Challenges face CARES Act's Paycheck Protection Program

The Coronavirus Aid, Relief and Economic Security Act was signed last week. Photo credit: Pixabay/12019 (skyline)

The Paycheck Protection Program, part of the Coronavirus Aid, Relief and Economic Security Act, was signed into law on Friday, offering support for businesses with fewer than 500 employees that were in business on or before Feb. 15.

The funds, AAHOA President/CEO Cecil Staton said, will provide some liquidity for hoteliers for a period of time—“maybe as much as 10 weeks, depending upon how the loan proceeds are deployed.” Within a week, he predicted, small-business people across America would be able to go to their bankers—“people that, hopefully, they already have a relationship with”—and begin the process of getting these loans in place. If used appropriately, he added, the loans will be forgiven and will become grants.  

The Terms

As reported previously, business owners can request 2.5 times their monthly payroll costs, up to $10 million. While the interest rate on PPP loans officially is 4 percent, the guidance issued by the U.S. Treasury declared the maximum rate would be half a percent. 

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According to the guidance, the loans are set to mature in two years, and payments are deferred for the first six months. Borrowers will not need to put up any collateral in order to secure a loan.

The Concerns

But while the funds may be available as soon as today, plenty of questions remain about how the loans will be supported.

Chris Hurn, CEO/founder of Fountainhead (one of 14 “nonbanks” in the nation that is licensed to lend COVID-19 Small Business Administration recovery loans), has been “working very closely” with the Senate Small Business Committee as well as others at the SBA and the Treasury over the past two weeks to determine what applicants and lenders will need to know before money changes hands.

“My biggest concern we have right now, that has gotten very little attention—and I've been banging the table about it for a week with the folks at Treasury and others—is we don't have a mechanism with which to recycle the [guarantee papers] on these funds,” Hurn said, referring to the person that is responsibly financial for the loan. “What I mean by that is, a lender is being asked to do their part to help stabilize the American economy and make these paycheck protection loans to business owners who will presumably keep their staff [or] bring back some of their staff. And yet these loans are very, very difficult loans to keep on the balance sheet for a lender.” 

The loans themselves, he explained, have no underwriting in place. “You've got no personal guarantees, no collateral. And most of these loans will be forgiven between months four and months nine or 12. So there's very little here.” While the Treasury is signaling that the department will purchase the loans along with the SBA, he added, “we don't have that mechanism in place.” 

Hurn also is waiting for instructions on what lenders will need from the SBA to close the loans. “If we were to remotely get close to the administration and Congress's wish to make these loans [available] in the same day [they are requested], then we have to get that clarity as soon as possible.”

Without the necessary information and without a clear structure in place to underwrite the loans, the program is still a puzzle waiting to be solved. “If you want this money to flow like you say you do, small lenders, community banks, regional lenders, nonbank lenders like myself, even the biggest banks—they're not going to have the capacity to make these loans and keep it on their balance sheet for any period of time,” Hurn said. “Maybe they can hold it on balance sheet through the forgiveness period, but they're not gonna have much capacity to do that.” With the interest rate at 0.5 percent, he added, it's impossible for anybody but the federal government to be buying the paper at this point. “And if they don't get this fixed, they can launch this program all they want tomorrow and ... it won't matter at all, because this will be dead on arrival. It'll be a spectacular failure to launch it.”