Over just 13 days this month, the nation’s banks and other financial lenders approved an unprecedented $349 billion in forgivable business loans allocated by the federal government in response to COVID-19. The $349 billion fund, also known as the Paycheck Protection Program, was intended to serve as bridge money for businesses to continue paying their rent, payroll, utility bills and debt obligations during the economic shutdown caused by the coronavirus. Banks in the San Fernando Valley region and elsewhere were tasked with the tall order of processing tens or hundreds of thousands of applications for these loans and issuing them through their existing Small Business Administration pipeline while federal rules and regulations changed on a daily basis. Jared Wolff, chief executive of Banc of California Inc., called the program “one of the craziest things I’ve ever seen in banking.” Banc of California is based in Santa Ana and has Valley branches in Woodland Hills, Sherman Oaks and Calabasas. Though the initial fund has run dry, Congress is reportedly considering extending the PPP with an additional sum of money for qualifying applicants who didn’t get approved for loans the first time around. How it works The Paycheck Protection Program provides loans of up to $10 million to businesses with 500 or fewer employees. Qualifying businesses can apply for up to 2.5 times their regular monthly payroll expenses as of Feb. 15, including health care benefits. A business with $100,000 in average monthly payroll, for example, can apply for a $250,000 loan. Interest rates are capped at a maximum of 1 percent. The federal government told banks in March that the PPP funds were to be distributed in the form of SBA 7(a) loans and would follow existing SBA protocol, with a few tweaks. The SBA doesn’t issue PPP loans itself, but guarantees the loans by participating banks and other institutions. As an incentive for businesses to keep employees paid without interruptions, the SBA said it would forgive a borrower’s loan payments if all of its employees were kept on the payroll for eight weeks, and if at least 75 percent of the PPP loan was used for payroll expenses. So when done correctly, the money is more like a grant than a loan. According to Banc of California’s Wolff, “certain types of businesses are not eligible for a 7(a) loan,” and therefore are excluded from the PPP. These exclusions include cannabis businesses, adult industry businesses, lenders and mortgage brokers, and any business derived from passive income, such as landlords. Independent contractors and self-employed workers, however, are eligible. In calculating payroll expenses, applicants are required to cap individual employee pay at $100,000 and not to include employees permanently located outside the U.S. Businesses with between 500 and 10,000 employees will receive COVID-19-related aid through the Main Street Lending Program, an under-construction lending facility that will be rolled out in the coming weeks. Details of the program have not been decided yet, but Congress has earmarked up to $600 billion for it as part of its $2 trillion CARES Act. Rocky rollout Several Valley bankers told the Business Journal that the roll out of PPP incurred plenty of hiccups. Problems cropped up as soon as the program opened for small businesses on April 3. Wolff said PPP loans, like all SBA loans, are submitted through E-TRAN, the government’s electronic loan processing system. But immense demand for PPP loans far outmatched the system’s capability. E-TRAN, unable to handle the traffic that rushed in when the program opened, crashed for several hours on launch day, further delaying funds from reaching struggling businesses. Meanwhile, bank branches toiled to keep up with a deluge of applications from existing clients and new ones whose personal banks weren’t participating in the program. According to a statement from Union Bank President Greg Seibly, “in only seven business days, Union Bank received more SBA applications than we normally receive in five years.” An Encino bank manager who requested to remain anonymous told the Business Journal his mid-market branch received 45,000 digital applications in three days. “People (were) panicking,” the banker said. Wolff said Banc of California has been “all hands on deck since the program opened.” He acknowledged the challenge to implement such a massive program while also completing daily banking functions such as processing transactions. He conceded the bank has seen less daily transaction volume at brick-and-mortar branches since the outbreak began, which has freed up some time for PPP. “We might’ve put some projects on hold,” Wolff said. “Everyone’s been working harder.” Wolff added there was extra confusion because the SBA was still working out its requirements for how banks should prepare applicants’ loan documents even after the program went live. “The government hadn’t decided whether banks were authorized to modify existing government forms to meet the requirements of the program, or whether they would come out with new forms of documentation,” Wolff said. “We had to build the car as we were driving it.” By the time those problems were resolved it was largely too late. On April 16, less than two weeks after the program launched, the money was nearly all gone. The SBA that day announced it had approved roughly 1.66 million loans worth $342.3 billion. The little funds that remained evaporated hours later. For context, the Encino banker said the SBA issued a total of $21 billion in 7(a) loans throughout all of 2019. Not every business approved for a loan has received it yet. A newly formed website called COVID Loan Tracker is crowdsourcing data from small business owners regarding the status and timing of their PPP loans. Of nearly 14,000 small business applicants who responded to the site’s survey, just 1,100 – under 8 percent – have received their approved funding as of press time. Wolff said a lag between loan approval and distribution is normal. Under the PPP’s current guidelines, he said, banks have up to 10 days to issue a loan once it is approved. COVID Loan Tracker said the median length to receive loans among its survey respondents is nine days. “Banks probably have the ability to do it faster, but they want to be careful. They don’t want to undermine the terms of the program,” Wolff said. While the Encino banker criticized the PPP as “slapdashed together,” and “all over the place,” Wolff said the SBA and the banking system are to be lauded for taking on such a massive relief campaign on short notice. “Banks have been working extremely hard,” he said. “The government did a tremendous job of creating a program to get money into the hands of businesses that needed it.” Second wave According to the SBA, there are about 30.2 million small businesses in the U.S. That means the 1.7 million approved PPP loans account for less than 7 percent of the small business market. The banking industry is now lobbying for lawmakers to allocate more funding to the PPP as demand for loans remains sky high. Rob Nichols, chief executive of the American Bankers Association, wrote a letter to Congress on April 18 asking legislators to authorize more funding for the program “expeditiously.” “Further delay will only harm the very businesses that the program is meant to protect,” Nichols said in the letter. Wells Fargo Chief Executive Charlie Scharf said in a statement released on the April 16 that he too would like to see the federal government expand the PPP. “Given the magnitude of the crisis the country is facing, we are hopeful that Congress will approve additional funds for the PPP and we will continue accepting new applications so we will be ready to proceed if and when that happens,” Scharf said. Wolff agreed that reloading the PPP fund would be hugely beneficial. “Our average loan size has gone down over time, indicating smaller businesses are the ones still waiting,” he said. Wolff added that the businesses that were ready and able to apply as soon as PPP opened were likely more sophisticated borrowers, and therefore probably larger companies. “The folks who didn’t get it and are waiting in line now are the ones that really need it. They are the ones who might not have had the flexibility to be as nimble early on, or the resources to be preparing paperwork while still trying to keep the lights on,” he said. Wolff advised small business owners who weren’t able to get approved during the first round to make sure their applications are complete so they’ll be ready to proceed smoothly if Congress greenlights a second round of loans.
