As PPP deadline approaches, a few lenders make a final push
As most banks and credit unions shift focus from making Paycheck Protection Program loans to having them forgiven, a few lenders continue aggressively pursuing new originations.
The number of loans made under the program has increased just 4.6% since May 16, to about 4.5 million, while aggregate volume is down slightly after some earlier loans were returned. About $131 billion in PPP funding remains, according to the Small Business Administration.
Against that backdrop, lenders like Customers Bancorp in Wyomissing, Pa.; Cross River Bank in Fort Lee, N.J.; and Fountainhead Capital in Lake Mary, Fla., are still looking to make as many loans as possible before the looming June 30 deadline for applications.
Fountainhead, a nonbank lender, is turning a small profit on its originations at a time when demand for traditional SBA loans is tepid, said CEO Chris Hurn.
“It’s definitely the big game in town,” Hurn said.
Active participation represents a change of heart for Hurn, who was sharply critical of the program’s initial rollout. He said the process has become smoother during PPP’s second phase.
“It definitely got off to a rocky start, but round two has been better,” Hurn said. “That’s allowed us to focus and, like an assembly line, work through this for our borrowers.”
Fountainhead is on pace to make about 2,500 program loans by the time the program’s origination window closes. It has purchased another 2,500 loans from other PPP lenders.
“The play for us is to buy them at a discount, then bet that the forgiveness process will be less cumbersome,” Hurn said. “We’re comfortable with the asset. I’m not crazy about the [1%] interest rate, but with the cost of funds as low as it is [borrowing through the Federal Reserve’s Paycheck Protection Program Liquidity Facility], I’ve got a positive rate of carry. We’re making a little money.”
Lenders caught a few breaks last week when a newly enacted law allowed for more non-payroll-related spending and expanded the covered period for forgiveness from eight to 24 weeks.
The $12 billion-asset Customers has made more than 80,000 Paycheck Protection loans. Its originations jumped from $380 million in the program’s first round to more than $4.6 billion in the second phase.
The Paycheck Protection Program was included in the $2.2 trillion coronavirus stimulus program that was signed into law March 27. Small businesses with 500 or fewer employees can borrow up to $10 million.
After the program’s initial $350 billion funding was exhausted in roughly two weeks, Congress approved another $310 billion. Loan proceeds spent on personnel and benefits costs, as well as some basic operating expenses, are eligible for forgiveness.
Customers remains an active Paycheck Protection lender, even though many of the loans it is approving result in a net loss, said Sam Sidhu, the company’s vice chairman and chief operating officer. While the initial loans were for relatively large amounts, some recently originated credits have been as small as $4,000, Sidhu said.
“As sole proprietorships became eligible, we noticed the average loan size get smaller and smaller,” Sidhu said. “On a $4,000 loan, you have a 5% fee, which is $200. Just producing legal documentation costs more than that.”
Since early May, the average size of Customers’ PPP loans has dropped by about 20%, to $60,000, Sidhu said.
Fountainhead and Customers are among the lenders pressing lawmakers and the program’s administrators to streamline the forgiveness process.
Hurn said he hopes the 11-page forgiveness application will be shortened, adding that he would like to see it “cut back to one or two pages.”
Sidhu feels likewise.
“The borrower has to fill out [the application] and provide supporting documentation,” Sidhu said.
“Doing that is going to take a significant amount of time, especially for small borrowers who don’t have chief financial officers, who don’t have accountants, who don’t have lawyers, who don’t have more than two or three employees total,” he added. “What we need to do is educate them on how the forgiveness process works.”
Customers’ management and board have adopted a policy of getting as much Paycheck Protection money to borrowers as possible, Sidhu said. To that end, Customers is one of a relatively small number of depository lenders that has not required borrowers to open an account at its bank.
While its average loan size has been decreasing, Customers has gone out of its way to add Paycheck Protection loans to its portfolio, even signing agreements with a number of fintechs that lacked a funding source for their loans. It also stepped in to help Ready Capital with its originations.
“We developed partnerships with those that needed our capital and in whom we were confident would be a strong institutional partner,” Sidhu said. “They had dozens, if not hundreds, of engineers on their side and they could develop a better sort of sourcing and execution mousetrap to” process applications.
Customers was not the only bank to partner with fintech to make more loans.
The $2.5 billion-asset Cross River partnered with more than 30 fintechs to make more than 105,000 PPP loans for $4.7 billion. Cross River ranks among the top PPP lenders in overall volume.
“COVID-19 has had a devastating impact on businesses across the country and we immediately recognized how to leverage our own technology, knowledge of fintech and expansive relationships to ensure wide access to PPP loans,” Cross River CEO Gilles Gade said in a press release.
While Customers' original goal was to help borrowers and spur economic recovery, Sidhu said he believes the company’s extensive involvement should boost its long-term plan to become a national lender. PPP has added to Customers’ national client base and helped it build deeper fintech relationships.
“We were already speaking with many of the fintechs ... about potential partnerships on the small-business lending side,” Sidhu said.
Customers has also started asking PPP borrowers if they would consider switching banks, with a conversion rate as high as 25%.
“We’re essentially using this government program to build a stronger affinity and relationship that would otherwise take years and tens of millions of marketing dollars,” Sidhu said.