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Uncertainty has banks holding off on PPP forgiveness process

Many financial institutions are holding off on accepting Paycheck Protection Program loan forgiveness applications until the regulatory and legislative picture becomes clearer.

Banks must ensure their borrowers are taking the necessary steps to receive forgiveness for their Small Business Administration loans that were part of the program Congress created in March to help businesses cope with the COVID-19 pandemic. But banks are grappling with the complexities of the PPP forgiveness application, and some are concerned that legislation will soon change the rules that govern the process.

"We have not encouraged [PPP borrowers] to come in and file applications," said Michele Vervlied, head of SBA operations at Customers Bancorp Inc. in Phoenixville, Pa. "We're not openly saying that it's time yet. We don't think it's a prudent idea. There's a lot of verifying and confirming that banks have to do."

Michael Budinger, a principal at Crowe LLP, a financial institution consulting firm, said most of his clients are not accepting applications, either. Brian Waldron, senior vice president of lending for Hudson Valley Credit Union in Poughkeepsie, N.Y., said his institution is not in a position to accept them until there is more clarity.

Many large lenders are also taking a wait-and-see approach.

Both Wells Fargo & Co. and Capital One Financial Corp. say on their websites that they have not yet opened their loan forgiveness application processes but will reach out to customers when they are ready to go.

Capital One says it is "currently finalizing our loan forgiveness application," while Wells Fargo says it plans to send emails to its clients and open a link on its PPP Loan Forgiveness Center when the application is ready.

As the forgiveness phase begins, some in the banking industry are pushing lawmakers to simplify a process they assert is too convoluted. Conversely, there are stakeholders who say simplification might throw a wrench into loan forgiveness processes that are already underway at many banks.

Currently, banks must review and approve an 11-page forgiveness application that requires borrowers to document that they have spent 60% of their loan money on payroll and 40% on overhead expenses like rent, utilities and mortgage interest payments — documentation that is often error-riddled or entirely missing when applications arrive, according to Craig Mancinotti, managing director at ProBank Austin, an investment company in Toledo, Ohio.

In their applications, borrowers must tabulate cash compensation, noncash compensation and compensation to business owners. Banking officials said checking those figures can often prove onerous.

"Banks aren't going to have time to do it," Noah Wilcox, president and CEO of Grand Rapids State Bank in Grand Rapids, Minn., told S&P Global Market Intelligence.

Once they receive the applications, banks only have 60 days to review them and decide whether to send them to the SBA for final approval. The agency just announced it will soon open an online platform for the applications with its own set of requirements for banks, which could add a new layer of complexity to the process.

Among other responsibilities, SBA tasked lenders with submitting detailed data in cases where they approved forgiveness for only part of the loan.

Faced with these obligations, some lenders and industry trade groups are pressing lawmakers to simplify the process by allowing loans under a certain threshold to be automatically forgiven. Loans under $150,000 have been floated as a possibility.

Hudson Valley Credit Union's Waldron said 95% of his clients would fit underneath that $150,000 umbrella, so simplification is "very, very important."

Despite bipartisan support in Congress for an automatic forgiveness threshold, partisan squabbles over other aspects of the broader coronavirus relief package that will contain PPP legislation may delay its implementation.

And not everyone agrees simplification is a good idea.

"The concern is that any newer changes essentially move the goalposts again," said Crowe's Budinger. Lenders "want to provide clients with a good experience and be able to do that effectively."

ProBank Austin's Mancinotti said businesses may not meet the original intent of the PPP to keep workers on the payroll if they do not have to document their efforts.

"Once they get forgiveness, they're looking at potential layoffs," he said. "With any kind of a blanket forgiveness, there wouldn't be any checks and balances."

In addition, if Congress passes simplification, it is not yet clear how the SBA will tweak its application portal, he said. In announcing the portal, the agency said it is also waiting to see whether simplification is enacted.