As lawmakers weigh PPP reforms, bankers want them to think big

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WASHINGTON — Small businesses will be unable to get loans through the Paycheck Protection Program starting Saturday without congressional action, but bankers say lawmakers should prioritize a host of other provisions to improve the program besides just reauthorizing it.

As Congress debates a new coronavirus relief package, the industry is urging lawmakers to focus on prescriptive measures to simplify the PPP loan forgiveness process and on removing barriers small businesses may face in trying to get a second loan.

“Giving those smaller businesses a second bite of the apple, including [personal protective equipment] expenses being covered, is a lifeline,” said Patti Husic, president and CEO of the $1 billion-asset Centric Financial in Harrisburg, Pa.

Senate Republicans last week proposed to make roughly $190 billion available for businesses to apply for a first or second loan. Democrats, in their stimulus proposal introduced in early July, suggested allowing businesses to apply for PPP loans through Dec. 31. As of July 31, roughly $128 billion was still available for lending through the existing PPP.

While bankers would like for Congress to enable businesses to access a second loan, some bankers are concerned about a proposal to reduce the origination fees that banks can collect on a second loan from 5% to 3%.

Bankers would also like Congress to address concerns about the Small Business Administration's process for forgiving PPP loans by specifying in the legislation what an application form for forgiveness should look like.

“Many small businesses participating in PPP were completely overwhelmed with the application process and forgiveness has proven to be even more of an obstacle,” said Jill Castilla, CEO of the $292 million-asset Citizens Bank of Edmond in Oklahoma. “Small businesses have exhausted their reserves for operational losses. They need immediate help."

Husic said the SBA and Treasury need to reduce the number of changes being made to the program, which has caused confusion.

Some bankers are concerned that because of the constant changes, the loans they originate will not be guaranteed by the government.

“Congress needs to immediately extend the payment subsidy of SBA loans and provide 100 percent guarantees to SBA loans originated in 2020,” Castilla said.

Some bankers want blanket forgiveness of all loans of $150,000 or less as well in addition to letting companies access a second round of financing.

“A lot of businesses brought their employees back as soon as they got their money, but others didn’t, and those that did used the money in eight weeks and the amount they got cannot sustain them long-term,” said Husic.

High on the industry's wish list is for Congress to focus on improving the loan forgiveness process.

Republican senators’ proposal, known as the Health, Economic Assistance, Liability Protection, and Schools Act, or HEALS Act, would automatically forgive loans under $150,000 for borrowers who submit an attestation to lenders that they made a good faith effort to comply with requirements in the PPP. Borrowers receiving up to $2 million in PPP loans would also be exempt from submitting several documents and requirements initially mandated by the Coronavirus Aid, Relief and Economic Security Act, or CARES Act.

A spokesperson for the Consumer Bankers Association said that the simplified PPP forgiveness was a positive step, but that it could still be improved.

“While the HEALS Act does call for streamlined forgiveness, it does not specify what that form should look like or set a timeline for SBA to issue the form,” the spokesperson said. “Congress already instructed SBA to create an 'EZ' form, which when released still required a full page of complex business calculations many small businesses will have to hire a third-party firm to complete.”

Bankers support a proposal introduced by Sens. Kevin Cramer, R-N.D., Thom Tillis, R-N.C., Bob Menendez, D-N.J., and Kyrsten Sinema, D-Ariz., that would go a step further by specifying that the attestation could be a simple one-page form submitted to the lender. The legislation would also ensure the lender will be held harmless from any enforcement action if the borrower’s attestation contained falsehoods.

Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, said that a “safe harbor” for lenders was “very attractive.”

“We are fully engaged and pressing hard to get relief in the forgiveness phase,” Merski said. “I think if you can get that, you’ll free up time and resources to be able to extend additional PPP loans. But most loan officers around the country are working with borrowers now on the grant phase, collecting all that paperwork.”

Some observers also say the loan terms associated with the program have not made it worth the time that banks spend processing forgiveness applications.

Merski said that the 1% interest rate on PPP loans proposed in the HEALS Act, as well as the proposed decrease in origination fees from 5% to 3% if businesses apply for an additional PPP loan, is not attractive to banks given the amount of time spent dealing with PPP loans.

“The terms just barely worked in the first round of PPP with the origination fees and interest rate and things like that,” Merski said. “Now the origination fees … and terms are even less attractive in what’s been proposed. So I don’t see a robust take-up of additional PPP lending if the terms for both the borrower and lender get worse. … The fees were on the low side for the amount of work they ended having to do.”

Ed Mills, a policy analyst at Raymond James, said banks need better incentives to make it worthwhile to participate in the paycheck program.

“Incentives matter,” Mills said. “Initially folks were really engaged because they wanted to provide assistance to existing customers. But you’ve gone through an earnings season where [net interest margins] have been lower because the interest rate charged has been below the market interest rate that is traditionally charged on bank loans.”

While bankers are seeking more incentives to participate in the PPP, some observers are skeptical that improvements, such as higher fees or interest rates or a simplified loan forgiveness process, would be appropriate.

Moorari Shah, a partner at Buckley, said raising interest rates and fees on the PPP would go against the original intent of the program.

“Higher interest rates might also be helpful, but they are contrary to the program itself, which was intended to create a less expensive source of credit,” Shah said.

Gregg Gelzinis, senior policy analyst at the Center for American Progress, noted that banks have profited from participation in the PPP, despite compliance burdens associated with forgiving the loans.

“I would say it seems like whether it’s from PPP or the debt issuance that’s occurring thanks to the Fed’s intervention, banks have made out pretty good from a profit standpoint when it comes to these emergency programs,” Gelzinis said. “So generally speaking, I don’t have a lot of sympathy that they need to be compensated more or their paperwork burden needs to be limited.”

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Paycheck Protection Program SBA Small business lending Coronavirus Community banks Regional banks