New Guidance for PPP Loans Fails to Provide Automatic Forgiveness

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The SBA and Treasury released a simplified loan forgiveness application for PPP loans of $50,000 or less. The two-page forgiveness application, called Form 3508S, is designed to ease the servicing burdens for lenders currently weighed down by collecting required borrower information and documentation.

While the streamlined application is welcomed, it is important to note the new guidance does not provide automatic loan forgiveness. PPP forgiveness procedures are the same, meaning banks servicing loans for PPP borrowers are still obligated to calculate the loan forgiveness and provide all supporting documents.

Form 3508S: What You Need to Know

The application is two pages, with the first page asking applicants to certify the PPP loan received does not exceed $50,000, and the money provided was used to pay eligible costs. Applicants must also submit verification of payroll and non-payroll expenses for the covered period. The second page focuses on borrower demographics, such as race, gender, veteran status, and is optional.

Borrowers who qualify to use Form 3508S are exempt from any reductions in the loan forgiveness amount based on reductions in full-time equivalent (FTE) employees or reductions in employee salary or wages that would otherwise apply. Also, SBA Form 3508S may not be used if total PPP loans for the borrower and its affiliates are equal to or greater than $2,000,000.

The Good & Bad News

The good news: Approximately 1.71 million PPP loans of $50,000 or less were made to small businesses, totaling $62 billion. A simplified application for these borrowers is certainly a step in the right direction, however, the new form only results in a reduction of ~25% of the work required by lenders to process the forgiveness application. The SBA & Treasury update is far from ‘simple’ to be certain.

The bad news: Nearly 463 billion PPP loans, of the total $525 billion provided, do not qualify for the simplified forgiveness application. Additionally, the clarification for borrowers forced to reduce wages or laid off employees does little to reduce the servicing requirements for lenders. Form instructions still require the gathering and submission of bank statements, tax forms, and payment receipts.

According to the Consumer Bankers Association, banks estimate that as many as 80% of PPP forgiveness applications that have been submitted by small businesses are requiring additional follow-ups to reconcile errors or find missing information.

On the Horizon: Years of Regulatory Scrutiny

There are increasing concerns lenders could face legal challenges and reputation damage over PPP lending as regulators identify potential fraud. Bank of America, for example, said in a July filing that its participation in government stimulus programs “could result in reputational harm and government actions and proceedings, and has resulted in, and may continue to result in, litigation, including class actions.”

A recent U.S. House committee analysis found tens of thousands of PPP loans could be subject to fraud, waste, or abuse, with the SBA inspector general recently stating there are “strong indicators of widespread potential abuse and fraud.”

So, What’s Next?

The new guidance is a positive step for businesses that qualify, however lenders should anticipate the rules and interpretation may continue to evolve. For many bankers, PPP forgiveness complexity, ongoing updates, and the risk of long-term scrutiny is too big a burden. By selling all or some of a PPP loan portfolio to a servicing expert, lenders can avoid forecasted PPP pitfalls.

Reduce Risk & Accelerate Loan Income

ACAP, an SBA-approved non-bank servicing partner, provides complete PPP loan servicing solutions. By outsourcing PPP loan servicing to ACAP, lenders can rest assured all required borrower documentation is collected and submitting to the SBA properly and promptly. With 30K PPP loans totaling $4.0 billion purchased to date. ACAP brings the most experienced PPP team together under one roof to provide the white-glove loan servicing PPP borrowers deserve.

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ACAP was created exclusively to service PPP loans. We are an SBA-approved non-bank servicing partner providing complete PPP loan servicing solutions. The Loan Source originates SBA (including PPP loans) and buys PPP loans. Our team is committed to helping banks reduce future risks and accelerate loan income.

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Partner Insights by ACAP & The Loan Source
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