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Wine Country lenders tackle flood of small-business requests for new coronavirus relief loans, but questions remain

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Three days after the official start date for banks to begin accepting the Small Business Administration's Paycheck Protection Program loan applications as part of the CARES Act relief package and coronavirus loan relief options for businesses, some banks have delayed implementing this process, while striving to set up internal handling procedures.

Others held back, attempting to seek clarifications on the guidelines and criteria associated with these loans. Here is a status report on what three SBA preferred loan providers are doing.

Summit State Bank

Right now, if you talk to five people, you may get five different viewpoints on what is required.Brian Reed, Summit State Bank chief credit officer

“We went live Friday afternoon, taking 30 applications from our customers after reading through a 31-page document outlining interim final rule guidelines received from the SBA on Thursday,” said Brian Reed, executive vice president and chief credit officer for Summit State Bank. “We received another 100 applications over the weekend.”

While the SBA document was helpful, it also left many questions unanswered, he said, such as specifics on what banks need to document and calculate the loan amount, uses of proceeds and ultimate debt forgiveness.

“There was an email string with dozens of bankers over the weekend, many of whom have different interpretations about the PPP rules," Reed said. "In the days ahead, we expect more information and clarifications will be coming from Washington. Right now, if you talk to five people, you may get five different viewpoints on what is required.”

He said these loans can be good for those small businesses financially impacted by the COVID-19 economic crisis and for banks administering them.

“If handled appropriately, small businesses can receive 2.5 months of payroll and potentially have the whole loan forgiven," Reed said. "The main advantage to banks is to help their small business customers reducing potential default rates and/or losses down the road. Is this program perfect? No. Are there risks for borrowers? Yes. This is a two-year loan so any part not forgiven must be paid back in a short period of time. Our role is to educate borrowers how this program works such that all or most of the loan they apply for will ultimately be forgiven.”

To illustrate how this could impact a borrower, Reed said assume that their average monthly eligible payroll is $100,000 so the maximum loan amount would be $250,000. If the company maintained the payroll numbers after receipt of the loan, the forgiveness amount would roughly be eight weeks of payroll or around $200,000. They would also be able to include costs associated with rent, interest on mortgage obligations and utilities to the amount requested for debt forgiveness.

However, 75% of the forgivable costs must come from payroll costs. So, if a company only hired back 50% of their previous payroll costs, then the eight weeks of payroll would only be $100,000 and the amounts forgivable from the other sources would be limited to about $33,000. Therefore, this company may have a loan after forgiveness of about $120,000.

Beneficial State Bank

We quickly found that with the increased volume and variability of submissions, we needed a systemized and standardized approach to be able to process the high volume of inquiries received.Randall Leach, Beneficial State Bank CEO

Looking at the big picture, CEO Randall Leach said there are two primary constraints to implementing this loan program: operational capacity and liquidity. To date, Beneficial has received more than 1,200 inquiries representing approximately half of which are existing clients.

“After the SBA outlined its basic parameters for the application on Friday morning, many banks pulled back from the market as we saw a surge in the volume of inquiries,” said Leach.

“On Friday, we tested taking applications directly from clients through our loan officers. We quickly found that with the increased volume and variability of submissions, we needed a systemized and standardized approach to be able to process the high volume of inquiries received. The same day we pivoted to create a more streamlined and comprehensive approach to the application, processing, and funding. We are testing that system now and anticipate shifting client intake to that platform.”

Leach said additional guidance would be helpful on the technical/legal aspects of the loan sizing and forgiveness calculations; the documentation requirements and standard operating procedures (SOPs) from the SBA, as well as the funding mechanism for banks to be able to sell the loans back to the SBA.

“Since not all the rules have been written or completely defined, it is difficult for banks to set up a streamlined process to handle the tremendous volume," he said. "Once that is overcome, there needs to be liquidity for banks to originate loans to meet this unprecedented demand.”

Banks say there’s also clarification needed on what happens when a small business cannot bring back all of its workforce yet pays them to stay at home. Is this payroll expense eligible?

“We recognize how hard this is for small business owners, their employees, the nonprofits that are serving on the front lines in our communities," Leach said. "In addition to the tragedies being suffered on the health front, there’s just so much loss: people are losing businesses they’ve put their heart and souls into building, workers are losing their livelihoods, essential community services are being lost. Beneficial State Bank is doing everything we can to help."

Exchange Bank

Guidance provided in the SBA application is only two paragraphs long, and the definition of “payroll records” is very vague.Michael Sullivan, Exchange Bank chief credit officer

The bank has received thousands of calls from businesses and is current accepting applications only from Exchange Bank customers, said Michael Sullivan, executive vice president and chief credit officer for the Santa Rosa-based institution.

“We are doing all of the customer contact work for the SBA‘s Paycheck Protection Program loans in house. Staff has been redeployed to address this process, including employees from other lending groups,” Sullivan said.

One outstanding item for the bank is the language of a promissory note from the SBA, which is not clear.

Guidance provided in the SBA application is only two paragraphs long, and the definition of “payroll records” is very vague, he said. The key is determining average monthly payroll costs and then calculating up to 2.5 times that figure for the total loan amount.

“We are trying to be more specific," Sullivan said. "As a lender, Exchange Bank is expected to perform a good-faith review of incoming applications within a reasonable time frame.”

To help accelerate the Paycheck Protection Program application process for an SBA 7(a) loan, and improve accuracy and completeness of applications submitted, Exchange Bank on March 5 added a checklist on its website outlining in detail 16 types of documentation required.

Exchange Bank said applications will only be accepted electronically. In addition, incomplete applications – or those submitted without complete documentation – will not be processed. If time permits, the bank will contact the customer to gather the additional information. Tax and payroll documents submitted must be fully accessible — no password-protected documents.

Businesses apply, but when will the money run out?

“This thing is supposed to be designed for small business, and this is adding more stress in a stressful environment from a complexity standpoint.Will Seppi, Costeaux French Bakery

At Costeaux French Bakery in Healdsburg, President William Seppi said he was able to submit his application over the weekend, although he found the relief program’s rules complex even with his accounting background.

“This thing is supposed to be designed for small business, and this is adding more stress in a stressful environment from a complexity standpoint,” Seppi told The Press Democrat.

The Sonoma County business executive has furloughed about 80% of his bakery’s workforce of 116, halting retail operations with the exception of the one inside Big John’s Market. Costeaux’s sales to restaurants have dried up, too. The company is still selling its breads and baked goods to local grocers, he said.

The money will help him keep a skeleton crew on the job, but it’s unlikely to be enough incentive to recall workers, Seppi said.

According to The Washington Post, some of the country’s biggest banks say they have already allocated more than 10% of the $349 billion emergency small-business fund, raising concerns there won’t be enough money for the millions of companies expected to apply.

Bank of America, alone among the big banks to begin processing applications Friday, said Monday that it received 178,000 applications from small businesses seeking $32.9 billion in loans. Wells Fargo never formally started taking applications, but by Monday morning it said so many people had expressed preliminary interest that it had already reached the $10 billion cap it had set for loans under the program.

—The Press Democrat and The Washington Post contributed reporting to this story.

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