Coronavirus: US small business loans won't be ready because of chaotic government handling, banks warn

Failure to deliver aid to small businesses as promised could severely dent confidence ahead of looming recession

Banks warn that the $350bn lending program to help small businesses struggling with the impact of coronavirus won't be ready in time for Friday's launch, with one executive calling that timeframe “beyond optimistic.”

Lenders say that the Trump administration has not provided necessary guidelines for the program, while also setting unworkable requirements for the loans, “without consulting the banks.”

They say that Treasury Secretary Steve Mnuchin set an unrealistic deadline for the roll out, and that the rules they have been given could delay what is supposed to be a rapid response for as long as several weeks.

The role of banks in the program is to process loan applications and dole out the funds to those approved. They expect millions of applications from across the country.

As the first sizeable economic response to the impact of the coronavirus pandemic, a failure to deliver aid to small businesses as promised could severely dent confidence ahead of the looming recession.

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Politico reports that banks fear a disaster that could dwarf the roll out of the Obamacare website in 2013.

Greg Baer, president and CEO of the Bank Policy Institute, which represents the nation's biggest lenders, says: “Banks are ready and willing to lend, but they need clear rules of the road and a streamlined process to be able to get funding into the hands of small business owners in the coming days.”

As part of the $2.2trn Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the $349bn Paycheck Protection Program is intended to provide much-needed relief to millions of small businesses so they can sustain their businesses and keep their workers employed. The program will be overseen by the Small Business Administration (SBA), but run locally by lenders or credit unions already approved by the SBA.

Loans will not require collateral requirements, personal guarantees, and will be provided without SBA fees – all with a 100% guarantee from SBA. Payments will be deferred for six months, and the SBA will forgive the portion of the loan proceeds that are used to cover the first eight weeks of payroll costs, rent, utilities, and mortgage interest.

Banks' have concerns about operational and technical issues that may arise from the program, but a greater concern is the verification of borrower information and who might be liable if things go wrong.

In theory, lenders should already be familiar with the borrowers that approach them from their day-to-day operations pre-pandemic, but banks are wary of being held responsible for attempts to abuse the system.

Under the program, banks will verify that a borrower was in operation as of 15 February and had paid employees, as well as confirming average monthly payroll costs. Banks see a situation developing in which the program works well for the customers they know well, but others may miss out without greater flexibility or assurances about liability.

There are further concerns that as the loans carry a 0.5 per cent interest rate as mandated by the administration, some lenders may not find it economically feasible to participate. The decision to set the rate of interest surprised banks as Congress had decided to allow the rate to go as high as 4 per cent.