The nation’s credit unions have been through the wringer over the past several weeks when it comes to the Paycheck Protection Program (PPP). They have had to make challenging decisions, such as whether or not to offer PPP loans, how to manage the volume of applications and how to ensure they are keeping up with new guidance as it comes out. While some credit unions jumped in feet first, others explored alternative methods of providing relief to small business owners.
Now, that the second round of PPP funding has begun, credit unions that did not participate in the first round of funding may have another chance. And, with $60 billion of the second round’s $310 billion earmarked for credit union and community bank lending, the appeal of participating may have increased.
To help guide the strategic conversations CU executives will have with their senior leadership, lending and board teams, we’ve put together a list of some items credit unions should consider prior to offering PPP loans.
What do credit unions need to know about becoming an approved PPP lender?
To make PPP loans, credit unions must first be approved by the SBA. Existing SBA lenders are eligible to make PPP loans, but non-existing SBA lenders must complete the CARES Act Section 1102 Lender Agreement. This is an expedited SBA lender agreement and allows a lender to offer PPP loans. This agreement expires on September 30, 2020.
What are some operational items credit unions should consider when it comes to offering PPP loans?
Offering PPP loans to small businesses can create stress on the current operations of a credit union. Credit unions should consider the processes and procedures that will work best to collect loan applications, review the documents provided by the member, disburse the funds and monitor the loan. Despite a multitude of distractions during the COVID-19 emergency, credit unions will want to maintain a high level of integrity with this new loan portfolio.
What are the BSA/AML implications should we experience an influx of non-member applications?
Due to how fast PPP funds were depleted during the first round of relief, credit unions mainly focused on helping existing small business members. This expedited the application process for a PPP loan, as credit unions did not have to establish membership for the small business. While we expect this focus to stay consistent in the second round of funding, credit unions should ensure that they are taking their time and appropriately identifying new businesses when offering them PPP loans. Although examiners may be more lenient with credit unions during this time, understanding the nature of a business and identifying its owners should never cease.
Should credit unions consider liquidity and interest rate prior to offering PPP loans?
Credit unions considering participation in the second round of PPP lending should factor these loans into their overall liquidity plan to see if that plan may need to be amended. Leaders will also want to forecast the potential for interest rate risk for portions of loans that are not forgiven. Essentially, a credit union will want to work to understand how offering PPP loans at the SBA’s specified rates and terms may present in terms of the cooperative’s overall and long-term safety and soundness.
What alternative forms of relief can credit unions provide small businesses?
Credit unions with existing small business members may feel pressure to offer PPP loans so as not to lose or damage those relationships. However, if the cooperative decides not to pursue PPP lending, there are many other forms of relief they can offer their business members.
These may include referring a small business to another reputable financial institution that is offering PPP loans to new clients (You can find a full list of lenders here.), modifying existing loan terms, temporarily waiving fees or creating a specialized loan product hyper-relevant to the local lending community.
Not all businesses will qualify for a PPP loan, nor will all businesses be able to apply before the funds are exhausted. This increases the importance of exploring alternative methods of relief.
The above questions are far from exhaustive. However, we hope they provide a framework for mulling over the pros and cons of PPP participation. If there are specific concerns your credit union has with regard to its approach, don’t hesitate to reach out to the PolicyWorks team. We are watching this program, and many other CARES Act programs, very closely to anticipate credit union challenges and opportunities.