Navigating The Ever-changing Paycheck Protection Program

By Michael Franco
Michael Franco is the Chief Executive Officer for SitusAMC.

On March 13, 2020, the Covid-19 pandemic was declared an emergency in the United States. This declaration paved the way for the closure of states under stay-at-home or similar government orders across the US. These orders in turn led to the closure of non-essential businesses nationwide. While these actions had the noble goal of slowing the spread of the Coronavirus to save lives, it also crippled small businesses who no longer had access to their physical locations or customers.

To aid small business, the Coronavirus, Aid, Relief, and Economic Security Act or the CARES Act was signed into law on March 27, 2020. Within this act the Paycheck Protection Program or PPP was authorized to be created and administered by the SBA under the guidance of the Treasury Department. The SBA, an entity that in 2019 had issued guarantees on approximately 63,500 loans totaling $28B, was now being asked to oversee and help implement an approximately $349B lending program (later upsized to $659B from additional funds authorized under the Paycheck Protection Program and Health Care Enhancement Act or PPP-HCE Act signed into law on April 24th). Unfortunately for the SBA, they had less than a week to stand up the program before the application period began.


Once the CARES Act was approved, initial PPP loan demand was enormous as the lure of a forgivable loan captured the attention of the program’s target audience and non-target audience alike (see exhibit A). However, the rules for the program were lagging the demand and political and economic pressure for the program to start. As such, the SBA did not release updated guidance until the day before applications started being accepted (and that guidance would be far from final). As a result, the rollout was chaotic with major lenders publicly stating that they were not ready to accept loan applications.

Exhibit A

SBA Loan Volume as compared to PPP Loan Volume

Given little time to ramp up operations or build technology to support the PPP process, lenders were faced with the unenviable choice to either (a) not accept applications until further clarifications were issued and controls were successfully built or (b) move forward as a participating lender knowing that rules might change and loans approved could later contain defects stemming from incomplete documentation, improper loan balance calculations, or insufficiently documented “Know Your Customer” (KYC) and Anti-Money Laundering (AML) requirements.


The PPP had ambitious and well-meaning goals. Its aim was to be an easy to implement lending program that got money into small businesses quickly while ensuring that the business owners themselves utilized the money to support the ongoing employment of their employees versus pocketing the loan proceeds. Unfortunately, anything that is big, complicated, and fast moving is bound to have some issues going from conceptualization to implementation.

From the passing of the CARES Act on March 27th through May 13th, the SBA/Treasury has issued 26 interim final rules or FAQ expansions (see our PPP Timeline for more details) and, most recently on May 15th, a detailed loan forgiveness application.[1] The real world impact of all those revisions is that borrowers who made a good faith assessment that they qualified for the program on March 27 may have subsequently found that they should have repaid the loan before the safe harbor lapsed.[2] Similarly, lenders who made a good faith calculation on borrower eligibility, loan amount, documentation requirements, etc. early on in the process may be looking at revised rules where they may have either (i) rejected an application incorrectly or (ii) granted a loan where it should have been rejected.

Despite the time the SBA took to put together thoughtful loan forgiveness guidance and come up with a detailed loan forgiveness application, it is highly likely that the loan forgiveness process will also face similar challenges that will require application revisions and FAQ updates. This is not to fault the SBA as it’s impossible to think through all the possible permutations that will create a one-size-fits-all forgiveness solution once the millions of applications start getting processed.


Now, imagine being a lender who wants to help customers secure a lifeline for their business. You have been presented with an opportunity to do so via the PPP; however, you know you are going to be taking on risk due to the incomplete guidance. You have decided to accept that risk and move forward as it is the right thing to do for your customers, the country, and therefore your institution. Having accepted the inherent risks of being a PPP lender, you are now faced with the logistical challenges of executing the PPP application acceptance and loan fulfillment process.

It is now April 4th, the country has just announced the largest number of deaths in a day yet from Covid-19 and effectively the entire country is now under some form of state mandated social distancing order. Your team members, who probably used to report to your office, are now working from home and your systems are being stretched to the max as your institution never imagined that it would have to support 100% of its workforce concurrently for remote access. Additionally, the SBA lending program has always been a smaller part of your institution and therefore you have dual problems: (i) you have a limited pool of talent who are familiar with underwriting corporate loans to small borrowers and (ii) your systems are not built to support the number of concurrent users required to do all this processing.

On top of those problems, your ability to conduct 24-hour processing by leveraging offshore labor has been compromised as India and other typical outsourcing locations have issued countrywide stay-at-home orders and your institution’s information security protocols do not provide approval for foreign team members or contractors to access your network from their homes. So how do you reconfigure your operations in order to provide the best possible customer experience and outcome?

Your solution is to repurpose people from throughout your institution (bank tellers, greeters, individuals from other lending groups, etc.) and bring in third parties to help you handle the massive influx of loan demand all while attempting to (a) build out technology to support the lending process, (b) establish process controls and protocols, and (c) interpret incoming guidance. However, these measures are likely not going to be enough as funding is running out quickly so you must now also set-up 24-hour teams here in the US in order to maximize processing without overwhelming systems.

It’s a political hot potato, a game with constantly changing rules, a money-losing operation, a class action lawsuit magnet, and headline risk waiting to happen, but you are acting in good faith to help your customers. You’ve finally processed all the applications you’ve received and submitted every loan you can for SBA approval. It’s been a long, hard, thankless slog, but it’s nearing its end, right?

Wrong! The real fun has only just begun.


A borrower’s ability to ask for loan forgiveness starts eight (8) weeks after the disbursement of the funds under PPP. During this period of time, borrowers are allowed to utilize the funds as they would like; however, if they want loan forgiveness certain amounts of money must be spent on the intended expense areas as elaborated within the PPP guidelines, interim rules, FAQs, and a newly published loan forgiveness application, assuming you can locate, collate, and decode all the requirements. Funds not spent in this manner will not be forgiven and will instead convert to a two-year loan at a maximum 1.0% interest rate. (See our PPP Timeline for an overview of the program’s shifting guidelines)

What is now becoming well documented is that borrowers are confused about how to use the funds and what are allowed versus non-allowed expenses. As a result, the burden of the program will again shift to the lender who must take the time to educate the borrower on how to properly utilize PPP funds to best position themselves for forgiveness. The challenge is that these actions need to be taken now, not eight weeks from now when forgiveness requests are starting to be made, to ensure that borrowers properly utilize funds and the loans can be forgiven as was intended by the program at its creation (after all the Congressional Budget Office report scored 92.5% of the original PPP funding as a non-recoverable subsidy). Smart lenders are realizing that the program’s risk is now shifting to customer service prior to loan forgiveness and that the stakes here are just as high as they were during the application and funding process.


Unfortunately, even if the lenders manage to educate borrowers on how to use the funds, any errors made in the front-end of the PPP lending process are not going to simply disappear. As loans are evaluated for principal forgiveness a lender must also access whether the original loan was properly made or face the risk of potential damages under the False Claim Act for defrauding the government (this is the same Act that drove many banks out of FHA/VA/USDA lending after facing stiff fines and penalties during the Great Financial Crisis). As such, loans with processing errors that resulted in (a) loans being issued when they should not have been, (b) excess loan amounts being granted, (c) errors in disbursement amounts versus note amounts, etc. may not be covered by the SBA guarantee. These potential errors could expose the lending institution to financial loss on overextended amounts that may be non-guaranteed.

After forgiveness has been decisioned, lenders are likely going to be faced with the unfortunate reality that these PPP loans were not retired in full but were rather partially forgiven. These remaining loans will likely be overly comprised of (i) very small balance loans ranging from $10,000 to $50,000, (ii) financially stretched borrowers, and (iii) a large amount of non-quantifiable political and headline risk. For taking on this risk and operational challenge, the lender will receive a 1.0% interest rate for the remaining portion of the two-year original term and the servicer will receive up to 3.5% of the loan balance[3].


A massive government initiative with limited time to build proper controls is going to bring out the fraudsters. As soon as the word “forgivable” was included in the CARES Act some individuals instantly started thinking about ways they would legally or illegally get funds they either did not need or were not entitled to receive. The government knew this would be the case which is why they established the PPP as a lending program versus a grant and created protocols for auditing the loans. After all, the idea was not that it would be “free money” for anyone who happened to own a small business but rather that it would be less disruptive to the economy if a loan could be utilized to keep team members in place with their employers versus obtaining direct government support through unemployment benefits (which were also enlarged under the CARES Act and which the Federal government may end up largely financing for State governments through additional stimulus packages). As such, the audit and enforcement portion of the CARES Act is essential to ensuring that taxpayer dollars are not wasted enriching the already rich or being stolen by lying applicants.

That being said, the rocky start many institutions got off to setting up the PPP may be creating unintentional bad actors. These individuals applied for PPP loans at multiple lenders when their initial applications were not being accepted or processed under the first PPP tranche and may end up securing multiple PPP loans from different lenders. Just like a safe harbor period was established for companies that applied for and received loans the Treasury and SBA later decided should not have been granted by PPP, these borrowers should also receive an amnesty period to return funds that may have been improperly received from multiple lenders.


Given the challenges facing the program and the opportunity for misuse of the funds, both accidental and intentional, it is critical that a thorough audit of loans take place. The audits, while tedious, are essential to the integrity of the PPP and any future programs. Only by auditing the loans for forgiveness can we as a nation make sure that the PPP funds have been properly utilized by the intended recipients. While I would encourage the SBA and Treasury to widen the net on the time period for fund utilization (maybe 10 -12 weeks vs. 8 weeks) and continue to examine “technical fixes” (as stated by Treasury Secretary Mnuchin), I would also encourage them to keep the program as a lending program versus a grant. While rational people will expect that not all funds will be spent as intended, we should also realize that the experience of the PPP will help establish a baseline for what a government stimulus response should be if a similar economic scenario or pandemic (including a re-emergence of Covid-19 later this year) should occur in the near future.


Much of the media attention has focused on the PPP as being a way to preserve businesses and jobs with credit being given to small lenders who acted quickly to get money to their customers. What has not gotten much attention is the fact that the PPP is also supporting small and community banks (defined as banks with assets under $10B) throughout the country that are chock full of Commercial & Industrial (or C&I) loans. An economic slowdown will put significant pressure on these C&I loans and the rapid default of these borrowers could cause the failure, on a massive scale, of smaller lending institutions across the country. Realizing this fact, these smaller lenders leapt into action to improve their collateral position through their PPP lending activities. As a result, many of these borrowers may now be in a better financial position and the prospects for repayment on current non-PPP obligations may have been improved. At the very least, it has provided some additional time for regulators to identify troubled institutions and come up with contingency plans to minimize the impact to those institutions’ stakeholders.

To make sure that smaller lending institutions got their fair share of PPP funds, the PPP-HCE Act allocated $30B to lenders under $10B in assets and $30B to lenders between $10 – 50B of assets. Additionally, to ensure that eligible institutions could fund their PPP loans, the Federal Reserve has made PPP funding available at a 35 basis point interest rate (0.35%). As of May 13th, the Federal Reserve was carrying $40.6B of PPP loans on its balance sheet and had provided funding assistance to approximately 600 institutions.


Additional stimulus, both monetary and fiscal, is actively being entertained. A center piece of proposed stimulus will be to further insulate businesses and individuals from income discontinuation. No matter what form that takes, we should all appreciate that individuals who become unemployed will end up seeking government aid through unemployment insurance (36.5 million people have sought insurance over the last eight weeks through the May 9th reporting period and 40% of jobs paying under $40,000 a year have been lost) so the taxpayer will ultimately own the risk of job loss. Regaining employment at a new employer may be a much longer, and more costly, endeavor than preserving positions with current employers. Despite that fact, whatever policy is adopted, we must ensure that funds are utilized to save jobs and businesses and fraud is prevented.


The PPP, for now, has helped stave off a massive consumer and small business led financial depression and subsequent credit collapse within small lenders who are overexposed to small balance C&I loans. The program has its warts for sure; however, we are better off as a country as a result of the lending program which may help millions of small businesses keep their doors open. Consequently, all parties who have acted in good faith (borrowers and lenders) should be spared from the potential litigation, reputational damage, and financial harm that may arise as externalities to their participation in the program. As such, loan originators should be granted a safe harbor period to conduct quality control audits and fix errors just like borrowers were given a period to return funds.

The “Bad Actors” should be identified and face the stiffest penalties allowed under law. The “Good Actors,” including some banks that are currently being vilified, should be applauded for taking on the thankless task of participating in this program and answering the bell when it rang. After all, the next time we as a nation need volunteers to administer a necessary government program for scant economic returns (or even losses) we will need those same institutions to keep their hands raised.

[1] SitusAMC research as recorded in the Federal Register and as available in the SBA “Paycheck Protection Program Frequently Asked Questions” guides of May 13, 2020.

[2] The safe harbor has moved three times (May 7th, May 14th, and now May 18th).

[3] SBA fees are capped for loans under $500,000 at the lesser of 3.5% of loan balance or $10,000.

*Per SBA Agency Financial Report, Fiscal Year 2019 (

**SitusAMC estimates based on available information from the Treasury and SBA (



SitusAMC is a leading provider of consulting, strategic outsourcing and technology solutions to participants in lending and capital markets. In 2019, SitusAMC supported the origination, valuation, diligence, and servicing of approximately $7T in financial assets. As a trusted solutions provider, SitusAMC has (i) aided a number of institutions with the processing of PPP loans, (ii) conducted due diligence and brokered secondary market sales of PPP loans, (iii) created technology and staffing solutions grounded in a consistent data driven, rules driven, automated process to facilitate borrower outreach, workflow management, and evaluation of PPP loans for debt forgiveness.

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