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Mnuchin promises audit of larger PPP loans as new wave of applications swamps system


FILE - In this April 23, 2020 file photo, a sign is posted on a closed store  in North Miami, Fla.  Banks trying to submit applications for thousands of small businesses seeking coronavirus relief loans have hit a bottleneck for a second day at the Small Business Administration. Banking industry groups say the SBA’s loan processing system is still unable to handle the volume of loan applications from business owners trying to get aid under the Paychceck Protection Program, part of the government’s $2 trillion coronavirus aid program.(AP Photo/Wilfredo Lee, File)
FILE - In this April 23, 2020 file photo, a sign is posted on a closed store in North Miami, Fla. Banks trying to submit applications for thousands of small businesses seeking coronavirus relief loans have hit a bottleneck for a second day at the Small Business Administration. Banking industry groups say the SBA’s loan processing system is still unable to handle the volume of loan applications from business owners trying to get aid under the Paychceck Protection Program, part of the government’s $2 trillion coronavirus aid program.(AP Photo/Wilfredo Lee, File)
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As the second round of funding under the Small Business Administration’s Paycheck Protection Program got off to a rapid but rocky start, Treasury Secretary Steven Mnuchin said Tuesday the government will perform a full audit on all companies receiving more than $2 million through the coronavirus relief program.

“This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity,” Mnuchin told CNBC.

The PPP loans authorized under the CARES Act were intended to benefit businesses with 500 or fewer employees that are facing economic hardship because the virus outbreak has temporarily shut them down or severely disrupted commerce. However, several provisions in the $2.2 trillion bill allowed larger companies to apply for loans as well, and initial data suggests the smallest and most financially strapped businesses were left out of the initial $349 billion tranche of funding.

President Donald Trump signed legislation last week replenishing the program with another $310 billion, but business owners were still encountering obstacles applying for loans Monday and experts project the new funds will run out within days. With Congress out of town for at least another week and political tensions rising over the next emergency stimulus package, it is not clear when more money will become available.

Technical glitches and an unreliable online system marred the launch of the program earlier this month, and similar issues cropped up Monday with banks reporting an inability to access the SBA’s E-Tran loan application system. According to ABC News, the SBA had sought to limit lenders to submitting 350 applications per hour to avoid overtaxing the system, but it was still slammed by unprecedented demand.

“After working tirelessly to get ready for the second round of PPP funding for their customers and communities, most community banks found themselves continually kicked out of the E-Tran system this morning after the program’s relaunch went live. It is unacceptable for community banks to be locked out when their customers need them most,” Rebecca Romero Rainey, president and CEO of Independent Community Bankers of America, said in a statement.

Since the first round of funding dried up in less than two weeks, many banks were already sitting on a significant backlog of applicants. Some larger banks have warned anyone applying for the first time this week is unlikely to get approved before the latest funds run out.

Businesses are allowed to apply for PPP loans of up to $10 million to cover two months of expenses, which can be fully forgiven if they spend all the money on payroll, rent, and utilities. They are also required to maintain or return to pre-pandemic staffing levels by the end of June.

As of 3:30 p.m. ET Monday, SBA had processed more than 100,000 loans submitted by more than 4,000 lenders. SBA Administrator Jovita Carranza said the system was flooded by twice as many users Monday than on any previous day during the first round of funding.

“Due to the nature of the crisis, Congress and the administration have decided to move forward quickly with programs that are ‘blunt objects,’” said Tom Schryver, executive director of the Center for Regional Economic Advancement at Cornell University. “There just wasn’t enough time to have the legislation or the implementation be particularly nuanced, and I think the issues that we’ve heard reported on the program since its launch are therefore not surprising.”

More than 220 publicly-traded companies have applied for loans totaling nearly $1 billion, according to FactSquared. Mnuchin said Tuesday businesses that had other ways to shore up their finances should never have applied for the program, even though they were eligible, and the Treasury Department has issued guidance intended to clarify that only businesses that truly need the loans to survive should be getting them.

“Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary,” the updated guidance states, adding that public companies with substantial market value may be required to demonstrate the basis for making that certification if they apply.

Some larger businesses have caved to public and political pressure to give back their loans, and the SBA said Monday more than $2 billion has been returned and will be made available alongside the new funds. Many other publicly-traded and politically-connected companies intend to hold on to the money given to them under the program, saying they intend to use it for paying furloughed employees and other expenses.

The latest high-profile company to return its PPP loan was the Los Angeles Lakers—one of the NBA’s most profitable franchises valued at $4 billion—which received $4.6 million during the initial round of funding. The NBA has expanded its own line of credit for teams to access if necessary.

"Once we found out the funds from the program had been depleted, we repaid the loan so that financial support would be directed to those most in need," the team said in a statement Monday. "The Lakers remain completely committed to supporting both our employees and our community."

While Mnuchin said it is “outrageous” that the Lakers applied for a loan, experts say it is hard to discern whether such payouts violated the spirit of the law. Provisions like the exemption allowing massive hotel and restaurant chains to apply for loans as long as they have fewer than 500 employees per location were deliberately included in part due to heavy pressure from lobbyists and donors.

“I can't find a meaningful statement of intent, except to give money to constituents and donors who are losing money because of the virus,” said Michael Merrill, director of the Labor Education Action Research Network at Rutgers University. “In that sense, the program may well have functioned exactly as it was intended.”

Under the legislation, publicly-traded firms and businesses that have access to other sources of capital were eligible for loans as long as they could claim in good faith that their finances were threatened by the virus outbreak and they planned to use the money to keep workers employed. Some larger businesses that are keeping their loans maintain they are as deserving of assistance as anyone else.

“The level of threat firms faced to qualify for funding remains ambiguous and all firms are facing some level of impact, so the answer is really in the eye of the beholder,” said David King, chair of the department of management at Florida State University. “I think the backlash relates to the most vulnerable firms having the most difficulty in applying for and receiving funding, and awareness of the firms that did receive funding.”

House Democrats plan to investigate how some PPP funds were distributed under the jurisdiction of the newly-created Select Committee on the Coronavirus Crisis. Majority Whip Rep. Jim Clyburn, D-S.C., chair of the committee, told The State looking into how publicly-traded companies got to the front of the line for small business loans is one of his top priorities.

Lawmakers and the Trump administration attempted to address some complaints raised about the first round of funding as they unleashed the second tranche. Limits have been placed on the amount individual larger lenders can originate, and $60 billion has been carved out specifically for smaller lenders so businesses that have relationships with community banks will have more access.

Democrats say those changes do not go far enough. In a letter to the Treasury Department and SBA Saturday, House Speaker Nancy Pelosi, Senate Minority Leader Chuck Schumer, and other top Democrats urged the administration to set aside $10 billion for minority lenders and community development institutions that work with borrowers who do not have access to traditional banks.

"These institutions’ specific mission to serve low-income, rural and minority small business owners and communities uniquely positions them to increase the amount of PPP loans that reach our underserved businesses," they wrote in the letter obtained by Politico. "These businesses are the heartbeat of the diverse communities they serve and are particularly vulnerable during this crisis."

King said such a provision would be useful for guaranteeing the businesses with the greatest need have an opportunity to get funding. That has not happened in the first two rounds of funding, but he is hopeful it eventually will.

“Better matching the intent of the PPP to target funding to more vulnerable businesses is likely needed, and this is likely as the Small Business Administration works to implement the program,” he said.

According to Merrill, the fundamental problems of the PPP have not been fixed. It is a Band-Aid on a much deeper economic and public health crisis, and it is deliberately not targeted to businesses where it would do the most good. He argued addressing the health and economic concerns separately means not doing either especially well.

“There are better ways to protect paychecks than giving money to employers and better ways to ensure the country's economic recovery than giving the money to randomly selected firms on a ‘first-come, first-served’ basis with minimal strings attached,” he said.

Though the program is ostensibly first-come, first-served, a New York Times investigation found several larger banks worked closely with their biggest clients to ensure they were first in line and helped shepherd their applications through the process. Meanwhile, smaller businesses struggled to get their applications completed and submitted and those without existing banking relationships with approved lenders were often blocked out entirely.

According to Schryver, banks accommodating their biggest clients first, and potentially shutting out other borrowers in the process, was predictable and might not have been avoidable. Under extraordinary circumstances, bankers were trying to deploy as much money as possible as quickly as possible and there simply was not enough to go around.

“Given the choice between an application from someone I worked with before, where I could be confident they’d move through underwriting quickly and with a low likelihood of problems, versus taking on a new client or taking a client who had not been through underwriting before through that process, I’d clear my inbox of the first group and then move on to the second,” he said.

Some business owners have alleged in lawsuits that banks prioritized larger loans when money began to run out because they could turn more of a profit from them. Bank of America and US Bank have denied those accusations.

A Goldman Sachs survey of 1,790 small businesses released Monday found 81% are still operating in some capacity, but they have had to cut their workforce by an average of 37%. Nine-out-of-ten businesses had applied for PPP loans, but nearly 80% of applicants are still waiting for funds. Still, more than three-quarters of those whose applications had been approved believed their businesses would survive the pandemic.

The Goldman survey also showed small business owners had taken advantage of other relief programs included in the CARES Act, with 63% applying for Economic Injury Disaster Loans. Almost half said their employees have applied for unemployment benefits, which are temporarily boosted by $600 per week under the legislation.

As Congress weighs additional stimulus, 78% of small business owners say more money should be made available through PPP, and half want steps taken to make applying easier and loan disbursement faster. Three-quarters of respondents said the program should be extended beyond its current June 30 deadline, with many states still operating under stay-at-home orders through May or longer.

When further funding or reforms to the small business loan program might be coming is uncertain. The Senate plans to return to Washington next week, but based on advice from the Capitol’s attending physician, Pelosi said Tuesday the House will not, which could complicate politically fraught negotiations on another stimulus package even if PPP funds are again quickly exhausted.

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