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SBA Loan Stimulus Package Will Trigger More Oversight: Financial Institutions Need to Be Prepared with Robust AML Compliance Programs

The Banking Law Journal

With financial institutions issuing an unprecedented amount of Small Business Administration Section 7(a) loans through the CARES Act’s Paycheck Protection Program, lenders need to be vigilant and adopt thorough recordkeeping and anti-money laundering compliance programs. The authors of this article discuss the issues.

Congress’ unprecedented two-trillion-dollar stimulus package, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), includes the “Keeping American Workers Paid and Employed Act,” which adds a new program called the “Paycheck Protection Program” (the “PPP”) to the Small Business Administration’s (“SBA”) jurisdiction. The PPP is a $659 billion appropriation for Section 7(a) loans, a type of SBA loan. Unlike previous Section 7(a) loans, the PPP provides that certain portions of the loan may be forgiven if they are used to continue making payroll or paying rent.

Section 7(a) loans are federally guaranteed, but underwritten by private banks. The PPP is a massive increase in funding. To put things in perspective, the SBA’s 2019 Annual Report indicated that the agency made approximately seven billion dollars in SBA loans quarterly, with a portfolio of outstanding loans totaling about $120 billion. Congress contemplates underwriting $659 billion in loans over the next approximately 90 days.

Congress also has increased the number of financial institutions that handle these loans. SBA loans have historically been issued within days of an applicant’s seeking a loan—sometimes less than one week. The stimulus program will mean billions of dollars being paid out with minimal or no due diligence, in many cases, by lenders who have no experience making SBA Section 7(a) loans. While this program grows exponentially, the primary regulator, the SBA, will have nearly all of its employees sequestered in their homes.

The stimulus package is plainly welcome news for the economy, but the surge in lending will no doubt cause significant regulatory growing pains. Under the Section 7(a) program, applicants typically receive their loan proceeds in less than two weeks. The SBA places heavy emphasis on quickly releasing funds to businesses. Despite this rapid turnaround, the loans still have certain due diligence requirements on financial institutions (albeit minimal).

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“SBA Loan Stimulus Package Will Trigger More Oversight: Financial Institutions Need to Be Prepared with Robust AML Compliance Programs,” by Joseph G. Poluka and Jed M. Silversmith was published in the June 2020 edition of The Banking Law Journal (Vol. 137, No. 6), an A.S. Pratt publication. Reprinted with permission.

This article was first published as a Blank Rome White Collar Defense & Investigations Advisory in April 2020.