Gears Jammed Again During Relaunch of Small-Business Relief Program

(Bloomberg) -- The relaunch of a government relief program for small firms got off to a rocky start Monday, with lenders reporting being shut out of the overwhelmed U.S. Small Business Administration’s system amid a flood of loan applications and concerns about when struggling companies will get the funding they need.

The SBA said that “unprecedented demand” was slowing down its loan-processing platform, and that there were double the number of users accessing the system compared with any day during the initial round of funding that ended April 16. The SBA said in a statement that it had processed more than 100,000 applications from more than 4,000 lenders as of 3:30 p.m. New York time.

Shortly after the SBA’s Paycheck Protection Program restarted this morning, lenders reported that they either couldn’t access the system or were being kicked out as they tried to submit applications on behalf of small-business owners, said Paul Merski of the Independent Community Bankers of America.

Rob Nichols, president and chief executive officer of the American Bankers Association, said in a tweet that his member banks across the country “are deeply frustrated at their inability to access” SBA’s system. He said the association has “raised these issues at the highest levels,” and until they are resolved, banks “will not be able help more struggling small businesses.”

The glitches echo the first round of the program, when lenders were repeatedly locked out of the loan platform. The initiative restarted Monday with $320 billion in fresh funds after the initial $349 billion ran out after just 13 days. Some lenders had thousands of applications ready to go when the system restarted, fueling concerns the extra money would run out fast.

JPMorgan Chase & Co. said it stopped taking new applications before the initiative relaunched Monday because it was trying to work through a backlog of requests already in its pipeline.

The second round of funding -- similar to the first -- has been plagued by vague guidance and ongoing changes to the process. One senior banker, describing the process on condition of anonymity, said SBA’s decision to allow lenders to submit applications in bulk was unclear and came at the last minute.

The SBA said it notified lenders on Sunday that it would pace the rate of applications into its E-Tran system, meaning that all lenders should be able to submit at the same rate. The pacing mechanism was designed to prevent any one lender from submitting thousands of loans into the system at once. A lender that goes above that limit would get timed out of the system, an agency spokesman said.

But with the SBA limiting applications to 350 per hour per lender, according to a person familiar with the matter, it could take days or even weeks to get each bank’s applications through -- prolonging the amount of time it will take for small businesses in dire need to get their funds.

Merski said lenders are frustrated because they don’t understand how SBA is processing the applications, and the agency hasn’t provided an adequate explanation. It raises the fear that borrowers will get shut out because success may depend on who’s able to access the system before the funding runs out again, he said.

“It’s all serendipity, who gets in and who doesn’t,” Merski said. “There’s some serious issues that need to be addressed.”

The program allows for loans of as much as $10 million per borrower and is meant to help small businesses affected by the coronavirus pandemic keep workers on their payrolls. The loans become grants if companies use them for payroll and approved expenses for two months.

Even before the first new application was processed Monday, advocates were concerned the additional funding could also be exhausted in a matter of days, won’t be enough to meet demand, and might not reach the entities that need it the most.

The initiative, which first launched April 3, was marred by delays and glitches after guidance on how to process loans wasn’t released until the night before, and many big banks weren’t ready to participate or held back until rules became clearer. Advocates complained that many small mom-and-pop shops were shut out as outrage grew as larger, public companies and big chains got loans.

Bigger companies including Shake Shack Inc. and the operator of Ruth’s Chris steak houses got loans but returned the money after a backlash. A spokeswoman for the National Basketball Association’s Los Angeles Lakers said on Monday the team qualified for a $4.6 million loan, but repaid it after learning funds had been depleted.

The American Hotel & Lodging Association, which had won special consideration for hotels in the program after a last-ditch lobbying campaign -- even issued a study Monday suggesting that hotel owners could end up with a better cash flow position if they didn’t take the loans and closed their doors instead.

The SBA and U.S. Treasury Department have sought to avoid pitfalls from the first round. They issued new guidance last week reaffirming that companies must certify they were affected by the pandemic and telling large firms with access to other capital they shouldn’t apply -- and that firms can return loans by May 7 without penalty. Hedge funds and private-equity firms were told they were ineligible.

More than $2 billion from the first round was declined or returned and will now be made available, SBA Administrator Jovita Carranza said in a tweet on Monday. Congress also set aside $60 billion for small financial institutions with $50 billion or less in assets to ensure better access for smaller firms.

Still, large banks including Wells Fargo & Co. and Bank of America Corp. have been preparing to submit a barrage of loan applications that weren’t processed the first round or have been accepted since then.

To ensure access for all of the more than 5,000 lenders approved to participate in the program, the SBA announced on Sunday it’s capping loans from each bank at $60 billion and pacing the acceptance of applications while allowing lenders to submit them in batches -- initially set at a minimum of 15,000 and revised Monday to 5,000 or more that must be submitted by 9 p.m. on Monday.

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