The Small Business Administration (SBA) has suspended nearly 6,900 borrowers in Minnesota due to suspected fraud related to two COVID-19 relief loan programs, the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL). This decision, announced by SBA Administrator Kelly Loeffler, comes amidst ongoing scrutiny of fraud cases within the state’s social services and a backdrop of political and financial challenges.
In total, these borrowers were approved for approximately $400 million in loans, with the SBA indicating that these individuals will face a ban from all future SBA loans, including disaster funds. The agency plans to refer cases to federal law enforcement for potential prosecution and repayment. Loeffler detailed the situation in a statement posted on X, highlighting the need for accountability.
Minnesota’s economy faced severe challenges during the pandemic, as many small businesses struggled to survive due to stay-at-home orders and reduced customer traffic. Research by Robert Fairlie, a professor at UCLA, revealed a stark decline in active business owners, dropping from 15 million in February 2020 to 11.7 million by April 2020. The national unemployment rate soared to 14.8 percent, marking a significant increase from 3.5 percent just two months earlier.
In response to the economic fallout, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020, which included the establishment of the PPP. This program became the largest small business aid initiative in U.S. history, providing nearly $800 billion through over 11 million loans before its conclusion in 2021. In Minnesota alone, over 98,000 loans were approved, with more than 84,000 of those under $150,000.
The funds from these loans were intended to support essential business expenses, allowing small businesses and nonprofits to maintain payroll, cover rent, and manage other operational costs. If borrowers utilized the loans appropriately, they could be eligible for forgiveness, which has been the case for the majority of recipients.
The EIDL program, which was modified from an existing SBA initiative, also provided financial relief but did not offer forgiveness for the funds received. The urgent need for financial support during the pandemic led to a rapid rollout of these programs, creating an environment ripe for confusion and potential misuse.
Research conducted by economists Aaron Staples and Thomas Krumel Jr. in the craft brewing sector demonstrated the effectiveness of the PPP. Their findings suggest that businesses receiving PPP funding were more likely to remain operational and experience less decline in production compared to those that did not qualify for assistance. Krumel noted, “When the focus is on real businesses you still see significant benefits from the program.”
Despite the program’s benefits, the swift disbursement of funds raised concerns about oversight and fraud. David Schultz, a professor at Hamline University, remarked on the challenges, stating that many anticipated a significant portion of the PPP funds may not reach legitimate recipients. He acknowledged the catastrophic alternative of inaction, arguing that the benefits of rapid assistance justified the associated risks.
In a 2022 study, ten economists assessed the impact of the PPP, estimating that the program preserved between 2 and 3 million job-years over 14 months at a cost of $170,000 to $257,000 per job-year retained. While they concluded that only 23 percent to 34 percent of PPP funds directly benefited workers who might have lost their jobs, they also noted that policymakers faced a difficult trade-off between speed and targeting.
The recent suspension of borrowers highlights ongoing concerns about fraud, an issue that has affected various states beyond Minnesota. Studies suggest that approximately 1.4 million loans, representing around $64 billion, exhibited at least one characteristic indicative of fraud. This represents about 12 percent of the total loans distributed through the PPP program.
Despite these challenges, the PPP and EIDL programs provided vital support to many struggling small businesses during the pandemic. The consensus among some economists, including Krumel, is that the overall benefits of keeping small businesses operational during a time of crisis outweigh the issues now being uncovered. As fraud investigations continue, the focus remains on balancing swift assistance with necessary oversight to prevent misuse in future relief efforts.
