“Banks are ready and ready to lend, but they need clear rules of the road and a streamlined process to be able to put the financing in the hands of small business owners in the coming days,” said Greg Baer, President and Chief Executive Officer of the Bank. Policy Institute, which represents the largest lenders in the country.
Tensions illustrate the challenges that lie ahead to distribute the record $ 2 trillion in aid that Congress made available last week in a massive economic rescue package. The potential failure to deliver aid to small businesses as promised – one of the first major deployments of the legislation – could be a major blow to public confidence as a crippling recession looms.
The urgency was highlighted on Thursday when the Labor Department announced that unemployment claims had soared to a record 6.6. million last week, more than double the previous week, signaling increased economic pain from the coronavirus pandemic.
The portion of the legislation at issue – known as the “paycheck protection program” – was designed to increase government-guaranteed loans to small businesses, which are particularly vulnerable to a deep economic recession. Congress has attempted to make loans more attractive by allowing loans to be canceled if borrowers continue to pay their employees.
Yet banks not only have operational and technical questions about how the program works, but also greater concerns about the extent to which they will be responsible for verifying information about the borrower – and then held accountable in the event of problem. The industry has been the subject of billions of dollars in fines and lawsuits after the 2008 financial crisis and does not want to repeat the experience.
A senior administration official said the agencies were doing everything they could.
“Cash and [the Small Business Administration], in close coordination with the White House, is working at record speed to implement the paycheck protection program, “said the official. The SBA’s top priority is to make sure these programs are up and running as quickly as possible to relieve American workers and businesses. ”
A matter of paramount importance to banks is the extent to which they are expected to screen borrowers before approving loans and distributing funds.
These concerns increased on Tuesday after the Treasury and the SBA issued brief guidelines for lenders participating in the program. The Trump administration has said banks should verify that a borrower has been in office since February 15 and has paid workers, while confirming average monthly salary costs.
Banks say the audit requirements could cause substantial delays in lending – a mandate that could create a delay of several weeks in establishing the necessary procedures. They are seeking more assurance that they will not be held liable if a borrower obtains a loan after providing misleading information.
In the absence of greater flexibility, banks envision a scenario where the launch program only works for their existing small businesses – those they know well – while other potential borrowers miss the $ 350 billion .
“Banks are working to withdraw money as quickly as possible,” said Consumer Bankers Association spokesperson Nick Simpson. “Although the demand has been considerably condensed, the verification process the government needs will likely take longer than many had originally hoped. Hopefully by Friday, we can further optimize the process. “
In a memo responding to Banks said on Tuesday that lenders should only be required to confirm that borrowers have completed the loan application according to its instructions – not to validate the information. Borrowers are required to certify the information they have provided, and banks should only be required to pass this information on to the SBA, they said.
They also don’t want to be subject to “unlimited potential liability for things they can’t control.”
“The choice in the administration of the program is binary: if the main objective is to make many loans in a short time, the process must be automated and the lender must be able to rely on a certificate of borrower”, have said the banks. Treasury. “If the main objective is for the loans to be taken out to ensure initially that all program requirements are met, then the lenders will need to establish a process – which will necessarily be manual – to ensure that the payroll calculations and other requirements are respected. This in turn will cause delays of several weeks or months as lenders will establish the necessary policies and procedures and train their staff. ”
Some banks fear that the way the Trump administration structures loans may even deter lenders from offering them in the first place.
In a letter to the Treasury and the SBA on Wednesday, the Independent Community Bankers of America said that the 0.5% interest rate charged by the administration was so low that for many banks “it will be neither economical neither feasible to participate in the program. ” The rate came as a surprise to the banks after Congress decided to let the rate go up to 4%.
The trade group, which represents the country’s smallest lenders, also argued that the required two-year loan period – which Congress has authorized to last for up to 10 years – was unreasonably short for borrowers in difficulty. Another concern is that the administration has provided little information on how the crucial part of the loan forgiveness program works.
The community bankers group urges the Treasury and the Federal Reserve to immediately create a “liquidity facility” that would provide funding to banks to make loans and secure any unsecured loan balance.
“In light of all of the above concerns, many banks have already indicated that they will not be able to use the program under current conditions,” said group president Rebeca Romero Rainey in the letter. “Others will only use it for existing customers, which will greatly limit the purpose and potential of the program. It would be an unacceptable lost opportunity at a time when we can least afford it. “