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Forging ahead with PPP loan forgiveness


At the beginning of 2020, if someone had suggested that lenders would fund more Small Business Administration loans in nine weeks than the SBA had approved in the past 20 years, most experts would have laughed. But it happened. More than 5,500 lenders have approved over $518 billion in Paycheck Protection Program (PPP) loans for the benefit of American businesses and their employees.

However, the most important work still lies ahead. While the initial cash injection was critical, the real impact will be found in the forgiveness of those obligations. Lenders are currently grappling with how they are going to process 4.9 million forgiveness applications during the months ahead. Banks that do not have a strong forgiveness execution strategy in place will quickly become overwhelmed, creating inefficiencies for the institution and a frustrating experience for customers.

There are four key factors for banks to consider in formulating a solid forgiveness strategy.

Eye on the investment

To effectively manage forgiveness, most institutions will select a partner to help them process the applications and execute any follow ups. However, banks should avoid selecting a forgiveness solution that requires an upfront financial commitment.

The landscape of PPP forgiveness guidance is still quickly evolving, with Congress and the Treasury continuing to debate the rules of the game. A proposed Senate bill would provide for automatic forgiveness of PPP loans less than $150,000 – that is 86 percent of all loans made to date. The margins on this form of lending are already thin, so it’s wise to keep costs as low as possible during the forgiveness phase. Ideal solutions protect both banks and borrowers without going overboard on expenses.

There is a wide range of options available, from sophisticated, expensive solutions to free calculators and everything in between. Those that take the time to carefully evaluate the choices and determine which works best for their institution’s individual strategy and workflow style will be positioned to make the smartest choice possible.

Simplicity is key

The current PPP loan forgiveness application options are quite complex, resembling a tax return methodology when calculating the ultimate amount of forgiveness a borrower will be granted. Leveraging technology to automate everything from data entry to calculations and downloading the required documentation increases efficiencies and streamlines the process for bank employees and customers alike.

For example, consider an option that allows your PPP loan data to be extracted directly from your core processing system. PPP loans have strained resources as bankers have been forced to wear multiple hats and work long hours. Integration with the core can reduce the time commitment necessary to complete various tasks that do not necessarily need human involvement.

The PPP process has undoubtedly accelerated the path toward digital lending. Those that didn’t already have digital platforms and electronic signing capabilities in place were at a distinct disadvantage when trying to process the loans while maintaining physical isolation. Expect to see a lot more movement in the digital lending space once PPP forgiveness plans are established and running smoothly.

Timing is everything

Given the average cost of funding, there is little to be gained by keeping these 1 percent loans on the books longer than absolutely necessary. Even though the term has been extended from two to five years, there has yet to be much guidance around what rates can be charged for the longer-term loans.

Perhaps even more importantly, the ultimate goal of this initiative is to help borrowers remove these potential obligations from their ledgers while achieving the highest rate of forgiveness possible under current guidelines. Bankers should proactively reach out to borrowers on the very day they are eligible to begin the loan forgiveness process. And some solutions automate this outreach by extracting PPP data from the core on the banker’s behalf, making it easier and quicker for all involved.

Look to the latest guidance

If bankers are confused about the guidelines for forgiveness, just consider how borrowers must feel. As banks evaluate and eventually choose a forgiveness solution, they should consider vendors’ ability to keep up with the latest compliance guidance and perform the necessary changes to comply.

The SBA and Treasury Department have both been diligent in updating their websites as new guidance is announced. And certain associations, like the ICBA, have proactively provided several resources for bank members to keep a close pulse on updates, including webinars and detailed Q&A articles. Savvy bankers are keeping a careful eye on these tools, helping their teams stay in the know and act accordingly.

Banks’ forgiveness strategies will be critical to the outcome of their overall PPP lending efforts, impacting both employees and borrowers in the months ahead. Those that take the time to consider these four areas will be better positioned to make the best decision for their individual institutions.

Pat True is senior risk analyst at Jack Henry Lending

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