Borrowers may fall shy of PPP forgiveness standard, SBA watchdog warns

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The Small Business Administration’s inspector general is raising concerns that many borrowers in the Paycheck Protection Program could fail to qualify for full forgiveness of their loans.

Mike Ware, who oversees the inspector general office, wrote in a report released Friday that the SBA’s standard requiring that 75% of Paycheck Protection proceeds be spent on payroll costs would hamstring large numbers of borrowers.

“Our review of data from round one found that tens of thousands of borrowers would not meet the 75% payroll cost threshold and would therefore have to repay the amount of nonpayroll costs in excess of 25% in two years,” the report said.

Ware noted that the payroll threshold and the loans’ two-year maturities were not part of the coronavirus stimulus package that authorized the Payment Protection Program. Rather, the SBA and the Treasury Department created those rules while implementing the program.

The agencies also locked in a 1% interest rate for the unforgiven portions of PPP loans even though the law allowed the rate to be as high as 4%.

Ware’s report also chided the SBA and Treasury, which are administering the PPP, for failing to issue guidelines outlining the program’s forgiveness terms in the time frame required by the stimulus law.

The law required the agencies to create forgiveness guidelines within a month of President Trump's signing of the legislation on March 27.

As the delay has dragged on, lenders have been voicing concerns about forgiveness guidelines, with bankers claiming that the absence of rules has played a role in the program’s slowing usage rate.

“The current lack of clarity is inhibiting critical spending, and only clear and reliable guidance will allow the program to reach its potential,” Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America, said in a Wednesday press release.

The American Bankers Association has also called for "clear, bright-line guidance" on how Paycheck Protection loans will be forgiven.

“This program has already provided more than 4 million loans to small businesses across the country, but until we resolve some of these remaining issues, this financial lifeline will remain a work in progress,” Rob Nichols, the ABA's president and CEO, wrote in a letter to the agencies running the program.

Romero Rainey also called on the SBA and Treasury to reduce the nonstatutory 75% payroll requirement to 50%. According to one banking trade group, about $125 billion of the PPP's current $310 billion funding allocation remains unspent.

The program’s initial $349 billion funding was expended between April 3 and April 16.

Finally, the inspector general report found that the SBA and Treasury did not prioritize lending to veterans and women, as well as minority and rural borrowers, as required by the stimulus law. The report suggested that the agencies provide fresh guidance to lenders encouraging them to prioritize underserved communities.

The report also suggested revising PPP applications to collect borrowers’ demographic data and encouraging optional reporting on forms used to request loan forgiveness.

The inspector general’s comments on underserved communities and collecting demographic data comes less than two weeks after the Office of the Comptroller of the Currency issued guidance urging PPP lenders it regulates to “identify and track the PPP loans made to small-business borrowers that have annual revenues of $1 million or less and are located in low- to moderate-income areas.”

The Consumer Financial Protection Bureau has also raised concerns about possible discrimination in the distribution of PPP loans.

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Paycheck Protection Program Law and regulation OIG SBA