5 ways the Paycheck Protection Program has evolved

April 13, 2021 12:46 PM

The Paycheck Protection Program debuted slightly more than a year ago with a flurry of applications for emergency small-business loans and a well-documented crash of the Small Business Administration’s overworked portal.

The SBA has since approved about 9.6 million loans totaling more than $755 billion.

The initial $349 billion of funding barely lasted two weeks, forcing a shutdown on April 16, 2020. Congress eventually allocated more funds, allowing the program to reopen and operate from April 27 to Aug. 8.

A new round of PPP began Jan. 11, though the program has gone through a number of changes since its inception. For one, a greater emphasis has been placed on smaller loans to smaller businesses.

The PPP has changed in several other ways, too. The latest iteration of the program allows existing borrowers who can demonstrate ongoing pandemic-related hardship to apply for a second round of funding. And a number of community banks have significantly increased their involvement compared with the PPP’s earliest days.

Here is an outline of five ways that the PPP has evolved.

Emphasis on small credits

The Paycheck Protection Program has come to put more emphasis on smaller loans while making a bigger commitment to smaller lenders.

When funding ran out a year ago, the average loan was about $206,000. That average fell to $101,000 when the first phase of PPP ended in August. So far, loans in the second phase of the program have averaged $53,000.

To look at it another way, loans of $1 million or more make up just 17% of current PPP activity, a sharp decline from 44% when the original funding was exhausted.

Several factors have contributed to the shrinking loan size.

The SBA, under the Trump and Biden administrations, and Congress have made several concessions that favor community banks. Last April, smaller lenders were given an exclusive window to process applications and $60 billion of dedicated PPP funds.

When the portal reopened in January, early access was given to community development financial institutions, minority depository institutions and other mission-driven lenders, along with $15 billion of dedicated funds. The origination fee for smaller loans was increased.

Another reason for the lower average loan size involves the stepped-up participation of smaller lenders and nonbanks.

Attention to glitches

Everyone knew there would be hiccups with PPP, which has become the largest disaster- loan effort in U.S. history. Those issues have changed over time.

The first glitches happened soon after the lending portal opened on Aug. 3.

E-Tran, the SBA’s electronic loan-processing system, struggled with an onslaught of applications. The portal frustrated lenders, who faced login problems, repeated requests for an authorization number they didn't have and a crash that kept them out of the system for up to four hours one day.

The SBA still managed to approve nearly 1.7 million of loans, totaling $342 billion, in the program’s first two weeks. It largely addressed the issue by working with Amazon Web Services to develop a new gateway.

While the 2021 version of PPP has not suffered from crashes or login problems, lenders are dealing with a new issue stemming from upfront compliance checks designed to guard against fraud and improper payouts.

Whenever the system detects an issue, such as a mismatched employer identification number or business name, it creates an error code that blocks applications’ progress. And the SBA hasn’t always been clear about how to fix the issues the system flags.

At one point, error codes were delaying 2 million loans.

The agency in February began letting lenders certify a loan’s legitimacy to work around some error codes. The change helped whittle down the backlog to about 190,000 loans on March 24.

The SBA has since announced plans to use a machine-learning tool to address any remaining code issues.

Clarity on forgiveness process

The SBA kept lenders waiting as it crafted a process for converting PPP loans to grants. The process has undergone several modifications as well.

The SBA released its initial guidance May 15, more than a month after the portal opened and two weeks after a congressional deadline. Completing the process is important to borrowers since it takes away their financial obligation, and to banks because they don’t receive an origination fee until a loan is forgiven.

Lenders and borrowers complained that the 11-page forgiveness application was overly burdensome, especially for small-dollar borrowers. With the loan count rocketing past 1.5 million in the PPP’s first two weeks, there was a push for blanket forgiveness.

The SBA responded first with a shortened application in June, then a plan in October to streamline forgiveness for loans of $50,000 or less. Congress increased the threshold for blanket forgiveness to $150,000 in its Dec. 27 stimulus bill. A one-page forgiveness application was made public Jan. 21.

The rate of forgiveness, which proceeded at a glacial pace throughout 2020, has accelerated this year. More than $100 billion of loans were forgiven through mid-January; the amount has since doubled.

As of April 1, the SBA had forgiven 2.4 million loans for $209 billion. More than 99% of applications received full forgiveness, the agency said.

Changing leaderboard

Among the stinging critiques of the PPP’s initial phase was that big banks were dominating the program and steering most of its limited funding to large existing clients.

Critics claimed that smaller firms, especially those owned by women and minorities, were struggling to access the program.

When the SBA released its initial leaderboard on June 6, big banks were clearly atop the standings.

The top-five PPP lenders at that time — JPMorgan Chase, Bank of America, PNC Financial Services Group, Truist Financial and Wells Fargo — accounted for nearly a fifth of the PPP’s $511 billion of volume. The smallest lender to crack the top 10 was the $76 billion-asset Zions Bancorp.

The rankings for the latest phase of PPP look quite different.

While JPMorgan Chase and Bank of America remain the biggest lenders, Biz2Credit, a fintech, is right behind them with $6.5 billion of volume.

Capital Plus Financial, a certified community development institution that serves the Hispanic community in Texas, is in fourth place, with $6.2 billion of loans, and the $9.7 billion-asset Cross River Bank in Teaneck, N.J., is in the top five.

The $18.4 billion-asset Customers Bancorp in Wyomissing, Pa., is also among the 10 biggest PPP lenders.

Rise of a secondary market

The complexities tied to the forgiveness process helped create a secondary market that few fully envisioned when PPP launched a year ago.

While the original stimulus law that created the program included language to permit loan sales, it took a few weeks to address questions about secondary market transactions. In mid-April, and again in May, the SBA released guidance waiving requirements for prior agency approval and deemed any SBA lender an eligible buyer.

The Federal Reserve created the Paycheck Protection Program Liquidity Facility, or PPPLF, providing a way for nonbanks to fund the underlying loans they were buying from banks and credit union.

The first significant PPP loan sales were announced in June. The $1.2 billion-asset Northeast Bank in Portland, Maine, sold a $458 million portfolio to The Loan Source, a nonbank SBA lender, and ACAP, its servicing partner.

Other buyers, including Citigroup in New York and Fountainhead Commercial Capital in Lake Mary, Fla., have announced deals.

The Loan Source and ACAP have emerged as the leading buyers of PPP loans. Luke LaHaie, ACAP’s chief investment officer, said the partners have purchased about 60,000 loans totaling $7.2 billion. They are gearing up for a new push as the program nears the end.

“We’ve built the infrastructure. We’ve got the team and processes in place,” LaHaie said.

“This year, we feel like we could probably even pay the banks a little bit more than we did initially … and try to get an even larger share of the market than we had last year,” he added. “There are definitely still interested sellers out there.”