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SBA COVID PPP & EIDL Business Closure Reviews & Regulatory Compliance Audits

SBA COVID PPP & EIDL Business Closure Reviews & Regulatory Compliance Audits

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SBA COVID PPP & EIDL Business Closure Reviews & Regulatory Compliance Audits

Concept In A Nutshell

An SBA Loan Regulatory Compliance Review — also known as a COVID EIDL Business Closure Review or a Risk-Based PPP Lender Review — is an SBA Office of Credit Risk Management (OCRM) audit that happens after the money has been disbursed and deposited into a small business’ bank account. The review generally tests three things:

  1. Borrower eligibility
  2. Lender’s adherence to SBA rules and regulations
  3. Proper use of proceeds

The authority sits in 13 C.F.R. § 120.1010 and SOP 50 10 7; think of it as the SBA’s quality-assurance backstop for every 7(a), PPP and COVID EIDL loan on the books.

Why The SBA Is Digging Back Into COVID-Era Files

  • Audit Finding: $200 billion in suspected pandemic fraud (OIG,March 31, 2025)
  • SBA’s New Objective: Recover & prosecute every ineligible loan
  • Audit Finding: “Pay-and-chase” controls (GAO, March 24, 2025)
  • SBA’s New Objective: Retro-verify borrower revenue & payroll
  • Audit Finding: 37,938 forgiven PPP loans now in Hold Code 70
  • SBA’s New Objective: Claw back wrongful forgiveness
  • Audit Finding: Fintech lenders’ fraud rate ×5 traditional banks(OIG, November 2024)
  • SBA’s New Objective: Full OCRM exams + guaranty “repairs”
  • Audit Finding: Early-stage defaults tripled between 2022 and 2024
  • SBA’s New Objective: Limit taxpayer loss & shore-up guaranty fund

Bottom line: Congress, GAO, OIG, and headline fraud totals have the SBA under a microscope. Post-funding reviews are how the agency shows it can police the $1.2 trillion it rushed out the door.

How And Why Your File Can Get Pulled

Triggers & Typical Examples

Risk-algorithm flags– Large balance, rapid delinquencies, linked federal debts

Random sampling – Quality-control pulls to keep lenders honest

Event-driven – Guaranty-purchase request, default, DOJ / OIG referral

Program directive – Blanket sweeps of PPP ≥ $2 million or 2024-2025 fintech campaigns

What The SBA Audit Team Looks At

  1. Eligibility & credit:  size standards, affiliation, “credit elsewhere,” revenue accuracy, statements  contained in loan applications
  2. Closing & disbursement:  equity injection proof, IRS transcript match, Form 1050 trail
  3. Servicing:  site visits, annual financials, liquidation steps
  4. Fee & reporting compliance:  guaranty fee timing, 1502 reports, Form 159 disclosures
  5. Fraud/conflict checks:  SAM.gov, prior federal loss, insider conflicts

Timeline & Possible Outcomes

  1. Notice – 10 days to upload the full file
  2. Desk + virtual/on-site exam  – analysts work the checklist, issue “needs”
  3. Exit conference  – preliminary findings, chance to cure gaps
  4. Final report  – Compliant, Corrective Action, Repair (partial guaranty loss), Denial (full loss), or referral to OIG/DOJ
  5. Corrective-action plan  – 30-60 days; big failures can suspend lender authority or trigger indemnification demands

Nightmare Tales

Certified Public Accountant

A certified public accountant (CPA) applied for an SBA COVID EIDL Loan and received an initial disbursement of $150,000. Months later, the SBA contacted him and offered additional COVID money for his business. The CPA applied for and received a modified increase in a second disbursement. However, despite paying the loan under the terms of the agreement, in 2025, the SBA contacted him after conducting a regulatory compliance review, accusing him of fraud. The SBA auditor alleged that his 2019 revenue was “overstated,” implying fraud—even though SBA initially validated the same IRS transcript from 2019 during the CPA’s 2021 increase request which was prompted by SBA personnel inviting him to apply for additional funding

As a result, the CPA is now facing default, acceleration of the loan (which terminates the remaining 25 year repayment schedule), referral to OIG / DoJ for further investigation of AFCA or FCA charges, or aggressive collection action through the Bureau of Fiscal Service's Treasury Offset and Cross-Servicing Programs.

Yoga & Pilates Instructor

A small business entrepreneur applied for SBA COVID EIDL as her newly minted yoga and pilates business was shut down by the governor of her state. Since her business did not meet the criteria of an "essential business," no revenue coming in as her clientele was forced to "shelter in place" due to COVID-19 restrictions. When the SBA first opened the COVID PPP and EIDL loan programs to small businesses, she immediately submitted an application for the EIDL loan as this was the only way for her business to survive. The SBA loan specialist who reviewed her application materials, however, canceled her EIDL application indicating that her business was not eligible since she only started her business in January 2020 - just 3 months before the pandemic declaration. Her business never received any COVID EIDL funds. Fast forward to 2025, and she submitted an application for a 7(a) loan for her business which survived the pandemic without any SBA COVID assistance. The participating lender reviewing her 7(a) loan application sent it to the SBA as part of the 7(a) guaranty and authorization process. That submission apparently triggered an SBA review.

As a result of this compliance review, the SBA not only denied the 7(a) loan authorization and guaranty, but also debarred the business and the owner/officer from participating in SBA loan programs because of the investigator's claim she fraudulently applied for an otherwise ineligible COVID loan in 2020 - even though she never received any government funds. Because of this, she has received permanent SAM.gov exclusion, no SBA financing and reputational damage. Moreover, she could still face either an AFCA or FCA charge by OIG or DoJ as a result of certifying that her business was in need of SBA COVID EIDL funds and was eligible.

Red-Flag Checklist—Are You On The Radar?

  • Amended 2019-2021 tax returns after receiving COVID funds
  • Payroll numbers differ between forgiveness and initial applications
  • Requested an increase or hardship accommodation plan in 2023-2024 with potentially false or inaccurate statements contained in documents submitted to the SBA
  • Business property, equipment and assets sold or disposed of without SBA approval
  • Business closed, sold, or changed hands without SBA approval
  • Seeking a new SBA-guaranteed loan in 2025

Two or more red flags? Assume your file is being queued for SBA audit.

Best Practice Guide

Borrowers & Guarantors

Must-Do Actions Before the Notice Arrives

• Build a digital file now

• Match revenue/payroll data across all filings and submissions to the SBA

• Maintain bank, credit card statements & invoices and tax return filings for six-year retention up to ten years (per the statute of repose due to delayed discovery of fraud)

• Respond to SBA information demand requests (IDR) within the deadline

• Monitor SAM.gov & CAIVRS for surprise listings and exclusions

Lenders & Fintechs

Must-Do Actions Before the Notice Arrives

• Verify equity injection, lien perfection, and 1502 timeliness

• Keep risk ratings clean; OCRM now grades quarterly

• Answer SBA information requests within the deadline

Both

Must-Do Actions Before the Notice Arrives

Transparent communication through experienced legal counsel —inconsistencies could prevent or resolve issues early and cost far less than subsequent fraud referrals to OIG / DoJ and/or False Claims Act charges

Call To Action

A post-funding compliance review can turn a forgiven or settled COVID loan into a white-knuckle legal battle years later. Honest paperwork errors, a canceled application, or a mismatch the SBA missed in 2020 can be recast as fraud in 2025.

If you receive a “business closure review,” “post-funding compliance review,” or any sudden SBA document request:

Contact experienced SBA loan defense counsel immediately.

Our SBA Attorneys has guided thousands of borrowers through reviews, contested or negotiated debts assessed against owners, officers and guarantors, and litigated cases before the SBA Office of Hearings & Appeals (OHA) Court before presiding Administrative Law Judges (ALJs).

Schedule a confidential strategy session today → keep your success story from becoming the next SBA nightmare tale. If you believe your SBA COVID PPP or EIDL loan could be targeted for enforced collection, business closure review, audit, investigation or an AFCA claim, contact us at SBA-Attorneys.com for a confidential Case Evaluation.

This article is provided for informational purposes only and does not constitute legal advice. Consult a qualified SBA-Attorney for advice regarding your individual situation.

Why Hire Us to Help You with Your Treasury or SBA Debt Problems?

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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

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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

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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.

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

$150,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

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.

$750,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

$750,000 SBA 7A LOAN – NEGOTIATED WORKOUT AGREEMENT

Client’s small business obtained an SBA 7(a) loan for $750,000.  She and her husband signed personal guarantees exposing all of their non-exempt income and assets. With just 18 months left on the maturity date and payment on the remaining balance, the Great Recession of 2008 hit, which ultimately caused the business to fail and default on the loan terms. The 7(a) lender accelerated and sent a demand for full payment of the remaining loan balance.  The SBA lender’s note allowed for a default interest rate of about 7% per year. In response to the lender's aggressive collection action, Client's husband filed for Chapter 7 bankruptcy in an attempt to protect against their personal assets. However, his bankruptcy discharge did not relieve the Client's personal guarantee liability for the SBA debt. The SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection against the Client to the SBA. The Client then received the SBA Official 60-Day Notice. After conducting a Case Evaluation with her, she then hired the Firm to respond and negotiate on her behalf with just 34 days left before the impending referral to Treasury. The Client wanted to dispute the SBA’s alleged debt balance as stated in the 60-Day Notice by claiming the 7(a) lender failed to liquidate business collateral in a commercially reasonable manner - which if done properly - proceeds would have paid back the entire debt balance.  However, due to time constraints, waivers contained in the SBA loan instruments, including the fact the Client was not able to inspect the SBA's records for investigation purposes before the remaining deadline, Client agreed to submit a Structured Workout for the alleged balance in response to the Official 60-Day Notice as she was not eligible for an Offer in Compromise (OIC) because of equity in non-exempt income and assets. After back and forth negotiations, the SBA Loan Specialist approved the Workout proposal, reducing the Client's purported liability by nearly $142,142.27 in accrued interest, and statutory collection fees. Without the Firm's intervention and subsequent approval of the Workout proposal, the Client's debt amount (with accrued interest, Treasury's statutory collection fee and Treasury's interest based on the Current Value of Funds Rate (CVFR) would have been nearly $291,030.

$391,000 SBA COVID EIDL - CROSS-SERVICING DISPUTE | NEGOTIATED REINSTATEMENT & WORKOUT

$391,000 SBA COVID EIDL - CROSS-SERVICING DISPUTE | NEGOTIATED REINSTATEMENT & WORKOUT

Client's small business obtained an SBA COVID EIDL for $301,000 pledging collateral by executing the Note, Unconditional Guarantee and Security Agreement.  The business defaulted on the loan and the SBA CESC called the Note and Guarantee, accelerated the principal balance due, accrued interest and retracted the 30-year term schedule.  

The loan was transferred to the Treasury's Bureau of Fiscal Service which resulted in the statutory addition of $90,000+ in administrative fees, costs, penalties and interest with the total debt now at $391.000+. Treasury also initiated a Treasury Offset Program (TOP) levy against the client's federal contractor payments for the full amount each month - intercepting all of its revenue and pushing the business to the brink of bankruptcy.

The Firm was hired to investigate and find an alternate solution to the bankruptcy option.  After submitting formal production requests for all government records, it was discovered that the SBA failed to send the required Official 60-Day Pre-Referral Notice to the borrower and guarantor prior to referring the debt to Treasury. This procedural due process violation served as the basis to submit a Cross-Servicing Dispute to recall the debt from Treasury back to the SBA and to negotiate a reinstatement of the original 30-year maturity date, a modified workout, cessation of the TOP levy against the federal contractor payments and removal of the $90,000+ Treasury-based collection fees, interest and penalties.

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