Watchdog sees massive potential loan fraud at SBA, sparking fight with agency

But SBA Administrator Jovita Carranza rejected the report, claiming that the findings and figures “rest on hasty, incomplete conclusions.” The inspector general stood by the investigation, pointing to $450 million in 15,000 fraudulent loans that has already been seized, as well as the agency’s decision to fire employees and contractors involved in approving loans to themselves or inappropriately influencing loan approval.

“SBA’s management continues to insist that its controls are robust despite overwhelming evidence to the contrary,” the inspector general said in the report. “Our analysis of SBA’s Covid-19 EIDL loan and application data highlights strong indicators of ongoing fraudulent activity in the Covid-19 EIDL program.”

The dispute was the latest example of the SBA clashing with federal oversight officials. The agency has also fought in recent months with investigators at the Government Accountability Office and with journalists seeking disclosure of federal loan recipients.

During the pandemic, the SBA has approved $192 billion of so-called EIDL loans plus $20 billion of related disaster grants. In addition, it issued $525 billion worth of forgivable loans under the Paycheck Protection Program that Congress established in March. It’s an unprecedented level of activity for the agency.

While some fraud was expected, Ware has indicated that it may be happening at a greater degree during the pandemic. Speaking at a conference Wednesday hosted by the National Association of Government Guaranteed Lenders, Ware said he believed that SBA loan fraud is “more than normal” and it’s “a bone of contention when I’m discussing this with the agency.”

“I keep saying this is the very, teeny tip of the iceberg,” he said.

In the report Wednesday, the inspector general pinned blame on the SBA and contractors it used to implement the EIDL program. The inspector general said an SBA team would approve batches of loans after review by a subcontractor “with little to no vetting of the loan information.” The SBA initially set goals for loan officers to make final loan decisions on at least four applications per hour, and its subcontractor’s system did not always flag duplicate loans, according to the report.

Investigators found that fraudsters understood that sending a “shower” of applications increased the likelihood that one or more would make it through the agency’s safeguards. One applicant filled out 38 applications that were flagged as potentially problematic but at least two were disbursed for $384,600. One IP address used by applicants was used for 245 approved loans. One email address had 158 loans approved.

While the inspector general said the SBA had agreed to make some changes to its operations, Carranza dismissed the findings in a letter to Ware.

She said the inspector general “largely failed to investigate whether the ‘potentially fraudulent loans’ raised more than the minimum quantum of suspicion.” She said the report’s examples of shared IP addresses and email addresses involved loan applicants who relied on certified public accountants, law firms, loan packagers or religious and cultural centers to submit their loan applications.

“SBA’s analysis fatally undermines much of the draft report’s findings and shows that the draft report has significantly overstated the extent of “potential” Covid-19 EIDL fraud,” she said.