December 2, 2020

Caity Roach

C-Suite Wednesday — SBA OIG Highlights Opportunities to Improve Section 1112 Debt Relief Payment Controls

On December 1, 2020, the SBA OIG released a report on the CARES Act Section 1112 debt relief payments provided to 7(a) borrowers. The review found that SBA effectively ensured more than 224,000 borrowers received $2.6 billion in debt relief within the first 3 months of the CARES Act. By June 2020, SBA had verified that nearly all eligible 7(a) borrowers had received subsidy payments. This debt relief helped alleviate some of the economic hardship caused by COVID-19. However, the OIG found that opportunities exist to improve payment controls and ensure only eligible borrowers receive subsidy payments.

The SBA OIG identified issues with lender reported information that increased the risk of either making payments to ineligible borrowers or making excessive payments. The report states that the OIG found $43 million in subsidy payments that went to borrowers who may have been ineligible. Consequently, the OIG has made the following recommendations:

  1. Incorporate procedures to verify the accuracy and reasonableness of the loan status, principal, interest, and any fees of loans before approving subsidy payments.

  2. Establish post-payment audit procedures, using a risk-based approach, to verify the accuracy and completeness of all subsidy payments to lenders and include reviews of payments made to loans that changed from liquidation status to regular servicing status, and remedy improper payments in accordance with the Payment Integrity Act of 2019.

Although the SBA agrees that additional procedures can be incorporated to verify the accuracy and reasonableness of the loan status and payment amount before approving subsidy payments, the agency does not agree that it is necessary to verify the accuracy of the principal, interest, and fees prior to approving subsidy payments. The SBA says that the additional administrative burden imposed by requiring Lenders to breakdown each monthly loan payment is not a cost-effective approach to addressing the issue. Instead, the SBA believes that it can proactively address this recommendation by taking additional steps to validate the total payment amount requested by comparing it to the terms of the loan.

SBA fully agrees with the OIG’s second recommendation and has already contracted with an auditing firm to conduct a risk-based audit of all subsidy payments made to lenders and recover any overpayments identified. 

Source: SBA OIG