PPP forgiveness: Lenders push for loans under $150,000 to be turned to grants

Congress may have just passed new legislation altering rules to make the Paycheck Protection Program loans more flexible, but banks and lenders are asking policymakers to forgive smaller loans altogether.

In a letter sent to members of Congress (including Sen. Marco Rubio, chairman of the Senate Committee on Small Business & Entrepreneurship) on Tuesday, the Consumer Bankers Association and the Bank Policy Institute asked for loans under $150,000 to be automatically forgiven, citing that “considerable gaps in policy, particularly regarding the forgiveness aspect of PPP, … has proven to be unnecessarily burdensome for many of the businesses it sought to help.”

The lobbying groups, whose members include big banks like JPMorgan ChaseBank of America, and Citibank, argue that by passing legislation to forgive PPP loans under $150,000, it’d help 85% of total recipients, but only account for less than 26% of PPP loan dollars. Although Congress passed a bill to amend some rules for the loans on Wednesday (which included requiring businesses to spend 60%, down from 75%, on payroll costs over a now-extended 24-week period), the forgiveness process as-is looks complicated, lenders say.

Small businesses’ “time and resources would be better focused on getting the economy safely back up and running, not processing burdensome paperwork,” the banking groups wrote.

An onerous burden

But it’s not just the big banks that are seeing smaller borrowers struggle and support forgiving their loans. Regional banks like Sunrise Banks, based in Minnesota, are servicing some of the smallest businesses (a large portion of their PPP loan recipients are sole proprietors and 1099 workers, CEO David Reiling tells Fortune), and point out that the process is challenging for businesses without the luxury of an accountant or attorney.

The “biggest issue” small businesses have voiced is working through the calculations, he says. “They just don’t have any counsel on that. It’s kind of like … the first time you ever tried to do your own tax return. You’re trying to read through all this jargon and language you don’t understand and do the best you can, and it’s nerve wracking,” Reiling says.

And with the intense civil unrest he’s been seeing in his city, and how it’s impacted the communities, time is of the essence for these small businesses—”They need every ounce of energy and dollars they can to get back up and running and to hire people,” he says.

Some fintech lenders are also adding their voices in support of the proposal. U.K.-based fintech Funding Circle favors the proposal to automatically forgive all loans under $150,000—which it says would account for most of their loans. Having loans forgiven without going through the onerous process of getting documents together and worry about forgiveness would be “awesome” for the fintech’s small clients, says Libby Morris, head of U.S. operations at Funding Circle, as it would allow businesses to focus their time and money on reopening.

“If you think about the smallest of small businesses who already have been kicked when they’re down with the situation that’s happening in the country right now and with the reopening, … Having them spend hours trying to come up with all this documentation is certainly one more thing that I imagine a small business would be happy to not have to do,” Funding Circle’s head of U.S. regulatory affairs Ryan Metcalf tells Fortune.

Mega fintech and fellow PPP lender Square is also in favor of the proposal, as head of Square Capital Jackie Reses wrote on Twitter Tuesday that they “absolutely agree” with the proposal, stating that “forgiveness as written is a challenge.”

Forgiveness is ‘simply too complicated’

From the start, problems have plagued the SBA and Treasury’s guidelines and regulations for the program. And the latest pieces of guidance about forgiveness of the loans are no exception.

Some attorneys and accountants have wrestled with the calculations and rules in the guidance. It’s enough to have those like Sunrise Banks’ Reiling declare: “It’s simply too complicated.”

Reiling’s bank works with a lot of the smallest businesses. In fact, he says that of the roughly 1,800 loans Sunrise Banks has serviced, about 92% of them were for under $350,000, with over half worth only $25,000. For businesses like that, Reiling argues, “There’s no time nor money in some cases to try to figure this paperwork and complexity out.”

Funding Circle is of the same mind, as Morris describes the forgiveness application as “pretty complicated.” Their average loan size has been around $60,000, and the majority of businesses they’ve funded have 10 employees or less.

And for lenders, new rules from the SBA and Treasury suggest the banks might have these loans on their balance sheets for years, with only a 1% interest rate (“that’s a 1% return, that’s not great at all,” Reiling says), with the cost of still having to service them if the borrowers didn’t get full forgiveness.

Funding Circle’s Morris also points out that for lenders who participated, doing forgiveness as-is means they won’t be able to get back to regular lending as quickly. Having legislation passed that would automatically forgive loans under $150,000 (reserving the right, of course, for the SBA to ask for additional information from any individual loan if they need) would let them get back to what they “really want to do, which is traditional lending,” Morris suggests.

Slowed demand in Round 2

Coming off of the flurry of activity in the first round of the PPP, which ran out in under 14 days, Round 2 has had less demand, some lenders say.

For one, Sunrise Banks’ Reiling says some borrowers have been wary to apply for loans amid all the controversy of companies returning loans or being threatened with audits to see if they were eligible, and others are simply “not confident” about forgiveness. “It’s not clear and it’s complicated, they don’t know if they can hire people back, so they’re not willing to take that risk of debt not knowing and having that certainty of what that forgiveness looks like,” he says. However, the new bill passed by Congress might help quell some of these worries by providing a longer runway for businesses to use funds.

Based on the latest numbers on May 30 from the Small Business Administration, there is still $120 billion that hasn’t been allocated to borrowers.

Now, the Hill has passed new legislation that amends loan rules just as the first businesses were reaching the end of their previous eight-week period. A bill proposed and passed by the House last week passed the Senate late Wednesday that extends loans to 24 weeks and reduces the cap businesses must spend on payroll (versus on things like utilities) from 75% to 60%.

With more time to use the funds and figure out forgiveness, Sunrise Banks’ Reiling, for one, thinks that slumping demand might pick back up. “Maybe [people can] get their arms around it a little bit more,” he adds.

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