A Wall Street Journal article from July 14, indicates that the largest U.S. banks of JPMorgan Chase & Co, Citigroup, and Wells Fargo took huge hits to their second quarter profits to stockpile $28 billion to cover losses as consumers and businesses begin to default on their loans. On June 3, NPR reported that Americans are skipping payments on mortgages, auto, loans and other bills. Under normal times, this would result in foreclosures, evictions, and repossessions.
Much of this has been put on hold. Congress and the President have helped with several stimulus packages for businesses and individuals. Lenders and regulators have been lenient and allowed for modifications, extensions, and deferments of payments. Many of those modifications will remain until late summer or even toward the end of the year.
TransUnion is reporting that around three million auto loans and 15 million credit cards are in some forbearance plans. Black Knight reports that 4.75 million homeowners or 9% of all mortgages are in some deferment plan. Since lawmakers do not want delayed payments to impact credit scores, Congress mandated that people current on their payments prior to the outbreak should still be reported as current on their payments when they are in a hardship program. This has the impact of moving credit scores higher at a time when payments are not being made.
The law firm Starfield Smith, PC, in their weekly ezine have a lead article this week titled “Best Practices: Increasing Loan Defaults Require Prudent SBA Lenders to Pivot Staffing from PPP to Monitoring of their 7(a) Loan Portfolios”. Again, the message is out. It is expected a tidal wave of problem deals, defaults, reduced revenues will hit throughout the economy and your portfolio.
Now is the time to prepare for these. You really have three options. First you can move staff you have internally to manage the problem credits. If you believe that we will see a mountain of problems starting later this year, then existing staff you may have on the consumer side will not have the time, much less to mention they probably do not have the experience in managing problem business deals. This leaves you with shifting business lenders to manage the problems. On a positive side, they have the most familiarity with the relationship. This can also be a negative where they fail to act or act too harsh based upon their knowledge. This also takes them away from managing their credits and finding good new deals that will be out there as other lenders may not pay attention to their problems.
Your next option is to hire staff to take care of the problems. If you have a small portfolio, it may not be cost effective to hire experienced folks to manage that. Also, good workout specialists are also those who are working themselves out of a job. The demand for the services of problem loan managers will be high.
The third option is to partner with a third party to help you manage your problem loans. This could consist of attorneys, retired professionals, experts in commercial banking or lender exams that can help you get your arms around the problems and manage them to improve or work to reduce challenged loan balances. Utilizing a third party provides flexibility to the institution’s leaders. They can keep existing staff focused on their existing responsibilities and business while working with professionals to help manage the problems.
Either one of these, or a combination of several options, need to be decided by credit administration now, prior to the problems becoming worse. The NCUA, in response to the COVID-19 pandemic and subsequent regulatory changes, is changing its emphasis to reviewing actions taken by CUs to assist borrowers during the financial hardships. Examiners will review CU policies and the use of loan workout strategies, risk management practices, credit union’s controls, reporting, and tracking these programs. On the examination front, there is a focus of what these pandemic decisions have an impact of their capital position and financial stability. More emphasis will be placed on loan loss reserves than tracking any progress toward the current expected credit loss (CECL) standards.
We can provide help in managing your problem loans and if you need a professional third-party review of your lending department. Contact us for more help.
PPP Forgiveness
Now that there are only three weeks left in the application process for new PPP loans, there is more of a focus on the forgiveness process. Some PPP borrowers have completed their original 8-week period and others who have opted for a longer time to use the funds, will exhaust their funds soon. Most borrowers will want to get through the forgiveness process as quickly as possible.
The SBA has provided two applications for forgiveness, the Form 3508, and the Form 3508EZ. The EZ form shortens the application process to three pages and can be used in the event where there has not been a reduction in staff FTEs outside the safe harbor or has reductions in pay rates. Both forms contain detailed instructions for what must be provided by the borrower.
The challenge is there has been no clear instructions of how the lender is to process these applications for forgiveness. It does appear there may be some reporting via the Colson report for the PPP loans. The SBA did announce this week on a national conference call update that there are no clear instructions yet and that they were working with the Amazon Web Services Cloud for a possible solution. The workload for the lender on forgiveness may change greatly as there has been a bill that would shorten the application and reduce the workload for forgiveness on any PPP loan below $150,000.
At this time, we just have to collect the application and supporting documents and then wait. Clear directions will be available soon.