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November 16, 2020

Delayed PPP forgiveness process brings uncertainty, trepidation for some CT borrowers

Photo | HBJ File David Rotatori, CEO of Naugatuck-based Ion Bank, which applied for PPP loan forgiveness on behalf of borrowers in early rounds of funding.

Following several months of delays, the federal government has started to forgive some of the nearly 65,000 stimulus loans issued to Connecticut employers this past spring and summer to help them stay afloat during the COVID-19 pandemic.

Banks and other institutions participating in the Paycheck Protection Program, which issued $6.7 billion worth of Connecticut loans this year, in August began submitting forgiveness documentation to the U.S. Small Business Administration on behalf of borrowers. The first loans were forgiven last month and money was sent to banks that issued the credits and provided the upfront cash to businesses.

The SBA had accumulated a backlog of 96,000-plus forgiveness applications from around the country before any money began to flow back to lenders, Politico reported.

David Rotatori, CEO of Naugatuck-based Ion Bank, which wrote approximately $175 million worth of PPP loans, said his bank has asked the SBA for forgiveness on several hundred loans so far. The agency has only acted on a small number of those, approving them all, and sending Ion about $3 million in forgiveness payments.

Rotatori said he always assumed the process would start slowly, due to the logistical challenges posed by unprecedented loan volume.

“[The SBA] is getting its foothold and it’s getting the process down, just like we are,” said Rotatori, whose bank has several Greater Hartford branches. “They will be processing them, I think, quicker and quicker. It will continue to ramp up.”

While the loan forgiveness process begins for some companies, uncertainty remains for businesses that took PPP loans of $2 million or more.

Spurred by media coverage this summer of public companies and other well-capitalized businesses that received PPP loans, the SBA has for months promised more scrutiny on larger borrowers, to determine if they actually needed the assistance.

In Connecticut, about 371 borrowers received loans worth between $2 million and $10 million, SBA data shows.

The SBA recently created questionnaires that probe larger borrowers’ 2020 performance and other financial details, leaving some wondering how loan reviewers might use the information in making their forgiveness determinations.

Test cases

So far, it’s unknown how many Connecticut loan forgiveness applications have been approved by the SBA. A spokesperson for the agency said that data isn’t yet available.

In September, the federal Government Accountability Office reported that banks had sent 56,000 loan forgiveness decisions to the SBA as of Sept. 8, a tiny fraction of the 5.2 million PPP loans issued nationwide this year.

That number has surely increased since then, as more banks have begun to accept the applications en masse from customers.

Ion Bank has received forgiveness application materials from about 40% of its approximately 1,700 PPP borrowers. It has submitted roughly half of those applications to the SBA and received forgiveness decisions back on 5% of them.

The SBA rules are complex, but in general, to qualify for full forgiveness borrowers need to have spent at least 60% of their PPP funds on payroll costs and the rest on other eligible expenses such as rent and utilities, all within a certain time frame. Borrowers that have not maintained their employee headcount according to the SBA’s calculation method could receive partial loan forgiveness.

PPP borrowers still have plenty of time to apply for forgiveness before they have to start making monthly payments to their bank or credit union. For example, the earliest PPP recipients, which received their loans back in April, have until July or August of 2021.

However, there’s been conflicting advice for borrowers about whether they should apply for PPP forgiveness right away, or wait a while longer.

Rotatori says it’s best to get it over with.

“You know what you know at this point, you might as well get it done and go into the new year with a fresh understanding,” Rotatori said. “It’s easier to get it done now and not have to take on the risk of potential additional scrutiny, or changes to the tax law.”

However, some worry that the SBA’s recently created “loan necessity” questionnaire indicates that the agency will apply a stricter filter in its forgiveness decisions related to loans of $2 million or more.

Rotatori said Ion Bank had about 10 larger PPP loans and has submitted a few of them to the SBA for forgiveness, but has not yet received a decision.

Some anxiety

Area accountants say SBA’s recently revealed loan necessity form — which asks $2 million-plus PPP borrowers for a 2020 and 2019 revenue comparison as well as data on cash balances and dividend distributions to owners — is creating some anxiety, according to Drew Andrews, managing partner and CEO at Hartford-based accounting firm Whittlesey, who said the initial understanding about PPP earlier this year was that the loans were designed to be forgiven.

“There’s always been this attitude or implied reasoning that they don’t want this money back,” Andrews said. “Now this is kind of changing that thought process, in my mind. They’re getting a little bit more strict.”

There are also potential tax implications for borrowers whose loan is officially forgiven by year’s end, he said.

Of course, there’s no telling how things will play out at the SBA, Andrews added.

The recent election, which saw Democrat Joe Biden win the presidency from Donald Trump and the Republican Party hold onto the Senate, only adds additional wrinkles to predicting outcomes.

Some have been hoping that Congress passes more lenient loan-forgiveness rules.

While that could still happen, Michael Maksymiw Jr., a partner with accounting and advisory firm Marcum LLP, said it’s probably best for many companies to get the forgiveness process underway, assuming they followed the loan-forgiveness guidelines.

Loans of $50,000 or less are particularly likely to get forgiveness approval, since the SBA has reduced the amount of information the borrower must supply.

“If none of your expenses are questionable, … then you might want to go ahead and apply,” Maksymiw said.

However, he said there are PPP scenarios about which the SBA has not yet issued extensive guidance, meaning waiting to apply may be prudent. One involves companies that laid off workers after receiving a loan and then hired family members to replace them. Another involves companies that have different tax structures for their real estate and operations.

“If anything is giving you pause as a borrower, so far the best course of action throughout every aspect of this has been patience,” he said.

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