Community Banks should not only be permitted, they should be encouraged, to participate as borrowers in the CARES Act SBA Paycheck Protection Program (PPP). Both the Small Business Administration and each of the federal and state banking regulators should expressly acknowledge that community banks with less than 500 employees are both permitted and encouraged to participate, as borrowers, in the PPP. 

[Update, Evening of April 2, 2020. The SBA has now published the interim final rule for the PPP. Although the guidance published under either “2(a) Am I eligible?” or “2(b) Could I be ineligible even if I meet the eligibility requirements in (a) above?” make no mention of banks being ineligible, provision 2(c) provides that “Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10.” Banks are included as non-eligible borrowers under both provisions. As discussed below, this remains in apparent disagreement with the CARES Act, but unless the SBA changes its mind, it appears we’re missing an opportunity to further expand credit for small businesses.]

[Update #2, Still Evening of April 2, 2020. The Interim Final Rule clearly contemplates that the PPP is not otherwise subject to SBA rules as it provides “The program requirements of the PPP identified in this rule temporarily supersede any conflicting Loan Program Requirement.” So, to be clear, the SBA and Treasury chose not to allow community banks to participate.]

Without this encouragement, community banks risk regulatory criticism and reputational concerns that participating in the PPP represents a warning regarding the bank’s safety and soundness.   I would argue that the truth is far different.  Participating in the PPP would demonstrate that bank management, notwithstanding the economic uncertainty, wants to fortify the bank’s safety and soundness while extending its ability to provide credit to households and business throughout the United States.

In the last week, the federal banking agencies have announced a number of regulatory actions intended to “increase banking organizations’ ability to provide credit to households and businesses,” including modifications to the supplementary leverage ratio.  These changes are both reasonable and appropriate, but only affect the largest banking institutions.  Like the aims of the Small Business Administration and the Paycheck Protection Program more broadly, efforts should also be taken to support community banks in their efforts to continue to provide credit to households and businesses as we all work through the impacts of the coronavirus.  Banking regulators could directly “increase community banking organizations’ ability to provide credit to households and businesses” by encouraging their participation in the PPP.  

The text of the CARES Act provides that “any business concern … shall be eligible to receive a covered loan” if the business concern meets the employee thresholds set forth in the CARES Act.  If law school taught me anything, it was that any should mean any. Neither the Borrower nor Lender Information Sheet on the program published by the U.S. Treasury Department discuss any additional limitations based on type of business.  In fact, the Borrowers Information sheet states that “All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply.”  If law school taught me anything else, it was that all should mean all. Similarly, the initial application provided by the U.S. Treasury does not contemplate or provide for any collection of the type of business engaged in by the borrower.

Notwithstanding these relatively clear pronouncements, we continue to hear from representatives of the SBA and bank regulators (as well as bank trade associations that are speaking to even more representatives of the SBA and the bank regulators), that banks should not be eligible borrowers.   It is true that SBA regulations generally (See 13 CFR Part 120.110) provide that financial business primarily engaged in the business of lending, such as banks, are ineligible for SBA business loans.  However, that regulation also makes all non-profit businesses ineligible, and contains other limitations that are not found in the CARES Act statute, loan information or application.

Concerns have also been raised whether banks will be punished or otherwise criticized for certifying that the current economic uncertainty makes a loan request under the PPP necessary to support the ongoing operation of the applicant.  The U.S. banking system is strongly regulated and well-capitalized.  Certainly no depository institution is at immediate risk of being unable to make payroll payments or otherwise honor its contractual obligations.  But that also certainly does not mean that the current economic uncertainty isn’t affecting community banks on a daily basis.  After all, community banks are fundamentally small businesses.  They are having to deal with the economic, health, and social distancing aspects just like other small businesses… while also remaining a part of the critical infrastructure of the U.S. economy and lender to so many other small businesses.  The economic uncertainty of the pandemic affects every operational and credit decision made by our nation’s community banks… and that is, to quote the requested certification, the “ongoing operation” of community banks.

The operating expenses, including payroll, of a bank reduces the funds (and capital) that bank has available to provide credit to households and businesses.  Because of the powers of capital ratios and FDIC insurance, participation in the PPP program by community banks as borrowers could allow significant additional credit to be extended to households and businesses throughout the United States.

Bankers are no doubt scarred by their experiences with TARP; I know I am.  While TARP was marketed as only being available to healthy banks (and knowing many unhealthy clients that did not receive the funds, that marketing was truthful), it quickly became a black mark in the eyes of regulators and the public.  It will be hard for this generation of bankers to ever overcome that impression of a bait and switch by the government.  That said, community bankers also want to do what is right for their banks and for their communities.  Increasing their ability to lend in the face of this crisis is critical. We need the banking trade associations and regulators to come together to encourage participation in the PPP and to push back against any perception of weakness in the community banks that elect to bolster their ability to support extending credit to households and businesses by participating.