The Small Business Administration (SBA) didn’t follow proper procedures while managing Economic Impact Disaster Loan funds during the pandemic, according to a report from the Office of the Attorney General (OIG).

Here’s where the SBA erred, according to the OIG report:

1. The contractor awarded the EIDL contract in 2018, RER, met the contract-required small business size standard (no more than $15 million in annual revenue) but its subcontractor (Rocket Loans) did not. That contract continued through the pandemic.
2. The SBA did not use procedures to ensure its contracting officers used effective proposal analysis techniques to ensure prices were fair and reasonable. Such procedures are required as part of the Federal Acquisition Regulation (FAR).

OIG Critical of EIDL Small Business Loan Process During COVID Pandemic

The EIDL program existed before the pandemic. Funds are used to help businesses meet financial obligations and operating expenses after a catastrophic event.

In 2018, the SBA solicited proposals to help process EIDL loans promptly. It limited the proposal responses to small businesses only.

RER was chosen out of 10 applicants. The SBA estimated that it would receive about 300,000 EIDL applications annually and award 65,000 loans. RER’s contract was for up to 4 years with a total price cap of $100 million.

Then came the pandemic.

• March 13, 2020: The pandemic is declared a national emergency.
• March 27, 2020: The CARES Act passes, with funds for EIDLs.
• March 31, 2020: The SBA receives 680,000 EIDL applications on that one day. Over the next 10 days, the SBA receives more than 4.5 million EIDL applications.
• April 2020: The SBA increases the total price cap for the contract with RER from $100 million to $600 million.
• August 2020: The SBA increases the total price cap for the contract with RER from $600 million to $850 million.

EIDL Program Implementation Issues

RER subcontracted with RockLoans Marketplace LLC, DBA Rocket Loans. Rocket Loans is an affiliate of RockHoldings and Quicken Loans – one of the nation’s largest mortgage lenders. When RER relied on Rocket to perform contract requirements, that relationship defined them as affiliates. And Rocket is too big to meet the small business size requirement specified in the 2018 contract.

“In other words, participation of a larger firm was required to satisfy the contract,” reads the OIG report. “The SBA did not evaluate whether the business relationship between RER and its subcontractor, RocketLoans, presented an affiliation concern, which would have prevented RER from being considered a small business for contract eligibility services.”

“As a result, RER and RocketLoans circumvented the subcontracting rule – which was established to prevent a larger business from using a small business as a pass-through to profit from set-aside contracts meant to support diverse, small business enterprise,” the OIG concluded.

In addition, the rates SBA paid RER and RocketLoans for data analysis and loan recommendations may not have been fair and reasonable, according to the OIG report.

“The SBA did not follow proper procedures to ensure the contract provided the best value to the government,” according to the report.

RocketLoans Exceeded Cost Limits, Possible Penalties

According to the OIG report, RocketLoans exceeded the cost limits allowed by a subcontractor.

The total contract payout was $740,506,022. Of that, RER was paid $357,338,310. RocketLoans was paid $383,167,711.

RocketLoans was paid $26 million more than RER. Under a contract limitations 50% rule, the excess payment amount is $13 million.

Possible Penalties:

• RocketLoans could be required to repay the $13 million.
• RER and RocketLoans would be excluded from future federal contracts.

SBA Responds to OIG Report on EIDL in COVID

The OIG provided 6 recommendations to the SBA. The SBA has agreed or partially agreed to all six.

The SBA has taken steps to resolve 4 of the recommendations, which will strengthen SBA procurement policies and enhance controls.

Two of the recommendations have not been resolved:

1. Implement procedures for effective proposal analysis techniques to ensure prices are fair and reasonable.
2. Request a formal size determination to evaluate whether the loan processing contractor exceeded the size standard.

The OIG is seeking resolution of these recommendations.

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Image: SBA