Loan System Bugs Holding Up PPP Loans: AICPA

In a letter to the SBA this week, the AICPA said legitimate loan applications are being denied acceptance because they are being incorrectly flagged.
Vincent RyanFebruary 5, 2021

The second round of the Paycheck Protection Program seems to have finally gained some traction, at least according to the data. The Small Business Administration said this week that from January 11 to January 31, more than 890,000 loans worth $72.7 billion had been approved. That’s about one-fourth of the $284 billion in total federal loan guarantees Congress authorized for the second round of the PPP program.

Most PPP loans — $68 billion, or 93% — are second loans to borrowers that exhausted their first one last year. The average loan size for “second-draw” borrowers was $102,228. First-time borrowers scored $4.8 billion in loan funds, and the average loan size was $21,157.

However, the SBA’s numbers may be cloaking problems individual borrowers are having applying through the SBA’s electronic loan servicing system, E-Tran.

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In a letter to the SBA this week the AICPA said tens of thousands of legitimate loan applications were denied acceptance because they were incorrectly flagged for fraud and other errors. The SBA E-Tran system is flagging 20% to 30% of all first- and second-draw PPP applications for additional review, the AICPA said.

“Lenders and loan applicants do not understand the process to resolve these declines, creating great anxiety and confusion for small business owners,” the AICPA said.

Because these errors are slowing up loan applications and approvals, the AICPA said the SBA needs to inform applicants that their initial acceptance could take more than a week, potentially lengthening the timeline for receiving funding.

“On average, borrowers should be prepared for the process to take two to three weeks as underwriting must occur first at the lending institution and then again at the SBA before a formal offer can be made.”

— Ben Johnston, COO, Kapitus

“Our experience with the second-round PPP application process is that it is generally slower than the first round, as there are more requirements to assess,” Ben Johnston, chief operating officer of Kapitus, told CFO. “On average, borrowers should be prepared for the process to take two to three weeks as underwriting must occur first at the lending institution and then again at the SBA before a formal offer can be made.”

The SBA is performing more stringent underwriting than it did last year, and there are tougher criteria for borrowers seeking second-draw loans, Johnston said.

Kapitus is a growth capital provider to small businesses and is partnering with a New Jersey financial institution, Cross River Bank, to underwrite the loans.

While Kapitus sees healthy demand from its customer base for second-draw PPP loans, Johnston says demand is not at the same level it was in April and May 2020, when there was even more economic uncertainty.

Second-round loans are “likely to be used to strengthen those companies that are that are going to survive and help those companies prepare to grow and sort of re-emerge as leaders in their space,” Johnston said. “Some of this money will likely be used as growth and reopening capital.”

PPP loans are eligible to be forgiven if the small business meets certain criteria for spending the funds. But the program is an attractive option even if a small business feels it won’t meet the loan forgiveness qualifications, Johnston said.

“It’s a five-year loan carrying a 1% interest rate with no payment for the first 10 months,” Johnston explained. “It’s the cheapest source of capital that a small business is going to find.”

Loans issued before June 5, 2020, have a maturity of two years, and loans issued after June 5, 2020, have a maturity of five years.

The SBA data released this week showed that accommodation and food services sector companies had the largest amount of net loans approved at $6.53 billion for 2021, compared with $42.48 billion approved in 2020. The construction sector started 2021 as the second-largest, with $4.95 billion in loans approved, followed by manufacturing with $3.98 billion in loan approvals.

The second round of the PPP ends on March 31,