While the U.S. Small Business Association defended its decision not to collect on small Paycheck Protection Program loans that have defaulted, the agency did agree to assess the costs of its program following criticism of its decision.
The SBA Office of Inspector General in a report issued Friday said the SBA did not take sufficient steps to determine whether the cost of collecting debt on delinquent PPP loans of $100,000 or less would be more than the amount recovered by pursuing the debt. The report followed the OIG’s review this year of the SBA’s process for purchasing delinquent PPP loans from lenders.
PPP loans were guaranteed, and the SBA has been purchasing PPP loans from lenders for more than a year if loan repayments were more than 60 days past due and the lender had complied with the program’s requirements.
The SBA in April 2022 said it would not collect on PPP loans with an outstanding balance of $100,000 or less.
“SBA’s rationale for the decision was to provide equitable treatment between smaller sole proprietor borrowers not protected by an incorporation shield and larger incorporated borrowers,” the OIG’s report said. “In addition, SBA indicated that the cost to collect the purchased PPP loans would likely be more than the recovery amount.”
The OIG, however, said the SBA did not undertake a comprehensive analysis to estimate the expected costs and benefits of collecting the debt.
The report also raised concerns about the message the SBA was sending about future lending programs.
“Although it is difficult to quantify the effect of not promptly initiating collection actions, according to Treasury guidance, the ability of an agency to collect its delinquent debts will generally decrease as debts get older,” the OIG said. “Ending collections could set a precedence for future stimulus programs and incentivize ineligible borrowers to obtain loans valued at $100,000 or less. However, continuing to pursue collections will help ensure accountability from delinquent borrowers and promote program integrity.”
The OIG recommended the SBA pause its decision not to collect balances on PPP loans with outstanding balances of $100,000 of less until a cost benefit analysis is conducted. But the SBA did not agree with this recommendation, citing existing laws and guidance.
“SBA’s decision to end collections on PPP loans with an outstanding balance of $100,000 or less is not a new program or project and is consistent with current law,” the SBA said.
The OIG also suggested the SBA explore alternative means to collect on these loans, but the SBA said alternatives would not be cost effective because of the lack of collateral and personal guaranties.
The SBA did agree with the OIG’s recommendation to conduct an initial and periodic cost benefit analysis to assess whether the cost of collecting on the smaller loans is more than the recovery amount. Depending on the results of the third-party analysis, the SBA could pursue collections in the future.
The SBA in its response also said that 88 percent of the borrowers whose loans were purchased with balances of $100,000 or less, 75,000 loans, had not gone through the forgiveness process.