By Jon Hill

Law360 (October 20, 2020, 8:38 PM EDT) -- Top U.S. banking industry organizations are urging Congress to address what they're saying is a "debt trap" that threatens to leave a large number of struggling small businesses unexpectedly owing money on their forgivable Paycheck Protection Program loans.

In a Monday letter to senior lawmakers, the American Bankers Association and other banking trade groups warned that many PPP borrowers won't get the loan forgiveness they were counting on because they also accepted aid in the form of Economic Injury Disaster Loan advances, which will reduce dollar-for-dollar how much forgiveness these borrowers are eligible to receive.

"Lenders we represent are seeing firsthand the spreading awareness, shock and resentment among borrowers who believe they were deceived about the nature of the EIDL Advance," the groups wrote. "We do not believe it was the intent of Congress to effectively trap one million vulnerable small businesses with unexpected debt."

Handled by separate offices within the U.S. Small Business Administration, the PPP and EIDL advances were creations of the Coronavirus Aid, Relief and Economic Security Act and were intended to help small businesses struggling to stay afloat amid the COVID-19 crisis.

The PPP offered small business loans of up to $10 million each that could be fully forgiven if put toward payroll and certain other expenses, while the EIDL advances were emergency grants of up to $10,000 each meant to tide over small businesses waiting on approval for an economic injury loan.

Many small businesses pursued relief through both programs simultaneously, but banks and other PPP lenders "did not know" if a given PPP loan applicant already did or would receive an EIDL advance, too, the trade groups said in their letter on Monday.

The groups said the SBA also pulled the carpet out from under these small businesses by changing guidance midstream. The agency initially made the EIDL advances out to be just grants, only to say later that a borrower's PPP loan forgiveness would have to be offset by any EIDL advance amount, according to the letter.

As a result, some small businesses that participated in both programs might see significantly less or none of their PPP debt forgiven, the trade groups said.

"Whether intentionally or as a result of confusing communications, PPP borrowers were misled and are only now beginning to discover the truth of their situation. Even today, many borrowers remain unaware of the debt burden they will soon face," the letter said.

The trade groups added that many PPP lenders aren't happy about the offset situation, either, given that whatever PPP debt isn't forgiven will wind up occupying space on their balance sheets.

"The EIDL advance debt trap could not come at a worse time," the groups wrote.

The letter, which was addressed to the chairs and ranking members of the U.S. House and Senate small business committees, called on lawmakers to work quickly with the SBA to "find a solution that will fully restore PPP forgiveness and help our nation's small businesses."

"We urge you to take all necessary measures to provide relief for affected small businesses and PPP lenders in conjunction with releasing unallocated PPP funds to create additional small business credit," the groups wrote. "At a minimum, SBA should immediately stop the transfer of any residual EIDL advance balances to PPP lender balance sheets and return them to the SBA Office of Disaster Assistance, which administers the EIDL program."

Joining the ABA on Monday's letter were the Consumer Bankers Association, Community Development Bankers Association, Credit Union National Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America, National Association of Federally-Insured Credit Unions and National Federation of Independent Business.

--Editing by Michael Watanabe.

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