Thousands of business owners across Texas are now coming due on loans they thought was forgivable.
DALLAS — Lowell Michelson is frustrated.
Michelson, the owner of Simcha Catering and Event Design, recently received a letter in the mail from Cross River Bank telling him he had to make the first installment on a loan. One problem: Michelson thought the loan he received would be forgiven.
Like so many other small business owners in Texas and across the US, Michelson participated in the Paycheck Protection Program. The federal program served as a lifeline for businesses at the height of the Covid-19 pandemic, providing them with quick cash to use on payroll and other expenses like utilities and rent. The loans, distributed through banks, became eligible if certain conditions were met and bore interest at a rate of 1%.
Michelson, who founded Dallas-based Simcha in 1984, saw his kosher catering business decimated as the pandemic suspended weddings, bar mitzvahs and other events.
“We weren’t prepared for that,” Michelson said. “We thought in April we would move events to August. We woke up every day trying to manage brides, down payments, and moving dates. It was just crazy.”
Simcha received a $47,000 PPP loan through Prosperity Bank in April 2020. Though less than the amount he wanted, Michelson said it helped get any money in the first place. Data from the US Small Business Administration shows the loan was fully forgiven last year.
In December 2020, Congress passed legislation to reinstate the program. The law also allowed some companies to apply for second draw PPP loans. A friend brought the opportunity to Michelson’s attention and put him in touch with Cross River of New Jersey.
Simcha received a $65,858 loan in March 2021, which Michelson expected would be foregone like his previous PPP loan. To his surprise, this was not the case and he has no idea why or what to do.
Many other business owners are in the same position as Michelson. While some bankers talk about PPP as if it’s a thing of the past, an analysis of the SBA data by the Dallas Business Journal found that as of October there were 83,858 outstanding PPP loans worth more than $2.8 billion in Texas alone. That’s nearly 9% of the 938,531 loans approved by the SBA for businesses statewide.
Cross River Bank has by far the most unforgivable loans of any lender in Texas. The bank, which has gained national notoriety for its performance with PPP, has 9,178 outstanding loans in Texas, 22% of the more than 41,000 for which the bank has filed with the SBA. The outstanding loans have a total value of US$215.3 million.
Multiple attempts by a Cross River spokesman to comment have gone unanswered, but the bank has an online portal to help small businesses with the loan forgiveness process.
Cross River has partnered with financial technology companies to reach as many small businesses as possible. One of them, Kabbage, was also among the other lowest-performing lenders in Texas. Here’s a look at the top 10:
- cross river shore – 9,178 loans totaling $215.3 million
- Prestamos CDFI LLC – 8,839 loans totaling $143.2 million
- Capital Plus Financial LLC – 6,506 loans totaling $110.5 million
- Benworth Capital – 6,497 loans totaling $96.3 million
- cabbage – 5,947 loans totaling $146.9 million
- Harvest Small Business Finance LLC – 5,900 loans totaling $117.2 million
- Rental – 5,205 loans totaling $98.2 million
- Fountainhead SBF LLC – 4,872 loans totaling $71.8 million
- customer bank – 2,933 loans totaling $55.4 million
- bank of america 2,433 loans totaling $148.9 million
JPMorgan Chase, which has processed the most PPP loans in Texas of any bank, has the second most outstanding uncommitted loans by dollar amount behind Cross River. The New York-based financial giant issued 2,058 loans totaling $185 million. These loans represent 4% of the 47,880 that JPMorgan Chase has filed with the SBA.
There are many reasons why credit might be unissued. Borrowers had to submit applications showing they used the money for eligible expenses. One reason for an unforgiven loan could be that the business owner simply never applied for forgiveness. Another could be that the owner didn’t use the money for eligible expenses.
Michelson has tried calling Cross River but admits he can’t remember all the details of his loan. A successful caterer for more than 35 years, he has never before had to go through a document-driven process like PPP. He also admitted that he had an administrative assistant who did most of the paperwork. Michelson said he had to let her go because of the pandemic.
“When I applied we were still trying to figure out how to rotate and hearing about different government programs. It was all a lot of paperwork,” Michelson said. “Now Cross River is sending me a notification that payment is due. I think what? I don’t know the answers when someone asks questions. It’s like witnessing a car crash two years ago.”
Another reason a loan may appear as unissued in the SBA’s data could be that the loan was approved by the bank but never disbursed. The data from the SBA does not show whether a loan has been paid out or not. A loan may not have been paid out because the business owner ultimately decided not to accept the money. Another reason could be that the lender has discovered a possible scam.
A University of Texas study found that fintech loans are six times more likely to be suspect and potentially fraudulent than loans from traditional banks. The top 12 lenders with the highest bad loan rates in the study were all fintech lenders. Overall, the UT study estimates that 1.4 million US loans totaling $64.2 billion were potentially fraudulent.
The SBA’s inspector general identified at least 70,000 loans totaling $4.6 billion as potentially fraudulent. Some lenders worry that a percentage of PPP loans could default. But the SBA is required to buy distressed PPP loans from lenders.
Some of the lenders with the most outstanding loans in Texas have faced questions about their lending practices.
Last year, a group of borrowers filed a class action lawsuit against Prestamos CDFI, alleging that the processed lender breached its contractual obligations by processing PPP loans and never actually funded them. This lawsuit remains pending in federal court in Pennsylvania.
Capital Plus Financial faced a similar lawsuit, but it was dismissed. The company focused on serving minority-owned businesses that are typically underserved, particularly those owned by Hispanics.
Andy Boian, a spokesman for Capital Plus, said many of its borrowers may not have applied for forgiveness due to their lack of experience in conducting a loan process. He said Capital Plus did everything it could to help its borrowers.
“If they had specific questions about the application process or fundamentally misunderstood something, we were of course there to explain, provide clarity and ensure all regulations were being followed in accordance with the law, all SAV requirements were met and the borrower understood what he or she was they let themselves in when they filled out the application,” Boian said.
Boian also said Capital Plus discovered fraud on a certain percentage of the loans but declined to disclose the exact figure.
Kabbage, the lender that worked with Cross River, has had its share of issuance since participating in the PPP. Like other lenders, Kabbage faces lawsuits for processing PPP loans but not funding them. In 2020, the company sold some of its key assets to American Express. The remaining holding company, KServicing, filed for Chapter 11 bankruptcy protection in Wilmington in October.
A spokeswoman for KServicing declined to comment.
Business has returned for Michelson and Simcha, but not fully. Weddings are happening again, but Michelson said they’re smaller because people are more selective about who they invite. He said revenue was down 75% from 2019. He remains grateful for the PPP loans he has received and hopes to be awarded his second.
“We wouldn’t have stayed in business without these programs,” Michelson said.