Rush for $350B in coronavirus small-business loans starts Friday, and banks have questions

As much as $350 billion in government-guaranteed loans will be made available to small businesses meant to cover eight weeks of payroll and other expenses

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A day before small businesses can apply for forgivable loans from the $2 trillion financial-relief package, banks say they are still struggling to understand how to make these loans eligible for a government guarantee.

Under the Small Business Administration’s Paycheck Protection Program, part of the stimulus package signed into law last week in response to the Covid-19 pandemic, lenders would make available as much as $350 billion in government-guaranteed loans to cover eight weeks of payroll and other expenses. Business owners can begin applying on Friday for the loans, which are forgivable if businesses keep their workforce largely intact and use the loans for eligible expenses such as rent and utilities.

Many details of the program remain unclear, which is complicating efforts by lenders to gear up for what is expected to be an onslaught of prospective borrowers at the end of this week. Among what lenders say are the unanswered questions are how much due diligence of borrowers is required and whether they will be able to sell these loans to create liquidity.

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“As a community bank, we want to support all of the small businesses in our communities,” said Jeanne Hulit, chief executive of Maine Community Bank in Biddeford, Maine, which has about $950 million in assets and has received inquiries about the loan program from more than 300 small businesses. “But we need to wait for the lender application forms so we know what we have to provide in terms of documentation and procedures,” she added. “Until we get that guidance from the SBA, we are on hold.”

The Treasury Department and the Small Business Administration, which are both working on the new program, didn’t immediately respond to requests for comment on whether lenders would be required to collect credit information from borrowers.

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Megan Flynn, co-owner of M Flynn Jewelry in Boston, said she had inquired about the Paycheck Protection Program with two SBA-approved lenders, and was gathering documentation she might need to apply, such as payroll statements.

“We’re prepared to really fight for it,” said Ms. Flynn regarding the loan-application process. She hopes to use the funds to rehire three full-time workers and one part-time employee. “I don’t think anyone is going to make [the process] easy for us,” Ms. Flynn added.

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The new program includes a two-page borrower application that asks businesses to provide their average monthly payroll, number of employees and other basic information.

In addition to the borrower application, the SBA requires lenders to fill out an application when making a traditional SBA-backed loan. As of Wednesday evening, the Trump administration hadn’t issued a final version of the additional lender application form for the new program. On Thursday, an SBA spokeswoman said the agency is revising the form.

A draft copy of the lender application, reviewed by The Wall Street Journal, asks for a “credit memo” that will support information about payroll, health-insurance costs, salaries and other key expenses. It also asks lenders to certify that “loan proceeds will be used for an eligible purpose.”

The proposed form “is not as simple as we hoped,” said Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, a trade group for lenders that originate SBA loans.

As lenders get more information about the new program, “most of them are saying, given what they know today, their likelihood of participation is getting smaller and smaller,” Mr. Wilkinson added.

On a conference call with lenders Wednesday morning, officials at the SBA gave conflicting guidance on whether lenders will need to evaluate applicants’ creditworthiness, according to a person on the call.

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How lenders that don’t already make SBA loans get approved to participate in the program is also unclear. A Treasury Department document instructs lenders to submit an application via email but doesn’t provide any application forms or criteria that those companies will have to meet.

Some lenders say they are eager to participate in the program, but are struggling to make the costs of it work. The 0.5% interest rate that all paycheck protection loans must carry is too small to entice money managers to buy the loans that banks make, said Thomas Wells IV, chairman and CEO of First American Bank in Elk Grove Village, Ill.

Banks can hold the loans on their books, but 0.5% is less than what many smaller banks have to pay their depositors and other creditors, making the loans uneconomical for them to keep.

“We’re not talking about making a lot of money on this,” Mr. Wells said. “We’re talking about being able to afford” it.

The SBA in fiscal year 2019 made about $23 billion in loans available to businesses through its flagship 7(a) program. That amount is a fraction of the loan volume the Paycheck Protection Program seeks to issue in a matter of weeks.

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Nitin Mhatre, head of community banking at Webster Bank in Waterbury, Conn., estimated the bank would likely reassign about 50 employees to process program applications.

“What Webster and what I think most banks are doing right now is just preparing their internal processes to get a significant amount of volume,” Mr. Mhatre said.

Some in the banking community have also expressed concern about potential capacity issues with E-Tran, the SBA’s system through which lenders register loans with the agency.

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The Trump administration has said it is working to ensure that the SBA’s systems can manage whatever volume the program receives. “We will have a supplementary system as a backup and an add-on,” a senior administration official said on a briefing call with reporters Tuesday.

Karen Gordon Mills, former SBA administrator from 2009 to 2013, said creating a backup system is essential. “I have a lot of worry about how the traditional systems will handle this kind of volume,” she said.