The U.S. federal government signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 in response to the economic fallout from the COVID-19 pandemic. Within that $2.2 trillion relief bill was a $953 billion loan program designed to help certain businesses and organizations continue paying their workers.
Since the Paycheck Protection Program’s inception, 5,467 lenders have approved nearly 12 million loans worth approximately $800 billion. In the program’s first three weeks alone — when uncertainty was high and loan approvals critical — businesses borrowed $342 billion, according to data from the U.S. Small Business Administration, the entity that implemented the program. Processing that volume wasn’t easy.
Jeffrey Cascione, SVP & Director of Commercial Banking, Navigant Credit Union
“Round one approvals were particularly challenging as they were all via email or paper applications,” says Jeffrey Cascione, senior vice president and director of commercial banking at Navigant Credit Union ($2.9B, Smithfield, RI). “Our teams did a fantastic job — working extra hours, coming in early, leaving late, and working weekends.”
Across 2020, Navigant made 1,226 PPP loans totaling approximately $83 million.
Lance Hatzenbeller, senior vice president and director of commercial services at Idaho Central Credit Union, says his team, facing similar pressures, put up an online application portal.
“Our ultimate goal during the first round was to help as many members and Idahoans as we could while money was available in the program,” he says. “There were many long days and nights securing PPP funds for our members.”
The big Idaho credit union approved more than 4,000 applications in 2020. Like Navigant, that was the most in its state.
But things have changed in the months since that initial flurry of activity. Economies have reopened and business operations have rebounded. Now, the bills on these government-guaranteed loans are coming due.
The deadline for business owners and approved borrowers to apply for PPP funds was Aug. 8, 2020. The program reopened again on Jan. 11, 2021. On May 31, 2021, the program ended. The government has not indicated it will provide further funding rounds.
A Complicated Program
The Paycheck Protection Program rollout prompted immediate action from credit union auditors.
“Any time a program that large gets rolled out that quickly, you have to understand the risks,” says Chad Garber, a partner at BKD. “Whether that’s something not handled properly or additional guidance that’s provided after the program is underway.”
Chad Garber, Partner, BKD
The credit union industry approved billions of dollars in PPP loans to help its members and communities keep their businesses afloat and their employees compensated. In 2020, 719 credit unions with assets less than $1 billion made $3.1 billion in PPP loans, according to the SBA; the 2021 data is more complete, showing 859 credit unions of all sizes made loans totaling $5.6 billion.
“It was a stressful but rewarding time as we assisted so many current and new members,” Navigant’s Cascione says.
But the rollout of PPP was complex, and there were complications. There still are.
PPP lenders had to be SBA-approved. For some credit unions, this represented their first time making these loans, which introduced inexperienced lenders to the complications of government programs.
“The biggest challenge when dealing with government-guaranteed loans is to have everything in order,” says Bryan Mogensen, a principal at CliftonLarsonAllen. “You dot your Is, cross your Ts, and follow the instructions exactly.”
For a program as large as the PPP, this was no small task.
Lance Hatzenbeller, SVP & Director of Commercial Services, Idaho Central Credit Union
Navigant and Idaho Central leaned heavily on their local SBA offices and SBA.gov for information. Navigant says the National Association of Government Guaranteed Lenders also was a trusted resource, whereas Idaho Central looked to the Coleman Reports.
Understanding eligibility requirements, loan amount calculations, loan terms, loan forgiveness, and more impelled leading auditors to create educational materials for their clients. Things were happening fast, and auditors provided what expertise they could.
BKD created a COVID-19 resource center on its website that included articles, webinars, and other resources for credit unions and its own employees on PPP guidelines.
“We were all digesting information as fast as it was coming in,” says BKD’s Garber. “It was the most conference calls I’ve ever participated in.”
“We were all digesting information as fast as it was coming in. It was the most conference calls I’ve ever participated in.”
Still, the speed at which applications came in remained a challenge. The long hours spent processing requests opened the door for employee burnout and even fraud. CLA’s Mogensen heard stories about applicants creating fake businesses. Additionally, some businesses were applying for loans across dozens of financial institutions in an effort to ensure they received a loan.
Financial considerations posed risks as well. From interest rate risks, balance sheet accounting, and the actual forgiveness portion of the process, the Paycheck Protection Program has remained top of mind throughout 2021.
Accounting For The Risks
When approving PPP loans, credit unions had to consider how to account for them.
The SBA’s Paycheck Protection Program loans had an interest-bearing component, a flat 1% no matter the size. But the SBA also paid lenders an upfront processing fee based on the loan amount, although the percentages changed as volumes changed.
Initially, the SBA offered lenders:
5% for loans $350,000 or less.
3% for loans more than $350,000 and less than $2,000,000.
1% for loans at least $2,000,000.
For second draw PPP loans, the allocation changed to:
50% or $2,500 (whichever is less) for loans $50,000 or less.
5% for loans more than $50,000 and less than $350,000.
3% for loans at least $350,000.
Most credit unions, including Navigant and Idaho Central, accounted for the loan itself in similar ways. Cascione at Navigant says the credit union accounted for them as regular loans but coded them as PPP for tracking purposes. Hatzenbeller says Idaho Central also assigned these loans their own product code but rolled them into its commercial portfolio.
I’m Just A PPP Loan
Most credit unions assigned PPP loans a specific product code but rolled them into their loan portfolio. When the credit union submits the application for forgiveness to the SBA, it should reclassify those loans as an accounts receivable until it receives the money from the SBA.
“In general, we advised clients to account for these loans no different from any other loans on their balance sheet,” says Andrew Quinnette, senior manager at BKD.
How to account for the fees was another matter.
“The biggest issue was how to record those fees,” Quinnette says.
Andrew Quinnette, Senior Manager, BKD
In principle, the income was meant to be deferred over the life of the loan, Mogensen at CLA says. But how long is that?
The credit unions Mogensen worked with initially thought they would be paid back within three to six months, certainly by the end of 2020. Rather than amortizing those dollars over a number of years and then recognizing the full fee amount the date the loan was forgiven, many chose to record those fee dollars as income from the start. That wasn’t wrong, per se, but it might complicate the next audit.
“We have to determine if it was material or not from an audit standpoint,” Mogensen says. “If it was and they booked it all upfront we have to say, you should have deferred it and it could cause an audit adjustment — or even a modified opinion — because you weren’t following GAAP.”
Forgive Us Our Cents
Borrowers and lenders should refer to the SBA to determine eligibility for forgiveness. Broadly speaking, however, when a loan is 100% forgiven by the SBA, the credit union removes the receivable, stops collecting interest, and recognizes its deferred fees. What about for loans that aren’t 100% forgiven? “Technically, the borrower would owe you the amount that’s not forgiven,” says CLA’s Mogensen.
That’s for loans a credit union knows were or were not forgiven, but the SBA is still providing loan forgiveness and potentially one-third of applications for forgiveness are still outstanding.
According to the SBA’s latest data, current as of May 2021, it has received 3.5 million applications for forgiveness out of the 5.2 million loans approved in 2020. The remaining 1.7 million loans total $160 billion, less than $100,000 a loan on average. There is no final due date for applications for forgiveness, though borrowers must apply before their loan matures, but longer wait periods open up lenders to interest rate risk and liquidity concerns, however minor. Some credit unions are participating out these loans to reduce that risk.
Bryan Mogensen, Principal, CliftonLarsonAllen
“Most credit unions currently have plenty of liquidity, but the forgiveness of the PPP loans is making it more challenging to manage,” says BKD’s Garber. “It’s hard to know how much, if any, of the PPP loan will be forgiven each month.”
At Navigant, two-thirds of its 2020 PPP loans have been forgiven, but the process is ongoing, and the next step for many credit unions will be connecting with their members and encouraging them to apply for it.
“We’re working with our members to get their loans fully forgiven,” Navigant’s Cascione says. “That’s our main focus.”
“It’s forgivable money but it’s also a loan on which payments will be due if forgiveness is not requested. You’d like to believe that most of them want to get it forgiven and paid off.”
Auditors like BKD and CLA have introduced forgiveness application technologies of their own, taking some burden off credit unions willing to outsource that part of the process. And the SBA itself has worked to make the process easier for the smallest borrowers, allowing those with loans $150,000 or less to submit a single, one-page form. Now that the second PPP period is over, too, CLA’s Mogensen is optimistic the SBA’s processing times will improve as the agency shifts into forgiveness mode.
In fact, both auditors agree that most loans that qualify for forgiveness will be forgiven by the end of 2021 as long as the borrowers submit their applications. But credit unions must continue their work contacting members to get the process started; ultimately, requesting forgiveness is the most important part.
“It’s forgivable money, but it’s also a loan on which payments will be due if forgiveness is not requested,” Mogensen says. “You’d like to believe most of them want it forgiven and paid off.”
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