After mistakenly telling unknown numbers of small business owners that they are criminals and rejecting their applications for a Paycheck Protection Program loan, the U.S. Small Business Administration took steps this week to let actual previously incarcerated individuals access the program.
Along with a slew of changes aimed at increasing access to the $284.5 billion forgivable loan program, the Biden administration on Monday directed the agency to allow some small business owners with prior non-fraud felony convictions to obtain relief. The Biden administration also reconfirmed its commitment to upholding its enhanced fraud checks, as a means for curbing waste and abuse of federal systems.
Previously, a business was ineligible for PPP funds if it was at least 20 percent owned by someone who had been arrested or convicted of a felony related to a financial fraud within the past five years or, secondarily, any other felony within the previous year. Starting the first week of March, the agency has been directed to disregard the second restriction, unless the applicant or owner is incarcerated at the time of the application.
It's unknown how many actual business owners who fit this bill had been unable to access the program. The SBA has reportedly rejected plenty of applicants whom it had wrongly accused of being a criminal.
According to a February 3 letter from the American Institute of CPAs (AICPA) to the SBA, some applications have been denied because the business owner was incorrectly identified as having a criminal record. Other rejections have stemmed from the SBA's requirement that borrowers apply using their employer identification numbers (EIN) this time around--even if they applied for a first-draw loan using their Social Security numbers. The group points to as many as 40 different potential error codes that are causing additional validation checks, which can delay loan approvals for weeks.
Altogether, nearly one-third of all applications were receiving requests for further review, as of February 3, according to the AICPA letter. A more recent assessment from the group shows that validation challenges persist.
The problem is two-pronged. The SBA's new automated approvals system, which was designed to streamline a previously disjointed process and provide added verification checks to guard against fraud, cross-references loan applications with the U.S. Treasury's Do Not Pay database and public records, which may be wrong. The SBA's system also cross references a borrower's prior application against its new one, so things like conflicting data points between rounds one and two are getting flagged--and rejections are oftentimes instantaneous, says Dan O'Malley, CEO of Numerated, a Boston-based digital lending platform for banks.
"It's moving way faster because of the self-service aspect," says O'Malley, "but working the loans into the SBA and getting them approved has been just as painful as we thought it would be."
The SBA did announce important fixes on January 26 and February 10, which offered to counter some of the ill effects of increased fraud checks the agency has undertaken in this iteration of the PPP. Among other things, the agency is now allowing lenders to directly certify the eligibility of borrowers for first and second-draw loan applications that are experiencing validation errors, as well as upload supporting documents directly.
Further, the AICPA said the SBA issued a notice last week to lenders detailing new updates to PPP, including a change that will allow lenders to self-correct Social Security and EIN numbers that were used in processing loans last year. The SBA also said it intends to keep working out another validation issue--that is, duplicate loans and Dun & Bradstreet numbers. (D&B is one of the databases the SBA is using to confirm information in this round.) In the meantime, the SBA suggests lenders continue to route inquiries to the PPP loan platform's data validation problems inbox.
The Biden administration says it remains committed to stamping out fraud--so it's unlikely that the additional checks will get reined in. Yet the update regarding formerly incarcerated individuals should at least relieve one data glitch that previously caused delays. And that should help those wrongly--or even rightly--pegged as a criminal get access to the funding they need to keep their businesses afloat.