If current pandemic-induced lockdowns continue through June, more than thirty percent of small businesses may be forced to close permanently, according to a study by Main Street America. While small businesses experience tremendous challenges, this is also an unprecedented time for the lenders serving small businesses during COVID-19.
As we’ve spoken with small business lenders nationwide, on- and off-the-record, clear patterns emerged:
The Paycheck Protection Program provides valuable resources to businesses in need, but lenders are concerned about fraud- and fairness-related risks.
When it comes to PPP, time pressure, lack of processes, and application volume combine to increase risk exposure. In 2019, the SBA issued $28B total. Now, lenders are being asked to issue more than $500B on behalf of the SBA in just 8 weeks. One bank received 53,000 PPP applications on April 3, the day after the program launched.
Policies and processes are being created and tested in real-time, while existing systems may not support demand. Some lenders have had to rely on manual verification processes, although such efforts are unlikely to effectively manage risk.
Risk concerns have proven to be well-founded. On May 5, news broke of the first PPP fraud-related arrests, while separately, Wells Fargo is now being investigated for its PPP loan management.
To manage risk, one Director of Compliance with 15+ years of experience in BSA/AML and Fair Lending recommended that lenders establish compliance procedures and outline who is responsible for managing PPP compliance.
Some lenders also expressed another fraud-related concern: namely that, in a pinch, consumers will use their higher-line business credit cards instead of their personal cards.
With the future of millions of small businesses in jeopardy, lenders aren’t sure what percentage of their portfolio will be impacted - or how much. As a result, many lenders aren’t focusing on attracting new SMB customers. Instead, they’re focused on monitoring their existing portfolio and reducing exposure to risk and loss.
When growth does become a priority, lenders will focus on businesses and industries that have shown themselves to be resilient. Experts also anticipate that the process of approving small business loan applications will transform. In the past, lenders wanted to attract and approve small business loan applicants. Post-COVID-19, lenders will be more selective about approving applications, setting more stringent parameters for loan or credit qualification.
For monitoring, underwriting, and recession readiness processes, access to new types of data is now critical.
“Inevitably, banks will have to adjust their data and methodologies to reflect the new normal,” according to a McKinsey article.
Credit bureau reports aren’t enough anymore; lenders will need to use a variety of sources, new data points, and fresher, more frequently updated data to get a clear picture of risk and opportunities.
“Need of alternative data or alternative bureau data, along with smart capabilities, has taken the center stage in this pandemic-driven recession,” said Petal’s Chief Risk Officer Kaustav Das in a recent interview with Enigma.
Das also highlighted the need for data freshness. “You cannot rely only on bureaus, you need more real-time data like bank data, processing data, or other alternative data as that captures recency.”
Lenders shared that this data will be valuable in the longer term as well, not just for COVID-19 recovery.
To our lender community: we’re curious to hear about your experiences in SMB recovery and risk mitigation, and whether the points above resonate. Please get in touch if you have a point of view to share.
Enigma has made resources and new risk signals available to lenders; to learn more, visit our COVID-19 hub.