Summary of SBA Plan to Claw Back Pandemic-Era 7(a) Program Mispayments

The Small Business Administration recently disclosed that it will directly contact more than 1,000 lenders after it potentially made erroneous 7(a) program payments to borrowers under Section 1112 of the CARES Act.

Ultimately, the SBA’s plan is to work with lenders to claw back the Section 1112 program mispayments, which do not involve either the Paycheck Protection Program or SBA’s 504 loan program

Below is a summary of what the SBA said about the plan during a briefing attended by ICBA.

Faulty Payments

Section 1112 of the CARES Act directed the SBA to make up to six months of loan payments for preexisting 7(a) loans during the pandemic.

Since making the debt-relief payments, the SBA has contracted with a third-party consultant to analyze the payments. The consultant reviewed the section 1112 payments requested by lenders, calculated expected payment amounts based on the loan terms, and compared those expected amounts to what the SBA actually paid to lenders.

As a result of that analysis, the consultant found information indicating potentially 8,000 loans from approximately 1,100 lenders may have included erroneous payments.

Reconciliation Process

The SBA’s Office of Financial Program Operations will begin working directly with affected lenders to reconcile potential mispayments and recoup any overpayments.

The SBA is still in the early stages of the claw-back process, but it has started a pilot-like program looking at one single lender’s sample of loans.

There will be three phases of the reconciliation process:

Test Phase:

• The SBA is in a test phase in which it is reviewing a sample of loans from a single lender.
• During this phase, the SBA provided a list of 15 loans for the lender to research.
• The lender provided results back to the SBA in a spreadsheet showing its calculations and a brief written explanation.
• After the SBA worked with the lender to reconcile each loan, the agency ultimately determined that there were mispayments in roughly half of the loans it flagged.

Phase 1:

• Following the test phase, the SBA will formally begin phase 1 of the reconciliation process.
• During phase 1, the SBA will begin working with a small group of lenders to help identify common themes and optimize the process for reconciling payments.

Phase 2:

Phase 2 is expected to begin approximately 90 days after Phase 1.

During phase 2, the SBA will send loan lists to the remaining population of affected lenders.

This is when most affected lenders will begin reviewing their loans to determine whether the SBA made mispayments.

Lender Reconciliation: Six Steps

The SBA will directly notify lenders selected for reconciliation, with most contacted during Phase 2. In those cases, the process will be as follows:

1. The SBA will provide lenders with a list of potentially erroneously paid loans and a spreadsheet template.
2. Lenders will research loan payments to validate they requested the correct amount from the SBA.
3. Lenders will provide their results to the SBA in the spreadsheet template, certifying the accuracy of the calculations.
4. The SBA will review the certified lender calculations in which lenders determine they were paid correctly.
5. If lenders find instances in which they were overpaid, the SBA will provide remittance instructions to the lenders.
6. Lenders will remit overpaid funds to the SBA.

While the SBA continues ironing out the details of this process, ICBA will remain engaged with the agency to ensure community bank questions and concerns are addressed.

Community bankers with questions about this process can contact ICBA Vice President of Congressional Relations Steve Keen at [email protected].

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