A week ago, the paycheck protection program didn’t exist — Congress created it in an effort to stop the massive number of small businesses in America teetering toward disaster because of the coronavirus pandemic.
The program is attractive to businesses because unlike most Small Business Administration-affiliated loans there’s the promise it could become a grant. The program allows companies and nonprofits with fewer than 500 workers to get a low-interest loan to cover up to two months of payroll and expenses like rent and utilities.
If the loan is used to retain workers and the company doesn’t cut wages, it will turn into a grant — an alluring prospect given that most other relief and deferments will add to a company’s debt. It’s viewed as a potential tool to keep workers attached to their jobs and off unemployment benefits at at time when millions of Americans are being laid off. Already, more than 350,000 people have filed for unemployment benefits in the state since businesses began closing because of the pandemic, The News & Observer reported.
Now, on the first day the program is meant to be operational, thousands of businesses want to be in line to receive some of the $350 billion available. But many banks say they are not yet ready to accept loan applications, and are still waiting on guidance from the government about how to administer them. The loans were designed to go through banks rather than the SBA because, in theory, banks can dole out money much faster than the government can.
Most banks aren’t ready
On Friday morning, large banks like JP Morgan Chase and Wells Fargo told customers they weren’t able to accept applications yet, CNBC reported. Wells Fargo’s website told customers that “Financial institutions like ours continue to receive program implementation guidance from the SBA and the U.S. Treasury. Unfortunately, as a result, Wells Fargo will not be able to start accepting applications on Friday, April 3rd.”
Bank of America made its portal for applications live on Friday — though its CEO, Brian Moynihan, said in a television interview that only existing borrowing clients would be able to apply.
“This law was not enacted until late in the afternoon Friday,” he said on CNBC. “A week later ... we are now taking applications. We are (at) about 10,000 applications this morning.”
Other banks, which are launching multiple aid programs and in many cases working remotely, are still trying to get their systems ready for applications.
A spokesman for Truist, the bank created from the merger of SunTrust and BB&T, said a team is working around the clock to make the program available for clients.
A spokesman for Raleigh-based Coastal Credit Union said it would begin accepting PPP applications from existing business relationships, but the credit union is still developing its program.
“Right now, our best-case estimate is that this will be during the week of April 20th at the earliest,” the bank’s spokesman, Joe Mecca, said in an email.
Tracy Ward, director of the SBA 504 Loan Program at Self-Help Credit Union, said the credit union expects a huge volume of inquiries. But with the SBA only having a week to lay out guidelines there were bound to be some delays, she said.
Ward said they received a portion of the guidance on the program last night, but she believes additional guidance is still needed.
She said it is critical that SBA gets this right, with an application that is clear, easy and fast — given the tough decisions companies need to make over the next 30 to 90 days.
“I believe SBA is diligently working to get those guidelines out, but they’ve been tasked with the enormous task of creating guidelines for a new program that is very different from any of their existing programs, and I am not surprised that getting those right and getting them out hasn’t been possible in only a week,” Ward said.
Speed versus normal vetting
Shawn Munday, who serves as executive director for the Kenan Institute-affiliated Institute for Private Capital, said banks are being cautious with their programs because they are trying to figure out potential liability issues.
The banks are being asked to make a trade-off, Munday said, between speed and proper vetting of companies applying for loans.
“The fundamental question in my mind is if the program is supposed to be the responsibility of the banks just to get money into small-business owner hands,” he said, “or is there some responsibility that they are underwriting what they are doing here. Those are two different things.”
The banks are being pressured to get money into as many hands as quickly as possible, he said. But will they be responsible on the back end if there is bad underwriting that leads to fraud and abuse?
“In order to underwrite a loan, you need to know who you are lending to, do due diligence and structure it so that it works for both the borrower and the lender,” Munday said. “You can’t do that in a week.”
The risks are real for a bank, Munday noted. Just about any LLC can meet the requirements listed on the loan application, he said, so the opportunity for fraud and abuse are enormous.
He said that is why some banks are only originating PPP loans to existing customers.
“In hindsight, a lot of people are quick to judge,” Munday said. “[The banks] don’t want the finger to be pointed at them after this that says they were responsible for contributing to waste, fraud and abuse.”
This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work. Learn more; go to bit.ly/newsinnovate