Why the SBA withdrew threat to audit PPP lenders

Though the Small Business Administration has forgiven about 60% of the nearly $793 billion in Paycheck Protection Program loans approved in 2020 and 2021, the process hasn’t always gone smoothly.

The SBA’s relationship with community banks appeared to take a turn for the worse last week after the chairman of the Independent Community Bankers of America accused the agency of threatening to audit banks that don’t adopt the direct forgiveness portal the agency unveiled Aug. 4.

“We and other PPP lenders received an email from the SBA informing us that to avoid lender audits we are encouraged to opt into direct forgiveness,” Robert Fisher, who also serves as president and CEO of the $547.6 million-asset Tioga State Bank in Spencer, New York, told lawmakers Wednesday during a virtual House Small Business Committee hearing.

In a copy of the email obtained by American Banker, the SBA said it would be “conducting independent outreach and audits on lenders who have not actively communicated to borrowers on the availability of forgiveness. This outreach will be primarily focused on those lenders who are not participating in Direct Forgiveness,” the name of its portal.

“To avoid these lender audits, we would encourage you to opt into direct forgiveness and maintain an active and aggressive outbound campaign to your PPP borrowers,” the email said.

Fisher wasn’t pleased with this wording. “We resent the coercive tone of this email,” he said.

PPP forgiveness has been a hot-button issue for lenders and lawmakers throughout the program’s 18-month existence. The SBA’s initial attempt to manage forgiveness came in May 2020, when itreleased the first forgiveness application. The 11-page application was immediately criticized as too long and complicated by groups representing PPP lenders and borrowers, many of whom advocated for blanket forgiveness, at least for smaller loans.

Rep. Roger Williams, R-Texas (left) said the SBA’s forgiveness portal doesn’t measure up to the work done by the private sector. Nydia Velazquez, D-N.Y., said the portal has helped inform more businesses about how they can apply for PPP loan forgiveness.


Ultimately, Congress streamlined forgiveness on PPP loans of $150,000 or less in the Dec. 27 Economic Aid Act. Lawmakers authorized a one-page application that asked borrowers to break out loan proceeds spent on payroll expenses and attest to their compliance with the program’s rules and regulations.

The direct forgiveness portal was intended to further streamline the forgiveness process.

According to Fisher, the SBA also raised concerns that despite the efforts to simplify forgiveness, some lenders may be seeking to delay forgiveness for at least a portion of their PPP portfolios in a bid to smooth out potential earnings volatility in 2022. Fisher rejected this premise.

“That practice would be unacceptable and would cut against the grain of community bank service and relationship-oriented lending,” Fisher said. “I can assure you that no community bank that I know of is engaging in it … We all want to get these loans off our books.”

Following the hearing, Patrick Kelley, the SBA’s associate administrator for capital access, said the agency would neither require lenders to participate in the direct forgiveness platform nor audit those that opt out. However, the SBA “will expect every lender to do their part to provide timely forgiveness for America’s small businesses,” Kelley said in a statement emailed to American Banker.

Banks with assets of $10 billion or less made up nearly 80% of the 5,252 lenders that made PPP loans in 2021, according to the SBA.

The controversial email could be viewed as a sign of “how badly SBA wants to get this thing done,” Chris Hurn, founder and CEO at Fountainhead Commercial Capital, said Friday in an interview.

“There’s a cost savings to the taxpayer if forgiveness happens sooner,” Hurn said. “The sooner it gets done, the sooner the interest clock stops ticking.”

Consumer Bankers Association President and CEO Richard Hunt did not mention the SBA’s email in an Aug. 31 letter to House Small Business Committee Chairwoman Nydia Velazquez, D-N.Y., and ranking minority member Blaine Luetkemeyer, R-Mo. — but he argued that borrowers have benefitted from the forgiveness portals lenders have created.

“Some participating banks have developed their own streamlined forgiveness portals to provide a ‘one-stop-shop’ for PPP borrowers,” Hunt wrote. “These lenders have well-established relationships with their customers and are following the same guidance and forgiveness rules as those banks using the SBA’s direct portal.”

The American Bankers Association declined to comment.

Tioga State Bank, which opted not to use the SBA’s direct forgiveness portal, has achieved forgiveness for all but five of its 2020 PPP loans and anticipates completing forgiveness for the entire portfolio by the end of 2021. “We’ve worked forgiveness very hard,” Fisher said.

Not every institution has been as proactive. While the SBA reported receiving more than 700,000 applications through the direct forgiveness platform between its Aug. 4 debut and Sept. 1, it said 133 lenders have yet to begin offering forgiveness for 2021 PPP loans. Another 267 have achieved forgiveness for 10% or less.

Besides the direct forgiveness portal, some lenders argued that the streamlined forgiveness process is often slowed by demands for extra paperwork.

Affinity Federal Credit Union in Basking Ridge, New Jersey, faced “ongoing and repetitive requests for additional documentation for loan forgiveness applications under review, regardless of loan size,” Leslie Payne, the $3.6 billion-asset credit union’s assistant vice president of commercial lending, said during last week’s hearing.

Affinity had achieved forgiveness for about 80% of the $96 million in PPP loans it originated, Payne said. On average, it takes Affinity about nine days to gain forgiveness once it submits an application — but that span jumps to 47 days for loans under review, according to Payne.

“We did not necessarily anticipate the level of loans going under review,” Payne said. “When we started, they were [flagging] 10% of our loans … It’s time consuming for our members. It’s stressful. They’re not sure why they’re under review [and] we don’t know whether it’s random or otherwise.”

Fountainhead, which opted to use SBA’s direct forgiveness portal, said the agency has flagged about 1,500 of the loans it submitted for further review. “It’s unfortunate, but we’re dealing with it,” Hurn said, adding that the flagged loans represent less than 1% of the total it’s uploaded.

While the SBA has always been the ultimate arbiter of forgiveness, until its direct portal debuted last month, lenders handled the task of collecting applications and routing them to the agency. Many, like Tioga State Bank, created their own portals to organize the workflow.

The SBA says nearly a third of PPP lenders have agreed to use its direct forgiveness portal, which allows borrowers to submit applications directly to the agency. That run rate didn’t stop some lawmakers from questioning the decision to introduce such a major initiative so late in the process.

“It’s interesting that all of the sudden, SBA wants to get involved in forgiveness of late with portals and so forth,” Rep. Roger Williams, R-Texas, said. “The private sector does it much better than government.”

Rep. Jim Hagedorn, R-Minn., said the direct forgiveness portal might represent an effort by the SBA to “retain their turf” after seeing the bank-led PPP program outperform disaster relief programs such as Economic Injury Disaster Loans and Shuttered Venue Operators Grants, where the agency acted as a direct lender.

“They see the writing on the wall, that if we turn over the EIDL loans and others to the banks where we can minimize fraud and do better for our customers, they’re going to lose some power,” Hagedorn said.

Velazquez was less laudatory of banks’ PPP record, particularly for reaching smaller applicants.

“Many underserved businesses and the smallest businesses didn’t get access to PPP, even though they tried their hardest,” Velazquez said. With its direct forgiveness portal, the SBA is doing “great work in informing businesses what they need to do” to obtain forgiveness, Velazquez added.

Similarly, Rep. Carolyn Bourdeaux, D-Ga., called the direct forgiveness portal “an important step toward insuring greater access to forgiveness.”

Republicans on the committee focused much of their attention on the SBA’s recent email.

“That’s the heavy hand of government that I’ll fight tooth and nail,” Rep. Pete Stauber, R-Minn., said.

“I’m always concerned when the government is interfering with these relationships banks have,” said Rep. Claudia Tenney, R-N.Y.

“There are multiple legitimate and prudent reasons why lenders haven’t joined the SBA’s new direct forgiveness portal,” Luetkemeyer said. “I will not stand by while lenders are punished for working closely with their small-business borrowers.”

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