SBA suspends nearly 7,000 Minnesota borrowers over suspected COVID relief loan fraud
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The Small Business Administration Thursday suspended 6,900 Minnesota borrowers over suspected fraud tied to two COVID-era small business lending programs, according to Administrator Kelly Loeffler. The move comes as Minnesota faces financial and political fallout from several multiyear social services fraud cases and heightened scrutiny from the Trump administration.
“In total, these borrowers were approved for 7,900 PPP (Paycheck Protection Program) and EIDL loans (Economic Injury Disaster Loan) worth approximately $400M,” wrote Loeffler in post to X. “These individuals will be banned from all SBA loan programs, including disaster loans, going forward. We will also refer every case, where appropriate, to federal law enforcement for prosecution and repayment.”
When the programs were launched during the pandemic, stay-at-home orders and social distancing measures meant many small businesses faltered and failed with few customers and little revenue. Robert Fairlie, professor of public policy and economics at UCLA has found that the number of active business owners plummeted from 15 million in February 2020 to 11.7 million in April 2020. Estimates on losses to small business revenues and sales range from 30 percent to percent. The national unemployment rate hit a peak of 14.8 percent in April 2020, up from 3.5 percent in February. The pandemic recession hit minority and immigrant business owners especially hard.
Washington responded to the growing economic emergency with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. Among it hastily constructed provisions was PPP, soon to become the largest small business aid program in U.S. history. PPP was designed to provide a financial lifeline to small business and small nonprofit organizations reeling from the pandemic's onslaught.
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PPP made nearly $800 billion available through more than 11 million loans before the program ended in 2021. In Minnesota more than 98,000 loans were approved and over 84,000 of these loans were at sums of less than $150,000. Small business and nonprofit borrowers were to use the loan money to support payroll, rent, utilities, and other operating costs. If borrowers used the loan to pay for necessities to stay in business, the loan could be forgiven (and most have been). The EIDL modified an existing SBA program. It too provided funds for small businesses reeling from the pandemic, but the monies weren’t eligible for forgiveness.
Considering the economic crisis, the demand for speed was understandable at the time and with the benefit of hindsight. The program helped many companies stay in business. Take research by economists Aaron Staples and Thomas Krumel Jr. into the craft brewing industry. In “The Paycheck Protection Program and small business performance: Evidence from craft breweries” they tapped into a verified industry dataset of craft beer producers around the country that used PPP loans. Since the businesses were verified, fraud wasn’t a concern. Their results? The firms that received PPP funding were more likely to remain in operation and experience a smaller decline in annual production compared to those that didn’t. “When the focus is on real businesses you still see significant benefits from the program,” says Krumel, economist at North Dakota State University.
The fast and messy pace of the rollout also meant confusion (mistakes) and abuse (fraud) occurred among borrowers. The SBA didn’t have the technological or administrative infrastructure to adequately screen the huge number of loan applications.
“Lots of us figured a good chunk of the PPP money wasn’t going where it was supposed to,” says David Schultz, professor in the departments of political science, environmental studies, and legal studies at Hamline University. “We knew we threw out hundreds of billions of dollars rapidly. The catastrophic alternative was so great it was worth the risk.”
A 2022 study by 10 economists reached a similar conclusion. In “The $800 Billion Paycheck Protection Program: Where did the money go and why did it go there,” the scholars estimate that the program cumulatively preserved between 2 and 3 million job-years of employment over 14 months at a cost of $170,000 to $257000 per job-year retained. These estimates suggest that only 23 percent to 34 percent of PPP dollars went directly to workers who would otherwise have lost jobs. The rest went to business owners and shareholders.
The scholars emphasize a big problem with the program was the lack of existing administrative infrastructure for overseeing large-scale federal support aimed at supporting small businesses. That said, the scholars also judge that policymakers made a “defensible trade-off between speed and targeting.”
Unfortunately, the rush to disburse funds opened the door to fraud and, while Minnesota has been targeted by the Trump administration recently, it isn’t an outlier. One study estimates that about 1.4 million representing some $64 billion in capital out of the nearly $800 billion in more than 11 million loans in their PPP database (or 12 percent) showed at least one characteristic suggestive of fraud. Suggestive, but not definitive.
PPP was a crucial lifeline for many small businesses and nonprofits, including in Minnesota. To be sure, not enough attention at the time was spent on creating guardrails that included verification of applicant legitimacy. Nevertheless, on net—and in economics and finance the net result counts—the program in Minnesota and in other states offered beleaguered small businesses wide-reaching and timely financial support during an economic crisis. “Given the unprecedented nature of the pandemic, the benefits outweighed the costs,” reflects Krumel. “The benefits of keeping small businesses open outweighed the current problem we are starting to have now.”
