Getty
The Probable Next Round of PPP Loans Based on Necessity, Minority Outreach, and Exactly What Was Said About Automatic Forgiveness for Loans Under $150,000.
On July 17, 2020, the House of Representative’s Committee on Small Business held a hearing with Steven Mnuchin, the United States Secretary of the Treasury, and Jovita Carranza, Administrator of the Small Business Administration (“SBA”), to discuss the Paycheck Protection Program (“PPP”). Members of both parties praised the work done by these individuals with regard to the PPP program, but also voiced concerns about important issues as discussed below.
There was strong agreement that there should be a future round of PPP loans for businesses. Secretary Mnuchin suggested that Congress “would reauthorize the program to allow for a second check, and a second payment to the businesses that are most hard hit.” He followed this by discussing a revenue test to ensure that the businesses that receive future loans must actually need them.
My friend and PPP expert, Kevin Cameron, CPA, noted that Mnuchin’s “positive comments are welcomed, but he fails to mention that much of the positive results are simply a direct result of the unprecedented injection of $517 billion of PPP loan money into the economy… much of this money has been spent or is running out.”
Kevin and I will be hosting a free webinar on where we are with PPP loans on Wednesday, July 22nd at 10 a.m. EDT, with a free replay at 5:30 p.m. EDT. You can email info@gassmanpa.com with the subject line “Next Round” to sign up.
Democratic members of the committee argued that it was wrong for the SBA to allow many of President Trump’s associates to receive PPP loans, and encouraged greater funding for minority business owners and an increase in Economic Injury Disaster Loan (“EIDL”) caps.
The only clearly “biased political” discussion was in regard to Planned Parenthood. Congressman Bishop requested “unanimous consent to submit for the record the May 19, 2020 letter of SBA Associate Administrator, William Manger, to Planned Parenthood of Delaware, Incorporated, including the investigative document request and interrogatories appendant there, too.” Democrat Chu rebutted this and argued that Planned Parenthood’s actions were legal, and indicated that 166 members of Congress wrote a letter to the SBA stating that, “we asked you to administer the PPP program in a uniform manner and specifically not to exclude any entity or nonprofit on the basis of political ideology.”
It was clear from questions and statements that the Republican members have a much more optimistic view of the economy and the prospects for COVID-19 cases in future months. There was no discussion by Republicans of an increase in cases or the possibility of another shutdown. Hopefully this turns out true, but I am strongly advising my clients to prepare for an even worse economic recession than what occurred in the Spring. As the saying goes, prepare for the worst and hope for the best.
OPENING STATEMENTS
Chairwoman Velázquez, a Democratic Representative from New York, began the hearing with a discussion of how a number of President Trump’s friends and family members were able to receive PPP loans because the SBA exempted lawmakers and federal officials from otherwise applicable Ethics Rules. She then highlighted the racial divide of those who were and were not able to apply for and receive PPP loans, and stated that “a mere 12% of black and Latino business owners who applied for PPP loans reported receiving what they asked for and nearly half anticipated being forced to close permanently in the near future.” Her final point was that borrowers and advisors were fed up with “incomplete and ever-changing guidance,” and she asserted that the SBA should “do a better job communicating.” Thousands of CPAs and lawyers certainly agree with these last points. The forgiveness rules clearly constitute the largest en masse legal confusion for American businesses that has ever occurred, and make the tax law seem as clear as a yes or no answer.
Chairman Chabot, a Republican Representative from Ohio, was next to provide opening statements. He voiced some concern about PPP program funds being allocated to political organizations, but apart from this he simply praised the SBA.
Jovita Carranza, the Administrator of the SBA was the next speaker. She began by highlighting the successes of the PPP. She then provided information on the PPP data disclosure and stated that loans were made without reviewing borrower information, which will be verified in the future. What she said exactly was as follows:
- The data reflects information about loans approved by lenders and entered into the SBA loan system by those lenders. It does not mean that SBA has determined that a borrower has complied with program rules or is eligible to receive a loan and forgiveness. We are reviewing all loans.
Steven Mnuchin then spoke and first praised the Trump Administration for working with Congress to pass helpful legislation, and confirmed his support for future PPP funding. He then discussed his optimistic predictions for the economy:
- While the unemployment rate is still historically high, we are seeing additional signs and conditions of improvement. The Blue Chip Report is forecasting that our GDP will grow by 18% in the third quarter. The US Chamber of Commerce reports that 79% of small businesses are at least partially open, and one-half of the remaining businesses will open soon. Retail sales rose by 18% in May and by 7.5% in June.
I don’t know of any closed businesses that will reopen soon, so I sure hope the above 50% statistic is correct.
QUESTIONS AND ANSWERS
The remainder of the hearing was filled with questioning from the committee members. An outline of what was said is as follows:
Questioning from Congresswoman Velázquez
- Question: “Ethics Rules were waived administratively in the PPP, allowing friends of the Trump administration to get access without any further review… Were you concerned about those optics?”
- Secretary Mnuchin: “Congress could have included those same requirements, but decided not to do so.”
- Question: “Moving forward, you must work with us. And I ask that you remove the cap for new item loans immediately, and allow those with existing loans to obtain the capital they deserve. You still have $200 billion of loan-making authority left in the EIDL program, while small businesses are hurting.”
- Secretary Mnuchin: “I agree with you. There should be a set aside for small minority businesses.”
Questioning from Congressman Chabot
- Question: “Does the loan forgiveness process need to be simplified any more? For example, I know there’s some members of Congress that have suggested perhaps even forgiving all the loans under $150,000 for example.”
- Secretary Mnuchin: “I know one of the things we’ll talk about is should we just have forgiveness for all the small loans? I think that’s something we should consider. We should obviously make sure there’s some fraud protection, but we look forward to working with this committee and others”
- Question: “As you know, at this point, there’s approximately $130 billion that’s still in the PPP program. So everyone’s talking about. So what do we do with that? Do we reduce the number of employees eligible from, say, 500 down to 100, or do we stick with what we have? Do we do a second PPP?”
- Secretary Mnuchin: “The administration supports using the existing money and topping it up with some additional money, and that will be discussed, and allowing for a second payment to the businesses that are especially hard hit… I think this time, we need to have a revenue test and make sure that money is going to businesses that have significant revenue declines.”
- Question: “One major concern was the time it took to get the guidance out. Do you have any thoughts for the future as to what we might be able to do with regards to that?”
- Secretary Mnuchin: “Now that we have it up and running, especially to the extent there are minor changes to the PPP and the EIDL programs, working with the SBA, we can get the guidance out very quickly. We won’t have the technology problems we had last time. And again, I would encourage this committee to work in the context of these programs and put more restraints”
Questioning from Congressman Troy Balderson
- Question: “An issue that I’ve heard more and more about from my constituents is the lack of clarity on PPP forgiveness. Specifically, I hear this often from business owners looking to have their businesses bought out. This could be because of the pandemic or a planned sale prior to COVID-19 that’s been placed on hold because of the virus. In this situation, the business owner took PPP in order to support their employees, and now they cannot sell their business with this forgivable loan on the books. Why is this?”
- Administrator Carranza: “We haven’t addressed that at this point. An entity wanting to sell their firm, and they have a loan.”
- I guess she is not familiar with the rules that her SBA has promulgated, which permit a buyer of a business from stepping into the shoes of the borrower for loan and forgiveness purposes.
Questioning from Congressman Kevin Hern
- Question: “Could you discuss what you’ve learned from this, or strategies that the federal government can implement in the future to better prepare for this next situation, or this situation in the future?”
- Secretary Mnuchin: “One of the things we liked about the PPP was all the money we were spending on the employment side of this was money we saved on unemployment. I think one of the issues we’ve learned, and we have to fix in the next legislation, is the technical issue where in certain cases, states with the top up were paying people more not to work than to work.”
Questioning from Congressman Andy Kim:
- Question: “I understand that the Economic Injury Disaster Loans were capped at $150,000 to ensure all borrowers could access the funds. However, this policy shortchanged many businesses. So I wanted to ask you, moving forward, will you commit to removing this cap for new EIDLs and to allow the existing loans to obtain more funding in phase two.”
- Administrator Carranza: “Congressman, what our experience is currently is that the average loan has dropped from $63,000 to$57,000, down to about $37,000, since we’ve opened in June. July, excuse me. And so at this point, the operating expenses that people apply for are not hitting the cap in great numbers. About 1% of the applicants are pursuing that amount. 80% of the loans that we have processed come in significantly under the $150,000, but I will continue assessing it… Since we opened up the portal, we have an additional five million applications. We have probably about 15 to 20 days remaining with the remaining funds. So if I keep that level of $150,000, I will be able to service five more million small businesses.”
Questioning from Congressman Jason Crow:
- Question: “Is it important that members of the Trump family, associates of the Trump organization, or employees of the administration disclose their interests in entities that are receiving PPP money so you can conduct that conflict of interest analysis? Do you believe that disclosure is necessary in the context of the administration?”
- Secretary Mnuchin: “Again, I don’t believe that, because, again, this was not an issue that was required by Congress. This was a very specific issue, and there were no restrictions. Now, I’m not aware if they took loans or they didn’t, but let me be clear, there was no restrictions on the PPP. There were restrictions for the administration in Congress, same terms, on the other.”
Questioning from Congressman Burchett
- Question: “Secretary Mnuchin, in your opinion, how should we in Congress utilize the remaining $103 billion in the PPP funding?”
- Secretary Mnuchin: “My suggestion is that Congress would reauthorize the program to allow for a second check, a second payment to the businesses that are most hard hit. I think we should use a revenue test… I don’t think any specific industry should be targeted, I think that we should use a revenue test and something significant. I’m sure there were some that fell through the cracks, but we’re very proud that the majority of the loans went to very small businesses.”
Questioning from Congresswoman Davis
- Question: “Can you tell us what your plans are for releasing the data of the recipients for the loan forgiveness portion here?”
- Secretary Mnuchin: “Yes, in the forgiveness process, people will be required to provide much more data, and that data will be released.”
Questioning from Congressman Bishop
- Question: “Given that fantastic success, if Congress legislates additional relief, we would be wise to continue the model of PPP and keep private sector lenders enlisted in the mission. But we’ve heard that lender fatigue is an issue… isn’t it important to fight lender fatigue in this way? Will you work with us on this protection for lenders who have done so much to help in the current crisis?
- Answer: “Yes” from both Secretary Mnuchin and Administrator Carranza.
- Question: “Shouldn’t we also be looking at that same issue for small businesses who face similar concerns, that is, frivolous liability or frivolous lawsuits?”
- Administrator Carranza: “Yes. One of the concerns I had was that we don’t take any measures that would be punitive to the borrower or the lender, especially when we have started with 1,800 authorized lenders and grew that to 5,500. The Secretary and I are still working on additional non-traditional lenders that are still applying to provide PPP loans. We are looking forward to making sure that the underserved, the sole proprietors and the independent contractors, really have an opportunity with this over $100 billion dollars that remain.”
- Question: “It is now widely known that abortion provider Planned Parenthood brazenly violated the law concerning business affiliation by taking $80 million of PPP loans via its affiliates. The American people want to know how the SBA failed to act in real time to prevent this wrongdoing and how it will act quickly to compel the return of those funds and prosecute those responsible.”
- Administrator Carranza: “I’ll answer that question in two manners. One, we do not discuss individual loan issues publicly, and secondly, we will be reviewing all affiliations and all loans closely.”
Congresswoman Judy Chu used her time to respond to these statements regarding Planned Parenthood.
- Statement: “Let me say that planned Parenthood affiliates operate independently from the national organization, each having their own CEOs and board of directors, and therefore qualify for PPP… So I am deeply concerned about the motivations which would have prompted the SBA to conduct these investigations into the eligibility of Planned Parenthood affiliates, especially after several of them learned about these investigations first from Fox News, rather than from the SBA directly.”
Questioning from Congressman Schneider
- Question: “Secretary Mnuchin, what economic forecasting or modeling, if any, has the Treasury done to anticipate future needs?”
- Secretary Mnuchin: “So, I think economic modeling is particularly hard at the moment because of the fact that we closed down the economy, this is not a typical economic situation. But we are relying upon our economic models where we do anticipate as we open the economy, that we will have a significant improvement, as I’ve said, in the third quarter, but there will be industries and we’ve done economic modeling within the Treasury on the industries that are going to be hit the hardest and the sizing that we need of additional PPP funds to address that. And we’ll be working with this committee and with the Senate on that.”
- Question: “Do your models take into account the fact as we’re seeing in California, Texas, Arizona, Louisiana, Florida, a serious spike in cases? California, you’re seeing businesses closed down again, do the models take that into consideration?”
- Secretary Mnuchin: “Well, again, let me just first say that traditional economic models, given the medical situation, are very hard. But yes, we’re looking at this across the entire US and certain scenarios, as you said, where there will be a slowdown in opening and certain areas where things are doing better. But again, that’s the reason why I think we need additional funds to help these hardest hit businesses.”
Questioning from Congresswoman Craig
- Question: Secretary Mnuchin, can you just say a little bit more about the program as you would envision it allowing those hardest hit sectors to come back? And I just want to make sure that I understand the direction that you and the administration are thinking as well.”
- Secretary Mnuchin: “My suggestion would be, we have a program that works. We try to keep as many parts of the program consistent. We allow a second check and that we put a limitation on a revenue decline and size. And I understand your bill, I think that’s a reasonable approach, but something again, we’re going to want to work with you, this committee, and the Senate, to figure out what the appropriate revenue decline should be? What the size of the businesses should be? Whether it should be 100 or slightly higher than that? But again, we have complete agreement, there should be a second check available to the businesses that are hardest hit and there should be requirements around that.”
CONCLUSION
This hearing provided a number of indications for what is to come for future PPP loans.
We will continue to read both pronouncements and tea leaves as the rules develop and keep you posted.