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Forgive But Don't Forget: Implementing The Paycheck Protection Program - PPP

Recommendations to mitigate risk and promote fairness in COVID-19 lending programs

This article was first published on April 27, 2020. 

Editor's note: Oliver Wyman is monitoring the COVID-19 events in real time, and we have compiled resources to help our clients and the industries they serve. Please continue to monitor the Responding To Coronavirus Hub for updates.


Paycheck Protection Program - PPP

COVID-19 has taken an enormous human and economic toll on the world, and financial institutions globally are helping to implement government programs that have been designed to mitigate economic damage. In the United States, financial institutions have been rushing to implement the Paycheck Protection Program (PPP), a key provision within the Coronavirus Aid, Relief, and Economic Security (CARES Act), which provides fully guaranteed (and forgivable) loans to small businesses.

While the Paycheck Protection Program lending period expires June 30, 2020, and the funds may run out sooner, the pitfalls lenders face could lead to consequences for years to come. Our paper, Forgive But Don't Forget, offers immediate cross-functional recommendations while implementing the Paycheck Protection Program (PPP).

Lenders’ experiences from the global financial crisis should serve as a warning that good intentions are not enough, and the impact of any infractions can be expensive and long-lasting.

Already, lenders are being accused of unfair practices in processing Paycheck Protection Program (PPP) loan applications and face a variety of risks:

  • Lawsuits have been filed against the largest banks in the country, accusing them of prioritizing loans to larger businesses and existing lending clients.
  • Lenders are processing loans differently from each other as well as changing their own practices repeatedly, partially driven by changes from the Treasury and Small Business Administration (SBA) — for example, one lender updated its application at least eight times in the first 12 days of the program.

With the second tranche of Paycheck Protection Program funding approved by Congress, the time for lenders to act is now to improve processing, minimize additional risk, and change public perception. The focus must include both refinements to new loan origination and front-running potential issues in loan forgiveness, servicing, and ultimately guarantee redemption.  

The primary focus of lenders so far has been on the origination period and getting borrowers’ loans processed and funded through the SBA. Lenders need to establish and maintain appropriate operational processes and controls throughout the loan’s life cycle. The following provides a summary of recommendations intended to help lenders implement the Paycheck Protection Program with robust and fair processes. For more detail, please view the paper's PDF version.  


RECOMMENDATIONS TO IMPLEMENT IMMEDIATELY
  • 1ESTABLISH A “CONTROL TOWER” RESPONSE TEAM

    Lenders should establish a “Control Tower” — a cross-functional central team with accountability to make decisions and manage issues. The “Control Tower” should be comprised of key senior executives from Business, Risk, Operations, Technology, Corporate Communications/Marketing, Legal, and Compliance/Anti-Financial Crime.

  • 2PROVIDE CLEAR COMMUNICATION

    Perceptions of fairness can by damaged by poor communications. Having a clear external communication strategy, both to the general public and to specific applicants/borrowers, can mitigate these concerns and develop closer customer ties.

  • 3RUN WELL-DEFINED AND DOCUMENTED PROCESSES

    Lenders have already come under scrutiny on how the initial Paycheck Protection Program loans were processed and prioritized. Clear processes supported by policies and procedures are vital for the remainder of the loan life cycle including loan forgiveness as well as servicing, default, disposition, and recoveries. Internal policies, procedures, and other documentation.

  • 4MAINTAIN EXISTING (HIGH) STANDARDS FOR KYC/AML

    The Paycheck Protection Program cannot be a fair program if funds are going to ineligible or entirely fake businesses. Many lenders have made the decision to extend Paycheck Protection Program loans only to existing customers in the first tranche of funding, but pressure to serve non-customers with additional funding is coming from Congress and the public. While it may be tempting to create new and “exception” processes in order to expedite decision-making, it is critical to maintain high standards for customer due diligence (CDD) and transaction monitoring (TM).

  • 5STRENGTHEN QUALITY ASSURANCE AND CONTROLS

    A strong control framework and quality assurance (QA) program ensures that standards are consistently applied across borrowers. This is especially important given the tight timelines and operational constraints from the large volume of loans which are further exacerbated by social distancing.

  • 6LEVERAGE TECHNOLOGY TO PROMOTE OPERATIONAL CONSISTENCY

    Lenders can increase the fairness of their processes by avoiding mistakes and running operationally excellent processes assisted by technology.


THE TIME TO ACT IS NOW.

While the first round of the Paycheck Protection Program funding has been exhausted, lenders have an opportunity to identify prior shortfalls, continuously improve origination in subsequent
round(s) of funding, and plan ahead for forgiveness, servicing, and loan disposition.


Key activities across the Paycheck Protection Program life cycle


Already we are seeing lenders experience reputational damage from their approach to the Paycheck Protection Program. The risks that are present in the remainder of the Paycheck Protection Program will require executive attention, institutional resources, and careful management. The time to act is now.

Forgive But Don't Forget: Implementing The Paycheck Protection Program - PPP


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