US economy

US banks fret over fine print in small business rescue plan


Legal ambiguity and uncertain financing arrangements are continuing to curb US banks’ enthusiasm for taking part in the federal government’s rescue plan for small businesses affected by coronavirus, even as congressional leaders discuss expanding the programme from $350bn to $600bn.

Despite several statements of clarification from the US Treasury and the Small Business Administration — including a new, six-page FAQ document published late on Wednesday — regional and local bank executives say they are still awaiting key details they need to begin disbursing the emergency loans at scale.

At the same time, several said they were nervous about what would happen in two months, when borrowers had been told their loans would be forgiven if they had been used to cover employee pay, utilities, rent or mortgage interest.

The concerns come after a glitchy rollout of the programme, known as the Paycheck Protection Program. It was formally launched last week for companies with up to 500 employees and is due to be extended on Friday to independent contractors or the self-employed. Although about $100bn of loans had been authorised by the SBA by Wednesday, it was unclear if significant sums had made their way to businesses. 

“It’s been a very frustrating rollout, particularly as guidance is coming out as the programme is being launched,” said Paul Merski, head of congressional outreach for the Independent Community Bankers of America, a trade group for smaller banks. 

“There’s been several rounds of guidance and even more guidance coming out today,” he said. “That doesn’t give the banks a hearty and robust level of confidence that if I’m doing this documentation it’s not going to change later in the day.”

Bankers had complained, for example, that the government’s guidance had left them uncertain about the level of due diligence required to verify that payroll information provided by borrowers was accurate, and whether they would be left holding loans if the amounts were miscalculated. The maximum amount for the loans is set a 2.5 times average monthly payroll.

The guidance released on Wednesday specified that “providing an accurate calculation of payroll costs is the responsibility of the borrower” and that the lenders are only “expected to perform a good faith review, in a reasonable time”.

But Mr Merski said there were still unresolved questions about how to close and fund the loans. “The SBA didn’t have a sample [promissory] note out until today, and there’s still questions on that note,” he said. “So even disbursing [that] money after you go through all those steps is still challenging.” 

Banks also remain worried about applying for forgiveness for the loans when that becomes possible after eight weeks. Some expressed concern they could be left holding unforgiven loans and exposed to legal liability, should the SBA object to the way the loans were filed or declare that the uses of the funds were inadequately documented. 

“The devil is in the detail, and we won’t know the details for eight weeks now, when we go to ask for forgiveness,” Mark Kajita, chief executive of Baker Boyer Bank, a $600m community bank based in Walla Walla, Washington. “If borrowers don’t get forgiveness, they may hold us liable.” 

The concern was shared by Bruce Lee, chief executive of Heartland Financial, which operates community banks across the western part of the US. “Let’s say the borrower did not use the funds appropriately, but they give us documents saying that they did — and then someone comes back and says it didn’t happen. I’m left holding the thing. I want to know what the details of the verification process are,” he said. 

Separately, banks still await an update from the Federal Reserve on its promise to take the loans off of bank balance sheets.

The Fed issued a single-sentence press release on Monday saying it would “establish a facility to provide term financing backed by PPP loans”. A spokesperson for the central bank could not say on Wednesday when the full terms and conditions for the loan-buying scheme would be published.

Several small and midsized banks told the Financial Times that they were at or near the limit for PPP loan commitments they could take on.

“We are the ones that have to administer the programme, without any money up front,” said Mr Lee, whose bank has submitted $1.5bn in PPP applications to the government. “We’re a $13bn bank [by assets]. This has increased our loan portfolio by 20 per cent in five days.”

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Laurie Stewart, chief executive of Sound Community Bank in Seattle, said her bank, which had $720m in assets at the end of the last quarter, had already filed about 300 PPP applications. That is “already approaching what would be prudent” to hold on the bank’s own balance sheet.

Leaders of both parties in Congress have supported adding an extra $250bn to the programme through urgent new legislation, although the details of what else may be in any bill remain to be hammered out.

Mr Lee said Heartland still had more customers in need. “We want to do more, our community needs it, but we can’t do more until we get the loans we have processed off our balance sheet.”

As for the Fed’s announcement, he said: “I’m not going to bet my balance sheet on it.”

Additional reporting by Laura Noonan in New York



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