The Small Business Administration recently announced it has exhausted funding for its disaster loan program, raising new concerns about the government’s ability to assist survivors of recent hurricanes and other disasters. Though SBA has paused loan disbursements, it continues to process loan applications. Consequently, only temporary disruptions to the program are anticipated.
Congress is expected to pass legislation providing additional funds when it returns next month from its current recess. Once new funding is in place, SBA will have a renewed opportunity to demonstrate its enhanced fraud-fighting capabilities developed in the wake of the COVID-19 pandemic when fraud reached unprecedented levels.
How Did The Funding Lapse Occur?
While there is a tendency to think of the Federal Emergency Management Agency as the go-to agency for disaster assistance, SBA is the largest provider of disaster recovery funds for survivors. Not only does SBA offer loans to affected businesses, covering uninsured losses from both physical damage and economic injury. It also lends money to homeowners and renters to help repair or replace damaged or destroyed property. Loans are made at low, fixed interest rates with maturities of up to 30 years.
The funding lapse is the result, at least in part, of the government’s failure to pass a budget on time, continuing a remarkable 27-year streak of late budgets. Rather than operating with full-year budgets, agencies have received funding under a continuing resolution – at roughly 25% of last year’s level – running from Oct. 1 to Dec. 20, 2024.
There has been plenty of finger-pointing about who’s to blame for the failure to allocate enough funding in the CR to meet the rising needs for federal disaster assistance from Hurricanes Helene and Milton. Additional money for SBA disaster loans was not included in a list of extraordinary funding needs, known as budget anomalies, provided by the White House to the Congress a month before the start of the new fiscal year. However, the White House subsequently did make clear the need for additional disaster loan resources.
Regardless of the cause of the current funding hiatus, SBA is encouraging survivors to continue to apply for assistance through the agency’s application portal. Whenever additional funding is provided, the agency should be able to disburse loan funds quickly.
Fighting Fraud: A Higher Priority At SBA
When the government deployed trillions of dollars of COVID-19 assistance in 2020 and 2021, two federal agencies – SBA and the Labor Department – were the primary marks of fraudsters. SBA’s Office of the Inspector General has estimated $200 billion in fraud from the $1.2 trillion in assistance provided through the agency’s paycheck protection and disaster loan programs. At Labor, the Government Accountability Office has estimated more than $100 billion was lost to fraud on pandemic unemployment assistance.
On the heels of that experience, is SBA better prepared to prevent such theft going forward? The answer is almost certainly yes.
During the pandemic, SBA was swamped with requests for help. In fact, COVID-related disaster lending exceeded SBA’s cumulative disaster lending from the previous 60 years.
Complicating matters, more generous program features were passed into law and eligibility standards statutorily loosened to accommodate the breadth of firms claiming financial stress. Those program changes included a new advance grant of up to $10,000 – to be disbursed within three days of application submission. It quickly became a magnet for fraudsters. Other changes included allowing loan approval without a personal guarantee and a two-year repayment deferment.
Operationally, an emphasis was placed on speed in application processing. Good for those in need and, unfortunately, good for those looking to defraud the government. According to a 2023 SBA report, application processing was expedited by skipping a step that verifies applicant data against other government databases, particularly the Treasury Department’s Do Not Pay system. Further, a legal prohibition prevented SBA from obtaining and validating applications against tax records.
SBA Has Learned From Its Pandemic Response
In the wake of its experience disbursing COVID-19 aid, SBA has sought to strengthen its ability to fight fraud through “prioritized actions that restored longstanding anti-fraud controls, put in place innovative new protections, and successfully reduced the potential for fraud,” the agency said.
Nevertheless, GAO placed SBA’s financial assistance programs on its high-risk list in 2023. Since then, GAO has monitored the agency’s efforts to address fraud risks and has reported steady progress. Other agencies should note key actions taken by SBA including leveraging stronger and more integrated data analytics, creating leadership-level working groups, and enhancing program design and delivery to prevent fraud.
SBA hired an outside contractor, Summit Consulting LLC, to evaluate its efforts to reduce fraud risks across its programs. In an August 2024 report, the firm stated the agency’s efforts align with fraud management best practices and indicated ongoing business process improvements will continue to mature fraud risk management.
Longer term, SBA has suggested reforms to improve emergency response programs. Those include ideas to expand data-sharing across the government and to factor in the cost of fraud prevention activities in funding decisions.
Clearly, SBA learned hard lessons as it suffered unacceptable levels of fraud during the pandemic. Central among them is that it is far better to prevent fraud than to chase it. When its next round of funding is provided to deal with devastation caused by recent hurricanes and other disasters, the agency should be much better positioned to assist those in need while blocking and prosecuting the fraudsters looking to steal taxpayer dollars.
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