Cassidy and Kennedy

Senators John Kennedy (left) and Bill Cassidy

(The Center Square) – Louisiana’s two U.S. senators are raising concerns about a provision in the proposed $3.5 trillion congressional budget reconciliation bill that would allot billions in direct government loans to small businesses.

U.S. Sens. John Kennedy and Bill Cassidy, both Louisiana Republicans, called the plan “inefficient, costly and inequitable,” along with 13 other senators in a letter addressed to U.S. House and Senate leadership and chairs of both chambers’ Small Business Committees.

The provision, known as Section 100502, or the Funding for Credit Enhancement and Small Dollar Loan Funding, would authorize nearly $4.5 billion over 10 years for the U.S. Small Business Administration (SBA) to issue direct 7(a) loans.

The 7(a) loan program provides up to $5 million for eligible borrowers to use for real estate, short- and long-term working capital, refinancing of current business debt and “furniture, fixtures and supplies.”

The main concern offered by the opposing senators pertains to taxpayer accountability. Whereas the inclusion of private banking lenders in the SBA’s loan process involves built-in financial oversight, they said, direct government loans invites abuse.

“Aiming to get more 7(a) loans in the hands of the smallest of small businesses by providing the SBA $4.5 billion to run its own lending program is misplaced,” the letter read. “Without proper parameters, the direct lending program can fall into a great deal of fraud and abuse.”

The letter cited an SBA Office of Inspector General report showing the government-run Economic Injury Disaster Loan (EIDL) program had processed and advanced $79 billion in potentially fraudulent loans.

The OIG was alerted to the direct government loan program's potential fraud problems when private financial institutions reported red flags upon receiving borrow deposits.

"We have received complaints of more than 5,000 instances of suspected fraud from financial institutions receiving economic injury loan deposits," the OIG report said.

Coincidentally, the day after the senators’ Oct. 6 letter, the SBA inspector general released another report showing the EIDL program had overpaid $4.5 billion in “illogical” small business claims.

The OIG found 700,000 applicants claiming to be sole proprietors and independent contractors wrongly received taxpayer-funded grants based on claims they employed as many as 1 million employees. Required tax identification numbers also were not submitted, the OIG said.

“SBA approved thousands of grant amounts for applications that were not sufficiently vetted because no system of controls was in place to flag applications with flawed or illogical information,” the report concluded.

“Compare this to the PPP (Paycheck Protection Program), where only $4.6 billion in potential fraud was identified,” the senators said about the CARES Act loan program that involved 5,467 private lenders servicing 12 million loans. “Out of $800 billion for the full program, that is only .6% of the total.”

The proposed SBA 7(a) loan provision is tucked into a $25 billion small business package that is itself nestled into the 2,465-page budget reconciliation proposal.

House Small Business Committee chair Rep. Nydia Velázquez, D-N.Y., said the funding package was critical to move the American economy beyond the COVID-19 pandemic when it passed her committee in September.

“Small businesses are the foundation of our economy and ultimately the key to our nation making a full economic recovery,” Velázquez said. “The small business policies that we advanced today represent a generational investment in America’s entrepreneurs and will help businesses recover from COVID now and prosper in the future.”

The Consumer Bankers Association, a retail banking group with members in all 50 states, contends making direct 7(a) loans could undercut private lenders because of favorable SBA loan conditions.

In a letter to Congress, CBA President and CEO Richard Hunt said, "In addition to fraud concerns, a new direct lending program established by Congress creates concerns of a government-subsidized SBA direct lending program that will be in competition with private market lenders that have invested heavily over the years to be able to offer 7(a) loans."

Hunt floated a compromise involving increased access to government support for very small businesses.

"Perhaps a more constructive policy would be for Congress to consider continuing the CARES Act provisions that enhanced 7(a) lending, such as the 100% loan guarantee for loans under $150,000,” Hunt said.

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