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AML/CFT Fraud Prevention Lending & Credit Risk SBA Lending

PPP Headaches: As Anti-Fraud Efforts Continue, Borrowers & Lenders Face Challenges

Mary Ellen Biery
February 5, 2021
Read Time: 0 min

Moves to validate applicants create complaints 

The SBA is urging patience as it works to assist lenders with resolving "holds" on applications.

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Takeaway 1

To prevent the kind of fraud that plagued the Paycheck Protection Program in 2020, the SBA has put new measures in place that have created challenges.

Takeaway 2

SBA officials have asked lenders and borrowers to remain patient as they work to resolve issues and have tried to reassure them funds won't run out quickly.

Takeaway 3

Meanwhile, regulators continue to reinforce the importance of lenders knowing customers and beneficial owners.

New Guidance Out

PPP fraud-prevention challenges arise

Efforts to combat fraud related to the Paycheck Protection Program (PPP) and other coronavirus-related relief remain front and center among government agencies. In addition to updating guidance related to PPP customer due diligence and beneficial ownership, the federal government recently warned about fraudulent schemes promising to help borrowers get SBA loans for a fee and about phishing emails targeting business owners.

The American Institute of CPAs (AICPA) on Feb. 3 asked the Small Business Administration (SBA) to address quickly “significant operational, system and communication challenges,” including applications being erroneously denied due to validation checks in place this round.

In a letter, the AICPA cited an example that, in many instances, small business owners applying for PPP loans were being incorrectly informed they had a criminal record. “Even after redoing this certification, borrowers may then still be declined on the same application due to another incorrect validation rule (for instance, an Applicant Tax ID issue),” the letter said. “Overall, the process for resolving these application declines is unclear to small business owners and their lenders. Small business owners are being surprised by these requests from lenders that are driven by the SBA system.”

After facing criticism and increased scrutiny during funding in 2020 for the PPP, the SBA is performing more due diligence on borrowers this year before loan approval, whereas in earlier rounds, the focus was on getting loans approved quickly to get funds out to businesses, and more of the due diligence has been performed during the forgiveness process, SBA officials have said.

The SBA has said that during this round of the PPP, it is conducting some initial verifications of applications within the PPP loan platform and E-Tran, and then it is checking borrower data against the U.S. Treasury’s “Do Not Pay” list to make sure the federal government doesn’t provide loans to people or businesses on that list. It is also running a public-records check via LexisNexis.

SBA Seeks Patience

Validations checks cause 'anxiety and confusion'

As a result of the extra verification on the front end, SBA officials have asked lenders and borrowers to remain patient with the loan approval process and have tried to reassure businesses that funds will not be used up quickly. The SBA last month said it was addressing PPP loan reviews and related delays to allow for efficient processing by providing lenders with additional information to help resolve first draw loan reviews and potential holds that impact second draw application approvals. It also said it was providing more information to local and district SBA staff on the review and resolution processes.  

However, the AICPA’s letter noted that lenders and business owners still are struggling to understand how to resolve denials caused by validation checks, “causing great anxiety and confusion for small business owners.”

Andy Snow, Senior Vice President of Customer Success for Abrigo, a leading technology provider of compliance, credit risk, lending, and asset/liability management solutions to financial institutions, said some lenders have been very frustrated. “We're doing the best we can to help them work through these challenges,” Snow said. “We’ve had a large portion of our company working non-stop supporting our CFI customers because we are committed to the effort to get much-needed capital in the hands of small business owners and their employees.”

Northrim Bank, Alaska’s leading PPP lender, is an Abrigo customer that has experienced some of the challenges first-hand, according to Northrim Executive Vice President and Chief Information Officer Ben Craig.

“With the best of intentions, the SBA incorporated several new automated validations into their PPP Loan approval process in an attempt to curb fraud, reduce overfunding, and increase efficiency,” Craig said in an email. “However, some of this automation has inadvertently delayed valid applications and spawned other undesirable consequences.”

Ongoing changes help

SBA, lenders are ‘flexibly adapting’

For example, Craig noted, many seasonal businesses were faced initially with the dilemma of ignoring guidance from the SBA’s PPP loan portal at the risk of jeopardizing their loan forgiveness or submitting an application for less than they were legally entitled as a result of automated validations embedded into the portal. That issue was resolved. However, a significant number of PPP loans have been delayed because the SBA’s lookup database does not recognize a borrower’s legal address even though it’s on borrower’s tax documents and U.S. mail, Craig said. In addition, several businesses have been flagged as “inactive” even though they have been operational throughout the pandemic. 

“The SBA, third-party origination vendors, lenders, and borrowers are all in this together,” Craig said. “To everyone’s credit, we’re all flexibly adapting to rapidly changing environs, and doing our best in the face of unprecedented circumstances.  Anyone who has implemented automation understands it can lead to significant benefits, but the devil is in the details, and it can lead to devastating inefficiencies when it breaks.  Nobody should fault the SBA for trying to be good custodians of our tax dollars or drive internal efficiencies.  That said, it might be helpful to implement a centralized issue-tracking database viewable to all lenders and third-party originators, that can be used to escalate programmatic errors, submit feature requests, and track open issues.”

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Ongoing changes help

Focus remains on KYC’

In the meantime, regulators are reinforcing the importance of lenders knowing their customers as they work with borrowers applying for PPP loans.  After all, it’s critical for financial institutions to know customers and beneficial owners in order to prevent these critical relief funds from getting into the wrong hands. 

The Financial Crimes Enforcement Network (FinCEN) and the SBA recently republished some Bank Secrecy Act (BSA) related guidance for lenders. The agencies also issued two new answers to Frequently Asked Questions (FAQs) for lenders to clarify how the BSA guidance applies to second draw PPP loans.

FinCEN and the SBA’s guidance stated that BSA specific guidance within FinCEN April 2020 PPP FAQs does apply to second draw PPP loans. This includes the following:

  • For existing customers:
    • With respect to collecting beneficial ownership information for owners holding a 20% or greater ownership interest, if the PPP loan is being made to an existing customer and the lender previously verified the necessary information, the lender does not need to re-verify the information. Furthermore, if financial institutions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, they do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.
    • A PPP lender can rely on the same information received from a borrower for the purposes of a first draw PPP loan for a second draw PPP loan to that same borrower if the borrower is an existing customer.
  • For new customers (first draw at another institution):
    • The lender’s collection of the following information from someone with a 20% or greater ownership stake in the applicant business will be deemed to satisfy applicable BSA requirements and FinCEN regulations governing the collection of beneficial ownership information: owner name, title, ownership %, TIN, address, and date of birth. If any ownership interest of 20% or greater in the applicant business belongs to a business or other legal entity, lenders will need to collect appropriate beneficial ownership information for that entity.

Decisions regarding the updating of customer due diligence and the verification of the beneficial ownership information collected from customers should be made consistent with the CDD Final Rule and current institution risk-based policies and procedures.

The SBA’s Office of Inspector General also warned the public to be on the lookout for phishing, loan fraud, and grant fraud tied to coronavirus relief. “If you are contacted by someone promising to get approval of an SBA loan, but requires any payment up front or offers a high interest bridge loan in the interim, suspect fraud,” the office said. It also warned of phishing attacks and scams using SBA’s logo. “If you are in the process of applying for an SBA loan and receive email correspondence asking for [personally identifiable information], ensure that the referenced application number is consistent with the actual application number.”

Given the amount of funding at stake, fraud has been and will remain a top issue for lenders as they are reviewing applications for loans and processing forgiveness applications.

-Abrigo Compliance and Engagement Director Terri Luttrell, CAMS-Audit, contributed to this report.

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About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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