The White House and congressional leaders reached a $484 billion deal to help small businesses, hospitals and coronavirus testing.
The nation’s very small businesses, which say they largely have been shut out of a federal program aimed at keeping them afloat during the coronavirus pandemic, are hoping for a fairer shake in a second round of rescue money.
The White House and congressional leaders reportedly reached a deal Tuesday to increase funding for the Paycheck Protection Program (PPP) by about $300 billion. The program depleted its initial allotment of $349 billion just two weeks after it began taking applications for the loans — fully guaranteed by the Small Business Administration — on April 3.
Yet banks are generally incentivized to favor larger small businesses over smaller ones, experts say, and the legislation that created the PPP program may be helpless to stop it.
The program provides small business loans of up to $10 million to keep workers on staff and pay other operating costs. As long as 75% of the money is for payroll and the businesses retain employees — or rehire those laid off — the amount of the loan covering eight weeks of expenses is forgivable.
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In class-action lawsuits filed early this week, small businesses claim that banks such as Wells Fargo, J.P. Morgan Chase and Bank of America gave priority to the larger loans sought by bigger small businesses with up to 500 employees because they generated heftier loan origination fees totaling $6 billion. Yet the rules set forth by the $2.2 trillion CARES Act require the loans to be processed on a first-come, first-served basis, according to the suits, filed in U.S. District Court in California’s central district and first reported by USA TODAY.
Bigger loans front-loaded?
In the final three days of the program, the number of approvals for loans under $150,000 surged by 70%, twice the rate of the largest loans of $5 million and higher, according to the suits. That shows that banks “front-loaded” large loan requests early on, the suits say. Otherwise, the mix of small and large loan applications would have been evenly distributed during the two-week period.
Firms with fewer than 20 workers make up about 90% of all small businesses, according to the Small Business and Entrepreneurship Council. Just 8% of small businesses that have applied for government aid under the CARES Act have received money and another 14% were approved but aren’t sure when they’ll get funding, according to a survey conducted April 17-20 by Alignable, a small business network.
The smallest businesses “are the most desperate,” says Dylan Ruga, an attorney at Stalwart Law Group in Los Angeles, which filed the class-action suits. Such firms typically have fewer cash reserves and so are more likely to lay off workers and close down sooner amid a pandemic that has shut down much of the U.S. economy to minimize contagion.
Where’s first-come, first-serve
While the law requires the SBA to process the loan applications on a first-come, first-served basis, there’s no explicit requirement that lenders follow that principle, according to interviews with congressional, small business and banking officials. That means a lender could serve a bigger business ahead of a smaller one who filed earlier without repercussions.
Critics charge that the loophole is giving banks far too much flexibility in deciding which order the SBA sees – and processes – those requests.
Holly Wade, director of research for the National Federation of Independent Businesses, said she continues to hear from members who say they filed for a PPP loan on the first day the program opened and were shut out when the money ran out earlier this month.
“It’s kind of a black box of what happens on the bank end,” she said. “It seems like a lot of big companies figured out a way.”
Meanwhile, banks disagree that they’ve done anything wrong. Bank of America spokesman William Halldin said the company denies the allegations in the lawsuit.
Wells Fargo spokesman Manuel Venegas declined comment, but added, “Wells Fargo is working as quickly as possible to assist small business customers with the Paycheck Protection Program in compliance with the regulations and guidance provided by the U.S. Treasury and the SBA.”
Wells Fargo also has said the fees generated by the program will be distributed as charitable grants to nonprofits that support small businesses.
JPMorgan Chase wouldn’t comment. But the company refuted the charges on its website late Sunday.
“We funded more than twice as many loans for smaller businesses than the rest of the firm’s clients combined,” the company said. It acknowledged, however, that applications by smaller and larger businesses are handled by separate divisions. Applications for smaller businesses are handled “generally sequentially, understanding that a given loan may take more or less time to process.”
The firm added that because the number of applications to the division handling the larger loans “was much smaller,” it “did complete work on most of the applications it received” while the unit processing the smaller loans didn’t finish its work before the funding ran out.
In an online message updated Monday, Jennifer Roberts, CEO of Chase Business Banking, which handles the small business loans said, “Sometimes the need to verify or request additional information required more time to complete an application.”
Dan Nansel, owner of Kirkland, Washington-based Basic Beginnings, says he applied for a PPP loan early this month but was told by a Chase representative in an email that more information was required.
Yet he says that when he asked for the type of information needed, he didn’t get an answer. Then, after the PPP program ran out of money, he was told his application was approved by Chase and simply needed to be cleared by the SBA.
“That’s a little odd to me,” says Nansel, whose company serves children with special needs in local schools. “It’s not right what they’re doing.”
Nansel says he has enough cash to last until mid-May. But if he doesn’t receive funding by then, “I’ll have to lay off probably 27 staffers,” out of a total of 30.
Chase didn’t respond to an email seeking comment.
Wells’ revenue goes to non-profits
Although Wells says it’s channeling revenue from PPP bank fees to non-profits, the other big banks haven’t made that commitment. And experts say banks have other reasons to prioritize larger loan requests by bigger banks.
“They are the businesses that have the banking relationships,” says Amanda Ballantyne, national director of the Main Street Alliance, a small business advocacy group.
Dick Bove, a banking analyst with Odeon Capital Group, says banks prefer to serve larger businesses first because they’re more likely to buy other services. “Banks don’t really want to be in the business of making loans alone with no other business relationships,” Bove says. “They want deposits, payment systems.”
“Banks may have wanted to keep their best customers in business,” adds Gregg Ott, CEO of Nav, which connects small-business borrowers with lenders.
Bigger businesses ‘could save more jobs’
Ami Kassar, CEO of MultiFunding, a small business loan adviser, says banks should be able to decide which businesses they want to fund first. Financing a bigger business “could save more jobs,” he says.
That provides no solace to Michael Dolatowski, founding partner at Deft Union in Miami, who has been waiting for an answer for weeks since he filed for a PPP loan through his bank, JP Morgan Chase, several weeks ago.
The owner of the small design studio that remodels spaces such as restaurants and bars has laid off his eight full-time workers.
He’s upset at what he views as a favoritism that has banks taking care of of larger customers, such as Shake Shack, but not small ones like his.
“It’s just pretty frustrating to feel that we didn’t make the cut,” Dolatowski says. (money) certainly shouldn’t be going to Shake Shack. I bought Shake Shack during the pandemic. They’re still open.”
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