Round two of the Paycheck Protection Program (PPP) opens this morning at 10:30am ET. If you thought round one was a little crazy wait until you see how wild the next couple of days are going to be.
Congress approved $484 billion in additional coronavirus relief that was signed into law by President Trump on Friday. Of this money $320 billion has been allocated to the PPP, of which $60 billion will be set aside for smaller lending institutions.
The Challenges of Round One of the PPP
When the PPP launched on April 3 very few lenders were ready and there were many problems, that was to be expected with such a new and massive program. Many small businesses were shutout because their bank couldn’t or wouldn’t accept their application. By the time they did it was too late. Another big problem was that hundreds of millions of dollars went to large companies, some of them public, that have access to other forms of capital. For millions of small businesses the PPP was their only option. There were several other problems, many of them detailed in this recent in depth piece in Business Insider.
So, now we move to round two. Some of these problems have been addressed with Congress allocating $60 billion of the $320 billion to two tiers of smaller lending institutions. There is $30 billion for banks with between $10 billion and $50 billion in assets and $30 billion for banks with less than $10 billion in assets (this latter category also includes CDFIs and credit unions). But there is no money earmarked for fintech lenders. Or even money targeted directly towards the smallest businesses.
How Fintech Lenders Could Have Been Central to Round Two of the PPP
What would have been far better would have been for Congress to allocate this $60 billion based on loan size. If they had allocated that amount to a maximum of, say $50,000, many more, possibly millions more, small businesses would be served. And the best positioned group to handle that money would be the fintech lenders. Companies like Square, PayPal, Quickbooks, Kabbage, OnDeck and Funding Circle are all setup with automated systems to process loans like that at volume. So, while these companies have all been approved to participate in round two of the PPP they will be competing with every bank in the country to process loans.
I am not only the only one thinking this. Funding Circle’s communications people sent me this note from Managing Director, Bernardo Martinez and Head of Public Policy, Ryan Metcalf who commented on the Phase Two initiative:
The bill does not meet the needs of all small businesses, with the carve-outs excluding non-depository state regulated lenders exacerbating the program’s capital access issues. At Funding Circle, 61% applications are for PPP loans under $50k.
OnDeck has been approved to offer PPP loans directly and they are working with a partner bank, Celtic Bank, so they will be able to help their customers through two channels. And one advantage of partnering with Celtic Bank is that they have less than $10 billion in assets so they will be allocated part of the aforementioned $30 billion. Here is a comment I received from OnDeck:
As the Federal Reserve noted early this month, there is a significant gap between banks funding low credit risk, million dollar plus annual revenue small businesses at a higher rate than any other credit risk, or revenue size set of businesses. OnDeck, on the other hand, was founded in the last great recession to provide financing to the underserved and the underbanked. We work daily to fill this very real credit gap, by specializing in providing digital, fast access to capital deemed too risky or too small for banks. FinTech’s like OnDeck are uniquely qualified to support our nation’s small businesses during this unprecedented time and we are delighted to be at work processing PPP applications now.
Kabbage also has been approved to be a PPP lender and they are also working with a partner bank. Sam Taussig, Kabbage’s Head of Policy sent me this message on round two of the PPP:
The additional funding passed by Congress is critical for the smallest of America’s businesses and we will continue working tirelessly to disburse desperately-needed PPP loans to these companies.
One of the most active participants in round one of the PPP was Lendio. While not a lender, they are a marketplace that connects small businesses with lenders (both fintechs and banks), they processed a huge number of loans in round one. Over 70,000 businesses were connected with one of 250 PPP lenders and their small business clients received $2.5 billion in PPP loans.
There is one important point to note about the participation of fintech lenders in round two of the PPP. They will be limited on how much they can lend because of capital constraints. The Federal Reserve established the Paycheck Protection Program Lending Facility (PPPLF) on April 9. This facility allows depository institutions (namely banks and credit unions) to access much needed liquidity to continue lending under the PPP.
Fintech lenders do not have billions of dollars of liquidity on their balance sheet to lend for this program. Using PPP loans as collateral banks are able to borrow near 100% of the loan value which ensures they are able to continue to lend. The Fed has not yet opened this facility to approved Fintech lenders, so once again we are placed at a disadvantage compared to the banks. Without the PPPLF, it is increasingly difficult for Fintech lenders to directly participate in the PPP the way depository institutions can.
The Floodgates Are Opening Today for Round Two of PPP Lending
While the PPP certainly has flaws, it will open today to massive demand. The funds for round one ran out on April 15 but for the past 12 days many lenders (including approved fintechs) have been taking applications in anticipation of round two. So, there is massive pent up demand for new dollars.
The largest banks have also got their act together. Wells Fargo has 450,000 applications ready to go, Bank of America has processed 390,000 applications (some of these were funded in round one) and Chase has tens of thousands of new applications ready to go. Many fintech lenders will also have thousands of loans ready to go when the virtual doors open at 10:30am today.
Now, the SBA is fully aware they are about to be inundated with completed applications. They sent out an advisory yesterday afternoon (hat tip to Nat Hoopes of the Marketplace Lending Assocation):
SBA and Treasury are implementing the following measures:
- Pacing the number of loans processed in the E-Tran system for participating lenders when processing resumes on Monday, April 27, 2020 at 10:30 am EDT;
- Instituting a maximum dollar amount at 10% of PPP funding authority that any lending institution will be able to originate, exclusive of the additional $60 billion preserved for lenders with assets under $50 billion (i.e. $60 billion cap);
- Implementing operational standards to ensure that lenders access PPP funds based on their asset size;
- Ensuring the Paycheck Protection Program continues to operate on a first-come, first-serve basis so that every small business has access to PPP loans to sustain their business and retain their employees; and
- Issuing this guidance for lenders who have received a significant amount of loan applications.
It is likely that there is more than $320 billion in loan demand that is ready to be processed by the SBA. It will simply be a matter of how fast the SBA can process these loans. If their systems stay online today the entire amount could be gone by the end of the day. Certainly by the end of day tomorrow I don’t expect any of the PPP money to still be available.
Which begs the question, how about round three? There will be calls for more funding, that is for sure, as small businesses complain they were locked out of both round one and round two. So stay tuned.