How Lenders Can Prepare for The New SBA 7(a) Paycheck Protection Program

Mary Ellen Biery
March 28, 2020
Read Time: min

This article has been updated numerous times due to changes in guidance and information from regulatory agencies. 

Financial institutions hoping to help small businesses land some of the $349 billion in Small Business Administration (SBA) assistance from the federal coronavirus stimulus package should take steps now to prepare for what’s expected to be a crush of customers seeking help.

SBA to draft guidance on Paycheck Protection Program

Though they are still finalizing the logistics of the SBA loan program, the SBA and Treasury Department have released additional details regarding the Paycheck Protection Program. 

Since April 3, small businesses and sole proprietors have been able to apply for a Paycheck Protection Program loan. To handle the influx of people expected to seek resources, the SBA is also ramping up operational and internal capabilities – even though borrowers will be going through lenders, not the SBA, to get loans. “We need our lending institutions to help provide capital to these small businesses,” said Bill Briggs, Senior Advisor for the SBA’s Office of Capital Access, during an ABA webinar March 26.

In the meantime, lenders seeking to participate in the Paycheck Protection Program should take the following actions, based on the information released by the SBA and Treasury Department, preliminary advice provided to financial institutions during the webinar, and guidance from Abrigo’s lending and credit experts:

Learn about Paycheck Protection Program, other SBA options

1. Determine whether your financial institution is an SBA lender.

The SBA and Treasury Department on Tuesday said all existing SBA-certified lenders would have “delegated authority to speedily process PPP applications.” During the ABA webinar, Rosemarie Drake, Chief of the SBA’s 7(a) Program Branch, said many lenders have executed an SBA Form 750, the Lender’s Loan Guaranty Agreement, making them SBA-certified lenders, but they may not have completed a loan in years. “That 750 agreement that you currently have on file with the SBA has no expiration,” she said. A local district SBA office should be able to verify whether a bank or credit union has a 750 agreement, officials said on the webinar.

On April 2, in an interim final rule issued ahead of the launch of the PPP, the SBA and Treasury Department said that in addition to all existing SBA 7(a) lenders, all federally insured depository institutions, federally insured credit unions, and Farm Credit System institutions are eligible to participate in the Paycheck Protection Program. Lenders that are not already SBA 7(a) lenders, the rule said, "will be automatically qualified under delegated authority by the SBA upon transmission of CARES Act Section 1102 Lender Agreement (SBA Form 3506) unless they currently are designated in Troubled Condition by their primary federal regulator or are subject to a formal enforcement action by their primary federal regulator that addresses unsafe or unsound lending practices." SBA Form 3506, which was released April 4. Lenders should send a completed, signed, dated, and attested Form 3506 to delegatedauthority@sba.gov and request approval as a PPP lender, according to the SBA.

Make smart SBA 7(a) loan decisions fast
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2. Learn as much as you can about the Paycheck Protection Program and other options borrowers may have.

SBA officials encourage lenders to find out as much as possible to prepare members for applying and to dispel rumors or misunderstandings about the application process.

The SBA Paycheck Protection Plan provides loans of up to $10 million that are 100% guaranteed by the SBA in order to encourage employers to retain employees or bring laid off workers back on the payroll. They are unsecured loans due in 2 years with a fixed interest rate of 1% (initially, the SBA and Treasury said they would be 0.5%, but raised the rates on April 2). They require no collateral or personal guarantees, and no upfront borrower fee payable to the SBA. Another major difference from the regular 7(a) program is that borrowers don’t have to show that they cannot obtain credit elsewhere.

The lender pays no ongoing service fee on the outstanding balance of the loan through June 30, and the SBA will pay a processing fee to the lender. The amount of the loan is determined, in general, by taking the monthly average of the last 12 months of payroll and multiplying it by 2.5. Payroll costs will be capped at $100,000 annualized for each employee, and only 25% of the forgiven amount may be for non-payroll costs. Borrowers receiving and Economic Injury Disaster Loan (EIDL) must subtract that amount from the PPP loan amount.

The new loan program expands on the 7(a) definition of eligibility. In addition to small businesses, borrowers can include nonprofits, self-employed people (with or without workers), sole proprietors, and independent contractors. Borrowers must attest that they need the funds to keep operating, and that they will maintain the number of full-time-equivalent workers used in determining the loan amount.

All loans for the Paycheck Protection Program will be approved by lenders’ delegated authority, said John Miller, Deputy Associate Administrator for the Office of Capital Access, during the ABA webinar. “You’ll go into E-Tran, enter the loan data parameters and will receive a loan number from the SBA, which is your approval,” he said. That will be the case for both lenders currently approved as Preferred SBA Lenders and those that are not, in order to expedite processing.

Payments on loans will be deferred for six months, and the amount of loan forgiveness is determined by the amount of loan proceeds used for payroll, mortgage interest, rent, and utilities during the eight-week period after loan origination. The CARES Act had said payments could be deferred for up to a year, but the interim final rule shortened the deferral period.

SBA officials have also noted that new money would be available for SBA Express Loans, with the maximum amount available for those increased to $1 million from $350,000, and for the Economic Injury Disaster Loan Program (EIDL). Learning details about all of the options available will make it easier for lenders to match the right loan to each borrower's needs.

Start reaching out to customers

3. Reach out to small business customers.

SBA officials said reaching out to customers is a good idea anyway, but it’s especially a good time to contact customers with existing bank loans or SBA 7(a) or 504 loans and provide information on assistance that is already or will be available. For example, SBA Express Lenders can offer bridge loans of up to $25,000 to businesses in areas impacted in presidentially declared disaster areas. Borrowers with existing 504 or EIDL loans can defer payments on those loans, and in some cases, use some of the new programs to pay off existing 504 or EIDL loans.

Small business owners who have received an EIDL loan before March 31 can apply for one of the new Payment Protection Plan loans, but after March 31, they have to choose between the two programs.

Lenders can also educate customers on the likely terms of Paycheck Protection Program loans and help them begin collecting payroll information if they expect to apply. That way, once federal guidelines are available, the application can be completed quickly. Reassure customers that they will be working directly with the local financial institution rather than the SBA and that the bank or credit union, not the customers themselves, will be submitting the Paycheck Protection Program application to the SBA. This is a change from the EIDL program, which requires borrowers to apply through SBA.gov.

4. Prepare your own financial institution’s processes.

The Paycheck Protection Program loans can be a great help to a community financial institution’s customers, but given everything institutions are facing at the moment, the right processes are critical to avoiding bottlenecks, errors, and inefficiencies that drive up costs. Passing along information as it becomes available from the SBA and shifting staffing as needed to handle demand will be vital. So will adjusting the application and credit analysis process as needed.

Tuesday, the SBA and Treasury Department released a Paycheck Protection Program application form. It is critical that financial institutions work to ensure their respective SBA lending solutions are updated to generate the 2483 forms and submit the completed application directly to E-Tran. Having the SBA lending solution on the same platform as personal and commercial loans will also streamline the underwriting process by eliminating duplicative data entry.

By taking steps now to prepare for the Paycheck Protection Program, financial institutions will be able to participate in the expanded SBA 7(a) program at a critical time for both lenders and members.

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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