DALLAS — This story originally appeared in the Dallas Business Journal, a WFAA news partner.
Lowell Michelson is frustrated.
Michelson, the owner of Simcha Catering and Event Design, recently received a letter in the mail from Cross River Bank notifying him that he needs to make the first payment on a loan. One problem: Michelson thought the loan he had received would be forgiven.
Like so many other small business owners in Texas and across the U.S., 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 fast cash to use for payroll and other expenses such as utilities and rent. The loans, distributed through banks, became forgivable if certain conditions were met and carried a 1% interest rate.
Michelson, who founded Dallas-based Simcha in 1984, saw his kosher catering business decimated when the pandemic put weddings, Bar Mitzvahs and other events on hiatus.
"We weren’t prepared for this," Michelson said. "We thought in April we would be postponing events to August. We woke up every day trying to manage brides and deposits 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 receiving any money at all helped. Data from the U.S. Small Business Administration shows the loan was forgiven fully last year.
In December 2020, Congress passed a law restarting the program. The law also enabled some businesses to apply for second-draw PPP loans. A friend made Michelson aware of the opportunity and connected him to New Jersey-based Cross River.
Simcha received a $65,858 loan in March 2021, which Michelson fully expected to be forgiven like his previous PPP loan. To his surprise, it wasn't, and he has no idea why or what to do.
Many other business owners find themselves in the same position as Michelson. While some bankers talk about PPP as if it is a thing of the past, an analysis of SBA data by the Dallas Business Journal found that in Texas alone there are still 83,858 unforgiven PPP loans valued at more than $2.8 billion as of early October. That's almost 9% of the 938,531 loans approved by the SBA for businesses across the state.
Cross River Bank has by far the most unforgiven loans in Texas of any lender. The bank, which gained national notoriety for its performance with PPP, has 9,178 unforgiven loans in Texas, 22% of the more than 41,000 for which the bank submitted to the SBA. The unforgiven loans have a total value of $215.3 million.
Multiple attempts for comment from a Cross River spokesman were not returned, but the bank has an online portal to assist small businesses with the loan forgiveness process.
Cross River partnered with financial technology companies to reach as many small businesses as possible. One of those, Kabbage, was also among the other lenders with the most unforgiven loans in Texas. Here's a look at the top 10:
- Cross River Bank - 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
- Kabbage - 5,947 loans totaling $146.9 million
- Harvest Small Business Finance LLC - 5,900 loans totaling $117.2 million
- Lendistry - 5,205 loans totaling $98.2 million
- Fountainhead SBF LLC - 4,872 loans totaling $71.8 million
- Customers Bank - 2,933 loans totaling $55.4 million
- Bank of America - 2,433 loans totaling $148.9 million
JPMorgan Chase, which handled the most PPP lending in Texas of any bank, has the second-most outstanding unforgiven loans when ranked by dollar amount behind Cross River. The New York-based financial giant did 2,058 loans totaling $185 million. Those loans represent 4% of the 47,880 that JPMorgan Chase submitted to the SBA.
There are many reasons loans could be unforgiven. 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 submitted a forgiveness application. Another could be the owner did not use the money for eligible expenses.
Michelson has tried calling Cross River but admits he can't recall all of the details about his loan. As a successful caterer for more than 35 years, he had never had to go through a document-driven process like PPP before. He also admitted he had an administrative assistant who handled most 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 pivot and were hearing about different government programs. It was all a lot of paperwork," Michelson said. "Now, I have Cross River sending me notice that payment is due. I'm like, what? I don’t know the answers if someone is asking questions. It's like being a witness at a car accident two years ago."
Another reason a loan may show up in the SBA's data as unforgiven could be because the loan was approved but never disbursed by the bank. The SBA's data does not indicate whether or not a loan was disbursed. A loan may not have been disbursed because the business owner decided to not take the money in the end. Another reason could be that the lender detected possible fraud.
A University of Texas study found that fintech loans are six times more likely to be suspicious and possibly fraudulent than loans by traditional banks. The top twelve lenders with the highest rates of suspicious loans in the study were all fintech lenders. In total, the UT study estimated 1.4 million loans across the U.S. totaling $64.2 billion may have been potentially fraudulent.
The SBA's own inspector general identified at least 70,000 loans totaling $4.6 billion as potentially fraudulent. Some lenders are worried that a percentage of PPP loans could end up delinquent. But the SBA is required to purchase nonperforming PPP loans from lenders.
Some of the lenders who have the most unforgiven loans in Texas have faced questions about their lending practices.
Last year a group of borrowers filed a class-action lawsuit against Prestamos CDFI claiming the lender processed violated its contractual obligations by processing PPP loans and never actually funding them. That lawsuit remains pending in federal court in Pennsylvania.
Capital Plus Financial faced a similar lawsuit but it has been dismissed. The company focused on serving minority-owned businesses that are typically underserved, particularly those that are Hispanic-owned.
Andy Boian, a spokesman for Capital Plus, said many of its borrowers may not have applied for forgiveness because of their lack of experience going through a loan process. He said Capital Plus did everything it could to help its borrowers.
"When they had particular questions about the application process or when they basically didn't understand something of course we were there to explain it, provide clarity and ensure that all regulations were followed to the law, all SBA requirements were fulfilled and the borrower understood what he or she was getting into when they filled out the application," Boian said.
Boian also said Capital Plus detected fraud in a certain percentage of loans but declined to disclose the exact number.
Kabbage, the lender that partnered with Cross River, has had its share of issues since participating in PPP. Like other lenders, Kabbage faces lawsuits that it processed PPP loans but failed to fund 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 KServicing spokeswoman declined to comment.
For Michelson and Simcha, business has come back, but not completely. Weddings are again taking place, but Michelson said they are smaller because people are being more selective about who they invite. He said revenue remains down 75% from 2019 levels. He remains grateful for the PPP loans he received and hopes he can get his second one forgiven.
"Had it not been for these programs, we wouldn’t have stayed in business," Michelson said.