All Insured Depository Institutions Should Strongly Consider Becoming PPP Lenders
Based on documents released from the Treasury on March 31, 2020, we now believe that all insured depository institutions will not only be eligible to participate as lenders in the Paycheck Protection Program (“PPP”), but will be quickly accepted by the SBA with a very limited approval process. The process may be as simple as verification that the institution is FDIC or NCUA insured, but more specific guidance may yet be released.
As small businesses and non-profits across the nation struggle to address financial stress related to COVID-19 during these uncertain times, all insured depository institutions should strongly consider joining the program as a lender.
What is the Paycheck Protection Program?
The PPP offers forgivable loans to small businesses, non-profits, and certain other employers to allow them to continue to pay their employees during the COVID-19 crisis. The loan amounts are pre-set by the program at 2.5 times the businesses average monthly payroll costs, which includes certain related taxes and benefits with a total loan amount of up to $10 million.
Loans may be forgiven if borrowers use the funds to cover payroll costs, mortgage interest, rent, and utilities over an eight week period after getting the loan.
How are Lenders Compensated for Making PPP Loans?
Lenders will receive a processing fee for each PPP loan based on the balance of the financing outstanding at the time of final disbursement as follows:
- Loans $350,000 and under: 5%
- Loans greater than $350,000 to $2 million: 3%
- Loans greater than $2 million: 1%
In addition, the loans bear an interest rate of .5% and have a maturity date of two years, if not forgiven.
Risks and Guarantees to Consider
The SBA guarantees 100% of the outstanding PPP loan balance and that guarantee is backed by the full faith and credit of the United States. PPP loans can also be sold in the secondary market, if necessary, for liquidity purposes. Further, a purchase by the SBA of the expected forgivable portion of the loan can be expedited upon closing of the loan, with the SBA obligated to act on such purchase within 15 days of receipt a report of the expected forgiveness amount from the lender.
For customers that participate in the PPP program, the ability to obtain access to forgivable loans to help support payroll and other short term needs may help bolster the long term viability of the business, which could theoretically help to lessen the risk of default on the customer’s other business or personal loans your institution may currently have outstanding.
It also allows hometown institutions an opportunity to continue to serve their customers and community during this difficult time without adding the same degree of risk to their balance sheet as traditional credit.
Next Steps
Because of the limited window for loan applications under this program and the current cash flow needs of borrowers, institutions should move quickly to evaluate the Paycheck Protection Program. The SBA will begin accepting applications for the program on April 3rd so institutions will need to quickly familiarize themselves with the program, contact the SBA to apply, and begin reaching out to borrowers.
We know ramping up a new lending process during this already challenging time may feel like a daunting task. CLA is here to help. We stand ready to assist you and your customers during the application and underwriting process. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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