Limbo is a tough place to be. Yet that’s where lenders find themselves as Congress debates a new round of stimulus packages that could impact the Paycheck Protection Program (PPP) forgiveness phase. As banks await the final details of the legislation, they can use the time to ready their lending operations for greater flexibility and agility for whatever comes.
Republicans (HEALS Act) and Democrats (HEROS Act) have proposed new stimulus packages that have the potential to impact PPP and, in particular, the PPP forgiveness phase. Among the most impactful changes for lenders is a provision in the HEALS Act that streamlines loan forgiveness. By proposing automatic forgiveness for loans less than $150,000 as long as certain compliance conditions are met, the provision would eliminate approximately 85% of PPP loan volume and 26% of program loan dollars. It also recommends simplified forgiveness for loans from $150,000 to $2 million.
The HEALS Act forgiveness provisions are intended to save banks approximately $500 per PPP loan to process forgiveness requests, and as much as $2,000 in compliance costs for small businesses. The provision will also reduce the burden on the Small Business Association (SBA), which labored to process more than five million PPP loans in Phase 1 under stressful conditions.
As a sign of the strange times we’re living in, the bill stipulates PPP loan proceeds can be used for mandated health- and safety-related improvements, such as personal protection equipment (PPE) for employees, sneeze guards and installation of drive-through windows. It would have been unimaginable in January to think small businesses would need loans to cover these types of expenses. Reality sometimes really is stranger than fiction.
The Current Landscape
Given the pending changes for forgiveness, our clients tell us that like small-business borrowers, they’re taking a wait-and-see approach. Mixed with uncertainty about the lending environment are personal stories and concerns. Clients struggle with mobilizing for remote work, and they worry whether their kids will return to school. Many of their neighbors are out of work. There are no safe havens.
Many banks are still recovering from Phase 1. They tell us their retail and commercial functions are taking a hit, with loan volume and fee income down and losses up. More than a few observers we’ve spoken with theorize that one reason the government is easing forgiveness requirements is to ensure banks will participate in the next round of funding, particularly given the expected strain on operational resources and the need to increase capital reserves for their existing lending portfolios.
As they await the next round’s final legislation, banks and non-bank lenders have the opportunity to get PPP right. Flexibility and agility have never been more important as what started out as a short-term program to help small business has evolved into a much longer cycle.
Preparing for What’s Next
We recommend PPP lenders consider the following actions during this period of “limbo” to ensure they’re ready for any changes that will occur once more clarity is gained.
- Get ready now, because another round of PPP funding is coming. Given the $130 billion remaining in the PPP fund, as well as the lingering economic impact of the pandemic, additional rounds of funding seem certain. Most experts agree the next round will include funding for SMBs whose revenue was impacted more than 50% by the pandemic, and also for businesses excluded from the previous round, such as farmers and ranchers.
- Develop free resources and tools for SMBs. Even if the legislature approves the automatic forgiveness provision, SMBs will need to gather documentation related to their PPP application and funding. Helpful guidance from lenders can include free resources like the informational section on Atlantic Union Bank’s website. The Virginia bank also hosted a PPP webinar that included experts from the SBA. Other banks have assembled PPP teams with go-to experts who host office hours on a weekly basis to meet with SMBs. Several banks told us they awarded bonuses to employees for their hard work and commitment to the first phase of PPP.
- Be willing to accommodate SMBs with extenuating circumstances. One banker told us that while her bank, like many, isn’t accepting forgiveness applications for sub-$150,000 loans until more clarity is available, it’s moving forward with forgiveness applications for SMBs that have mitigating factors, such as the pending sale of a business.
- Integrate with the SBA forgiveness platform. Hopes are high that the SBA’s loan forgiveness platform launched on August 10 will be a better solution than the E-TRAN platform that was created for the originations and funding phase. The SBA is optimistic that its “borrower-friendly” platform will eliminate the integration problems that plagued E-TRAN during Phase 1. Lenders should move forward with integration as it will be required regardless of any changes to the legislation.
- Be proactive about the Main Street Lending Program. Intended to serve businesses too large for PPP or those that did not qualify for it, the Main Street Lending Program is a more complex long-term program than PPP. It gives banks an option for helping businesses restructure debt and provide much needed cash flow relief. Banks can reach out proactively to businesses in their portfolio that might be showing signs of stress, such as late payments, and use the Main Street program to offset the risk of restructuring the customer’s debt. It’s an opportunity to help businesses restructure and ride out this unprecedented storm.
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