What Would Bill Withers Say?

April 7, 2020 at 9:25 am Leave a comment

Updated 04/07/2020 2:30pm

It’s time for everyone to take a deep breath, remember the situation we’re all in, and look at the facts when it comes to the increasingly controversial Payroll Protection Program (PPP) that was signed into law on March 27 and for which initial guidance was just released this past Thursday.

  1. Can the SBA make lenders responsible for these loans?

Concern over participation centers, in part, on well-deserved criticism of the traditional administration of the regular 7(a) SBA loan program combined with some bad memories about how Fannie and Freddie scoured loan documents to force lenders to repurchase mortgage loans for technical violations of lending procedures. A lot of lenders out there are concerned that the 100% guarantee is too good to be true, and that when the dust settles the SBA will look for reasons to deny repayment. But keep in mind when reviewing whether or not to participate in the PPP program that 1) you are not becoming a 7(a) lender for any other purpose but the PPP; and 2) so long as you collect the proper documentation coupled with the appropriate borrower certifications, the scope of your potential liability is limited. You are not engaging in traditional underwriting. You are collecting forms.

2. Should the credit union become certified to make these loans before it decides whether to participate in the program?

My answer is no, and here’s why. The CARES Act Lender Agreement stipulates as follows: “(“Lender”) hereby agrees as a condition and in consideration of authorization by the United States Small Business Administration (“SBA”) and the Department of Treasury for Lender to make Paycheck Protection Program SBA-guaranteed financing available as part of the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”) (P.L. 116-136) to eligible recipients, as follows (the “Agreement”). . .”

3. Are the terms of the loan too restrictive for borrowers?

This is an argument being advanced by the Wall Street Journal this morning. Under the loan terms, the SBA decided to keep non-payroll costs including mortgage interest, rent and utilities to 25% of the total authorized expenditure to focus on payroll. The problem is that for many businesses, these non-payroll expenses are the bulk of their costs.

4. How will this impact my capital ratios?

This will, of course, vary by credit union. But the program does give you the option of selling these loans to the SBA as soon as seven weeks after the loan closes. If you still don’t trust the SBA, then you will be happy to know that the Federal Reserve announced that it would be purchasing PPP loans. This is huge news. There will be a secondary market and there is going to be demand for the product.  Finally, under the CARES Act, if you are one of the handful of credit unions that is already utilizing a risk based capital model, these loans have a risk weighting of zero.

5. Can I limit my participation to my members with existing accounts?

Yes, you can. This is a great compromise for those of you who want to be there for your existing members but are a bit gun shy about taking a big plunge into the program.

6. Are there compliance risks?

Absolutely. As long time readers of this blog know, my wife justifiably accuses me of being a beater of dead horses. I want to stress yet again that you have the same obligations to know your customers when making these loans as you would with any other business accounts. That means that you should identify the beneficial owners of the organization and monitor the account for unusual activity.  That being said, however, the SBA has issued this guidance providing some relief, specifically, the Q & A provides that:

If the PPP loan is being made to an existing customer and the necessary information was previously verified, you do not need to re-verify the information. Furthermore, if federally insured depository institutions and federally insured credit unions eligible to participate in the PPP program have not yet collected beneficial ownership information on existing customers, such institutions do not need to collect and verify beneficial ownership information for those customers applying for new PPP loans, unless otherwise indicated by the lender’s risk-based approach to BSA compliance.

7. What would Bill Withers do?

 Listen, I understand all the cynicism when it comes to participating in the government program, but this is a classic Bill Withers moment.  We are not for-profit cooperatives and we should be there for our members to lean on and to help them carry on.  If not now, when?  If not us, then who?



Entry filed under: Compliance, General, Regulatory. Tags: , , , .

Going Viral: Four Key Reg. Developments Over The Weekend Participating Credit Unions Should Get PPP Capital Relief

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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