The passage of the CARES Act and associated Paycheck Protection Program (PPP) loans have largely consumed bankers since the Small Business Administration (SBA) began accepting applications on April 5. The primary intent of the program was to allow banks to make loans to businesses that would cover eight weeks of payroll (excluding salary payments over $100,000 per employee) and related operating expenses. Initially, Congress allocated $349 billion to the PPP, but these funds were quickly accounted for such that the program closed. This week Congress is voting on another relief act that will presumably allocate an additional $310 billion in small business loans. While these loans have allowed many businesses and non-profit organizations to retain employees and thus continue operations, thereby saving jobs, the actual implementation of the PPP has raised numerous issues concerning fairness about who received the initial PPP funding and uncertainties about the SBA’s preparedness and the ultimate terms of the loans. Remember that the program was intended to support small organizations.

Consider the following:
  • Several of the nation’s largest banks apparently favored their existing business borrowers, particularly those with the largest and/or most profitable relationships.
  • A large amount of the funding went to publicly-traded firms with large balance sheets and strong net income. For example, Ruth’s Hospitality Group (Ruth’s Chris) got $20 million in PPP loans, Shake Shack received $10 million as did Potbelly’s.1
  • The rules surrounding loans for independent contractors and the self-employed were unclear such that most of these borrowers were effectively excluded.
  • The SBA’s guidance on loan forgiveness is unclear as to what the final terms will be.

Most community banks actively participated in the first allocation of PPP funds. Still, many community bankers have serious concerns about the SBA and its guidance and whether the final terms of the loans will actually reflect the stated intent of the program.

The Graduate School of Banking (GSBC) surveyed its community banker audience over the period April 9-14, 2020 in an attempt to gauge participation in PPP and measure the benefits to their communities. Approximately 170 bankers from 156 different banks responded and provided anecdotal comments in addition to estimates of the number of and dollar amount of PPP loans approved and the number of jobs saved via their PPP lending.2 Of the respondents, 63% worked with banks with total assets under $500 million, 23% with total assets between $500 million and $1 billion and 14% with total assets over $1 billion. Most of the banks were located in the Midwest and Mountain states, followed by the Southwest and Southeast. Roughly three-fourths of the banks’ primary trade areas are in self-proclaimed rural areas with the remainder in metro areas. The results indicated that over these six days, these community banks approved an estimated $7.6 billion in PPP loans to around 20,000 different borrowers.3 In the process, the bankers estimated that the loans potentially saved over 200,000 jobs.4

The respondents’ general comments noted that implementing PPP was extremely labor intensive, especially with many bankers working remotely. It has been draining on staff and will likely continue as the next funding becomes available. But this is what community bankers do! What better service is there than to help protect local businesses and non-profit organizations by helping them continue operations and not lay-off employees. This is especially true in rural markets in which most of the nation’s largest financial institutions no longer have a physical presence and/or worry about the smaller dollar customer.

Some of the comments, however, indicate the difficulties in quickly designing and approving emergency legislation, such as the CARES Act and PPP. Witness the fact that large companies received almost 45% of PPP funding while representing just 4% of applications.5 As always, there will be unintended consequences, especially with limited up-front guidance from the SBA.

  • Some borrowing firms will retain many higher-paid employees, but will have difficulty rehiring those in lower paying jobs because unemployment benefits plus the $600 CARES payments exceed the standard wage rate.
  • Sole proprietorships, independent contractors, 1099 recipients had difficulty applying for loans under PPP.
  • There is considerable uncertainty regarding the appropriate loan documents to use.
  • The SBA has not indicated how and when banks will receive the fees associated with making PPP loans.
  • Loan forgiveness terms are uncertain as the SBA has not issued final guidance on the provisions required for forgiveness.

One additional thought concerns the last item listed. The PPP application asks that the borrower certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” Given the criticism regarding big firms getting PPP funding and recent admonishment of Universities, such as Harvard, Stanford, MIT, etc., getting approved for PPP funding when they have large endowments , what would happen to all PPP loans if the government decides to means test whether a borrower legitimately qualified for the loan, that is whether the loan request was necessary due to economic uncertainty.6 Harvard, with its $40.9 billion endowment, would likely have had difficulty demonstrating that it needed the almost $10 million approved. In addition, under the CARES Act the borrower is responsible for documenting how PPP funds were actually used and formally requesting loan forgiveness from the lender servicing the loan.

Congratulations on supporting your communities. Congratulations on how you are supporting your employees who may be stressed with the long hours and uncertainty. Think of the following as you prepare for the second phase of funding.

Address the following:
  • How do you decide who gets funding? How do you prioritize the applications that you receive?
  • Has the borrower demonstrated that economic uncertainty makes the loan request necessary for ongoing operations?
  • How will you handle loan forgiveness when you do not know the final terms and the borrower is responsible for requesting forgiveness?
1. The U.S. Treasury formally asked publicly-traded firms to repay the PPP loans on April 23rd. Ruth’s Hospitality Group and Shake Shack were among firms that agreed to refund the loans. In updated guidance, Treasury indicated that public firms with access to the capital markets and substantial market value would likely be unable to demonstrate a true need for PPP funds. Firms that return their PPP funding by May 7th would be deemed to have acted in good faith when applying.
2. The PPP application asks the borrower to indicate the total number of jobs the borrower has. Respondents were asked to estimate the number of jobs saved, but the reported figure could, in some instances, indicate the borrower’s total jobs if the figure was taken off the loan application.
3. Survey respondents indicated whether under PPP they assisted less than 50 organizations, 50-200 organizations or over 200 organizations. The reported figure is an estimate of the combined responses.
4. See endnote #2.
5. Simon, Ruth and Peter Rudegeair, “In Race for Small-Business Loans, Winning Hinged on Where Firms Bank,” The Wall Street Journal, April 20, 2020. Interestingly, JP Morgan Chase had loaned Ruth’s Chris almost $42 million in March and $40 million to Potbelly less than one year ago, then loaned more to each under PPP.
6. Harvard and Stanford ultimately indicated that they would not accept PPP funding.

by Timothy Koch, Ph.D., President