According to a report from the Office of the Attorney General (OIG), the Small Business Administration (SBA) did not follow proper procedures in managing disaster loan funds with economic consequences during the pandemic.

Here’s where the SBA made a mistake, according to the OIG report:

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

OIG critical to EIDL small business loan process during COVID pandemic

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

In 2018, the SBA asked for proposals to process EIDL loans quickly. It limited responses to the proposal to small businesses only.

RER was chosen from 10 candidates. The SBA estimated that it would receive approximately 300,000 EIDL applications and grant 65,000 loans each year. 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 is passed, with money for EIDLs. March 31, 2020: The SBA receives 680,000 EIDL applications in that single day. In the next 10 days, the SBA will receive more than 4.5 million EIDL applications. April 2020: The SBA raises the total price cap for the contract with RER from $100 million to $600 million. August 2020: The SBA raises the total price cap for the contract with RER from $600 million to $850 million.

Problems with the implementation of the EIDL program

RER outsourced with RockLoans Marketplace LLC, DBA Rocket Loans. Rocket Loans is a subsidiary of RockHoldings and Quicken Loans – one of the largest mortgage lenders in the country. When RER relied on Rocket to fulfill contract requirements, that relationship defined them as affiliates. And Rocket is too big to meet the small business requirements specified in the 2018 contract.

“In other words, participation from a larger company was required to fulfill the contract,” the OIG report reads. “The SBA did not evaluate whether the business relationship between RER and its subcontractor, RocketLoans, presented an affiliation issue that would prevent RER from being considered a small contract eligibility services company.”

“As a result, RER and RocketLoans have circumvented the outsourcing rule — which was put in place to prevent a larger company from using a small business as a conduit to take advantage of set-aside contracts intended to support diverse, small businesses,” the OIG said. 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 that the contract provided the best value for the government,” the report said.

RocketLoans exceeded cost limits, possible sanctions

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 $357,338,310 was paid. RocketLoans was paid $383,167,711.

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

Possible penalties:

RocketLoans may be required to repay the $13 million. RER and RocketLoans would be barred from future federal contracts.

SBA Responds to OIG Report on EIDL in COVID

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

The SBA has taken steps to resolve 4 of the recommendations, thereby strengthening the SBA’s procurement policies and improving controls.

Two of the recommendations have not been resolved:

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

The OIG aims to find a solution to these recommendations.

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This post OIG says SBA management of EIDL program had contractual flaws was original published at “https://smallbiztrends.com/2022/04/inspector-general-report-sba-management-eidl-small-business-loan-program-covid-pandemic.html”