White Paper: Risk Awareness and Lessons Learned from Prior Audits of Economic Stimulus Loans

This memorandum provides the Small Business Administration (SBA) information regarding lessons learned and risks identified in prior audits and reviews that SBA should consider to ensure program integrity and mitigate the risk of financial loss for COVID-19 related loans.

The President signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law on March 27, 2020. The Act contains several provisions intended to provide economic relief to our nation's small businesses. One of the Act’s largest provisions created the Paycheck Protection Program under section 7(a) of the Small Business Act. This program provides $349 billion in fully guaranteed SBA loans, which can be forgiven if used properly, for small businesses to cover payroll, rent, utility payments, and other limited uses. SBA’s 7(a) loan program is the Agency’s primary method of facilitating capital to eligible small businesses. SBA offers guarantees on loans made by participating lenders to help expand capital to small businesses that face challenges getting loans through conventional financing methods.” Another significant provision of the CARES Act provides $17 billion for SBA to pay 6 months of principal and interest payments for current SBA loans.

SBA’s 7(a) loan is a deferred participation loan made between the lender and SBA, with the lender providing the funding to an eligible small business. SBA will honor its guaranty on the 7(a) loan if the lender demonstrates it originated, serviced, closed and liquidated the loan according to SBA requirements. As of December 31, 2019, the total unpaid principal balance of SBA 7(a) loans was approximately $95.4 billion.

The Office of Inspector General (OIG) regularly conducts audits and inspections that evaluates management controls and assesses the program integrity, efficiency, and effectiveness of the 7 (a) loan program. We compiled findings from those audits and reviews that identified significant issues and relevant risk.

Our review of prior audits and reviews of economic stimulus loan programs identified areas of risk in SBA’s 7(a) loan program. Specifically, delays in promulgating regulations caused confusion among program participants about economic stimulus loan program requirements. In addition, we found SBA did not require program participants to submit documentation, which resulted in inappropriate or unsupported loan approvals. Further, we determined that SBA should establish proper controls, such as clear and consistent guidance and training for new stimulus programs before disbursing funds. The controls should also ensure that program requirements are updated. Finally, inaccurate or unreliable data did not allow for proper measurement of economic stimulus loan program performance.

While SBA has improved controls related to existing loan programs, we note several risk areas that may present SBA with challenges while issuing and administering requirements under the COVID-19 related 7(a) stimulus loan programs. We provided key considerations for SBA to ensure program integrity and the timeliness of loans to eligible small businesses and to mitigate the risk of financial loss.