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Washington Let Lenders Approve $793 Billion in Pandemic Payroll Loans on the Borrower's Word. A Houston Man Reported 50 Employees and $375,000 in Monthly Payroll for a Company With No Staff, and Bought a Lamborghini.

The Complaints Department

The Complaints Department

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Washington Let Lenders Approve $793 Billion in Pandemic Payroll Loans on the Borrower's Word. A Houston Man Reported 50 Employees and $375,000 in Monthly Payroll for a Company With No Staff, and Bought a Lamborghini.
Photo by Harold Mendoza / Unsplash

The Paycheck Protection Program opened in April 2020, weeks after the CARES Act created it. Its purpose was to keep small businesses paying their employees through the first lockdowns, and its governing principle was speed. The loans were fully guaranteed by the Small Business Administration, made through private lenders, and forgivable if the money went mostly on payroll. By the time it closed in May 2021 it had lent $793 billion across 11.5 million loans.

Speed required removing the parts of lending that take time. The interim final rule of 15 April 2020 said that the SBA "will allow lenders to rely on certifications of the borrower" to determine eligibility and use of proceeds, and that lenders would be "held harmless for borrowers' failure to comply with program criteria." The SBA paid each lender a processing fee of 5 percent on loans up to $350,000, falling to 1 percent on the largest. The lender was paid to approve, protected if the approval was wrong, and not required to check.

The Applications

Lee Price III of Houston applied on behalf of Price Enterprises Holdings LLC, stating that it had 50 employees and an average monthly payroll of $375,000. It had no employees and no payroll. A second application, for 713 Construction LLC, was submitted with a counterfeit Texas driver's license in the name of an Ohio resident who had died shortly before. Price obtained more than $1.6 million. According to the Justice Department, part of it went on a Rolex for $14,343 and a 2019 Lamborghini Urus for $233,337.60, with further sums spent on a Ford F-350 and at Houston nightclubs and strip clubs. In November 2021 he was sentenced to 110 months in prison.

David T. Hines of Miami sought roughly $13.5 million for several companies, reporting millions of dollars in first-quarter payroll. Prosecutors said the purported employees "either did not exist or earned a fraction of what Hines claimed." He received $3.9 million, and within days bought a 2020 Lamborghini Huracán for about $318,000. The remainder went, according to the complaint, on dating websites, jewelry, and Miami Beach resorts. He pleaded guilty to wire fraud and was sentenced in May 2021 to more than six years.

The Estimate

In June 2023 the SBA's Office of Inspector General published its estimate. Across the PPP and its sister program, COVID-19 disaster loans, the agency had disbursed more than $200 billion in potentially fraudulent funds, about 17 percent of the total. The PPP's share was $64 billion, or 8 percent. The report noted that the relief effort had been allowed to "rely on self-certification of eligibility to expedite aid," and described the result as a "pay and chase" environment.

The SBA objected in writing. Its own reviews, it said, put likely fraud across both programs at approximately $36 billion, and "potentially fraudulent" should not be read as confirmed. The two figures differ more than fivefold. Neither was produced before the money left.

The Lenders

Researchers at the University of Texas at Austin, led by John Griffin, examined who approved the questionable loans. FinTech lenders began the program with a minimal share and ended it originating over 80 percent of loans. A 2021 version of the study flagged more than 1.51 million questionable loans worth over $68.9 billion, found FinTech loans more than 3.17 times as likely to carry a primary indicator of misreporting, and more than 3.5 times as likely to be initiated by someone with a felony record. From April 2020 to May 2021, the amount of potential misreporting rose more than fourfold.

Some of the loan brokers had no lending history at all. BlueAcorn, according to the paper, was founded in April 2020 exclusively to source PPP loans. The fee structure made no distinction between a loan to a restaurant and a loan to a company that existed on a form.

The Clock

Bank fraud carries a ten-year statute of limitations. Loans made by non-bank FinTech lenders could generally be prosecuted only as wire fraud, which carries five. The channel that approved the most suspicious loans was therefore the one whose cases would expire first. In August 2022 Congress extended the limit for PPP fraud to ten years regardless of lender, an acknowledgement that the investigations would outlast the program by most of a decade.

The Forgiveness

As of October 2022, 10.5 million loans worth $755 billion had been forgiven, about 95 percent of everything lent. Forgiveness also ran largely on attestation; the rule told lenders they did not "need to conduct any verification" if the borrower submitted supporting documents and attested to their accuracy. Of the questionable loans, the Griffin study observed that few had been prosecuted or repaid.

The program did what it was built to do, which was to move money before anyone could look at it. Price and Hines spent part of theirs on Lamborghinis, which is a conspicuous way to spend a payroll. Most of the estimated $64 billion did not arrive in a showroom, and it passed through a program that went on to forgive 95 cents of every dollar it lent.

Filed from public reporting:

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