Clearing the PPP Forgiveness Hurdle

hurdler clears hurdle in the sun
Contributing Writer
member of Bellco Credit Union

3 minutes

Getting back out of the Payroll Protection Program is an important effort that hopefully won’t be a long-term one.

Loans under the federal Payroll Protection Program comes with two big challenges for participating financial institutions: how to get into the program and how to get out of it. 

Getting in was rough but it’s over. Now getting out of this time-limited program is a big issue right now. 

Credit union participation in the program, administered by the U.S. Small Business Administration, was limited but still significant. About 18% of CUs, 930 all told, participated, reports Jim Devine, chairman and CEO of Hipereon LLC, Redmond, Washington, and a faculty member for CUES School of Business Lending, CUs made about 200,000 loans under the program (3.9% of the total), worth $9.7 billion (.19% of the total), citing numbers from SBA and CU industry publications.

So how do CUs sort out which loans qualify for forgiveness and deal with the ones that don’t in ways that comply with a program that was rushed to market?

“We think it is more of a responsibility shift versus strictly a compliance issue,” explains Larry Middleman, president/CEO of CU Business Group, Portland, Oregon. “The lender has increased responsibility to verify the accuracy and completeness of the borrower’s forgiveness application, and then give assurances to SBA that the forgiveness has been properly accounted for. But there are so many different variables that go into forgiveness qualifications that it will not be easy for the lender to sort all that out.

“The borrower is ultimately responsible for the forgiveness materials,” he continues. “The lender needs to make its best effort to ensure proper records to support the forgiveness application, but it is still unclear from SBA guidance whether the lender will be held responsible for non-compliance. The borrower will clearly be held responsible for any fraud or misstatements in applying for forgiveness.”

“PPP compliance resulting from the CARES Act … ,” says Dennis Dollar, partner in Dollar Associates LLC, Birmingham, Alabama, and former chairman of the National Credit Union Administration, “that has been and will be a heavy workload in man-hours for those credit unions that participated. However, other than monitoring the performance of those loans not forgiven, this compliance concern will be somewhat short-lived as the bulk of the loans will be forgiven as the forgiveness period plays out over the months to come.

“Other than having to participate with some of their business clients who had bigger PPP loans and may face an SBA audit,” Dollar notes, “it is unlikely that PPP will be a long-term concern. There will be compliance issues much bigger than PPP in COVID-era compliance if more consumer regulation comes forth.”

Good news might or might not be coming. “The push from Washington,” Devine reports, “appears to be advocating blanket forgiveness of all PPP loans under $150,000 and to require pretty stringent audit processes for granting forgiveness for all the loans that exceed $1 million.” Most CU PPP loans would qualify for blanket forgiveness if that becomes the policy, he explains.

Those that don’t could be a big headache. “Loans that end up not being eligible for forgiveness will roll over into conventional loans,” Devine explains. “Since none of these loans were based on adequate cash flow to service the debt, the underwriting process was flawed. With rollover rates of just 1% (right around many CUs’ cost of funds), these loans don’t make fiscal sense.” 

Richard H. Gamble writes from Grand Junction, Colorado.

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