After PPP reform, more flexibility but same complexity

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Legislative fixes to the Paycheck Protection Program should make the forgiveness process more attractive for borrowers, but not much easier to navigate.

Bankers said they view the changes, including a lower threshold for payroll expenses and a longer qualification period, as a way for them to reintroduce the program to small businesses that have been wary about participating.

While bankers will also have more flexibility in allocating resources, they will also have to adjust the financial implications of their participation since loans will likely stay on their books longer than originally forecast.

The adjustments “help lenders from the perspective of the conversation we can now have with our customers” about the new terms, said Clem Rosenberger, CEO of NexTier Bank. “We believe most customers will breathe a sigh of relief as a result of these changes. That’s a great message to be able to share.”

Lawmakers late Wednesday intervened in the administration of the $659 billion PPP, lowering the amount that must be spent on payroll to secure forgiveness to 60% from 75%. They also increased the amount of time borrowers have to qualify for forgiveness from eight weeks to 24 weeks.

The Small Business Administration and Treasury Department, as the program’s administrators, set the initial payroll requirement and coverage period.

A surge of new applications is unlikely, but more small businesses will likely show an interest given the added clarity and flexibility, bankers said. About $124 billion in funds remain under the program’s second phase.

Potential borrowers who thought the program would be too much trouble early on are now inquiring about the loans, said Matt Flannery, team leader of SBA lending at the $9.9 billion-asset Provident Financial in Jersey City, N.J.

“From a borrower’s perspective, anything that makes forgiveness easier is a welcome relief,” said Grethell Anasagasti, a principal at the public accounting firm MBAF.

The moves are a net positive for banks, though they will impact financial models, industry observers said.

Extending the time to qualify for forgiveness by roughly four months means that banks will likely hold onto PPP loans, at a 1% interest, longer that originally projected. But a larger percentage of loans should be forgiven, meaning more will completely roll off banks’ balance sheets.

“In our view, this enhances the possibility that borrowers can have their PPP allocation forgiven,” said Chris Marinac, an analyst at Janney Montgomery Scott.

But the changes mean it could take longer for banks to recognize the fee income from originating the loans. Lenders expect to record those fees over the life of the loans through interest income.

The research team at Keefe, Bruyette & Woods, which originally forecast that the fees would kick in during the next two quarters, said it now expects most banks will collect those fees in late 2020 or early next year.

Bankers should be able to space out forgiveness applications, which should help avoid overburdening their staffs.

“I believe it will even out the work flow for the banks instead of everything coming due in two weeks,” said Todd Nagle, CEO of IncredibleBank. “There is less pressure on businesses to get their paperwork done.”

Lawmakers also lengthened the maturity period of PPP loans from two years to five years, but bankers said they expect very few borrowers to hold onto their loans for that long.

“We believe the majority of business owners pursued their PPP facility to secure loan forgiveness,” said Chuck Shaffer, chief operating officer and chief financial officer at the $7.4 billion-asset Seacoast Banking Corp. of Florida in Stuart. “The changes could impact the calculus of these borrowers. However, we expect this to be the exception, not the rule.”

Bankers, while generally pleased with the fixes, still have a list of improvements they would like to see made to the program. Some might be legislative; others could be handled by the SBA and Treasury.

The biggest concern has been the complexity of the forgiveness process, which includes an 11-page application. There is a chance it could get longer as a result of the legislative fixes, industry experts said.

Though the 24-week coverage period is mandatory for new PPP loans, existing borrowers must work with their lenders to extend the original eight-week timetable. While most borrowers and lender will agree, some may not. That could lead to two sets of applications.

The SBA and Treasury are “going to have to go back to the drawing board and revamp the application,” Anasagasti said.

Another complication involves a “cliff” provision inserted in the new law that bars forgiveness for borrowers who fall short of the new payroll requirement. The original rules allowed borrowers who fell short of the 75% threshold to receive partial forgiveness.

“The cliff is a brand new concept,” Anasagasti said. “We never heard of it in the discussions we tracked.”

Bankers such as Jill Castilla, CEO of Citizens Bank of Edmond, would like to see total forgiveness for smaller loans made under the Paycheck Protection Program.

Automatically forgiving small-dollar loans would “be a big step” toward boosting demand as some cities remained closed, said Vernon Hill II, chairman of the $3.3 billion-asset Republic Bank in Philadelphia.

The Consumer Bankers Association and Bank Policy Institute have called for blanket forgiveness of loans of $150,000 or less. The Independent Community Bankers of America has proposed a presumption of compliance on loans of $1 million or less.

The American Bankers Association supports efforts to include blanket forgiveness, said James Ballentine, the association’s executive vice president for congressional relations. He noted that a $150,000 threshold would cover about 80% of all PPP loans.

While he said he's “thankful for PPP improvements, including the now 60/40 rule and extending time” to qualify, Brad Bolton, CEO of Spirit Community Bank, tweeted late Thursday that he was “disappointed” the law did not red application process or presumption of compliance for small loans.”

Small businesses and bankers need simplicity so they can spend more time on “continued recovery efforts,” added Bolton, who is also the ICBA’s vice chairman.

“Substantive simplification or total forgiveness is needed for smaller PPP loans — and needed fast,” Jill Castilla, CEO of Citizens Bank of Edmond in Oklahoma, said in response to Bolton’s original tweet. “You don’t want the complexity of a form to drive a small business out of business.”

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Paycheck Protection Program Community banking SBA Treasury Department Small business lending Coronavirus