Companies that wrongfully took loans intended for small businesses ravaged by Covid-19 shutdowns have an extra week to return them, but banks likely are off the hook for any penalties.
MANHATTAN (CN) — One more week. The Treasury Department extended the time for publicly traded companies that received small-business loans to return the money without repercussions. Banks that issued faulty loans meanwhile are unlikely to face any punishment.
Under the Small Business Administration’s Paycheck Protection Program (PPP), small businesses can apply for up to $10 million in forgivable loans to keep employees on the payroll. Loan money not primarily used to pay employees must be repaid.
At the outset, the program was beset with technical glitches, regulatory loopholes, and a lack of guidance, causing the initial $349 billion in funding to dry up almost immediately. The $310 billion provided in the second round of funding has lasted longer, cushioned with the promise of some larger companies to return millions of dollars in loans.
As for the others, Treasury has warned it will audit loans greater than $2 million and crack down on publicly traded and larger companies that received PPP loans they didn’t need.
Companies originally had until Thursday to return PPP loans without any fallout, but the Treasury extended the safe harbor until May 18.
Meanwhile the banks that serviced such loans seem to have an indefinite safe harbor.
Paul Merski, head lobbyist at the Independent Community Bankers of America, noted that the CARES Act gave banks a lot of leeway to make these loans without having to scrutinize borrower certifications.
But the program remains a compliance minefield for banks, Merski said, due to confusing guidelines on loan forgiveness thresholds. “It puts the banker in between the borrower and the SBA,” he said. “Virtually every borrower expects [the loans] to be a grant.”
Treasury Secretary Steven Mnuchin seems inclined to leave banks alone. “I really fault the borrowers who made these certifications,” Mnuchin told CNBC last month. “It is the borrowers who have criminal liability if they made this certification and it’s not true.”
Banking trade groups like the Independent Community Bankers of America have suggested Treasury automatically assume loans under $1 million are in compliance with the PPP guidelines, and have called for further guidance to determine whether companies are in compliance with Treasury guidelines.
“Detailed review of each loan is simply not practical for borrowers or lenders,” ICBA President Romero Rainey wrote in the Wednesday letter. “A presumption of compliance for these borrowers will allow business owners to focus on their businesses and the safety of their employees and customers.”
Small business groups like the National Federation of Independent Businesses also want further guidance on when the loans would be forgivable. “Small business owners should not be penalized due to the current lack of regulatory clarity,” NFIB President Brad Close wrote in a May 4 letter.
So far, while several large banks have faced lawsuits over how they doled out PPP loans, only one major bank is under the government’s microscope. In a footnote in its quarterly filing with the Securities and Exchange Commission, Wells Fargo noted it has “received formal and informal inquiries from federal and state governmental agencies regarding its offering of PPP loans.”
According to research company FactSquared, more than $1.1 billion in PPP loans have been made to public companies. The NFIB says that sum could have covered about 30,000 small businesses with five or fewer employees.
Fearing government investigations and further public outcry, about 42 companies — most notably Shake Shack, Ruth’s Chris Steakhouse and the Los Angeles Lakers — have returned loans worth about $337 million, FactSquared found.
A leading proponent of the PPP, Senator Marco Rubio has said the amount of loans received by publicly traded companies needs to be “put in perspective.”
“It’s not like they took half the money, which is the perception that’s been created out there in some of the coverage,” said Rubio. The Florida Republican contends that publicly traded companies accounted for a small share of PPP funding.
Even companies like hotel company Ashford Inc., which initially balked at the idea of turning away PPP funds, have buckled and refunded the loans. Taking a parting shot on May 2, the company blamed confusing regulatory guidance for its ability to tap the funds. It also blasted the media and lawmakers who accused the company of accessing PPP loopholes.
“Ashford applied for PPP loans for each qualified hotel property in full compliance with [initial government] guidance, and in the belief it was our obligation to protect our employees, vendors, communities, lenders and shareholders from unfair economic damage,” the company said in its statement.
“Since we submitted our loan application, the rules have changed almost daily.”
CEO Monty Bennett, a staunch supporter of President Trump, previously had defended his company’s access to the funds. “I won’t apologize for being a capitalist in America, or for being reasonably successful at it,” Bennett wrote in a March 22 post on Medium.
A number of public companies have not yet returned their loans. According to FactSquared’s data. As of Thursday morning, OneWater Marine, which has a market cap of $160 million, has kept its $14 million in PPP loans, and biopharmaceutical company MiMedx Grup still has its $10 million loan.
Some say another problem is that many PPP loans also have not gone to the hardest-hit areas. An analysis on Wednesday by Haoyang Liu and Desi Volker, economists at the Federal Reserve Bank of New York, found that businesses in New York, New Jersey, Michigan and Pennsylvania have gotten fewer loans than businesses in Mountain and Midwest states.
“In New York, the epicenter of the coronavirus in the United States, less than 20 percent of small businesses have been approved to receive PPP loans,” they wrote. “In contrast, more than 55 percent of small businesses in Nebraska are expecting PPP funding.”
Hard-hit industries like food services and construction companies received the most PPP loans, the study found, though mining and transportation industries, which also suffered greatly during the pandemic, did not receive large pieces of the PPP pie.
According to SBA’s most recent data, smaller companies have been approved for most of the loans — 74% of the loans were under $100,000, and the average loan size was $79,000 — during the second round of funding. But most of the actual dollars have gone to larger companies, with 45% of the pot allocated to loans of $350,000 or more, the data show.
Larger banks also dominate the PPP, according to SBA. A summary of loans from April 27 through May 1 shows 53% of the $175 billion doled out under PPP’s second round of funding were from lenders with more than $50 billion in assets under management.
It is also unlikely the Treasury or SBA will disclose who has gotten or given PPP loans as a way to curb abuse.
Holly Wade, NFIB’s head of research, wrote in an email that forcing the SBA to disclose all PPP loan recipients would create “a political firestorm with Main Street” business owners.
“They need financial assistance and didn’t apply for these loans thinking that they’d be thrown under a public spotlight for doing so,” she wrote.
“That seems like overkill,” agreed Merski, the lobbyist.