Posts tagged ‘SBA loans’

Sole Proprietors Gain Meaningful Access to PPP Loans

Even as the clock keeps ticking closer to a March 31 deadline the SBA released new regulations yesterday making it easier for sole proprietors, persons convicted of nonfinancial crimes and persons with delinquent student loans to qualify for assistance.  The expanded eligibility only applies to individuals who have not previously obtained a PPP or Second Draw Loan.   Let’s hope that these well- intended but significant changes can be quickly and accurately integrated into lending platforms and that loans can get out the door without an accompanying surge of scams and waste. Better yet, let’s hope that Congress extends the deadline so that everyone can take a deep breath and administer the program properly.

IRS Form 1040 schedule C is the form used by sole proprietors. Previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule-C as payroll costs (if any employees exist) plus net profits, which is net earnings from self-employment.  The problem is that many of these entities are the smallest of small businesses with few if any employees and many are struggling to generate net income.  Furthermore many of these are minority and woman owned businesses that the Biden administration is targeting for relief. Under these new rules the term “income” as used in the definition of payroll costs for sole proprietors and independent contractors is expanded to encompass either borrower’s net income or a borrower’s gross income.

Depending on the size of the loan being requested, it may take longer for borrowers to get through the process.  A borrower applying for a typical PPP loan certifies the accuracy of his application and the SBA reserves the right to scrutinize applications in the future.  To guard against potential abuse under this expanded eligibility if a sole proprietor reports $150,000 or more on gross income when making a PPP application the SBA borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith, and the borrower may be subject to a review by SBA of its certification.

CFPB issues QM Patch Extension

 Yesterday the CFPB issued the regulations that have been anticipated for a while under which mortgages eligible for sale to Fannie Mae or Freddie Mac will continue to qualify as Qualified Mortgages under the CFPB’s TRID regulations.  This designation gives them added protection against borrowers contesting foreclosure actions.  The CFPB is also going ahead with new regulations permitting loans to qualify as QM loans provided their interest rates are comparable to similar mortgages.  For those of you who underwrite to secondary market standards, I have not seen any word from the GSE’s as to whether or not these new type of QM loans will be automatically eligible for purchase once I do, I will let you know.

March 4, 2021 at 9:44 am Leave a comment

SBA Statistics Provide Glimpse Into Credit Union PPP Participation  

Yours truly believes this is a crucial time for credit unions both large and small.  Pandemics come and go but legislators and the advocates who energize politics have long memories.  You can bet they are going to be asking if your credit union participated in the PPP.

The SBA released an updated breakdown of PPP lending through June 6th which provides at least a partial answer to this question.  For instance, it appears that the second round of the PPP has done a better job of getting smaller institutions involved in the program.  According to SBA statistics, as of June 6th, 721 credit unions with less than $1 billion in assets have made more than 57,000 loans worth close to $2.9 billion.  Unfortunately I can’t find any statistics breaking down the performance of credit unions with over $1 billion in assets.  It is also not clear to me if the credit union total includes CDFI credit unions.  Incidentally, CDFIs have made over 95,000 loans worth over $7 billion.

Looking at the big picture, California, Texas and New York companies lead the way in PPP loans and the lending program is being led by JPMorgan Chase which accounts for 4.3% of all loans being made.

If you look at the top 15 lenders, not surprisingly, the program is being dominated by larger regional banks many of which have an established comfort level with small business lending in general and SBA loans in particular.  Perhaps when things get back to the “new normal” one of the areas that can be examined is the perceived difficulty in making SBA loans and whether changes can be made to help credit unions and other small financial institutions develop a greater comfort level with the SBA.

When I say this type of thing to grizzled veterans they get a bemused look on their face and brace for me to start singing “kumbaya”.

 

June 9, 2020 at 9:16 am Leave a comment

Powell to Congress: Spend More Now for a Stronger Economy Later

There are two questions we will know the answer to in about six weeks that will profoundly impact your credit union and its members.  The first question is how quickly can the country reopen for business without sparking a surge in COVID-19 cases?  The second question is how much additional stimulus does the country need?

Over the last week Federal Reserve Chairman Jerome Powell has made his answer to the second question abundantly clear; while the Fed has taken extraordinary steps to provide loans to banks, businesses and even municipalities, only Congress can give the country the economic lifeline it needs to not only get through the pandemic, but to make sure it comes back stronger next year.

The focus of his presentation has not simply been to explain the short term steps the Fed has taken but to stress that only Congress can spend money.  In a speech last week, Powell scrapped the maddeningly opaque language for which the Fed is known.  His concern is that without additional spending the economy could be in for an extended period of “low productivity growth and stagnant incomes”.  He went on to explain that “additional fiscal support could be costly but worth it if it helps to avoid long term economic damage and leaves us with a stronger economy”.

Just to make sure we didn’t miss the point, he reiterated many of the these same points in a 60 Minutes interview last night.  It will be interesting to see how big of an impact this media blitz has on legislators reluctant to spend another trillion dollars before assessing the economic impact of the fiscal stimulus already provided by Congress.

And let’s not forget the first question I asked; if the summer months bring about a second wave of COVID-19 cases, particularly in states not prepared to cope with a surge of hospitalizations, then none of these steps will be good enough to prevent what could become a Depression.

SBA Releases Borrower Forgiveness Form

Speaking of steps that Congress has already taken, the SBA over the weekend released the form to be used by borrowers seeking to have their PPP loans forgiven.  Hopefully, additional guidance will be coming shortly.

 

May 18, 2020 at 9:15 am Leave a comment

How Can PPP Borrowers Spend Their Loans?

The PPP can’t get a break. Now that at least some of the glitches involving lenders filing loans with the SBA have been addressed, there are increasing concerns that the program’s terms are too restrictive to help out some of the businesses it was designed to help. The result is that banks and credit unions participating in the program are being asked questions to which they cannot offer definite guidance and the SBA still faces a pressing need to clarify the intricacies of the program even as it is charged with getting more than half a trillion dollars out to the public in record time.

According to the New York Times, many small business owners are afraid to spend the money even after they get the loan. Under the program’s regulations, the PPP loans are completely forgivable provided 75% of the loans proceeds cover payroll costs and payroll is maintained. If those targets are missed then the PPP becomes a normal loan repayable with 1% interest. The article quotes business owners who are concerned that they may be violating the law depending on what they spend the money on if they decide to spend the money on expenses other than payroll.

In fairness to the SBA, this may be yet another example of overcautious legal interpretation as we all dive in to unchartered legal waters. Many of the small businesses interviewed have been advised by lawyers and accountants that they have the flexibility they need to spend the money where it can be of most use for their business. Then again, the same businesses were unable to get yes or no answers from the SBA.

Fortunately there is a simple solution to this problem. The SBA has it within its authority to either adjust the 75% requirement or clarify what small businesses are authorized to do with PPP money if they choose to forgo the 75% requirement. Hopefully it will take these steps quickly. After all, for many small businesses it makes more sense to invest these funds in ways that will keep the businesses viable rather than paying employees for whom they have no work and who are eligible for generous unemployment benefits.

In the meantime, if your members ask you how they can spend the money, I would instruct your staff to tell them that you are still waiting for an answer from the SBA.

May 4, 2020 at 9:42 am Leave a comment

Federal Reserve Gives Financial Institutions Greater Transaction Account Flexibility

Over the weekend, there were two important developments involving key operational issues facing credit unions.

First, the Federal Reserve Board issued regulations amending Regulation D. As a result, credit unions now have the explicit right to allow members to make more than six (6) monthly transactions in their savings accounts without having to worry about reclassifying them as transaction accounts.

The purpose of Regulation D is to discourage the excessive use of transaction accounts by making financial institutions put aside reserves equal to a percentage of their transaction accounts. About six weeks ago (have we really been in COVID-19 mode for that long already?) the Federal Reserve Board eliminated the reserve requirements but much confusion has remained about how much flexibility this gave financial institutions. The promulgation of this regulation removes any of this uncertainty.

It’s Alive!

It’s back and better than ever. President Trump signed legislation replenishing the PPP. That means that starting Monday morning at 10:30AM EDT, the SBA will once again be accepting loan applications. The legislation did not change any of the lending terms but press reports indicate that the Treasury is taking a closer look at larger businesses which applied for the loans. In this round, Congress set aside two (2) $30 billion pots as part of the overall appropriation specifically to be used by institutions with up to $10 billion in assets and those with between $10 and $50 billion in assets.

 

 

April 27, 2020 at 9:13 am Leave a comment

What Would Bill Withers Say?

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?

 

 

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

Going Viral: Four Key Reg. Developments Over The Weekend

Regulators are scrambling to keep up with the virus.  In recent days the SBA released the forms to be used when making Paycheck Protection Program loans, the Department of Labor released additional guidance on your COVID-19 related HR obligations, the Financial Crimes Enforcement Network (FinCEN) published guidance on its expectations for lenders during the outbreak and the recently finalized State Budget includes a $25 million commitment to fund the state level Community Development Financial Institutions (CDFI) program over the next five years.

To Loan or Not to Loan, That is the Question

There continue to be numerous published reports about how banks and credit unions need more guidance about the Paycheck Protection Program passed last week.  The good news is that over the weekend, forms were posted to SBA’s website.  The most basic point I want to stress to you is that by signing or submitting the “CARES Act Section 1102 Lender Agreement” posted on SBA’s website, you are committing to participating in the PPP.

On a personal note, I’m a little concerned that the industry is suffering paralysis by analysis.  These are not normal times, and if your plan is to wait for the dotting of all the Is and the crossing of all the Ts before starting to make these loans, you have effectively decided not to participate in the program.

FinCEN Issues Updated Guidance

FinCEN moved quickly to update guidance to address lender obligations related to PPP loans specifically, and lender obligations during the pandemic in general.  Most importantly, it addresses lender obligations under the CARES Act.  The FinCEN guidance informs credit unions and banks that PPP loans for existing customers will not require re-verification of existing BSA information unless otherwise indicated by the institution’s Risk Based Approach.  How’s that for decisive equivocation?  The guidance also touches on timing requirements for the filing of Currency Transaction Reports.

DOL Issues More Guidance on Employee Relief

The Department of Labor issued updated guidance on paid sick leave and expanded family leave under the quickly changing federal law.   I still do not see much relief for businesses with 50 or fewer employees that have to comply with these laws, but I will provide additional information as it becomes available.

State Budget

This year’s state budget was passed with more secrecy than a papal conclave.  But now that the puff of smoke has risen, it appears that credit unions that are CDFI certified have reason to celebrate.  According to the Governor’s press release, the budget includes $25 million over five years to support New York’s Community Development Financial Institutions Fund.  For almost two decades, New York has had this Fund in place, but has never funded it.

The budget also creates an Office of Financial Inclusion and Empowerment to meet the financial service needs of low and middle income New Yorkers.

April 6, 2020 at 9:52 am Leave a comment

SBA Issues Crucial Guidance for Payday Protection Loans

It’s Here!

It’s not often that the credit union industry awaits a guidance more eagerly than an eight year old expecting a new X-box on Christmas morning, but last night, the SBA provided guidance on how to implement the Paycheck Protection Program (PPP). Now we can stop speculating and start implementing. Here are some answers to some of the key questions.

  1. Can my credit union participate as a lender in the program?
  2. Yes it can. If you are one of the approximately 15 credit unions already authorized to make so -called SBA §7a loans, you are automatically qualified. Consistent with the need to get these loans out the door quickly, even if you are not already an SBA certified lender, you are qualified as an additional lender under the regulation so long as you are not currently classified as in “Troubled Condition” or subject to an enforcement action for an unsafe or unsound practice by your primary federal regulator. Don’t let the language confuse you too much; as federally insured institutions, state chartered credit unions may also participate in the program. In addition, institutions without existing §7a certification are consider qualified upon transmission of the CARES Act Section 1102 Lender Agreement (SBA Form 3506).
  3. Is my credit union an eligible borrower?
  4. No. Although the CARES Act extended eligibility to 501(c)(3) organizations, this classification does not extend to credit unions. In addition, the statute left unchanged SBA regulations prohibiting financial institutions from being eligible borrowers under the program. The Association is advocating for SBA to change its existing regulations and has already alerted several elected officials to this situation.
  5. If I choose to be a lender under the program, what underwriting obligations do I have?
  6. Your obligations under this program are more analogous to the obligations of a mortgage processor who collects the necessary documentation than a mortgage originator or underwriter. You must collect the information required on the SBA PPP loan application form from applicants, verify that they had employees and paid payroll taxes on February 15, 2020, confirm the amount of applicable payroll and payroll taxes submitted with the application, and follow Bank Secrecy Act (BSA) rules. The key point is that you can rely on borrower certifications.
  7. How do I comply with my BSA requirements?
  8. What surprises yours truly most about this guidance is the emphasis it places on BSA compliance. Clearly, the administrators of this program recognize the potential for abuse and are counting on frontline lenders to mitigate this weakness. You have the same CIP requirements that you would for any other loan, which is particularly important since you may be dealing with businesses for the first time.
  9. How much interest can I charge on these loans?
  10. The interest rate is 100 basis points or 1%.
  11. What is the maximum loan amount?
  12. The maximum loan amount for any borrower is the lesser or $10 million or a multiple of the borrower’s payroll. The formula is laid out in the guidance. In addition, the program also has generous provisions under which the amount of the loan can be forgiven up to the full amount of the principal and interest “if the borrower uses all of the loan proceeds for forgivable purposes and employee compensation levels are maintained.”

April 3, 2020 at 9:06 am Leave a comment

Paycheck Protection Program Underscores Vital Role for Lenders

Now that Congress has passed and President Trump has signed the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748), also known as the CARES Act, the focus shifts to compliance professionals. Regulations that would normally be proposed months from now will be released in the coming days and frameworks that would be implemented over a year and one-half must be put in place within days and weeks. The extent to which lenders can swiftly provide relief to members and businesses will largely determine how effective this $1.7 trillion measure is in keeping the economy from further disintegrating and may very well shape your members’ view of your credit union for years to come.

Of all the initiatives tucked away in the bill, the most original is the paycheck protection program, which can be found in Title 1, §1101 et sec. Generally speaking, the traditional §7(a) program extends loans to small businesses. The lenders are certified to make the loans by the Small Business Administration (SBA) and the SBA guarantees some but not all of the loan. The process to become an SBA lender can be challenging; credit union participation has historically been anemic, but some of our larger institutions actively participate.

This Act amends §7(a) of the Small Business Act to authorize SBA lenders to offer business loans for the period February 20, 2020 to June 20, 2020. These loans could be used to cover payroll costs, a term which is defined broadly to include traditional salaries and benefits as well as tips, commissions and family and medical leave. It can also be used to cover rent and lease costs, utilities, and the interest on debt obligations. The program also expands eligibility for these loans to include non-profit organizations, veterans’ organizations and tribal businesses that meet certain criteria, and even includes sole proprietors. Under this amendment, the SBA will cover 100% of the loans. There is also language permitting the SBA to fast track the approval of eligible lenders.

Although additional regulations have to promulgated, the statute underscores just how quickly Congress wants these loans to be processed. Applicants will have to certify 1) that the uncertainty of the economic conditions make the loan necessary; 2) that the loans will be used to maintain workers, provide payroll and mortgage payments on the business; 3) that it is not applying for duplicate loans; and 4) that is has not already received loans under this program.

The bill includes language that may fast track the number of eligible lenders qualified to participate, but my guess is that for many credit unions the competing demands brought on by the COVID-19 pandemic will make participation difficult.   Still, credit unions can all expect to get phone calls from small businesses throughout their communities today.

March 30, 2020 at 9:23 am 1 comment

Does Knowing Your Members Really Make a Difference?

One of the very first mantras I learned when I became a full time resident of credit union land was that credit unions really know their members. The implication, of course, is that credit unions make better loans than their commercial banking counterparts because of these personal relationships. But does the personal touch really make a difference?

Recently, University of Kansas business professor Robert D. Young reported on findings based on a ten year review of Small Business Administration (SBA) loans made by banks. His findings suggest that the answer is a resounding yes.

Young and his colleagues reviewed indexes of social capital, which are generally measures of how integrated people are in their community such as participation in religious and civic groups. They found that “SBA loans between banks and borrowers in high-social-capital towns are 20% to 25% less likely to default than SBA loans made where social capital is low.” The theory is that in tight knit communities it is easier for lenders to gather information about borrowers and borrowers tend to be a better risk. His findings also suggests that social indexes are actually a better indicator of default risk than are a business’ credit score. A couple of quick points about this research.

First, it is certainly an area rich with possibility for credit unions. One of my favorite stories from a long time credit union executive is how he learned the basics of lending by going around with his father to collect loans owed by firemen. His father knew most of his borrowers personally and at the end of the day if they weren’t able to make the occasional payment he knew that they would pay it back when they could. The more that hard research can back up these anecdotes with hard statistics, the easier it is for all credit unions to make the case for expanded lending powers.

Politicians and judges have done a lousy job balancing lending flexibility with anti-discrimination laws. Everyone says they love George Bailey’s approach to lending, but as long as lenders can be held liable for lending decisions that have the effect of discriminating against a minority group, the use of soft underwriting criteria is implicitly discouraged. It’s actually safer to use a computer program with set criteria and apply it across the board.

Finally, these findings suggest that social capital lending criteria works best in small communities. We all know that banks are growing larger and that credit unions are the only true remaining community banks. But, as credit unions get larger, how do they ensure that they balance the need for growth against the need to continue to really know their members.

August 26, 2015 at 8:49 am 2 comments


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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