The latest regulations coupled with the Treasury Department guidance have left many scratching their heads as to whether fintech companies will be able to provide small business loans under the recently enacted Paycheck Protection Program (PPP), a crucial part of the U.S. legislature’s latest attempts to address the serious economic impacts of the COVID-19 pandemic. While the landscape is shifting daily, and sometimes hourly, as regulators fight the clock to roll out the program fast enough to help keep many small businesses afloat – regulators should not lose focus on the important role that fintech lenders can play. Given their existing relationships with sole proprietorships and smaller-business customers along with their strong ability to deliver services through robust online platforms, fintech lenders are particularly well placed to fill emerging gaps arising from the overextension of many traditional lenders’ and their resulting reluctance to extend PPP loans to new customers, particularly smaller business and sole proprietors.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. Title I of the CARES Act establishes the PPP which is tasked with providing up to $349 billion in funding for loans to small businesses and other qualified applicants, using the existing Small Business Administration (SBA) 7(a) loan guaranty program, but with key differences intended to expedite the intended relief. The loans may be used to cover qualified payroll costs, rent, utilities, and interest on mortgage and other debt obligations in order to allow borrowers to maintain pre-COVID-19 employment numbers and compensation levels to their employees.
On March 31, 2020, the U.S. Department of the Treasury released guidance on various aspects of the PPP, including guidance relevant to lenders under the program. And on April 2, 2020, the SBA enacted interim final rules.
The guidance explicitly provides that the PPP loans may be made by existing section 7(a) SBA qualified lenders, federally insured depository institutions, federally insured credit unions, and farm credit system institutions. According to the guidance, loans can also be made by “Additional Lenders” that the Administrator and Secretary of the Treasury determine are qualified. Treasury has announced that a “broad set of additional lenders can begin making loans as soon as they are approved and enrolled in the program.” Along with their announcement, Treasury included an Application for New Lenders. According to the Application, however, eligible applicants appear to be limited to:
- A federally insured depository institution; OR
- A federally insured credit union; OR
- A Farm Credit System institution (other than the Federal Agricultural Mortgage Corporation) that applies the requirements under the Bank Secrecy Act and its implementing regulations as a federally regulated financial institution or functionally equivalent requirements.
Requiring a new lender to fit into one of these three categories – without offering another category for qualification – would exclude a host of potential fintech companies, who are very well positioned to provide PPP loans to a pool of customers that may not be reached by traditional 7(a) SBA lenders.
The CARES Act generally directs the Administrator and Secretary of the Treasury to designate as Additional Lenders those that have the “necessary qualifications to process, close, disburse and service loans” made with the guarantee of the SBA. The Act also provides that “the Department of the Treasury, in consultation with the Administrator, and the Chairman of the Farm Credit Administration shall establish criteria.” Generally, a lender may not participate in the PPP if doing so would affect its safety and soundness, as determined by the Secretary of the Treasury. In addition, nonbanks must meet certain other standards, including requirements surrounding compliance with the Bank Secrecy Act, a federal anti-money laundering law. However, the CARES Act does not include any other specific limiting criteria for Additional Lenders which might exclude fintech companies.
Many fintech lenders already meet the general standards and have established relationships with small businesses and sole proprietorships, the intended beneficiaries of the PPP. These fintech companies often also have streamlined systems and online platforms in place to efficiently extend loans remotely.
Moreover, many traditional banks, concerned about risk and the time and expense of underwriting PPP loans for new customers, may limit their PPP offerings to current clients, which will leave a host of small businesses unable to participate in the program absent the ability of other lenders, including fintechs, to participate.
With the $349 billion pool of PPP loans set to be distributed on a first-come, first-serve basis, time is of the essence. Small businesses and sole proprietorship applicants began applying for loans from participating lenders starting Friday, April 3, 2020. Independent contractors and self-employed individuals can begin applying for PPP loans on April 10. Early reports indicate that $38 billion in loan applications have already been approved by the SBA.
Given the scale of the loan program and the pressure that regulators have been under to expedite its launch, it comes as no surprise that there are still kinks to iron out. Based on our work on the PPP since the CARES Act was enacted, we are optimistic that there will be a path forward for fintechs to participate in the program and we will continue to provide guidance on this new law as updates emerge.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.