The Paycheck Protection Program (PPP) has gone from a trickle to a flood of applications as the lenders’ transmission websites have gotten up and running. Because initial funding had been fully committed, lenders were on a forced “pause,” but applications resumed processing on April 27, 2020, when a new appropriation passed Congress to re-open the program.
From a lender perspective, any pause in the program represents a time to catch up, and plan for both a new surge in applications, as well as the forgiveness applications to come from the first round of borrowers.
Lenders have many things to consider in terms of both evaluating applications for loan approval and forgiveness:
1. How to process all the loans in a timely and accurate fashion?CrossCountry has partnered with UiPath to offer a solution to automate the PPP loan application process. This solution enables efficiency and accuracy, and reduces processing times by up to 80 percent. CrossCountry offers an RPA proof of concept assessment free of charge to interested parties.
2. How to ensure that loans made have appropriate forgiveness calculations?Given the flood of applications and disparate nature of businesses applying for PPP loans, a robust testing program should be developed by lenders to ensure a strong control environment and reduce the opportunity for fraud. The hallmark of a strong testing program includes clearly defined control and test procedures that focus on internal approval procedures and identification of higher-risk populations, as well as disbursement validation testing to ensure that funds are used appropriately.
3. Considerations should be made for False Claims Act (FCA) violations from applicants, and potential Bank Secrecy Act (BSA) violations within their loan processing.While the PPP has been a very rushed process from both a borrower and lender perspective, the application process requires applicants to validate certain facts regarding their eligibility for the program. Specifically, applicants must verify (and lenders should have confirmed) that:
- Current economic uncertainty makes this loan request necessary to support the applicant’s ongoing operations.
- The loaned funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments.
- Documentation verifying the number of full-time equivalent employees on the payroll, as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight weeks following this loan will be provided to the lender by the applicant.
- During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under the PPP.
- The information provided in the application and supporting documents is true and accurate.
- The tax documents submitted in support of the application are identical to those submitted to the IRS.
While these requirements focus on the borrower, lenders will face heightened scrutiny despite Congressional protections, and several class-action lawsuits have already been filed against PPP lenders. Lenders are required to maintain an effective compliance program and abide by BSA requirements and/ or other AML-related statutes.
Congress has established three new oversight committees as part of the CARES Act to monitor the use of federal funds. Most applicable to lenders is the newly established Special Inspector General for Pandemic Recovery (SIGPR) which will perform audits and investigations of loans and loan guarantees under any CARES Act program. The SIGPR is similar in scope to the Special Inspector General for the TARP program that was created as a result of the 2008 financial crisis. Despite a level of protection from concerns arising from the PPP program, lenders should look to develop and maintain a robust compliance program for all CARES Act lending - whether PPP or Main Street - because protections do not absolve lenders from complying with existing regulatory standards.
Finally, after the eight-week period, lenders must consider how to integrate PPP loans that remain on their books into their existing loan portfolio, explore a sale of loans to the market, or both. Given the disparate types of businesses who have applied for loans and the varying amounts of remaining, “unforgiven” balances after the program period, lenders will need to consider borrower risk ratings and integration with existing loan servicing systems, as well as pooling criteria and pricing options depending on whether they decide to sell the loans or leave them on their balance sheet.
However lenders approach the PPP and resulting loans, a robust risk management framework is key.