Small business owners grumble that banks front-ended COVID-19 loans to larger companies, preferred customers

April 27 - May 3, 2020

SBA’s Paycheck Protection Program paid out $2.72 billion to nearly 22,000 small businesses in Arkansas

Even as local communities in Arkansas and across the U.S. prepare for another round of funding for small businesses impacted by COVID-19, sole proprietors and other “gig economy” firms with limited access to capital are still angry that banks and SBA-approved lenders halted their applications due to confusion over the first $2.2 trillion stimulus act signed into law on March 27.

At the same time, some small business advocates allege that some banks may have front-ended loans to larger companies and publicly traded concerns that exploited a loophole in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to get access to federal dollars through the much talked about Paycheck Protection Program (PPP).

That initial $349 billion emergency loan program created under the CARES Act and administered and approved by the U.S. Small Business Administrative provided forgivable loans up to $10 million to small businesses left financially distressed by the coronavirus COVID-19 pandemic. Those loans, however, quickly ran out of funds in only two weeks after by a national network for more than 100 banks and credit unions began accepting applications on April 3.

In Arkansas, more than 100 Arkansas banks and lenders processed 21,754 PPP loans totaling more than $2.72 billion, according to the SBA’s District Office in Little Rock. Under CARES Acts rules, the loans were provided to small businesses without collateral requirements, personal guarantees, SBA fees, or credit elsewhere tests. Supposedly, those eligible for the program include small businesses, certain non-profits, veterans’ organizations, self-employed individuals, independent contractors, and other businesses with fewer than 500 employees.

On April 17, exactly two weeks after the program’s highly anticipated launch, SBA Administrator Jovita Carranza and U.S. Treasury Secretary Steven Mnuchin hailed the PPP as a national success despite technical delays and snafus that created application backlogs at SBA district offices nationwide, including Arkansas. 

“The Treasury Department and SBA launched the unprecedented Paycheck Protection Program in just one week. Following its launch, the SBA processed more than 14 years’ worth of loans in less than 14 days, which will protect a vast number of American jobs,” Carranza and Mnuchin said in a statement, adding that payroll assistance has been provided to more than 1.6 million small businesses in all 50 states and territories. “The PPP enjoyed broad-based participation across the country from lenders of all sizes and a wide array of industries and businesses.”

SBA officials also highlighted that nearly 20% of the amount approved was processed by lenders with less than $1 billion in assets, and approximately 60% of the loans were approved by banks with $10 billion of assets or less. No lender accounted for more than 5% of the total dollar amount of the program.

PPP Protests

Despite processing those thousands of PPP applications in Arkansas, several small business trade groups and advocates protested that many SBA-approved banks and financial institutions processed the biggest loan amounts first because they increased origination fees.

Some small business advocates in Arkansas say possibly thousands of applications by firms sole proprietors, independent contractors, nonprofits and other self-employed “1099” entities were held up by SBA lenders due to confusion over a late guidance by SBA and Treasury officials on April 14. That notice provided specific instructions on calculating the maximum loan amount for self-employed individuals with income of less than $100,000. 

By that time, however, SBA officials had explicitly stated that nearly all the $350 billion in PPP funds were gone. Locally, SBA officials sent out a notice to Arkansas banks, lending partners, clients, local and state policymakers, and others on April 17 that PPP funds had completely dried up.

“The high demand we have seen underscores the need for hardworking Americans to have access to relief as soon as possible. We want every eligible small business to participate and get the resources they need. SBA is communicating with Congress to request additional appropriations,” said email communications from SBA’s Little Rock Office, headed by State Director Edward Haddock. “Unfortunately, the SBA cannot issue new loan approvals or accept new applications given this lapse in appropriations per US law.”

Besides halting PPP loans, SBA’s Arkansas office also paused the agency’s expanded Economic Injury Disaster Loans (EIDL) program that included a much-talked about feature that allowed program participants to receive a $10,000 advance for COVID-19 relief that did not have to be repaid.

The EIDL program also allowed loans for up to $2 million for more established small business firms with first payment is deferred for 12 months. However, that program had also exhausted all its available CARES Act funding, prompting SBA to acknowledge that applications for that program had been tabled too.

“The application portal for the EIDL–COVID-19 assistance program is temporarily closed,” SBA Arkansas officials said on April 17. “Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.”

Haddock told the Daily Record on April 21 that because of the unprecedented deluge of applications, Arkansas banks were faced with receiving and processing thousands of submissions in the days after the launch nearly three weeks ago.

On top of the PPP applications, Haddock said the SBA agency approved 26,919 EIDL loans nationwide totaling nearly $5.6 billion in proceeds. In Arkansas, SBA provided nearly $96.9 million to 460 small businesses under the CARES Act provisions.

“Just the sheer number of applications, there has never been anything like this,” said Haddock, adding that PPP and EIDL applications in the agency’s pipeline can be restarted if Congress approves a new round of CARES Act funding.

Still, National Federation of Independent Business (NFIB) officials said 90% of its members surveyed in all 50 states last week said they were unable to secure funding in the first round of PPP funding. They also indicated they had not yet received any explanation from the SBA or their local banks.

In its 10-point legislative blueprint asking Congress to extend as second round of funding under the CARES Act funding, the NFIB said lawmakers should force banks and SBA-approved lenders to end the practice of “big-customers-first and favored-customers-first,” noting that the illegal policy leaves the smallest businesses with the greatest need at the back of the loan line.

“Small business is the heart and soul of Arkansas’s economy,” said Sylvester Smith, state director of NFIB’s Arkansas chapter. “Unless Congress relieves the financial pressure the COVID-19 response has put on small businesses, many of the local establishments that had to close temporarily may never reopen.”

The nation’s largest small business trade group, which has chapters in all 50 states, also said Congress should amend section the Small Business Act to prohibit discrimination among applicants in the order or speed of processing or granting of loans. That process is based in whole or in part on the number of employees of the applicant business, dollar value of the business, or length of relationship of the business with the financial institution, the group said.

“Small businesses, which account for half of the American economy and nearly half of all jobs, are fighting for their survival every day that this crisis continues. Efforts by the (Trump) Administration and Congress, while well-intentioned, have been met with significant challenges to this point,” said NFIB President Brad Close.

POSSIBLE LAWSUITS AHEAD

Meanwhile, a recently filed class action lawsuit in California claims that the nation’s four largest lenders involved in the PPP program, JPMorgan, Bank of America, Wells Fargo and USBank, rigged the loan process to benefit their bottom line to the tune of nearly $6 billion in commission and fees.

According to the federal complaints, instead of a “first-come, first-served” application process after the PPP program was launched on April 3, many banks processed the biggest loan amounts first because of profitable origination fees. That method left more than 90% of the small businesses still in the SBA’s queue once funds were depleted, according to federal class action complaint.

The lawsuit, filed by Los Angeles-based Stalwart Law Group, also alleges that Bank of America and other banks concealed from the public that they were reshuffling the PPP applications that gave preference for deceptive lending prioritization practices, giving preference to larger “small businesses” over true small businesses. The lawsuits further allege that as a result of their deceptive lending practices, many banks handed out hundreds of millions of dollars low-interest, taxpayer-backed loans to publicly traded companies with more than 500 employees. 

Under the CARES Act rules outlining the PPP program, Congress encourage companies with fewer than 500 employees to apply for relief to keep workers on payroll. The law also gives the U.S. Treasury Secretary a $454 billion credit line to provide financing for banks and other lenders that make direct loans to mid-sized businesses with more than 500 employees. That program has not been implemented yet.

Bank of America, which has branch offices in Central, Northwest and Northeast Arkansas, did not immediately respond to a request for comment concerning complaints about its PPP initiative. In the Bank of America’s first quarter earnings report on April 15, the Charlotte, N.C.-based banking giant posted quarterly profits of $4 billion and said it received 279,000 PPP loan applications totaling $43 billion in the first week of the program. 

On Thursday, U.S. House of Representatives overwhelmingly approved the $500 billion CARES Act stimulus to replenish the SBA programs with an additional $335 million for the PPP and EIDL programs. The legislation, which was approved by the Senate on April 21, will also provide COVID-19 funding for hospitals and more virus testing as the Trump administration looks to reopen parts of the nation’s economy again within weeks.