THESOUNDINGBOARDPPP - For You and For Me(Maybe) BY DAN GWALTNEYAs Americans try to cope with the effects of the pandemic, we are routinely reminded that we will get through this because “we are all in this together.” Congress acknowledged this sentiment when it passed the massive Coronavirus Aid, Relief, and Economic Security (CARES) Act aid package containing the Paycheck Protection Program (PPP). The PPP was designed to keep small-business employees attached to their employers during this crisis. This rushed relief program implemented by a seldom-tasked agency was bound to have its issues, and it certainly did. Confusion, delays, and technical glitches plagued the rollout of the PPP. Even still, recently released numbers by the Small Business Administration (SBA) show that 4.9 million entities received PPP funding, leading to an estimated 51 million jobs supported. That’s commendable and much appreciated by those businesses receiving support from this more than $660 billion financial rescue plan.Unfortunately, not every small business is benefiting, even though numerous members of Congress and the Administration promised swift economic aid to all small businesses with 500 or fewer employees. Apparently, the term “all” doesn’t really mean all of us.The plain language of the CARES Act clearly states that “any business concern” that does not employ more than 500 employees shall be eligible to participate in the PPP. However, the SBA chose to ignore this Congressional directive when it included its historical 7(a) loan eligibility restrictions in its first PPP interim rule. With this single provision, the SBA excluded a wide range of businesses, including financial companies, primarily engaged in the business of lending. This came out of nowhere on the eve of the program’s rollout after many of us had already prepared our loan documents and put off staff reductions in anticipation of PPP funding. Could this have been just a gross misstep by an overwhelmed bureaucracy or was the SBA now Lucy with the football?Giving the benefit of doubt, let’s assume the SBA simply thought Congress authorized another regular, albeit massive, 7(a) loan program. Standard procedures would help to explain why long-standing restrictions were applied to PPP loans. But a basic comparison of the loan programs would lead one to conclude that there is nothing standard about the PPP. To begin with, 7(a) loans are long-term debts, with prepayment penalties, collateral, underwriting, variable interest rates and personal guarantees. PPP loans, on the contrary, are short two-year debts with none of these features. Ability to repay is not considered, and ownership doesn’t personally guarantee a PPP loan. Furthermore, the loans have vastly different purposes. A 7(a) loan is conventional financing designed to help nurture and grow a business. Startup costs, working capital, inventory financing, acquisitions, equipment and property purchases are all acceptable uses of 7(a) loans. Yet none of these are allowable expenses under the PPP program, since it’s meant primarily for employee payroll. And unlike conventional 7(a) loans, the PPP loan is forgivable, so small businesses can keep employed Americans working without being saddled with another financial burden. If used as intended, the PPP loan will essentially convert to a grant. Not so for the other SBA traditional loans. One would be hard-pressed to believe these distinctions were lost on the hardworking folks at the SBA.Various attempts were made early on to point out this obvious mistake, but to no avail. Seeing no other option, numerous “disfavored” companies in several industries turned to the courts for relief. In responding to these suits, the SBA claimed the statute language doesn’t prevent the inclusion of preexisting restrictions for other 7(a) loans. It also argued that granting eligibility to disfavored entities would mean denying otherwise eligible businesses access to limited funds. But time has proven this assumption wrong. Congress was forced to extend the application deadline, as more than $130 Billion in PPP funds have gone untapped.Given the SBA’s zeal in defending its policy, you would think a compelling argument to bar lending companies must exist. But you’d be wrong. The SBA has not offered an explanation as to why lenders are categorically excluded from conventional 7(a) loans, let alone omitted from the PPP. Only a reference to a precursor regulation, which also denied loans to finance companies, was given. But since PPP funds cannot be used to conduct the business of the recipient (in this case, lending money), the SBA’s position is illogical. Apparently, the argument seems to be “just because.”Federal judges in both Wisconsin and Michigan have disagreed with the SBA’s exclusion policy when applied to the PPP program. As acknowledged in these court decisions, the CARES Act provisions addressing PPP eligibility broadly cover a wide spectrum of small businesses and their workers. Any other interpretation would unduly limit the intent of Congress. Undeterred, the SBA has appealed. Ironically, the SBA betrayed its own policy justification when on April 28 it granted a special carve out for certain casinos, noting that this would be “more consistent with the policy aim of making the PPP loans available to a broad segment of U.S. businesses.” Even though we are supposedly all in this together, the SBA appears to believe some employees are more deserving of income and job protection than others.At a time when our nation is most sensitive to equal protection under the law, the Treasury Department and the SBA, not Congress, have picked winners and losers. Consider two retail financial service centers located in the same town offering an identical product mix. One conducts 55% lending, while the other derives only 45% of its revenue from loans. Both are deemed essential businesses with employees on the front line doing the exact same job. But under the current SBA policy, the operator with more that 50% lending volume is denied PPP eligibility. Does that seem fair? The blessed operator is able to cover payroll, while the denied company is left to decide between employee layoffs or financial ruin. Both pay taxes and employ American workers, but only one merits a financial life raft. Are we really all in this together?Following the Treasury’s release of PPP recipient data, news agencies report roughly 120 small-dollar lenders received funds from the program. How many are deemed worthy by the SBA to receive loan forgiveness? For those of us singled out by yet another federal agency for different treatment, it looks like the courts may be our only option to right a clear wrong. Does this situation sound vaguely familiar? Looks like we are not all in this together. Dan Gwaltney is CEO of Payday Money Centers, serving customers in Southern California. He may be contacted at dan.gwaltney@pdlcorp.us.