The SBA Should Not Be Defined by Fraud
When evaluating the program, it’s important to separate what’s fraudulent from what’s just bad policy.
By Ami Kassar
Kelly Loeffler, the new SBA Administrator, took over the SBA a few weeks ago at a tricky time in its history. On her very first day, she issued a memo listing her priorities, which include an emphasis on cracking down on fraud: “SBA’s loan programs should be a powerful tool for empowering small business formation and delivering critical aid to disaster victims. The prior Administration left these programs with unaddressed fraud – including an estimated $200 billion in pandemic-era fraud. Starting today, the SBA will institute a zero-tolerance policy for fraud and investigate fraud across all programs. The agency has established a Fraud Working Group and will appoint a Fraud Czar to identify, stop, and claw back criminally obtained funds on behalf of American taxpayers – working across agencies to prevent fraud.”
I think it’s important to remember that there is a big difference between losses caused by fraud and losses caused by bad policies. Let me clarify.
First, there has been a lot of fraud in SBA lending over the last few years, particularly with the EIDL and PPP programs. One type of fraud can be attributed to borrowers who got loans with fraudulent IDs. Another example is those who got loans and used the proceeds to pay off divorces or buy yachts or jets. That is blatant fraud, and I believe these borrowers should go to jail.
But fraud is not the only problem. Plenty of SBA EIDL loans were released to borrowers who now can’t afford to pay them back. If those borrowers followed the rules when they took the money and when they spent it, these losses are most likely the result of bad lending policy – not fraud.
One example of bad lending policy came with the EIDL loans made during the Biden administration. The average EIDL loan was approximately $70,000 during the first Trump administration. That increased to roughly $700,000 during the Biden administration. About $250 billion of loans were made near the end of the Covid pandemic without requiring proof of economic injury or of the ability to pay back the loans. If these borrowers followed the rules when they applied for the loans and used the money for permissible purposes, they did not commit fraud.
The second type of SBA lending loss is a result of decisions made by the Biden administration to remove important guardrails from the SBA program to make it simpler and faster to get loans. (I’ve written about this previously.) Once again, if these borrowers presented all their information accurately, they didn’t commit fraud. These problems can be resolved by bringing back many of the guardrails over time.
As I said, I believe that any and all fraud should be prosecuted fully, and we should look for ways to deter fraud from happening in the first place. But the SBA has been an important lifeline for many entrepreneurs for many decades and an important catalyst for economic growth. My hope is that the new team will sort through the issues at hand and make the necessary policy adjustments but not let the pandemic-era fraud sidetrack the SBA from its mission. We need to keep the SBA machine moving forward to help all of us prosper and grow.
Ami Kassar is CEO of MultiFunding.
