Best Practices: What Should You Do With Your PPP Loans?

This year has brought a lot of uncertainty and SBA lending is no exception.  The Paycheck Protection Program (“PPP”) expired on August 8th, and the SBA’s loan forgiveness portal opened up on August 10th, and yet Lenders continue to wait and wonder what will happen with PPP and forgiveness as Congress debates another economic stimulus package.  Some lenders and private companies have started to build platforms to process forgiveness applications for their PPP borrowers.  However, thanks to the Flexibility Act (passed June 5, 2020), which extended the covered period for PPP loans to 24 weeks, the deferment of payments for 10 months, and the maturity of the PPP loans to 5 years, many small businesses are not as rushed to spend their PPP funds and apply for forgiveness.  As a result, Lenders are not as pressured to process the PPP loan forgiveness applications, allowing them to take a, “wait and see what happens next” approach. Yet, the extended forgiveness process is not ideal for many lenders. With $525 billion in PPP loans outstanding to more than 5 million borrowers, many Lenders are examining the time and resources it will take to hold and service their PPP loan portfolio over the next few years, and many are looking at alternatives.

As with all stages in PPP, processing a forgiveness application may be very straightforward in some cases, and quite complex in others.  There is no doubt that Lenders will need dedicated employees to learn and navigate the forgiveness process.  Many PPP notes that are not forgiven, in whole or part, or for which the borrower does not apply for forgiveness, may require modifications to reflect the extended 5 year term (for loans originated after June 5, 2020), and calculate and establish the principal and interest payments for any unforgiven amount.  For borrowers who received PPP funds, but did not survive in the pandemic, the SBA has not begun to address how the lenders will submit their claims for the 100% SBA guaranty on such loans. SBA audits and investigations will also require staff time and attention, as well as “regular” servicing actions, such as borrowers trying to sell their businesses prior to applying for forgiveness.

Lenders who want to conserve their resources, or focus on providing financing to new and existing customers, are seeking partners to outsource servicing and forgiveness, or participating or selling their PPP loan portfolios in total.  If a Lender desires to hire a company to help service and process forgiveness for their PPP Loan portfolios, they must enter into a Lender Service Provider Agreement (LSPA), which must be reviewed and approved by SBA.  The line between providing a technology platform for processing forgiveness applications and actually providing services on behalf of the Lender is thin, so Lenders should be cautious and get an expert opinion on whether a LSPA is needed. SBA has been efficient in reviewing and approving these agreements throughout the PPP process.  

SBA has also provided two policy notices to address Guidance for Participation Sales of PPP Loans (SBA Procedural Notice 5000-20021 effective April 24, 2020) and Guidance on Whole Loan Sales of PPP Loans (SBA Procedural Notice 5000-20024 effective May 1, 2020).  In both cases, the SBA requires notice (as opposed to providing approval), provided that the Lender is selling either a 100% participation or the whole PPP loan, and the PPP loan(s) is sold to another Lender with an executed SBA Form 750 Agreement, SBA Form 3506, or SBA Form 3507.  In a 100% participation, the selling Lender will remain the Lender of record, hold the note and be responsible for all servicing of the PPP Loan.  This option is better for Lenders who want to raise capital now, but are comfortable going through the forgiveness process later.  In a whole loan sale, the purchasing Lender becomes the Lender of record, takes possession of the note and is responsible for servicing and processing forgiveness.   If a Lender is not interested in going through the forgiveness process, but wants to provide good customer service for its clients, finding a buyer who has an established PPP Loan forgiveness platform and is focused on purchasing and servicing PPP Loans may be the right choice for your institution.  

While it’s difficult to predict what will happen next for PPP, it’s certain that PPP loans will require servicing which will take time and resources, so consideration of all options is a worthwhile investment.  If you have questions about servicing or selling your PPP Loans, please contact the attorneys at Starfield & Smith at 215.542.7070.