Observations on the PPP Loan Forgiveness Process
This blog was authored by my colleague, Tom Danielson, Principal in CLA’s Minneapolis office.
Anyone who has provided customer support has likely dealt with a variety of odd questions. Here is an example:
Dear Betty Crocker:
I live on the 50th floor of an apartment building. Do I have to use the high altitude directions on the cake mix package?
Letter from Chicago, 1990
Betty’s Response:
High altitude directions apply to elevations of 3,500 to 6,500 feet. You are safe in Chicago to use the regular cake mix directions.
As CLA assists financial institutions with the Paycheck Protection Program (PPP) forgiveness process, we too are receiving our share of questions including:
Thank you for providing instructional videos related to PPP forgiveness. I can see the videos, but there is no sound. Can you help me?
CLA response: Please turn up the volume on your computer’s speakers.
The application asks for the loan number. Do you know what my loan number is?
CLA response: The loan number is most likely on the loan documents that you signed. Otherwise, please reach out to your loan officer.
While responding to customer questions can be time consuming and, at times frustrating, it provides insight into the challenges that borrowers are experiencing.
Common Borrower Application Issues
If your financial institution has chosen to process forgiveness applications without outside assistance, be prepared for an onslaught of questions from borrowers. Some common items borrowers may not be aware of, confused about, or struggle with include:
- Unaware of 8-week and 24-week covered period options.
- Payroll that is incurred prior to the covered period, but paid after the covered period and other timing differences between when expenses are incurred versus paid.
- Understanding the payroll limitations – for example, in the 8-week covered period, limiting employee payroll to $15,384 and $46,153 for those making over $100,000.
- Further limits on owner compensation.
- Addition and subtraction errors.
- Determining what constitutes a utility.
- How to handle payroll taxes and fringe benefits.
Encourage Borrowers to Read the Instructions and Frequently Asked Questions (FAQs)
It is clear many borrowers have not read the instructions or the Small Business Administration (SBA) FAQs. This may not be surprising, but many questions could be eliminated by simply reading both documents.
However, sometimes the forms and instructions do not make sense to borrowers and leave many questions unanswered. For example, both Form 3508 and 3508EZ ask for the number of employees at the time of loan application and for the number of employees at the time of the forgiveness application. This prompts applicants to ask if the SBA wants to know how many employees they have now, or how many employees they had at the end of the covered period as those numbers can vary significantly and borrowers are unclear as to why the number is important to SBA. Furthermore, the instructions have not yet been updated to cover the new rules covering related party leases.
Influencing the Flow of Applications
Financial institutions have the opportunity to influence application volume levels. Staging the application process by loan size has been an effective method of reducing the “wave” of applications that can overwhelm personnel. Because of the uncertainty around anticipated automatic forgiveness, it seems prudent to encourage your smaller borrowers to wait to apply for forgiveness. By addressing the largest loans now, this ensures your personnel can focus on smaller borrowers once there is more clarity. Also, phone calls to borrowers to encourage behavior also appears much more effective than email as many borrowers do not appear to carefully read or follow email instructions.
Unforgiven PPP Loans at Year End
Given the fairly slow submission by borrowers and since the SBA has 90 days to approve the application, we believe most loans will still be on borrower balance sheets at year-end. This may also affect your loan underwriting and may have you asking the following questions:
- Should we exclude PPP debt when looking at debt-to-equity ratios?
- Should we treat PPP as equity if we expect full forgiveness?
- How will PPP affect projected debt service coverage ratio?
- How do we effectively evaluate loan covenant waiver requests?
Be Patient
A small group of vocal borrowers wants to file now, but the larger group does not seem to be in a hurry to file. When calling your borrowers, take the time to explain the process but also listen to their perspective. Many of your borrowers have been facing an array of uncertainty, and view their PPP loan as something within their control to solve. Remind them the deadline is ten months from the end of their covered period and that no payments are due until the forgiveness process has been concluded.
Lower Income and Inflated Financial Institution Balance Sheets at Year End
We believe it will take a concentrated effort to get borrowers to file for forgiveness. Financial institutions will want to get as many applications filed before the holidays and year-end. If unforgiven PPP loans remain on the balance sheet at year-end, there are several impacts to the financial institution, including:
- Loan forgiveness triggers an acceleration of net deferred loan fees, so delays in borrower application submission could shift revenue recognition to the next year. Even if automatic forgiveness is granted by congressional action ahead of the November presidential election, it is likely the SBA’s release of those forms will take at least a week and the SBA responses to the submission of financial institution decisions could continue past yearend.
- PPP loans have caused many financial institution balance sheets to grow and could cause you to exceed the asset thresholds of FDICIA at January 1, 2021 even after your balance sheet returns to normalized amounts during the 2nd or 3rd We understand the FDIC is considering relief to address these short-term increases in total assets, but those discussions seem to be in the early stages.
How Can We Help?
Many financial institutions clearly remember the substantial time commitment in working with borrowers during the PPP origination process. As the forgiveness process begins, it appears to be an equally, if not greater, time consuming endeavor. Many financial institutions remain uncertain if they want their loan officers and loan staff working on managing loans or helping borrowers with PPP forgiveness questions. If you want to spend less time dealing with PPP issues, CLA may be able to help. We have an automated portal to assist borrowers in submitting the required documentation and a team dedicated to reviewing the accuracy of the submitted documents. Please contact us contact us if you want to know more about taking some of PPP forgiveness pain away.
Susan is a CPA with more than 20 years of combined experience in public accounting and the financial institution industry, including experience with Fortune 500 financial services companies. Susan serves as the managing principal of CLA’s financial services group. Her responsibilities include providing engagement oversight in the areas of assurance and internal audit. In addition, Susan provides board advisory and management consulting services in the areas of strategic planning and mergers and acquisitions. Susan has been involved in multiple mergers and acquisitions of sizes ranging from $150 million to $500 billion with engagement at all stages of the process.
Question
Using the 24 week period for a W-2 employee who makes over $100,000, is your cap $46,153 or $20,833. I have seen both numbers.