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Congress set to stretch PPP loan forgiveness period, impacting fees, interest

Legislation extending the loan forgiveness period under the Paycheck Protection Program is likely to become law, an action that could affect banks' income statements into 2021.

Under the existing PPP, the Small Business Administration provides forgivable loans to smaller companies facing economic damage caused by the COVID-19 pandemic. Lenders recognize their fees over the life of the loans or once they are forgiven.

A House-passed bill known as the Paycheck Protection Flexibility Act would extend the forgiveness period from eight weeks to 24 weeks, a measure that could affect lenders’ revenue recognition for months, according to Craig Mancinotti, managing director at ProBank Austin, an investment services company in Toledo, Ohio.

That bill would "stretch out the forgiveness process into 2021 — so the level of expected fees is not going to change, only the timing for recognition," Mancinotti said May 29 in an interview.

Action on the measure, which sailed through the House with an overwhelming majority of 417-1 on May 28, could happen soon in the upper chamber, Senate Majority Leader Mitch McConnell, R-Ky., said June 1. "I hope and anticipate the Senate will soon take up and pass" the House bill, McConnell said on the Senate floor.

It remained unclear whether the final measure in the Senate will look exactly like the House legislation. However, it is all but certain that the loan forgiveness period will be extended by at least a few weeks.

Rick Giovannelli, corporate practice area leader for K&L Gates, said even if banks are waiting longer for their fee recognition, they will continue to garner interest on the loans over time. However, he said in an interview on May 29 that he does not "know that extending the loan forgiveness period will change bank profits." With low fees and a low interest rate of 1 percent, "I think it could ultimately be a little bit of a wash."

The revenue will not necessarily offset the challenges to banks posed by a slowing economy, he said, with reduced applications for credit cards and potential loan reserve increases, among other difficulties.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Giovannelli added that the process of applying for loan forgiveness, which is more complicated than applying for the loans under recent guidance from the Treasury Department and the SBA, also could cost banks money through the year, depending on the level of applications coming in the door.

Scott Sinder, an attorney with Steptoe & Johnson LLP, said, "Some people are concerned that the process is overly complicated," but banks are preparing, anyway.

"They don’t have a choice," he said. "It’s a capital issue. If they extend their loans, they’re using capital to do it."

Referring to the lending facility set up by the Federal Reserve to provide liquidity to banks participating in the PPP, he said, "They can always sell their loans to the Fed."

There may be more concern over the process than the impact on revenue recognition, said Eric Livingston, a financial services principal at Ernst & Young LLP who leads the company’s PPP counseling.

"This is complicated for some borrowers, it’s new for the banks," Livingston said May 29 in an interview. "This is more of a conversation about getting to a stable set of guidelines and less of a conversation about their specific income or financials.”

The EY principal said lenders want to build strong client relationships to help them through the complex PPP process, including loan forgiveness.

"The banks really want to facilitate a healthy economy and the health of customers," he said.