Lenders get a second chance to correct PPP flaws


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As the United States grapples with the impact of the coronavirus crisis, the federal government has given the banking system a critical role to play in helping individuals and small businesses weather economic disruption.

Thanks to stimulus checks valued at $ 1,200 and the Paycheck Protection Program (PPP) which received a $ 320 billion injection on Friday, the government’s coronavirus relief plan has relied heavily on banks to distribute tax assistance. But some of the biggest banks have been accused of borrower favoritism when it comes to disbursing relief loans.

JPMorgan Chase, Citibank and US Bank used a two-tier system to prioritize applications from their richest clients, sources said The New York Times.

JPMorgan Chase, Wells Fargo, Bank of America and US Bank also face class actions small businesses claiming that banks have prioritized existing customers and larger loans, resulting in higher set-up costs, rather than processing applications on a first-come, first-served basis.

While the PPP is well-intentioned, these actions reflect a “structural flaw” in the program, Mehrsa Baradaran, a law professor specializing in banking law at the University of California, Irvine, told Banking Dive.

“We rely on the banks, and the banks can choose their customers,” Baradaran said.

“Banks didn’t have a legal obligation to do that, and that’s the problem,” she said, of lending on a first come, first served basis.

And to be fair, some banks, like Wells fargo and, more recently, JPMorgan Chase, urged borrowers to seek other lenders, Baradaran said, adding that she doesn’t think the lawsuits have a legitimate claim.

Either way, the practice was “not a good idea for the big banks,” said Ian Katz, analyst at Capital Alpha Partners. Bloomberg.

“The second time around, they should have a better idea of ​​how to handle this,” he said.

The second coronavirus relief bill, which President Donald Trump signed on Friday, includes a $ 60 billion exclusion for banks and credit unions with $ 50 billion or less in assets – intended to give smaller businesses equitable access to funds.

The program also caps the amount that large banks with more than $ 50 billion in assets can lend at $ 60 billion. Lenders below the $ 50 billion threshold will not be subject to the cap.

While the first PPP rollout generated negative press for some banks, the crisis has also given financial institutions the opportunity to prove that they can help their customers in the worst times, said David Zaring, research professor. Legal and Business Ethics at the Wharton School, University of Pennsylvania.

“Rather than being rescued, [banks] were the vectors for the rescue of the Fed and the Treasury Department, ”Zaring told Banking Dive, comparing the pandemic to the financial crisis of 2007-08. “The banks are encouraged by the government and have provided the liquidity to be truly friendly neighborhood bankers at a time when their customers need it. There is certainly a chance for banks to form relationships with their customers which could lead to lasting post-crisis relationships which could be good for banks. “

This could allow lenders to become “heroes” once the crisis is over, said Nick Ford, co-manager of US Opportunities fund and US Smaller Companies fund at Premier Miton Investors. CNBC.

“I think there is a huge opportunity for the American banking system to come out of this as good guys – as heroes,” Ford said.

Community banks, in particular, were able to show their strengths while dealing with small businesses during the PPP process.

Almost 20% of the initial PPP money was processed by lenders with less than $ 1 billion in assets, and about 60% by banks with $ 10 billion or less in assets, according to Bloomberg.

“The small banks were able to get these loans efficiently. They have relationships with the small businesses,” Baradaran said. “And they’re in the communities where a lot of other banks have gone.”

Community banks such as First American Bank have had to allocate resources from virtually all areas of the bank to meet the demand for PPP loans.

“We’ve moved people into our legal team, so paralegals and compliance staff who may have worked in other areas are now doing documentation,” said Brian Hagan, president of the bank’s Florida market. . Bank dive this month. “The same goes for loan operations. If you were working in retail or some other field, you are now contributing trade volume because the PPP program has so much volume. “

Community banks have also found creative ways to help their members access their stimulus checks.

Oklahoma’s Citizens Bank of Edmond this month began offering an interest-free overdraft line that customers can pay off once they receive their $ 1,200 government stimulus checks.

Bank CEO Jill Castilla worked with serial entrepreneur Mark Cuban to design the program. A similar initiative was adopted by digital bank Chime.

It’s time for Fintech to shine

FinTechs have expressed frustration at not having equal access to PPP money. Many non-bank lenders were approved just days before the program ran out of funds and, unlike banks and credit unions, they still do not have access to the Federal Reserve’s credit facility, a a tool that they believe would help them finance more loans.

FinTechs are also excluded from the $ 60 billion exemption Only for small banks, a move, according to non-bank lenders like Funding Circle, will once again prevent small businesses from getting the funds they need.

As the second P3 cycle approached, Funding Circle had thousands of pending applications – 61% for loans under $ 50,000 and 95% for loans under $ 350,000, said Ryan Metcalf, business manager. US regulations at Funding Circle, at Banking Dive last week.

According to these parameters, Funding Circle should have been included in the $ 60 billion allocated to small institutions, he said.

“I hope there will be another round, and I hope that [Congress] can fix this error, ”said Metcalf.

The fintech industry is eager to participate, with Funding Circle, Kabbage and BlueVine lobbying Congress for the ability to help with loans early in the pandemic.

PayPal and Square weren’t just approved become direct lenders, but were also allowed to disburse stimulus checks.

Digital bank Running delivered the checks to his customers days before most traditional banks, crediting the accounts on the day he received the funds from the Federal Reserve.

“We can very quickly … make changes in ways that traditional banks aren’t motivated to do, or that are just too slow,” said Adam Hadi, vice president of marketing at Current, at Banking Dive this month.

Meanwhile, some of the country’s biggest banks, including JPMorgan Chase, PNC, and US Bank suffered interruptions to their websites the day millions of Americans started receiving their checks.

PNC Bank public relations manager Marcey Zwiebel attributed the bank’s problems to an unprecedented volume of customers checking their accounts for the stimulus.

Help welcome

As Round 2 of the PPP begins, fintechs will have the opportunity to relax their ability to deliver from the start.

“We welcome assistance in securing these loans,” Hagan said. “But it’s not as easy as it sounds, so I think a lot of fintech companies are finding that they can’t get started quickly. But we certainly welcome more robust distribution vehicles for these loans because this it will be impossible for community banks and even big banks to meet demand. “

The $ 320 billion injection of PPP funding is expected to be used up in as little as two days.

The next challenge for fintechs may be to ensure that the opportunity to let them lend at an unprecedented rate continues after the crisis.

“We tried to work with the [Small Business Administration] for over a year, ”said Metcalf. “And the SBA has refused to allow us to participate in the 7 (a) program, until now.

“Going forward, when we enter the recovery phase after the PPP is over, loans will still have to be made, but this will not happen without government support,” said Metcalf. “And so the thing I’m focusing on now is the recovery. How do we make sure we can continue to lend after PPP? “

To look forward

“I think what the virus has done has really exposed some of the weaknesses in the banking system,” said Baradaran, adding that she hopes lawmakers will pay close attention to the lasting impacts the crisis will have on underserved communities. “A crisis is a difficult time to make structural reforms, but there are a lot of people who are constantly living in a state of crisis, and we have to make sure that we all recover.”

A group of lawmakers, including House Speaker Nancy Pelosi, D-CA, and Senate Minority Leader Chuck Schumer, D-NY, have called on the Trump administration to set aside $ 10 billion from the P3 for managed banks by minorities and community lenders.

“The specific mission of these institutions to serve small business owners and low-income, rural and minority communities uniquely positions them to increase the amount of PPP loans that reach our underserved businesses,” lawmakers wrote in Sunday. a letter addressed to the Treasury and the SBA. “These businesses are the heart of the diverse communities they serve and are particularly vulnerable during this crisis.”

“One of the lessons of the financial crisis is that you have to measure the recovery not as a whole, but by looking specifically at certain communities, such as black homeowners who lost their homes during the financial crisis and never left. recovered, ”Baradaran said. “The racial wealth gap between blacks and whites has widened during the last crisis. These are things to watch out for in this one as well.”

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