[REN #926] U.S. Economy: PPP Money Grab Could Turn into SBA Audits

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U.S. Economy: PPP Money Grab Could Turn into SBA Audits, Real Estate News for Investors Podcast Episode #926

Businesses large and small lined up for the government’s Paycheck Protection Program, and now many of them may be lining up for an audit. The program was designed to help companies that were hurt by the coronavirus with loans that are forgivable if employees are kept on the payroll. But, loans were approved quickly, without a lot of documentation, and now many businesses may have to prove that they truly meet the loan criteria, or give the money back.

The Treasury Department and the Small Business Administration released information just a few days ago on the identity of loan recipients in response to demand for more transparency. That now puts those borrowers up for public scrutiny, and there are plenty of critics. The program was authorized by the $2 trillion CARES act, and critics are concerned that the PPP was a big money grab for some companies. The data release includes information on the program as a whole along with a list of companies that received loans of $150,000 or more. More than 650,000 companies are on that list.

In a July 6th press release, Treasury Secretary Steven Mnuchin said, “The PPP is providing much-needed relief to millions of American small businesses, supporting more than 51 million jobs and over 80 percent of all small business employees.” He said, “The average loan size is approximately $100,000, demonstrating that the program is serving the smallest of businesses.” (1) The lion’s share of the funding went to the larger loans, however. About 75% of it.

SBA Names PPP Loan Recipients

Health care and social service companies received the highest dollar amount overall. Those loans amounted to about $67 billion or 13% of the available funds. Other industries getting a larger share of PPP dollars include professional, scientific and technical services, construction, and manufacturing. Applicants in California got the most, followed by applicants in Texas and New York.

DS News reports that for real estate, rental, and leasing sectors, the program handed out a combined $15.6 billion for almost 250,000 loans. That’s about 3% of the $521 billion available for the PPP program. The National Mortgage Professional group says, 550 mortgage companies received loans of $150,000 or more. Banks received almost $500 billion in loans. (2)

Law.com says, more than three dozen of the nation’s biggest law firms and scores of smaller firms across the country have received loans. The bigger companies posted gross revenues of more than $100 million last year, and received loans of between $5 and $10 million. A law firm that represents powerful clients, like former Vice President Al Gore, was among them.

There are also surprising reports about loans handed out to wealthy individuals and organizations. A million dollars in coronavirus relief funds reportedly went to billionaire property developer Joe Farrell. NBC News reports, Kanye West’s $3 billion clothing and sneaker company got a loan along with multimillionaire pop artist Jeff Koons and the Church of Scientology. Many Catholic Archdioceses also received big loans. The one in New York got a loan valued at $5 to $10 million.

Big restaurant chains, like PF Chang’s, received loans along with some that are backed by private-equity investors, like TGI Fridays. There are also reports of loans to companies with political connections. (3) Many news organizations also got loans including Forbes Media, The Washington Times, the Washingtonian, and others.

One might argue that with more than 25 million people suddenly out of work and the nation’s economy in shutdown mode, getting a loan was a hedge against what “might” come of all this. Plus, the guidelines have been changing since the program was first introduced. After reading updated guidelines, some companies have given their loans back.

PPP Rules Have Been Changing

Companies were required to self-certify their need for the loans during the application process.  They also had to check a box that said the money will be used to pay workers and other bills like mortgage interest, lease payments, and utilities. There weren’t many guidelines at first, and the SBA had initially offered a “safe harbor” for loans under $2 million, which meant they wouldn’t be audited.

Those rules have changed, and many are now wondering who will get audited.
JD Supra posted a blog that talks about the SBA program and the chance of an audit. Although the SBA won’t have the resources to audit everyone, JD Supra says the SBA may audit any PPP loan of any size at any time. It’s all up to the SBA Administrator.

SBA Administrator Decides on an Audit

Some of the issues that the Administrator might want to examine include eligibility at the time the application was made, whether the borrower calculated the loan amount correctly and used the proceeds according to the CARES Act rules, and whether the borrower is entitled to loan forgiveness.

So what happens if the SBA determines that the borrower is ineligible? The “loan forgiveness” part of the deal will surely go away. JD Supra also says, “The SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.” There are no details yet on the “other available remedies.”

If the SBA decides to do an audit, it will notify the lender in writing. The lender will then notify the borrower. The SBA may conduct the audit by communicating directly with the borrower, or it may choose to deal with the lender. Anyone who disagrees with a decision by the SBA can appeal.

JD Supra believes that audits may be limited to borrowers with the larger loans. But there’s no guarantee.


(1) SBA Press Release

(2) National Mortgage Professional Group Article

(3) PPP Loans Data: Washington Post

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