These remarks have been edited for length and are being published in four parts. The following post is Part II of Neil M. Barofsky’s prepared remarks, which were delivered on July 28, 2020. For Part I of this post, click here.
My testimony concerning the effectiveness of the CARES Act will focus on the lending programs administered by the SBA, Treasury, and the Federal Reserve, with specific attention on the most active of these programs, the PPP. First, there is no question that the PPP has had a significant and positive impact on millions of small businesses, with a recent study by the Federal Reserve and others estimating that it helped preserve more than 2.3 million jobs.[1] But by no means should there be a declaration of mission accomplished. Chiefly, there has been a significant lack of transparency by Treasury and the SBA in the program that makes it difficult to fully assess its integrity, fairness (particularly to traditionally underbanked businesses), or overall effectiveness. In order to fully assess the program, additional measures will be needed to increase transparency and oversight. In addition, available information suggests that meaningful sums may have been lost or misdirected because the program design elevated the risk of fraud and misuse by borrowers.
Second, although the Federal Reserve lending programs have been impactful as a result of the announcement effect noted above, they are significantly undersubscribed, despite apparent unmet need in the economy. That significant lack of uptake by eligible businesses and lenders appears to derive, in part, from the limited (and stated) purpose of those programs to serve principally as a backstop to private debt markets. If Congress intends to reach a broader (and riskier) range of entities, and to more immediately drive these funds from the sidelines and into the economy, it will need to take affirmative action to do so.
PPP Program
The PPP has provided critical emergency funding to more than four million small businesses. Although the rollout was chaotic—with significant changes to program terms just hours before the launch and a lack of clear guidance that left borrowers and lenders puzzled over key terms—the overwhelming demand for the program shows that it addressed a real need in the economy. As noted above, the PPP likely saved millions of American jobs in the short term, and gave millions of small businesses a lifeline, if only a temporary one.
At the same time, the design of the program has made it a potential playground for borrower fraud. The SBA’s PPP lending applications directed banks to rely solely on borrower certifications of eligibility, with only scant requirements for supporting documentation to verify the attested-to information. Although it is certainly understandable that SBA and Treasury chose such a set-up in order to get the money out quickly and broadly—given the urgent needs many small businesses were facing because of the COVID-19 crisis—they nonetheless may have created ideal conditions for fraudsters. Just months into the program, the Department of Justice (“DOJ”) has announced more than twenty criminal prosecutions for fraud,[2] and those cases are likely just the tip of the iceberg. Yet, the program design itself may preclude further uncovering of the iceberg. Despite the enormous volume of lending contemplated by the program (which has by now entailed more than 4.5 million PPP loans), the CARES Act left primary responsibility for oversight to the modestly sized SBA Office of the Inspector General (“SBA OIG”), with limited additional funding. With 4.5 million PPP loans, one estimate is that each SBA OIG employee would have to review approximately 55,000 loans.[3]
As a practical matter, it is unlikely that the SBA OIG alone (or even a good portion of the entire Inspector General (“IG”) community) can provide the necessary oversight over such a vast program. In such circumstances, full and complete transparency by the government is essential in order to deter fraud (borrowers will be less likely to try and steal from a program if they know that their efforts will be publicly exposed), to better identify those who commit fraud, and to measure the effectiveness of the program. Such transparency, in effect, deputizes the public at large, including nonprofit oversight groups, journalists, and concerned citizens, in rooting out fraudulent participants and bringing program shortcomings to light.
After promising full transparency regarding PPP participants and loan amounts, we have witnessed just the opposite. Treasury at first resisted releasing borrower data at all, later relenting only under intense pressure by providing data for loans over $150,000 (and that data with ranges instead of actual amounts for borrowers) and aggregate data for the rest.[4] With 86 percent of borrowers with loans under $150,000, data is being withheld for more than 4 million loans.[5]
Moreover, the SBA data that has been produced to date appears to contain significant errors and inaccuracies. Some listed companies have denied they participated at all, and a recent Bloomberg analysis[6] showed companies listed in the wrong district, employers with a negative number of employees, or other information that was clearly wrong or just did not make sense. For example, an architectural firm in Miami that received $19,700 was incorrectly listed as receiving over $1 million; and a one-man accounting firm that received $3,700 was listed as receiving $2 to $5 million.[7] This kind of inaccurate data undermines the oversight that public transparency provides, and saps public confidence in the program. And, in stark contrast to the last financial crisis, where SIGTARP pushed hard for the release of documents related to banks that accepted TARP funds—which Treasury eventually did—Treasury has taken a far different approach in this crisis by persistently withholding information about borrowers.
Although the administration has failed the transparency test so far, even the limited disclosures to date have exposed flaws in the PPP program design. It is now apparent that there were borrowers who took advantage of the program who never should have received funds, either because they misrepresented their eligibility or because they were not the types of businesses that Congress or the administration contemplated would participate—including highly profitable law firms or premier sports teams, to name only a few. The identification of seemingly ineligible recipients likely would not have occurred but for these limited disclosures and the actions taken by news organizations and concerned citizens to review them (as also outlined in the testimony of my co-panelist, Danielle Brian of the Project On Government Oversight), and their work will allow law enforcement and IGs to focus their limited resources on such cases.
Transparency would also help identify whether the goals of the program are actually being met. As noted above, even the limited transparency provided has exposed that existing program rules appear to have paved the way for companies to participate that did not “need” the funds. But other key aspects remain unknown, including how often this may have occurred. For example, in providing additional funding to the program in April 2020, Congress included language that lawmakers said was intended to drive more loans to smaller and minority-owned businesses. Those provisions responded to widespread concern that funding was not getting to those constituencies.[8] But the SBA and Treasury failed to ask banks to collect demographic data on the businesses that received PPP loans—a failure of transparency highlighted in a recent SBA OIG report showing that such information was required to determine the volume of loans going to rural, women-owned, and minority-owned businesses.[9] As a result of these failures, we cannot measure whether Congress’ attempt to drive more lending to minority-owned businesses was effective. In other words, a lack of government transparency about what loans are being made, in what amount, and to whom, has contributed to the difficulty in determining whether the program goals are actually being met, while simultaneously providing cover to those who may have defrauded the program.
Lack of transparency is also relevant to several current legislative proposals. For instance, some proposals include a process for extremely streamlined forgiveness for certain smaller loan amounts with no documentation requirements. There is an attractiveness to this proposal: Given the sheer volume of loans, there is no way that detailed and fully-documented forgiveness applications will ever be fully reviewed by the SBA, and preparing those applications would undeniably tax already struggling small businesses in paperwork and professional fees they can ill afford. It also risks bogging down lenders whose resources might be better spent on additional lending through the PPP or other governmental programs. However, this type of expedited forgiveness may materially increase the risk of fraud for a program already prone to it. Because this process will remove any audit trail for large swaths of borrowers—and remove the deterrent inherent in requiring borrowers to submit documentation—I believe that such a process could be adopted only if Treasury and the SBA provide full transparency and accurate data about the identities of participants and the precise amounts of their loans. Such disclosure will provide a deterrent to many businesses that might otherwise exaggerate their compliance in order to achieve full forgiveness, and will give the public the opportunity to identify bogus businesses that may have far fewer employees (or even no employees) than for which they are seeking forgiveness. In all, streamlined forgiveness may be necessary and desirable, but without the potential deterrent of exposure, it is an invitation to an even higher level of fraud.
More broadly, the lack of public transparency has made it harder for Congress to enact effective changes to the program. Controversy has surrounded the life of the PPP so far—from concerns about whether banks would participate at its launch, to questions about whether funds were going to the right businesses during the first round of funding, to worries over whether the program’s use restrictions were stifling participation by small businesses. More recently, despite the availability of additional funding, the rate of PPP lending has significantly declined. Without adequate data from SBA and Treasury, policymakers cannot properly determine whether and how to adjust the program—whether there is a supply problem (for example, banks that are reluctant to participate, as at the launch of the program), a demand problem (for example, businesses that are either maxed out, unable to meet the payroll thresholds, or just scared away by politicization of the program), or another problem altogether. Transparency helps provide a basis for adjustments to the program to take into account changing economic realities.
Because of program design, its interplay with existing banking regulations, and the lack of incentives to drive lending to smaller businesses without established banking relationships, this portion of Main Street was less likely to be successful in getting PPP loans. This was an unforced error by Treasury and SBA, and echoes a mistake made in the last financial crisis. Back then, Treasury ignored warnings from SIGTARP that the banks who received TARP funds would not carry out the program’s goals that the money be used to lend to Main Street businesses or help struggling homeowners because they lacked the necessary requirements or incentives to do so. It is not clear whether there was any internal warning by oversight entities about these issues this time around, but the failure to heed the lessons of such recent history has surely contributed to outcomes in the PPP. According to a recent report, just 1.7% of businesses participating in the PPP through June 30, 2020, received 35% of money lent through the program.[10]
To be clear, my criticisms about Treasury and SBA’s lack of transparency in the PPP, its vulnerability to fraud, and the flaws in its program design should not be taken as an indictment of the program as a whole. The accomplishments noted in the beginning of my testimony are significant ones, and as businesses burn through their PPP funds (which were originally intended to cover just 8 weeks of payroll), there is a desperate and obvious need for an additional round of funding for these businesses. I fully support such a response, but it must be done transparently and equitably to give the program the best chance to help the businesses that need it the most.
Footnotes
[1] See Jonnelle Marte, PPP Small Business Aid Saved 2.3 Million Jobs, Study Estimates, Reuters, July 22, 2020, available at https://www.reuters.com/article/us-usa-economy-ppp/ppp-small-business-aid-saved-2-3-million-jobs-study-estimates-idUSKCN24N2TK.
[2] See DOJ, Coronavirus-related Press Releases, available at https://www.justice.gov/news?f%5B0%5D=field_pr_topic%3A40971 (last visited Jul. 24, 2020) (listing announcements of over twenty criminal prosecutions related to PPP fraud).
[3] See Cezary Podkul & Orla McCaffrey, Firms With Troubled Pasts Got Millions of Dollars in PPP Small-Business Aid, Wall St. J., July 18, 2020, available at https://www.wsj.com/articles/firms-with-troubled-pasts-got-millions-of-dollars-in-ppp-small-business-aid-11595064602.
[4] See SBA, PPP Additional Program Information, supra note 2.
[5] See id.
[6] Mark Niquette, et al., PPP Data Errors Raise Questions About Relief Effectiveness, Bloomberg, July 13, 2020, available at https://www.bloomberg.com/news/articles/2020-07-13/ppp-data-errors-raise-questions-about-effectiveness-of-stimulus?utm_campaign=pol&utm_medium=bd&utm_source=applenews.
[7] Id.
[8] See Emily Flitter, Black Business Owners Had a Harder Time Getting Federal Aid, a Study Finds, N.Y. Times, July 15, 2020, available at https://www.nytimes.com/2020/07/15/business/paycheck-protection-program-bias.html; National Community Reinvestment Coalition, Lending Discrimination Within the Paycheck Protection Program, available at https://ncrc.org/lending-discrimination-within-the-paycheck-protection-program/ (last visited July 27, 2020).
[9] See SBA OIG, Flash Report: Small Business Administration’s Implementation of the Paycheck Protection Program Requirements 4 (May 8, 2020), available at https://www.sba.gov/sites/default/files/2020-05/SBA_OIG_Report_20-14_508.pdf (PDF: 654.17 KB).
[10] See Yan Wu & Vivien Ngo, Where Did the Biggest PPP Loans Go, Wall St. J., July 23, 2020, available at https://www.wsj.com/graphics/where-did-the-biggest-ppp-loans-go/.
Neil M. Barofsky is a partner, chair of the Monitorship Practice, and head of the COVID-19 Response Team at Jenner & Block. He previously served as a federal prosecutor and the first special inspector general of the Troubled Asset Relief Program (TARP).
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