Banks are grappling with a slew of new compliance questions as they gear up for an expected crush of loan applications under the latest version of the Paycheck Protection Program.
"It's a positive for the program, but it's going to be an operational challenge for banks," said Preston Thompson, managing director and co-leader of the PPP practice at Ernst & Young LLP.
The new iteration, enacted in late December 2020 as part of economic stimulus legislation, offers first and second loans to small businesses. It also creates a one-page application for loans of $150,000 or less.
First enacted in March 2020, the PPP originally offered forgivable loans of up to $10 million with 500 employees or less. Under the new version, the maximum loan amount is $2 million, and the employee limit is 300 or less. Businesses seeking a second loan must show a 25% year-over-year revenue drop from any quarter in 2019.
Paul Merski, a lobbyist for the Independent Community Bankers of America, said it is not clear whether businesses seeking first loans also must show a 25% revenue drop to qualify. Demonstrating that drop is a big concern for all banks, Merski said.
"The documentation needs to be simple and accessible," he said, noting that many of these businesses do not have financial statements prepared by certified public accountants.
He also said the U.S. Small Business Administration, which oversees the program, should try to disseminate new rules before the inauguration of President-elect Joe Biden.
"I'm worried that this changeover might cause delays in implementing these programs," Merski said. "The key now is really getting a successful relaunch with the appropriate guidance very early in January."
EY's Thompson said the new legislation is going to strain banks trying to decide how to move forward in the new landscape and how to devote resources. He said he believes most of the demand under the new program will be for "second-draw" loans, but banks will face challenges in determining how their borrowers would qualify for those funds.
For example, the borrower needs to indicate that they have used up or will use up all of the original PPP loan proceeds. How borrowers can demonstrate that they intend to spend all of their loans is still not clear, Thompson said.
The SBA has not yet released the simplified form for small PPP loans, but once it does, banks can expect a wave of loan requests, according to Robert Klingler, financial services partner at Bryan Cave Leighton Paisner's Atlanta office.
"I'm not sure a borrower under $150,000 will apply until the form is available, then they'll all apply at once," he said.
Klingler said it is likely that the SBA would take about 30 to 40 days to develop the form, and because the SBA has 90 days to approve an application once it is sent in by the bank, the process of forgiving these loans "realistically will go through the end of the second quarter," he said.
He said larger borrowers may have waited until the last quarter of 2020 or the first quarter of 2021 to apply for forgiveness for previous loans, which could further delay the process.
Ultimately, lenders will need to see what the new, simpler form requires before they know how to proceed, according to Probank Austin Managing Director Craig Mancinotti.
"If banks [do not have to] review documentation, that would be a significant streamlining for the banks," he said. "But I'm not sure if it's purely certification."
In an additional wrinkle for lenders, since the loan parameters under the new law are different from the past version of PPP, banks will have to adapt their processes for sending forgiveness applications to the SBA, according to Michael Percy, managing partner for financial services at Crowe LLP.
"These are not simple changes," he said.
However, for applications already submitted, the forgiveness process appears to be functioning properly, said Joel Pruis, senior director at Cornerstone Advisors.
"I've been getting favorable commentary that the process is working and that the SBA is responding, and these loans are being forgiven," he said.
In October, an SBA official said the government plans to forgive almost all loans.
