When the federal government began the Paycheck Protection Program (PPP) in April, one rule was clear to small-business owners bedeviled by its chaotic and messy start: If most of the loan money was used to pay employees, the debt would be forgiven.
But as the program enters its loan forgiveness phase, those owners — and their lenders — are finding out that although the principle may have been simple, its execution is anything but.
Many lenders have yet to start accepting applications from borrowers to have the loans forgiven. They are waiting to see whether Congress will pass a proposal to automatically forgive debt of less than $150,000, which makes up the bulk of loans made under the program.
Square, the mobile payments company, lent Audrey Kramer $5,600 in May to pay the only employee of Sweet Treat Stop, her mobile food truck bakery. She has been ready since July to apply to have the debt wiped away, but Square hasn’t started taking applications. It sent her an email this month saying that it was “waiting to release our forgiveness application until we get more information from Congress.”
Kramer is grateful for her loan — it helped her keep paying her baker even as her sales plunged — but she’s also eager to be done with it. “We’ve been cautious, and we’ve never carried any debt at all on the business,” she said.
On Thursday night, the Small Business Administration (SBA), which runs the program, released new forgiveness forms and rules for loans under $50,000. Such loans make up nearly 70% of the program. The new rules mean that some borrowers can still have their loans forgiven even if they cut head count or wages after taking the loan, but they will have to submit payroll documents and other records.
Lenders said the change was a start but did not go far enough. The Consumer Bankers Association, an industry trade group, renewed its call for all loans under $150,000 to be automatically discharged.
“It’s almost a nightmare to go through the forgiveness process as it is now written,” Richard Hunt, the group’s chief executive, said. “You have millions of small businesses in crisis, some going under, and Congress is not there in their time of need.”
Lenders said they were also wary of processing applications without knowing how crucial aspects of loan forgiveness will work, like how carefully they are expected to vet borrower-provided documents like payroll records. They are waiting for details on the Trump administration’s stated plan to audit all loans over $2 million. And they are getting nervous about whether they will be paid back by the government for loans they made to businesses that have since closed or gone bankrupt.
More than 5.2 million business owners borrowed a total of $525 billion through the paycheck program, which used banks and other lenders as conduits to issue the loans. From April to August, small businesses were encouraged to borrow cash to cover eight weeks of payroll and a handful of other expenses. Once the money is spent, borrowers must apply through their bank to have their loan paid off by the government.
But business owners looking to start the loan forgiveness process have found lenders mostly unwilling to work on those applications until there is clarity from Congress, especially because of the cost and complexity of handling fairly small loans. Loan forgiveness proposals have been introduced in both the House and Senate with bipartisan backing — Treasury Secretary Steven Mnuchin said he was a supporter — and were likely to be included if Congress passed an economic relief bill, but the fate of such legislation is uncertain, with the presidential election just weeks away.
Ed Sterling, president of Flagler Bank in West Palm Beach, Florida, said lenders had been “waiting on the edge of our seats” for legislative action. The process for reviewing a loan forgiveness application will take his bank about three times as long as it took to actually originate the loan, he said.
The SBA has been slow to act on loan forgiveness applications that lenders have sent in. The agency began accepting the forms Aug. 10. By late September, it had received 96,000 but had not yet approved or denied a single application, William Manger, the agency’s chief of staff, said at a House subcommittee hearing. By law, the agency has 90 days to respond after it receives an application. An SBA representative said the agency sent its first approvals and loan payments to banks Oct 2.
Lynn Ozer, a banker who specializes in small-business lending, said borrowers she worked with at Fulton Bank in Lancaster, Pennsylvania, were “panicked” at the prospect of their forgivable loans becoming debts if they made mistakes on their paperwork. “We can’t help our borrowers if we ourselves don’t understand the guidance,” Ozer said.
Trapped in the middle are business owners like Léa Kujala, a co-owner of Northwest Treatment, a counseling center near Portland, Oregon. Kujala got a $34,000 loan in April, which helped her and her business partner retain their three employees when their revenue nose-dived.
Now Kujala would like to get the loan paid off, but her lender, U.S. Bank, has not yet opened its forgiveness portal to her. Kujala — who estimates that she has already spent five hours gathering records and preparing her application — is so concerned about the loan’s many rules and potential tripwires that she is keeping all of the money she got in a reserve account, just in case her loan isn’t forgiven. (She drained her business’s savings to make payroll and will pay that back if her loan is discharged.)
“We’re supernervous about the fact that we don’t know what’s going to happen,” she said. And the loan was only a temporary salve; with her revenue still down at least 30%, Kujala is preparing to lay off one of her employees.
A U.S. Bank spokesperson said the bank was sending out invitations in stages to its forgiveness portal. After the bank was contacted for this article, a representative told Kujala that she would get an invitation soon.
Most borrowers — and their lenders — can afford to wait before seeking loan forgiveness. The coronavirus relief bill, which created the PPP, initially set repayments on any remaining debt to begin six months after a loan was disbursed, but Congress later revised the law to give borrowers as long as 16 months to apply for forgiveness. For most borrowers, that means the issue won’t become urgent until mid-2021.
But there, too, the law has a gray area. More than 4 million borrowers — a majority — have loans that were made before the rules changed. To scrupulously follow the law, lenders would need to formally modify those loans and get each borrower’s signature on the changes. That’s a “momentous task,” said Brad Bolton, chief executive of Community Spirit Bank in Red Bay, Alabama. The SBA has not yet responded to banks’ requests for clarification on the matter — and payments for the program’s earliest borrowers are scheduled to come due this month.
Most lenders, especially the biggest ones, have decided to take the risk and simply postpone all payments, said Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, a trade group. “Because it’s a benefit to the borrower, they’re doing it unilaterally, because who is going to object?” he said.
Glenn Sandler, an accountant in Melbourne, Florida, has around 200 clients with PPP loans, averaging around $40,000 each. He’s advising all of them to sit tight and wait for what he believes will be legislative fixes to the forgiveness process. “Hopefully, Congress will get off their butts,” he said.
Sandler thinks automatic forgiveness for small loans is likely, in part because the alternative — trying to collect payments from small businesses struggling to stay afloat — is untenable.
“They’re broke,” he said of the mom-and-pop ventures that he works with. “There’s a lot of people who won’t be able to pay it back. So, what, they’re going to go into collections with them? There’s no sense in that.”