SBA direct financing would be a scams magnet: GOP legislators

Republicans on the House of Representatives’ Small Business Committee took the varying scams experiences of 2 Small Business Administration programs as proof that the company need to not make direct loans moving forward.

During a Wednesday hearing, which was set up to talk about considerable management and efficiency obstacles dealing with the SBA, GOP legislators highlighted relatively low levels of scams that happened under the $800 billion Paycheck Protection Program — the federal government’s greatest COVID-19 relief program — compared to the smaller sized $321 billion Economic Injury Disaster Loan Program. Fraud under PPP was approximated to be simply $4.6 billion, compared to $80 billion in the EIDL program.

The crucial element was the level to which the SBA was associated with each program, Republicans argued. Private sector lending institutions made all PPP loans. The company handled EIDL by itself.

“Differences in how these programs were run cannot be overstated,” Rep. Blaine Luetkemeyer, R- Mo., the Small Business Committee’s senior Republican, stated. “They should serve as case studies for future public policy debates…Asking the SBA to expand or enhance its direct lending would be counter to the facts we have on the ground.”

With PPP, taking part lending institutions — mostly banks — understood their consumers, Small Business Administration Inspector General Hannibal “Mike” Ware stated at the hearing. Ware was the only witness to affirm. While he attempted to remain clear of the partisan back-and-forth, Ware did acknowledge that PPP had a much better record of fighting scammers than other relief programs.

“Asking the SBA to expand or enhance its direct lending would be counter to the facts we have on the ground,” stated Rep. Blaine Luetkemeyer, R- Mo.


Most lending institutions “were able to ask the right questions off the bat and put a stop to [fraud] prior to funds being disbursed,” Ware informed legislators. “Within the first week or so [of program operations] we got like 5,000 contacts from banks where we knew there was a problem. They’ve been a great partner with us in terms of having the funds seized and returned to the government.”

At problem is the Biden Administration’s proposition for the SBA to make direct loans of $150,000 or less.

Administrator Isabella Casillas Guzman has actually argued the proposed direct financing program is required to guarantee females, minorities and other underserved groups, who usually look for smaller sized loans than other customers, get their reasonable share of financing. Guzman kept in mind that 35% of the loans SBA ensured under its flagship 7(a) program in financial 2021 were for $150,000 or less, below 56% in financial 2018.

As things stand, 7(a) loans are made by banks, cooperative credit union and other private-sector lending institutions, with the company’s function restricted to ensuring the loans they come from. GOP legislators, along with supporters for the banking and cooperative credit union markets, wish to keep things that method. Notwithstanding the down pattern in small-dollar 7(a) financing, they keep the economic sector is more effective than the federal government at dispersing capital, a point a variety of Republicans stated was highlighted by what they referred to as widespread EIDL scams.

“If the SBA has a track record with direct business lending that they already do with the EIDL program, who is going to carry the losses?” Rep. Byron Donalds, R-Fla., asked. “Who bears the real burden of losses if the SBA doesn’t have the basic underwriting capacity, as you’ve outlined in your report?”

Donalds called the direct-lending program well intentioned, however concluded that the company was unprepared to make loans straight to customers.

“There’s a lot of work to be done at the SBA. They’re nowhere close. To radically change the mandate into direct lending would actually cause significantly more problems. It will not fix them,” Donalds said.

Rep. Nydia Velazquez, D-N.Y., the Committee’s chairwoman, countered that much of the fraud in EIDL and PPP can be traced back to the earliest days of the pandemic, “when programs were new, loan volume was high and the need to get the loans out quickly was the priority.”

Guzman carried out enhanced internal controls that drastically lowered deceptive activity, Velazquez included.

For his part, Ware stated he thought the SBA’s personnel was “up to the task” of making direct loans, including that the experience with COVID-19 relief programs like EIDL couldn’t always be equated into routine SBA programs like 7(a).

“They’re two totally different animals,” Ware stated.

Committee Republicans, nevertheless, stated the scams differential in between EIDL and PPP is too plain to accept any growth of SBA’s direct-lending authority.

“The SBA demonstrated their inability to discharge emergency lending at every single turn,” Rep. Roger Williams, R-Texas, stated. “Yet, my Democratic colleagues want to expand the SBA’s lending authority and kind of reward bad behavior, even when the private sector has proven to be better suited to take on these efforts. The private sector always does it better.”


A news media journalist always on the go, I've been published in major publications including VICE, The Atlantic, and TIME.

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