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Murky PPP guidance has some participants facing troubled waters

For months, lenders and borrowers have tried to navigate the Paycheck Protection Program without clear guidance, and now big banks are facing backlash for alleged practices that were not explicitly prohibited from the onset, experts say.

The House Select Subcommittee on the Coronavirus Crisis has initiated a probe into whether some of the nation's biggest banks, including JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., gave major companies favorable treatment when processing the Small Business Administration's emergency loans, according to a Bloomberg report.

The subcommittee reportedly sent letters June 15 to the big banks seeking details on their PPP lending and on what guidance they received from Trump administration officials, Bloomberg said.

Those interviewed by S&P Global Market Intelligence did not comment specifically on the probe, but they noted that banks might not have had the clearest instructions on the program as time-crunched regulators worked quickly to draft guidance on the legislation in an effort to combat the rapid economic fallout from the pandemic.

"It is difficult when you're drafting under a lot of pressure in a short time," said Mary Baker, government affairs counselor for K&L Gates LLP, an international law firm. "Maybe you have said something that could be interpreted differently. Reasonable people read things differently."

Jeffrey Paravano, a partner at law firm Baker & Hostetler LLP, said the initial guidance may not have specifically barred large banks from offering loans to their large clients, but with over $600 billion allocated to the program by Congress, borrowers of all sizes should have access to funds.

"Given that it appears that every company applying for a PPP loan may in fact have an opportunity to obtain a loan, issues relating to the processes banks set up to handle applications may be less important than they might have been had federal resources been more limited," Paravano said.

Many public companies have since returned PPP loans after regulators made clear in more recent guidance that the program was not intended for their use.

The House subcommittee probe comes in the wake of Treasury Secretary Steven Mnuchin's June 10 testimony to Congress in which he said the names of borrowers and the amounts they received would not be released because both are confidential information.

Mnuchin has since appeared to ease his stance, saying in a June 15 tweet that he will talk with senators on a bipartisan basis to "strike the appropriate balance for proper oversight of #ppploans and appropriate protection of small business information."

Paravano said releasing the names of companies that received PPP loans may be less risky to those businesses than releasing their loan amounts because the thresholds for loan forgiveness have been spelled out.

Borrowers can receive full forgiveness if 60% of the loan is used on payroll. If that threshold is not met, they can receive partial forgiveness. The loan amount and the forgiveness level can potentially "reveal what otherwise might be confidential information," Paravano said.

It is possible that the names of the borrowers could be obtained through a request under the Freedom of Information Act, but the government might not release the loan amounts, the Baker & Hostetler attorney told S&P Global Market Intelligence.

Elsewhere, borrowers are seeking more guidance on the audit process for PPP loans, Baker said. Mnuchin has said the government plans to automatically audit loans of more than $2 million, although it is still possible that loans under that threshold could be scrutinized as well.

"Treasury can review any loan at any time, for any reason," Baker said. "If I were a recipient [of a smaller loan], I wouldn't be breathing a sigh of relief."

Another question is whether there will be a window of time for the audit to occur.

"Can they reopen the case?" she queried.

Guidance issues were further highlighted June 17 when Treasury and the SBA released new loan forgiveness applications. The forms are intended to make the process simpler in the wake of the PPP Flexibility Act, enacted June 5.

Witnesses at a June 17 Paycheck Protection Program hearing held by the House Small Business Committee said the new applications were helpful but may still leave borrowers wanting more.

Eduardo Sosa, senior vice president of SBA lending at Commerce National Bank, which is part of Texas-based Amarillo National Bancorp Inc., said the new applications are "a step in the right direction," but small businesses still might have trouble using them. He recommended the government offer a streamlined process in which any loan less than $150,000 would be automatically forgiven.

Rep. Brad Schneider, D-Ill., said he is already hearing from lenders that the forms do not simplify the process. He said the guidance from Treasury and SBA since the start of the PPP has been "anything but clear," with nearly 20 interim final rules and 47 answers to frequently asked questions.