Big banks may have just killed the government's $349 billion relief effort to save America's devastated small businesses

Steven Mnuchin Donald Trump

  • Applications for forgivable loans for small businesses opened on April 3, but last-minute changes have thrown the program into chaos.
  • Banks, fintechs, and other financial institutions were expected to perform a critical function in processing and disbursing funds for the $349 billion small business relief program.
  • But a combination of high demand, conflicting information, and changing guidance are causing significant uncertainty for lenders and borrowers.
  • On Friday afternoon, Treasury Secretary Steven Mnuchin tweeted that $1.8 billion in Payroll Protection Loans had been processed, "mostly all from community banks. Big banks taking in large amounts but not yet submitted in these numbers."
  • "This will be dead on arrival" if the problems aren't fixed, said the CEO of a nonbank SBA lender in an interview with American Banker on Thursday before the launch.
  • Visit Business Insider's homepage for more stories.

Money that was authorized for small business relief in the $2 trillion coronavirus stimulus package may face significant delays in reaching its intended recipients due to a chaotic rollout of the application process.

Just hours before loan applications were scheduled to open on April 3, media reports show a rocky start to the $349 billion initiative to extend much-needed financial support to US small businesses.Advertisement

"If they don't get this fixed, they can launch the program tomorrow and have all the publicity - it won't matter because this will be dead on arrival," said Chris Hurn, the CEO of a nonbank SBA lender in Lake Mary, Florida, in an interview with American Banker on Thursday. "It will be a spectacular failure."

That is unwelcome news for small businesses, who have been left treading water since the economic disruptions from the public-health emergency accelerated last month. Most small businesses lack the cash reserves to weather a month-long shutdown, and the clock is ticking.

The program was lauded by many for its simplicity when it was originally outlined by Congress in March, but in the intervening weeks, a combination of high demand, conflicting information, and changing guidance are causing significant uncertainty for lenders and borrowers.
Advertisement

On Friday afternoon, Treasury Secretary Steven Mnuchin tweeted that $1.8 billion in Payroll Protection Program loans had been processed, "mostly all from community banks. Big banks taking in large amounts but not yet submitted in these numbers."

While Bank of America was the first major bank to open it's PPP loan portal, the bank sparked a social media backlash for its decision to restrict applications to customers who had existing "small business" accounts. (The bank was itself the recipient of massive bailouts in 2009). Banks, fintechs, and other financial institutions were supposed to perform a critical function in processing and disbursing funds, but reporting from Reuters indicates that thousands of banks - including several of the country's largest lenders - do not intend to participate.Advertisement

Banks initially mobilized behind a plan that called for federally guaranteed, forgivable loans with low interest rates, long deferral periods, and a 10-year amortization schedule.

But in the days running up to the program's launch, the US Treasury issued new rules that dramatically altered those calculations by further lowering rates, shortening the deferral period, and accelerating the amortization.

As a result, many established lenders are reportedly reconsidering their participation, saying the new rules don't make economic sense for their businesses, according to Reuters reporting of an executive conference call of a trade group whose members include JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.Advertisement

The current interest rate of 0.5% "would create unacceptable losses for lenders, which have a duty to preserve their financial strength for the sake of their communities," the Independent Community Bankers of America, a trade group that represents approximately 5,000 small and mid-sized financial institutions, wrote in a letter to Trump administration officials.

One justification offered by the Treasury for the rule changes is that demand for the program is expected to outstrip the funding level authorized by Congress.

But demand on financial institutions is also shaping up to prove problematic. In another interview with the Orlando Sentinel, Hurn said his office received more than 2,500 loan applications in less than a week.Advertisement

"We don't see 2,500 loan submissions in 2½ years time," he said.

Fintech companies have also been jockeying for a position to process and serve loans, but only received confirmation that they would be eligible to participate when Secretary Mnuchin gave a press interview last Sunday.

Even so, at $349 billion, the small business relief program is at least ten-times greater than all fintech small business lending since 2017.Advertisement

Get the latest Bank of America stock price here.

{{}}