A version of this article was originally published in American Banker’s Association Journal Online, June 2020
The events of 2020 have given commercial lenders the responsibility of helping to create greater economic stability. With the release of urgent stimulus programs, lenders must be nimble enough to make financing available to businesses that need it to keep their heads above water while they handle the COVID-19 “pause” to our economy. But at the same time, it is crucial for lenders to carefully mitigate risks and maintain strong lending practices to protect their organizations so that they can continue to lend in a more uncertain world.
Suzanne Konstance, Vice President of Product Management and Marketing for Lien Solutions recently answered some questions that have been on the minds of commercial lenders. She shared her views on several ways lenders can continue to be successful — even in a world facing a crisis.
Relief legislation is putting pressure on lenders with new/increased programs to administer. What should lenders be most concerned with as they receive massive numbers of loan applications?
Banks quickly came to the realization that stimulus projects would end up significantly taking their time for a while. We found that many of our customers focused intensely on managing the process around stimulus response. Lenders have been immersed in processing stimulus applications, while also ensuring they adhere to critical policies like fair lending that protect and maintain the bank’s reputation.
These programs are quickly testing just how nimble banks actually are, while at the same time requiring that lenders continue to maintain solid practices which protect the lender, borrowers, and other key stakeholders — like the government — in supporting bolstering business security and stability.
Part of a bank’s responsibility is understanding how these relief packages are structured and the applicable rules. For example, the recent Paycheck Protection Program (PPP) for small businesses stipulated that the business had to have been in operation on February 15, 2020. With this in mind, a lender would understand that it should confirm that part of a borrower’s history, among other information.
In addition, the sheer volume of applications for loans under the various stimulus packages would likely result in something falling through the cracks. Although fraudsters are focused on getting money for non-existent businesses, it wasn't fraud that was initially the main criticism of the program. Rather, it was larger organizations that have grabbed their share of relief funds meant for smaller organizations just trying to survive. At times, lenders are criticized for favoring their top clients for loans. But in fairness, navigating this situation well is an incredibly difficult task for an industry not used to this extraordinary level of activity.
One national bank normally received 300 or so small business loan applications each year. In the first week of the PPP they received more than 30,000. How does any organization pivot to that kind of exponentially greater lending activity, especially when it’s with businesses with which they have little or no experience? It adds extreme new challenges for banks, borrowers, and the government as they attempt to make this all work very quickly.
Are there other obstacles beyond managing the stimulus programs that lenders are facing due to COVID-19?
When there is new work that hits an organization in bulk, it can quickly overwhelm a lending department. Add to that the fact that shelter-in-place or similar orders and newly remote workforces have increased complexity to lenders’ operations and you quickly see that lenders need some relief. Right now, lenders we talk to are immersed in stimulus-related work and require help to ensure other very important tasks are still handled while staff is diverted. While the stimulus programs take much of their attention, they must handle the day-to-day management of their current lending portfolios where new complexity and risk is not initially transparent or easy to quantify.
Relying on an experienced partner that can extend the capacity of loan operations and take on some of the more burdensome work helps. The lender can use a proxy to safeguard their portfolio while they focus on urgent new tasks at hand. As a trusted partner, we have technology to proactively alert lenders to underlying risks to their lien portfolio and help adjust their liens to safeguard their interests. We are also managing titling issues with closed DMVs to help ensure that vehicles are titled and liens on those assets are established.
Your focus is on helping lenders secure their assets so that they can free up capital to make more loans. What are some specific steps they can take to protect their ability to secure the assets?
Often, lenders think UCC filings fall into the “set it and forget it” category for a lender. Once it has been filed, a lender may assume that they can concentrate on their other work, thinking their interest is protected. But that is not the case. A lien may not hold up if it was not filed with the absolute correct name (even an extra space in a name or a period can make a difference). If a lien was filed in an incorrect jurisdiction, or if a debtor moved or changed their name again, the lien may not be effective.
Liens are also due to expire after five years and if the debt has not been satisfied, a UCC-3 continuation filing needs to be submitted for a lender to maintain its interest. Due to shelter-in-place or similar policies, there was disruption of our clients’ workforces and the jurisdictions where they file their liens. So we took the initiative on behalf of our clients to help identify their liens that were set to expire within the next six months; we notified them that the expirations were imminent. On top of that, if they needed help, we were available to help continue these filings on their behalf, in advance of their expiration date. Through these and other proactive services, we’re assisting customers to stay ahead of potential future disruptions by helping to ensure their assets are protected now, with no heavy lifting on their part.
After COVID-19, we expect we will see more liens and lien extensions related to loan extensions happening at a higher rate due to loan payment deferments and the economic downturn. We also expect liens will be applied to more loans than before to mitigate the higher level of risk and uncertainty in lending. With higher levels of risk, more oversight will take place. Best practices require that lenders monitor their debtors for changes or new activity, that they understand their order to collect on the collateral, and that they are alerted if a competitor files a lien on a debtor. We have the technology in place to help lenders with these needs.
So COVID-19 has turned commercial lending upside down. What are your thoughts on what lenders will do to overcome the new challenges in front of them?
We see three obstacles that can hinder commercial lenders’ ability to be successful in all turbulent climates.
First, the ability to properly vet potential borrowers and understand their level of leverage is especially tricky when a substantial amount of money is being released to stimulate the economy. Many of the new stimulus loans define how businesses can use the funds, and we are seeing that other earlier loans cannot be paid with the funds. In addition, new stimulus loans may need to be paid off prior to earlier loans. There’s risk when a business takes on more debt than they can realistically manage and, because their loans are spread across multiple lenders, it may become more difficult for lenders to assess the borrower’s situation over time and the changing risk for the lender.
The second issue is the ability to pivot to create new policies and procedures to manage existing and new loans. Much of the information lenders had to rely on in the past has changed, and continues to change, in the post COVID-19 environment. Lenders may need to make adjustments to carefully manage how they handle their portfolios going forward. They can benefit from regular visibility into changes with their loans and should consider how they mitigate risks in new lending over time, possibly through the use of new reporting capabilities and by applying liens at lower loan thresholds versus the past.
Third, an issue lenders need to tackle consistently over time, especially as they battle cost savings pressures, is a lack of automation and integration. Tools that are manual, paper-driven, and outdated cause inefficiencies when it’s business as usual, but they may become more inadequate when a lenders’ workforce is remote and cannot come into an office to handle paper, or a jurisdiction is closed and only accepts electronic submissions. Lenders also often use multiple systems, processes, and vendors to work on a loan; we hear it is not uncommon to use as many as 10 systems from the beginning to the end of a loan cycle. This translates into multiple handoffs, disconnected systems and siloed information. When cost and efficiency are concerns, these processes cannot continue to deliver the lender organization’s required results.
Finally, lenders should look to their partners to also provide leading edge automation and integration capabilities to facilitate their work with borrowers, government agencies, and other stakeholders. As we have seen recently with the impact of stay-at-home orders and a remote workforce, automating transactions so a human touch is not needed can be critical. Automation doesn’t just add efficiency, it can actually keep business flowing.
The events around COVID-19 have revealed a need for all financial institutions to work smarter and more efficiently than ever to get businesses the funding they need to remain viable. And despite myriad struggles, banks are stepping up to help. We’re here to help them deliver on these short-term commitments while remaining strong for the long term.