Extension of Fed facility could spur more PPP loan sales

The Federal Reserve’s decision to extend the life of its Paycheck Protection Program Loan Facility through March should give lenders mulling the sale of PPP portfolios more time to weigh options and — potentially — strike deals.

Several banks have already sold originations under the $659 billion emergency loan program for small businesses, either to free up resources or to avoid having to navigate the complicated forgiveness process. It also expedites the influx of fee income.

Nonbank Small Business Administration lenders such as The Loan Source and Fountainhead Capital have been aggressively buying those loans. Those lenders have relied on the PPPLF, which had been set to expire on Dec. 31, to provide the liquidity needed to support those efforts.

Extending the life of the facility could spur more sales, industry observers said.

“I know some banks are thinking about it,” said Richard Wayne, CEO at the $1.3 billion-asset Northeast Bank in Portland, Maine, which is serving as the correspondent lender to The Loan Source. “I think the fairest way to characterize [the Fed’s move] is that it’s a positive.”

The facility was largely used by banks to provide added liquidity to support PPP loans, though that purpose has been on hold since the program expired on Aug. 8.

For buyers like The Loan Source, the facility is a key component of financial modeling.

While small businesses pay just 1% interest, lenders can finance deals with 0.35% PPPLF borrowings, providing enough leeway to eke out a profit. Volume amplifies the profit, helping explain the company’s big push to buy banks’ portfolios.

The Loan Source, which has acquired about 30,000 loans totaling $4 billion, is “absolutely” on the hunt for more deals, said Luke LaHaie, chief investment officer at ACAP SME, which provides SBA-approved services to the New York lender.

“The conversations really haven’t fallen off,” LaHaie said. “I kind of thought as it got later and later in the year they might, just because people would be forced to really start forgiveness. … But a lot of banks started and were like, 'Wow, this turned out to be a lot different,’ so they call us up.”

Northeast was among the first banks to strike a deal with The Loan Source, agreeing to sell its $458 million PPP portfolio in June. Southern First Bancshares in Greenville, S.C., and Bryn Mawr Bank in Pennsylvania have also sold PPP portfolios.

The PPP, created as part of the massive $2.2 trillion stimulus program that began in March, offered small businesses harmed by the pandemic up to $10 million in loans. Proceeds spent on payroll and benefits, occupancy costs, protective equipment and other basic operating expenses were eligible for forgiveness.

But the forgiveness process has been challenging. The SBA did not begin accepting forgiveness applications until Aug. 10, more than four months after the first loans were booked. Lenders and borrowers have criticized the SBA’s plan as overly complicated and time-consuming, even after the agency streamlined requirements for borrowers with loans of $50,000 or less.

Critics of the forgiveness process still want blanket forgiveness for loans of $150,000 or less.

The unsettled situation surrounding forgiveness and the effort involved in servicing PPP loans have prompted banks to consider selling, LaHaie said.

“A lot of banks don’t want to or don’t have the capability to service PPP loans,” he said.

Northeast, as The Loan Source’s correspondent bank, provides a link to the PPPLF and its low-cost financing. The bank derives fees from the lender’s purchases, as well as a share of its servicing revenue.

The arrangement has netted Northeast close to $14 million, said Alexander Twerdahl, an analyst at Piper Sandler.

The Loan Source has only absorbed 0.7% of the overall PPP volume, so “the opportunity for purchases is still meaningful and the extension for the facility is a clear positive,” Twerdahl added.

Extending the life of the loan facility also gives other nonbank lenders more time to decide if they want to buy existing PPP portfolios, said Chris Hurn, CEO of Fountainhead Capital in Lake Mary, Fla.

“Could we have more sellers come to us as a result of having another 90 days after a crazy 2020? Sure, that’s possible,” Hurn said Thursday. “I think it’s helpful. The Fed has been terrific in being flexible.”

Fountainhead acquired nearly all of Carson City-based Greater Nevada Credit Union’s $556 million PPP portfolio in July. The lender is in talks with other potential sellers — mostly nonbanks.

A flurry of deals will likely take place over the next few weeks despite the extension as potential sellers race to lock in the financial benefits this year, industry observers said.

“I’ve heard from a number of sellers over the past two or three weeks,” Hurn said. “They know the clock is ticking down.”

The facility could have even greater importance if lawmakers authorize a new round of PPP lending.

“If they pass more stimulus … I think it would give us the opportunity to originate more loans,” Wayne said.