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RODERICK CARMODY: Hi, I'm Roderick Carmody and today's topic is the end of the Paycheck Protection Program.
I'm joined today by Keith St. Germain, a Director in CrossCountry's Financial Services practice to discuss one of the most talked about acronyms these days: the PPP; the government's Paycheck Protection Program for small businesses under the CARES Act. And more specifically, the updates made to the program as it's nearing its conclusion.
Keith, thanks for joining me today.
KEITH ST. GERMAIN: Thanks Roderick. Great to be here.
RODERICK CARMODY: So, Keith, first question. The SBA issued their interim final rule to the PPP last week, the week of June 12th. What has changed?
KEITH ST. GERMAIN: So, Roderick, a number of things have changed, but from a borrower perspective there are really three things to think about. Most importantly, the program is closing to new applicants on June 30th. So, if you're a potential borrower watching this, maybe hit pause now and get your application in.
Second, there have been modifications to program terms. So, 60 percent of loan proceeds can be used for payroll expenses - originally that was a minimum of 75 percent - and 40 percent of loan proceeds may be used for other covered expenses like mortgage insurance or utilities - that was 25 percent previously.
And finally, the loan forgiveness period was extended from eight to 24 weeks. So, companies will have 24 weeks to use their Paycheck Protection Program proceeds - say that five times fast - from the date it was received.
These regulations really were loosened to just to be able to provide more flexibility to borrowers, and a larger period of performance to help businesses make it through this transition period.
RODERICK CARMODY: Thanks, Keith. That's the PPP from the borrower's perspective, but what about lenders? Are there changes they should be thinking about?
KEITH ST. GERMAIN: Yes, thanks Roderick. There are two things that lenders might want to focus on that have kind of flown below the radar in terms of the final rule.
First, loans originated after June fifth have five-year terms on unforgiven balances as opposed to the original two years. The interest rate stays the same at 1 percent. And then interestingly for loans originated before the fifth of June, the borrower and lender can extend that term on an unforgiven balance to five years from the original two years, but it has to be at their mutual consent. So, this is going to introduce some complexity into unforgiven balances for lenders, and potentially affect the loan's value in the market.
And then second, once the borrow submits their forgiveness application, assuming they do that within 10 months of the end of the loan forgiveness period, they don't have to make any payments on the loan before the SBA remits that forgiven amount to the lender. So, what the SBA is doing here is effectively giving borrowers forbearance until the forgiveness process plays out and the lender receives their funds. This serves to protect borrowers from delays in SBA processing time, but probably causes the loans to trade below par, perhaps significantly so, in the secondary market.
RODERICK CARMODY: Great. Thanks, Keith. And what are some of CrossCountry's banking clients thinking about with respect to the PPP at this point?
KEITH ST. GERMAIN: Sure. So initially our clients were about all hands on deck to try to process the most amount of applications they could as possible to serve their customers and the market. Now, the focus has shifted and has really kind of zeroed in on two things.
Risk: How are we managing all of the risk associated with this program? There has been a special Inspector General appointed, so are we considering our reputational risk? Operational risk? Have we followed our AML and BSA protocols? Sort of understanding that there will be scrutiny on this program and preparing for it.
Secondly, it's an opportunity to really think about how to focus attention on the borrower and unforgiven balances, and really maximizing attention to them during the forgiveness period. And so, a lot of our clients are considering automating the forgiveness calculation process. It just enables them to move quickly, to drive to a forgiveness number, and then work with a borrower to determine the loan going forward.
RODERICK CARMODY: Excellent. Thanks, Keith. I really appreciate your thoughts and insights. It's been a long and winding road for the PPP, but it does appear that we're reaching the conclusion.
So, Keith, thanks again for your thoughts. I appreciate your time today. And thanks to everybody for tuning in.