Some smaller banks may not be following generally accepted accounting principles in recognizing and reporting their Paycheck Protection Program loan fees, but regulators do not seem to be cracking down.
Some of these banks may be taking their fees up front instead of amortizing them over the life of the loan, as specified by GAAP. While the Federal Deposit Insurance Corp. requires banks to follow GAAP in call reports — and can levy penalties for filing inaccurate reports — practitioners said the regulator appears to be giving banks some leeway.
An FDIC spokeswoman provided the agency's rules for filing reports, but did not comment further.
"I think this is going to be based on facts and circumstances, and it's probably going to depend on how much the fee recognition actually is," Sydney Garmong, a partner with Crowe LLP, told S&P Global Market Intelligence. "When the call reports go to the FDIC, it's not like every single one is reviewed in detail upon receipt.
"The FDIC can't say, 'Don't follow GAAP,' but if it's not that much, they might not be strict about it," Garmong said.
In general, the American Institute of Certified Public Accountants has advised lenders to treat the fees as nonrefundable loan origination fees that should be offset against loan origination costs, deferred, and then amortized.
Enacted in March 2020, the PPP provided up to $10 million in forgivable loans to businesses in trouble due to the pandemic. Under the iteration of the program that lasted from March to August, banks got servicing fees of 5% for loans of up to $350,000, 3% of loans between $350,000 and $2 million, and 1% of loans of $2 million or more.
Under the latest fiscal stimulus package, which provided $284 billion in additional PPP funding, banks will get the lesser of 50% of the principal amount or $2,500 for PPP loans of up to $50,000. For loans between $50,000 and $350,000, banks will get a 5% fee, and for loans of $350,000 and above, they will earn 3%.
Craig Mancinotti, managing director at ProBank Austin, said in his experience, banks recognizing their fees early do state that fact in their call reports, but to date he has not seen a focus on that issue from regulators.
"I don't see any regulatory pushback," Mancinotti said.
Garmong stressed, however, that larger banks with audited financial statements are all following GAAP. Banks with less than $500 million in assets do not require audits except in certain cases in which state or other banking rules may apply.
However, some smaller banks may look to whether loan fees are "material" and would lead to a significant change in income in making their accounting decisions, Garmong said.
Mancinotti said for many smaller financial institutions accounting for PPP fees, "GAAP accounting is more trouble than it's worth. Many accountants are not making the bank go through the additional work."
He noted that this is in part because the PPP is "such a one-time, unique event" where most loans are expected to be forgiven within a few months and are guaranteed by the U.S. government. A Small Business Administration official said in October that his agency plans to forgive almost all PPP loans.
In the early days of the program, businesses only had eight weeks after their loans were disbursed to spend PPP funds and apply for forgiveness. Garmong said this likely led to some smaller banks recognizing their fees early. But under legislation passed in June, borrowers were given up to 24 weeks to seek forgiveness.
The fee issue is significant for banks following GAAP as the forgiveness process stretches on. These banks do not get to fully recognize their fees until the loan is paid off.
Under the original program, smaller banks may have made their decision to take fees upfront because handling PPP loan applications is expensive, according to Joel Pruis, a senior director at financial institution consulting firm Cornerstone Advisors.
"There are significant costs involved in starting up a loan platform under the program," he told S&P Global Market Intelligence.
Banks are "just trying to support these costs," he said.
The price tag for processing PPP borrowing could be as high as $1,500 per loan using an electronic portal, and could reach $2,500 for manual processing, Pruis said.
The 1% interest rate on loans is another aspect to consider when banks are deciding to recognize fees, he noted.
"That's not a great yield on a loan," Pruis said, adding that 1% "isn't really going to cover the costs of these loans."
