Facing an economic emergency tipped off by the unprecedented coronavirus pandemic landing on American shores, the federal government in an uncharacteristic burst of speedy bi-partisan cooperation passed the $2.2 trillion CARES Act, a massive stimulus effort meant to keep citizens and businesses whole and afloat while the world rides out the outbreak.
Paying out hundreds of billions of dollars virtually overnight to hundreds of millions of consumers and tens of millions of small- to medium-sized businesses (SMBs) is no small task, Ingo Money CEO Drew Edwards noted in this week’s On The Agenda Digital Roundtable discussion with Karen Webster and Dan Speight, CEO at Planters First Bancorp. And, having worked with federal officials on parts of this massive disbursement project already, he noted, they are well aware that prioritizing the speedy flow of funds to those who need it will have costs.
“In our broader conversations around the disbursement side of the $2.2 trillion, I have heard that the government is expecting there to be a level of fraud and they understand that, but they want to err on the side of getting people their money, even if they have to let a few crooks take advantage of them,” Edwards said, noting that there is a cost to doing business at a breakneck pace to outrun a crisis.
That pressure is also present on the SMB side, Speight noted, where the government will be disbursing $350 billion in loans starting April 3. The application for those loans went online in less than 48 hours, he noted, a short five days after the legislation that enabled it was signed into law by the president.
That pressure, Edwards, Webster and Speight agreed, is wholly appropriate for the situation — in some parts of the country, businesses have had their doors shut for nearly three weeks. They are out of money or very nearly there and starting to contemplate the possibility they will never open again. According to PYMNTS' data on the subject, one in four businesses doubt they will make it. Only four in 10 are confident they will.
But with the crush for speed, Speight noted, there is a handful of questions that remain unresolved that bankers like himself will need answered before funds can be disbursed. The design of the program is simple, and if all goes according to plan, the CARES Act could be a very efficient way to put funds in SMBs’ hands fast. But the devil is always in the details — in this case around verifying firm’s payroll numbers, whether loans have to be approved and how exactly firms can prove they are eligible for the loan forgiveness built into the program.
Points of Clarification
While the program is calling the cash infusion for SMBs “loans,” Edwards and Speight agreed, it is a bit of a misnomer in a variety of ways. Firstly, few of the firms taking them intend to repay them; they intend to keep their staff on the payroll and apply for the loan forgiveness program baked into the offering. And given there are basically no underwriting requirements — no credit check, no proof of revenue needed, and businesses need only have been open since January of this year — this offering doesn’t really much resemble any kind of loan product any banker in the U.S. has ever seen or offered. Mostly, they noted, what is happening is using the infrastructure of underwriting to create a reasonably secure pathway for SMBs with anti-money laundering/know your customer (AML/KYC) protection pre-built in.
“If the business is a good business, they were in existence before the end of January, and they have fewer than 500 employees, the only thing they need to submit to us is the payroll number since the loans are for two and a half times the monthly payroll.” Speight explained. “That's pretty much the underwriting piece. After that, then it becomes a matter of, ‘OK, we got all the information, we got your application, signed the note and here's your money.’ I mean that's the way it's supposed to work. And it could be that easy.”
Could be, he noted, but probably won’t be — at least not on day one, because bankers need to know some things.
First and foremost, he said, they need to understand what the requirements are, if there are any at all, for approving the payroll numbers that are submitted. They would very much like to know what documentation they need to ask for before they can approve the loans, and so far, they don’t have that guidance.
Also a bit up in the air, Speight said, is how exactly the approval process for loans works when it comes to taking money from the $350 billion federal pot since roughly thousands of banks nationwide are going to be simultaneously doling out these funds. Will the banks be the final word in approval, or will they need to submit applications to a relevant federal overseer to make sure the funds are approved? Banks, he noted, are nervous about accidently overextending, offering loans that aren’t covered, although they were encouraged by Treasury Secretary Steve Mnuchin’s affirmation that if $350 billion is insufficient to fund applications, more money will be added to the fund.
Finally, he noted, when businesses start applying for loan forgiveness — which the vast, vast majority will — banks also need to have some idea what the verification process will be to determine that they actually live up to the payroll maintenance requirements of the loan.
“And I suspect the documentation will probably be more stringent than the early documentation to make sure that we are proving that they've used the funds for the right thing,” Speight said.
What Comes Next
For bankers, Edwards noted, everything about this experience runs contrary to the instincts regulators have worked hard to instill in them in the decade since the financial crisis. At this point, he noted, they are largely constitutionally unable to make any kind of blind leap concerning lending, and their balance sheets are in play. And that, he noted, will cause some delays.
“The regulators’ attitude since 2008 and 2009 has been so strict on making loans that this very notion that they're relying on thousands of bankers and thousands of banks across the country to actually disburse money out without knowing for sure that they're not getting in trouble with the regulators and they're not putting their balance sheets at risk — they're going to take in a bunch of applications and nobody's going to get any money. Not yet,” Edwards noted.
The delays, Speight noted, will likely not be profound. Banks will start taking applications on April 3, and they are hopeful that money will begin to be able to roll into accounts starting the following week. They know every day counts to SMBs — and at this point everyone in the financial services ecosystem is walking in lockstep when it comes to pushing this money out quickly. They just want to make sure they are doing it properly as well.
“We’ve seen an amazing amount of fast action and details coming together at speeds I’ve never seen before in my entire career in financial services,” Speight said. “We just hope to help as many people as we can, and we think that is the goal of the entire ecosystem right now.”