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PPP Loan Fees for Banks

posted by Alan White

$10 billion of CARES Act funds are going to the banks, especially megabanks, in fees for making “small” business PPP loans. The fees established by Congress, to be paid by the Small Business Administration, i.e. Treasury, range from 1% for loans above $2 million to 5% for loans below $350,000.

The maximum loan amount is $10 million, so those loans generate a nifty $100,000 fee each. At least 40 large public companies received loans from $1 to $10 million.

Given the highly streamlined application process, these fees likely far exceed the costs of originating these loans. The 1% interest rate, while low, still exceeds bank cost of funds. Do the banks need a bailout? First quarter earnings reports for the largest banks show steep drops in earnings, but earnings are still positive. The earnings drop is entirely due to provisioning for expected loan losses; obviously predicting loan performance over the next year is a very tricky business. Nevertheless, the PPP fee structure is designed to subsidize financial institutions not especially in need of a bailout, especially compared to restaurants, main street stores, and other small businesses. In fact, given that SBA is waiving the guarantee fee, why don’t the banks just waive the fees and interest on these loans? And given the robust public subsidies to megabanks, why should SBA pay these fees in the first place? If banks have inadequate capital to weather the coming storm, surely there is a better way to support them than having SBA pay these arbitrary PPP loan fees.


Is this really unusual? First, just considering what is market, student loans have origination fees of between 1% and 4%. And a large leveraged loan transaction has so many fees they can't even come up with names for all of them.

Second, the point of the program is to get money into the market now, and the smaller the borrower the better. The best way to do that is to incentivize banks to make the loans. I suspect someone who needs less than $350,000 to make it through the pandemic doesn't exactly have financial statements and EBITDA calculations handy.

The banks were incentivized to make fewer, bigger loans. If they had gotten a fixed fee per loan — to line up with the roughly equal time commitment of a $10 million and $1 million loan — they would have been incentivized to give everyone an equal shake. Instead, they forced smaller companies to jump through hoops.


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