Up until a few weeks ago, I was a humble commercial real estate broker, end of story. How I long for that simpler life. Now I have morphed into a counselor spending time trying to help clients navigate the real estate related issues brought on by the COVID-19 shutdown.
Under the CARES Act, a small business employer (a business with fewer than 500 employees) can receive forgivable or low-interest loans of up to $10 million. The purpose is to provide cash-flow assistance to employers who maintain their payrolls during the COVID-19 crisis. This program is known as the Paycheck Protection Program (PPP). The government and lenders are promoting the PPP (Payroll Protection Program) as a wonderful solution for small businesses. The interest rate on the PPP loans is low and if the proceeds are used for qualified purposes such as payroll or utilities the loans will be forgiven.
The guidance given to small businesses is that it is a simple process and that they should submit the PPP application through the bank with whom they have a relationship. April 3rd was the opening date to submit applications
I went with a client to Bank of America on April 3rd so they could submit their PPP application. This client has been a loyal customer of Bank of America for 35 five years and they have always maintained strong deposits in the bank. There can be no question about the long-standing banking relationship. Bank of America refused to even look at the application, saying that the applicant did not meet the BOA criteria for the PPP loan because the applicant company did not owe Bank of America any money. The applicant business has been run in a fiscally responsible manner and at present does not have any loans or credit cards with Bank of America. For that reason, the applicant company did not qualify for relief through the PPP program at Bank Of America.
I was shocked and my client was outraged. They are a small business and were only applying for $20,000 in order to cover payroll expenses. All the propaganda about The Bank of America taking care of existing clients is nonsense.
The PPP loan program is designed to assist employers in maintaining eligible payroll costs within the “covered period.” The “covered period” runs from February 15 through June 30, 2020. The critical part is that the loans are made on a “first come, first served” basis, per guidelines issued by the Small Business Administration (SBA.)
The Banks are the gatekeepers and certain banks such as Bank Of America are only processing PPP loans for customers who owe Bank Of America money. Other clients are barred from crossing the threshold
My interpretation is that there is a simple reason for this code of conduct. The bank does not want defaults on its loan portfolio. In selecting only customers with a loan relationship, Bank Of America is protecting its interests. By processing only PFP loans for these selected customers, the bank is more secure that it will continue to receive loan payments from clients who have existing loans. I do not believe that this policy (i.e. requiring a loan relationship with the bank) is mandated by the SBA. I do believe that Bank of America has taken it upon themselves to select applications from certain clients in order to protect Bank Of America. By the time Bank of America has submitted all the self-serving PPP loan applications to the SBA, the funds allocated for the PPP loan program will have been depleted
Now I get it. Certain banks are using PPP process to protect the banks, not small businesses. The manner in which the program is being administered by certain lenders is neither honest nor fair. Countless small businesses will be shut out completely and they will not be able to keep their employees employed. Relationships are a two-way street. Bank of America and other banks who are operating in a similar fashion will pay a price down the road when their clients leave. This has a long tail.
How wide-spread is this? I suspect that this manner of processing the PPP applications is occurring at some larger banks. I am not sure if the smaller banks and community banks are operating in the same way. My gut feeling is that the smaller banks will take much better care of their customers. I can only speak factually about my experience with one bank. If I am wrong in my assessment, and it turns out that it is mandatory for all banks to service only their clients with loan relationships then I apologize for this entire article and I stand corrected. If I am correct, then the system is broken and is being abused. People should know about it. There may be other alternatives. I want to share whatever I can learn with my clients and my fellow brokers. I would love to hear from anybody who has been working with banks what their experience has been. Also, I would love to hear from lenders directly, as to how they are administering the PPP loan application process. .Kindly comment below
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