April 2020 | Point of View

PPP vs. Main Street Loan Program: The differences for banks and how they can leverage lessons learned

Banks faced a high volume of loan requests for the SBA Payroll Protection Program (PPP), and that will likely be the case for the Main Street Lending Program set to roll out. Based on our experience deploying digital solutions at 15 financial institutions participating in the PPP, here are our recommendations for how to prepare.

PPP vs. Main Street Loan Program: The differences for banks and how they can leverage lessons learned

Stemming from the CARES Act, the Federal Reserve is finalizing requirements for the Main Street Loan Program (MSLP). The program will make available $600 billion in capital to small and medium-sized businesses. Similar to the SBA Payroll Protection Program (PPP), it is anticipated that banks will again face a high volume of new loan requests. And, much like the PPP, given the pace the government is moving in order to provide economic aid, federal guidelines are expected to be slow to finalize. Given these logistical challenges, it should be expected that funds available under MSLP will run out well in advance of the September 30 program expiration date. We believe banks must move quickly and prepare for the program in order to secure limited funds for their borrowers.

Banks should assemble a team dedicated to the MSLP and equip them with appropriate processes and technology aligned with the program’s requirements. To be successful in securing program funds for business borrowers while managing credit risk, banks will need to streamline application intake, underwriting, decisioning, closing, and monitoring for these program loans. While participation in the MSLP may appear to only require a new business loan product with specific terms and conditions, managing demand for these funds while maintaining credit risk discipline will require dedicated and decisive attention to a bank’s end-to-end business credit delivery model. 

Based on our experience deploying digital solutions at 15 financial institutions participating in the PPP, banks should prepare for the MSLP in the following ways:

Be proactive, consistent, and monitor program participation

Given the scrutiny placed on the dissemination of federal funds via the CARES Act, it is important that banks be fair and equitable in distributing funds from the MSLP while making consistent credit decisions.

Funds from the program are designed to support businesses in urgent need of working capital for payroll, inventory, and operations. To get the funds where they are most needed quickly, banks should clearly define borrower qualifications as outlined by the Federal Reserve and make this information available on their website and through proactive communications to existing borrowers.

It will also be critical for banks to monitor application metrics including size and industry of applicant businesses, loan amounts requested, and to provide justifiable reasons for any declined application or approval for a lower-than-requested loan amount. Data points such as these should be put into a dashboard for regular reporting and to ultimately provide to auditors and regulators, should they ask for documentation. 

Equip a SWAT team with the tools and processes needed to make loan decisions quickly

Depending on size and complexity, a typical small to medium-sized business loan can take anywhere from 20 to 45 days to fulfill. Loan applications fulfilled through the MSLP will need to be analyzed, decisioned, documented, and fulfilled in a much shorter timeframe to ensure borrowers are able to gain access to the limited funds available via the MSLP.

In order to achieve this rapid loan fulfillment capability, a bank SWAT team should assemble a tool kit, enabled by technology, to be leveraged across all MSLP qualifying loan applications and include the following elements:

  • Online portal for MSLP loan intake. While many banks do not take online applications for business loans of this size, allowing businesses to express interest in the program via an online portal accessible through a bank’s website will allow streamlined management of incoming volumes versus relying on relationship managers alone.
  • Provide straightforward eligibility requirements and a client-facing eligibility checklist for attestation. Some banks may choose not to participate in the MSLP, creating an opportunity for banks that do to secure relationships with new borrowers in need of business capital. Providing clear guidance on eligibility and attestation requirements will facilitate the intake of qualified applications.
  • Underwriting and verification requirements. Under the terms currently outlined by the Federal Reserve, banks will have the final determination on loan amount, pricing, and approval decisions. Banks should empower their SWAT teams to make timely decisions based on MSLP requirements and bank credit policy as applied to the program to ensure that consistent and defensible credit decisions are made. 
  • A consistent guide to fees and pricing. Under the terms currently outlined by the Federal Reserve, a 1% fee must be paid to the SPV, and banks must decide whether to pay this fee directly or pass it to the borrower. In addition, the program provides the bank with pricing flexibility (250-400bp) based on the bank’s interpretation of risk. Keep in mind that credit decisions made under the program should be made in a consistent manner, based on the terms of the program, the bank’s underlying credit policy, and in accordance with all existing regulations. 
  • Approval/decisioning. Banks should consider expanding their definition of loans eligible for automated decisioning/recommendation in order to streamline the approval workflow. The potential volume of credit applications will likely overwhelm manual approval processes, jeopardizing a bank’s ability to make wise, timely credit decisions and secure limited MSLP funds for borrowers.

Leverage loan origination system (LOS) technology to streamline the end-to-end credit delivery process 

Given the significant need for capital, banks need to prepare for large volumes of MSLP applications by ensuring their loan origination tools (CRM, documentation management, underwriting, workflow, decisioning, closing, funding, boarding, and reporting) are efficient at all stages of the loan lifecycle. Relying on manual processes will not only limit the effectiveness of bank lending team but also increase the potential for risk as teams struggle to keep up with demand and even potentially cause clients to miss out on loan opportunities. Leverage the current LOS and other automated solutions to the fullest extent possible to speed up application processing, approval decisions and to mitigate risk. 

Update existing loan documentation to align with the terms and conditions of MSLP

While the details of the MSLP are subject to additional definition and revision, banks should begin working with their legal teams to update existing unsecured loan documentation to ensure that it addresses the unique terms and conditions within the MSLP. The introduction of new commercial loan products usually takes significant time and effort. The short timeframe and limited funds available under MSLP do not afford banks the luxury of time for documentation revisions. In particular, create loan document addendums to enable borrowers to attest to their eligibility, use of proceeds, and their EBITDA leverage used to calculate the maximum loan amount under the program. Details on all required attestations are available within the guidance provided by the Federal Reserve.

Establish a consistent communications and change management strategy 

Given the pace of change confronting bank clients, be prepared for questions. Before beginning proactive outreach to current customers, ensure FAQs are documented and clearly defined paths to show customers their loan options and implications of each based on whether they are seeking a new loan or expansion of an existing loan facility. Equip customers with guides and checklists to help them navigate the loan process. Make the same level of detailed instruction available internally. We recommend creating demonstration guides for internal teams on how to respond to applicant questions, how to efficiently process loan requests according to the newly expedited process created for this program, and how to monitor loans post-funding.

The Main Street Loan Program is the next in a series of efforts by the Federal Reserve to ensure capital is made available to all segments of the American economy. The need is real, particularly within the small to medium-sized businesses targeted by this program. Banks can expect a wave of application volume similar to the PPP, but MSLP loans carry credit risk, given the 5% unsecured tranche retained by the financial institution originating the loan. In order to manage the expected incoming application volume and properly assess the risk, banks must prepare now to develop expedited processes aligned with the requirements of the program.

In order to manage the expected incoming application volume and properly assess the risk, banks must prepare now to develop expedited processes aligned with the requirements of the program.

A nimble bank that is able to manage this program rollout in a customer-centric way stands to gain more than just loan volume -- it will position itself as a bank that can consistently provide stable capital to businesses in need.


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