New Congressional Bill Takes Aim at $335M in Small Business Lending Fraud

As tariffs loomed this spring, PYMNTS Intelligence found that obtaining financing was (and is) a difficult endeavor for smaller firms, which power the U.S. economy. Our surveys of small to medium-sized business (SMB) owners found that fully half of U.S. SMBs rely on their day-to-day revenue to stay afloat — and 7% of firms said they might not survive the next two years.

Through responses to PYMNTS, fewer than 1 in 2 of these firms said they had access to financing. Within that subset, 13% of companies with no access to financing consider their survival at risk. Beyond the 3 in 10 firms that wielded business credit cards, 28% of SMBs used other financing sources, such as loans.

The Small Business Administration (SBA) remains one of those sources to tap when credit is needed, for operational purposes with loans spanning the $500 to $5.5 million range. Eligibility demands that SMBs have exhausted other financing options before applying for the SBA-guaranteed loan program.

To that end, this week the U.S House of Representatives passed the Loan Agent Oversight Act (H.R. 1804) that seeks to address fraud within small business lending.

The program, per commentary from Rep. Dan Meuser (R-Penn.), issued 47,700 loans as recently as 2023 totaling $25.7 billion, and fraud identified via loan agent fraud came to $335 million. The program serves as the SBA’s primary lending tool for small businesses that cannot obtain credit through traditional channels. The SBA provides loan guarantees (but not direct loans) to private lenders to support small business growth. SBA data indicate that, for example, in fiscal year 2023, microlenders approved microloans totaling $86.4 million for over 5,500 small businesses.

New Reporting Standards

The text of the bill, which will next move to the Senate for consideration, indicates that new reporting standards for the Office of Credit Risk Management — through an annual report to Congress — will include data on the number of agents assisting SMB loan applicants; the number of fraudulent loans made for which an applicant used an agent; and the referral fees paid by lenders to agents.

Beyond the confines of loan-officer-related fraud, the application process itself has been examined for vulnerabilities. In a separate report published at the end of March, the Office of the Inspector General estimated that the agency disbursed more than $200 billion in potentially fraudulent loans through its COVID-19 relief programs.

Recommendations from the OIG included that the SBA strengthen controls “to ensure loan deposits are made to legitimate bank accounts for eligible borrowers only, preventing the change of loan application information post-approval without having that information reviewed again by a person.” There was also the recommendation that there be there be a “’Rule of Two,’” approach to the loans, “requiring two people to approve each loan application and eliminate the batch approval process.” The SBA also instituted a policy wherein loan officer reviews have been required prior to requests from applicants to change bank accounts prior to disbursement of the SBA loans.