Financial Institutions Need More Than Prayer as Borrowers Seek PPP Forgiveness

Bankers will be praying to their chosen deities for help as the industry heads down the path toward forgiveness of PPP loans

As borrowers begin the loan forgiveness process under the Paycheck Protection Program, financial institutions are looking at a long list of tasks to prepare for the next workflow.

While the process and/or guidelines for loan forgiveness are not well defined, the basic criteria under which the loans were extended is unchanged in these areas:

• Eligible loan amount not to exceed 2.5x the average monthly payroll expenses
• The funds can be used to cover:
  • Payroll costs (per the definition), which must be at least 60% of the total amount of the request for forgiveness (recently lowered by the Senate from 75%)
  • Interest on mortgage obligations, rent payments and utility payments (in place before Feb. 15, 2020), which must not exceed 40% of the total forgiveness request (just raised from 25%)

Lenders must process the application for forgiveness on behalf of the small businesses that received the loan. A few useful and innovative tools have emerged in the market for small businesses, like PPP.bank, promoted by Jill Castilla of Citizens Bank of Edmond and entrepreneur Mark Cuban.

The program guidelines indicate that the lender can rely on the documentation provided by the small business borrower without authenticating the accuracy of the information. Banks that feel comfortable with this government assurance may want to speak with this article’s author about a bridge in Brooklyn he’d like to sell you.

Although the Small Business Administration has indicated that it will hold the lender harmless for relying on the documentation provided by the borrower, banks and credit unions should confirm the accuracy of any of the calculations associated with the forgiveness requests to avoid initial rejection. Additionally, if any portion goes unforgiven (and unsold), the lending institution will have an unsecured loan on its books for up to five years (recently raised from two years) with no personal assurance from the business owner(s). This potential “loan purgatory” creates huge pressure to maintain the 100% guarantee of the SBA.

Jumping On at Week Seven

A provision exists under which a lender can sell an individual loan or pool of loans to the SBA at the end of week seven of the covered period. While this sounds great, several things must be in place before the SBA will approve the purchase:

• A detailed narrative explaining the assumptions and logic used to determine the effective forgiveness amount
• Any information obtained from the borrower since the loan was disbursed that the lender used to determine the expected forgiveness amount
• Any additional information the SBA administrator may require in order to determine whether the expected forgiveness amount is reasonable

While the early full purchase by the SBA sounds like a great idea, that last catch-all requirement makes this option look like the prayer method for forgiveness. Rather than putting their hopes on constructing narratives to explain assumptions, banks and credit unions will be better off using a tiered triage approach to determine how much intervention is needed for each group of borrowers.

For Best Results, Triage the Entire Portfolio

Rather than go through a full manual process with each borrower, Cornerstone recommends that the financial institution triage the entire portfolio following these three steps:

1. Run a query from your loan and deposit accounting platform, collecting:

• Date the PPP loan was funded
• Original (and likely current) balance of the loan
• Total balances in deposit account(s) the borrower held at your institution

2. Compare the deposit balances held as a percentage of the original loan amount of the PPP loan

3. Determine likely thresholds (of deposit balances held) based on the days-since-funding date

The percentages below are based on the initial guidelines and serve as one example of how the deposit thresholds could be calculated. The percentages assume weekly payroll at 9.375% of loan funds used/week and full use of the 25% portion for rent, mortgage interest and utilities at 12.5% of loan funds used every four weeks.

For borrowers that meet the minimum deposit balances, the institution should simply communicate (via email or other mass communication method) a reminder of what will be required at the time of application for forgiveness. If a borrower has deposit balances that fall below the determined likely threshold or if he does not maintain a deposit relationships with your institution, start the early intervention process immediately.   

Early Intervention

For any borrower with deposit balances that fall below the determined likely threshold or who does not maintain deposit relationships with your institution, implement the following steps:  

1. Schedule a meeting to confirm the following borrower data:

• Payroll service provider used by the borrower
• Landlord(s) of any of the properties occupied by the borrower
• Mortgage lender(s) of any of the properties owned/occupied by the borrower
• Utility service providers
• Detailed payroll reports of any payroll periods since issuing the loan
• Details of the number of individuals currently employed by the borrower
• Details of rent payments made since the time of the loan
• Details of mortgage payments made since the time of the loan (to calculate the interest paid)
• Details of utility payments made since the time of the loan
• Projected spending for the remaining covered period by payroll, rent, mortgage interest and utilities

2. Determine if the number of individuals still employed equals the number of employees used to calculate the payroll costs used to determine the amount of the loan

If there is a decline, determine the reason(s) for the decline and if any were due to layoffs.

3. Calculate the total payroll expenses (actual plus projected)

This is probably the biggest item overall. The payroll costs provide the greatest opportunity and the greatest restriction on the loan forgiveness. If the actual plus the projected payroll costs exceeds 60% of the total loan amount, great! If not, there’s a problem.

Also, counsel the borrower to lean on his payroll service provider for the documentation needed to certify the payroll expenses and the full-time equivalent (FTE) numbers required for compliance with the forgiveness. Not all payroll service providers support their clients equally. Hopefully that changes, and quickly.

If the borrower doesn’t have sufficient funds on hand to cover the required future payroll expenses (the most important part), determine how he plans to get sufficient funds to cover the remaining expenses.

4. Set the next meeting time with the borrower

For borrowers that look OK for the loan forgiveness amount but lack documentation, schedule the next appointment in two weeks with the intent to update the loan forgiveness amount and collect all documentation required to apply for the loan forgiveness.

For those with an apparent gap between the loan amount and the estimated forgiveness amount, schedule the appointment in one week to review numbers, check available funds and start building the repayment plan after the deferral period.

* * *

The PPP is providing significant benefit to banks’ and credit unions’ local economies. Each financial institution participating in this program is doing its part to support its customers for the long haul. The extension of these loans took extraordinary effort, and now each institution has to mobilize a second time with disciplined and organized workflows to achieve the anticipated forgiveness of these loans.

GonzoBankers, say a prayer and then start executing consistent workflows and documentation for PPP forgiveness.