Banks, PPP recipients caught in bind between two SBA rescue programs
WASHINGTON — Banks are urging Congress to address more confusion about the Paycheck Protection Program, this time as it relates to the impact of another coronavirus relief initiative.
As lenders process PPP forgiveness applications, they are being hit with the surprise that a certain amount of PPP loans cannot be forgiven if a borrower also sought aid from the Small Business Administration’s preexisting Economic Injury Disaster Loans program.
In addition to establishing the PPP, the Coronavirus Aid, Relief, and Economic Security Act allowed the SBA to provide up to $10,000 of a borrower's EIDL financing upfront as a grant. However, borrowers receiving the advance must have it deducted from their PPP forgiveness and converted to a loan payable to the PPP lender.
While SBA says this policy was clearly communicated through guidance, banks say they had no clue if a PPP borrower also had an EIDL advance. The SBA clarified the restrictions in an interim rule in June and updated guidelines in August, but that was well after banks started receiving a flood of PPP applications. The CARES Act was enacted in March.
“What’s happening is the amount of forgiveness on PPP is reduced and basically the SBA is putting the amount of the EIDL [advance] that they originated directly with the borrower onto my balance sheet,” said Noah Wilcox, chairman of the Independent Community Bankers of America and CEO of the $278 million-asset Grand Rapids State Bank in Grand Rapids, Minn. “It doesn’t make any sense.”
Sen. Ben Cardin, D-Md., the ranking member of the Senate Small Business Committee, has drafted legislation to repeal the requirement that SBA deduct the amount of any EIDL advance from a borrower’s PPP forgiveness amount. Banks are also urging the SBA to halt implementing the requirement to avoid the financial shock for small businesses already reeling from the pandemic.
The EIDL program was originally authorized under the Small Business Act. The CARES Act expanded eligibility to allow EIDL loans for businesses with up to 500 employees, and established the EIDL advances that totaled $20 billion. Borrowers could seek an advance totaling $1,000 per employee, up to $10,000.
“The advance is where people got confused, because if you applied for the EIDL program, you will get an emergency advance and anybody who applied under the CARES Act, regardless of whether you get approved or not, you get this emergency advance and it was up to $10,000,” said Margaret Rosenfeld, a partner at K&L Gates. “That advance never has to be paid back … except if you also got a PPP. If you got a PPP, that advance gets rolled into the calculation for forgiveness under that.”
Because the PPP program was administered through banks and the EIDL program was administered by the SBA, banks say they weren’t able to alert their borrowers that the EIDL advances would be deducted from the amount of the PPP loan that could be forgiven because they didn’t know whether businesses were participating in both programs.
“The PPP lenders had no idea if the borrower had an EIDL loan or would get an EIDL loan in the future. They are operating kind of blind, independently of each other,” said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America.
Confusion over the impact of EIDL advances is yet another complaint by banks about the PPP forgiveness process. The industry has previously raised concerns about the lag time it takes SBA to approve forgiveness for a borrowers and has long sought legislative fixes to make the forgiveness application simpler.
James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association, said banks and borrowers are bearing the brunt of the EIDL and PPP programs “not speaking to each other.”
Borrowers have also missed certain details about the rules for PPP and EIDL advance forgiveness, Rosenfeld said. She said most small businesses were so desperate to stay afloat that they applied for any assistance available.
“Most small businesses owners I know are just doing anything they can to stay alive during this time, the ones that are really struggling that are really impacted by the pandemic,” Rosenfeld said. “So they are going to take that paper and they are going to sign it and they are not going to read the details of it.”
But borrowers aren’t the only ones dealing with the burden of an unexpected loan of up to $10,000 that they must pay back. Banks are now dealing with an influx of new unforgivable loans on their books that were originally administered by the SBA.
“The PPP lending banks are scratching their heads, saying, Wait a minute, why do I have an EIDL loan now on my books for up to five years?” said Merski. “And some of them are rather small, it could be $1,000 that the bank has to service for the next five years. It’s kind of a hot mess and probably over a million of these situations exist.”
Wilcox said that his bank has on its books between $140,000 and $150,000 in unforgivable loans from the PPP and EIDL programs as of now.
“It’s a snarky thing, because the borrower is looking at the bank,” Wilcox said. “This is the SBA’s $20 billion problem, not mine, but I’m the messenger, and I don’t think that’s a fair position to put community banks in.”
The ICBA, ABA and a number of other banking and small-business trade groups have urged the House and Senate small business committees to address the issues with EIDL advances getting deducted from the PPP forgiveness calculation. They are asking Congress to either allocate leftover PPP funds that have not been distributed yet to cover the EIDL advances so that borrowers don’t have to pay them back, or to remove residual EIDL balances from banks’ books and return them to the SBA.
“Lenders we represent are seeing firsthand the spreading awareness, shock and resentment among borrowers who believe they were deceived about the nature of the EIDL Advance,” the trade groups said in an Oct. 19 letter to Congress. “We do not believe it was the intent of Congress to effectively trap one million vulnerable small businesses with unexpected debt.”
But SBA representatives argue that the agency was clear in its publicly released guidance that EIDL advances would be deducted from the forgiveness calculation for PPP loans.
“In order to comply with the CARES Act, SBA will automatically deduct the EIDL Advance amount reflected in SBA’s records from the forgiveness payment sent to the lender,” a spokesperson for SBA said in a statement to American Banker. “SBA communicated this publicly in several Interim Final Rules (posted on April 2, 2020, April 14, 2020, and May 22, 2020), the Loan Forgiveness Application Form 3508 posted on May 15, 2020, a Loan Forgiveness Procedural Notice issued on July 23,2020, and in Loan Forgiveness Frequently Asked Questions (FAQs) posted on August 11, 2020."
Michael Flynn, an attorney at the Buchalter law firm, said Congress has generally shown an interest in addressing small businesses' needs in the midst of the pandemic.
“Congress may have interest as a policy matter to do something similar to PPP forgiveness with the grant portion of EIDL,” Flynn said. “Congress has certainly shown an interest in addressing the concerns of small and midsized businesses and their impact on our economy through this COVID crisis.”
Ballentine said any additional coronavirus stimulus legislation should include a fix that would enable borrowers to have both their EIDL advances and PPP loans forgiven.
“As Congress looks to provide additional funding for PPP, these are the kinds of issues that need to be corrected so that there is a cleaner program going forward,” Ballentine said. “You really make it challenging for the lender and the borrower with these kinds of issues.”