SBA Adopts New Process for Absolving Fraudulent Loans in Attempt to Provide Certainty to Affected Businesses

By Michael A. Calvanico and Brett W. Johnson

The Paycheck Protection Program (“PPP”) was created on March 27, 2020 as part of the first COVID-19 relief package. Over the past year, Congress appropriated almost $700 billion to the PPP in an effort to provide forgivable loans to small businesses for the duration of the pandemic.

Notwithstanding the immense benefit that this undertaking continues to give small businesses, the PPP suffers from a problem endemic to many large government programs: fraud. As such, companies, whether they applied for or received PPP or other government relief monies, should ensure vigilance as to compliance and correctness of the relief monies received.

While most of the attention or scrutiny revolving around PPP fraud relates to large corporations applying for loans undeservingly, many businesses have also been impacted by PPP loans that were fraudulently applied for under their names by someone else entirely. These fraudulent loan applications have been a problem since the inception of the PPP program in March 2020. Shockingly, the Small Business Administration (“SBA”) waited until February 2021 to communicate a transparent process for businesses to absolve themselves of these fraudulent loans.

Until earlier this month, any business that discovered a fraudulent PPP loan was essentially left fumbling in the dark if they wanted to absolve themselves of that loan and any corresponding debt obligations. The options available to these businesses, according to SBA guidance, were limited to: reporting that fraud to the SBA office responsible for processing the fraudulent application so a hold could be placed on any undisbursed funds; alerting each of the three major credit reporting agencies and placing a fraud alert on credit reports; and submitting a complaint to the SBA Office of Inspector General (“OIG”) to commence an investigation of the fraudulent conduct.

On its face, an OIG investigation into the fraudulent conduct does sound like a sufficient process to absolve businesses of these loans. However, there is little to no transparency in how the process actually works to resolve and cure the fraudulent loans, or the speed at which that process can be completed. The SBA website notes that “the OIG does not provide status updates of complaints” and directs businesses to submit Freedom of Information Act (FOIA) requests in order to obtain any updates on the status of these investigations.¹ The FOIA normally provides a twenty-day timeline for a required response, yet this response time can (and has) been delayed substantially due to the pandemic.² Furthermore, these OIG investigations can sometimes lead to broader, lengthier, criminal investigations that provide even less transparency or promise of resolution.

As such, many businesses have been left for months without any idea as to the status of the fraudulent loan investigation, no sense of how or when an investigation will ultimately be resolved, and unsure of whether or not they will be responsible for paying back amounts due under the fraudulent loan. Seemingly in response to this confusion, the SBA recently released additional guidance for businesses affected by fraudulent loans.

This new SBA guidance, in the form of a letter to affected business owners, creates a process – separate from the OIG investigation – specifically designed to absolve business owners of the fraudulent loan debt.³ In order to initiate this process, businesses will first need to file an Identify Theft Report with either the Federal Trade Commission or some other law enforcement agency. The business will then need to send a copy of that report, some form of photo identification, and a signed declaration of identity theft to IDTheftRecords@sba.gov to commence a review of the fraudulent loan.

Unlike the OIG process outlined by prior SBA guidance, this new process specifically commits the SBA to a notification in writing and final determination letter once the review is complete. The SBA will also be more likely to respond to ongoing inquiries regarding the status of the investigation as it will not be criminal in nature. Hopefully, this new review process will provide businesses with the transparency and finality that was lacking over the past year, and yield substantive results for those businesses affected by fraudulent PPP loans.

Due to these everchanging developments, companies should remain vigilant in efforts related to their applications and receipt of government relief funding as a result of the COVID-19 pandemic and identify any corresponding vulnerabilities.