Few participants involved in the federal government's Paycheck Protection Program (PPP) will likely be able to escape criticism once the program is all said and done.
For the marketplace lenders and fintech companies that have been shut out of the program, the preclusion may ultimately be a blessing. It may also be an opportunity to improve their public image and competitive position by satisfying the goals and markets intended to be served through the PPP.
For those who got their wish to participate, the challenge will be to do all of that, plus navigate the program's problems with their reputation untainted.
Blame Is Going 'Round
It was clear from day one that the PPP launched through the Coronavirus Aid, Relief and Economic Security Act (CARES Act) would be oversubscribed. The first round was a limited pool of $349 billion in loans, which was intended to be made available to small businesses in response to the COVID-19 pandemic. In less than two weeks, and 1,661,397 approved applications later (only 5% of the 30.2 million small companies in the U.S.), the original funding was gone - to no one's surprise.
As my colleagues at Davis & Gilbert have described, the second round of PPP funding launched in late April (now with about $120 billion still left to disburse) had the hope of fixing some errors of the first wave, but the complaints around PPP are only escalating.
Despite its worthy goal of saving jobs amidst unprecedented economic uncertainty, a PPP-blame carousel is spinning, and it's effecting everyone involved: Congress, for the terms of the program; the Small Business Administration (SBA), for failures in implementation; the banks for prioritizing loans to existing clients; and large, public borrowers for receiving funds.
What Goes Around Comes Around
It's not surprising that negative public sentiment is aimed at the banks that granted the PPP loans in Round 1, but lost in some attacks is that lenders were faced with the challenge of distributing within weeks more than 10 times the normal annual volume of SBA loans, and they had to work with hastily drafted legislation and minimal government guidance. A common and appropriate refrain is the government is "building the plane while flying."
The good news for participating banks is that, for now, they have been given cover by Treasury, as they are allowed to rely on the borrower's certification at the time of its application with regard to eligibility for the program. But with all the backtracking and shifting sands that has marked the SBA's guidance - at least 9 updates to program rules and 40 pieces of guidance were issued over 5 weeks - it wouldn't be that surprising if, ultimately, when the time comes for determination of the amount to be forgiven under the terms of PPP loans and that ever-changing SBA guidance, that blame and resentment settles in a familiar place.
It wouldn't be the first time banks are on the receiving end of blame in executing on public policy goals. After years of providing greater access to credit to support the public policy of affordable home ownership, banks were investigated and penalized by the Department of Justice under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) for their role in subprime RMBS.
A Place for MPL
As we previously discussed, MPLs were born out of the last financial crisis, free of many of the restrictions imposed on banks and able to serve underserved markets. This time around, we expect - and others agree - MPLs to face significant challenges from banks with greater access to liquidity, but the playing field may become leveled a bit, if MPLs are able to exploit the gaps left by the PPP.
Putting aside any discretion exercised by the participating banks, awareness is building that the SBA guidelines may have failed to implement the intended purposes of the CARES Act, which specifically included serving minority and women-owned businesses. According to an inspector general report, the SBA failed to direct lenders to prioritize those underserved communities as required under the CARES Act. Further, given that the SBA did not require demographic information on the form of loan application, it will be very difficult to determine whether PPP funds actually made it to those communities.
In Round 2, $60 billion in PPP funds was earmarked for community development financial institutions, minority depository institutions, smaller banks and credit unions with the hope that this money would find its way to "smaller" businesses that may have had an existing relationship with these local institutions. Hopefully, underserved communities gain access to funds through these measures.
There are other ways the SBA's guidance diverged from Congress's initial intent. For example, guidance provided that in order for a borrower to receive forgiveness of a PPP loan, at least 75% of loan proceeds must be used for payroll costs over an eight-week-period, however this requirement was not included in the CARES Act. This requirement has limited the usefulness of the program for many businesses the CARES Act was intended to protect, including restaurants, as their operations remain shutdown over the crisis and still continue to incur large expenses for rent and utilities and will have significant non-payroll costs associated with re-openings.
Fintech lenders that were approved by the SBA in mid-April, but did not participate in the PPP's first-round of funding because the funds ran out may be better off. Without getting mired in those criticized loans, MPLs and fintechs allowed to participate in Round 2 can now make informed and smart decisions on where to place the funding. Even lenders that are not participating in Round 2 can now more clearly see where to focus their efforts due to the PPP shortfalls. Plus, borrowers who feel burned by the PPP process and how big banks mishandled their applications might be shopping for new lenders in the future.
The cries to fix the PPP's shortcomings are growing louder, but the government's missteps have provided a roadmap of opportunities for MPLs in underserved markets and an opening for them to help fund the re-opening of the U.S. economy. This will create the foundation for growth in the nation's recovery, whether V-shaped or a swoosh.
Adam Levy and Nicole Serratore, attorneys in the Insolvency, Creditors' Rights and Financial Products Group, each contributed to this post.
Originally published May 17, 2020.
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