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.”
https://www.marketscreener.com/news/For-small-business-loan-program-forgiveness-may-be-the-hardest-part–30510947/?countview=0
