Debt Forgiveness and Loan Modifications

 We’ve all been eyeball-deep in PPP for eight weeks, and now debt forgiveness is looming ahead, albeit with minimal guidance.

As you organize yourself to handle this next deluge, I’m sure you’ll apply many of the lessons learned during the initial PPP process.  In addition, here are some thoughts for you:

• Don’t wait.  Start organizing – not just planning – right now.  Put together a committee that meets frequently to pull together the resources, brainpower and process to get ready, while building some flexibility into the process given the uncertainty about the process.

• The volume of transactions in short period of time requires workflow management software.   Forgiveness is different workflow than loan request and a different vendor may be more appropriate.  Do utilize lessons learned from the loan request process to improve customer experience in this phase of PPP processing.

• User-friendly forms and application process are essential.  The SBA forms do not yield a high percentage of actionable requests for forgiveness.   Also, spend more time upfront.  Time spent on assuring the initial request is complete, accurate and well supported will save exponentially more time on back end.    

• Those banks that opted for automation, and even those that haven’t – accepting all applications through an online portal is best practice.  Tracking has been a nightmare, and debt forgiveness is bound to add tension and data requests to the already cumbersome process.  Have the customer self-serve and enter the data themselves.

• Communicate VERY frequently with customers.  Build into the processes automated checkpoints, such as “application received” or “These data items are still missing”, to ensure timely processing and reduced aggravation.

• Communication #2:  determine not only frequency but also content of your messages.  What is the purpose of communicating today?  What’s on the customer’s mind as you’re going through the process?  Have your content – and frequency - ready now.

• Although the urgency to complete forgiveness requests is not the same as the application process, customer anxiety will be high.   Setting customer expectations in communication process can help reduce anxiety and make each customer touch meaningful.   Again, better information, forms, education and hand-holding upfront will save higher call volumes later regarding application status and meaningfully improve the customer experience.    

• Consider what type of process you’re building. What would be the ideal process?  On one of our calls, someone described their process as:

o Simple 

o Clear

o Adaptable 

o Transparent

Setting these requirements in advance will help you select vendors and build the workflow that responds to your preferences.

• Customer education is essential.  You just can’t do enough! Customers aren’t sure what information is necessary to achieve forgiveness, and much of the decisions elements regarding forgiveness are determined way before they apply.  75% of the spend must be for employee payroll, and the rest designated toward essential support services – rent utilities etc.  Customers were informed of that, but not everyone hears what they are told.  Some banks have engaged CPA firms to conduct webinars for customers and educate them repeatedly on what’s required.  That material is relevant to both external and internal resources – your own employees need to understand precisely what are the forgiveness requirements as well.  Some CPA firms are also preparing to handle the inevitable overflow of calls from confused, even angry, customers as well.  They become back-up hotline.  Others offer temporary help to get the job done as well.

• Capacity planning.  Scope out your needs and how they will be met.  Can you work in shifts again?  Use vendor support?  Can you automate certain function using bots or other technologies, such as automated doc prep?

• Utilizing CPA firms to perform the initial validation can add independence and customer assurance to the process and improve your relationship with such important Centers of Influence.    

• Vendor support.  Banks have been using vendors for at least three reasons:

o Education

o Technology

o Call volume backup

o Initial validation

Your people can’t continue to work at the same frenetic pace they have performed for so long.  Battle fatigue is setting in; be prepared to relieve them through vendor assistance if need be.  As always, when using vendors for verification, establish well communicated SLAs.   

• Staffing fatigue is a major concern.   Also, asking too much of existing business banking resources in this process could be a distraction away from managing customer relationships through this pandemic.   The PPP loan was essential to managing customers’ liquidity risk; the forgiveness process is more administrative.   Business Banking teams should be focused on payment deferment requests, loan modifications, relationship management and risk assessment/management.   Keep RMs and their support staffs informed on forgiveness but not consumed by the process.

• Dispute resolution.  How are you going to handle the inevitable disagreements that will arise during the forgiveness phase?  Set the process up now, including the escalation hierarchy, key decision makers and information requirements for decisioning and resolution.  Ensure you have at least one customer advocate in the dispute resolution process.

There are many more aspects to this complex process.  The bottom line – get ready now, and adjust as process requirements are revealed from the SBA.

In addition to the debt forgiveness process, loan modifications will proliferate significantly, and the process has already started.  Such modifications are an integral part of our industry, but the number of modifications, and the criteria for doing so, could be overwhelming.

Past experience indicates that, when accommodations were made wholesale, without clear guidelines, controls and reporting, major issues emerged across many dimensions:  asset quality, fair lending, collections, compliance and other practices.

Below are several practices that might serve you well as you embark upon a large volume of modifications:

• Any modification, new or extended, related to COVID, should have two signatures to ensure rigorous thinking before the modification is approved.

• All such modifications should be reported timely to an oversight committee, and possibly even the board.

• Further extensions should be accompanied by the borrower’s plan for credit restoration, including demonstration of their ability to handle the newly defined debt both financially and managerially.  It’s good discipline for both the borrower and the bank.

• Modifications often entail additional collateral and rate floors.  In today’s environment additional deposits, borrower equity, updated and more focused covenants, guarantees and cross-collateralization are all tools available to you to ensure we do not repeat the 2009-2010 scenario.

• Seek to obtain – some say require – the borrower’s full operating account and cash management relationship, not just for profitability but more for the credit worthiness that comes from such a relationship.

• Many of you are already designating modified loans by a flag. It’s a wise move and needs to be done.  Need I mention TDRs???

• Start hiring now for additional capacity in loan review, workout, credit administration, asset disposition etc.  The demand for these resources, especially experienced ones, will skyrocket.

We will learn more as we make our way through this crisis.  In the meantime, we should apply the lessons learned from the last one to current processes and capacity so that we can avoid some of the intense credit issues we faced a short decade ago.