Last week we told you how important it is to be able to tell your Paycheck Protection Program (PPP) story. Now we’re giving you key points to help you do it.
As a refresher, the Consumer Finance Protection Bureau (CFPB) is adjusting the scope of its exams to emphasize COVID-19 related issues, including Fair Lending within PPP. Public interest groups are taking an active interest in equal access to PPP loans.
Meanwhile, the CFPB announced in its Spring 2020 Rulemaking Agenda its intentions to move towards implementing section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to collect, report, and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses. The bureau says “it will take a significant step forward toward implementing section 1071 of the Dodd-Frank Act” in September 2020. While unrelated to the PPP program, it’s a sign that Fair Lending will become increasingly relevant to small business lending.
How can you be sure your FI’s PPP activities are aligned with Fair Lending and pose no risk to your reputation or regulatory exam results?
- Get a feel for your PPP Fair Lending performance. PPP has provided a dress rehearsal for when the CFPB implements section 1071 of the Dodd-Frank Act. Use the opportunity to analyze Fair Lending trends within your approval and denial process and uncover disparities. This will help you recognize any weaknesses in your Fair Lending compliance management program.
- Keep an eye out for fraud. Bank of America got some bad press this week after the owner of a Florida moving company that borrowed $4 million through the Paycheck Protection Program used the funds to buy a $320,000 Lamborghini. The business owner grossly exaggerated payroll expenses, which typically ran around $200,000 a month.
Don’t become the next headline. When collecting documentation of payroll and nonpayroll costs for forgiveness applications, don’t accept borrower-created documentation. If the overall loan amount exceeds $500,000, credit analysis should validate all the figures in the application against source documentation.
- Make sure loan forgiveness policies and procedures align with Fair Lending best practices. With the rush to get PPP up and running and quickly get applications submitted, your FI may not have had the time to fully draft policies and procedures to ensure all similarly situated small businesses were treated consistently.
Now is the time to correct that oversight. The PPP loan forgiveness process isn’t under the same time crunch as the lending phase, giving FIs the ability to draft adequate policies and procedures that complement Fair Lending controls. Analyzing your FI’s Fair Lending performance in the application and funding process can help you uncover weaknesses in your initial program, providing insights that allow you to make practical changes and understand your data story.
When the CFPB looks at your Fair Lending program, your FI will fare better! You will be able to speak to and demonstrate the steps taken to proactively recognize any problems and correct them.
- Use the forgiveness process to ask for GMI. The PPP forgiveness application includes an optional section for government monitoring information (GMI) demographics on gender, race, ethnicity, and veteran status. Make sure lenders know how to ask borrowers for this information.
Collecting demographic information is a new concept for commercial lenders. It’s our job as compliance professionals to make sure we give them the language needed to ask the questions and explain how the information will be used. (Ex: The purpose of this information is to ensure all applicants are treated fairly in the lending process. We would appreciate you providing this information, but it has no bearing on this application.)
- Raise awareness of Fair Lending compliance with commercial lenders. Fair Lending compliance is not a new area for commercial lenders, but it can be unchartered territory. It tends to be a tough sale since their personal priority is closing deals and earning revenue for the FI.
Use your FI’s experience with PPP as ammunition when training commercial lenders on Section 1071. You will be able to demonstrate how even well-meaning financial institutions can have Fair Lending issues. But following policies and procedures will be essential to avoiding regulatory and reputation fallout.
- Look for CRA credits. PPP borrowers will need to provide all sorts of spending data when applying for forgiveness. There’s a good chance that there are some Community Reinvestment Act (CRA) lending credits hidden in there if you take the time to look.