The Paycheck Protection Program was launched in the wake of the spring 2020 pandemic shutdowns. It quickly became chaotic and open to all.
The program, called PPP, was easy-to-get and potentially forgiveable loans from the government to small businesses. However, billions of dollars were given to wealthy celebrities like Tom Brady and Khloe Kim Kardashian and companies that prospered under COVID, as well as companies that had a lot of success during this period, such as many construction and manufacturing companies.
Officials from the government admit that the program was full of fraud and didn’t weed out deserving applicants. There was a way to correct those mistakes: Deny forgiveness. This could have stopped scam artists and made it possible for businesses to repay the money.
Almost three years have passed since the introduction of PPP. The vast majority of the loans were forgiven.
NPR’s analysis of data from the Small Business Administration on Jan. 8, found that 92% had been forgiven in full or partially. This includes loans to mega-rich companies.
Samuel Kruger, an assistant professor of Finance at the University of Texas at Austin, said that the PPP program appears to have led to billions of dollars of fraudulent loans which have been turned into grants. Kruger co-authored a paper that estimated that $64 billion of nearly $800 billion worth of loans were fraudulent. Kruger also noted signs of fraud such as suspiciously high payrolls or multiple businesses listed at one home address.
Although the SBA denies these findings, its inspector general estimates that at least 70,000 loans could be fraudulent. Unknown additional loans were made to companies that did not require PPP funding to survive this pandemic.
Even though the Justice Department and federal agencies have up 10 years to pursue pandemic fraud cases, the inspector general of the SBA has declared that this pursuit is a “pay-and chase” situation that is unlikely to result in much money.
NPR examined the Paycheck Protection Program’s decision-making process, which led to it being widely viewed as a huge government giveaway. Since the program was implemented by both Presidents Trump and Biden, we spoke to many bankers, economists, and government officials to understand why loan forgiveness was so generous, particularly after the widely publicized misuse of it. They were a mix of blame-shifting, finger-pointing and buck-passing which made accountability difficult.
“There are very few things that you can do to disqualify yourself.”
The loans were easy to obtain in the early days of COVID. PPP was created to prevent businesses from collapsing. Companies had to simply state that they believed the pandemic would have a severe economic impact. It was unclear what it would take to be eligible for forgiveness later.
Eric Lichatin, a Centreville Bank commercial loan officer in Rhode Island, said that the process was completely unclear from the beginning. The bank was overwhelmed by requests for PPP loans and was swamped with calls. “The SBA really rushed this program out, which I think they should have commended for… however, a lot of details were not clear to banks and businesses.”
The program’s rules got more complicated as it evolved. Even experts had trouble understanding them. The SBA once published a 11-page list of frequently asked questions about loan forgiveness. A client advisory was issued by a consulting firm with the headline “Fast & Furious: Rules for the PPP continue to emerge at an accelerated pace, often updating prior guidance.”
Many companies were left with a dilemma: Should they accept the money, even if they have to repay it?
Lichatin was one of the many banking professionals who advised customers to accept the funds, to put it in a separate bank account and to wait until the rules were clearer.
Lichatin said that if you don’t need the money you can pay the loan back. It is a safety net that you have in case your business takes a huge hit.
This recommendation was wise as Congress has gradually weakened the PPP forgiveness criteria.
The Paycheck Protection Program Flexibility Act was signed by President Trump in June 2020. It allowed some borrowers to forgive their debts even if they did not fully restore their workforce. A company could offer a layoff employee a job and, even if the employee declined, it was still credited for maintaining worker headcount.
The loan money can also be used in new ways by Congress. It was originally intended to keep workers on the payroll. Businesses could eventually use it to cover non-payroll expenses, such as vandalism and looting of property.
These rules were so relaxed that anyone with $150,000 or less, which is more than 90% of all borrowers, could have their entire loan amount forgiven by proving they used the money correctly. There is no need for supporting documentation.
These changes were known as safe harbors. David Autor, an economist at the Massachusetts Institute of Technology, who studied PPP, said that there are few things you can do to disqualify yourself from loan forgiveness.
He felt that the Paycheck Protection Program made nearly any loan money legal and was therefore eligible for forgiveness. The SBA had little power to stop bad actors.
“I would like to make it as simple as possible.”
Because that was what the businesses lobbyed for, Congress made PPP forgiveness rules more lax.
Utah Senator Mitt Romney stated that some constituents were starting to worry about their eligibility for forgiveness at a Senate Small Business Committee hearing. He expressed hope that “we’re not strict, and instead, we are looking to help individuals get forgiveness.”
Louisiana Senator John N. Kennedy, a former Treasurer Secretary, stated that small businesswomen and businessmen believe that the federal government will double-cross them regarding the forgiveness of loans. This is something you need to remember.”
Mnuchin responded by stating that the “majority of this money” would be forgiven within the next few months and that that was our intention. He also stated that he wanted to make it as simple as possible.
He made these remarks even though he acknowledged that some well-resourced loan recipients such as the Los Angeles Lakers should not have applied, and they later returned the money.
Mnuchin stated that “we thought people would self-select appropriately” and that “unfortunately there were a lot of high-profile companies that took the loans.”
Mnuchin admitted again, in July 2020, that the Paycheck Protection Program was being misused, partly because it had been launched at breakneck speed.
Mnuchin said, “I am concerned about fraud and want the oversight committees to be comfortable that this money has been used appropriately.” “But, we decided it was more important that it be up and running quickly. And that it wasn’t going help small businesses to send money four months later.
Mnuchin vowed that officials would be more strict with PPP loan forgiveness than loan approvals at that hearing.
“We will have a very robust procedure to review loans before they are forgiven,” he stated, adding that people will need to provide more information during the forgiveness process.
“Eight hundred billion dollars. It is here. It’s yours.
The review process was not robust.
Only a small portion of PPP loans have been closely examined by the SBA for fraud or forgiveness eligibility. According to Patrick Kelley (associate administrator of the SBA’s Office of Capital Access), although the agency claimed it used computer models for all 11.4 million loans, auditors have manually reviewed just 215,000 of them, which is roughly 2% of the total.
He said that about 21,000 of these loans were declined forgiveness after conducting hands-on reviews. This is approximately 0.2%. Researchers at the University of Texas who examined PPP fraud found that the enforcement rate of chasing down scammers is well below 0.1% in all cases.
Autor is skeptical when he hears companies praise the Paycheck Protection Program.
He said that it wasn’t that the program was bad, but they couldn’t love it. What could be better than $800 billion? It is here. It’s yours.
Bert Talerman is the president of Cape Cod Five Cents Savings Bank which processed approximately 3,700 loans under PPP totaling around $315 million. He has a more accepting view.
He said that there were some people who didn’t probably need the money in some cases. He added that “at the same time, these were crazy times,” noting that PPP was founded amid immense societal fear, and an unprecedented economic shut down.
He noted that COVID-19 was still a new concept and many businesses were closing down more often than usual. This made it reasonable for them to think that a loan from the government might be needed to survive the pandemic.
It is hard to estimate the number of jobs that PPP has saved. Estimates range from 1.5 million to 18.6 million. Talerman stated that PPP saved the day for a lot of small businesses.
“They wanted it to be quickly forgiven”
Kelley, the SBA official said that it frustrates him that the SBA is being criticized for its handling the program. This is because the agency followed the guidance of Congress and voted repeatedly to extend loans and make it easier to forgive. Even when widespread fraud was apparent, it voted to do so.
He stated that Congress wanted the money out quickly and wanted it to be forgiven fast.
Kelley noted also that Congress didn’t give the SBA authority for businesses to inquire if they really needed government assistance in retrospect.
He said to the company that he didn’t think they needed the loan. “Please give the money back,” was not an option. A PPP loan was sometimes a way to make profit for companies that prospered during the pandemic.
Kelley stated that he still considers the Paycheck Protection Program to be a great feat of engineering, which did more good than harm.
“It’s a simple sentiment to say, “Well, there goes government again.” He said, “Why didn’t they do that right?” “I have met many, many many, many more people who are grateful for the relief we chose as a society.”
Kelley replied that Secretary Mnuchin had excellent questions to answer when Kelley asked why the government was not more strict in approving loans or forgiving them.
“My personal opinion?” “My personal opinion?
NPR’s request to Mnuchin for comment — who set up a private equity fund following Trump’s departure — was answered by Michael Faulkender. Faulkender served as assistant Treasury secretary under Mnuchin, and is now a finance professor at University of Maryland.
Faulkender stated that the government had always intended for the vast majority PPP loans to be forgiven. The priority was given to speed when the program was launched, even though it could lead fraud. According to the inspector general of the SBA, $3.6 billion worth of loans were mistakenly given to people on the Treasury’s list of “Do Not Pay”.
Faulkender stated that PPP was still in operation, and because small businesses could afford to keep people on their payrolls, they didn’t realize the potential catastrophe. What would the bread line look like during a pandemic? We want to find out. I didn’t. So we set out to get the program running.
Faulkender, echoing Kelley, said that the SBA was responsible for implementing the PPP legislation passed by Congress and not questioning congressional decision-making. He also stated that he believes that the program has saved many people from unemployment.
He said, “So from this perspective, I’m very proud about the work that was done at Treasury.” “My personal opinion as an academic economic economist who evaluated the program?” This is a completely different interview.
Faulkender elaborated that Congress had changed the purpose and goals of PPP over time.
“At its core, the program was let’s save jobs. He said that the program evolved into “let’s help small businesses.” “Whether we should morph it into many small business grants is a matter of debate.
“You just want these people to do your job!” ‘”
Who are those borrowers who have not paid off their PPP loans?
NPR’s analysis shows that the majority of SBA data is owned by one-person companies — the Paycheck Protection Program’s most targeted beneficiaries — and individuals whose loans were processed or arranged by financial technology companies (or fintechs), a vague term that refers to businesses that use technology for automating financial services.
These two types of borrowers are interrelated because one-person businesses were more likely than traditional banks to obtain loans through fintechs. Traditional banks were criticised for ignoring smaller PPP applicants in favour of larger clients.
NPR discovered that 13% of the unforgiven loans are held by the smallest businesses, such as barbers, janitors, and hairdressers. Only 3% of businesses with more than 10 employees have unforgiven debts.
In December, a long congressional report charged several fintechs with hastily appraising PPP loans in order to collect high-interest loan-processing fees and ignoring signs of borrower fraud. A class-action lawsuit was filed against Kabbage, a fintech that recently declared bankruptcy. It claims it was too quick to approve PPP loans, but it failed to forgive them. Others fintechs also appear to have a backlog for forgiveness requests.
According to NPR analysis, nearly three quarters of all unforgiven loans for PPP are made by fintechs.
Candy Crawford, a Cape Cod landscaper and sole proprietor, was entangled in the fintech mess.
Handy Candy, a small landscaping business, received a $1,022 PPP loan through PayPal in spring 2020. Later, she learned that her loan was sold to another company and it took her over two years to get it forgiven.
“The time and energy I expended!” It’s easy to just tell them, “Do your job!” Crawford agreed. “But you have be nice, because they’re at your mercy.”
NPR interviewed other small-business owners about their reasons for not forgiven PPP loans. These included bad advice from accountants and misunderstanding the rules of the program.
Some borrowers pointed out that if you are a small business with limited staff and are busy, it is difficult to delegate work. Katy Escher, co-owner of ARTichoke in Eastham, Mass., received an $8,275 PPP Loan through Square. She has struggled to find answers since she ran into problems with her forgiveness application.
Escher stated that “I cannot get ahold the SBA and then when I speak to a human being in Square, they tell me to contact the SBA.”
ARTichoke’s request for forgiveness is still in limbo.
She said, “We wear many different hats and sometimes you have the option of choosing which hat to wear depending on the season or time.” I wish we could have someone to tell us, “Hey, we need this to work out,” but we don’t.
In the meantime, the SBA has announced that Blueacorn’s and Womply’s fintech partnerships with the agency have been suspended. The SBA also stated that it has launched a “full investigation” into several other fintechs.
Nancy Kelly, the owner of a small Boston accounting company that received a $60,000 PPP loan through Kabbage said, “All these small businesses…they were just torturing them.” Kelly also described the forgiveness process to be a long ordeal. “If I knew the difficulty, I would not have taken out the loan.”
“A very expensive thing to do”
Will the government be financially better prepared in case of another financial crisis?
David Autor, an economist at MIT, is skeptical. He claims that Congress and the SBA could not have administered the Paycheck Protection Program in a more efficient manner due to the outdated state of many U.S government technological systems.
PPP meant that the Treasury and SBA could not pinpoint companies that needed pandemic-related financial aid. This was something that many European countries were able do through “short time work” programs. These programs were made possible by government access to payroll data which allowed companies to reduce their hours, rather than resorting to layoffs.
Autor stated that instead, the U.S. government foolishly gushed large amounts of money into its economy, hoping for the best.
He said, “It’s almost as if you just came home from work and found that there was a small fire in your kitchen — you need to put it out.” You go outside and connect a large hose to a fire-hydrant. Then you come inside and water your entire house. Although it would put out the fire, it would be very expensive.
He said that the Paycheck Protection Program valued speed more than accuracy at a high price. It continues to do this by forgiving most loans, even those flagged as suspicious.
Beba Touloupis, her husband and co-owner of Ted’s Restaurant in Birmingham (Ala.), is furious about this. They serve Southern cuisine in a cafeteria style. They were unable to sell takeout orders due to COVID shutdowns, and their business saw a drop from 200 employees per day to just 10. Some of their employees were kept on the payroll by a $45,000 PPP loan. However, the loan is still unforgiven.
So Touloupis was stunned when a customer, a long-time client, told her that he had received a PPP loan. He claimed it wasn’t necessary for the survival of his company but was still forgiven.
Touloupis stated that Touloupis had the gut to tell him that he had money but didn’t really need it. “And that was like, three times what I got — maybe four. I stared at him and thought, “I don’t want to ever see you again in my restaurant.” ‘”
She expressed disgust at the fact that, while many restaurants, hotels, and other hospitality businesses were devastated by the pandemic, others thrived during COVID, even though they received their PPP loans forgiven.
She added, “While I’m there, trying to keep these doorways open and keep my employees busy,” “It’s wrong. It’s so wrong.
Roy Thurston, the owner of Blue Heron Gallery in Wellfleet (Mass.), a seasonal Cape Cod business, shares Touloupis’ frustration.
Thurston was granted $14,000 in PPP loans. All of the loans were forgiven. This raises questions about why businesses such as TB12, a sports nutrition business founded by Tom Brady, are also eligible. TB12 was also granted a PPP loan of $960,000. Thurston points out that Brady purchased a yacht in 2021 at an estimated cost of $6 million.
Thurston stated, “What bothers is the people who took money that should not have been taken.” It should have been available to people who truly needed it.
The Paycheck Protection Program contributed to the nation’s $31 trillion federal deficit. This could eventually lead to higher taxes or fewer government services.
“Basically,” stated MIT’s Autor “we’ve just piled a huge debt upon our children to pay people for the present.”
Meg Anderson and Barrie Hartymon edited this story. Sierra Lyons was a contributor to the reporting. Emily Bogle did the art direction and photo editing.
Copyright 2023 NPR. Copyright 2023 NPR.
