What Access to the Payroll Protection Program Will Mean for Fin-Techs, Online and Alternative Lenders
One of the new and unique features to the Payroll Protection Program (PPP) is the authorization by the Treasury Secretary and the Small Business Administration (SBA) Administrator to extend the program to “additional lenders.” Since the enactment of the CARES Act, those additional lenders have been anxiously awaiting guidance on the program. On April 8, 2020, the SBA and the Department of Treasury released the CARES Act Section 1102 Agreement – Non-Bank and Non-Insured Depository Institutions (“Agreement”). While it appears there will be additional guidance coming from the SBA, the Agreement provides helpful insight into the requirements and expectations for a new pool of lenders.
The important terms are as follows, as lender applicants must attest to their eligibility in one of two groups:
Group A: (Must comply with all terms)
- The lender is either a depository or non-depository financing provider;
- The lender originates, maintains and services business loans or other commercial receivables;
- The lender has a formal compliance program to ensure compliance with applicable laws, including auditing of that compliance;
- The lender complies with the Bank Secrecy Act (BSA) requirements either as a federally regulated institution or equivalent federally regulated institution;
- The lender has been operating since February 15, 2020; and
- The lender has originated, maintained or serviced $50 million in business loans or other commercially financial receivables during a consecutive twelve (12) month period in the last 3 years.
Group B: (Must comply with all terms)
- The lender applicant is a service provider to an insured depository institution; and
- Has a contract to support such an institution's activities under 12 USC § 1867(c) (Bank Service Companies).
Additionally, lender applicants must provide the SBA with the amount and types of small businesses it has served within the past 12 months, whether the lender applicant has been subject to any enforcement actions by its primary regulator, or in the case of service providers, whether they have been examined by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) or the Office of the Comptroller of the Currency (OCC). There is no requirement that a lender be subject to oversight by any regulator. Finally, the lender applicants must attest whether they have been suspended or declared ineligible by any federal agency or department, whether they have ever filed for bankruptcy or subject to any indictments or criminal charges brought in any jurisdiction.
Like authorized lenders, the lender applicants will be responsible for administering the PPP loans, including the preparation of all loan documentation and disbursements. Furthermore, when the lender applicant seeks purchase by the SBA of the guaranteed portion (forgiveness) of the loan, the lender will have to attest that the covered loan has been “made, closed, serviced and liquidated” and has otherwise complied with all PPP requirements.
If the lender applicant is approved, their partnership with the SBA is short lived; the authorization to provide loans under the PPP terminates on July 1, 2020, or by the request of either party prior to that termination date. The termination, however, will not affect the forgiveness of any covered loan authorized by the SBA under the PPP. To the extent a loan is not forgiven, the lender applicant must still comply with all provisions of the PPP, including servicing and liquating, if necessary. Finally, if a lender applicant failed to submit a demand for forgiveness within one year after the maturity date, the guaranty will be automatically terminated.
There was much curiosity and anticipation about this proposal to expand SBA lending under the PPP to fin-techs, especially for those who have already been in the small business lending space for some time. With the maximum amount of a PPP loan capped at $10 million, for many fin-techs, as well as small community banks and alternative lenders, this type of loan is their bread and butter. Make no mistake, the PPP presents an opportunity for fin-techs to test the waters on the federal level with the possibility of guaranteed repayment. Whether an entity should consider taking advantage of the PPP will depend on numerous factors that are unique to each institution and the customers they seek to serve. If anything for fin-techs and others, the PPP is a business development opportunity to work with prospective small business borrowers who undoubtedly will need their services again in the future as they try to rebuild their businesses.
However, as the traditional banks are scrambling to go live with the PPP, there are some pitfalls. Monitoring and oversight over a borrower’s use of PPP proceeds will be key. Banks that have partnerships with long-term customers and who can mandate specific deposit accounts for use of PPP proceeds will be better positioned to determine forgiveness. Here is where fin-techs maybe a bit handicapped as they will need to find ways to monitor their borrowers in ways they did not have to before. Fin-techs will need to (1) ensure that their borrowers fully understand the requirements of the PPP, (2) draft loan documents that clearly state the borrower’s responsibilities for the loan proceeds, and (3) mandate documentation or some other evidence from the borrower that proves the same. There will be much scrutiny upon the SBA to ensure that lenders are not rubber-stamping loan forgiveness requests. While the SBA will hold harmless any lender that receives verified documentation which confirms that the PPP proceeds were used appropriately, those lenders that fail to obtain the appropriate approvals for loan forgiveness, yet grant the applications anyway, risk potential enforcement and penalties from the SBA.
Clark Hill’s Banking and Financial Services group has been actively reviewing all the latest and current information released from the Department of Treasury and the Small Business Administration in order to provide our clients with the most up-to-date information and guidance. Please visit our COVID-19 Thought Leadership Page. Stay well and be safe.