How Banks and Credit Unions Can Be Ready for PPP Loan ForgivenessJune 17, 2020
Bank and Credit Union FAQs and 3 Tips for Success
Banks and credit unions face new challenges of scale including efficient client relations, know your customer (KYC), distribution of funds and servicing loans all brought on by the Paycheck Protection Program (PPP).
The PPP Loan program has involved more SBA-backed loans in just over two months than the SBA had authorized in this century through all other programs. PPP loans have affected all corners of financial services. However, as the originator of those loans, banks and credit unions have the most to gain or to lose in the process.
In this article, we provide our overview of the PPP for financial services, answers to bank and credit union FAQs, as well as tips for managing and succeeding with PPP loan forgiveness.
Overview of Paycheck Protection Program
Paycheck Protection Program (PPP) went live on April 3, 2020 as part of the CARES Act and phase three of a national response to the COVID-19 pandemic.
PPP is a federally-backed loan provided to small businesses with up to 500 employees by retail banks and credit unions. PPP offers complete loan forgiveness to small businesses if all federal criteria are met. In doing so, it presents a lifeline for small businesses that have been affected by the novel coronavirus so that they will be able to retain or rehire employees. Retention of a workforce is the touchstone of this program, with all aspects of forgiveness tethered to maintaining payroll levels.
As a federally backed loan, both banks and credit unions have been required to contend with the changing terms and different potential interpretations of the requirements for loan forgiveness. This is the first time a program of this type has been tried nationally, and there have been more than a few bumps along the way.
On May 15, 2020 the SBA and the Department of Treasury published the PPP Loan Forgiveness Application form. The application form outlines two paths for calculating full time employees (FTEs) and the “covered period” of recipient business.
Further rules were published on May 22, 2020 through the Interim Final Rule on Loan Forgiveness. Clarifications included in that release included details around safe harbor provisions for smaller companies and information on the way that certain calculations for forgiveness eligibility are supposed to be made.
However, even these rules are not set in stone. Currently, both the House and Senate are developing options to expand forgiveness criteria, which would make PPP loan forgiveness more accessible for many small businesses. The expansion may include adding eligible expenses like PPE, decreasing the payroll requirement from 75% to a lower share of total funds, and extending the June 30 application deadline. As changes are made, we will update this article.
Official PPP Resources
CARES Act Legislation
Treasury Department Guidelines for CARES Act Assistance to Small Businesses
Small Business Administration Paycheck Protection Program Guidelines
Paycheck Protection Program Forgiveness Application
PPP Loan Forgiveness Frequently Asked Questions
Banks and credit unions, some of which have lifted asset caps to lend on a broader scale, have the most at risk given the requirements for PPP forgiveness. While the principal of PPP loans is secured, the interest is not. Mismanaging applications and forgiveness requirements may leave a national sum of at least $3.4 billion in interest on the table. But, on the other side, there are many who are concerned about fraud or similar applicant risks that are difficult to control at the scale of a program like PPP. How the SBA will respond in such cases, and what criteria will be used to insure the federal-guarantees are met remain open questions. Managing this type of risk leads to plenty of questions.
Our answers to the most Frequently Asked Questions about PPP Loan Forgiveness:
How much of the PPP loan can be forgiven?
A. PPP loans can be forgiven up to 100% of principal, with no interest charges added. 100% forgiveness may be achieved if funds are proven to be used 75% for payroll expenses and 25% for covered costs. Covered costs may include rent, mortgage interest and utilities. If a borrower does not follow those guidelines, or happens to use the funds for another purpose, the loan may be only partially forgiven, with the remainder being converted into an amortizing loan subject to SBA 7(a) reporting requirements.
When does PPP loan forgiveness begin?
A. Forgiveness is based on an eight week “covered period.” The regular “covered period” begins from the date of loan disbursement. There is also an “alternative covered period” available to employers that prefer aligning the start of the covered period with their payroll schedule. Borrowers are responsible for choosing the covered period that is applicable to them, but lenders should make an effort to ensure the covered period being used meets program requirements.
What is the difference between covered periods?
A. Covered period
The eight-week period (56 days) beginning on the day the borrower received PPP loan money (formally known as the loan disbursement).
A. Alternative covered period
The eight-week period (56 days) starting on the first day of the first pay period following the date of PPP loan disbursement.
Must headcount also be maintained?
A. Headcount must also be maintained at levels that match those prior to February 15, 2020. There are safe harbor rules in effect for borrowers who have attempted to rehire employees who rejected their offers, meaning that those borrowers will not be penalized for reductions in headcount that could not be restored for that reason.
How is headcount determined?
A. Borrowers will be forgiven based on Full Time Employees (FTEs). FTEs must match the levels held prior to February 15, 2020. If the borrowing business makes an offer in writing that is refused by an employee, then they will not be penalized, and forgiveness can still be processed.
Another key point is that borrowers do not need to necessarily rehire the same exact employees to meet the headcount threshold. Employee-level reporting used in the loan forgiveness application is to be used to sort out whether the borrower has met the requirement.
Is level of payroll a consideration?
A. Yes. Loan forgiveness will also be reduced if the borrowing business decreases salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019. The amount of forgiveness reduction corresponds to the amount of payroll reduction beyond the 25% mark for each employee.
What is the deadline for rehiring?
A. Businesses have until June 30, 2020 to restore full-time employment and salary levels for any workforce changes that may have been made between February 15, 2020 and April 26, 2020.
Can the lender, either a bank or a credit union, request forgiveness for the borrower?
A. Borrowers must request forgiveness from your financial institution. Banks and credit unions may not complete or submit forgiveness applications on behalf of their clients. All applications must be attested and signed by the borrower themselves.
The PPP Loan Forgiveness package will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations
How long do lenders have to grant forgiveness?
A. The lender must decide on forgiveness eligibility within 60 days after receiving a completed forgiveness application.
What is pre-purchase?
A. PPP Loan pre-purchase is a provision within the PPP program that allows the SBA to purchase the loan from an originator up to the amount that may be reasonably forgiven. Pre-purchase of loans may begin 7 weeks after loan disbursement.
Taking advantage of pre-purchase may require banks and credit unions to develop their own standards for judging the amount of a loan that may be reasonably forgiven, and for submitting a request to SBA accordingly.
3 Tips for Managing PPP Loan Forgiveness
1. Understand Your Bank or Credit Union Cost Centers
Operational costs over the lifetime of a loan can be one of the strongest deterrents to offering that loan at all. The scale of PPP loans exaggerates both the costs of processing loan forgiveness and loan servicing. Balancing those costs can be the key to success with PPP for your institution.
Under the Paycheck Protection Program, loans are held at an interest rate of 1% per year. These loans have a 2-year tenor on an amortizing term loan. The SBA guarantees the principal amount of the loan. Banks and credit unions may have up to 100% of the value of PPP loans forgiven. However, forgiveness is only given when stringent criteria for payroll and headcount are met. These criteria may change with new legislation.
Margins for PPP loans are thin. But those margins can be more appealing when banks can control how the loan is handled and how many times it requires the support of a cost center. Evaluate origination and servicing costs to find places to make operations more efficient.
Origination and servicing costs may include:
- Credit services
- Submission to SBA
- Approval processes
- Database hygiene
- PPP forgiveness protocols
- Pre-purchase process
- Internal or external loan servicing
An instance of one of these cost centers being needed through the lifetime of a loan represents one touch. Every individual touch, especially from live associates and underwriters, costs banks and credit unions time and money. Finding places to consolidate operations, for instance by automatically checking forgiveness eligibility against the initial loan application’s data, can make these loans more valuable in the long run.
2. Adapt and Stream line to Process Loans Even Faster
PPP guidelines state that loans which the SBA has approved must be distributed within 10 days of approval. But with processing of loans taking up to two or three weeks, unfortunately many lenders have missed that mark.
With PPP loan forgiveness providing a 60-day window in which to render loan decisions, lenders may have some more flexibility than they experienced during origination. But with the high volume of applications, that window of flexibility may not actually provide much additional cushion for lenders.
Completing due diligence on loan applications has been one of the greatest challenges to processing PPP loan applications quickly. With loan forgiveness, it is likely to be a similar story for many institutions. But this might be the right time to adopt more efficient due diligence protocols. Streamlining your institution’s process with digital automation can help decrease the time and cost to process a forgiveness application, and, if done correctly, could increase decisioning accuracy at the same time.
Banks and credit unions should look for ways to increase efficiency in the following areas:
- Customer Applications
- Customer Identification + KYC (Fraud prevention)
- Transaction Monitoring
- Risk Management
3. Leverage Technology to Get it Right
When it comes to speeding up operations FinServ technology can be broken into two basic categories: third-party integrated services and custom-built automation. The ability to program and launch security preferences, risk tolerance thresholds and other triggers across a broad set of systems has given many financing companies powerful and efficient tools to deal with loan forgiveness.
In general, integration technologies use Application Programming Interfaces (APIs) to connect one database of information to another. Automation tools help customize rules use to govern how a piece of software functions. For example, machine learning helps speed and expand capacity to perform tasks that may be too cumbersome to be done quickly by a person. Because machine learning is based on programmed rules, the flexibility to customize those rules is key to successful adoption of the technology.
Tech application for PPP Loan Management
SaaS offerings like Plaid’s API can offer pre-built connections to payroll processors and aggregators like Paychex, ADP or Gusto. Integrating with HR management services with an API can give banks and credit unions a direct line of sight into payroll expenses that will be essential to making accurate forgiveness decisions.
Custom automation applied to machine learning or accounting-specific programs can help financial institutions tackle questions of forgiveness eligibility at scale. The same programming rules can also be used to create a net serviceable calculation. When coupled with data sources from integrations such as the above, processing forgiveness requests can be made faster and more accurate at the same time.
When integration and automation are coupled to provide real-time expense data from the borrowers’ banks and HR services, lenders can expect a clear view into forgiveness eligibility and have a secure and verifiable means of proving this to the SBA.
The Future of Lending
PPP is the catalyst of a new era in lending. Digital data integration, speed of service and speed of decision making are more important than ever in the client’s choice of where to get and put their money. Handling PPP, and managing it well, offers enterprising lenders an opportunity to jump ahead in their respective markets.
The challenge for lenders moving forward will be to meet this new demand from empowered bowers and maintain faster speeds of origination and service. Banks and credit unions can look toward integration and automation solutions to ensure performance and position among competitors.
Please note, federal guidelines associated with Paycheck Protection Program are subject to change as Congress pushes for broader adoption of PPP among small businesses. FAQs within this article will be updated in accordance to new information as it becomes available.
Interested in technology that will make PPP Loan Forgiveness easier for your institution? Talk to us about Biz2X Accelerate SBA. Sign up for a Demo.