By Ruth Simon, Peter Rudegeair and Amara Omeokwe
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 3, 2020).
Hours before small businesses can apply for forgivable loans
from the $2 trillion financial relief package, some of the biggest
U.S. banks aren't ready to handle an expected flood of applications
from potential borrowers.
JPMorgan Chase & Co. told its small-business customers
Thursday that it doesn't expect to start accepting loan
applications on Friday. Bank of America Corp. plans to limit the
loans to customers with existing deposit accounts and loans at the
bank as of mid-February, according to people familiar with the
matter.
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 were empowered to 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.
JPMorgan said in a statement that it is still awaiting guidance
from the SBA and Treasury Department before making loans. A Bank of
America spokeswoman said the bank could move fastest with its
nearly 1 million small-business borrowing clients.
"We know for these businesses speed is of the essence," the
spokeswoman said in a statement, adding that existing customers are
Bank of America's "near-term priority."
Smaller banks also are unsure how to navigate the process. Maine
Community Bank in Biddeford, Maine, has fielded inquiries about the
loan program from more than 300 small businesses. Chief Executive
Jeanne Hulit said the bank, which has about $950 million in assets,
doesn't have the information it needs from the government to ramp
up lending.
"As a community bank, we want to support all of the small
businesses in our communities," said Ms. Hulit. "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. Late
Thursday, the Treasury Department provided more instructions to
lenders, but final versions of many forms needed to participate in
the program weren't immediately available.
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," she
added.
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.
How lenders that don't already make SBA loans get approved to
participate in the program is also unclear. Rules released by the
Treasury Department on Thursday evening specified criteria that
lenders will have to meet but required them, before making loans,
to fill out an SBA form that wasn't immediately available.
Some lenders say they are eager to participate in the program,
but are struggling to make the costs of it work.The interest rate
that all paycheck-protection loans must carry initially was set at
0.5%, 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.
On Thursday evening, Treasury Secretary Steven Mnuchin said the
interest rate would be increased to 1% at the request of community
banks.
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.
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.
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.
Write to Ruth Simon at ruth.simon@wsj.com, Peter Rudegeair at
Peter.Rudegeair@wsj.com and Amara Omeokwe at
amara.omeokwe@wsj.com
(END) Dow Jones Newswires
April 03, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
Bank of America (NYSE:BAC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Bank of America (NYSE:BAC)
Historical Stock Chart
From Sep 2023 to Sep 2024