03/09/2021 | News release | Distributed by Public on 03/09/2021 03:44
The Payroll Protection Program (PPP) was created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help provide relief to small businesses through loans that are forgivable and guaranteed by the Small Business Administration (SBA). Lenders who process PPP loans earn a fee from the SBA upon funding the loan. In addition, PPP loans bear a 1% interest rate.
Since inception, the program has provided a total of $550B of funding to businesses. And the second wave of the PPP loans (PPP2), which was put into place in January 2021, has been equally popular, lending $35B in the first week. As a result, in recent months, these loans have become a material part of bank balance sheets. And with changes in the program with each subsequent wave of funding from the SBA, this has raised many questions for lenders on:
And these questions are compounded by the fact that the guidance for these loans has changed with additional funding in June 2020 and the PPP2 program. And, many financial institutions have not had to deal with significant deferred fees in the past and the impact that they have on loan yield.
This blog will focus on the first two questions laid out above. Part II will focus specifically on the reserving considerations.
Classification of these loans
The first question that's arisen around these loans is how they should be classified. The AICP addressed this question in TQA 2130.42, noting that creditors should account for advances made under the PPP and PPP2 programs as interest bearing loans receivable, and not as facilitated government grants.
Tracking loans:
Loan tracking requirements have varied throughout the rollout of the program, with requirements evolving as the program continues. Loan systems must be flexible to allow appropriate setup for the variation in these.
For one example, the term of SBA loans was initially two years for the first wave and extended to five years for subsequent programs. For another, the application to be filled out and the reporting to SBA changed from the first PPP loans to PPP2 loans. In addition, the calculation of the maximum loan amount for a borrower has changed between the programs and is also dependent on whether the loan is a first or second draw. It is the lender's responsibility to calculate the correct maximum loan amount and to report that to the SBA.
Additionally, and notably, the processing fee paid to servicers by the SBA varies based on amount of the loan as originated. As such, business rules will need to be in place to ensure that the lender accurately calculates the appropriate accrual.
Finally, the processing fee paid to the creditor may be subject to clawback by the SBA if any one of the following criteria applies:
Because calculating the appropriate loan limits, reporting accurately and timely to SBA and managing borrower communication, are the responsibility of the lender, a lender's system limitations may mean that it can lose the processing fee it would otherwise have earned from the SBA.
LendersAccounting for PPP Processing fees and Prepayments:
Due to the unique structure of these loans:
The accounting for these loans raises many questions that banks will need to address, which is complicated by the fact that many institutions have not had experience dealing with fees and the yield calculations required to account for them.
The AICPA has been engaged in responding to questions, providing guidance to lenders to:
But lenders will need to think through the following questions as their portfolios continue to grow and fees become more material. And lenders will need to look for systems that can appropriately handle some of the complicated accounting associated with these loans, such as:
These processes are complex and require technical loan accounting that significantly deviates from the operational processing done by servicing systems. Lenders will be faced with having to comply with some of the more technical loan accounting standards.
And having the right processes in place can prevent material misstatements. Ensuring appropriate GAAP compliant loan accounting systems and allowance processes that provide enough flexibility that lenders can layer in their own accounting policies around things like non-accrual for SBA clawbacks, among others, will become a crucial investment for lenders.
To learn more about how we can help you solve the accounting, reserving and reporting challenges associated with PPP loans, contact us.
Commercial Lending, Regulation, Risk Management
Payroll Protection Program , PPP , small business administration , SBA , PPP loans