The Small Business Administration’s lending program has improved its processes, but for many struck by the Covid-19 downturn it is “second verse, same as the first.”
(CN) — By all accounts the second round of funding for small-business loans has gone far better than the disastrous first, but many community banks and mom-and-pop stores still feel sidelined by the big banks and companies.
Johnny Yoon, who co-owns the Plaza Cleaners laundromat in northern New Jersey, has had a difficult time getting his calls returned, let alone a loan.
“The bank says, ‘please don’t call the bank branch,’” Yoon says. “I’m not blaming them. They are just a cog or managers handling daily business.”
Because spring and summer are typically the busy seasons in his business, Yoon says getting a loan is a matter of survival. “If this goes for more than three months, I won’t be able to pay insurance, rent or utilities,” he said.
Offering loans of up to $10 million with the potential of never paying it back, the Small Business Administration’s Paycheck Protection Program initially started as a lifeline for outfits like Yoon’s that are struggling under various controls being enforced to slow the spread of the novel coronavirus. The program was plagued by technical glitches, regulatory loopholes and a lack of guidance, however, and saw its $349 billion reserve evaporate in a matter of days.
Congress eventually allocated $310 billion in a second round of funding, with $30 billion set aside specifically for community banks, but many of those banks continue to struggle processing applications.
“It’s ridiculous,” said Scott Cote, chairman and CEO of Pentucket Bank in Haverhill, Massachusetts. “Tons of lenders across the country were just sitting in front of their computers.”
During the first round of PPP funding, before the money ran out, Cote’s bank processed 300 loans worth more than $50 million.
About 100 applications were left in the queue for the second round, and Cote said his staff stayed up until 3 in the morning Monday to finish the backlog of applications after they were told at the last minute that the SBA could not accept applications until 10:30 a.m. Monday morning.
According to numbers by an SBA spokeswoman, the agency had processed $52 billion in total loans under the second round of funding, about $29 billion of which was from small lenders, as of Tuesday.
“They outsmarted themselves,” Cote said of regulators, noting that the $30 billion carveout for smaller banks was hampered by bigger banks’ submitting applications simultaneously. “They should have had had the smaller banks go first, instead of painting us with the same broad brush.”
As with the first go-round of PPP funding, technical issues seem to be at the heart of the snags. “They were allowing [large] banks to input 15,000 applications in a single XML file,” which then slowed down the process considerably, Cote said.
To contend with the logjam, the SBA announced Wednesday it would allow only lenders with less than $1 billion in assets to access its lending portal.
Other community banks have adapted their own systems to ease the process. Peapack-Gladstone Bank has processed more than 2,000 applications — including 155 left over from the first round before it ran out of money — but the process is much speedier than before.
Vince Spero, executive vice president of the boutique New Jersey bank, attributes much of that to the bank’s change of lending platforms. Whereas before the bank had to manually input applications during round one, it was able during round two to pre-load applications into the queue and then hit send once the SBA’s systems went live.
“Yesterday we got just as many loans approved in 14 hours as in 14 days,” Spero said on Tuesday.
Noting about 80% of the bank’s PPP loan approvals have been for $350,000 or less, Spero estimates that larger companies are more prepared with their applications than smaller ones are. “A lot of these are just smaller businesses that are just trying to stay alive” and didn’t have the required forms ready, Spero said.
“It’s certainly easier for the banks to facilitate loans when they have strong relationships with clients,” said Holly Wade, head of research at the National Federation of Independent Businesses, “but that wasn’t in the spirit of the loan program.”
The slight improvement in processing is cold comfort for the many small businesses turned away by banks or shut out due to larger companies jumping the line.
“We’re waiting, any day now we’ll find out,” said Adam Horowytz, co-owner of Nonna’s Pizzeria and Restaurant in Florham Park, New Jersey, of his loan application with TD Bank.
Horowytz says he has forgone taking a paycheck over the last six weeks to keep 90% of his staff. And despite the phone ringing off the hook for pick-up orders at night, most of the pizzeria’s corporate business has dried up, day business is scant, and the dining room has remained dark for weeks.
“We’re going to stay open because this is our livelihood. We have no choice.”
Across the street, Yoon blames publicly traded companies for swarming the program early on.
“Honestly, I kind of knew, I expected it when the PPP came,” Yoon said. “But I didn’t know they were going to take that amount of money.”
According to research company FactSquared, more than 267 public companies have received PPP loans worth nearly $1 billion. Only 21 companies — including Shake Shack, Ruth’s Chris Steakhouse and even the Los Angeles Lakers — have returned the funds, FactSquared found.
“Publicly traded companies did not access the money on their own,” NFIB President Brad Close said in a statement. “The legislation lacked strong guardrails, leaving an opening for big business, and allowing large financial institutions to help their bigger clients access money intended for real small businesses.”
In an April 28 letter, the NFIB called for SBA to make available to small businesses all of the funds returned by larger companies, noting that the combined returned funds could cover payroll for 30,000 small businesses with five employees making on average $65,000 per year.
The Treasury released guidance earlier this month for applicant companies to certify that they needed a PPP loan to maintain ongoing business. Loans that didn’t go to paying employees would not be forgiven, the agency reiterated.
After the outcry grew, Treasury said it would audit any PPP loans greater than $2 million, as well as other PPP loans “as needed.” But the department has not threatened any action against banks that facilitated such loans.
“I really fault the borrowers who made these certifications,” Secretary Steven Mnuchin said in an interview on CNBC on Monday. “It is the borrowers who have criminal liability if they made this certification and it is not true.”
Democratic Senators Ben Cardin and Chuck Schumer asked the inspector general this week to look into whether certain banks had offered special concierge treatment to larger customers seeking PPP loans. A spokesman for Cardin had no information on bank responses but said the questions “underscore the need for oversight hearings.”
Wade noted she has heard many complaints about banks reaching out to larger clients, asking if they were interested in applying for a PPP loan. “The program should be for small businesses that don’t have other resources for financial assistance,” Wade said, noting many publicly traded companies have other means to raise capital. “For many small businesses, this was their only option.”
Republicans, too, have grown somewhat uneasy with what they are hearing about banks. Senator Marco Rubio also has asked banks to provide information on how they have been prioritizing companies’ applications. A spokesman for the Florida Republican said Monday no banks had yet responded to Rubio’s letter.
SBA says the average loan size under the program has halved, from $207,000 during the first round to $111,000 during the second, showing that most loans are for relatively small companies. Still, some mammoth holding companies have found ways to tap the cash despite the best efforts to keep them out of the program.
Subsidiaries of hotel company Ashford Inc. have received more than $100 million in PPP loans, according to several of the company’s filings with the Securities and Exchange Commission.
One of Ashford’s subsidiaries, J&S Audio Visual Communications, received a $4.7 million loan through Comerica Bank, according to the company’s April 16 SEC filing. Still many other subsidiaries have received loans far below the $2 million threshold.
Ashford CEO Monty Bennett, a staunch supporter of President Trump, has balked at the idea of returning the cash.
“The PPP program was specifically designed to help companies like ours as part of the national objective of shoring up businesses and getting people back to work,” the Dallas-based company wrote in a statement.
Bennett, who has donated hundreds of thousands of dollars to President Trump, defended his access to the PPP in a March 22 post on Medium, saying that his business has been “completely crushed” by Covid-19’s economic impact.
“What saddens me more is what’s going on in Washington, D.C.,” Bennett wrote. “Some politicians are too concerned whether proposed government programs help small businesses rather than ‘big business,’ or individuals instead of ‘corporations.’
“I won’t apologize for being a capitalist in America, or for being reasonably successful at it.”
Other industries have reaped benefits from the program, as well. Small casinos were given regulatory leeway to access the program. In a statement April 24, American Gaming Association CEO thanked President Trump for the rule change.
Payday lenders also could soon offer the loans, though it’s unclear whether any funds will remain left once they do.
A letter by six Republican and Democratic representatives last week called on regulators to open the program to “small-size nonbanks,” noting such lenders “have been shut out completely from the PPP.”
One federal class action, led in Los Angeles by the Law Office of Sarkisyan and general contractor Simovich & Sons, claims U.S. Bank did this because it meant higher loan origination fees.
“U.S. Bank concealed from the public that it was reshuffling the PPP applications it received and prioritizing the applications that would make the bank the most money” the suit claims.
In an email, U.S. Bank said it changed its processes from digitally focused to accepting written applications, even from more complex businesses without a single owner. “The cumulative industry data provided by the SBA is not reflective of U.S. Bank’s practices or results,” spokeswoman Cheryl Leamon wrote in an email, noting the lawsuit is without merit.
Under the PPP, banks earn 5% fees on loans less than $350,000, 3% off loans up to $2 million, and 1% on the highest-tier loans.
It is unlikely, as of now, that there will be a third round of PPP funding, but if there is Cote said he hopes small businesses and community banks are allowed at the front of the line to process applications with SBA.
“If you’re going to carve it out, truly carve it out,” he said.
Spero said he hopes the second round of funding is enough. “It would be great if there weren’t PPP Three,” he said.