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Why local banks could make or break the success of the Paycheck Protection Program

Today is the first day of the 'Paycheck Protection Program' for small businesses with under 500 employees to get access to $349B in forgivable SBA loans. Yahoo Finance’s Alexis Keenan joins Seana Smith to discuss why the inconsistency of local banks will determine the efficiency of the program.

Video Transcript

SEANA SMITH: The big story of today is the jobs report. We had 701,000 jobs lost in the month of March alone. That is the worst report since 2009. A sector rise today leading the sell-off to the downside.

We have Utilities and Financials, those two sectors are the worst performers so far today. Well, today is also a big day for small businesses. We have small business under pressure from the coronavirus outbreak, they can begin applying for nearly $350 billion in forgivable loans. And here to talk more about this we have Alexis Keenan.

And Alexis, I know you're digging into this story, but I first want to talk about just the ability of these banks to handle the influx number of customers and number of businesses looking for loans at this point. Do we have any sense, just in terms of their ability to handle these loans? Because I know some of the biggest banks have been saying now for the past couple of days-- couple of days that they still are not ready for this surge in applicants.

ALEXIS KEENAN: Yeah. Hi, Seana. It's been really kind of a mixed basket of how accessible these program loans are for these small businesses. In theory, these applications were supposed to be widely available today, but some of the banks, including the largest US bank, JP Morgan Chase, they delayed in an email to clients on Thursday, yesterday, saying, that they were not quite ready. Though they have, since this afternoon, updated a website where it looks like their clients can apply. Also, Wells Fargo delaying.

Some local banks as well still trying to get up and running, but among the big banks, Bank of America was up first. They were up and going with their website for their clients to apply, but the reason that these delays were happening, really, is because the banks, large and small, looking for more clarity from both the Treasury Department, as well as the SBA, on the terms of these loans. Really some [? uncomfortability, ?] I guess, with how the underwriting is going to work for these loans because it's been rolled out so quickly. Now House Speaker, Nancy Pelosi, said, that that approximately, $350 billion is just not going to be enough for the full program.

But Treasury Secretary, Steve Mnuchin, he was tweeting today a couple times, this afternoon most recently, saying that, already more than $875 million of these programs loans had been processed. He said, most of those were processed by community banks and that big banks will get up and running quite quickly. So, yeah, you know, I've talked to a number of small business owners today, also organizations that represent small business owners, and their members and these small businesses, they're really struggling. Some local banks too. It's not just the big banks that aren't up and running.

SEANA SMITH: Is that a question just in terms of because these loans could potentially be forgiven, but they're only forgiven if these small businesses use the loans for specific purposes. What can you tell us there?

ALEXIS KEENAN: Yes. So there's a little bit of fuzziness around some of the particulars here, but this is basically how it works. The first step is really for these small business owners to determine if they're even eligible to apply. Now, generally, these are for companies that have fewer than 500 employees, but there are some exceptions to that rule. They also need to certify that the funds are absolutely necessary for their ongoing operations, and that's more of a-- that's kind of a trust factor, at this point, that representation.

So these are for small corporations, sole proprietors, self-employed, those with partnerships, also independent contractors, non-profits, veteran organizations, and a few others. Also they're going to need to either use the loan money to pay their workers, keep them on their payroll, or to pay for qualifying expenses, and I'll talk about that in just a minute. The second thing is what you're touching on is, whether once these eligible debtors will take possession of these loans. The next is, whether they'll actually be forgiven.

Now, the money that is eligible for forgiveness, it's only money that's spent during the first eight weeks of the disbursement of these loans. So you can't hold on to this money. It has to be spent in order to be eligible. Second is, that the types of expenditures that the loan money can be used for, to be forgiven, it has to go to qualifying payroll costs, also interest on covered mortgages, rent, utilities, paid sick, family, and medical leave.

However there's still a ton of uncertainty around whether other benefit payments by these companies will be accepted outside of the coronavirus, more emergency issues, in terms of taking care of those benefits. Also, employers have to maintain staffing and compensation levels, otherwise there are these proportional decreases that are going to happen where some of the loan money will not be forgiven. Also, in terms of how much capital they're going to be able to access and under what terms, the maximum amount that any company, any small business, can get, it's 250% of what is their trailing 12-month average payroll.

That is capped at $10 million. Under no circumstances can it exceed that $10 million threshold. Also, the rate last night was bumped from 0.5% to 1%. The loans have a two-year term, and they are also deferred for six months where payments do not have to be made during that time.

One more thing I want to mention is, that banks do get discretion over the interest rate. While that interest rate is generally accepted to be 1%, there is some discretionary ability for these banks to go up to 4%. They also prescribe their own underwriting standards, and so that is presenting some challenges for business owners that don't already have a relationship with a bank because it's all about knowing their customer, and some of the underwriting requirements that these banks are concerned about. They want to make sure that their giving the loans to folks who are representing accurately what their past businesses look like.

SEANA SMITH: Yeah. Yeah, there's a lot to unpack there. Alexis Keenan, thanks so much for breaking all that down for us. We really appreciate it.