SBA’s Herculean Pandemic Response Was Swift, But Not Smooth
SBA’s Herculean Pandemic Response Was Swift, But Not Smooth
(Bloomberg) -- Congress handed the colossal task of quickly getting $349 billion in pandemic relief for mom-and-pop firms to a small, understaffed federal agency that was overwhelmed from the program’s start.
Yet, after a glitch-plagued beginning, the Small Business Administration managed to approve applications and guarantee all the loans in just 13 days, dwarfing its previous record of $30 billion spread out over an entire year. With the funds now tapped out, many businesses remain in the cold, while some that received loans are still wondering when money would actually move into their accounts.
Questions remain about the handling of the loans, including potential inequities between states -- for example, why Texas got more than California, according to the most recent figures available -- and whether the rapid pace at which money is being approved raises questions about the potential for fraud.
“The SBA has never managed anything close to this magnitude,” said John Arensmeyer, chief executive officer of the Small Business Majority, an advocacy group for small firms. “They are not set up to run a crisis program like this.”
The SBA’s already outsized role in pandemic assistance will get even bigger if Congress passes another round of aid for small firms, in response to demands from the business community and the administration. President Donald Trump has hailed the program, part of the $2 trillion coronavirus relief measure, as “a tremendous success.” Advocates say any initiative this large, created so quickly, was bound to have flaws.
The SBA has said that working closely with the Treasury Department, it launched an unprecedented program in just one week and quickly resolved issues identified by lenders and borrowers. Administrator Jovita Carranza tweeted that in less than 14 days, the agency had processed more than 14 years’ worth of loans.
Now that funds have run out, lawmakers are debating whether to add another $250 billion to the initiative. The SBA’s first-come, first-served system has left behind many of the neediest companies, often those lacking a relationship with a bank.
Renee Johnson, senior government affairs manager for the Main Street Alliance, a network of small businesses, said Congress, the Treasury Department and the White House should “act quickly to provide direct subsidies to these small business owners.”
Carranza a former Treasury official who was just three months into her new job when the pandemic hit, worked with almost 5,000 lenders to approve more than 1.6 million applications for about $339 billion in loans that the SBA will guarantee. Another $10 billion went for processing and fees.
The SBA has more than 3,000 employees and is increasing staffing with an additional $675 million approved in the relief package enacted last month for salaries and expenses. The agency, with a fiscal 2019 budget of $1 billion, had been singled out for an 11% funding cut in Trump’s most recent budget proposal, according to the Washington Post.
The goal of the Paycheck Protection Program is to help companies with fewer than 500 workers maintain payrolls and cover expenses, like rent, for two months. The program offers loans of as much $10 million, which convert to grants if the companies keep workers on their payrolls and maintain salaries.
When the program began on April 3, the SBA’s overloaded computer system froze intermittently and some banks weren’t ready to issue loans because guidance hadn’t been released until the night before. At first, lenders didn’t know what loan documents to use.
Banks sought guidance on forms called promissory notes that are necessary to complete any loan. On April 8, the banks were told they could use their own forms or one from the SBA. But a sample form the SBA posted only caused more confusion because it was dated 2002 and mentioned “collateral,” which the coronavirus aid program doesn’t require. Lenders also said they had to ask multiple times for clarification on important details such as loan-forgiveness criteria.
Clayton Legear, president of Merchants & Marine Bank in Pascagoula, Mississippi, said the repeated changes delayed his ability to lend to struggling businesses in the Gulf Coast region. He said customers who had already filled out one application had to submit new ones.
Legear said his bank had to redesign its application process whenever the SBA revised its guidelines. The SBA was asked to build an airplane while “hurtling through the air,” Legear said. “They have worked very hard and very diligently,” he added, “but unfortunately, in a lot of cases, the bandwidth just wasn’t there.”
As part of its plan to police relief efforts, the SBA inspector general’s office said it would examine the agency’s rollout of the Paycheck Protection Program and vet the eligibility of borrowers who received funds. The office will also look into how borrowers used proceeds from the Economic Injury Disaster Loan program, a separate relief effort.
Next year, the office said it will delve deeper, looking into businesses that received loans from both programs as well as vetting approvals of loans forgiven under the coronavirus relief package.
Bill Shear, the Government Accountability Office’s director of Financial Markets and Community Investment, on Wednesday said the watchdog agency also would be reviewing the SBA’s performance in the pandemic, including whether it evaluated the ability of its technology to handle application surges and prepared for such high-risk episodes.
One reason for the problems may have been that the SBA’s technology loan processing platform, E-Tran, struggled to handle the traffic generated by the onslaught of applications. Without mentioning that system specifically, the GAO reported in June 2019 that several of the SBA’s programs relied on computer systems dating to 2002. Their hardware and software are no longer supported by vendors, and they reside on a platform that had been scheduled to be decommissioned soon, the GAO said.
The SBA is now testing an application programming interface, or API, which would allow financial institutions’ systems to connect directly with the agency’s, Bloomberg has reported.
The SBA should have thought about these issues before a pandemic forced the agency to launch such an enormous endeavor, said Johnson of the Main Street Alliance.
“We’re two weeks behind in helping businesses stay open,” Johnson said. “God only knows how many small businesses have had to close their doors permanently and are still trying to figure out how to get out of this themselves.”
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