An Unfiltered Look Back at the Paycheck Protection Program

It’s time to take a walk down memory lane and review the wackiest and wildest loan program ever: The Paycheck Protection Program (PPP). Here, Omar Shute of DFTC, Jeff Lyons of MBFS and I share some of our insights as we analyze the key takeaways and lingering impacts of this program.

The PPP loan program was vulnerable from the start because it was rushed, and there were no clear guidelines. With loose regulations and fintech solutions that leapt ahead without looking, fraud was inevitable. However, credit unions stepped up and did what was necessary to care for small business owners while protecting the taxpayer.

The Craziest Time of Our Professional Lives

The PPP program was put in place by the CARES Act in response to the COVID pandemic in the spring of 2020. Since everyone had to shut down for what we initially thought would be “two weeks,” the goal was to help businesses stay afloat in an uncertain time. The program would also cover salaries for those businesses. So, the federal government put this plan in place where you could get up to two and a half times your monthly salary for your company to keep you from firing employees and to keep your business going.

“Everything was shut down here at MBFS, so we jumped on this,” Lyons, COO of MBFS, said. “We reached out to our credit union clients to gauge who was interested in doing it and, hats off to them, almost all of them were in.”

In total, MBFS did over 4,800 loans with its credit union clients for $276 million. All told, the PPP program did about $800 billion including both of its phases. “A great line that I read in in one of the reports said the SBA did 14 years’ worth of lending in 14 days,” Lyons said.

“I remember those first few days and the build up to the program vividly,” Shute said. “The economy was shut down basically as people were afraid to leave their homes and a lot of businesses didn’t quite know what was going to happen.”

In that environment, Shute saw the PPP program as a savior to provide operating capital for those who qualified. “There was a lot of hope. At the credit union, we were willing to help in whatever way we could to ensure our members were taken care of,” Shute said.

Some Fintechs and Banks Jumped Ahead – Before Rules Were Established

What I remember most are all the fintechs and banks who were jumping ahead, taking applications and telling people they were getting their information and processing loans when the rules and what we needed to process loans didn’t even exist yet.

It was utter panic because people would call me and email everybody saying, why aren’t you processing loans? Well, there was nothing to process at that point. That rush of those viewing this as a lucrative deal ended up short circuiting the entire system once it did kick off.

MBFS and its credit union partners were literally getting thousands of applications and being told they must be processed that day. Despite wanting to process them all that second, the systems didn’t work. It was absolute chaos.

While the MBFS staff and credit union teams were looking for ways to help their organizations and members, financial institutions tend to like certainty and clear cut guidelines. PPP was a few generalities, with the rules seemingly made up every day. I specifically remember the rules about churches changing three times in a day.

“Misinformation was everywhere,” Shute said. “You’d call the SBA and their employees didn’t know the answers, while larger banks began taking applications before anyone knew what information was needed for someone to qualify for PPP.”

Not only did lenders have to manage the program, but they also had to manage the expectations of their borrowers. This required a lot of training and handholding for frontline people getting overwhelmed with calls and emails.

While some fintechs were fined by government agencies for jumping ship and saying they were going to give customers a “better” PPP loan, if the SBA went back and hit the bad actors hard, there would be so much more.

Unprecedented Volume Led to Unprecedented Fraud

The issue of fraud became apparent almost as soon as the program went live. However, because of the unprecedented volume of PPP loans, forgiveness became an automated process.

Fortunately, credit unions’ membership requirement helped reduce some of the widespread fraud others experienced. Business owners couldn’t just apply for a PPP loan, they also had to become members and go through a more robust verification process. Whereas at a lot of banks and fintechs, applicants could simply apply and get their funds.

“The membership step weeded out a lot of fraud for credit unions,” Lyons said. “And the fraud we did see most frequently was applicants using their business EIN number and then also applying with their personal Social Security number.”

With money being handed out, it didn’t take long for fraudsters to attack. Loan fraud farms formed with people applying for loans in online portals and finding the weakest links. For example, one IP address had 161 loans attached to it after a post-PPP investigation.

“For the most part, everyone that we were getting applications from was local,” Shute said. “Every once in a while, we’d see someone applying from out of state. That was a red flag and we’d work closely with our risk department to weed them out and prevent fraud.”

The drawback to credit unions doing their due diligence was that they couldn’t always move as fast as competing lending institutions.

System Challenges and Changing Rules

“When PPP was first rolled out, we had to manually enter each application in the SBA’s eTron system, which crashed constantly,” Shute said. “It wasn’t until weeks later that SBA Connect started working, so work had to be done at night.”

It was an exhausting, 24/7 venture filled with frustrating system crashes and constant rule changes.

While other organizations used automated bots to process applications without humans ever looking at them, credit unions and CUSOs put in the blood, sweat and tears required to help members in a responsible way.

PPP: The Extended Remix

What was originally supposed to be an eight-week period turned into 16 weeks and then years. Much like COVID, we got to the end of the year, and we thought 2021 would be a spectacular time to move on with our life, and we could all go back to vacations.

Then, PPP Round Two came along. Loan volumes were high, and it was a challenge to handle both our day jobs in normal loan applications and another full-time job with more PPP loans.

Rumors began to swirl again in regard to forgiveness being automatic. Financial institutions’ staff were still wiped out from the first round so the SBA offered to pay lenders more to entice them back in.

In 2020, the fee paid to lenders was 5%, which equated to $125 on a $20,000 loan and we did a lot of those small dollar loans. “You fulfilled your community service basically and got a few bucks,” Lyons said.

In 2021, if you were a lender and processed a $20,000 loan, you made $2,500. In this second wave, our costs dropped at MBFS because we knew what we were doing, and we had the systems in place to automate some of the process.

A Smoother Second Wave

For Shute’s former credit union, the experience with the first wave, a new system and a partnership with their legal team made the second round of PPP loans much easier to process. “It wasn’t like a fintech where no human was touching the application, but we were able to process the loans and complete our due diligence a lot quicker,” Shute said.

The increase in fee income was really appealing, and some local small business owners still needed and deserved the help.  “If I was an SBA consultant and I could go back in time, I certainly would have done more for hospitality industries, movie theaters, restaurants, hotels, because those were the businesses that were impacted the most,” Shute said.

On the flip side, IT companies, landscaping companies and construction companies – many of them had their best years ever in 2020. They were phenomenal and PPP just increased their bottom line even more.

The main eligibility criteria for the second wave remained payroll, which the SBA required to be the same figures businesses used to apply for their first PPP loan. “Payrolls change, but the SBA was automating things and rejecting people for incorrect loan amounts that didn’t match exactly,” Lyons said.

Another requirement was having one quarter where sales dropped 25% to be eligible for the entire year. This was not difficult to meet when the world had been shut down for a quarter, even if the rest of the year your business was earning record profits.

However, the rules continued to change to get all the money allocated to the program out the door.

Originally, the PPP loan was to replace income. We divided annual income by the number of weeks in the year and multiplied it by eight weeks. And there we had your PPP loan.

We’re all in the small business lending space and we know sometimes small businesses don’t claim a profit. So, if you didn’t claim a profit or you’ve never claimed the profit, you weren’t eligible for PPP.

Then what happened? The rules were changed to replace income with sales. The government did it originally for farmers and then they rolled it out to sole proprietors, LLCs and independent contractors. So, you could then go back and if you weren’t eligible, now you were.

Then, it changed again. If you were eligible under these new rules and you didn’t get a 2020 loan, you could go back and get your PPP loan from 2020 too. So, we were processing 2020 PPP loans for people in 2021.

That’s where the original intention of replacing income and keeping employees on payroll got completely tossed out the window because the money couldn’t get out the door with those rules. In my view, it became a giveaway and helped fuel the inflation we’re experiencing now.

Seeking Forgiveness

“Astute members were immediately asking us how they could apply for forgiveness,” Lyons said. “But at the time, we didn’t know. Nobody did. The SBA was to announce that part later.”

For the longest time, no one knew.

It was supposed to be automatic, except for larger loans. We thought they would have to submit some paperwork, and then the SBA launched a forgiveness portal. The portal had its own ups and downs, of course, but it did work a lot better.

The idea was, borrowers would go in there, upload their financial information, which, by the way, was the same information you gave twice already. Then you would click a button that says you swear it’s true, and hopefully you will be forgiven. That’s the way it was supposed to work.

The portal had its own ups and downs, of course, but it did work a lot better. The SBA was also inundated and had new loans coming in, so they started hiring contractors and a random audit process was implemented.

“We had a $1,700 loan go through the audit process, which probably cost three times the cost of the actual loan,” Lyons said. “It was just wacky and some of the contractors had no idea what they were looking at. We saw an example of forgiveness being rejected and later appealed because the decision was so egregiously wrong.”

The Good, the Bad and the Ugly

While the PPP loans were necessary early on and for specific industries hardest hit by the pandemic, we all agree that a more targeted approach would have improved the program, reducing both fraud and taxpayer waste.

Improving systems, setting clear rules early on (and sticking with them), or even utilizing existing IRS documentation to issue vouchers or grants to businesses based on previously supplied payroll figures could have streamlined the process and saved countless hours of frustration for all involved.

At its best, the PPP loan program was a savior for small businesses and employees in hard-hit industries. At its worst, it made the rich richer, led to historic levels of fraud and fueled an inflation crisis.

Mark Ritter is CEO of the CUSO Member Business Financial Services and its subsidiary, Nu Direction Lending, in Philadelphia, Pa.