When the federal government launched the Paycheck Protection Program (P3) in April, one rule was clear for small business owners in their chaotic and messy beginnings: if most of the loan money was used to pay employees, the debt would be canceled.
But as the program enters its loan cancellation phase, these homeowners – and their lenders – find that while the principle may have been straightforward, its execution is anything but.
Many lenders have yet to begin accepting loan cancellation requests from borrowers. They are waiting to see if Congress passes a proposal for automatic debt cancellation of less than $ 150,000, which constitutes the bulk of loans made under the program.
Square, the mobile payment company, loaned Audrey Kramer $ 5,600 in May to pay the lone employee of Sweet Treat Stop, her mobile food truck bakery. She has been ready since July to request debt relief, but Square has not started accepting the requests. He emailed her this month saying that he “was waiting to publish our request for forgiveness until we got more information from Congress.”
Kramer is grateful for her loan – it has helped her keep paying her baker even as her sales have plummeted – but she is also anxious to get it over with. “We have been careful and we have never incurred any debt on the company,” she said.
On Thursday evening, the Small Business Administration (SBA), which manages the program, released new forgiveness forms and new rules for loans under $ 50,000. These loans represent nearly 70% of the program. The new rules mean that some borrowers can still have their loans canceled even if they reduce their staff or wages after taking the loan, but they will have to submit payroll documents and other records.
Lenders said the change was a start, but it didn’t go far enough. The Consumer Bankers Association, an industry trade group, has renewed its call for all loans under $ 150,000 to be automatically canceled.
“It is almost a nightmare to go through the forgiveness process as it is now written,” said Richard Hunt, chief executive of the group. “You have millions of small businesses in crisis, some in bankruptcy, and Congress is not there when they need it.”
Lenders have said they are also hesitant to process applications without knowing how well crucial aspects of the loan cancellation would work, such as the care with which they are expected to review documents provided by the borrower, such as records. payroll. They are awaiting details of the Trump administration’s announced plan to audit all loans over $ 2 million. And they worry about whether they will be reimbursed by the government for loans they have made to businesses that have since closed or gone bankrupt.
More than 5.2 million business owners borrowed a total of $ 525 billion through the paycheck program, which used banks and other lenders as intermediaries to issue the loans. From April to August, small businesses were encouraged to borrow money to cover eight weeks of payroll and a handful of other expenses. Once the money is spent, borrowers must apply to their bank to have their loan repaid by the government.
But business owners looking to initiate the loan cancellation process have found that lenders are generally unwilling to work on these requests until Congress is clear, especially given the cost and complexity. processing relatively small loans. Loan cancellation proposals were presented in both the House and Senate with bipartisan support – Treasury Secretary Steven Mnuchin has said he was a supporter – and were likely to be included if Congress passed. a bill on economic aid, but the fate of such legislation is uncertain, with the presidential election in a few weeks.
Ed Sterling, chairman of Flagler Bank in West Palm Beach, Fla., Said lenders “are waiting at the edge of our seats” for legislative action. The process of reviewing a loan cancellation application will take his bank about three times as long as it took to get the loan, he said.
The SBA has been slow to act on loan forgiveness requests sent by lenders. The agency began accepting forms on August 10. By the end of September, she had received 96,000 but had not yet approved or refused a single request, William Manger, the agency’s chief of staff, said in a House subcommittee hearing. By law, the agency has 90 days to respond after receiving a request. An SBA representative said the agency sent its first loan approvals and payments to banks on October 2.
Lynn Ozer, a banker specializing in small business loans, said borrowers she worked with at Fulton Bank in Lancaster, Pa., Were “in panic” that their forgivable loans would turn into debt. they were making mistakes in their documents. “We can’t help our borrowers if we ourselves don’t understand the guidelines,” Ozer said.
In the middle are business owners like Lea Kujala, co-owner of Northwest Treatment, a counseling center near Portland, Oregon. Kujala got a $ 34,000 loan in April, which helped her and her business partner keep their three employees when their income plummeted.
Now Kujala would like the loan to be repaid, but her lender, US Bank, has yet to open their remittance portal to him. Kujala – who estimates she’s already spent five hours putting together files and preparing her application – is so concerned about the many loan rules and potential pitfalls that she keeps all the money she’s got on one. reserve account, just in case his loan is not forgiven. (She drained her business savings to do payroll and will repay if her loan is paid.)
“We’re super nervous that we don’t know what’s going to happen,” she said. And the loan was only a temporary balm; With its income still down by at least 30%, Kujala is preparing to lay off one of its employees.
A spokesperson for the U.S. bank said the bank is sending out staged invitations to its forgiveness portal. After the bank was contacted for this article, a representative told Kujala that she would receive an invitation soon.
Most borrowers – and their lenders – can afford to wait before asking for a loan forgiveness. The Coronavirus Relief Bill, which created the PPP, initially provided that repayments of any remaining debt were to begin six months after a loan was disbursed, but Congress then revised the law to give borrowers up to ‘to 16 months to request a discount. For most borrowers, that means the issue won’t become urgent until mid-2021.
But here too, the law has a gray area. Over 4 million borrowers – a majority – have loans that were made before the rules changed. To strictly follow the law, lenders should formally amend these loans and obtain each borrower’s signature on the amendments. It’s an “important task,” said Brad Bolton, general manager of Community Spirit Bank in Red Bay, Alabama. The SBA has yet to respond to banks’ requests for clarification on the matter – and payments for the program’s first borrowers are expected to fall due this month.
Most lenders, especially the bigger ones, have decided to take the risk and simply postpone all payments, said Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, a trading group. “Because it is an advantage for the borrower, he does it unilaterally, because who is going to oppose it? ” he said.
Glenn Sandler, an accountant in Melbourne, Florida, has about 200 clients with PPP loans, averaging about $ 40,000 each. He advises them all to sit still and wait for what he thinks are legislative fixes to the forgiveness process. “I hope Congress gets away with it,” he said.
Sandler believes automatic cancellation of small loans is likely, in part because the alternative – trying to collect payments from small businesses struggling to stay afloat – is untenable.
“They’re broke,” he said of the mom-and-pop businesses he works with. “There are a lot of people who will not be able to repay. So what, are they going to go into collections with them? It does not mean anything.