SBA Failed to Inform PPP Borrowers About Loan Offsets: IG Report

An Inspector General report released Tuesday shows thousands of ineligible loans were made by credit unions and banks.

Small Business Administration headquarters building entrance (Image: Shutterstock).

The Small Business Administration failed to inform Paycheck Protection Program borrowers that they would not have a portion of their loan forgiven if they also received an economic injury loan advance from the administration — an omission that has caused shock among PPP borrowers, financial trade groups charged Monday.

In a letter to congressional leaders, the trade groups, including CUNA, NAFCU, the American Bankers Association and the Independent Community Bankers of America, asked Congress to immediately fix the problem.

“Lenders we represent are seeing first hand the spreading awareness, shock and resentment among borrowers who believe they were deceived about the nature of the [emergency advance],” the groups said.

The issue emerged on the same day that the SBA’s Inspector General released another report alleging that poor controls in the PPP program has led to thousands of ineligible businesses receiving loans.

The financial groups said that many small businesses applied for and received SBA Economic Injury Disaster Loan Advances directly from the agency.

Many of those same businesses then applied for PPP loans from banks and credit unions, the groups said.

When lenders processed those loans, they did not know whether a business also applied for an emergency grant because the programs operate independently. The SBA indicated in April that the emergency payments would be treated as grants.

Then, according to the groups, the SBA reversed its guidance to say that the forgiven amount of a PPP loan must be reduced by the amount of any emergency grant a business received.

That effectively transformed a significant portion of a grant into a loan, the groups charged.

“Whether intentionally or as a result of confusing communications, PPP borrowers were misled and are only now beginning to discover the truth of their situation, the groups said. “Even today, many borrowers remain unaware of the debt burden they will soon face.”

The situation also caused problems for lenders who suddenly found themselves having the unforgiven part of a PPP loan on their balance sheets.

“The EIDL Advance debt trap could not come at a worse time,” the groups said in asking Congress to correct the problem.

The letter came on the same day that the SBA’s Inspector General released a report on the agency’s most difficult management issues.

On the PPP, the IG reported that: