Emergency loan program forces bankers to make hard choices

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The Paycheck Protection Program is presenting bankers with a difficult choice — wait for a promissory note from the Small Business Administration or pay out loans now without an explicit government guarantee.

The $349 billion program, designed to get money into the hands of small businesses hurt by the coronavirus outbreak, got off to a rocky start during its debut Friday, as bankers struggled to access the SBA's system. Without a properly executed promissory note, the SBA could, in theory, decline to honor the 100% guarantee Congress attached to emergency loans, leaving banks on the hook for potential losses.

Some bankers who navigated the SBA's platform over the weekend are prepared to fund the loans they have approved, counting on other forms of documentation to provide legal cover.

Others remain cautious, preferring to rely on the same process they use for the SBA’s flagship 7(a) program.

“We haven’t funded anything until we get a little more guidance from SBA,” said Rick Beall, president and CEO of the $112 million-asset Peoples State Bank in Velva, N.D., which has about 30 loans ready and waiting to fund. “It’s too risky I think right now to do it.”

IncredibleBank in Wausau, Wis., is holding 120 loans valued at $40 million until it gets feedback from the SBA, said CEO Todd Nagel.

“We’re waiting on that promissory before funding,” Nagel said.

Absent promissory notes or guidance from the SBA, lenders must balance the financial risk of originating the loans against the reputational risk of delaying aid for needy borrowers.

The SBA declined to comment.

Jill Castilla, CEO of Citizens Bank of Edmond in Oklahoma, said she is proceeding with originations even though she is still awaiting guidance from the SBA. The $302 million-asset bank gained access to the SBA’s platform late Saturday night.

“We'll fund out … but it's jumping out of the plane without a parachute,” Castilla said.

Aquesta Financial Holdings in Cornelius, N.C., funded its first Paycheck Protection loan on Friday. The company, which had about 120 in loans in its pipeline on day one, had employees working over the weekened.

“Customers have been extremely grateful,” said Jim Engel, the $523 million-asset company's CEO.

"We’ve had people literally in tears. The thought of losing everything has been traumatizing," Engel added. "A lot of our clients are restaurants and they’re just shot. They’re trying to hold on to their staff."

First Southwest Bank in Alamosa, Colo., had received more than 430 applications by Monday. The $333 million-asset bank plans to start cutting checks on approved loans in the next seven to 10 days, though heavy volume could push that target out some, CEO Kent Curtis said Monday.

“Other banks are asking if they can send their customers though our system,” Curtis said. “There’s been an outpouring of thanks for us bringing so much money to the region. ... I think eventually we could do as many as 1,000 of these loans, maybe more."

Looking back, lenders acknowledge that it was impossible for officials to resolve all the details of the lending program in the week before its launch.

That effort "was extraordinary and probably too unrealistic," said Chris Hurn, CEO at Fountainhead Capital in Lake Mary, Fla.

Lenders complained loudly when the SBA and the Treasury Department, which are administering the Paycheck Protection Program, released a loan application form on March 31, only to put out a revised version two days later. By then banks had taken thousands of applications using the original document.

Banks were also whipsawed when the program’s interest rate, capped at 4% by the stimulus law, was set at 1% by the agencies.

Bankers have also clamored for guidance on a multitude of other issues, including how to calculate an applicant's payroll expenses and a smoother process for qualifying new lenders to join in the effort.

Another concern for bankers appears close to being resolved.

The Federal Reserve announced Monday that it would provide financing to banks participating in the emergency loan program. The initiative would let banks extend more credit to small businesses.

That financing should provide helpful to lenders like IncredibleBank, which has been sitting on more than 700 applications totaling $140 million in order to keep PPP loans below a tenth of total assets.

“We have the capacity, but we’re not going to leverage more than 10%,” Nagel said. “It is eating into our capital. As the balance sheet grows our capital ratio goes down.”

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SBA Coronavirus Small business lending Paycheck Protection Program