Businesses are having problems in South Florida getting access to money under the Paycheck Protection Program portion of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Paycheck Protection Program is supposed to provide a lifeline so businesses in Miami and other places can keep their employees on the payroll and get money into the pockets of consumers. There are a lot of questions that small business owners are asking themselves, such as:
- What happens when the banks stand in the way of people being able to get the money?
- What incentive do the banks have for taking on new customers and underwriting the loans?
- Is there possible legal action to force a bank to take on a new customers?
First, it is important to know that the CARES Act is a roughly $2 trillion relief package that was passed with the intent of helping “keep businesses and individuals afloat during an unprecedented freeze on a majority of American life.” Of that $2 trillion, about $350 billion is for loans to small businesses under the “Paycheck Protection Program.” Eligible companies can apply to borrow up to 2.5 times their average eligible monthly payroll costs (capped at $10 million) and interest rates on the loans will not exceed 4%. Depending on how much a business borrows and how it uses the funding, all of the loan—or a portion of it—might be forgiven. All Paycheck Protection Program loans must be made by an SBA approved lender.
One of the biggest issues that businesses are now facing is getting a bank to take their application and approve their loan. Many banks do not want to underwrite the loans for the small amount of money they make on originating the loan. Other banks do not want to take on new customers to write these loans. That is a real problem for businesses because not all businesses have accounts with banks that are SBA-approved lenders. This has caused a problem for small businesses in Miami and the rest of Florida because it leaves a group of qualified businesses without the ability to get the Paycheck Protection Program money. This is even more of an issue because there are reports that the initial $350 billion of funding for the Paycheck Protection Program may run out. Wells Fargo stated that they are already at or near their capacity for lending under the PPP. Some people believe that the banks were unprepared to lend under this program. Fortunately, Congress is discussing providing an additional $200 billion in funding.
Other good news is that some local community banks are making an effort to take on new customers as a business initiative. National lenders, such Bank of America, are also allegedly starting to take new applications, likely due to pressure from the federal government. The federal government raised the fee that underwriting banks get to 1% from 0.5% to encourage SBA-approved banks to underwrite more of the loans.
However, what happens if you still cannot get a Paycheck Protection Act loan for your business? Can you force a bank under the CARES Act to take you on as a customer? The answer is probably “no.” Private banks do not yet have an obligation under the CARES Act to take on new customers.
In the CARES Act, the Senate stated that there should be guidance to lenders to ensure that the PPP loans prioritize “small business concerns and entities in underserved and rural markets.” It also grants preference to minority-owned businesses by providing $10 million to fund the Minority Business Development Agency. However, without similar specific guidance for how the remaining hundreds of billions of dollars is to be loaned to small businesses, banks are unrestrained in exercising their discretion. Unless an act specifically addresses discrimination—like the race, sex, gender, religion, national origin, and marital status language in the Fair Housing Act and Higher Education Act—then lending institutions can effectively deny loan applications on their own accord, including on grounds that the applicant is not a previous customer.
The CARES Act needed to be specific. Guidance language stating priority should be given to small businesses in “underserved and rural markets” is overly generic and under inclusive. It gives banks too much discretion and small businesses in cities too little funding. Without specificity, small business owners in cities around the country, including South Florida and Miami, will be left behind and forced to litigate the issue against banks who are not prioritizing small businesses, as the CARES Act requires.