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Biden changes PPP rules for self-employed workers, suspends some applications

In a bid to give the paycheck protection program its own stamp, the Biden administration abruptly changed the program’s crucial rules on Monday in a way to help smaller and neediest businesses, which have struggled at times. to get help from federal aid.

But the changes risk throwing an already turbulent agenda into chaos as banks and other lenders try to adjust to last-minute changes. With just five weeks to go until March 31, when the last iteration of the program is due to end, lenders have had to scramble to adjust to new rules that won’t even be fully explained to them until later this month. .

The changes include a new way to calculate loans for the self-employed and an exclusive 14-day window for applications from businesses with less than 20 employees. The adjustments aim to increase aid to very small businesses, many of which are run by women, blacks and members of other minority groups and which have so far received a disproportionately low share of relief funds.

“Reclaiming our economy means bringing back our small businesses,” Biden said in a brief address Monday afternoon. The changes, he said, “will provide much needed and long overdue help to small businesses that really need help staying open, keeping their jobs and making ends meet.”

The paycheck protection program was a signature effort by the Trump administration, which disbursed $ 523 billion in forgivable loans to small businesses last year. However, the program was criticized for its haphazard rules and hasty implementation, which often meant that the best established and most connected small businesses – including law firms, political lobbyists, and companies backed by private equity investors – got loans, while other vulnerable companies struggled.

In December, Congress provided $ 284 billion in new funds to revive the program. The Small Business Administration, which runs it, began approving requests last month in the dying days of the Trump administration. So far this year, around $ 140 billion has been distributed to 1.9 million businesses.

But with a wide range of qualifying businesses – from freelancers to companies with 500 employees – there has been a big disparity in how they have successfully secured loans. Sole proprietorships, such as sole proprietorships and independent contractors, have experienced particularly difficult times. And those who succeeded often received small amounts – as little as $ 1.

To help these companies, the Biden administration is revising the way their loans are calculated. Previously, their loans were based on the profits they declared on their annual taxes. This disqualified unprofitable businesses – a restriction that did not apply to large businesses – and limited the size of loans given to business owners who attempted to report as little taxable income as possible (as most businesses do) .

Sole proprietorship loans will now be based on gross income, a figure that excludes many expenses. This will allow unprofitable businesses to qualify and allow many applicants to raise much larger loans.

But lenders do not yet have details on how to handle the change, which Small Business Administration officials say will be made early next month. This leaves them in a bind: should they tell borrowers who are looking for loans now to put their applications on hold and wait for larger loans? And what happens to those who have already received loans but would now be eligible for larger loans?

Rohit Arora, managing director of Biz2Credit, the program’s biggest lender this year, let out a deep sigh at the questions. “We just don’t know at the moment,” he said.

More than 100,000 of the 140,000 loans his business made this year went to sole proprietors. He fears the reaction of those who have already received loans.

“Customers will be very, very upset and all of them will be calling us about it,” said Mr. Arora.

These clients are out of luck: The SBA will not retroactively modify loans that have been disbursed, and it will not let those who have already obtained loans return them and reapply, according to a familiar agency official. with the plan, who was not allowed to speak. publicly.

Even lenders who expect their clients to benefit are wary of another rule review on the fly. Randell Leach, managing director of Beneficial State Bank in Oakland, Calif., Said it is frustrating when lenders try to help borrowers understand their options, to move them forward.

“We’re going to have as much access to people as possible, but constant changes really make delivery difficult,” he said.

The 14-day freeze for large corporations has also left lenders in awe.

Companies with fewer than 10 employees collected 80% of loans made this year, receiving a total of $ 42 billion in loans, or about 30% of the money distributed by the program. More than half of the funds allocated by Congress remain available.

The biggest challenge, the lenders said, was a plethora of errors preventing apps from going through new, stricter fraud controls imposed by the Small Business Administration. These checks wrongly disqualify some candidates and reveal errors that were not detected last year. Both problems require lengthy intervention.

“This two-week window will not fundamentally change the barriers businesses face,” said Richard Hunt, CEO of the Consumer Bankers Association. “It’s like giving everyone a train ticket on an unfinished railroad.”

There were three other notable changes. Those who were recently convicted of non-fraud crimes will now be able to apply, as will those who are past due or in default on federal student loans. The agency also updated its guidelines to clarify that business owners who are not U.S. citizens but are legal residents are eligible for loans.

Officials in the Biden administration presented the changes as a response to long-standing disparities in the types of businesses that applied for and received loans – and a specific response to complaints from groups representing blacks, Hispanics and others. other business owners of color.

Officials said the two-week hiatus would focus government officials, lenders and other stakeholders exclusively on the types of businesses that do not have relationships with banks or Washington lobbyists and are not. may not be aware of the possibility of applying for the loans. . A senior administration official, who was not authorized to speak for Mr Biden on the matter, said the purpose of the break was to get everyone to focus on these types of things. ‘companies.

The White House remains confident that the program will have a significant amount of money available for further loans once the two-week period ends. Mr Biden and his team did not ask Congress to extend the March 31 deadline.

Small business advocacy groups have generally welcomed the changes. Shaundell Newsome, co-chair of Small Business for America’s Future, called them a “victory for America’s smallest businesses and those owned by people of color, far too many of which have been left behind by ill-conceived rules that favored large corporations.” .

Daniel Betancourt, managing director of Community First Fund in Lancaster, Pa., Which works on loans for about 300 businesses, most of which are minority-owned, was also excited. But Mr Betancourt would like to see the March 31 deadline extended by at least 60 days.

“We need time to let historically disenfranchised business owners know what is now available,” he said.

For sole proprietors like Elisha Trice who have been hampered by delays, the change in formula is a beacon of hope in a painful process.

Mr. Trice, an independent contractor in Florida who makes computer games, got a loan of $ 2,000 last year and applied for a second loan last month. His application has been stuck for weeks and he can now put it on hold until the new formula goes into effect.

Mr Trice, who lost his job at the start of the pandemic and relies on his freelance work to support himself and his daughter, said the change could mean his next loan would be over 7 $ 000.

“The fact that I can get more this time around is amazing,” he said.

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