The Small Business Administration (SBA) has suspended nearly 7,000 borrowers in Minnesota due to suspected fraud related to two COVID-19 relief loan programs. Administrator Kelly Loeffler confirmed that 6,900 individuals were involved in obtaining Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) funds. The total amount approved for these loans reached approximately $400 million. This decision follows a series of fraud cases in the state and increased scrutiny from the federal government.
Loeffler stated in a post on social media platform X that these borrowers would be barred from all SBA loan programs moving forward. Additionally, the SBA plans to refer cases to federal law enforcement for possible prosecution and repayment. The action highlights the ongoing challenges faced by both the SBA and small businesses that were significantly impacted during the pandemic.
The backdrop to this situation involves the economic fallout from the pandemic, which severely affected small businesses across the country. When the COVID-19 crisis struck, many companies faced unprecedented challenges due to stay-at-home orders and social distancing measures. Research by Robert Fairlie, a professor of public policy and economics at UCLA, revealed a dramatic decline in active business owners, dropping from 15 million in February 2020 to 11.7 million by April 2020.
As small business revenues plummeted by estimates ranging from 30 percent to 40 percent, the national unemployment rate soared to 14.8 percent in April 2020, up from 3.5 percent in February. Recognizing the dire situation, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020, which included the establishment of the PPP. This program became the largest small business aid initiative in U.S. history, allocating nearly $800 billion through over 11 million loans before its conclusion in 2021.
In Minnesota alone, the SBA approved over 98,000 loans, with more than 84,000 of those being under $150,000. These loans were intended to assist with payroll, rent, utilities, and other essential operating costs. Borrowers could have their loans forgiven if they utilized the funds appropriately, which many did.
The EIDL program, which provided additional funding for small businesses, did not offer loan forgiveness. Given the urgency of the economic crisis, loan disbursement was prioritized, leading to a mix of successful support and instances of fraud.
Research conducted by economists Aaron Staples and Thomas Krumel Jr. focused on the impact of PPP loans on the craft brewing industry. Their study demonstrated that businesses receiving PPP funding were more likely to survive and experienced a smaller decline in production compared to those that did not secure loans. Krumel noted, “When the focus is on real businesses, you still see significant benefits from the program.”
Despite the positive impact on many businesses, the rapid rollout of these relief programs resulted in confusion and, in some cases, fraudulent applications. The SBA lacked the necessary infrastructure to screen the vast number of loan applications effectively. David Schultz, a professor at Hamline University, remarked that there was an awareness that a significant portion of the PPP funds might not have reached their intended recipients. He acknowledged that the urgency of the situation justified the risk of rapid fund distribution.
A 2022 study by a group of ten economists reinforced these concerns, estimating that approximately 1.4 million loans, or around 12 percent of the total, exhibited signs suggestive of fraud. This included potential misrepresentation of information on applications. While these findings indicated issues within the program, they also highlighted that PPP was vital for keeping many small businesses and nonprofits afloat, particularly in Minnesota.
Despite the challenges, the overall net impact of the PPP has been deemed beneficial. Krumel summarized the consensus by stating, “The benefits of keeping small businesses open outweighed the current problem we are starting to have now.” The SBA’s ongoing efforts to address fraud while ensuring support for legitimate borrowers reflects the complexities faced during this unprecedented economic crisis.
