Episode 3: A lender’s guide to forgiveness
During the podcast, Neal discusses the technology used for facilitating PPP loans and the forgiveness process.
Visit the TSoftPlus PPP Forgiveness Module page for more information.
More insights from Neal Doherty:
Article: A lender’s guide to PPP loan forgiveness timeline
Article: Lender compliance implications of the 60-day PPP loan forgiveness application deadline
Article: Conducting pandemic risk assessments: What banks need to know
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Greg Corombos, News Director at Radio America 00:05
Hi, I’m Greg Corombos. Thank you for joining us for this special podcast series. In this edition, we’ll be taking the mystery out of loan forgiveness in the Paycheck Protection Program, commonly known as PPP. There is a lot of information that lenders need to know. We want to clear up any confusion as quickly as possible. Here to lead today’s discussion on the mechanics of loan forgiveness is Wolters Kluwer® Vice President of Banking Compliance Solutions, Samir Agarwal. He is joined today by Neal Doherty, a Senior Regulatory Consultant for Wolters Kluwer’s U.S. Advisory Services, to provide expert insights on preparing borrowers and managing expectations post-forgiveness.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 00:48
Thanks, Greg. I’m glad to be back. This time, we’re going to talk about the Small Business Administration’s Paycheck Protection Program loan forgiveness. Many lenders out there are thinking about what to do for loan forgiveness, but their real focus has been on their balance sheets. Companies are coming in asking for forbearance, and that’s causing a lot of stress over the balance sheet. Last time we went through the 1502 SBA filing, and now we know that many lenders are starting to get remittance on their fees due to them. So, what does it mean to forgive a loan as a lender? They’re not really in the business of forgiving loans, usually they are in the business of making loans. In this case, with a large number of loans out there to be forgiven, we need to change the tactics that a lender uses in order to forgive some of these loans. It’s almost like it’s a new business for many of these lenders. Today, I invited a colleague of mine, Neal Doherty, a consultant in our Advisory Services group. He has been helping lenders navigate and deal with the challenges of the PPP forgiveness program, and we’re going to talk about that forgiveness process. We know that the SBA notified many of the vendors that do business for banks how they’re planning to accept the forgiveness package. They haven’t accepted any to date. We know that there will be a website that’s available for folks to use, and we know that there will also be an application programming interface for individuals to use. Whether you’re a lender that goes directly to the SBA site to file your paperwork, or you’re using a vendor in the middle to aggregate and file the paperwork, there are two avenues to filing the forgiveness applications, get statuses, and upload documents or any supporting material. So, Neal, thank you for joining us today. A little while ago, I listened to a webinar series that you were hosting and talking about the SBA CARES Act program. I believe there was a question that was centered around our audience on “How prepared is your institution to handle PPP loan forgiveness requests?” Can you tell me a little bit more about that?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 02:49
Thanks for inviting me, Samir. I appreciate the opportunity. It’s a pleasure to speak with everyone. Yes, you’re right. On June 18, we hosted a webinar called, “Keeping a Focus on Compliance in the Face of COVID-19.” We asked our audience the same poll question, “How prepared is your institution to handle PPP loan forgiveness?” and the results, for the most part, were not that surprising, especially given the seemingly ever-changing nature of the PPP program. We have 234 respondents and had 83 percent indicate that they were either somewhat prepared or not prepared at all. So, those numbers were very much in line with what we had thought when we asked the question. On the flip side, and this was kind of the surprising part given the uncertainties around the program, we had almost 14 percent of the respondents answered that they were completely prepared for forgiveness. And again, just given the moving pieces that are still up in the air and the uncertainties, we thought that was very surprising.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 03:54
So, most banks are really not prepared to apply or to process the forgiveness that’s associated with the PPP loans?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 04:02
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 04:03
That makes me pause and think, what do our lenders need to know that are listening in. I want to talk quickly about the mechanics that are involved with the workflow that is being prescribed on how to submit for forgiveness. Can you help us understand, at a high level what that looks like?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 04:19
Borrowers need to submit a completed loan forgiveness application to their lenders. In turn, the lenders review the applications, and they make a determination about how much of the loan should be forgiven. Loans can be forgiven either entirely or in part. The lender will then inform the borrower of that decision, and submit the application to the SBA, who then reviews the application and will either approve, deny, or request additional information. If the loan forgiveness application is approved, the SBA will remit the funds to the lender within 90 days. But like I said up front, the process is more complicated than that makes it appear.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 05:03
It’s absolutely going to always be through the lender. That’s the most important part is if you’re a small business, and you’re working with a lender, and you’re going to have your forgiveness application done, it has to be done through a lender. Let’s look at the application process. How does one start the process? Is it a small business that has to start it? Can it be their CPA or is it the lender that starts that process?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 05:29
The lender can conduct some outreach to the borrower, and let the business know that loan forgiveness is out there, and if they took out a PPP loan, they may be eligible. But it’s the borrowers that initiate, and they do that by submitting a completed loan forgiveness application. This application is on one of two forms that the SBA has published. It is form 3508, which is the long form, and 3508EZ, which is kind of like your 1040EZ, in the tax world. Similar to tax forms, the 3508EZ form is limited to certain borrower types, for example, a sole proprietor, and then other borrowers that meet certain criteria, including, for example, not having reduced any employees or made any reductions in payroll greater than 25 percent.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 06:19
How complex are these forms? There’s a short and a long, but they must have some of the same elements that are required by the borrower.
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 06:26
Forms 3508 and 3508EZ have a calculation form, which basically is the final number of forgiveness. So, it’s the forgiveness now. It’s the inputs that went into determining that amount. Both have borrower demographic information. Submission of the borrower demographic information, right now, is optional, and then the 3508 form, the long-form includes other elements. It’s a PPP Schedule A, Schedule A worksheet, and both of those help the borrower figure out exactly what the forgiveness amount will be. That’s by looking at payroll costs, looking at the number of full-time equivalent employees they had before the pandemic and during what’s called the covered period, which is a period of time during the pandemic. So, there’s a comparison that’s made. They ultimately get to a number that will be the percentage of loan that is forgiven. It’s important to note that both forms have borrower certifications, where the borrower is attesting to the fact that this information is accurate, and that they have not obtained the loan under any fraudulent circumstances.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 07:37
In your best estimate, how long do you think it takes to fill the application out?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 07:42
With the “EZ” form, it should be very straightforward. The other form is going to be very difficult for a lot of borrowers to fill out. This is, again, a very similar situation with the tax analogy. Many, many borrowers are going to need accountants and lawyers and professionals to help them fill out Form 3508. So, they really need to leverage some sort of solution to make this process easier.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 08:06
What about the lender side of it? Do they also have to put an application in or are they screening what’s on the borrower’s application and submitting on behalf of?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 08:16
They’re screening, but there are certain steps that lenders must take with every application, regardless of whether it’s the 3508 or 3508EZ. For any application, lenders must confirm receipt of the borrower certifications. Again, there’s a series of certifications that the borrower must make to indicate that they are not receiving the loan under fraudulent circumstances, and that they spent the money on what they said they spent the money on, and their calculations were done in good faith, etc. The lenders need to confirm receipt of documentation to support payroll and non-payroll costs. For payroll, they need a report from a third-party vendor, for example, mortgage or personal property, interest statements, utility bills, things like that. The lenders must review the documents that are submitted and confirm the calculations on the loan forgiveness application. That’s really the challenging part because lenders need to not just do a cursory review of the documentation that’s submitted, they actually have to redo the applications and make sure they make sense and are aligned with what the documents reflect that were submitted by the borrower. Then they have to validate that the final forgiveness is accurate.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 09:31
Is there a time limit on when lenders must engage for the forgiveness application?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 09:37
There is a time limit lenders must engage. Lenders do their review, and then they issue a decision to the borrower, which has to be in writing. Then, they also submit the application to SBA for review, and that submission to SBA needs to take place not later than 60 days after the receipt of a completed loan forgiveness application. The term “completed” is not defined in either the CARES Act or any of the other laws that have been passed or any of the regulations. So, that’s something lenders need to take into consideration. What constitutes a “complete” application. What we’ve been guiding lenders to do is consider that when they’ve gone through all the steps: they’ve reviewed the input documents; they’ve reviewed the calculations; they feel that they’ve reached a decision that is accurate, that’s when they should deem it a complete application and submit it to the SBA.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 10:34
What do they do if they find an error?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 10:37
The regulations are clear. The lender needs to work with the borrower to remedy either calculation errors or a lack of documentation. If a lender finds that the calculations are wrong or they’re missing a key piece of information, they have to go back to the borrower and obtain that information and have the borrower redo the calculation.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 10:58
What does the lender owe the borrower once the application is submitted and the review is complete?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 11:03
The lender needs to inform the borrower in writing of the decision. The decision can be an approval, “Your entire loan has been forgiven,” or whatever you thought you were going to get has been forgiven. It could be a “different amount of forgiveness,” or it could be a “denial of forgiveness.” But both of those scenarios need to be done in writing. Then, there’s a third scenario depending on whether the SBA wants to do an independent review of the loan file. In that circumstance, the lender also needs to notify the borrower that they received an outreach from the SBA indicating that the SBA is looking closer at the loan.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 11:41
Give me the different scenarios under which a lender can deny an application?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 11:45
The lender can deny an application, or part of an application. If the forgiveness amount that’s being requested is less than the borrower thought, or they can deny the application in whole so the loan simply will not be forgiven. In either situation, if there are gaps, they have to work with the borrower to close those gaps, to fix the errors, and any calculations, and to obtain all the required documents. At that point, the lender will notify the borrower in writing with respect to the decision.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 12:18
So, we’ve got the application in. Now, let’s talk about the happy path. The lender has also completed their review. Let’s say we’re set from the lender, and they’re going to submit it to the SBA with the criteria that’s undefined, but they’re going to submit it to the SBA. What happens then? Is the SBA set up for taking that information in, or how have they disclosed that they’ll be processing or looking at forgiveness applications?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 12:46
There’s guidance forthcoming about the actual mechanism for submitting the applications. With respect to the actual review of the applications, SBA has given some guidance in this area. Basically, the guidance is that borrowers can expect that if they had a loan greater than $2 million, SBA is going to conduct a review of it, period. For borrowers that had a loan of less than $2 million dollars, we think that it’ll be more of a spot check. There’ll be some automated calculation that runs where they’re going to look at the inputs on the application and the forgiveness amount and make sure that they align. But we feel a full audit will be limited to loans that are greater than $2 million. The SBA in their public guidance has indicated that that’s the case and it’s due to the fact that they have resource limitations on what they can audit. They simply cannot look at all the loans that have been made.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 13:49
So, let’s say the lender approves the application, it goes to the SBA, the SBA denies it upon an audit. What options exist for the borrower and for the lender to reconsider or do another review of the application?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 14:04
The borrower can appeal the SBA’s decision and they’ll do that through the lender, if they receive notice, for example, and this would be before the loan is actually denied. But the SBA can reach out to the lender and request documentation with respect to a secondary review, and the lender needs to respond to the SBA by, and it’s a tight timeframe to respond, it’s within five business days of receiving any notice. The lender needs to electronically transmit several forms and documents that the borrower provided to the lender in making the determination about forgiveness. The lender needs to submit those documents to SBA. They need to submit a signed and certified transcript of the account and executed note. There’s additional documentation hurdles that the lender will have to jump through in working with the SBA to facilitate the secondary loan review.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 15:00
How does the SBA notify the lender when they’re doing an audit?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 15:05
They reach out to the lender. They will send the notice directly to the lender that the borrower’s loan application is under review. At that point, the lender needs to notify the borrower, and that starts the cycle where the lenders is submitting this additional information to the SBA. The SBA also may reach out directly to the borrower and ask the borrower for additional documentation, which could create a scenario where the lender thinks everything is fine, but the borrower is getting contacted directly to submit additional information.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 15:39
What happens if the SBA determines that a borrower was not eligible for the loan?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 15:45
They will reach out to the lender, and they’ll direct the lender to deny the loan forgiveness application, presumably in whole. But there may be scenarios where partial forgiveness would be granted. But SBA is also going to seek repayment of the outstanding loan balance, and they’ve indicated they will “pursue other available remedies.” That really signals that if there was fraud in the initial application, then there may be a bigger response from SBA than simply repaying the loan.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 16:18
Let’s talk a little bit about remittance. What are the current plans for the SBA remittance here?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 16:24
After they do the review, SBA will remit the forgiveness proceeds to the lender, plus any accrued interest not later than 90 days after the lender issues its decision to SBA. The lender sends in the completed loan application to the SBA 90 days later, and the SBA needs to remit the funds to the lender. The loan will go off the lender’s books, although we’re not exactly sure how this process will work. We’re awaiting further guidance here.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 16:56
If today is July 2020, what is the first time we would really see lenders receiving SBA remittance? Are we talking Q4?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 17:06
Yes, the end of September or early October. That’s right. It could happen faster than that, certainly, especially if there are easy cases with maybe a form “EZ” and a small business that clearly has a loan that would be forgiven, but it could be delayed until that time.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 17:26
How long does the review period take? I’m assuming most banks are going to want to get done as fast as possible. Do we know how the SBA is going to handle it? Is it first in, first out? Or have they published any other guidance on how long the review period could take?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 17:42
They have published guidance, and they’ve indicated that they’re going to take advantage of this 90-day window. The guidance they’ve published indicates that they’re going to look at compliance obligations by borrowers and lenders during this 90-day review period. The SBA is concerned that due to the speed in which the program was launched, and the fact that a lot of lenders with very little SBA lending experience are involved, they want to make sure that the loans were originated properly, they were required due to the impact of the pandemic, and that all the compliance obligations from both the borrowers and the lenders have been met.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 18:24
Are there any risks of fee clawback for lenders if a negative outcome was found from a review?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 18:32
There are. One of their interim final rules, originally published on May 22, indicated that lenders are at risk of clawback of lender fees, and even the potential loss of the loan guarantee. Currently, those cases are limited to where the borrower was not eligible for the loan in the first place, or where the lender failed to comply with origination or record-keeping requirements.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 18:59
It sounds like there’s a lot of diligence required both from borrower and lender to ensure that a forgiveness for a loan is successful. What I want to understand better is, aside from just the forms and applications that we have to provide, what documents might be good pieces of substantiation for loan forgiveness?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 19:22
Apart from the applications, there are a number of other key documents that the borrower needs to submit to the lender so the lender can review the application and determine the forgiveness amount. The key documents are the eligible payroll expenses. Documents showing the compensation paid to employees, and again, if you’re providing payroll data from a recognized third-party provider, that can be relied on by the lender more than if you’re doing back of the envelope calculations. Eligible mortgage interest and rent and lease payments, meaning proof of payment of mortgage interest, and it can be interest on personal property. For example, if you lease an automobile for your work, you can claim the interest as part of the forgiveness amount, not the principal, just to forgive the interest. Specified utility payments that were in place before February 15, 2020, and then information about full-time employees. If you had an employee that was let go, and you tried to rehire that employee, but the employee didn’t want to come back to work due to the pandemic, you need to keep records of that type of information to show that you made a good faith effort to try to get the employee back. But that employee did not want to come back to work because of the pandemic. If you could show that you’re not going to be penalized for having a reduction in employees.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 20:52
If we go through all of that, we still either get success or we get asked for more information. It’s really just a letter back that we are getting from our lender if we are a small business. For the lender, it’s really status or notice from the SBA on the disposition of the application. Is that right?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 21:10
Yes, that’s right.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 21:11
Then 90 days later, we would expect remittance to come flowing through. Do you think some lenders will remit to the end borrowers before receiving the SBA approval and remittance?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 21:25
I don’t think that is prudent. This is a very new process, and we don’t fully know what the SBA is going to do. Certainly, for lower amounts, there’s less risk. If it’s above $2 million, those loans will be audited. So, you certainly wouldn’t want to do that. But I think the best practice would be to wait until you see from the SBA that your file has been approved, and you are going to receive the money that you think you’re going to receive before you pass on that information to the borrower.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 21:57
Neal, let’s talk about the actual operation in a bank because the mindset of our individuals has always been to make loans. Now, we’re going to be in the business of how to forgive loans. I think that affects the psyche of a loan officer or processor, including upward to the management at an institution. It could dynamically change the way that we think about how we treat our customers. Is there any guidance or feedback that you can tell us around what we have to do to make sure our employees are prepared for the forgiveness applications or requests?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 22:35
That’s a great point, Samir. It is a very different mindset that lenders are undergoing here. First and foremost, they should be looking at employee training. Lenders need to develop end-to-end training plans to assist employees in tackling this forgiveness challenge. First off, the process by which applications will be received, intake, and tracked to make sure that there aren’t any gaps there. In the background, the 60-day clock is running. You need to be cognizant of that, and your employees have to understand that there is a time limitation on processing these applications. Employees need to understand what the lender review process entails, the timeline, and how to finalize the forgiveness decision. Lenders should train their employees on borrower communications, regarding incomplete applications and the ability to follow up with borrowers to obtain additional documentation or to discuss errors and calculations, like we talked about earlier. Very, very important is going to be training employees around how to communicate denied applications because a lot of borrowers went into this program thinking that all the loans would be forgiven, and they were not really going to have to do much to get forgiven. this will come as a shock to many borrowers when they have outstanding balances.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 23:59
It’s supposed to be very easy, right? Take advantage of a government program to help us survive during shallow times. It’s very tough, in my mind of having been a banker, how we approach our customers. What does that mean to our organization? While we’re still talking about the lender’s organization, do you think that it’ll be easy or hard for loan origination teams to become loan forgiveness teams because the same person does that job?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 24:28
Many, many lenders are not going to be able to staff up with additional employees to take on this challenge. The key to having your existing employees, who are transitioning from originating loans to forgiving loans, is training, including understanding the program, understanding what the borrowers are going through, what the expectations were, how the forgiveness program was communicated, and the whole PPP program. That goes to training and communication and making sure that everyone is aligned and consistent.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 25:01
When is the first time that somebody can actually apply and submit the forgiveness application?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 25:07
They can technically apply and submit right now. That would be on a paper form. They can go to their lender, and they can sit down with their banker and submit it. Obviously, that would be with a lender that is probably low volume. But they could submit it right now and send it to the SBA for forgiveness. We don’t, however, expect that the real volume will happen until the SBA releases additional guidance on the mechanics of the loan forgiveness submission process. I think a lot of borrowers will wait to see what happens. There’s rumors of additional legislation out there in terms of automatic forgiveness for loans lower than a certain threshold. The SBA also extended the covered period. The time in which that borrower had to spend the money went from eight weeks to twenty-four weeks, and that will have the effect of lengthening the time in which these applications are going to be submitted. This will be a good thing because it will take some of the pressure off the lenders and will reduce the height of the wave as it’s coming in.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 26:21
If I’m thinking with my business strategy hat on, both from a lender’s and from a borrower’s perspective, I should also think about when to ask for forgiveness and just have twenty-four weeks to spend the money. Do you feel that the forgiveness applications will be submitted in 2021, as opposed to 2020?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 26:41
That’s a good question. There is what happened recently in Congress, and the President is expected to sign it. The window for accepting loans was pushed out to early August, and there’s talk of a fourth round of stimulus. I think there’s definitely potential where forgiveness stretches into 2021. Even without further congressional action, one additional bill that Congress passed, and the President signed, extended the time in which forgiveness could be applied for to the end of the year. We will certainly see some applications lingering into 2021. But you know, the pandemic shows no sign of going away, unfortunately. With talk of a fourth round of stimulus, I think the program is here to stay in some shape or form. There will be refinements around the margins, and there’s always talk of, like I said before, automatic forgiveness for loans below a certain threshold. But that’s up in the air right now.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 27:44
Let’s flip over to customers, what’s the right way or the best way to inform customers on the timeline and what to expect?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 27:55
This is very important. Lenders should be getting out in front of this and working with their customers in terms of describing what the forgiveness process looks like, what the required documents are, what the application process is, and really teeing those borrowers up for success. Especially, because as lenders know, they need to work with the borrowers to make sure that the application doesn’t contain any calculation errors or missing documents. To the extent that they can have a process upfront that educates borrowers on what the requirements are, they will be better served when the application is actually submitted, and they start the review process. It will extend the timeline for review if the lenders have to go back multiple times to the borrowers to collect additional documentation. The communication strategy should start soon as possible and really start prepping borrowers so they’re successful in their forgiveness application.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 29:01
What about complaints or disappointment when the applications are not fulfilled? What’s your guidance on customer communication in those scenarios?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 29:10
Yes, there will be many complaints. We know that’s just the nature of the program, like we talked about earlier. This was sold as a basically a risk-free loan and then the goalposts moved. Now, many borrowers are not going to get the level of forgiveness they thought they were going to get. They’re going to complain. They’re not going to complain to the SBA, they’re going to complain to their lenders. Lenders need to ramp up complaint training and understand how to intake complaints and do trending and analysis to make sure that they’re tracking the complaints. A couple things to keep in mind there. If there’s any fair lending allegations, they want to be super cognizant of those and give those heightened scrutiny and heightened response. They also want to do trend analysis, and they want to be mindful of any threats of litigation and potential damage to reputation. Because one of the problems going into the program was the delays in funding the actual loans and that some parties, some businesses were shut out. That’s hopefully not true. But that is a risk in terms of borrowers not getting what they wanted, and having reputational issues for the bank.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 30:26
That also plays into potential fraud or any fraud flag that may come up during a review or even any compliant questions that may come up. How do borrowers and lenders protect themselves from the risk of fraud or the risk of non-compliance?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 30:44
That’s a big question. One of the scenarios where lenders need to be very mindful is where they have a borrower that has submitted an application and is not satisfied with the forgiveness amount. After working with the lender to provide additional documentation or fix calculation errors, suddenly there’s new documents there that prove up the new amount, or the original amount for which forgiveness was sought. If there’s inconsistency in the documentation, that can be a real red flag and lenders need to watch out for that. Because, in the future, these files will probably be looked at again. You want to make sure that you flag those situations, and in cases where there’s obvious fraud, that you’re not facilitating forgiveness that the borrower is not entitled to.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 31:37
Let’s say everything goes along the happy path, or even any bumps in the road are resolved appropriately, and our loan is still on the books at the lender once we’re forgiven. How long does it stay on the books from a servicing perspective? Are there any obligations or things that we need to be aware of if our loan is 100 percent forgiven, or is that the end of the transaction?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 32:00
If the loan is 100 percent forgiven, that will be the end of the transaction—with some record-keeping and back-office things that SBA does to close the books on it. The PPP loan repayment period is two years unless the loan was originated after June 5, 2020. June 5 is the effective date of the Paycheck Protection Program Flexibility Act of 2020. It was a law that amended the original CARES Act. For loans that were originated before June 5, the term again is two years. For loans that originated after June 5, those loans have a five-year term. Now, lenders and borrowers can work together on loans that have a two-year term and agree to extend that term to five years. But there must be a mutual agreement to that fact. So, loans before June 5, automatically two years unless you get an extension with your lender. Loans after June 5 automatically have five years. The interest rate on loans is one percent. The deferment period for making payments and the deferment of interest was extended from six months to the date that SBA remits the loan forgiveness amount of the loan. But if forgiveness has not happened within 10 months after the cover period ends, payments of principal and interest will begin on that day.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 33:26
It really is helpful when there’s no loan payment, ultimately, for a very long period of time. Its balance is on the books for the bank until there’s another action on it after 10 months.
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 33:37
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 33:38
Are there any other risks that are involved with servicing? I mean, how does default work on a PPP loan after 10 months?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 33:45
Yes, lenders are going to have to be aware of their responsibilities in terms of servicing the loans. Again, a lot of the loans were entered into with the understanding that it would be forgiven, and any balance on the books from the borrower’s perspective may come as somewhat of a surprise. Another factor here is probably the most obvious one, is borrowers are struggling, and a lot of these businesses are not going to survive. So, there’s going to be a high potential for default from borrowers, not only because they thought the loan would be forgiven, but also because the business simply can’t repay the loan.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 34:21
How long do banks need to hold on to the documents for these loans?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 34:25
Lenders are required to maintain all loan and loan forgiveness documentation based on the retention schedules of their individual regulators. In addition, the SBA has published guidance that borrowers must retain all documentation supporting forgiveness for six years after the date the loan is forgiven or repaid in full. In addition, borrowers must be able to provide those documents to the SBA when requested.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 34:50
You’ve definitely given us a lot to think about, Neal, and it’s been quite informative. I’m curious, what else are you thinking about that our clients would need to know?
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 35:02
The biggest thing is just the overall pace of change and uncertainty around the program. As you know, Samir, the requirements of the program, including forgiveness, change almost on a weekly basis. There have been more than 20 interim final rules published by the SBA, and Congress has already enacted one law updating the program. There are also future changes on the horizon, including additional regulations by SBA and the possibility of future congressional action to forgive loans under a certain threshold. Anytime there’s uncertainty, our clients need help understanding these rules. We, at Wolters Kluwer, have a team of experts that track these developments and provide consulting expertise to make sure lenders understand and comply with all the various requirements.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 35:46
I truly appreciate you joining us today. Thank you. I know our listeners have probably found our conversation very informative, and it helps them navigate and prepare for loan forgiveness requests. Thanks again, Neal. Thanks for joining us today.
Neal Doherty, Consulting Manager, Wolters Kluwer U.S. Advisory Services 36:00
Samir. Thanks a lot. It was a pleasure joining you.
Greg Corombos, News Director at Radio America 36:03
That’s Wolters Kluwer Vice President of Banking Compliance Solutions, Samir Agarwal, joined by Neal Doherty, a Senior Regulatory Consultant for Wolters Kluwer’s U.S Advisory Services group. Wolters Kluwer is the host of this podcast. Wolters Kluwer is a market leader in SBA lending technology with its TSoftPlusTM software solution. They recently launched the TSoftPlusTM PPP Forgiveness Module to help local lenders and their small business client recipients of PPP funding facilitate loan forgiveness applications. The Forgiveness Module is available to all lenders, regardless of how they originated their PPP loans. Additionally, Wolters Kluwer offers Advisory Services to assist clients with evaluating PPP loans for compliance and navigating the forgiveness process. This podcast was recorded in early July, and PPP legislation and guidelines continue to rapidly evolve. The Wolters Kluwer team closely monitors PPP legislation to ensure that our solutions are up to date. For the latest information and additional guidance, please visit WoltersKluwer.com or call 1-800-397-2341 and press the number one. For more information on the Paycheck Protection Program, please visit the Small Business Administration online at sba.gov. I’m Greg Corombos. Please join us next time as we expand this series into additional areas of regulatory compliance.