Inspector General Warns The Paycheck Protection Program Might Be A Disaster

Written by SK Ashby

The "forgivable" loans distributed by the Small Business Administration (SBA) under the Paycheck Protection Program are only forgivable under certain conditions and the big problem facing tens of thousands of businesses right now is that the terms and conditions are unclear.

Businesses are suppose to use at least 75 percent of their loans to cover the cost of payrolls if they want the loans to be forgiven, but the inspector general of the SBA has released a new report warning that many if not a majority of the businesses approved for loans are spending more than 25 percent on other costs.

The inspector general determined that “tens of thousands of borrowers” who participated in the first round of funding have used more than 25 percent of the money they were allocated to cover costs such as rent and utilities, meaning they are likely to be stuck with new debt. And that debt — “the amount of nonpayroll costs in excess of 25 percent,” according to the IG — would need to be repaid within two years. If businesses failed to repay in that timeframe, they would likely need to work out additional terms with their lender.

Essentially, a program aimed at helping alleviate the financial burden small businesses are facing right now could ultimately add to it.

Bloomberg also reported this morning that even small businesses -- not just large public-traded companies -- are returning their loans now because the terms and conditions aren't clear.

Attempting to clarify Congress’s hastily-written Paycheck Protection Program, the Trump administration issued rules and guidance that stirred new confusion, whipsawed borrowers and led dozens of firms to return loans.

Now, with a deadline to return PPP loans without penalties just days away, firms and their advisers have had to grapple with rules that seem to run counter to the law they’re based on. [...]

“The guidances and interim rules are really changing the underlying law,” said James P. Joseph, a partner at the law firm Arnold & Porter. “I have been a tax lawyer for 31 years, and I’ve never seen anything like it. They are building the plane while it’s in the air.

While the first round of funding for the Paycheck Protection Program (PPP) was claimed relatively quickly, the New York Times reports that 40 percent of the second round hasn't been claimed yet.

Suffice to say, in many cases, accepting a PPP loan may cost you more than doing without it.

It occurred to me that if the cost of this program has been calculated assuming that most of the money will be repaid, then the Trump regime may have an incentive ensure that as few businesses as possible are able to have the loans forgiven. I mean, it's starting to look like Steve Mnuchin is running a vulture capital enterprise out of the Treasury. We're loading tens of thousands of businesses with debt that may end up costing them more in interest when they negotiate new terms to repay it. That almost feels like a stretch, but is it? This looks predatory to me; like a government payday loan shark, but for business.

While we're on the subject of the Paycheck program being a hopeless boondoggle, CBS New reports that 9,000 Catholic churches were approved for loans. You may recognize the Catholic church as one of the richest institutions in the world.