On December 8, the U.S. Small Business Administration (SBA) issued a statement regarding its intent to investigate certain participants in the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This announcement, just a few months after the U.S. Department of Justice (DOJ) announced its first-ever False Claims Act (FCA) settlement with a PPP lender, raises concerning questions about how far the SBA will go in investigating and enforcing potential fraud in the pandemic relief program and whether it will abide by its own guidance issued at the inception of the PPP in April 2020.
SBA Guidance Under the Interim Final Rule
As explained in our article here, the CARES Act created the PPP under which the SBA guaranteed 100% of the amounts loaned by participating lenders to certain U.S. small businesses, nonprofit organizations, veterans organizations, and tribal businesses. An application for such loan required borrowers to make specific good faith certifications, including, for example, that the uncertainty of the current economic conditions made the loan request necessary to support the applicant’s ongoing operations and that the funds would be used to retain workers and maintain payroll to make mortgage payments, lease payments, and utility payments.
In response to this legislation, the SBA issued what it called an “interim final rule,” guidance issued under emergency procedures related to the PPP. Section III.3.c of the interim final rule addressed the question of whether lenders could “rely on borrower documentation for loan forgiveness.” The SBA’s answer was:
Yes. The lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that is has accurately verified the payments for eligible costs. The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower.
As the PPP went through modification under the Paycheck Protection Program Flexibility Act of 2020 (PPPFA) and the SBA continued to update and revise its interim final rule, this guidance was constant. In a further “streamlined” version of the interim final rule issued on July 30, 2021, the SBA provided that “[a]s the First Interim Final Rule” indicated, “lenders may rely on borrower representations.” Lenders read this to suggest that they could rely on borrower certifications made in the application process.
DOJ Announces Settlement With Prosperity Bank
While the PPP provided essential relief for many small businesses, certain individuals and businesses took advantage of the program by submitting false information to procure PPP loan approval. The DOJ and other regulators have been persistent in combatting this fraud, primarily focusing on the conduct of borrowers throughout the PPP loan application process. However, on September 13, the DOJ announced the first-ever FCA settlement received from a PPP lender.
According to the DOJ, Prosperity Bank approved and processed a $231,400 PPP loan for Woodlands Pain Institute PLLC in May 2020. The application specifically asked whether the applicant, or any individual owning more than 20% equity, was the subject of an indictment, criminal information, arraignment, or other means by which formal criminal charges were brought in any jurisdiction. The sole owner of Woodland Pain Institute PLLC, Dr. Emad Bishai, asserted that the answer to the application question was “No.” Yet, at that time, he was facing criminal charges in Montgomery County, arising from his practice of prescribing opioid medicines. The DOJ alleged that Prosperity Bank employees knew Dr. Bishai was facing these charges and that because of such knowledge, Prosperity Bank was liable for the misrepresentations made to the U.S. government under the FCA. Prosperity Bank agreed to pay $18,673.60 to resolve the allegations that it improperly processed the PPP loan on behalf of Dr. Bishai’s business.
SBA Issues Statement on PPP Investigations
Less than four months after the DOJ announced this ground-breaking settlement, the SBA issued a statement regarding the findings of the House Select Subcommittee on the Coronavirus Crisis Report on PPP fraud, suggesting that it too would be shifting its enforcement focus to lenders. According to the SBA, the House Select Subcommittee found “serious problems of fraud and self-dealing by lenders and by companies who were paid fees by lenders to help PPP funds reach small business owners.” Specifically, the subcommittee suggested that certain fintechs “failed to implement systems capable of consistently detecting and preventing fraudulent and otherwise ineligible PPP applications,” criticized a lack of training for employees reviewing applications, and found that “[t]heir lending partners, who were tasked with supervising the activities of these fintechs, often did little to oversee the activities of the companies to which they delegated their responsibilities.” In response to the subcommittee report, the SBA immediately suspended two fintech companies, Blueacorn and Womply, from working with the SBA “in any capacity” and also announced that it was launching “full investigation” of several PPP lenders.
The SBA guidance was consistent: it would “hold harmless” lenders who relied on borrower attestations. But now, not only has the DOJ proven it is willing to pursue lenders who relied on the interim rule, but SBA also is suggesting it may fault lenders for very similar conduct. The investigation may focus on outlier participants with particularly egregious facts. However, if the SBA seeks to hold a large number of lenders responsible for their or their vendors’ failures to investigate borrowers’ representations and otherwise implement adequate fraud prevention procedures, is that materially different from holding such lenders responsible for borrower misrepresentations? It will be important for lenders to keep a close eye on the SBA’s enforcement activities to determine whether they may become the subject of an SBA investigation or other enforcement action.
 Press Release, Small Business Administration, “U.S. Small Business Administration Statement on the House Select Subcommittee on the Coronavirus Crisis Report Concerning Fraud in the Paycheck Protection Program.” (Dec. 8, 2022), https://www.sba.gov/article/2022/dec/08/us-small-business-administration-statement-house-select-subcommittee-coronavirus-crisis-report.
 Small Business Administration, Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811, 20815–20816 (April 15, 2020), https://www.govinfo.gov/content/pkg/FR-2020-04-15/pdf/2020-07672.pdf.
 Id. (emphasis added).
 Small Business Administration, Business Loan Program Temporary Changes; Paycheck Protection Program—COVID Revenue Reduction Score, Direct Borrower Forgiveness Process, and Appeals Deferment, 86 Fed. Reg. 40921, 40926 (July 30, 2021), https://www.govinfo.gov/content/pkg/FR-2021-07-30/pdf/2021-16358.pdf.
 Press Release, DOJ, “First-ever False Claims Act settlement received from Paycheck Protection Program lender” (Sept. 13, 2022), https://www.govinfo.gov/content/pkg/FR-2021-07-30/pdf/2021-16358.pdf.
 Press Release, SBA, supra n.1.
 Select Subcommittee on the Coronavirus Crisis, “We Are Not The Fraud Police”: How Fintechs Facilitated Fraud in the Paycheck Protection Program (Dec. 1, 2022), https://www.regulatoryoversight.com/wp-content/uploads/sites/835/2023/03/2022.12.01-How-Fintechs-Facilitated-Fraud-in-the-Paycheck-Protection-Program.pdf.
 Press Release, SBA, supra n.1.