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PPP Loans — A Stampede and Snags for Small Business

Apr 13th, 2020   Michael Barry
Business Law

A poll released by the U.S. Chamber of Commerce, found that 24 percent of small businesses say, that without near immediate financial assistance, they will have to close permanently within two months — becoming economic victims of the coronavirus pandemic.

Last month, the $2 trillion+ CARES Act appeared to throw those businesses a lifeline, with the inclusion of the Paycheck Protection Program or PPP. The program offers $349 billion in very low-interest, (potentially) forgivable loans to keep workers on the payroll. Small business owners around the country are now clamoring for a cut of the emergency loans, swamping lenders with a staggering surge of applications.

Unfortunately, the federally-backed small business bailout is off to a hazy and shaky start — with bankers and small business owners agreeing the PPP has provided little, if any, financial relief so far. More than a week into the program, the vast majority of businesses are still waiting for the emergency funds necessary to keep the lights on and employees paid. Others say they haven’t even been able to apply for loans.  Those lucky few that have received assistance are likely preferred customers of their bank with established credit relationships.

On the lending side, many banks claim they are simply not ready for the rollout of the unprecedented loan program. Fueling lenders’ concerns and delays, are the sheer number of applications and the effective lack of regulations and detailed guidelines. While money for loans will come from the federal government, it falls to the banks and credit unions to vet, approve and process the applications.  Most banks were simply unprepared to handle this unprecedented volume of loan applications so quickly.

So, what’s the holdup?

The problems are many and range from the confusing to the technical to the bureaucratic, but fall roughly into four categories.

  1. Unprecedented demand

As of April 10, 2020 roughly 550,000 applications had been assigned SBA e-Tran loan numbers for a value of some $140 billion, with 4,100 lenders participating, up from 1,800 the prior week. For comparison, the SBA reported loans for fiscal year 2019 totaled $28 billion with more than 63,000 approved loans. What a difference a year makes.

To get a sense of the urgency of it all, consider last week’s PYMNTS report Main Street on Lockdown, which surveyed more than 200 small- and medium-sized businesses (SMBs) on March 24 — the vast majority responded that there was only enough company cash on hand to get through the next 20 days before having to tap into additional means of funding, such as through personal credit lines or loans (such as the ones on offer through the PPP). Considering that survey took place two weeks ago indicates that the cash emergency has deepened, and that “cushion” has been cut in half.

SMBs, as a group, comprise roughly 3.6 million businesses across the U.S. — spanning restaurants, professional and personal services, construction and remodeling companies, fitness clubs and, a wide range of retail verticals. It is estimated that small business represents 28 percent of total employment, 36 percent of total establishments and 23.2 percent of wages. As Main Street goes, so goes the GDP.

  1. Late and incomplete government guidelines

It may be the emergency funding gates opened on April 3, and the PPP was launched – but the devil is in the administrative details.

SBA began approving PPP loans just a week after the President enacted the bill that created the program, writing the rules and legal guidance for lenders along the way.

Several experts in the lending community sounded the alarm that many banks and other lenders would not be ready to take the applications on April 3, and others were reluctant to participate due to many uncertainties (some that still exist today) regarding how and when the loans will ultimately move off their books.

When the PPP submission portal went live thousands of small businesses submitted PPP applications. Multiple news outlets reported that the program was unable to immediately accommodate that demand. Only four of the nation’s 10 largest banks were accepting these applications on that day, as the Treasury Department had only issued program regulations the night prior.

Importantly, lenders claimed a lack of clarity about how long the SBA PPP funding will last, which has created unnecessary uncertainty for borrowers and lenders.

The administration has since been forced to revise legal guidance for banks about what promissory notes to use and how to include PPP provisions in loan paperwork, among other snags that have bogged down the approval process. While banks and credit unions are eager for clearer, standardized guidance, senators from both parties are pushing for changes and additions. See the SBA’s FAQS here and the long-awaited Promissory Note Form here.

  1. Bank concerns over legal liability

PPP is a complicated program that’s raised concerns for lenders, which are worried about liability. In short, banks fear this program is riskier than it appears. The head-spinning rollout and massive demand have prompted fears among bankers about the potential legal risk they take when issuing the loans. Awaiting guidance on how to navigate federal anti-money laundering laws, they worry the program may not protect them fully from frauds they unwittingly fund despite complying with necessary legal requirements.

Still, banks say they have accepted and approved hundreds of thousands of applications, but they have hit technical and legal snags with the SBA. Paperwork and contract issues, they say, may seem minor but can have unintended legal consequences should something go awry.

Most lenders are first focusing on the customers they know. And why wouldn’t they? Given the murky federal regulations and guidelines, and that demand for these loans exceeds their supply, there’s little incentive for banks to take a risk on a new client — especially when they could be held culpable for extending credit to a fraudulent borrower. So, if banks are able to extend loans right away, it’s likely they’ll take care of their own customers first — effectively forcing other applicants to the process over again with another lender.

  1. Old technology learning new tricks

Any government program developed in less than a couple of weeks will get off to a rocky start, and PPP was no exception. The primary problem is that computer systems between banks and the SBA have had problems communicating with each other.

Banks have complained of numerous glitches in the SBA platforms, and businesses consistently report issues accessing application forms. SBA loan processing crashed early on, preventing lenders from processing any loans. This just added to the uncertainty about the process and status of loan applications, and when the money will flow into the accounts of desperate businesses.

Last week, the SBA enlisted Amazon Web Services to develop a new gateway for loan applications that went live Wednesday morning. The loan application portal may help with streamlining (fingers crossed). It gives non-SBA lenders direct access to E-Tran rather than requiring lenders to use an authorization number. Agency officials report the new gateway should prove “particularly useful” to lenders who had not made 7(a) loans before the coronavirus crisis.

By all accounts, it appears everyone involved is trying to work through these technical issues to make the process smoother in the coming weeks.

Meanwhile, there are political headwinds

“Having just received guidance outlining how to implement a $349 billion program literally hours before it starts, we would ask for everyone to be patient,” Richard Hunt, head of the Consumer Bankers Association, said last week in a statement relayed by CNBC.

Banks and other lenders are definitely facing political fire for their uneven efforts to manage the surge of PPP applications, with some criticism certainly tied to the stigma of the 2008 bank bailout.

Lenders have already approved tens of billions of dollars in loans in just over a week and the Senate is working to approve, perhaps another $250 billion in funding for the PPP.  Throughout the process, banks are facing a multiple challenges as they attempt to handle the deluge — driven by inconsistent federal guidance, a lightning-fast albeit uncoordinated beginning, disputes within the industry, and backlash from the public and government officials.

Indeed, SBA Committee Chairman Sen. Marco Rubio, (R – FL), tweeted that “BankofAmerica got bailed out with $45 billion of your tax money. But now just heard from #smallbusiness with a BOA account & a 400k line of credit they paid off. BOA denied #PPP loan because they don’t have a credit account. A ridiculous requirement that isn’t anywhere in law.” He followed up with, “Big banks – please – don’t be a bunch of jerks.”

Regulators, meanwhile, acknowledged lending through PPP doesn’t pose a risk for U.S. banks. The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said in a statement Thursday that they won’t make lenders maintain capital buffers as a protection against PPP loans.

A federal lending facility would back those loans, and regulators agreed to “allow banking organizations to neutralize the regulatory capital effects of participating in the facility,” according to the interagency interim final rule. That could be welcome news for banks.

There were some signs of improvement in PPP last week. More banks were accepting loan applications and some had funded those loans. Stay tuned.

In the midst of all the confusion, we hope you find the links below useful:

SBA Interim Final Rules Implementing Paycheck Protection Program

The SBA’s Official Page on PPP Loans

The Application for PPP Loans

Paperwork Needed to Apply

PPP Application Status Among the Top 100 SBA Lenders