CARES Act PPP Sequel Is Scarier Than ‘Nightmare On Elm Street II’

Many of us saw it coming.

The second round of the CARES Act Payroll Protection Program (PPP) lending program for small businesses that are suffering because of coronavirus got off to a rocky start this week, just as the first round did.

The SBA was hit with “unprecedented demand” as small business owners who had not applied when PPP was launched, again were frustrated during the resumption of the program. New applicants reportedly are now in line behind the business owners who applied at the start of PPP lending but were not funded by the program.

The flood of applications has caused a backlog in E-Tran, the lending portal used to submit requests for small business relief funding.

The disappointment tempered the enthusiasm of SBA Administrator Jovita Carranza and Treasury Secretary Steven Mnuchin, who issued a joint statement on Friday about the resumption of the PPP.

“We are pleased that President Trump has signed into law the Paycheck Protection Program and Health Care Enhancement Act, which provides critical additional funding for American workers and small businesses affected by the coronavirus pandemic,” Carranza and Mnuchin said. “We want to thank Leader McConnell, Leader Schumer, Speaker Pelosi, and Leader McCarthy for working with us on a bipartisan basis to ensure that the Paycheck Protection Program is funded so that small businesses can keep hardworking Americans on the payroll.”

The SBA resumed accepting PPP loan applications on Monday, April 27, at 10:30 a.m. from approved lenders on behalf of any eligible borrower. Still, even with the additional funding package approved by Congress and signed by President Trump last week, the amount of money in the lending pool might not be enough.

“We encourage all approved lenders to process loan applications previously submitted by eligible borrowers and disburse funds expeditiously,” Carranza and Mnuchin said. “All eligible borrowers who need these funds should work with an approved lender to apply. Borrowers should carefully review PPP regulations and guidance and the certifications required to obtain a loan.”

“I heard there was a glitch,” President Trump said.

Demand for the second round of funding crashed the system on Monday almost as soon as lending reopened. Nearly 30 million small businesses are vying for $310 billion in additional funding. The lenders could not input the applications into the SBA system at the same time, which was not designed for this level of volume. In fact, the SBA announced last week that in the first round of PPP alone it processed more loans in 14 days than it had in the last 14 years.

The SBA reported that it had made adjustments to its E-Tran system in an effort to ensure that all lenders would be on equal footing and have the ability to submit the same amount of applications per hour. However, a spokesperson for the SBA said that the “pacing” mechanism designed to stop any one lender from submitting thousands of loans an hour into the E-Tran system caused lenders to “time out” on the system. Confusion from lenders was the theme from that point forward on Monday as tens of thousands of small business applicants waited for word about the status of their outstanding requests.

The challenges highlight two key shortcomings in the current approach to the government’s lending program.

First, the technology underlying the submissions was, understandably, not built to handle the current influx of applications on such an urgent basis. However, in these circumstances the importance of reliable and efficient software could not be clearer. Government agencies and banks alike, which are handling transactional loads in the tens of millions, need to be using the latest technology to process such requests. For instance, it has been reported that much of the E-Tran system is coded in COBOL, a programming language that is no longer in widespread use by tech companies.

Fintech solutions, such as Biz2X, are built with modern software and can handle processing at scale. Recently developed solutions avoid many of the challenges involved in legacy systems, ensuring the most important outcome is achieved: serving the customer.

Related: CARES Act PPP Do-Over Provides More Money, But Doesn’t Increase Speed Of Funding

Second, the widely covered issues with the SBA’s program to get money out to small businesses highlights the uneven roll-out of the program. For example, minority-owned and women-owned businesses, as well as smaller firms that generally bank with regional or community banks, have been largely unable to benefit from the program so far. Large banks have prioritized their lucrative clientele, while many Main Street businesses that need funding just to keep their people employed are waiting weeks for even a simple status update from their banks.

During the first round of funding, restaurant chains including Shake Shack and Ruth’s Chris Steak House were chided for applying for and securing funding intended for what Congressman Tom Malinowski (D, NJ-7) calls “genuinely small businesses.” This week, it came to light that the NBA’s Los Angeles Lakers, a team worth $4.4 billion, secured a $4.6 million loan. The Lakers swiftly gave the money back following widespread criticism.

“I’m not a big fan of the fact that they took a $4.6 million loan,” Treasury Secretary Steve Mnuchin told CNBC. “I think that’s outrageous.”

Later in the day, Mnuchin and SBA Administrator Jovita Carranza issued a joint statement:

“We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan.” 

“To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Regulatory guidance implementing this procedure will be forthcoming.”

The SBA has many hurdles to clear in these unprecedented times when more companies than ever have sought the agency’s help all at once. The agency has tried to instill practices, such as the pacing mechanisms, to make the application process fair to small business owners, but the process is still flawed.

Involving fintech firms that know how to streamline the lending process and can prioritize truly-deserving businesses from the very beginning would have been a good start.