First things first, let’s give credit where credit is due. A mere seven days after a bill became law, which itself moved through two legislative chambers in 11 days, a loan guarantee program was up and running and had approved billions of dollars in urgently-needed loans. Most importantly, large portions of many of these loans will become grants that effectively pay businesses to keep their employees on the payroll. This is an important, if imperfect, way to maintain attachment between workers and their employers. Avoiding breakage during this period is the only hope we have to regain momentum when the course of the coronavirus reaches a point that allows us to return to something like ordinary economic activity.
There are many frustrations with the initial rollout of the Paycheck Protection Program. Businesses in dire need of support, and lenders who want to help them, are understandably upset that some guidance has been less than crystal clear, the SBA’s systems are creaking under the pressure of volumes far surpassing anything they’ve ever handled before, and many lenders with small business customers have not been given a path to help those customers--despite repeated promises that they would be.
Here are five steps that would help maximize the impact of the Paycheck Protection Program:
First, provide a clear path for nonbank, state-licensed lenders to participate in the program. There are several reasons that lenders should be able to assist their existing customers: They know those customers, reducing both fraud and financial crime risk without requiring a new onboarding process, and they will have an incentive to service the loans well to maintain their customer relationship.
FinTech lenders have gotten the most attention, and they are not unimportant, but there are nonbank lenders all over the country that serve small businesses. It has been reported that there will be a way for them to apply early this week, and should be open to all state-licensed lenders who have made at least $50 million in small business loans over the past year, as provided in the rules released by SBA last week.
Second, nonbank lenders require access to funding. Because Program loans will be SBA-guaranteed they are not risky. But at the moment access to traditional funding sources is limited, and the interest rates on Program loans (1%) are so low that raising funds to make these loans would be a losing proposition. These loans are arguably eligible for TALF, though even that is unclear (the Fed has not offered detailed guidance on TALF). But TALF purchases securities, so loans would have to be packaged and sold off to investors before the Fed would buy them. The Fed should:
Clarify that securities backed by Paycheck Protection loans are eligible for TALF; and
Launch the Main Street Lending Program it previously announced and use that program to fund Paycheck Protection loans made by bank and nonbank lenders. The Fed could even charge the same rate of interest that lenders can make under the Program, as lenders would still collect the origination and servicing fee.
The Fed may argue that they cannot take the risk of funding loans that turn out to have been ineligible for SBA guarantees, but that is likely to be a low risk if lenders are serving their existing customers and have conducted customer due diligence or have a longstanding relationship with the borrower.
Third, clarify that service providers who provide more than pure “agent” services in connection with Program loans can receive more than just the agent fees provided for under the program. Low agent fees will only encourage shoddy gate-keeping, increasing fraud in the Program. As long as lenders cannot pass higher costs on to the borrower, they should be permitted to negotiate their own terms with service providers.
Fourth, rethink eligibility restrictions based on both the SBA’s usual affiliate rules and sectoral limitations that usually make a broad array of financial services companies ineligible for SBA loans. Both of those limitations make sense for ordinary SBA 7(a) loans, but this is better thought of as a disaster assistance package, and this crisis is hammering businesses of all stripes, regardless of who happens to own their stock or what sector they work in.
Finally, the Administration and Congress should signal that additional funding will be made available if the Program uses all of its $350 billion. SBA has warned these loans are first-come first-served, which has created some panic among potential borrowers. If $5.4 billions in loans were approved Friday, it will take ~64 business days to run through the available funding. But the pace is likely to increase drastically this coming week as several large banks get their programs up and running. If the money does run out, it’s a good sign that it’s much-needed and should be topped up.
These steps would help maximize the benefits of the Paycheck Protection Program, and give confidence to small businesses that funds will be available to support them if this period of induced economic coma lasts longer than expected. That element—time—is the greatest uncertainty facing businesses and lenders in this crisis. This Program can buy lots of time. And the cost really isn’t that significant.