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Federal Market Intelligence for Small Business |
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OIG questions SBA’s rules on 8(a) net worth, HUBZ residencyIG also faults SBA on CARES Act oversight, goalingThe Small Business Administration may be in legally questionable territory in its recent rule changes on HUBZone residency and 8(a) applicant net worth limits, according to a new report by the SBA’s Office of Inspector General (OIG). The SBA’s recent HUBZone rule change loosening the requirement for employee residence appears to run contrary to the law authorizing the HUBZone program, the OIG wrote in the report, “Top Management and Performances Challenges Facing the SBA in Fiscal 2021.” And the SBA’s recent increase of the ceiling for 8(a) Business Development Program Applicants’ net worth to $750,000, from $250,000, also appears to be of questionable legality because it is not based on empirical evidence to conform to the law authorizing the 8(a) program, the OIG added. In addition, the OIG report outlined a number of concerns with SBA’s oversight of hundreds of billions of dollars in CARES Act loans, which it deemed a highest-priority concern, and rated progress on longstanding concerns, including small business goaling accuracy and the 8(a) program. HUBZone eligibility In 2020, SBA changed the requirements for HUBZone employee residency. An employee no longer needs to live in the zone to be counted toward the requirement. Instead, as long as the employee lived in the zone for at least 180 days when the company was first certified as a HUBZone firm, the residency requirement is met. “HUBZone businesses could theoretically have no employees (zero) currently residing in the HUBZone but continue to be qualified under this rule,” Inspector General Hannibal “Mike” Ware wrote in the report. “Consequently, the government’s ability to argue the employee residency requirements for enforcement purposes is significantly weakened. Allowing continued certification of concerns without current HUBZone residents and no requirement that the company hire such residents in the future, appears inconsistent with the agency's legislative authorization for this program.” 8(a) net worth threshold Regarding 8(a)s, the most serious concern for which there has been “Moderate or Limited Progress” is the SBA’s raising the maximum net worth allowed for 8(a) applicants. SBA implemented the rule change in 2020 that raised the net worth cap for 8(a) applicants from $250,000 to $750,000. SBA said its intention was parity with other contracting programs. However, Ware wrote that the SBA’s actions were not based on empirical evidence and may be in violation of the Small Business Act. “The Small Business Act requires that participants be socially and economically disadvantaged. The Act defines economic disadvantage as diminished capital and credit opportunities compared to owners of similar businesses that are not disadvantaged. SBA, however, has not adequately determined what constitutes diminished capital and credit opportunities,” the OIG wrote. In fiscal 2018, SBA hired a contractor to do an empirical study to help establish criteria defining economic disadvantage and set net worth thresholds. The study recommended a maximum $375,000 net worth for applicants. The SBA did not adopt that standard. Instead, in May 2019, SBA published a proposed rule to raise the cap to $750,000, which is the same cap as in the Women-Owned Small Business Program. There were 146 comments in favor. The final rule went into effect in 2020. In the new report, the OIG states that the SBA should have set the limit at $375,000, which was recommended in the study. “The SBA dollar threshold for economic disadvantage should be based on verifiable data,” the OIG report said. The OIG noted three additional 8(a) concerns in which the SBA has shown “Substantial Progress” since the problems were first identified in recent years, but has not yet resolved the concerns:
Small business goaling The OIG rated the SBA’s performance as “Substantial Progress,” but without resolution, on two issues relating to the accuracy of small business goaling and the small business procurement scorecard. OIG audits continue to identify federal agencies that may have received credit toward their small business goals because of inaccurate reporting. In many cases, contracting officers have incorrectly reported ineligible firms as being certified in the 8(a) and HUBZone programs, the OIG wrote. CARES Act loans The OIG report says the SBA’s top management challenge is oversight of the CARES Act loans, including $670 billion in the Paycheck Protection Program (PPP) and $169 billion in Economic Injury Disaster Loans. Preliminary investigation showed a huge potential for fraud and abuse. Additional concerns include: -
The SBA’s performance on monitoring the CARES Act loans was not rated as those are new concerns. SBA officials were not immediately available to comment on the OIG’s report.
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