Government Spending

Government Pandemic Loans Plagued by Potential $260 Billion in Fraud

The hasty work behind the PPP and other relief loans shows the limits of big government.


All told, Congress has authorized about $5.9 trillion in spending to address the social and economic fallout from the pandemic, of which $4.32 trillion has been disbursed or committed already. By now, more than a year into this unprecedented burst of spending, there's sufficient hindsight to assess the federal pandemic response, and the early results bode poorly for proponents of "big government."

In a new Cato Institute Legal Policy Bulletin, I describe the Small Business Administration's (SBA) shambolic implementation of two marquee pandemic policies. The first is the $813 billion Paycheck Protection Program (PPP), involving federal loan guarantees, set at a low interest rate (1 percent), which could be forgiven if the borrower spent a certain percentage (about two-​thirds) on payroll. The second is the $367 billion Economic Injury Disaster Loan (EIDL) program, which entails loans on favorable terms that are disbursed directly by the government. 

Both of those pandemic programs reflect gross expansions of troubled frameworks. The PPP is an extension of the SBA's "section 7(a)" loan guarantee program, which, in the years prior to the pandemic, was an annual presence on the Office of Management and Budget's list of "high priority" programs that warrant greater scrutiny due to their poor stewardship of taxpayer dollars. 

Similarly, watchdogs had sounded alarms about core aspects of the EIDL program (including the SBA's assessment of creditworthiness and applicant eligibility) long before COVID-19 plagued us. Despite these repeated warnings, the EIDL program reported its highest-ever improper payment rate of 11.98 percent in the fiscal year before the pandemic, among the worst rates in government.

From this suboptimal baseline, both programs were further stressed by a vastly increased workload. For example, in a "normal" year, the SBA makes about 62,000 loan guarantees, totaling $16.7 billion, under the section 7(a) program; over the first year of the PPP, in comparison, the agency made more than 9 million loan guarantees worth $746 billion. The EIDL program, too, exploded: In the first year of the pandemic, the SBA disbursed about twice as many direct loans as the agency had made over its entire 67-year history before COVID-19.

Overwhelmed, the SBA cut corners to facilitate the flow of public funds out the door. For the PPP, the agency relaxed underwriting controls for lenders, waiving basic documentation requirements like financial statements and income tax returns. The Government Accountability Office faulted this decision, among others, in a report whose blunt title speaks volumes: "COVID-19 Loans Lack Controls and Are Susceptible to Fraud."

Regarding the pandemic EIDL program, the inspector general determined that the SBA "lowered the guardrails," which "significantly increase[ed] the risk of fraud." His office also reported that the SBA for months "ignored" a subcontractor's system for flagging suspicious loans.

To recap, these already troubled programs loosened their existing safeguards to process their unprecedented workload. This is a recipe for disaster and, predictably, the results have been dire.

About halfway through the PPP program, the inspector general warned of "widespread fraudulent activity." By the end of September 2020, his office had received more than 77,000 hotline complaints of potential fraud, and since then, "the numbers continue to rise." In addition to the risks posed by scammers, there is the related risk posed by administrative inefficiency at the SBA. In December 2020, an independent financial statement auditor flagged as potentially improper payments more than 2 million approved PPP loan guarantees, with an approximate value of $189 billion.

Turning to the EIDL, the inspector general has warned of "rampant fraud," and a preliminary assessment conducted by his office flagged more than $77 billion in approved loans that evinced "strong fraud indicators"—or almost 46 percent of the EIDL applications that had been approved up through last October ($169 billion). Of course, the SBA has continued to make loans since then, and accordingly, the inspector general cautioned that "the potential fraud in the COVID-19 EIDL Program has continued to grow."

For both programs (EIDL and PPP), the SBA's response to criticism has been illustrative. Over the past year, various public and private watchdogs have issued a raft of reports that are all in agreement that the SBA's management failures have placed huge sums of taxpayer money at risk. In response, the agency effectively buried its head in the sand. Last October, for example, the inspector general observed that "SBA's management continues to insist that its controls are robust despite overwhelming evidence to the contrary."

In sum, more than $260 billion (and counting) in taxpayer money has been placed at undue risk by administrative bungling at the SBA. To be sure, the federal government faced an extraordinary challenge. Due to the very nature of Congress's intention to quickly aid those affected by the pandemic and its economic effects, federal relief programs were at an increased risk of improper payments. Still, while it may be that some level of waste is acceptable in an emergency, the SBA's miserable performance is beyond the pale, and serves as a stark reminder of the limitations of "big government."

NEXT: The Budget Reconciliation Battle Is a Procedural Power Grab

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  1. Feature, not a bug.

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  2. The PPP program was “free” money, if enough of the loan (as the article points out) was spent on payroll and office rent. There’s no doubt that many businesses didn’t need the loan – but applied for and received the loans, which were forgiven – no fraud required.

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  3. I only feel bad for not participating.

    1. I feel bad that so many progs still draw breath.

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  4. Fraud begets fraud.

  5. Government Loans.

    Gov-Gun enforced ‘other peoples money’ investments into growing the SLAVE State.

    Slave-out those who originally labored/earned by forcing them to ‘lend’ it to others with a ‘slave’ ledger x 3 + tax.

    Remember when the people gave the feds the authority to —
    Congress shall have the authority to be a Gov-Gun totting BANK.

    Ya; me either.
    Crony Socialism strikes AGAIN!

  6. As the rioting slowed down, folks still needed their free shoes.

  7. Make people go back to into workforce offices and apply in person with ID. Same for voting. End the leftie shit fraud racket.

    1. Don’t you know that the poor, stupid, benighted niggers can’t get ID or prove their residency or birth place, you racist!?!?!

      1. “Who you are” is not a reasinable standard with Biden in the Oval Orifice.

        He doesnt know who he is

  8. Shocking! Well, it’s a good thing we have responsible adult leadership in the white house now to guide us through the post-apocalyptic hellscape of cold viruses.

  9. Government Pandemic Loans Plagued by Potential $260 Billion in Fraud

    Wait ’til you see our elections.

  10. how is it a limit on big government when the fraud worked out just fine?

  11. No way. We were assured that Top Men were in charge.

    1. Top Men! (use your best family guy voice)

      1. I blame Meg.

        1. I think I flagged your comment for review. Didn’t mean to. Fat fingers on my phone. Sorry.

          1. this site sucks on mobile

            1. Indeed.

  12. You can’t spell fraud without politicians and bureaucrats.

  13. I’m sure once the right people look into it they will find
    “not a smidgen of scandal”

  14. Potential 260 billion in fraud? Government doesn’t care. If they need more money they will get it through taxes and/or print it. Besides government determines success by how much was spent not on how much was ripped off.

  15. I’m shocked, shocked to find that fraud and inefficiency is going on in here!

  16. let’s all agree that not a single person who is reading this is the tiniest bit surprised.

    this is a trump shit-pie…biden is just making the pie bigger. we’re still balls deep in turds

    1. no Troll. Biden owns this shit pie. Its just that youre eating it and enjoying it

        1. Why? He’s right.

    2. “…this is a trump shit-pie…”

      This ^ is a TDS-addled piece of shit.

  17. All government spending is wasteful. Even if 100% of recipients were eligible it would still be a waste of resources from an ethical and economic point of view. The government should not be bailing out businesses for any reason. Either the loans were needed because the government had forced the business to close their doors, in which case the remedy is clearly to allow them to re-open; or else the business was suffering due to changing demand, in which case again the remedy is to allow the business to fail so its assets and labor can be reallocated to more successful businesses. Would people have suffered more if they were locked down and denied relief at the same time? Perhaps, but then perhaps they would have revolted sooner against the lockdowns and forced the tyrants to back down.

    1. A forced government shutdown is a poor way to filter poor from successful business. Especially a lockdown that was applied unevenly between sectors. Many successful business were brought to their knees by the lockdowns whereas other fundamentally less profitable business or even loss-making business were relatively unaffected.

      I agree that lockdowns were a disaster and mostly ineffective. But it was what it was. The public demanded a shutdown and politicians went along with the demand. The PPP at least help many business keep going.

      1. Right but the solution was to lift the lockdown, or better not impose it in the first place.

        1. Which is what I’ve implied – the lockdowns should never have existed in the first place. But the public – or at least the WFH elites in control of the media and politicians – demanded it and politicians caved to their demands.

          The PPP at least prevented many business from having their property stolen from them by the government violence the lockdowns represented.

    2. One would be hard put to it to find a clearer case of government intervention begetting yet more government intervention, and so on, and so on, and so on….

  18. I’m not sure the point this superficial article is trying to make.

    First what specific mistakes did the SBA make? I am not asking about loans to specific companies that willfully engaged in fraud. I am asking, given the drastically reduced timelines the SBA was force to operate, what process mistakes were made that a reasonable person could level?

    Second, the a major point of the PPP was to get the money out FAST. They did not want a repeat of 2008 where the Obama administration dawdled during the financial crises and aid did not reach people and businesses quickly enough to make a difference. The point of the PPP was to get money into business’s hands fast to keep them afloat in the face of an utterly unprecedented forced government shutdown.

    Third, this article gives a little thought to the good the PPP did in keeping thousands of business afloat. History will likely show that the current economic resurgence we are experiencing in summer 2021 is due to the financial policies of 2020 and early 2021.

    Finally, this article highlights fraud as it should. It should also focus on the thousands of honest, small business who through no fault of their own would have been driven out of business and all the ensuing economic carnage that would follow. By focusing only the fraud that will inevitably happen as part of such a massive, quickly deployed program, it distorts the overall impact of the program.

    1. Im sure youre a Troll attacking the Messenger. Youre not sure? So you admit being an ignor-anus but Reason are wrong

      1. Skimming thru your comments, the reason you get so upset is that you seem incapable of constructing a cogent counterargument.

      2. “daveca”, people like you that failed basic English class and cannot construct properly formatted and grammatically correct sentences are neither entitled to nor capable of criticizing your betters like BenF.

    2. To your first question: I am going with and I quote from the article “ Overwhelmed, the SBA cut corners to facilitate the flow of public funds out the door. ” you can also find government agencies raising doubts throughout the article.

      To the second question: we could have tried not shutting everything down! Or we could come to the conclusion, from a vast amount of evidence that the federal government is horrible at getting money where it is needed.

      To your third point: the will be no honest way to make that judgment. All parties have a reason to, let’s say, fudge the truth.
      After the government forces a shutdown for over a year, destroying people’s lives and livelihoods, people will find a way to recover. They don’t have a choice. This will be done without government “help” because again they rarely help and people will have to no choices.

  19. And the libertarian smoothbrains on here howling about businesses taking advantage of a lax system through fraud are the same ones who see no potential downsides to letting business do whatever it wants as a general rule. SMDH…

    1. Had the watchdog been a private firm (like Underwriters Laboratories for example) they would have had an incentive to actually fo something. Had the loaners had to accept risk, they would have behaved differently. The issue is not that businesses are corrupt or not… all people are tempted by easy money. The issue is moral hazard and is the appropriate risk in place to force people into better behavior. With all things government, risk is always mitigated through dispersed and diluted blame so the average joe never sees that just how the problem manifests itself.

    2. “And the libertarian smoothbrains on here howling about businesses taking advantage of a lax system through fraud are the same ones who see no potential downsides to letting business do whatever it wants as a general rule. SMDH…”

      Did you drag that strawman all the way from home, you idiotic piece of shit, or find it on the way?

    3. Honestly I don’t think defrauding the government is a very serious crime. The government itself is basically a criminal enterprise and it isn’t a crime to relieve a thief of his loot.

    4. And you cannot see the difference between private/voluntary and government/forced.

  20. 6 Trillion debt. Obama = 24 trillion. 8+ on Obozo care.

    This is Depression bailout.

  21. Anyone sufficienty naif to hold that the fraud is a problem wit h this admnistration is sorely mistaken. That fraud and waste is a feature of this admnistration, not a bug.

    COunt on uch more of the same to be exposed.

  22. Regarding the fraudsters, male and or female, mentioned, how about the following. First, claw back as much of the stolen funds as can be clawed back. Secondly, permanently seal the waste disposal openings of offending parties, and let them blow up.

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