Banking and credit union representatives are urging lawmakers to create a special relief fund for the smallest businesses, loosen restrictions on the use of Paycheck Protection Program money and all but eliminate the paperwork involved in what is expected to be forgiveness of the loan in the future.
The representatives say they want the legislative fixes and regulatory tweaks to be included in in the next coronavirus response bill as the COVID-19 pandemic batters the economy. The Bureau of Labor Statistics said Friday the April unemployment rate soared to 14.7 percent, and 20.5 million workers were cut from nonfarm payrolls in April.
It's unclear what Congress' next move is. Democrats say they want to move quickly on the next package, but Republicans say they want to see the results of about $3.5 trillion provided in four bills enacted in less than two months. More than 33 million workers have filed for unemployment in the last seven weeks as public health restrictions have kept most Americans away from shops and restaurants due to the pandemic that has claimed more than 75,000 American lives.
"If Congress does decide to provide additional funding, we think there are opportunities to address some outstanding issues including greater clarity around BSA/AML [Bank Secrecy Act/Anti-Money Laundering] requirements, more detail on the forgiveness provision and other tweaks that would make the program even more accessible to small businesses in need," said James Ballentine, executive vice president of congressional relations at the American Bankers Association.
The PPP, one of the lifelines keeping shuttered businesses afloat during the crisis, offers small businesses forgivable loans worth up to 10 weeks of payroll. If the borrowers use the money to cover payroll and other fixed costs like rent, they won’t have to pay the loans off. The program relies on private lenders to provide the loans after the Small Business Administration authorizes them.
FiscalNote, the parent company of CQ Roll Call, has received a Paycheck Protection Program loan.
Despite hiccups at the start, the PPP ran out of its initial $349 billion in less than two weeks, forcing Congress to consider another spending measure almost immediately. Lawmakers provided an additional $310 billion for the program in its fourth coronavirus relief bill, which also included more money for hospitals and other Small Business Administration emergency loans.
The PPP’s daily burn rate has slowed from more than $50 billion during the first round to under $3 billion a day this week. At this rate, the second round could last well into June, although the money could run out sooner if companies that held off on applying early do so now that some states are beginning to lift public health restrictions.
Among the initial complaints about the program was that the smallest businesses were being excluded.
On a conference call Thursday, Businesses for Responsible Tax Reform co-chair Shaundell Newsome backed a separate fund for smaller firms, saying businesses like his marketing firm were last to get funds.
“We learned a hard lesson that not all small businesses are created equal,” he said, noting that he had trouble getting a PPP loan despite a long-standing relationship with his bank. “The SBA and our legislators need to make it a priority to improve access to capital for small businesses, focusing on very small and minority-owned firms in particular.”
The National Association of Federally-Insured Credit Unions also supports earmarking PPP funds for the smallest businesses, said Brad Thaler, the trade group’s vice president of legislative affairs. “In general, we support set-asides that help smaller financial institutions and smaller businesses,” he said.
Congress, in an effort to reach small businesses left out in the first round, earmarked $60 billion of the second-round funding for smaller banks. But data from the Financial Services Forum, which represents the nation’s eight largest banks, suggests that might have been unneeded. The FSF found that 53 percent of the PPP loans made by its members went to businesses with fewer than five employees, and 46 percent were for less than $25,000.
House Speaker Nancy Pelosi, in addition to wanting to provide more money in another bill, has said she wants tweaks to the PPP included in the next legislation. On a conference call with small-business groups Tuesday, Pelosi said she wants to extend the length of the loans beyond eight weeks and relax the rules on forgiveness. She also called for setting aside some of the additional PPP funds for small businesses with fewer than 25 employees.
Senate Small Business and Entrepreneurship Chairman Marco Rubio, R-Fla., endorsed most of those proposed changes on Wednesday, but said he opposed the set-aside for the smallest employers.
“The average loan is down to $79,000, so it’s getting there,” he said. “You don’t have to set aside that money.”
Many small businesses have complained that the PPP’s spending restrictions emphasizing payment to workers are too strict, arguing that they can’t keep workers employed if they go out of business.
“We need no-strings-attached grants to truly small businesses,” said Anne Zimmerman, another co-chair of the Businesses for Responsible Tax Reform and a certified public accountant. “This will allow us to stay open and operational so we can make it to the other side of this crisis, and employ as many or more than we did before all this started.”
While Pelosi and Rubio have said they’re interested in making the program more flexible, one of the PPP’s other architects, Sen. Susan Collins, R-Maine, said she thinks the focus should remain on workers.
The SBA regulations say businesses must use at least 75 percent of the loans on payroll, with the rest allowed to go to certain fixed costs like rent, utilities and insurance. To the extent that borrowers use the loans for other expenses, like inventory, or if fixed costs exceed the 75-25 ratio, they would have to pay them back.
A bipartisan group of 21 senators, led by Sens. John Cornyn, R-Texas, and Bob Menendez, D-N.J., sent a letter to the administration Wednesday seeking to raise the 25 percent limit on non-payroll expenses to at least 50 percent, echoing calls from the National Restaurant Association.
Lenders and businesses are demanding more clarity on how the PPP loan forgiveness process will work. To get the money out the door fast, Congress placed most of the paperwork on the back end. The loan application is only two pages, but certifying that the money was spent on forgivable activities will require much more documentation.
“Anything we can get from SBA to make [the forgiveness process] more clear, simple for the borrower, would be terrific,” Consumer Bankers Association President Richard Hunt said Thursday on C-SPAN. “We hope every loan is forgiven and everyone will use 75 percent of the proceeds to pay employees. We want to make sure the borrower has clear rules of the road and make sure they can get full forgiveness. I am hoping 100 percent of the loans are forgiven.”
Paul Merski, the Independent Community Bankers of America vice president for congressional relations, said Congress should dispense with the paperwork expected.
Congress — or the SBA administratively — should just skip it, said Merski. For loans under $1 million, the SBA should just rely on the good-faith certifications borrowers made in their loan applications, he said. “Otherwise, you’re creating a huge bureaucratic nightmare of borrowers, lenders and the SBA all trying to figure out these forgiveness pieces,” he said.
Merski said ICBA’s interest in skipping the red tape wasn’t self-serving. “Banks are capable of doing the paperwork,” he said. “It’s going to be more challenging for certain small businesses that don’t have accountants or payroll systems to gather up all these documentations and certifications to prove forgiveness.”
He said he expects the SBA to still audit the certifications to catch those who lied, not unlike how the IRS audits tax returns to catch tax evaders.
While Merski said he doubted Congress will move fast on another bill, he recommended that when they do, they should extend some temporary regulatory relief passed in the March bill to reflect the ongoing economic struggles. He pointed out the community bank leverage ratio, which was lowered to 8 percent, and further delaying implementation of some new accounting rules.
NAFCU is lobbying for Congress to lift, at least temporarily, a cap on business loans that limits them to 12.25 percent of a credit union’s assets. While government-backed loans like PPP and the SBA’s Section 7(a) program don’t count toward that cap, Thaler said it would slow the economic recovery by curbing the number of loans credit unions could offer after the crisis ends.
A bipartisan group of 30 lawmakers led by California Democrat Rep. Brad Sherman introduced a bill in April that would lift the cap for three years.
Credit unions’ main competitors for those loans — banks — are opposed. The American Bankers Association wrote a letter to Pelosi and House Minority Leader Kevin McCarthy, R-Calif., in April urging them to “reject opportunistic and unnecessary requests for credit union charter enhancements in the midst of a pandemic.”
According to data from the Federal Reserve, business loans made up 12.4 percent of commercial bank assets in March.