Second White Paper: Risk Awareness and Lessons Learned from Audits and Inspections of Economic Injury Disaster Loans

This White Paper is to provide SBA information regarding lessons learned and identified risks from prior audits and inspections that it should consider in managing and mitigating the risk of loss for Coronavirus (COVID-19) related loans. The expected increase in loan volumes and amounts and expedited processing timeframes will place additional stress on existing controls. This document is intended to assist SBA with ensuring program integrity, program goals and objectives are met, and managing lending risk.

In response to the COVID-19 pandemic, the Coronavirus Preparedness and Response Supplemental Appropriations Act (CVPR Act) deemed COVID-19 a disaster and authorized SBA to provide EIDLs to businesses and nonprofits affected by COVID-19. In addition, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided $10 billion to SBA to provide emergency EIDLs. This is a significant increase compared to prior major disasters. For example, SBA approved approximately $1.1 billion combined in disaster loans to businesses and nonprofits in response to Hurricanes Harvey, Irma, and Maria. For Hurricane Sandy, SBA approved approximately $527 million in disaster loans to businesses and nonprofits. Only a portion of the business and nonprofit loans for these hurricanes were EIDLs. As of April 1, 2020, SBA received more than 94,000 EIDL applications for the COVID-19 pandemic.

The Office of Inspector General (OIG) has regularly conducted audits and inspections to evaluate management controls and to assess program integrity, efficiency, and effectiveness of the Disaster Assistance Loan Program. We compiled findings from those audits and evaluations that identified significant issues and relevant risks.  Prior audits and inspections identified that SBA:

• Issued EIDLs and non-EIDLs without fully vetting the borrowers’ credit or their ability to repay the loans

• Issued EIDLs and non-EIDLs to businesses that did not suffer an economic loss or to businesses outside the timeframe of the disaster

• Encountered challenges with having experienced or well-trained staff to provide accurate and appropriate assistance to borrowers during large-scale disasters

In summary, to ensure program integrity and mitigate the risk of financial loss, SBA should ensure that loans are provided to eligible applicants timely, that borrowers meet all eligibility requirements, and that it has experienced or well-trained personnel to provide appropriate assistance and handle the increased loan volume and expedited processing timeframes.