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SBA will directly handle PPP loan forgiveness so banks don’t have to

A portion of a borrower application form used in the Small Business Administration’s Paycheck Protection Program. (AP)
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Small-business owners who received taxpayer-subsidized Paycheck Protection Program loans of $150,000 or less during the coronavirus pandemic will be able to seek forgiveness directly with the government through an online portal starting Aug. 4, allowing them to sidestep the private financial institutions that ran most aspects of the program for 14 months.

The policy change, contained in a regulation published Wednesday, was framed by the Small Business Administration as a way to quickly wind down the massive emergency loan program, which gave about $806 billion to millions of small businesses between April 2020 and June 2021.

The PPP loans were attractive to borrowers because they had an interest rate of just 1 percent and can be entirely forgiven at taxpayers’ expense. But the loan forgiveness process has been more difficult than many expected, leaving some small-business owners worried that they will have to pay off unexpected debt.

The vast majority of those waiting for forgiveness fall under the $150,000 threshold, according to the SBA. They are primarily sole proprietors or what are called microbusinesses that have just a few employees.

“This initiative will allow PPP borrowers to put their concerns of achieving full forgiveness behind them and focus on operating and growing their businesses again,” Patrick Kelley, associate administrator for the SBA’s Office of Capital Access, said in a statement.

The Consumer Bankers Association, an industry trade group, said letting the government handle loan-forgiveness applications would help banks and borrowers move on.

“The creation of a new PPP forgiveness platform from the SBA will allow more small businesses to focus their time and resources on successfully reopening, while also providing lenders the choice to retain oversight of their customer relationships,” Richard Hunt, chief executive of the Consumer Bankers Association, said in a statement.

The move to a direct forgiveness portal is a significant departure from how PPP was designed.

The program relied on banks to manage most aspects of the loans with very little government intervention. This allowed it to move quickly in the early months of the pandemic ― far outstripping a parallel government-run program ― as financial institutions of all sorts quickly processed the loans and pocketed fees.

But the loan-forgiveness process has been much slower. In some cases, banks have been reluctant to accept loan-forgiveness applications because they are unsure whether they can process them within the required two-month window.

“Because lenders are overwhelmed by the volume of PPP loans and are mindful of the statutory 60-day requirement for lenders to issue a forgiveness decision to SBA from receipt of the borrower’s loan forgiveness application, lenders are limiting when loan forgiveness applications are accepted from borrowers, creating uncertainty among borrowers that they are going to have to start making payments on their PPP loans,” the SBA said in the regulation posted Wednesday.

The SBA said it had received feedback from some small banks that they did not have the technology or staff to process the loan-forgiveness applications in a timely manner. The process entails significantly more paperwork than issuing the loan in the first place, in part because it requires borrowers to take the basic step of proving that the loans were needed.

For most of the program’s duration, banks were allowed to effectively take borrowers at their word with respect to need ― something that sped up loan approvals but increased the risk of fraud.

The PPP provided a windfall for banks, especially smaller ones. An analysis published by S&P Global in July 2020, just a few months after the program began, found that the PPP fee revenue earned had already exceeded an entire year’s revenue for many community banks.

Small businesses were allowed to apply if they met the SBA’s definition of a small business, which for most industries is 500 employees or fewer. At first, the entry requirements were loose; borrowers had to self-attest that they needed the loans but weren’t asked to prove their need. Later, the SBA limited the program to businesses that could prove they lost revenue because of the pandemic.

As of May 24, the latest date for which the SBA published loan-forgiveness information, 3.3 million PPP loans had been forgiven and 145,000 were under review. At that point, at least $270 billion in PPP loans had been forgiven. That money is taxpayer-backed loans that will not be paid back. Also, the SBA estimated at the time that it had yet to receive 1.7 million applications.

In addition to the new loan forgiveness portal, the SBA is reducing the documentation requirements for some of the smallest businesses. For businesses to seek forgiveness directly from the SBA, their banks will have to “opt in” to the SBA’s direct portal. Several participating banks said Wednesday that they would do so.