CBA and BPI letter to the Senate and House Small Business Committees on PPP forgiveness (June 2, 2020)

Summary

A letter dated June 2, 2020 from the Consumer Bankers Association and the Bank Policy Institute to the chairs and ranking members of the Senate and House small business committees on PPP loan forgiveness, with Addendum A, a June 1, 2020 analysis by AQN Strategies. The addendum, by Ben Sabloff, Jason Ford and Gaby Garcia and titled Is It Easier to Ask for Forgiveness Than Permission? Not for PPP Loans Under $150K, estimates that an auto-forgiveness strategy for loans up to $150k could save US small businesses 70 million hours of owner labor.

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“CBA and BPI letter to the Senate and House Small Business Committees on PPP forgiveness (June 2, 2020).” Original at bpi.com. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/cba-and-bpi-letter-to-the-senate-and-house-small-business-committees-o-1705afa9b0/, SHA-256 44f10c6ed0f9b8b6bfb9e1ce342b692084ad0e77abfb8d9d3e352859b0025385.

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June 2, 2020

The Honorable Marco Rubio The Honorable Nydia M. Velázquez
Chairman Chairwoman
Committee on Small Business & Entrepreneurship Committee on Small Business
U.S. Senate U.S. House of Representatives
428A Russell Senate Office Building 2302 Rayburn House Office Building
Washington, D.C. 20510 Washington, D.C. 20515

The Honorable Ben Cardin The Honorable Steve Chabot
Ranking Member Ranking Member
Committee on Small Business & Entrepreneurship Committee on Small Business
U.S. Senate U.S. House of Representatives
428A Russell Senate Office Building 2371 Rayburn House Office Building
Washington, D.C. 20510 Washington, D.C. 20515

Dear Chairman Rubio, Chairwoman Velázquez, and Ranking Members Cardin and Chabot:

The Consumer Bankers Association and the Bank Policy Institute write to express our concerns regarding
the Paycheck Protection Program (PPP) loan forgiveness process and the significant burden it will place
on the smallest of businesses who sought relief during these uncertain times. The PPP, established by
Congress in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, has provided millions of
small businesses the economic relief they need to meet the challenges posed by the COVID-19 crisis.
However, the expedited process by which the program was implemented has resulted in considerable
gaps in policy, particularly regarding the forgiveness aspect of PPP, and has proven to be unnecessarily
burdensome for many of the businesses it sought to help.

In order to help our nation’s smallest small businesses, we urge Congress to quickly pass legislation that
would forgive PPP loans of less than $150,000. This threshold would account for 85 percent of total PPP
recipients, but less than 26 percent of PPP loan dollars. Lenders would continue to meet the PPP
requirements provided by SBA for these loans, but the loan forgiveness process would be faster for
these small businesses. Further, these hard-hit businesses could save more than $7 billion dollars and
hours of paperwork. These small businesses and their employees are the backbone of our nation’s
economy and communities. Their time and resources would be better focused on getting the economy
safely back up and running, not processing burdensome paperwork.

An independent analysis by AQN Strategies (AQN), attached as Addendum A, has shown an estimated
benefit of issuing auto-forgiveness for various loan size thresholds.1 AQN anticipates the combined

1
Ben Sabloff, Jason Ford, Gaby Garcia, “Is It Easier to Ask for Forgiveness Than Permission? Not for PPP Loans
Under $150K” AQN Strategies, June 1, 2020, https://www.aqnstrategies.com/aqncentral/forgive-small-ppp

Page 1 of 3
resource requirements of operators’ time and/or third-party expenses to represent an effective cost of
$2,000-$4,000 for each business that applies for forgiveness, requiring 20-100 hours of focused time
from key leaders of these businesses. With an average loan size of less than $19,000 for the smallest
60% of loans, this estimate would represent 10-20% of the loan amount itself, which is otherwise
intended to support payroll, rent, and other obligations necessary to keep businesses alive and ready to
restart.

AQN used key assumptions into costs and revenues incurred by business, lenders, and government.
Business costs were estimated to include interest paid to banks across the life of the loan and the cost of
resources needed to apply for the loan and forgiveness of the loan. Bank costs include underwriting and
processing applications for loans and forgiveness, servicing the loans, and paying the government for
the cost of PPPLF funds. Bank revenues include origination fees paid to them by the government and
interest collected throughout the life of the loan. The cost to the government was estimated as the
incremental loan balances to be forgiven if auto-forgiveness was in place. We anticipate an inherently
high forgiveness rate (90%+) as a baseline and recognize key sensitivities to this assumption.

Leveraging these assumptions, AQN set out to estimate the incremental cost that would stem from
auto-forgiveness. For example, if it is assumed that there would be inherent forgiveness rates of 90%,
the analysis sought to understand the difference in cost between the government forgiving the
remaining 10% of loans versus the costs to both businesses and banks to apply for all 100% of loans and
associated costs for those not forgiven. AQN’s analysis suggests that the cost to businesses and lenders
would be lower than the cost for the government to auto-forgive loans under $100,000. If policy
changed that forgiveness is more likely, such as by extending the usage window (as currently proposed),
then auto-forgiveness may be palatable for loans up to $150,000.

With all this considered, the undersigned trade associations recommend Congress provide automatic
forgiveness to small businesses that received loans with amounts less than $150,000. By doing so, our
nation’s small business owners can focus their time, energy, and resources back into their business and
not on paperwork.

We look forward to working with members of the Committees and Congress on this issue.

Sincerely,

Consumer Bankers Association
Bank Policy Institute

Page 2 of 3
ADDENDUM A

Page 3 of 3
June 1, 2020

AQN estimates that an auto-forgiveness strategy for loans up to $150k could
save US Small Businesses 70 million hours of owner labor.

Is It Easier to Ask for Forgiveness Than Permission? Not for PPP Loans Under $150K
By Ben Sabloff, Jason Ford and Gaby Garcia

For the last two months, consumers and businesses alike have grappled with the challenging realities of
a world operating under the COVID crisis. While Americans have largely been inundated with bad news,
one of the few bright spots has been the government’s relatively quick and substantive effort to provide
the financial support necessary to keep the economy intact. Legislation to supply small businesses with
government loans was swiftly enacted through the Paycheck Protection Program, providing over $500
billion in support to more than 4.3 million businesses. While these efforts have been broadly applauded,
the policy prioritized speed to implementation over thoroughness, resulting in gaps that are causing
pain for both small business recipients and the bank facilitators of these loans.
One of the primary gaps that has come under scrutiny in recent weeks is the process for businesses to
file for PPP loan forgiveness. On May 15th, the SBA published the Paycheck Protection Program Loan
Forgiveness Application, an 11-page document required for the process. While this document has
served to clarify some outstanding questions surrounding eligibility, it represents a significant burden on
businesses seeking forgiveness. Due to both its length and complexity, we anticipate the combined
resource requirements of operators’ time and/or third-party expenses to represent an effective cost of
$2-4k for each business that applies for forgiveness, requiring 20-100hrs of focused time from key
leaders of these businesses. For smaller businesses who function without full-time finance
professionals, leaders need to be focused on managing their businesses through these crises - not
dealing with paperwork and reading complicated regulations in an attempt to play amateur accountant.
With an average loan size of less than $19,000 for the smallest 60% of loans, this estimate would
represent 10-20% of the loan amount itself, which is otherwise intended to support payroll, rent, and
other obligations necessary to keep businesses alive and ready to restart.
Banks, playing their part in this crisis as the facilitator of these loans, also find themselves in less than
desirable circumstances. While origination fees (ranging from 1-5% depending on the size of the loan)
compensate for the cost of underwriting loans ($500-$1000 on average), the economics behind the
maturation of these loans is less rosy. With servicing costs expected to be relatively flat by loan size
(~$150 annually) and a lending margin of a mere 65bps (1% APR less 35bps cost of government funds),
banks will run a deficit on that smallest 60% of loans to the tune of about half a billion dollars. These
institutions find themselves in the awkward position of having loans they would rather see default
immediately (with the SBA providing guarantees) than survive to full maturity. The economics look
healthier for larger loans, as many of these costs do not scale while revenue does, but most loans (from
a unit basis) sit well below that breakeven threshold.
With meaningful burdens placed on both the smallest of businesses and banks, stakeholders are left
scrambling for a solution that relieves both parties. One of the levers that has garnered significant
attention is the option to grant auto-forgiveness for some segments of loans. Under the assumption that
most applicants will qualify for forgiveness, the ecosystem stands to save significantly by foregoing the
cumbersome forgiveness application process and redirecting the otherwise required resources to be
deployed against more meaningful challenges.
AQN Strategies performed an analysis of the estimated benefit of issuing auto-forgiveness for various
loan size thresholds. To inform our sizing of the impact of this decision, key assumptions into costs and
revenues for the three parties were generated, utilizing our involvement with participating lenders as a
basis.
1. Business costs were estimated to include interest paid to banks across the life of the loan and
the cost of resources needed to apply for the loan and forgiveness of the loan.
2. Bank costs include underwriting and processing applications for loans and forgiveness, servicing
the loans, and paying the government for the cost of PPPLF funds. Bank revenues include
origination fees paid to them by the government and interest collected throughout the life of
the loan.
3. The cost to the government was estimated as the incremental loan balances to be forgiven if
auto-forgiveness was in place. We anticipate an inherently high forgiveness rate (90%+) as a
baseline and recognize key sensitivities to this assumption.
We acknowledge that these costs will vary heavily by lender, by the final forgiveness policies that are
set, etc., but they are reliable enough to generally inform us of the effectiveness of this strategy.
Leveraging these assumptions, we set out to estimate the incremental cost that would stem from auto-
forgiveness. For example, if we assume inherent forgiveness rates of 90%, we wanted to understand the
difference in cost between the government forgiving the remaining 10% of loans versus the costs to
both businesses and banks to apply for all 100% of loans and associated costs for those not forgiven. Our
analysis suggests that the cost to society (bank profit + business cost) would be lower than the cost for
the government to auto-forgive loans under $100K. If policy loosens in a way that forgiveness is
inherently more likely, such as by extending the usage window (as currently proposed), then auto-
forgiveness may be palatable for loans up to $150K.

With assumed forgiveness of 85-95% by segment, our baseline scenario suggests that the government
would forgo an estimated repayment of $10 billion of earmarked PPP funding due to small business
repayment as part of an auto-forgiveness strategy up to $150k. If higher forgiveness rates are assumed,
then the cost of forgone repayment drops precipitously. We estimate that an auto-forgiveness
strategy up to $150k could save US Small Businesses 70 million hours of owner labor. This is time that
we all would rather see focused on helping businesses and our economy navigate these unprecedented
circumstances.
There are many additional details that add color to this situation, including the role of deterrence that a
forgiveness application process serves and what entities should ultimately bear the brunt of the cost
stemming from the COVID crisis. With that said, the government’s action to date suggests an outlook
that businesses should be provided with the resources necessary to survive in this environment. Our
analysis gives us the belief that auto-forgiveness of some of these loans is a reasonable path to ensuring
that those resources are kept in the right hands.

Founded in 2016 by a team of accomplished industry executives, AQN Strategies is a boutique financial services
consulting firm specializing in lending, payments and consumer retail banking. Our firm has advised dozens of the
world’s leading financial institutions including FinTechs, regional banks and multi-national institutions on leading
issues and initiatives including credit risk, alternative data, predictive modeling, payments intelligence and most
recently around all issues of forbearance, collections and PPP lending that have been introduced with our latest
COVID-19 crisis. Led by Stanford MBA graduate Founder and Managing Partner, Ben Sabloff, AQN Strategies has
assembled a team of accomplished industry practitioners with real operational experience at some of the world’s
most innovative lending companies.

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