PPP, PME and the challenges of KYC
The House selection subcommittee on the coronavirus crisis found that the US Treasury Department had encouraged banks to prioritize existing clients who applied for PPP loans, allegedly to the detriment of underserved communities and SMEs. But “going with who you know” may be a way to get loans processed faster, speed up funding, and cut fraud.
Controversies surrounding the Paycheque Protection Program (P3) can reverberate long after the pandemic is in the rearview mirror.
On Friday, October 16, the House selection subcommittee on the coronavirus crisis found in a report titled “Underserved and Unprotected: How the Trump Administration Neglected the Neediest Small Businesses in the PPP,” the US Treasury Department urged banks to prioritize existing customers. apply for PPP loans.
Search the report – which largely focused on whether small and medium-sized enterprises (SMEs) and underserved and under-represented markets were adequately served by the program – the subcommittee found that:
“Documents obtained by the subcommittee show that the Treasury privately told lenders to ‘go to their existing customers’ when issuing PPP loans. Banks acknowledged that this created “an increased risk of disparate impact on minority and women-owned businesses,” but many banks have followed the Treasury’s direction. “
In terms of timing, in an email obtained by the select subcommittee dated March 28, 2020, the head of the American Bankers Association (ABA) described to the ABA board that there had had a call with Treasury officials on March 27 (the day the CARES law was enacted, which got the PPP off the ground).
The Treasury Department’s alleged directive was that banks should go to their existing customer base when extending loans. Elsewhere, JP Morgan agents corroborated that the banks “got it”, as noted in the report, that they would work with existing customers.
The report also found that many of the financial institutions (FIs) studied by the subcommittee designed loan programs that benefited larger business clients with a separate and faster process.
Despite the establishment of portals for PPP, “most of these banks limited PPP loans to existing clients, many applicants were served by the industry that usually managed their primary banking relationship.”
In terms of individual lenders, JP Morgan – the largest PPP lender – processed loans over $ 5 million almost four times faster than loans under $ 1 million, according to the subcommittee report. PNC and Truist processed their larger loans about twice as fast as smaller loans. All three lenders processed loans to large businesses with more than 100 employees on average 70% faster than loans to small businesses with five or fewer employees.
The KYC component
The report raises legitimate concerns about whether and how the smallest and most vulnerable communities and businesses have been (or have not been) served. Estimated PYMNTS recently that 32.7% of SMEs had applied for Small Business Administration (SBA) loans – including, but not limited to, PPP loans.
But it also apparently bypasses a sticking point and a major issue in launching a multi-billion dollar program: the onboarding process, the compliance boxes to check, and the know your customer (KYC) rules to be. regular.
In a interview with David Barnhardt, Experience Director at GIACT, as the PPP program was in full swing, the executive told Karen Webster that the program was speedy… but the opportunity for fraud was also emerging. Speed meant FIs had less time to complete the usual battery of due diligence checks, and therefore may have prompted them to look to existing relationships.
“The idea was, presumably, that they didn’t have time for their normal due diligence,” he said. “Time is running out because the money is going to run out. »With already existing relationships, the initial pitfalls of relying on initial inquiries or (so far) unknown entities / contractors (and perhaps falling prey to fraudsters or incomplete information) can be avoided. .
“Given the onerous regulatory requirements to onboard a new client and the need to act very quickly for struggling businesses, we initially focused on existing clients,” said a JP Morgan spokesperson. The Wall Street Journal. Treasury Secretary Steven Mnuchin “encouraged small businesses to go to their own banks for this reason,” the spokesperson said.
The $ 670 billion program had its ambitions, to be sure – namely to keep the backbone of the Main Street economy intact… and whether those ambitions were realized is open to debate.