Republicans on the House of Representatives' Small Business Committee seized the differing fraud experiences of two Small Business Administration programs as evidence that the agency should not make direct loans going forward.
During a Wednesday hearing, which was scheduled to discuss significant management and performance challenges facing the SBA, GOP lawmakers highlighted comparatively low levels of fraud that occurred under the $800 billion Paycheck Protection Program — the federal government's biggest COVID-19 relief program — compared to the smaller $321 billion Economic Injury Disaster Loan Program. Fraud under PPP was estimated to be just $4.6 billion, compared to $80 billion in the EIDL program.
The key factor was the extent to which the SBA was involved in each program, Republicans argued. Private sector lenders made all PPP loans. The agency managed EIDL on its own.
“Differences in how these programs were run cannot be overstated,” Rep. Blaine Luetkemeyer, R- Mo., the Small Business Committee’s senior Republican, said. “They should serve as case studies for future public policy debates…Asking the SBA to expand or enhance its direct lending would be counter to the facts we have on the ground.”
With PPP, participating lenders — primarily banks — knew their customers, Small Business Administration Inspector General Hannibal “Mike” Ware said at the hearing. Ware was the only witness to testify. While he tried to stay clear of the partisan back-and-forth, Ware did acknowledge that PPP had a better record of combatting fraudsters than other relief programs.
Most lenders “were able to ask the right questions off the bat and put a stop to [fraud] prior to funds being disbursed,” Ware told lawmakers. “Within the first week or so [of program operations] we got like 5,000 contacts from banks where we knew there was a problem. They’ve been a great partner with us in terms of having the funds seized and returned to the government.”
At issue is the Biden Administration's proposal for the SBA to make direct loans of $150,000 or less.
Administrator Isabella Casillas Guzman
As things stand, 7(a) loans are made by banks, credit unions and other private-sector lenders, with the agency’s role limited to guaranteeing the loans they originate. GOP lawmakers, as well as advocates for the banking and credit union industries, want to keep things that way. Notwithstanding the downward trend in small-dollar 7(a) lending, they maintain the private sector is more efficient than the government at distributing capital, a point a number of Republicans said was underscored by what they described as rampant EIDL fraud.
“If the SBA has a track record with direct business lending that they already do with the EIDL program, who is going to carry the losses?” Rep. Byron Donalds, R-Fla., asked. “Who bears the real burden of losses if the SBA doesn’t have the basic underwriting capacity, as you’ve outlined in your report?”
Donalds called the direct-lending program well intentioned, but concluded that the agency was unprepared to make loans directly to borrowers.
“There’s a lot of work to be done at the SBA. They’re nowhere close. To radically change the mandate into direct lending would actually cause significantly more problems. It will not fix them," Donalds said.
Rep. Nydia Velazquez, D-N.Y., the Committee’s chairwoman, countered that much of the fraud in EIDL and PPP can be traced back to the earliest days of the pandemic, “when programs were new, loan volume was high and the need to get the loans out quickly was the priority.”
Guzman implemented improved internal controls that dramatically reduced fraudulent activity, Velazquez added.
For his part, Ware said he believed the SBA’s staff was “up to the task” of making direct loans, adding that the experience with COVID-19 relief programs like EIDL couldn’t necessarily be translated into regular SBA programs like 7(a).
“They’re two totally different animals,” Ware said.
Committee Republicans, however, said the fraud differential between EIDL and PPP is too stark to accept any expansion of SBA’s direct-lending authority.
“The SBA demonstrated their inability to discharge emergency lending at every single turn,” Rep. Roger Williams, R-Texas, said. “Yet, my Democratic colleagues want to expand the SBA’s lending authority and kind of reward bad behavior, even when the private sector has proven to be better suited to take on these efforts. The private sector always does it better.”
