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Loan fraud hurt LI businesses

The U.S. Small Business Administration headquarters is seen

The U.S. Small Business Administration headquarters is seen in Washington, D.C. Credit: Alamy/Todd Bannor

Long Island's small businesses were desperate for help as the pandemic took hold. For many, such help was hard to come by. In some cases, loans and grants were denied, or applications weren't processed properly or came through after funds were exhausted. Some of the region's restaurants, shops and businesses couldn't survive and have since closed.

But criminals found success where legitimate business owners could not. The egregious, rampant fraud found in the Small Business Administration's Economic Injury Disaster Loan program is deeply disturbing — in its scope, in the ease with which it occurred, and in the impact it has had.

A Newsday analysis found that fraud in the loan program could total as much as $79 billion, an extraordinary 35% of the $225 billion in loans and grants approved since the start of the COVID-19 pandemic. The stolen identities of about 846,000 people nationwide have been used to obtain fraudulent disaster loans and grants.

Stories like that of Northport resident Joseph Stewart — who was asked to pay a loan he never took out for a restaurant he never owned, supposedly located at his home address — are befuddling for the simplicity of the fraud and how seemingly easy it should have been to catch the perpetrator. An address check would have confirmed the location wasn't a restaurant; an employment check would have shown Stewart is a bond underwriter, and that workers listed as his restaurant employees were not his employees.

Some of the extensive fraud has stemmed from the SBA's past lax controls, which allowed bad actors to take advantage of pandemic-related programs without necessary checks and balances, and it further erodes the public trust in an effective bureaucracy. By lacking reviews or ways to flag problems, the SBA left itself open to the fraud it's now trying to combat. SBA officials said they've improved controls, but they must make sure they have the right systems going forward.

It's important, too, that the SBA and departments with which it works ensure inspectors general have the resources to analyze these programs, discover fraud and root it out. While the SBA apparently has recouped $2 billion so far, there's a long way to go.

It's essential federal officials respond to victim complaints efficiently. It took Stewart eight months just to receive an SBA letter promising he won't be held liable for the fraudulent loan in his name.

Most important, the SBA and other federal agencies must be prepared for future fraud, especially in the aftermath of a disaster like COVID-19. It happened before and will happen again. Agencies must find a balance between providing deserving small businesses and others with easily available assistance, while closing the door to those abusing the system.

That way this nation will stop compounding one disaster with another.

Editorials are written by members of the editorial board, a group of opinion journalists whose views on the issues of the day reflect the longstanding values of Newsday.