April 15, 2020
Scott Cammarn comments on some of the concerns with the federal government’s deployment of the $349 billion in loans that were dedicated to small businesses as part of the $2 trillion Coronavirus Aid, Relief and Economic Security Act.
Excerpts from “4 Key Issues Clouding COVID-19 Small Biz Loan Program,” Law360, April 15, 2020”:
Since the program launch, large banks like Bank of America and Wells Fargo have voiced their struggles with the PPP program, with many initially saying they could only handle requests from existing customers. Small- and midsize lenders in many cases will take the same stance, having less capacity to shell out the amount of debt needed to meet demands. While only catering to existing clients may sound like a harsh line to draw, attorneys said that, while lenders want to do the right thing, the requirements of onboarding new customers are simply too burdensome.
"Lenders need to prioritize their available resources," said Scott Cammarn, a Cadwalader Wickersham & Taft LLP partner and co-chair of the firm's financial services group. "Not only do they have the SBA PPP loans, they've got credit card loans, mortgage loans, car loans and all of their other business loans to take care of."
In particular, so-called Know Your Customer or KYC requirements, which include checks on money laundering and terrorist financing activity, are a particularly burdensome part of the onboarding process.
"This may be the basis for complaints that banks are unable to respond promptly to PPP application submissions,'" Cammarn said.
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There is confusion around if and how lenders can transfer PPP loans to the secondaries market, Cammarn said. While the SBA and U.S. Department of the Treasury have both stated that PPP loans can be sold in the secondary market, existing SBA regulations do restrict certain loans from being transferred in the secondary market, he noted.
This conflict could tie the hands of lenders looking to use the secondary market to free up funds unless additional guidance is forthcoming on how lenders can use this valuable resource efficiently and safely.
"This program needs firm guidance from the SBA and the Treasury on how a lender can sell these loans quickly and easily so they can reload and start lending again," Cammarn said.
Normally, the SBA has a precise process in place to track the transfer of loans in the secondary market. Indeed, the unchecked transfer of PPP loans into the secondary market could result in major issues when the holder of the loans ultimately asks the SBA for reimbursement upon loan forgiveness, Cammarn said.