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Financial institutions across the country are beginning to experience an inundation of Paycheck Protection Program (PPP) loan forgiveness applications, calling for staff to stand ready to help borrowers navigate the complicated process. It is each institution’s responsibility to assist borrowers in completing the detailed forgiveness application document, finalizing the required paperwork and sending it to the Small Business Administration (SBA) for approval. With over 4.3 million PPP loans granted to borrowers (amounting to over $500 billion) and the fact the program allows each borrower to request forgiveness, institutions should expect to be extremely busy.
Given the specific SBA terms for loan forgiveness, many businesses will find they do not meet the requirements, leaving lenders as their lifeline for questions and concerns. Customer relations issues are expected to escalate drastically and more time will be spent on the phone, digging through line items of business expenses and conducting audits. Moreover, loan forgiveness requirements are everchanging, making it difficult for lenders to keep up and provide their customers/members with the most up-to-date information.
Initially, PPP borrowers could qualify for loan forgiveness if 75% of the funds were spent on payroll, but on June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into effect reducing the amount to 60% for partial forgiveness. However, the new bill passed by Congress contained language which could be interpreted as saying if the borrower did not spend a minimum of 60% of their PPP funding on payroll, none of the loan could be forgiven. SBA Administrator, Jovita Carranza, and Treasury Secretary, Steven Mnuchin, provided clarity in a joint statement, confirming partial loan forgiveness will be available under the 60% threshold for payroll costs during the forgiveness covered period.
More changes to the loan forgiveness requirements include:
The U.S. Department of Justice (DOJ) has reported an increase in criminal charges against borrowers for alleged PPP loan fraud and the number continues to increase as loans are examined for forgiveness. Given the speed in which the SBA and the Treasury Department implemented this program, combined with the immense volume of loans currently being moved into the loan forgiveness application phase, more cases emerge by the day.
There are many ways in which an individual could have committed fraud when they applied for a PPP loan, and criminals used the urgency of the COVID-19 pandemic to their advantage to secure thousands, even millions of dollars. Below are some “low-hanging fruit” examples of misusing PPP funds, and should be considered during the loan forgiveness application phase.
Failed Businesses Applying for a Loan
“Business owners” applied for loans for businesses that haven’t operated in over a decade. Picture driving past a shop and it is boarded up – it’s been closed for all this time and yet the previous owner still used its name, past payroll information, TIN and more to apply for a loan.
Creating a Fake Business
Given the PPP loan’s favorable terms and fewer restrictions, many people lined up across the country to create a business and get their piece of the pie. However, if their business (if they have one at all) was not functioning before the COVID-19 crisis and didn’t have a staff to pay, they didn’t qualify for the loan program. Criminals were way ahead of this and know their way around fudging numbers, using name generators to create fake staff members and otherwise tricking their way into an eligible loan application. Fraudulent business owners went on to use these loans for material goods, sometimes writing them off as business expenses.
Sending PPP Money Abroad
Once loan money was secured (whether legally or via fraud), there have been cases where individuals sent their money abroad to be invested elsewhere or sent to family members. With the money not being used for its intended purpose (payroll, rent, business expenses, etc.), this is considered fraudulent and able to be prosecuted.
As more and more fraudulent cases are being investigated, credit unions and banks should be wary of the warning signs of PPP loan fraud when assisting customers in their loan forgiveness applications. Some of the most telltale signs include:
The large question that is slowly being brought to the surface is whether or not banks and credit unions hold liability when unknowingly providing PPP loans to scammers. Since the CARES Act lifted many traditional SBA loan restrictions to allow financial institutions to disburse funds to borrowers as fast as possible, banks and credit unions who were duped by criminals would be held harmless if they followed all aspects of the act’s requirements. Despite the fact institutions would be off the hook from prosecution, this doesn’t mean they wouldn’t suffer in the event one of their loans went to a criminal. The collateral damage of a federal investigation can cost institutions a lot of money and time when it comes to producing documents, gathering witnesses and examining what exactly happened.
In order to keep your financial institution safe and free from a fraudulent loan investigation, be aware of the red flags of PPP loan fraud during this loan forgiveness period. If you’re reviewing an application and feel as if it is suspicious, take the extra time to investigate and verify information. We will continue to keep you updated with the latest in loan forgiveness updates and loan fraud trends. In the meantime, if you have any concerns about PPP loan forgiveness at your financial institution, contact Doeren Mayhew’s Financial Institutions Group today.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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