Where, Exactly, Did $800 Billion in PPP Money Go?

Billions of dollars of federal funds may have been misappropriated as part of the government’s well-intentioned but loosely monitored effort to support entrepreneurs and their employees during the Covid-19 pandemic. Meanwhile, the Small Business Administration, which has supervised the massive rescue since last year, decided recently to speed up its completion by making it easier for borrowers to have their loans forgiven.

Let’s slow down, shall we? After all, those billions came from taxpayers, and more transparency and accountability are needed before the government wraps it up. Congressional investigators and auditors, along with federal prosecutors, should stay on the case — especially before all of those loans are forgiven.

When former President Donald Trump’s administration launched the Paycheck Protection Program in early 2020, it billed the push as an effort to preserve jobs threatened by economic fallout from the coronavirus onslaught. Other programs were in place to support big corporations, but PPP money was meant for the small fry — some 30 million small businesses employing about 59 million people. Protecting jobs to keep small businesses afloat so they could ride out what policy makers hoped would be a short slump was the intent.

Time was of the essence given how rapidly Covid-19 was upending businesses and workers’ livelihoods, but the entire push was thrown together so quickly that the Treasury Department and the SBA failed to establish guardrails and oversight to ensure the program’s goals were met. During the program’s early days, former Treasury Secretary Steven Mnuchin’s team was unable to provide data indicating that PPP borrowers actually used the money to cover workers’ wages.

The first round of funding was sucked up in a flash and went to more established small businesses, leaving modest startups and entrepreneurs of color out in the cold. Subsequent efforts sought to remedy those disparities, but the rules also changed along the way. Borrowers were permitted to use a smaller portion of their PPP loans on wages. Eventually, revisionist history took hold. Some analysts said the best way to assess the PPP’s effectiveness was to examine how many small businesses it sustained, not how many jobs it preserved. I’m not convinced that is a better benchmark, but even if it was, that wasn’t the only standard when the program started. And if helping workers was the primary goal, why wasn’t the funding simply channeled through federal and state unemployment insurance programs rather than through banks and small businesses?

Analysts remain split on how best to assess the success of the PPP and the related Economic Injury Disaster Loan program. The Government Accountability Office puts the spending at $910 billion, of which $800 billion is PPP money. Any assessment, however, will rely on the release of more sweeping data about the push from the government and borrowers. It’s also becoming clearer that fraud may have been much more rampant than originally understood, although the likelihood of massive misappropriation because of lax supervision was obvious from the start. Any funds that wound up in the wrong pocket or were steered toward insiders also blunted the program’s effectiveness.

The GAO, a nonpartisan federal agency that provides auditing and analysis to Congress, has flagged looming abuses for more than a year. Several months ago, it warned that the SBA’s oversight and analysis of PPP and EIDL funding was insufficient and that the agency lacked a formal fraud risk assessment program. It noted that the SBA’s inspector general had detected the possibility of “widespread potential fraud” in the EIDL program and had, along with federal prosecutors, seized ill-gotten EIDL and PPP loans. Some cases involved identity theft and money laundering, along with bank and wire fraud. A GAO report released a few weeks ago found that the SBA had improved some of its monitoring but that its loan forgiveness plan lacked important public guidelines and suffered from communication problems with lenders.

A study released Tuesday by the University of Texas at Austin noted that $76 billion of a $780 billion pool of PPP loans it examined involved “questionable” lending. Nine of the 10 lenders with the highest rates of suspicious loans were financial-technology firms, according to the study. So-called fintechs specialize in digital lending. The study concluded that three of the largest fintechs that made PPP loans — Capital Plus Financial, Cross River Bank and Harvest Small Business Finance — each hauled in more than $900 million in fees while simultaneously granting suspicious loans riddled with reporting problems. The firms either disputed the report’s conclusions or said they had yet to fully digest it.

All of this is ripe for aggressive and continued investigations, but it’s not clear how much of that will be coming from the SBA itself. Its “PPP Direct Forgiveness Portal” is now up and running online. The portal aims to “streamline forgiveness processing” for borrowers with loans of less than $150,000. While it asks applicants for information such as how much PPP funding was spent on workers, it no longer includes a “loan necessity questionnaire.” That requirement was dropped in June after the Associated General Contractors of America, a trade group, sued the SBA, arguing that it amounted to unfair second-guessing of borrowers’ eligibility for forgiveness.

Call me old-fashioned, but if a PPP loan wasn’t necessary, should it have been granted in the first place? And if it seemed necessary when the Covid-19 pandemic arrived, but no longer is, why not just give taxpayers their money back? That’s certainly a better route than forgiveness.

The SBA still has a lot of explaining to do.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Timothy L. O'Brien is a senior columnist for Bloomberg Opinion.

©2021 Bloomberg L.P.

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