How to Refinance an SBA Loan Successfully
If your SBA loan is now making it hard to operate your business, you may want to consider refinancing. Learn more about how to refinance an SBA loan.
Discover actionable tips for small businesses facing SBA audits, including compliance and legal strategies for COVID PPP and EIDL loans. Contact us today.
Book a Consultation CallThe U.S. government has recently escalated its efforts to investigate improper use of COVID-19 relief funds, with a particular focus on Paycheck Protection Program (PPP) loans, but also Economic Injury Disaster Loans (EIDL). Both the Small Business Administration (SBA) and the Treasury Office of Inspector General (OIG) are quietly investigating claims of fraud, misrepresentation, and technical noncompliance regarding these loans. Click: CARES Act Fraud Tracker for detailed information.
For small businesses that find themselves in the government's sights, it’s crucial to act quickly to understand and mitigate potential legal risks, which could include civil penalties under the False Claims Act or worse criminal prosecution.
PPP Loans: A Lifeline with Legal Risks
During the COVID-19 pandemic, the PPP offered vital financial relief to small businesses, enabling them to pay employees and cover essential expenses. However, the rush to secure funds, coupled with sometimes conflicting guidance, led many small businesses to adopt an “apply now, verify later” approach.
To recap, the core eligibility requirements for PPP loans included:
- Qualifying Entities: Eligible applicants included small businesses, nonprofits, tribal businesses, and self-employed individuals.
- Operating Date: Businesses had to be in operation as of February 15, 2020.
- Employee Count: Generally, businesses with 500 or fewer employees could apply, factoring in employees across any affiliated entities.
- Certifying Necessity: Applicants had to certify that economic uncertainty made the loan necessary to sustain operations.
- Use of Funds: Loans could be used for payroll, mortgage interest, rent, and utilities, with payroll costs capped for higher-earning employees.
Government Scrutiny Growing
Between April 2020 and May 2021, the government approved over 11.5 million PPP loans, totaling nearly $793 billion. Of this, more than 95% of the loans were forgiven, transforming them into essentially free money. However, the scale of the program has prompted concerns over fraudulent claims and misuse of funds.
In response, the Department of Justice (DoJ) has begun investigating instances where it suspects fraud or noncompliance. Many companies have already received notices or target letters under the False Claims Act, asking them to preserve extensive records related to their loan applications and financial status.
COVID-EIDL Also Under Scrutiny
COVID-EIDL loans, which provided relief directly to small businesses impacted by the pandemic by the SBA, are subject to the same level of scrutiny as PPP loans. The SBA OIG and Treasury OIG have clear authority to audit and investigate the potential misuse of COVID-EIDL funds. This expanded focus is consistent with the U.S. government’s broader efforts to root out fraud and abuse across all pandemic-related financial relief programs. Both agencies were granted oversight powers under the Inspector General Act of 1978 and the Coronavirus Aid, Relief, and Economic Security(CARES) Act, giving them the jurisdiction to investigate fraud, waste, and abuse in federal programs like EIDL.
For example, the SBA OIG's 2022 Semiannual Report to Congress revealed billions of dollars in potential fraud across PPP and EIDL programs. Misuse of funds in these programs can trigger significant legal consequences, ranging from fines and repayment demands to criminal charges.
Authority and Sources
1. SBA Inspector General Authority: The SBA OIG operates under the Inspector General Act to conduct audits and investigations. The office has actively pursued fraud in COVID relief programs. Misuse or misrepresentation related to economic necessity, fund allocation, or eligibility could result in penalties.
2. Treasury Inspector General Oversight: Similarly, the Treasury OIG oversees COVID-related financial programs under the CARES Act. The OIG works to ensure that federal funds, including those distributed through EIDL, were obtained legitimately and used appropriately.
3. False Claims Act (FCA): The False Claims Act holds borrowers accountable if they provided false information in their EIDL loan applications. The act empowers both the SBA and Treasury to refer cases to the Department of Justice (DOJ) for enforcement, which can lead to hefty fines, treble damages, and even imprisonment in severe cases of fraud.
Risk of Investigation and Compliance Steps
Just as with the PPP loan fraud investigations, businesses that misrepresented their eligibility or misused EIDL funds are also at risk of government action. This includes borrowers who inflated their financial hardship or diverted EIDL funds for impermissible uses.
Borrowers who received EIDL loans should take these steps to prepare for potential investigations:
- Consult Legal Counsel: Businesses should engage legal counsel experienced in SBA investigations to help navigate potential issues and protect their rights.
- Document Compliance: Companies should gather all relevant documentation - loan applications, financial statements, and communications with the SBA - to demonstrate their compliance with program requirements.
- Self-Review: Conduct an internal audit to ensure that EIDL funds were used in accordance with the guidelines, identifying any discrepancies that might raise red flags in a government audit.
- Be Prepared for Audits: The SBA and Treasury OIG have increased their audits of COVID-related loans. Businesses must be prepared to show how they used the loan funds and provide the necessary documentation.
- Transparency: Clear communication within the company about the potential audit is crucial to maintaining trust and morale.
Conclusion
Both the SBA and Treasury Inspector Generals are empowered to investigate the misuse of COVID-EIDL loans, following similar trends already seen with PPP loan fraud investigations. Given the broad oversight powers granted under the CARES Act and the False Claims Act, small businesses must be prepared to defend their loan applications and fund usage if questioned by federal authorities.
By proactively gathering documentation, conducting internal reviews, and working with legal counsel, businesses can reduce their exposure to civil and criminal liability under the law.
This blog post is intended to provide general guidance and is not a substitute for professional legal advice.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Client personally guaranteed an SBA 7(a) loan to help with a relative’s new business venture. After the business failed, Treasury was able to secure a recurring Treasury Offset Program (TOP) levy against his monthly Social Security Benefits based on the claim that he owed over $1.2 million dollars. We initially submitted a Cross-Servicing Dispute, but then, prepared and filed an Appeals Petition with the SBA Office of Hearings and Appeals (SBA OHA). As a result of our efforts, we were able to convince the SBA to not only terminate the claimed debt of $1.2 million dollars against our client (without him having to file bankruptcy) but also refund the past recurring amounts that were offset from his Social Security Benefits in connection with the TOP levy.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
Client received the SBA's Official 60-Day Notice for a loan that was obtained by her small business in 2001. The SBA loan went into default in 2004 but after hearing nothing from the SBA lender or the SBA for 20 years, out of the blue, she received the SBA's collection due process notice which provided her with only one of four options: (1) repay the entire accelerated balance immediately; (2) negotiate a repayment arrangement; (3) challenge the legal enforceability of the debt with evidence; or (4) request an OHA hearing before a U.S. Administrative Law Judge.
Client hired the Firm to represent her with only 13 days left before the expiration deadline to respond to the SBA's Official 60-Day Notice. The Firm attorneys immediately researched the SBA's Official loan database to obtain information regarding the 7(a) loan. Thereafter, the Firm attorneys conducted legal research and asserted certain affirmative defenses challenging the legal enforceability of the debt. A written response was timely filed to the 60-Day Notice with the SBA subsequently agreeing with the client's affirmative defenses and legal arguments. As a result, the SBA rendered a decision immediately terminating collection of the debt against the client's alleged personal guarantee liability saving her $50,000.
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