For small business loan program, forgiveness may be the hardest part

The U.S. government’s $660 billion small business rescue program has stumbled on missing paperwork, technology failure, and the misdirection of funds to big corporations. Now, it is lurching toward another hurdle: forgiving those hastily arranged loans.
The second round of the Small Business Administration’s Paycheck Protection Program launched on Monday, allowing lenders to issue forgivable, government-guaranteed loans to small businesses shuttered by the novel coronavirus outbreak.
Smoothing the forgiveness process is critical for the program to succeed, but a lack of government guidance on the related calculations and necessary documentation could land borrowers and banks alike with billions in unexpected debts.
“Probably every PPP borrower expects their loan to be forgiven, but it is not that simple,” said Paul Merski, an executive at the Independent Community Bankers of America.
“There are rules and regulation to consider. So the borrower best have their information and paperwork in order.”
In principle, the forgiveness terms are straightforward: borrowers must spend 75% of the loan on payroll costs, such as salaries, tips, leave, severance pay and health insurance, within the first two months. The remaining 25% can be spent on other running costs, such as rent and utilities. Money spent on non-qualifying expenses must be repaid at an annual rate of 1% within two years.
But in reality, it is going to be very tricky calculating partial forgiveness sums for borrowers who have not met the 75% threshold, said bankers. They point to potential areas of confusion such as when employees must be rehired and what happens if borrowers do not use the funds as promised.
“I do think it could become a little bit complex, because with every answer there’s another question,” said Chris Giamo, head of the commercial bank at TD Bank in New York.
That has created uncertainty for borrowers like Josh Mason, founder of Maryland catering company Vittles Catering. He said his bank only gave him instructions on how to maximize his eligibility for forgiveness on April 24, two days after he received the funds. Those instructions warned clients that the forgiveness process was “not yet clear.”
While a 1% interest rate is very low, the two-year repayment term could see companies that fail to qualify for full forgiveness landed with chunky monthly payments.
“I have read all the guidelines, but I wouldn’t be able to say exactly how much will be forgiven and not forgiven. I think that ambiguity is going to create a little bit of a mess when all of this comes to a close,” said Mason.
Given the many potential calculation variables, banking groups are pushing the SBA and the Treasury Department to issue a standard forgiveness form for borrowers and to create a calculator so every bank gets the same outcome when using the same data, said executives at three bank groups.
They are also seeking clarity on which documents are necessary to prove borrowers’ expenditures, and how closely banks are expected to scrutinize that paperwork.
Spokespeople for the Treasury and SBA did not respond to requests for comment, but the agencies are aware of the issues said David Pommerehn, general counsel of the Consumer Bankers Association.
“From a banking perspective, we are really acting as a middleman here. We don’t want to carry these loans on our books,” he said. “We see this as potentially a bigger mess than the funding process.”
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