PPP: Fair Lending Fields in the Forgiveness Application & Updated Law
Just when you think you’ve finally wrapped your head around the Paycheck Protection Program (PPP), new information changes your outlook.
Here’s a rundown on the latest PPP news and what it means for you.
- PPP Loan Forgiveness Application Is Asking for Demographic Data
- Lenders & Borrowers Must Keep PPP Documentation for 6 Years
- Loan Forgiveness Under New PPP Flexibility Law
PPP Loan Forgiveness Application Is Asking for Demographic Data
Last week I predicted the initial PPP rollout fiasco was likely to create more interest in Small Business lending, particularly in section 1071 of the Dodd-Frank Act, which amended the Equal Opportunity Act to require financial institutions to collect and report information about credit applications submitted by small businesses and women-owned or minority-owned businesses. The Consumer Financial Protection Bureau (CFPB) hasn’t implemented this rule yet, but it looks like the Treasury and the Small Business Administration are getting ahead of the CFPB.
The PPP Loan Forgiveness Application requests borrower demographic information, demonstrating potential Small Business Administration interest in Fair Lending. The optional data collected includes:
- Veteran status
As with HMDA, borrowers can choose not to provide this information. In that case, lenders may want to take a conservative approach, following in the style of the old HMDA, documenting only what they know to be true about the business owners.
Bottom Line: It’s unclear if or how the SBA plans to use this demographic data, but lenders should seriously consider using it for data analytics. Using gender, race, and ethnicity to examine approvals and denials, time from application to loan closure, and the percent of the loan forgiven can provide Fair Lending insights that can help your FI prepare for the eventual adoption of section 1071 of the Dodd-Frank Act and get a feel for how your portfolio is performing.
Lenders & Borrowers Must Keep PPP Documentation for 6 Years
The SBA is requiring both lenders and borrowers to retain all documentation related to PPP loans for six years from the time the loan is forgiven or repaid in full—an enormously long period that doesn’t align with other regulations. (For example, Reg B requires records to be retained for 25 months.)
The SBA is able to review any PPP loans, and this documentation requirement means the agency will have a period of six years to audit loans and take action. If documentation suggests that a borrower was ineligible for a loan, the loan amount or loan forgiveness, both the FI and the small business can be on the hook. The agency could withhold or claw back the FI’s fees and force the loan to be repaid.
While borrowers are responsible for calculating the forgiveness amount in their application, it’s the lender’s responsibility to make a good faith effort to review that application. That includes checking payroll records from third-party providers and canceled checks for lease agreements and utility bills. It’s a much stricter standard than most commercial lending.
Bottom Line: With a six-year look-back period, lenders need to be especially careful with PPP loans. Be sure to update policies and procedures to ensure all borrowers—including those who took out PPP loans before the program was adjusted by Congress—are being treated consistently. You don’t want one set of borrowers to follow the old process and another set to follow the new one.
SBA guidance provides a safe harbor for PPP loans under $2 million, but it only assumes the necessity of the loan due to limited access to credit—not that the loan is fully forgivable.
Loan Forgiveness Under New PPP Flexibility Law
The Paycheck Protection Program Flexibility Act (PPPFA) was signed into law by President Trump last week, correcting several perceived flaws in the original PPP program, especially when it comes to loan forgiveness.
Among the changes:
- Just 60% of the loan must be spent on payroll, compared to the 75% originally required.
- Small businesses now have 24 weeks to spend funds compared to the original 8 weeks.
- Deadline to rehire workers moved to December 31, 2020, from June 30, 2020.
- Small businesses don’t have to rehire everyone. A smaller headcount is okay if someone quits, is fired for cause, asks for fewer hours, or the business can’t return to the same level of activity.
- Extends the repayment period to 5 years from 2.
- Forgiveness for deferring payroll taxes.
The adjusted rules apply to all PPP borrowers, not just those who closed on loans after the PPPFA was passed.
Bottom Line: Make sure you FI has updated its PPP policies and procedures to address if and how it will help borrowers complete loan forgiveness applications. If you tell one borrower they can have longer to spend the funds or help them understand how to maximize the amount of their loan forgiveness, you need to provide that help to everyone or risk running afoul of Fair Lending.
Applying for a PPP loan is just one step in the process. Applying for forgiveness is a whole other application, one that gives small business owners a substantial grant.