The rollout of the Paycheck Protection Program (PPP) in April had banks scrambling to process a flood of applications from small businesses seeking to grab a piece of the more than $350 billion in forgivable loans that was initially designated for the program.
The federal relief program, which is aimed at helping small businesses weather the economic hardship brought on by the coronavirus pandemic, was rolled out at breakneck speed, but was not without its share of complications.
In the early days of the program, some of the largest banks were accused of borrower favoritism and a recent National Federation of Independent Business poll of its members found almost three-quarters of PPP loan recipients found it very or somewhat difficult to understand the loan's terms and conditions.
And now, two months after the first PPP loans were made, banks and small businesses are facing their next hurdle: loan forgiveness.
"Forgiveness is definitely going to be a burden banks will struggle with," Bill Byrnes, managing director in the risk and compliance practice at global consulting firm Protiviti, told Banking Dive. "Branches have started to open back up and things have stabilized. People were able to put their day job on hold for a period of time on the origination side, but I don't think that's really the sustainable viable option for most institutions to work through forgiveness."
The PPP has already undergone some adjustments in an effort to ease the process for small businesses.
President Donald Trump on June 5 signed the Paycheck Protection Program Flexibility Act, which would decrease — from 75% to 60% — the proportion of a PPP loan a small business must put toward payroll.
The law also triples — to 24 weeks — the time frame during which the funds must be spent for the loan to be forgiven.
Despite the PPP's most recent revisions, however, some trade groups and bankers say the forgiveness portion will place significant resource constraints on banks and small businesses.
For First American Bank, a $5 billion-asset institution that operates in Illinois, Wisconsin and South Florida, the early demand for PPP loans meant the community bank had paralegals, compliance and loan operations staff working on documentation, Florida Market President Brian Hagan told Banking Dive in April.
First Resource Bank, a community bank that operates in Pennsylvania, also had to reallocate staff members to keep up with PPP demand.
"We were calling people from all different areas of the bank," President and Chief Financial Officer Lauren Ranalli told Banking Dive. "We had accountants doing loan documents and we had retail people opening accounts left and right."
As the bank prepares for forgiveness applications, Ranalli said her bank has no option but to tap those same internal resources.
"I'm going to have to pull resources from everywhere, which is less resources I have helping existing borrowers that may need a modification, or the new borrower that’s looking to buy a property," she said. "It's just not an efficient use of my resources."
A solution may be to implement a forgivable loan threshold, something several trade groups are advocating in an attempt to simplify the process, Ranalli said.
The Consumer Bankers Association (CBA) and Bank Policy Institute (BPI) this month called on Congress to pass legislation automatically forgiving PPP loans of $150,000 or less.
"This threshold would account for 85 percent of total PPP recipients, but less than 26 percent of PPP loan dollars," the groups wrote.
But some bankers want to see a higher threshold.
"That does cover a lot, but I think it should be bigger," said Randell Leach, interim CEO of Beneficial State Bank, a $1 billion community development financial institution (CDFI) with locations throughout California, Oregon and Washington. "Why not have it be under half a million and we'll just get on with it? We’ll have more resources, federal resources, banker resources and business resources to try and tabulate all that stuff. These are tough issues we need to address as an economy and a society."
Ranalli said an automatic forgiveness threshold of less than $350,000 would mean 90% of her bank’s PPP loans would qualify.
"That certainly would change my resource needs," she said.
Community and regional banks won't be the only institutions that will experience the resource constraints from the PPP’s forgiveness portion, Byrnes said.
"Bigger banks have more resources to pull from, but they also typically have more complexity, and that doesn't necessarily mean they're going to be able to more easily address the challenges," Byrnes said.
The loan forgiveness portion of the PPP will be a "minefield" for lenders of all sizes as they balance providing high levels of customer service while at the same time meeting government expectations, he said.
"There's going to be a learning curve, and it’s going to take a big investment for many institutions,” Byrnes said. "Contract resources are one option — going to consulting firms — and I know some banks are looking for retired or former bankers, people that have been in the industry."
Many banks are turning to tax professionals to help process the 11-page forgiveness document small businesses are required to submit, said Eric Livingston, principal at EY Americas Financial Services.
"People who know the documents that are associated with the forgiveness process, those kinds of specialty skills are certainly in high demand," Livingston told Banking Dive. "That, complemented with the operational capacity of the banks, is a strategy being actively pursued in the marketplace."
The forgiveness document has drawn concern from lawmakers.
"Since the release of the forgiveness form and instructions a few weeks ago, we have heard significant concerns from small businesses and lenders alike about the complexity of the process especially for the smallest businesses," 47 Democratic senators wrote in a letter to the Trump administration Friday. "The 11-page form that must be completed to secure forgiveness is especially burdensome, time-consuming, and costly for very small and underserved businesses, including microbusinesses, sole proprietorships, rural, and minority-owned small businesses."
In the letter, the senators call for "streamlined forgiveness" for low-dollar amounts, as well as the creation of online tools and videos to help businesses fill out the application.
"The government is not helping anybody by using an 11-page forgiveness application," Ranalli said. "One of my PPP loans is for $300. ... A lot of small businesses, quite frankly, are going to have to go to outside resources like CPAs and accountants. If your loan is that small, it doesn't make any sense for you to do that."
While bankers say the forgiveness portion of the PPP will present hurdles for lenders and small businesses, they don’t expect the process to overwhelm banks like the wave of applications did during the start of the program.
Unlike the initial rollout of PPP, banks know how many forgiveness applications they can expect.
"We're feeling like it's going to be less of a tidal wave and more of a steady stream," Ranalli said.
Beneficial State Bank is setting up a system to accept forgiveness applications, Leach said.
"We've shifted our resources over to assessing how we can create a process to help people through what looks to be an over-complicated forgiveness program," Leach said. "It's not a process that banks have today, on how to systematically forgive 1,100 loans. So building those rails is a significant chunk of project effort, and we expect there to be more guidance and ambiguity as we go."
Ranalli and Leach both say they are hopeful a threshold for automatic forgiveness is on its way.
"You leave money on the table if you simplify the process, but there's also going to be waste with people trying to adhere to an over-complicated process," Leach said. "There are going to be people that won't take the money because they're not sure how to use it and there are going to be people that then have to defend what they did. All that is going to be a cost and a drag on the ultimate business recovery."