Confusion, inconsistency mar rollout of small-business loan program

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A massive government program aimed at delivering deliver emergency relief to small businesses devastated by the coronavirus outbreak lurched forward Friday, weighted down by the short timetable and lack of coordination among the many parties involved.

Confusion was rampant among bankers, small-business owners and policymakers as some lenders plowed ahead on the Paycheck Protection Program’s official launch date, while others planned to wait until next week.

Among banks that did start taking loan applications, eligibility was generally restricted to existing customers, though the specific criteria still varied significantly. Some of the restrictions that banks were placing on applications angered small-business owners and both Democratic and Republican lawmakers.

“Creating artificial barriers that block businesses from much-needed capital is redlining by another name,” Sen. Ben Cardin, D-Md., said in a statement.

The Paycheck Protection Program, run by the Small Business Administration, is part of the $2.3 trillion stimulus package enacted a week ago in response to the coronavirus crisis. The $349 billion program will provide government-guaranteed small-business loans of up to two and a half times a company’s monthly payroll, which can be fully forgiven if the funds are used for payroll and certain other purposes.

Banks and credit unions that approve applications will receive 1% interest and processing fees of 1% to 5%.

Sen. Marco Rubio, who crafted the program with Cardin, pleaded with certain unnamed banks to loosen their eligibility rules. “Please don’t be a bunch of jerks,” the Florida Republican said in a video posted online.

In the program’s initial hours, participating banks were hit with an avalanche of applications from cash-strapped small businesses that are eager to get approved for a program that operates on a first-come, first-served basis.

First out of the gate was Bank of America, which started taking online applications early Friday and received around 85,000 applications within the first 12 hours. The Charlotte, N.C.-based bank initially restricted applications to existing small-business borrowers, freezing out businesses that only have a deposit relationship with BofA.

But by Saturday morning, BofA had loosened its eligibility criteria. Customers that had small business checking accounts as of mid-February, but no credit products, can now apply for relief as long as they do not have a borrowing relationship with another bank.

JPMorgan Chase has also opened its online portal to receive applications. The nation’s largest bank established comparatively loose eligibility criteria, stating that applicants need to have Chase checking accounts but do not necessarily need to have a borrowing relationship.

Wells Fargo said on its website that small businesses that had a business checking account at the San Francisco bank on Feb. 15 will be eligible to apply, as long as they use online banking. By late Friday afternoon, Wells Fargo had yet to start accepting applications.

Other banks made different choices.

U.S. Bancorp, which expected to begin taking applications digitally on Friday afternoon, planned to start with customers that have product relationships with the Minneapolis bank — loans, accounts or credit cards — and have previously signed up to receive information about the emergency aid program.

A U.S. Bank spokesman said that those customers will receive an email from the bank over the next several days seeking additional data and documentation.

M&T Bank in Buffalo, N.Y., said it is preparing to accept applications starting on Monday. To get funding from the $119 billion-asset lender, applicants will be required to have had business checking accounts since mid-February.

Fifth Third Bancorp in Cincinnati also plans to launch next week, though an exact date hasn’t been set, according to a spokeswoman. A spokesman for Citigroup, the fourth-largest bank in the U.S., said the New York-based lender is reviewing program guidelines and expects to start accepting applications as soon as possible.

One bank industry official, who spoke on condition of anonymity, blamed the Treasury Department for the program’s chaotic rollout, saying that Trump administration officials put politics first by pushing for a launch before banks were prepared.

“They didn’t listen to concerns or really seem to care,” this official said. “Less time should have been spent going on TV setting up high expectations, and more time spent doing the work to make sure this was ready to go. They went forward and made the calculation banks would take the blame for a flawed rollout.”

In response, a Trump administration official said that Treasury and the SBA have established an unprecedented $350 billion program in just one week. "Billions of dollars in loans have been registered on the very first day of activity," the administration official said. "We are continuing to update guidance and work with lenders to ensure that all eligible borrowers and lenders are able to participate in this critical program."

In Evansville, Ind., Old National Bancorp was expecting to open its online portal on Friday afternoon. The $20.3 billion-asset bank is working with current customers only, a spokeswoman said.

“Whether it’s someone with a mortgage with us or a deposit account with us or a loan, we’re assisting those current clients,” spokeswoman Kathy Schoettlin said.

Program guidance that was released by the Treasury Department on Thursday shed some light on the choices that banks made about which applications to accept. The guidance states that participating banks and credit unions should follow their existing Bank Secrecy Act protocols when making loans under the program, which highlighted the greater risks associated with approving noncustomers.

But those compliance requirements did not appear to offer an explanation for why some banks were only accepting applications from existing customers that have a lending relationship, as opposed to those that only have a deposit account.

Under the program’s terms, banks have a financial incentive to help their own existing borrowers first, since small businesses that become insolvent will be unable to repay their debts.

Mehrsa Baradaran, a law professor at the University of California, Irvine, argued that the program does not offer sufficient financial incentives for banks. She said a direct government lending program that did not use banks as intermediaries would have made more sense.

“There’s nothing in it for banks,” said Baradaran, a frequent critic of the industry. “For banks to do it, it’s taking away from some of the things that they would rather be doing.”

Many small-business owners reported Friday that they were rejected by banks because they are not an existing borrower or customer, said Karen Hamed, executive director of the legal center at the National Federation of Independent Business.

“I am worried that the smaller businesses that we represent will lose out on these just because of the logistics of getting their applications processed on time,” she said.

Hamed suggested that Congress may ultimately need to pump more money into the program. “I don’t know how long $350 billion is going to last us,” she said.

This article was updated Saturday to reflect changes to Bank of America's eligibility criteria and to incorporate more recent application volume numbers from BofA.

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Small business lending Coronavirus SBA Bank of America JPMorgan Chase Wells Fargo M&T Bank Fifth Third Bancorp U.S. Bancorp Paycheck Protection Program