Potholes in Lending Program Leave Small Business Stranded

Colfax Avenue is the main street that bisects the metropolitan area in Denver, Colorado. Today many of the business that line the street are closed, part of a tapestry of millions of layoffs around the country. (Photo by AMANDA PAMPURO/Courthouse News Service)

MANHATTAN (CN) — Small businesses, the lifeblood of the U.S. economy, have had trouble getting lending infusions the last two weeks, as problems persist in the government’s lending program. 

The massive $349 billion Paycheck Protection Program, managed by the Small Business Administration, was designed as a lifeline for small businesses during the coronavirus crisis.

Under the program, businesses with 500 or fewer employees or ones that have less than a certain amount in revenue could apply for loans to make payroll, mortgage or lease payments. Interest is capped at 1% on the loans and deferred for six months, and the loans are forgiven if the business maintains its employees and salaries.

“When I heard about the program, at first blush it sounded like a wonderful thing,” former SBA Administrator Maria Contreras-Sweet said in an interview. “However, I was concerned about the way it would be deployed and the way it would be executed.”

A survey by the National Federation of Independent Businesses released Thursday found that 28% of its members that tried to apply for a loan under the PPP were unsuccessful, mostly because their banks either didn’t participate or weren’t lending to businesses that weren’t already customers.

Additionally, lenders and borrowers both are still awaiting federal guidance on several key provisions of the program.

 “There are still a lot of questions unanswered,” said Holly Wade, the NFIB’s director of research. “It’s been very frustrating for small business owners.”

Frustration has flowed the other way, too. In a webcast earlier this week, Joseph Amato, an SBA district director in Nevada, called out big banks for not immediately signing up.

“The same banks that basically took billions of dollars with one page from [Secretary Henry] Paulson from Treasury at the time are the ones saying the documentation isn’t clear enough for them,” Amato said during the webcast, which was first reported by The Washington Post. “So what they’re saying is I don’t give a hoot about the small businesses, what I care about is whether or not I have enough paperwork. And it’s just crazy.”

Since the April 3 rollout, federal agencies have worked overtime to put out guidance and ease banking restrictions.

The Federal Reserve lifted its cap Thursday on Wells Fargo’s growth restriction to let the bank continue participating in the program. The Federal Deposit Insurance Corporation also modified its capital-reserve rules and lending limits for participating banks to ease liquidity constraints.

But key guidance is still lacking, experts say, particularly for independent contractors who had to wait a week to tap into the fund.

“Not a single crumb, a shred of guidance, has come out on how to handle self-employed borrowers,” said Paul Merski, executive vice president for congressional relations at the Independent Community Bankers of America. “Bankers are at their wits’ end.”

Technical problems have also caused a logjam in loan applications.

“When I arrived at SBA, we were working off fax machines,” said Contreras-Sweet, who ran the agency from 2014 until 2017 under President Obama. “I said we would go online, and at first it was unclear what that meant to banks … who were scanning applications and sending them to us online.”

Merski noted, before the coronavirus hit, the SBA would handle about $30 billion in loans a year. In the last eight weeks, it has been in charge of $350 billion in loans.

“The SBA systems were never designed for that kind of volume,” Merski said, adding that 60% of banks nationwide were not already participating in the SBA’s lending programs and had to newly register under the PPP. 

As of Friday morning, the SBA has received 587,000 applications totaling more than $151 billion, an agency spokeswoman said. The SBA has more than 4,100 lending institutions now participating, up from 1,800 a week ago.

Contreras-Sweet noted that smaller banks also tend to have limited technological resources. “The large money centers have the tech infrastructure to process this volume, but it is much more manual at community banks.”

Some Republicans have acknowledged problems with the program. Senator Marco Rubio wrote on Twitter that the PPP “has some serious implementation issues.” But the Florida Republican also insisted the program “isn’t paralyzed,” noting that the SBA has added more server capacity to its online portals and has assisted lenders with technological problems. 

The program’s problems have spooked Wall Street, which began a sell-off earlier this week when President Trump called on Congress to appropriate more money for the program.

Efforts to beef up the program with an additional $250 billion has stalled, angering some in the small business community.

“This is half of the American economy and nearly half of all jobs we are talking about,” NFIB President Brad Close said in a statement Thursday. “But yet again, we are watching politics delay desperately needed assistance to small businesses and their employees.”

Democrats say the funds do not address immediate needs of small businesses, and that other SBA programs should be funded.

“The SBA doesn’t need money today to process the Paycheck Protection Program,” Senator Ben Cardin said on the Senate floor Thursday.

A Maryland Democrat, Cardin noted that not all of the PPP’s funds have been exhausted, but other SBA programs, such as its emergency relief program, needs funding more immediately. “Today applications are being processed, tomorrow applications are going to be processed, the day after that applications are going to be processed,” he said. 

In an April 9 letter to the Treasury and SBA, the ICBA said at least 25% of additional funds should be allocated to smaller community banks so large lenders in metropolitan areas do not absorb all the funds. 

Small businesses have been the hardest hit in the economy, with a 1,021% in layoffs last month, according to Gusto, a payroll company servicing small businesses, with a 3.7% in overall headcount among those companies.

Even without additional funds, other steps may help small businesses. Contreras-Sweet suggested the SBA could expand existing programs to help small businesses, such as requiring a greater number of federal contracts go to small businesses. 

“Our society will be distinctly different if we don’t create this ecosystem where our small businesses survive and thrive,” she said.

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