despite lender approval: “However, the lender’s approval does not reflect a determination by SBA that the borrower is eligible for a PPP loan or entitled to loan forgiveness. All PPP loans are subject to SBA review and all loans over $2 million will automatically be reviewed. Eligibility and compliance will be reviewed during the loan forgiveness process. Further, a small business’s receipt of a PPP loan should not be interpreted as an endorsement of the small business’ commercial activity or business model.”
The loan application process was riddled with confusion. Borrowers may have been approved for loans by their lenders and received the funds, despite being ineligible. The loan forgiveness process may trigger audits for companies that were unaware they were not entitled to the funds they received. The PPP forgiveness process will most certainly lead to further investigations of fraud and abuse. Borrowers should work closely with their counsel when applying for forgiveness to ensure that they have the correct supporting documentation, accurately calculated the qualified payroll costs, and appropriately used the PPP funds.
PPP Fraud Prosecution Tracker
Fox Rothschild’s White-Collar Criminal Defense & Regulatory Compliance Practice Group is tracking in real time all federal criminal cases alleging PPP loan violations.