Analysis

Fintech Lenders May Miss Boat On Virus Relief Loan Program

By Jon Hill
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Law360 (April 6, 2020, 10:15 PM EDT) -- Fintech firms want to be partners in the Trump administration's $349 billion loan program to provide relief to small businesses amid the novel coronavirus pandemic, but eligibility requirements and other features of the program could leave these lenders sitting on the sidelines.

Launched on Friday through the Small Business Administration, the Paycheck Protection Program aims to throw a lifeline to the millions of small businesses that are in danger of laying off workers and going under while large swaths of the economy are shut down for the COVID-19 pandemic.

The program calls for enlisting private-sector lenders to make up to $349 billion in low-interest, forgivable loans to small businesses for use in covering payroll and other expenses. But while the SBA and U.S. Treasury Department have given banks a clear path to participating in the program as lenders, nonbank fintechs may struggle to find a way in under current guidelines.

"Fintech lenders, especially the small-business fintech lenders who specialize in this, have been beating down the door of Treasury and SBA to participate," said John Pitts, head of policy for Plaid, a fintech software startup bought by Visa Inc. earlier this year. "They are very eager to do it. They have really solid relationships with many of these small businesses … they just need the go-ahead to do it."

He added that it's possible fintech lenders and their customers will be left out "unless there's an additional appropriation from Congress to fund a second round of PPP."

Authorized by the $2 trillion federal coronavirus relief legislation enacted in late March, the Paycheck Protection Program has been dogged by uncertainty as Treasury and SBA officials have rushed to get it up and running at full speed.

Initial concerns from banks about issues like potential legal liability and loan profitability were allayed somewhat last week as officials fleshed out details with additional guidance and rulemaking, but financial services attorneys told Law360 the qualifications needed just to become a PPP lender remain a sticking point for many interested fintech firms.

"There was tremendous lobbying to get fintechs involved in this because they've got the technology to originate lots of loans very quickly, but the way this program is set up, I think that there will not be many fintechs participating as lenders," said Scott Pearson, a financial services partner at Manatt Phelps & Phillips LLP.

In a rulemaking issued Thursday, officials essentially pre-approved banks to make PPP loans so long as they're in good financial condition and not in trouble with a federal regulator. But nonbanks must meet certain other standards, including requirements surrounding compliance with the Bank Secrecy Act, a federal anti-money laundering law.

Although many nonbank fintechs already have some anti-money laundering protocols in place, Pearson said these aren't likely to be viewed as robust enough to qualify and can't be bulked up without significant investments of time and money that would make PPP participation impractical.

"Essentially, this rule means you won't see any marketplace lenders or other fintech companies making these loans," Pearson said. "They may act as brokers, going to their customer bases and working with banks to help the banks make loans, but I don't think that they're going to be making the loans themselves."

Even if they felt confident about qualifying for the program, Pitts said there isn't yet a clear process for fintechs to obtain certification as PPP lenders. Banks and credit unions that aren't already approved to be SBA lenders can get certified by filing a form that was released last week, but Pitts said fintech lenders are still waiting on the SBA to put out an equivalent form for them.

"What I'm hearing is that form is coming early this week, but early this week is four or five days after the banks have begun making loans," Pitts said.

And with the $349 billion pool of PPP loans set to be distributed on a first-come, first-serve basis, time is of the essence. As of Monday morning, $38 billion in loan applications have reportedly already been approved by the SBA. 

"If fintechs and banks are, by law, supposed to participate in this program on equal footing, there's no reason why a small business that happens to be the customer of a fintech lender, as opposed to a bank lender, should miss out on this initial pool of money, simply because the government hasn't been able to give permission to the fintechs to participate," Pitts said.

Another potential issue identified by Pearson and others is the decision by Treasury and SBA officials to set the interest rate on PPP loans at 1%. That's up from an initially planned 0.5% rate that drew objection from banks for being so low as to be unprofitable, but Arnold & Porter partner Michael Penney said 1% is still going to be problematic for many fintech lenders.

"Depending on how they would fund PPP loans and whether they could sell the loans following origination on favorable terms, it’s possible that many fintech small-business lenders would have a cost of funding that doesn’t work for 1% PPP loans," Penney said. 

"While the lenders of PPP loans will receive an origination fee, fintech lenders will need to assess the economics of being a lender, and it’s possible the loan interest rates and origination fees are too low for the loans to be economical to fintech lenders," he added.

Given the scale of the loan program and the pressure that regulators were under to launch it, attorneys who spoke to Law360 were quick to credit Treasury and SBA with accomplishing as much as they have on implementation and said it's not surprising that there are still kinks to iron out.

"Any time you're making a multibillion-dollar rule on the fly to, you know, address a pandemic that has the potential to kill millions of people, you're probably going to miss some details," said Catherine Brennan, a partner in Hudson Cook LLP's fintech and alternative business finance practices.

Already, work to bolster the program continues. On Monday, for example, federal regulators responded to liquidity concerns shared by fintech lenders and banks about involvement in the program by announcing plans to create a Federal Reserve funding facility that would buy PPP loans.

And fintechs could yet have other roles to play in support of the program, according to Penney.

"People are still very optimistic in terms of trying to find an entry point where their solutions, their processes and their systems can provide a benefit on the backend to the lenders who are making these loans," Penney said. "Their focus is turning to how they can acquire technologies to service this [PPP loan] market in some other way."

But with some industry observers predicting that the program's lending capacity will be quickly exhausted, the window for getting fintech firms involved as PPP lenders may be closing sooner rather than later.

Pitts said such a development would represent a missed opportunity to capitalize on the underwriting efficiencies that these firms could bring to the program, including their ability to cater to the sole proprietorships and other smaller-business borrowers whose financing needs may not be profitable for banks to serve.

Brennan noted that fintech lenders are also set up to deliver services in the way that public health demands right now: remotely.

"We cannot go to a bank to sign an SBA loan agreement, yet many SBA loans are typically closed in person," Brennan said. "Fintech entities are uniquely positioned to help the government distribute these badly needed funds to small businesses, so it is kind of confusing to see the disconnect."

--Editing by Emily Kokoll and Michael Watanabe.

For a reprint of this article, please contact reprints@law360.com.

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