Lenders Struggle to Deliver Swift Virus Relief to Small Business

Lenders face continued difficulties in issuing much-needed financing under an ambitious $349 billion small business relief effort the Trump administration launched a week ago in response to the coronavirus outbreak, leaving mom-and-pop firms at growing risk of failure.

Banks have been intermittently shut out of the government’s loan-processing system, including again Thursday. They’re manually filling out forms — and are forced to start over if the network freezes. Lenders are especially galled over unclear guidance and confusing paperwork: after questioning the use of a sample loan form dating from 2002, they were told they could use their own documents instead.

“We’re all for the program — everything about it in theory is right,” said Heidi Brown, executive vice president of Citizens State Bank in Iowa. “But it’s like being sent out to build a house with only three tools in the tool box.”

Customers are coming in or calling constantly because they have either been forced to close or dramatically reduce hours, Brown said, and they’re concerned. “They’re desperate to get in line for the help. Unfortunately we can’t answer all their questions.”

Time is short to rescue small businesses. Filings for U.S. jobless claims reached a three-week total of almost 17 million on Thursday. Lenders, who have been flooded with applications, reported difficulties executing the program from the start, meaning funds are only trickling to firms a week after the initiative launched.

The Paycheck Protection Program, run by the U.S. Small Business Administration, is a signature piece of the $2.2 trillion stimulus enacted last month to contain the economic damage from the pandemic. It offers loans of as much as $10 million that become grants if the money is used for payroll and certain other expenses in the next two months.

The SBA said that more than 587,000 loan applications totaling more than $151 billion have been processed as of Friday morning, but there are no data on how much has actually reached business owners desperate to stay afloat.

Many banks are saying they have a “decent amount” of loans approved, but have yet to actually distribute it, said Julie Huston, chairwoman of the National Association of Government Guaranteed Lenders, who leads an SBA-approved lender called Immito LLC.

The unprecedented initiative, which was created and launched in a matter of days, is more than 10 times what the SBA’s flagship loan program oversaw last year. Advocates said the agency is trying to get it running smoothly and there were bound to be glitches.

The SBA didn’t comment for the story.

JPMorgan Chase & Co. and other banks weren’t ready to lend money initially after the Trump administration didn’t provide guidance on processing loans for the program until hours before it started on April 3. Many banks didn’t take applications from borrowers who didn’t have an existing lending account. Wells Fargo & Co., historically one of the largest lenders for small businesses, had to stop taking applications for a time because of a regulatory cap, which was eased on Wednesday.

Some lenders were also wary about their ability to resell the loans for needed liquidity. The Federal Reserve helped address those concerns Tuesday when it announced a program to provide financing against the loans.

Treasury Secretary Steven Mnuchin assured borrowers during a White House briefing April 2: “You get the money. You’ll get it the same day. You use this to pay your workers. Please bring your workers back to work if you’ve let them go. You have eight weeks plus overhead. This is a very important program.”

President Donald Trump defended the program on Thursday, saying billions of dollars’ worth of loans are being processed and bankers will be paying out the money “in the very near future.”

“I’m hearing it’s a very, very successful rollout,” Trump said. “They did want changes in applications, they want changes in loan requirements, etcetera,” he said of lenders.

Bankers warned the Trump administration it had failed to provide sufficient guidance on how lenders should draft critical documents. They wanted the fine print on rules that business owners must follow to get their loans forgiven, and banks held off completing financing because of uncertainty about loan documents, called promissory notes. Guidance from Treasury finally came on Wednesday that they could use their own form or an SBA one.

But a sample SBA loan note posted online caused even more confusion, said Kristen Granchelli, vice president of government affairs at NAGGL. It was dated 2002 and mentioned “collateral,” which the SBA’s coronavirus aid program doesn’t require.

“We are being told, ‘Just be comfortable with building your own note,’” Granchelli said. “That is an incredibly risky place to live in for a lender who’s trying to do right by their borrower.”

The main holdup has been a lack of clarity from SBA, Granchelli said. Historically, bankers that make loans through the SBA’s loan program use a guidebook that’s more than 300 pages, she said. Bankers have yet to see any such specific guidance for the new loans, including how to ensure the government will forgive them, she noted. The system could be further strained as the self-employed and independent contractors can start applying Friday, raising even more questions about how the rules apply to them.

For many banks, taking applications was only the beginning of their problems. Lenders reported that the legacy SBA E-Tran system has crashed or been inaccessible for long periods of times due to the flood of applications, even as SBA is working to increase capacity.

The SBA is testing an application programming interface, or API, which should allow financial institutions’ systems to connect directly with the agency’s, according to a person familiar with the matter, potentially speeding up the process dramatically.

The program also was initially limited to SBA lenders, meaning 60% of financial institutions couldn’t participate and faced delays trying to get certified, said Paul Merski of the Independent Community Bankers of America. Online and other non-bank lenders can apply to lend, but the application form was just released on Wednesday.

Small businesses have also been frustrated in trying to get loans approved because some banks aren’t accepting applications unless the borrower has an existing lending account. Banks blame time-consuming federal rules requiring them to verify customers designed to catch terrorists and money launderers.

“It might take the Treasury Department really pushing some banks,” billionaire Mark Cuban said Thursday in a Bloomberg Television interview. “I really truly expected that forward-thinking banks would use this as a way to attract new customers because it’s a unique opportunity, but they just haven’t.”

But small business owners are also wary about whether they’ll be able to get the loan forgiven at the end of the eight-week period and be stuck with a loan they can’t repay, even with payments deferred for six months.

“No one has ever disbursed this amount of cash in such a short amount of time, not surprised things are crashing.” said Justin Catalana, chief executive of Fort Point Beer Co., a San Francisco-based brewer, distributor and restaurant chain, who’s still waiting for a loan.

— With assistance by Jennifer Surane, Edward Ludlow, Sonali Basak, Saleha Mohsin, and Justin Sink

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