On February 10, 2021, the Small Business Administration (SBA) announced new policy changes to the Paycheck Protection Program (PPP) meant to address an ongoing issue loan applicants face regarding validation error codes. These error codes serve as validation checks to combat fraud and prevent improper loans from being issued to ineligible businesses. However, many eligible businesses have received such error codes during the application and forgiveness process, delaying necessary economic relief. SBA’s new changes grant additional authorities to lenders for borrowers experiencing validation error code challenges.
Under the new guidelines, lenders will be able to directly certify the eligibility of First Draw and Second Draw PPP applicants as well as upload supporting documentation on behalf of PPP borrowers seeking loan forgiveness. Lenders can only take these steps if the borrower is experiencing validation error code problems. In order to provide more clarity to lenders about this new process, SBA will be holding a national call with lenders to provide additional details and update them on the new capabilities of its E-Tran system, which is used to submit PPP-related documents. It also seems likely that SBA’s lender specialists will be able to provide additional assistance to lenders throughout this process as they have continued to do since the establishment of the PPP. SBA hopes this new policy will hasten the receipt of funds for many businesses that have been adversely impacted by the validation codes.
Validation codes were put in place during the second round of PPP loans to provide proper safeguards that were nonexistent last year. Industry groups previously noted the PPP’s susceptibility to fraud, and the Government Accountability Office released a report in October that highlighted these security concerns and a lack of adequate controls within the program.
While many have noted that validation checks and error codes are reducing the risk of fraud in the PPP, the American Institute of Certified Public Accountants has requested that SBA improve its PPP E-Tran system, so the validation checks do not harm eligible, lawful businesses in the process. So far, SBA has made no statement discussing modifications to its E-Tran system, but changes may come in the future if SBA’s new guidelines are insufficient to address the concerns and challenges faced by many PPP applicants and borrowers.
We have heard from a few clients that there have been hiccups in the process due to the chaos of the original rollout and its impact on Second Draw loans so it is good to see that SBA may be removing some computerized aspects of this to allow borrowers and lenders to fix the problems that can arise due to purely mechanical application of the computer systems used to process loans. While machine learning and automation is great, it is far from a perfect solution when nuance is concerned, and we all know that the way the CARES Act was rushed out (for good reason of course) has caused a lot of nuanced issues that really need direct attention from lenders and SBA. Hopefully, this gets implemented and fixed before the Round Two PPP funding is exhausted.