‘Automatic Good Faith’

Written by SK Ashby

I would have said -- and indeed I have -- that the Payment Protection Program (PPP) overseen by the Small Business Administration (SBA) is 'unaccountable' and that was before they made it formally unaccountable.

One of the most frequent complaints we've seen about the program, including from actual small businesses trying to obtain funds from it, is that the rules have changed too many times and neither businesses or regulators really know what they're doing.

The good or bad news, depending on your perspective, is that the SBA has updated their rules again to say there are no rules; there will be no oversight.

The SBA has limited resources so the agency has decided it will automatically assume loans totaling less than $2 million were all legitimate.

Treasury and the SBA announced on Wednesday in an updated FAQ that these entrepreneurs will be given what's known as "safe harbor" and won't face additional scrutiny.

"If you're under the $2 million threshold, you get this automatic certification in good faith," said Glen Birnbaum, CPA at Heinold Banwart in Peoria, Illinois.

"Given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns," the agency said in the FAQ.

If we're being shrewd, then I suppose using your limited resources to focus on the biggest targets make sense, but I can't help but feel like this is a license for fraud.

While the SBA will 'automatically' assume that all applications for loans of less than $2 million are legit, it remains to be seen what this means for requirements that a majority of each loan be used to cover the cost of payrolls.

It seems reasonable to assume that if the SBA does not have the resources to scrutinize applications and will more or less automatically approve them, they probably don't have the resources to comb through every loan and ensure a majority of the funds were used for payrolls. It's probably just a matter of time before those requirements are formally thrown out, too, in the interest of calming businesses who don't know how to use the funds they've received.

We should have just sent all Americans more checks or directly covered wages as they have done in other countries. Between two rounds of funding we've sunk about $650 billion into the Paycheck Protection Program and there's no outwardly visible evidence that it has changed the game or significantly limited the economic impact of the coronavirus. Even legitimate applicants that received funds from the program are at risk of permanently going out of business because it's just not enough.