Thousands flood banks as federal small-business loan program has a chaotic first day

The Trump administration launched a $349 billion small business lending effort Friday, but many of the country's largest banks said they weren't ready for the millions of people expected to apply because the program's rules weren't ready until just hours before the program began.

Bank of America was one of the few large banks accepting applications, but had limited its application to small businesses with existing loan relationships, frustrating many of its customers. Other banks, including JPMorgan Chase, the country's largest, Wells Fargo, PNC, Citigroup, and Truist, said they would eventually participate but needed more time to establish procedures.

"Please note that customers should not go to the Branches or contact our Care Center as they will not be able to assist with the online application process," PNC said in statement. "Thank you for your patience during what we know is a very challenging time."

Other banks offered similar assessments of their abilities to process applications. Truist, which is the result of a merger of SunTrust and BB&T, said its program "is still in development" and Wells Fargo said it "is working as quickly as possible to be ready to assist small business customers." Citigroup said it was still reviewing guidelines and expects "to begin accepting online loan applications as soon as possible."

"Expectations were unrealistically set but rest assured banks are doing everything humanly possible to get this system up and running to help small businesses," said a banking industry official, who asked not to be named in order to speak frankly.

Under the program, the Trump administration had hoped that small businesses could receive loans the same day they made their applications, an unprecedentedly quick turnaround for a government-backed lending program. But the guidelines for the program, a key element of the $2 trillion economic rescue package passed by Congress last week, were not finalized until late Thursday night.

Still, Bank of America said it had received 10,000 applications by 10 a.m. Friday for the Paycheck Protection Program, and SBA administrator Jovita Carranza reported in late morning that 2,335 loans valued at more than $889 million had already been processed. Treasury Secretary Steve Mnuchin tweeted that the new loans totaled $875 million and "almost all" had come from community banks.

Brian Moynihan, Bank of America's chief executive, told CNBC that the bank was taking applications first from existing clients - it's "easier to get them through the process faster," he said - and that it would then take applications from small businesses that have accounts with the bank but had never taken a loan before.

Some banking officials have warned that the abbreviated review process the Trump administration set ― which allows borrowers to attest to their own eligibility without the government's approval ― will make the program a magnet for fraud. Although the SBA will be able to audit lenders and borrowers later, it will fall primarily to private bankers to make decisions about who should receive the taxpayer-backed loans.

There is also concern that a crush of applications will overwhelm the private banking system.

"Just the scale of requests is going to cause the system to break down ... just the fundamental infrastructure of some of [the banks'] Web portals won't be able to handle it," said Hicham Oudghiri, chief executive of Enigma Technologies, a small-business-focused data analytics and fraud detection company. Oudghiri said most of his company's banking clients are planning to start rolling out the new loans after a week or more.

Terms for loans taken under the Paycheck Protection Program are designed to be especially favorable to borrowers, with ultralow interest rates, no payments for the first six months and the opportunity to have the loan completely forgiven if employees can be kept on payroll throughout the crisis. And the loans will apply to a broad swath of the U.S. business community, including sole proprietors and independent contractors.

"This is an unprecedented expansion of SBA lending that will take some time before it's fully functioning," said Rob Nichols, president of the American Bankers Association.

While Bank of America said it was moving quickly to meet loan requests, the policy of accepting applications first from current loan holders frustrated some customers.

"Even as a small business client, I cannot apply because we do not have a lending relationship with you - we have never required debt until now," Lindsey Johnson, the founder of Weezie Towels, said on Twitter. "This loan is make or break for our employees and it looks like if we are able to survive we will certainly need to find a new bank."

Goldman Sachs, the storied Wall Street bank, is not planning to directly participate in the new SBA program but announced Thursday it is setting aside $300 million for small-business lending in response to the pandemic and will lend $25 million to smaller banks participating in the SBA program.

"Our hope is that with immediate cash loans and the necessary stimulus to lending institutions, we can help provide the time these businesses need to weather this crisis," David M. Solomon, chief executive of Goldman Sachs, said in a statement.

In a mark of the frenetic pace with which federal agencies are trying to get money out the door, final regulations for the program were not released until Thursday evening, just hours before the program began.

Bankers reviewing the regulations for the first time wondered how they could be expected to disburse funds the next day.

"Having just received guidance outlining how to implement a $349 billion program literally hours before it starts, we would ask for everyone to be patient as banks move heaven and earth to get a system in place and running to help America's small businesses and the millions of men and women who work at them," Richard Hunt, president and CEO of the Consumer Bankers Association, said in a statement.

The hesitance of some of the banking industry's titans frustrated small community banks that were being flooded with applications.

Bank of the West, a small community lender in Texas, is juggling applications from hundreds of its own customers but also received calls from more than 300 small businesses with accounts at big lenders, including Bank of America, that aren't yet accepting applications, said Cynthia Blankenship, corporate president of the bank.

"They need to step up and stop hiding behind all of these excuses," she said of the big banks. "None of us are totally prepared for this but we're breaking our back to get prepared."

Bank of the West is aiming to fund at least one loan Friday but is still working through some of the technical aspects of the program, Blankenship said. The bank still needs a document that includes required SBA language that would allow us to finish processing the loans, she said. "We have several applications ready to go," Blankenship said.

She described the process Friday as "like drinking from a firehose."

"We're still having to work through a few challenges," she said. "We're experienced SBA lenders. I would like to fund at least one customer if not half a dozen today. That is my goal today."

The federal guidance addressed many of the industry's concerns. Banks aren't required to verify the accuracy of the documents the borrower has submitted for their application, removing the risk that the lender could be held legally liable for fraudulent behavior by the small business. "This should reduce greatly the risk that the government could go after lenders if they process applications in which the borrower has submitted inaccurate or fraudulent information," Jaret Seiberg, a policy analyst for Cowen Washington Research Group, said in a research note.

The guidance requires small businesses to spend 75 percent of their loan on keeping workers employed in order to have the loan forgiven. If not, the borrower may be forced to repay the loan and may not be eligible to have it forgiven. That may limit the program's appeal to some small business owners.

"That limits the ability to use these loans to pay rent and keep the lights on until the COVID-19 crisis eases," said Seiberg. "Instead, it is more about keeping workers from collecting unemployment insurance for eight weeks than it is prepping these business for the recovery."

Meanwhile, small-business owners say they are in limbo and can't make critical decisions until the program is operational. Some worry that the fund - which officials say is first come, first served - is not enough and that they might not get approved in time to claim their share.

"I think they are going to run out of money really fast, and people are going to have to wait in line" for Congress to approve more money, said Jenn Berman, chief executive of MZQ Consulting, a company helping small businesses with their loan applications.

SBA and Treasury officials emphasize that their first priority is to get cash in the hands of struggling small businesses and avoid the normal seven-day review process.

"There really has never been a product like this in our history, with not only the streamlined nature but the fact that there is very little underwriting required in terms of personal guarantees, no collateral, no requirement for credit elsewhere," said Steve Bulger, an East Coast regional SBA administrator. "We are going to move forward as fast as we can because we know the need right now is to get the money out there."

Banking industry officials have warned they could quickly become overwhelmed by millions of applications and have told the Treasury Department they are particularly concerned about how much they will be expected to vet applicants.

Without clear guidance from the Treasury Department, industry officials worry they could be held responsible if small businesses defraud the program or close their doors, they have said.

The program is more complex than it seems and may pose too much risk for some banks, industry officials say. If the money is considered a grant rather than a loan, for example, then a bank may be willing to take more risks on what kinds of small businesses are approved, they said.

"Lenders are just digesting program guidance the night before the program is set to launch, and while banks want to be as helpful as possible right now, it may be a few days before lenders can get comfortable with the rules of engagement," said Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, a trade group for lenders that originate SBA loans.

The government is guaranteeing 100 percent of the loan's value, meaning banks are repaid by taxpayers if the business fails to repay the loan. But community banks are also concerned about the low interest rate, which was increased from 0.5 percent to 1 percent following complaints from banking associations. The law allows for a maximum interest rate of 4 percent.

Brock Blake, chief executive of the Salt Lake City-based financial technology company Lendio, said he has seen conflicting information from the Treasury Department and the Small Business Administration about basic issues, including which forms lenders should submit for approval.

He said he views the small-business loan effort as a troubled but necessary endeavor.

“It will be a disaster out of the gates, but at some point we will plug the holes, fix the problems and overcome all of these miscommunications because we have to,” Blake said. “Every day that we don’t, someone is going out of business or laying people off.”