PPP loan changes came too late for smallest businesses

As Congress considers extending the government's flagship small business coronavirus-aid plan, some of the smallest businesses want government officials to make some recent changes in the program retroactive.

"These changes that they've done are supposed to be to help someone like me, and they're not," said Lorraine Lyman, who owns Savvy Success Unlimited, an Oakland, Calif., career coaching and college admissions consulting firm.

Ms. Lyman, 45, runs her business as a sole proprietorship and moved quickly to get a second loan through the Paycheck Protection Program when the initiative reopened in January. That was before the Biden administration announced changes to how the program calculates funding amounts for sole proprietors and other very small businesses.

She estimates the changes could have resulted in a $20,833 loan, versus the nearly $7,800 she received. But current guidelines don't allow borrowers to seek additional funding if their loans were finalized before the first week of March, when the changes took effect.

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Ms. Lyman, who is Black, said she was particularly disappointed because the Biden administration has said the changes were meant to help minority-owned small businesses, which tend to have few or no employees. "It feels like a kick in the gut," she said.

The new rules allow sole proprietors, independent contractors and the self-employed to use gross income rather than net profit when determining the size of their forgivable loan. The tweak followed complaints that the program had disproportionately benefited larger businesses, leaving behind sole proprietors and many minority-owned businesses.

Bharat Ramamurti, deputy director at the National Economic Council, said he was sympathetic to borrowers unable to benefit from the changes. The Biden administration wanted to move quickly on its loan calculation modification and "retroactivity is a separate legal question," he said.

"It didn't make sense to hold off on allowing all these other businesses to take advantage of [the new rules] if we could at least make the change prospectively for tens of thousands of them," he said, adding that the best solution would be for Congress to make the changes retroactive.

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Roughly 164,000 loans have been submitted using the new formula, the Small Business Administration said. Another 136,000 small-business owners who might have benefited from the change received PPP loans this year based on the older, less generous formula, according to figures provided by the SBA.

"There are so many borrowers who feel like, once again, this program has not served them," said Ashley Harrington, director of federal advocacy for the Center for Responsible Lending, which supports making the new formula retroactive.

SBA spokesman Matthew Coleman said applicants may be able to use the new formula if their loans aren't yet finalized, meaning disbursed with lender documentation submitted to the SBA. An applicant, for example, can ask their lender to cancel a loan waiting for disbursement and then reapply.

Questions about retroactivity are the latest challenge for the PPP, which was subject to multiple on-the-fly rule changes and glitches when it rolled out last year, creating problems for borrowers and lenders.

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In a report issued last week, the SBA inspector general found that $692 million in duplicate PPP loans were disbursed last year to borrowers with the same tax identification number or same business name and address. The SBA said it would take steps to recover any improper payments and that it has made changes in its loan-processing system.

Some borrowers are wary of pulling applications filed this year and then reapplying, fearing they could miss out entirely unless Congress extends the PPP past its current March 31 deadline.

At Numerated Growth Technologies Inc., a technology company currently working with about 120 lenders to process PPP applications, 23,000 of the 149,000 loans approved this year went to sole proprietors who filed before the more generous formula.

"Most, but not all, would have been able to get more had the change been in place before the start," said Numerated Chief Executive Dan O'Malley. "There's not a quick and easy fix," because the loans were finalized, he said.

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As of March 14, the SBA had, in all, approved 2.7 million loans totaling $181 billion, or nearly 64% of available funds, to borrowers applying for aid this year, according to government data. More than 2 million of the loans have been for $50,000 or less.

On Tuesday, the House of Representatives approved legislation that would extend the PPP application deadline until May 31. There is also bipartisan support in the Senate for extending the program and lawmakers could vote on the issue as soon as this week.

Sen. Ben Cardin (D., Md.), chairman of the Senate Committee on Small Business and Entrepreneurship, said during a hearing Wednesday the chamber should move quickly to extend the program, then look at other changes.

"I support the retroactivity and we're going to have a bipartisan way of trying to correct that," Mr. Cardin said, speaking of the loan calculation change.

Reps. Nydia Velázquez (D., N.Y.) and Blaine Luetkemeyer (R., Mo.), the top lawmakers on the House Small Business Committee, said they were also considering the issue. "I don't think applicants should be denied these benefits because they applied for the program too early," Ms. Velázquez said.

There is precedent for making PPP rule changes retroactive.

Legislation enacted last year allowed farmers and ranchers who are sole proprietors, independent contractors or self-employed to use gross rather than net income in their PPP calculations. Lawmakers allowed them to request increased funding under the new method even if their loan had already been finalized, provided it hadn't yet been forgiven.

Lenders' approaches to the new rules have varied. JPMorgan Chase & Co. didn't allow sole proprietors to apply for larger PPP loans under the Biden administration's new rules before it stopped accepting applications, although it would do so if Congress extended the program's deadline, a spokeswoman said.

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Bank of America Corp. paused thousands of sole-proprietor loan applications when the administration announced the new policies and is contacting clients individually to update their loan amounts by hand, a spokesman said.

For jewelry designer Holly Anne Mitchell, sales dropped by roughly 90% after the pandemic forced the closure of shows where she sells earrings, cuff links and other jewelry made out of recycled newspaper.

The Indianapolis resident said she was initially happy to learn that she received $2,600 for her second PPP loan compared with $1,900 last year, but then discovered she would have qualified for roughly $10,000 under the new formula.

"It was bittersweet," said Ms. Mitchell, "when I saw how much more it could have been if I had waited a few days to apply."

—Peter Rudegeair contributed to this article.