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Small business loan data shows waning PPP demand as legislators consider revamp

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Some companies like Shake Shack returned their Paycheck Protection Program loans after public backlash.
Source: AP Photo

Loan-level data released July 6 shows subsiding demand for the U.S. government's signature small business pandemic rescue program.

Aid distributed under the Paycheck Protection Program topped out at a little over $500 billion at the beginning of May, less than a month after the program launched. Following a rocky start — many businesses were frozen out when an initial, $350 billion round of funding ran out in about two weeks — small business lobbyists have said that most potential borrowers who want a loan have gotten one. Government officials and public scorn have also pressured public companies and other enterprises with access to substantial resources to return money they received or stay away from the program, although the amount of money returned in such instances appears to be a relatively small sliver of the program's overall size.

The data shows a flurry of lending during the program's first month for loans of all sizes followed by a sharp tapering over the subsequent two months, suggesting the program was successful in getting $500 billion out the door reasonably quickly and helping stem job losses. The loans, which are available in amounts up to $10 million and are generally restricted to businesses with 500 employees or fewer, will mostly convert into grants, subject to conditions that recipients retain workers.

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Though demand has tapered, banks continue to issue a significant amount of new loans. About 4.2 million loans had been approved as of May 8, and another roughly 650,000 small businesses got loans through June 30, the initial deadline for applications. There was a modest increase in activity as that date approached, and there were an additional 27,763 loan approvals through July 13, following an extension of the application period through August.

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While borrowers large and sophisticated enough to deal with corporate bankers may have had an advantage over smaller concerns that faced long queues in small business and consumer banking units, the program has increasingly been weighted toward the smallest loans. The average loan size in the first round of funding was $206,000. In the second round through June 30, it was about $56,000.

PPP lending has been relatively widely distributed across the banking industry, with the top five lenders accounting for about 14% of the total dollar volume. Average loan size for these five banks has been roughly in line with the average of $107,000 for the program as a whole through June 30, ranging from $56,414 at the low end for Wells Fargo & Co. to $178,833 for PNC Financial Services Group Inc.

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Many small enterprises remain under intense pressure because of the pandemic. As COVID-19 infections surge across much of the country, a near-term return to pre-pandemic business conditions appears unlikely. Legislators are considering retooling the loan program, which has about $130 billion in untapped funds, to enable existing borrowers to seek additional aid, and to target it toward borrowers who can demonstrate ongoing, pandemic-related needs under stricter standards.

For many of the roughly 5,500 lenders across the country who distributed PPP loans to borrowers, the program appears likely to be highly profitable, delivering fees that range from 1% to 5% of loan amounts and modest spread income on assets that do not count toward regulatory measures of capital adequacy.

Based on data on volume by loan size through June 30, the program is poised to generate $18 billion of fees for lenders in total, or 3.5% of aggregate loan volume. Large lenders including Bank of America Corp., Citigroup Inc. and Wells Fargo have said they will donate profits from the program to support small businesses and make other philanthropic contributions. The Federal Reserve required that Wells Fargo transfer benefits from participation in the program to the federal government or nonprofits when it partially suspended a cap on the bank's asset size to give it more room to make emergency pandemic loans.

Most lenders have made PPP loans primarily to existing customers, however, and to the extent the program rescues borrowers who would have otherwise defaulted on other loans, it can help banks even without the fees.

The program does present a number of serious legal and reputational risks to banks, however, as large borrowers are scrutinized and subjected to government audits. Indeed, the July 6 loan-level information revealed by name a long list of lobbying firms, political consultants and private equity-backed ventures that have received PPP funds, renewing questions about whether aid has gone to organizations that do not need or deserve it.