NEWPORT BEACH, Calif.–The CEOs of three CUSOs involved in making Paycheck Protection Program loans say the process is getting better, a new portal is a big improvement over the SBA’s E-Tran solution, the size of the applications is indicative of the types of companies credit unions serve—but the real proof of the pudding will be in whether loans get funded this week.
The CEOs also agreed on one other point: the program offers “massive” potential for fraud.
The CEOs shared their perspectives during a webinar hosted by NACUSO on the SBA’s Paycheck Protection Program, which is now just over a week old and which began accepting applications from individual contractors on Friday. The system has seen tens of billions of dollars in applications and loans approved; the big issue now is when will funds start flowing to the applicants.
Discussing a wide number of issues and sharing their experiences during the NACUSO seminar were three panelists, including Shane Knighton, CEO of Member Business Lending in Utah, which has 39 owner CUs and approximately 70 clients; Mark Ritter, CEO of Member Business Financial Services in Pennsylvania, which has 40 credit unions in its program right now, and Joe Barbato, CEO of Milbury FCU and its wholly owned CUSO, MCU Commercial Services, in Massachusetts. The discussion was moderated by Guy Messick, general counsel to NACUSO, who asked some questions submitted by webinar attendees.
Below are some of the perspectives each CEO shared as well as their responses to questions from webinar participants.
Knighton: Like most of us in the credit union CUSO space right now, there is a high demand and we are trying to build a process with very little upfront guidance. We have built a front-end web portal and a CU-facing portal. We have created some bots to deal with the E-Tran situation (the SBA system through which loans are submitted). There have been some log-in issues.
We have about 5,500 loans in our queue in various stages (on Friday afternoon) and they are coming in so fast we are pitching them at about 100 per hour straight into E-Tran just to get the SBA number and then going back to make sure the amount is valid and making adjustments.
We are quite literally building this out on the fly. New things are coming up every day.
Ritter: I won’t beat up on the frustrating part of building it on the fly, but we are in the same boat as is every lender and borrower and SBA. Right now, we have about 3,500 loans in queue.
What’s been interesting with us is 45% of our applications are for $25,000 and under, and that says a lot about the credit union space and helping out small borrowers. Today, we hit a milestone; we have loan documents and are getting loans out the door. We will have 107 deals to fund on Monday. We think we are on a pace to do between 75-125 loans per day for next three weeks.
Because so many borrowers have had problems, some have shotgunned out applications. Others realize they not qualify and pull their applications, so for those taking applications it makes it much, much worse. The biggest frustration is the unknown. Sometimes, the best answer is the answer to that question doesn’t exist today. That’s tough for CUs and CEOs and for borrowers.
The other piece we have been running into is the board of director issue. Board members aren’t eligible (for loans) and we hope that gets rectified.
The local SBA staff has been great. I can’t tell you how hard they are working to try to get this done. It seems much, much more stable than it was on Tuesday, when it was chaos. We have more clarifications. We have found the new portal to be a godsend and that is the path of least resistance. You can enter a loan in five to seven minutes and get the authorization.
Barbato: We are at the other end of the spectrum ($380 million in assets). We do wholly own our CUSO. We are a much smaller organization and like everyone else we are learning on the fly.
We had a tremendous amount of trouble accessing the portal, as we are a low-volume lender. The SBA stopped access sometime last year to low-volume lenders, and we were not aware of that. There was no central office coordination and we have been dealing with people working from home. We wait in line and were in a world of hurt in moving forward. We had to get the help of our congressman and it took 10 days to get us access.
We are processing applications, but like everyone else it’s learning as you go, because the app online tells you need a pretty brief amount of information, but once you get online there is other information you have to get. We don’t have the staff to go chasing all the data. Our first few applications were approved almost immediately. To be fair to the SBA, they are working really hard. This was thrown at them.
Q: Do CUSOs qualify as borrowers?
Messick: If you are a CUSO that is primarily a lender, you do not quality. But CUSOs that are not primarily lenders, they can qualify as long as they meet the affiliation requirements and other requirements.
Knighton: For CUSOs in particular, it’s based on the ownership and control, and SBA has posted an affiliation rule. If you’re a credit union and you are majority owner of the CUSO, you have to count the size of the credit union and its employees, revenue and assets.
Ritter: There have been a lot of questions about contractors and contract employees and wages. When you lease the employees they are essentially a service provider and are not eligible.
Q: How do you qualify to be an SBA lender?
Ritter: The incumbency certificate has been the hardest part. Getting signed up as an eligible lender has been a very smooth process once the forms were finalized.
Q: If the credit union wants to make a loan or has received an application, how is it processed and fulfilled?
Knighton: The SBA has had a few iterations of the PPP borrower application form, such as SBA form 2483. I think the intake methods are pretty flexible, either online or a paper form. We are taking them electronically; many are coming in through scanned files. We are trying to move people to the online portal to get the data captured. I don’t know that any of us has experience in getting this volume of loans closed.
Ritter: The most frustrating part we’ve seen for borrowers is those who don’t have employees but use contractors. They were jumping the gun before (April 10). The smaller you are down the food chain, it’s probably the most frustrating. For CUs that call us, we tell them to submit this once, get the supporting documentation and move on from there.
Q: Do we have a confirmation from the SBA around loan forgiveness?
Ritter: One thing we have told people, and we have built into our loan documents, is how this forgiveness program works and all the intricacies don’t exist yet. We don’t know for certain.
Q: What platform is best to use?
Ritter: (Thursday), the SBA launched SBA Connect at Connect.SBA.gov. It is the modern version of E-Tran and it was ramped up through Amazon Web Services for a very, very friendly user platform. E-Tran is like hitting the lottery. With the SBA Connect process you can get your CU and multiple people signed up in a matter of minutes. The data entry process is considerably easier than E-Tran. It’s fabulous, it’s working and once you are through the first one you can crank out approvals in a matter of moments.
Q: Are you entering the borrower’s whole balance sheet at the end?
Knighton: In E-Tran, we go through the required fields. I don’t believe balance sheet is part of that. There are some nuances and information you have to have, like the last four digits of your zip code. Things like that have been tripping up the system.
I do want to mention that lenders need to now enter their account information in order to be paid their submission fees, and that particular field will not error out on you. You have to have the routing transit information.
Ritter: With the other portal, SBA Connect, it is specifically written so the only thing you can process through there is PPP loans, so it is much more skinnied down.
Q: What do you have to do upfront to make sure you get the guarantee at the back end?
Barbato: The big question mark is around the guarantees. We all understand what’s been put in print; the 75% of the loans are to cover payroll expenses, 25% other expenses, and if you follow those rules you could possibly get it all back later. It’s a little question mark and a little nerve wracking.
Knighton: There is some language in the interim guidance, but loan forgiveness is not defined for lenders. Lenders have been left guessing about when the time ultimately comes for lenders to ask SBA to honor that guarantee.
Barbato: We have been explicitly stating in our notes that we are not ultimately guaranteeing your loan will be forgiven. At the end of this, if there are pieces not forgiven, the borrower will say, ‘That’s not what I thought, so we’re not paying.’ So we are explicitly putting this in our notes that (forgiveness) is the SBA’s and the government’s option.
Q: We are a credit union that doesn’t do business lending. Are you getting any requests from credit unions to send these loans to other credit unions or CUSOs that are, to honor requests?
Ritter: We have been flooded with those requests. Unfortunately, we have to determine who is in the lifeboat and who isn’t and we have had to triage those and tell people we are dealing with our client CUs first. All credit unions are eligible for this. We have found it’s creating a bigger problem for credit unions that are involved.
Barbato: We’ve gotten a couple of requests from businesses that are in need and outside our field of membership or that we just couldn’t process, so what we ended up doing is I personally called CEOs of other organizations and they are being pretty cooperative. Most organizations around here are only helping their own commercial relationships at first. Those are the people who are most concerned over whether there will be money when it’s their time.
Q: Are borrowers applying at other lenders?
Knighton: We are finding it does appear borrowers are approaching multiple lenders and when they come to us they already have a PPP loan number.
Q: To what degree are you doing verifications on these loans?
Knighton: The underwriting guidelines say look at it; does it pass the sniff test? If it’s close and the document supports it in a quick fashion, move it along. That’s another thing that’s interesting. In SBA lending, we have always been responsible for making sure they are eligible. That has all shifted to the borrower.
Ritter: I have had to tell credit people to quit being credit people and to quit trying to read every footnote. We looked at it and read it as if you have a good faith verification process, move on. It’s a change in mindset.
Barbato: It’s hard when you’re a credit person and you’re looking at the underwriting stuff, and then trying to get in the mode of not doing that. That’s concerning.
Q: One CU said they heard it could be flagged for fraud if a number of applications are being filed by same borrower. If you discover that, should you deny the application?
Ritter: There is a massive opportunity for fraud in this program, because it is trying to be so borrower-friendly and so quick. I believe there is going to be a large amount of fraud. This is the bizzarro world of all SBA programs; you are really relying on the borrower for all the verification and not the lender. We will see in six months if everyone at the SBA remembers this when they are eating billions in fraud.
Q: What documents are part of the closing besides the note?
Knighton: It’s just the note. There are no fees, no collateral, no guarantor. It’s as easy as it can get.
Q: What else do we need to be aware of?
Ritter: This is the most frustrating thing I’ve seen. When you go into SBA Connect and sign in as a credit union, it asks for your charter number and authorization number. The charter number is easy. The authorization number is the four digit code of your local SBA office. Why not just call that the four digit code of your SBA office? That’s beyond me.
Q: How can a lender lose the guarantee?
Knighton: We’ll find out, but based on the interim guidance it’s really a matter that you didn’t validate the borrower’s request and it didn’t pass the closeness test. Our take is if you give us a form 940, we are going to rely on the borrower that they have excluded those (employees) over the $100,000 salary limit.
Ritter: There is one other catch where it explicitly says you could lose your guarantee, and that has to do with signatures. They have said you can accept electronically scanned signatures as long as you get a copy of the driver’s license. But there is a follow up saying you have to get an inked signature within six months. I would tell people to drop those off right away. That’s a potential guarantee loss.
(Knighton urged credit unions to look to SBA control number 5000-20009 for guidance on signatures.)