The Paycheck Protection Program (PPP) ended on May 31st, but borrowers should not be too quick to put the program in the rear view mirror. Despite its popularity, the program may soon come back to haunt even the earliest of recipients as loans are re-reviewed for “overfunding.”
PPP “overfunding” occurs anywhere a good faith error results in a borrower receiving more than he or she is qualified to have forgiven. Such errors could be due to anything from a typo in an excel sheet to a misunderstanding of the qualified expenses. If that happens, the difference must be paid back, unless it’s under $10. Yet, calling it a “good faith error” or “a typo” doesn’t quite capture the magnitude of an error that might mean a small business owes $10,000 on what was understood to be a forgivable loan in a crisis.
A similar overfunding issue occurred with the Pandemic Unemployment Assistance (PUA) program when recipients were informed that the PUA mistakenly approved them for more than what they were qualified to receive, and that the difference would need to be paid back in full. Across the country, people were confronted by notices to pay upward of $20,000 during their most desperate days.
Are these programs truly not accountable for the funds they mistakenly approve? It’s a difficult question — especially since the pandemic response has been one in which policymakers have acted as quickly as possible and hammered out the details later.
In fact, despite the PPP having largely been a success, its efforts have been most closely associated with confusion. According to Pescatore-Cooper PLC, the problem of overfunding was especially prevalent early on due to confusion on both sides of the loans: Lenders had conflicting opinions about maximum loans and borrowers were unsure how to properly calculate qualified payroll costs.
Yet, there was no time to wait. Demand for the loans exploded when the program first began, and the amount of money Congress had appropriated was quickly disappearing. More so, once the money was received, borrowers had limited time to spend it if they wanted the money to qualify for forgiveness.
As POLITICO’s Zachary Warmbrodt said, “since its inception, PPP has been a roller coaster for borrowers and lenders alike because of ever-changing rules and shifting deadlines.”
One of the latest of those ever-changing rules came when the Small Business Administration (SBA) released a Procedural Notice just three months before the original end of the program. The notice called on lenders to review both first and second draw PPP loans for overfunding.
Even if a loan has been approved, paid out and forgiven, the SBA says it is still subject to an overfunding review and may be retracted. With over 11,823,594 approved loans for the SBA and lenders to comb through, the review process is likely to be pending for some time.
Yet, despite the strict guidance for borrowers, lenders have been largely excused from accountability in cases of overfunding. In fact, lenders may be benefiting from the situation.
Loan forgiveness is denied for any amount that exceeds what should have been approved, but the responsibility rests with the borrowers, not the lenders issuing overseeing the loans. What’s more, even if the loan is denied partial forgiveness due to overfunding, the SBA will still protect lenders with the SBA’s loan guarantee. It is only if “excessive occurrences” of lender errors occur that the SBA will conduct a review of a lender and possibly retract the guarantee. But even then, the borrower is still responsible for returning the excess funds to the lender; the guarantee only comes into question if the borrower defaults.
In defense of the SBA, the agency should be commended for recognizing many of the errors made were likely in good faith — especially as they continue to battle with issues of fraud. Yet, it still seems that there is a serious oversight issue at hand if loans were overfunded and only the borrower is to blame.
In a past statement, Maryland’s Sen. Ben Cardin, a Democrat, said, “It’s clear that the most vulnerable small businesses will need help beyond March 31, so we must pass [the May 31st PPP] extension as quickly as possible.”
Now it seems the senator may have been more right than he initially thought. Yet, it’s going to take more than another extension to solve this issue.
The SBA spent the last year facing criticism that it was not doing enough to support the smallest of businesses. Let’s not have the next year spent criticizing it for taking advantage of them.
Nicholas Anthony (email@example.com) is a monetary and financial economist in Washington D.C.