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April 07, 2020

Paycheck Loan Program Off to Bumpy Start

Forgivable, small-business loans through the $2 trillion CARES Act are being issued, but there are still some kinks to be worked out.

By  Theresa Hegel

Lenders began accepting loan applications through the Paycheck Protection Program (PPP) on Friday, April 3 and were quickly inundated by small businesses desperate for a piece of the $349 billion set aside for coronavirus relief in the recently passed CARES Act. By many accounts, the program got off to a bumpy start, due to confusing rules and an electronic application system bogged down by requests.

Loan Agreement

“The Treasury on Thursday night announced that applications would be processed on a first-come, first-served basis,” said Andrew Budreika, partner at Philadelphia law firm Morgan Lewis. “That created an ‘everybody rushing to board the airplane’ type of moment for the applications.”

By the end of the day Friday, the Small Business Administration (SBA) reported that banks had already issued more than 13,000 loans, valued at more than $4.3 billion.

Bank of America, the first major lender to set up and launch its portal for the PPP program, told CNBC on April 6 that its current applications already account for nearly 10% of the pool of money Congress has allocated for small businesses. The bank received applications from 177,000 small businesses for a total of $32.6 billion in financing. Those numbers represent applications, not the sums the SBA has approved, however. The bank had initially caught some flak last week for its policy of focusing first on “borrowing clients,” and turning away businesses that didn’t already have a line of credit with them, but the bank has since reversed that policy. As of April 6, its website notes that businesses with a Bank of America checking account are eligible as long as they don’t already borrow money from a different bank.

Wells Fargo announced on Sunday, April 5 that it was bowing out of the PPP program, noting that it had planned to lend a maximum of $10 billion through the program and that it had already received more than enough applications to reach that threshold, according to CBS.

Not all banks were ready to accept applications on April 3, because the final applications for the program were only made available in the evening of April 2, according to Budreika. “It was too short of a turnaround time, despite the pressure to get it done,” he added. “We’re looking today to see how it goes, whether the weekend provided time for more banks to get their processes in place and ready to accept applications.”

In a 13-tweet thread on April 4, Sen. Marco Rubio outlined a lot of the snags the PPP ran into on its first day, including some contradictions and lack of clarity in the U.S. Treasury Department’s guidance, and the fact that E-Tran, the internal system for loan applications, had been slow due to volume. The SBA has contracted with Amazon Web Services to resolve those issues, according to Rubio. “When you launch something this unprecedented & far reaching, just 7 days after it became law, you are going to have some problems THE GOOD NEWS is every problem we saw on Day One of #Ppploans can be fixed We will stay on it to make sure it gets better each day forward,” Rubio concluded in a tweet.

The SBA's E-Tran system froze for four hours on April 6, slowing the application process further, according to Bloomberg. Still, by the afternoon, the SBA said it had assigned 130,000 loans, valued at more than $38 billion, according to CNBC.

For small businesses that haven’t yet gotten their applications in for a PPP loan, Budreika recommends going to your existing bank where you’re already a customer, since the process is likely to be smoother for both sides if the bank has already done due diligence on you. Smaller businesses are likely to have less red tape around their applications. “There are certain things if you’re corporate-owned or have investors that have to be looked at as part of small business rules to be sure you’re really a small business,” Budreika said. “Really, really small companies that don’t have any of those things present should move more quickly through the process. That is who this program is designed to help.”

The PPP loans are 100% forgivable if they’re used to keep workers on the payroll. The loans of up to $10 million have a maturity of two years and an interest rate of 1%, with payments deferred for six months, with the expectation that most businesses would apply for forgiveness before then. Some have raised concerns that the PPP money will run out before all the businesses that need it have had a chance to access it. As of April 3, hundreds of lenders were still trying to get approval to access the SBA system after it went live, according to Independent Community Bankers of America (ICBA).

“Funding of $349 billion is frankly inadequate for the magnitude of need in the American small business community and is likely to run out quickly,” the ICBA wrote in a letter to the U.S. Treasury. “When the large banks all come fully online, these funds will be depleted rapidly, and thousands of cash-starved small businesses who believe they were promised access to credit will be frustrated and angry.”

The ICBA urged the Treasury to request more funding immediately. Treasury Secretary Steve Mnuchin and President Donald Trump have both said they would ask Congress for funding if necessary.