As someone who has spent his entire career in banking and financial services – and who currently lives in one of the largest U.S. banking markets – it’s good to see that banks are part of the solution for the $2.2 trillion (yes, trillion with a “T”) CARES Act for combating the adverse economic impact of COVID-19. Such was not the case during the Great Recession of 2008-09, when banks were a big part of the problem.
It’s true that some banks struggled in the early days of the popular CARES Act Paycheck Protection Program (PPP), when massive volumes of applications originated in a short period of time under ever-changing guidelines. This overwhelmed banks’ loan processes and systems, as well as the Small Business Administration’s (SBA) E-Tran platform. However, banks and non-bank lenders have also catalyzed the help small businesses needed to mitigate the severe adverse economic impact of the COVID pandemic.
The next round of help is coming from the Federal Reserve in the form of the $600 billion (yes, billion with a “B”) Main Street Lending Program, which targets mid-size and small businesses that are too large to take advantage of the PPP. The Main Street Lending Program is part of the Fed’s aggressive effort to stabilize the U.S. economy and stimulate a rapid recovery in the post-COVID environment. The launch of the program has been a bit rocky, with multiple changes to the terms and conditions, as well as delays from numerous rounds of review during the discussion period. In fact, some critics have expressed doubts that the program will be effective and achieve its desired results.
Unlike the PPP, the Main Street Lending Program will initially be administered only through U.S. federally-insured depository institutions that meet eligibility requirements. Given that non-bank lenders were the “star performers” during PPP, it will be interesting to see if the Fed changes this requirement. The Fed also recently changed the guarantee percentage from 85% to 95% to limit a bank’s exposure to losses; it also increased the payment deferral period for borrowers. These changes are designed to make it more attractive for businesses to borrow and for banks to lend.
From Main Street to Wall Street
Our clients tell us they don’t expect the same high level of loan volumes as they experienced with the PPP. However, given the fact that Stage 2 of the PPP – which involves loan forgiveness for borrowers – is just around the corner and that banks already have PPP fatigue amid prolonged pandemic-infused operational woes, the Main Street Lending program has the potential to add a significant challenge for lenders.
We recommend increasing operational bandwidth and capacity to deal with short-term spikes in volume and customer requests through both internal reallocation of resources as well as external providers when and where necessary. Lenders should not be tempted to process new loans using only traditional tools and solutions within the existing ecosystems.
One client told us his institution would not make the same mistake it did during Phase 1 of the PPP, when it attempted to force the PPP processing to fit into its existing ecosystem. For example, it’s both expensive and time-consuming to book small PPP loans on commercial banking platforms that are designed for large complex loans. Instead, PPP lenders should consider using lower-cost environments such as conventional retail lending platforms, which are designed for smaller, less complex loans or low-cost servicing platforms that were created for PPP loans and can be quickly integrated. The PPP and Main Street Lending programs are intended to help mid-size and small businesses – not provide large profit margins for banks. This is a time for banks to return the favor for the taxpayer assistance that was provided in the 2008-09 Great Recession. (Remember TARP?)
Many of our clients view these challenging times as an opportunity to deepen relationships with existing customers and develop relationships with new customers. Some PPP lenders have prioritized the PPP loans by using an “all-hands-on-deck” approach, with resources working nights and weekends to process the loans. Many PPP lenders felt a sense of patriotism by helping small businesses obtain the money they so desperately needed. The Main Street Lending program will also offer banks an opportunity to help more stable mid-sized businesses get back on their feet, representing a huge upside to developing significant long-term relationships.
During Phase 1 of the PPP, fintech Kabbage was extremely aggressive; it reportedly processed 130,000-plus PPP loan applications, delivering in excess of $3.8B in funding. The company also launched a program to help Uber drivers obtain PPP loans, demonstrating its commitment to small businesses.
A Failure to Communicate
One of the biggest frustrations for borrowers during Phase 1 of the PPP has been the lack of communication and feedback on their loan requests. Many small businesses reportedly felt as if their requests went into a giant black box designed by the “Evil Empire” – never to be seen nor heard from again.
This time, banks and non-banks have an opportunity to get it right through the use of improved communication methods, such as real-time loan status updates and rapid responses to customer inquiries. Both would help reduce borrower stress and the load on bank resources.
Equally important is the human touch. For example, some banks are hosting webinars to educate borrowers on the documents they’ll need to clearly communicate next steps. Others are providing in-depth training for associates to ensure they provide a “trusted” and consistent resource for help during a time of rapidly changing requirements. Frost Bank is an example of a PPP lender that has provided resources for small businesses to help them through the borrowing process.
Regardless of your political beliefs or opinions of the Federal Reserve, the U.S. government has stepped up at a time of unprecedented crisis to help small and mid-sized businesses that are the backbone of the domestic economy and the largest source of employment. Time will tell if these efforts will be enough to help these businesses not only ride out today’s tough times but also emerge stronger once the pandemic eases.
To learn more, please visit the Paycheck Protection Program Forgiveness Solution section of our website.
Visit our COVID-19 resources page for additional insights and updates.
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