Fair Lending FAQs: Small Businesses & the Paycheck Protection Program
The Paycheck Protection Program (PPP) has proven a more-than challenging endeavor for financial institutions. After scrambling to try and serve customers under the program, many FIs are now looking back to consider the Fair Lending implications and what they should be doing to prepare for future exams.
In this second part of our two-part series on Fair Lending FAQs in the face of COVID-19, we’ll cover some of the most common questions related to PPP. (See Fair Lending FAQs Part 1: Exam Outlook, CRA & Mortgage Forbearance)
Should I include Small Business in my Fair Lending program?
The Consumer Financial Protection Bureau (CFPB) hasn’t yet implemented section 1071 of the Dodd-Frank Act, which amended the Equal Opportunity Act to require financial institutions to collect and report information about credit applications submitted by small businesses and women-owned or minority-owned businesses. It has shown interest in moving forward though, hosting a symposium in November 2019.
The fiasco that was the initial PPP rollout is likely to create more interest in Small Business practices and may push that effort further along. It’s also important to remember that commercial loans have always been applicable to Reg B (a foundational element of any Fair Lending program). With that in mind, we all should include them in our Fair Lending programs in some manner.
Will we have Fair Lending issues if we only lent to our existing customers as part of the PPP program?
The answer to that question is another question: Are you 100% certain you only lent to existing customers?
Experience suggests that there always seems to be an outlier. Don’t assume you only lent to clients. Go through your data with a fine-tooth comb to be certain.
There’s nothing that said you had to make PPP loans to everyone, but you do have to have a process in place and follow it consistently. This way if some loans did slip through the cracks, at least you can demonstrate that all borrowers were treated the same.
What and when do you recommend Internal Audit to review the PPP process?
Don’t wait for an internal audit to review the PPP process. Everything moved so quickly and FIs had to scramble to be ready. Your front line and compliance department should do some type of process and compliance testing, including Fair Lending analytics. It’s all about the three lines of defense.
It’s not too early for the three lines of defense to take action so your FI knows where it stands and can potentially and proactively adjust for any issues. This will help prepare your FI should another round of funding come out.
Is the SBA performing or requiring Quality Control (QC) audits on the back-end of the PPP lending program?
The SBA indicated that it would issue guidance on that. It seems certain that they will do QC for loans over $2 million.
What if a Small Business made an application but never submitted the other required information? Will we have Fair Lending issues if we don't do a lot of follow up with these applicants?
If a Small Business submitted an application, but didn’t provide any of the follow-up, I’d treat this like any other application. There are specific things that you need to process the application. You would take it in, record what you have, and you’d follow up if they never got back to you. You need to have a documented process that shows what you did and why the application didn’t go through completion.
The key is consistency. You’ve got to make sure that applicants in the same situation were treated exactly the same.
Stay tuned to the NTRUPOINT blog for the latest on Fair Lending and lending compliance.