“Banks are ready and willing to lend, but they need clear rules of the road and a streamlined process to be able to get funding into the hands of small business owners in the coming days,” said Greg Baer, president and CEO of the Bank Policy Institute, which represents the nation’s biggest lenders.
The tensions illustrate the difficulties in store for distributing the record $2 trillion in aid that Congress made available last week in a sweeping economic rescue package. The potential failure to deliver small business aid as promised — one of the first big rollouts from the legislation — could deal a major blow to public confidence as a crippling recession looms.
That urgency was underscored on Thursday, when the Labor Department reported that unemployment claims soared to a record-smashing 6.6 million last week, more than double the previous week, signaling more economic pain from the coronavirus pandemic.
The part of the legislation at issue — known as the “Paycheck Protection Program” — was designed to ramp up government-backed loans to small businesses, which are especially vulnerable to a deep economic slump. Congress tried to make the loans more enticing by allowing the loans to be forgiven if borrowers keep paying their employees.
Yet banks not only have operational and technical questions about how the program will work but also bigger concerns about the degree to which they’ll be responsible for verifying borrower information — and then held liable if things go wrong. The industry was subject to billions of dollars of fines and lawsuits after the 2008 financial crisis and doesn’t want to repeat the experience.
A senior administration official said the agencies were doing all they could.
“Treasury and [the Small Business Administration], coordinating closely with the White House, are working at record speed to implement the Paycheck Protection Program,” the official said. “SBA’s top priority is making sure these programs are up and running as fast as possible to provide relief to American workers and businesses.”
An issue of paramount concern for banks is the extent to which they’ll be expected to vet borrowers before approving loans and distributing funds.
Those worries grew Tuesday after Treasury and the SBA released brief guidelines for lenders participating in the program. The Trump administration said banks would need to verify that a borrower was in operation as of Feb. 15 and had paid employees, while also confirming average monthly payroll costs.
Banks say the verification requirements could lead to substantial delays in issuing loans — a mandate that could create a lag of weeks or more as they establish the necessary procedures. They are seeking greater assurances that they won’t be held liable if a borrower obtains a loan after providing misleading information.
Absent greater flexibility, banks see a scenario where the program at launch only works well for their existing small business customers — the ones they know well — while other potential borrowers miss out on the $350 billion.
“Banks are working to get money out the door as quickly as possible,” said Consumer Bankers Association spokesperson Nick Simpson. “While the application has been significantly condensed, the verification process the government is requiring will likely take more time than many had originally hoped. Hopefully between now and Friday, we can further optimize the process.”
In a memo responding to Treasury on Tuesday, banks said lenders should only be required to confirm that borrowers have completed the loan application in line with its instructions — not validate the information. Borrowers are required to certify the information they provided, and banks should only be expected to pass along that information to the SBA, they said.
Nor do they want to be subject to “unlimited potential liability for things that they cannot control.”
“The choice in administering the program is binary: If the primary goal is to make many loans in a short period of time, then the process must be automated, and the lender must be able to rely on a borrower attestation,” the banks told Treasury. “If the primary goal is for the loans to be underwritten to ensure on the front end that all program requirements are met, then lenders will need to establish a process — which will necessarily be manual — to ensure that payroll calculations and other requirements are met. This in turn will entail a delay of weeks or months as lenders establish the necessary policies and procedures and train their personnel.”
Some banks are worried that the way the Trump administration is structuring the loans may even deter lenders from offering them in the first place.
In a letter Wednesday to Treasury and the SBA, the Independent Community Bankers of America said the 0.5 percent interest rate mandated by the administration was so low that for many banks “it will not be economic or feasible to participate in the program.” The rate came as a surprise to banks after Congress decided to allow the rate to go as high as 4 percent.
The trade group, which represents the country’s smallest lenders, also argued that the required two-year loan period — which Congress allowed to go as long as 10 years — was unreasonably short for struggling borrowers. Another concern is that the administration has provided little information on how the critical loan forgiveness part of the program will work.
The community bankers group is urging Treasury and the Federal Reserve to immediately create a “liquidity facility” that would provide funding for banks to make the loans and securitize any loan balances that aren’t forgiven.
“Taking all of the above concerns into consideration, many banks have already indicated that they will not be able to use the program under the current terms,” the group’s president, Rebeca Romero Rainey, said in the letter. “Others will only use it for current customers, greatly limiting the purpose and potential of the Program. This would be an unacceptable lost opportunity at a time when we can least afford it.”