Anti-Fraud Measures in Relief Plan Seek to Aid Vulnerable Firms
(Bloomberg) -- The new $284 billion lifeline for small businesses approved by Congress features anti-fraud and other measures that advocates say will give some of the most vulnerable employers a better shot of getting some help.
The renewal of the Paycheck Protection Program included in the Covid-19 relief package that passed in Congress Monday adds to the $660 billion that has already been earmarked for forgivable loans. At least millions of dollars of previous aid went to fraudulent applicants, according to public and private estimates.
This time around, lawmakers set aside a fresh $50 million for loan audits and fraud mitigation -- double the amount previously authorized. Congress also redesigned the fee structure for banks that process the loans so they don’t benefit from cherry picking only the biggest loan applications. Publicly traded companies are also barred from being eligible for the new money.
“The government took the opportunity to correct some of the big things that they would have done if they had known better the first time,” said Eytan Bensoussan, the chief executive officer and co-founder of NorthOne, a banking service for small businesses. Lenders will also be better prepared to handle a rush of applications, with fewer technical glitches, he said.
The new pot of money sets aside $60 billion for businesses largely shut out of the process so far, and it puts an emphasis on companies with 10 or fewer employees or those in low-income areas. The initiative also has $30 billion to help boost capacity at lenders active in under-served areas -- including community development financial institutions, minority depository intuitions and other small lenders.
“There are lots of important changes here that ensure that women-owned and minority-owned businesses can get the money before it’s dried up,” said Awesta
Sarkash, a government-affairs manager at Small Business Majority, a left-leaning advocacy organization. “We want to make sure that federal dollars are being distributed equitably.”
Gwendy Brown, a vice president at small business lender Accion Opportunity Fund, said that specific funding for the neediest business sends a signal that this money is for them. Still, she’s concerned that PPP’s reputation for complexity, and new requirements like the need to demonstrate revenue loss, and long turnaround times for loan forgiveness decisions could scare away some would-be applicants.
“The only thing worse than having to shut down your business is having to shut down your business and owe the federal government money,” she said.
Less Than Smooth
The small-business rescue money is the single largest item in the near-$900 billion Covid-19 relief package that cleared the House and Senate late Monday after a months-long partisan stalemate. President Donald Trump is expected to sign the legislation in coming days.
The rollout of the first round of the PPP, set up by the Cares Act in March, was less than smooth: fraudsters were able to claim the money, repeated rule changes perplexed legitimate loan applicants and a series of technical glitches complicated the government’s rush to get money into the economy.
With the relative lack of guardrails in the first round of PPP, the Department of Justice uncovered millions of dollars in fraudulent applications, including coordinated efforts to falsify documents for loans. The Project On Government Oversight, an independent analysis group, said it found $113 million of successful applications submitted by individuals accused of fraud.
Tim Stretton, a policy analyst at the Project on Government Oversight, flagged Congress’s move to expand a simplified, one-page loan forgiveness procedure for loans up to $150,000 -- something that was recently only available for loans up to $50,000. Stretton said this could increase the possibility of fraud, because the banks may not thoroughly check if borrowers meet the qualifications for forgiveness.
“Showing documentation to the bank is not that burdensome. Businesses need to keep this documentation in their records in case they are audited by the SBA for this loan,” said Stretton, referring to the Small Business Administration. “It’s in the taxpayer’s interest to make sure the money went to the intended recipients.”
New measures aimed at addressing problems include a rule that any companies formed on Feb. 15, 2020 or later cannot qualify for PPP money -- an attempt to block sham companies created by fraudsters to claim assistance.
The legislation will allow businesses to apply for a second loan, but there are stricter rules there. Firms can have a maximum of 300 employees, down from 500, and the maximum loan amount this time is $2 million, a decrease from $10 million. Applicants also have to prove that revenues declined at least 25% during the pandemic.
The influx of cash comes at a critical point, with more than 60% of businesses believing that the worst of the pandemic-related economic crisis is yet to come, according to a recent survey of 600 small business owners by the U.S. Chamber of Commerce and insurer MetLife Inc. About half of the survey respondents said they would have to shut down within a year, unless the economy improves.
The problem is even more dire among minority-owned businesses. One-third of black-owned businesses, 26% of Native American-owned, and 21% of Hispanic-owned companies say they have less than a month’s worth of cash on hand to cover expenses, according to a poll of 8,000 small businesses conducted by Public Private Stategies.
It’s not clear how much PPP money has benefited minority-owned businesses so far. Loan applications ask for demographic data, but it is optional to fill out. The latest legislation continues to leave that data to the borrower’s discretion. Almost 90% of loan applicants haven’t included information about race, ethnicity and gender, according to data compiled by the Pandemic Response Accountability Committee, a publicly mandated oversight board.
“Without data, we cannot know that the goals of the PPP are being met,” the PRAC said in a tweet this month. “The Cares Act explicitly instructs lenders to prioritize underserved communities, including women and minorities.”
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