The most popular component of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act has been the Paycheck Protection Program (PPP), which provides forgivable small-business loans.
Phase one of PPP focused on disbursement, and it grabbed headlines for chaos and favoritism. Phase two pivots from loan disbursement to PPP loan forgiveness. This phase kicked off in early April and is full of uncertainty for lenders and borrowers alike.
A high-stakes phase
As they head into phase two, many lenders suffer from PPP processing fatigue, having processed 4.4-plus million loans during phase one. Many tell us they’re committed to supporting small-business owners. But the task of churning through forgiveness applications comes on top of already heavy workloads, not to mention the pressures of operating during a pandemic. The reality is that banks will lose money on processing most of these loans.
Yet the loan forgiveness phase is crucial for all stakeholders. Many small businesses’ survival will depend on it. For lenders, the stakes vary. Large banks hope to provide a smooth experience that alleviates the burden on applicants and minimizes disruption to their own organizations. Some are looking to repair damage to their reputations suffered during phase one.
Smaller and regional banks are betting that PPP-specific enhancements such as intuitive portals, virtual help tools, and trained contact centers will add up to a positive experience that deepens their relationships with business owners. Meanwhile, fintechs like Kabbage are looking to ride their PPP success to greater market share.
Demystifying loan forgiveness
We’ve noted three persistent myths about loan forgiveness that may hold lenders back. By getting past these myths, lenders can excel during phase two.
Loan forgiveness is a short, well-defined process.
Reality check: Initially viewed as a short-term event, PPP loan forgiveness will be anything but.
The recently signed PPP Flexibility Act extends the original eight-week period during which businesses could use loan funds to 24 weeks, meaning lenders will likely feel the impact of the forgiveness phase on their operations for a long time to come. For one thing, the guidelines involve a complex decisioning process that requires extensive documentation from borrowers. For another, the Flexibility Act extends the payback period from two to five years for the portions of PPP loans that don’t qualify for forgiveness. Provisions for the payment and interest deferral period further complicate loan tracking and servicing.
The fix: To avoid being tripped up by the complexities of the forgiveness process, lenders must plan for the phase’s impact on their core business, especially amid the current environment of remote workers and constrained resources. In our conversations with banks, they tell us phase one impacted their businesses in two main areas: the reassignment of resources to manually process PPP applications, and extended shifts for contact center workers.
As lenders head into phase two, adequate resources remain a top concern. There’s also the likelihood that this phase will collide and compete with banks’ efforts to support the Federal Reserve’s Main Street Lending Program, a high-profile pool of loans for companies too large for PPP.
Technology will save us.
Reality check: Phase two is likely to be more manual than phase one.
During phase one, banks implemented new tools such as digital portals to ingest the volume of PPP applications and bots to upload the loan applications to E-Tran, the U.S. Small Business Association’s loan servicing system. Many banks optimistically expected these systems to provide smooth sailing for phase two.
But much of the documentation small businesses will need to furnish is non-standard and paper-based — proof of rent and utilities payments, for example, and job offers to furloughed employees. As a result, the amount of manual data entry and verification is expected to be far greater than phase one — as is the pressure on lenders to fully validate applicants’ claims. PPP loan applicants are banking on forgiveness; more than half of applicants surveyed expect their loans to be fully forgiven.
The fix: Lenders must possess the ability to ride the waves of short- and long-term processing needs and costs, not to mention PPP rules that are constantly in flux. While technology plays more of a supporting role in phase two, it’s still vital. A positive customer experience starts with an intuitive loan application and documentation submission portal that includes an automated document parsing tool.
Given the nuances of loan forgiveness, however, communication with borrowers is an even higher priority. Quality customer experience will hinge on systems that emphasize outreach and transparency, such as automated emails notifying borrowers whether their documentation has been accepted or rejected. Customer service is an important factor in flexible loan-forgiveness operations. Managing heavy call-center volume will rely on agents trained to service all of the variations of PPP loans and constituents, from LLCs and LLPs to 1099s.
PPP is a responsibility.
Reality check: Actually, it’s an opportunity.
Smaller banks and fintechs bested their larger counterparts in phase one because they recognized PPP’s potential for acquiring and retaining customers — and acted on it. Regional banks marshaled their resources with an all-hands-on-deck approach. Fintechs hit the ground running with mobile-centric strategies and digitized processes. It’s no surprise that banks with less than $10 billion in assets issued 60% of loans in the first round of the PPP.
Amid the fallout from phase one, we’re hearing about what could be a permanent shift. In our conversations with credit providers, they tell us more small businesses are maintaining their deposit relationships with large banks but increasingly relying on small banks and fintechs for their lending needs.
The result is that lenders face different challenges during the loan forgiveness process depending on their size. By capitalizing on their successes during phase one, small banks and fintechs have the opportunity to solidify their relationships with small businesses.
Large banks, too, have an opportunity in phase two. Many found their channels overwhelmed by phase one’s scale and swift rollout, leading to delays and poor customer experience. For those interested in maintaining small-business market share, the forgiveness phase provides a chance to restore their reputations and rebuild their relationships.
The fix: Our guidance is to take a long-term view emphasizing advocacy for borrowers. Technology is an important part of advocacy. For example, self-service in the form of real-time loan status will help lower borrowers’ stress and reduce the load on banks’ resources. Equally important is the human touch. For example, some banks tell us they’re hosting webinars for phase two applicants, educating them on the documents they’ll need to maximize the amount of their loan that’s forgiven. Some are also providing in-depth training for associates on the forgiveness process. The common thread among all these efforts is a customer-first approach.