People Need Loans as Coronavirus Spreads. Lenders Are Making Them Tougher to Get. - MarketWatch

People Need Loans as Coronavirus Spreads. Lenders Are Making Them Tougher to Get. - MarketWatch


People Need Loans as Coronavirus Spreads. Lenders Are Making Them Tougher to Get. - MarketWatch

Posted: 28 Mar 2020 10:41 AM PDT

Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses. That means many people could find it hard to get credit just when they most need it, as the novel coronavirus pandemic puts thousands out of work.

Large U.S. lenders including JPMorgan Chase & Co. US:JPM , Bank of America Corp. US:BAC , Capital One Financial Corp. US:COF and Santander Consumer USA Holdings Inc. US:SAN are among the companies reviewing and revising certain lending criteria, according to people familiar with the matter.

Planned moves include approving fewer consumers with lower credit scores, asking for more income documentation and placing lower spending limits on new credit cards.

American Express Co. US:AXP has scaled back financing offers to small businesses, according to people familiar with the matter. Fintech lenders Square Inc. US:SQ and On Deck Capital Inc. US:ONDK said this week they would do the same.

About half a dozen lenders that have found borrowers through Fundera Inc., an online marketplace for small-business loans, have paused new extensions of credit, said Fundera CEO Jared Hecht. "Lenders have zero idea how to assess risk in this environment," Mr. Hecht said. "There is no model that can predict today if I lend $1, will I get paid back?"

Lenders are concerned that rising unemployment and a potential recession will send loan defaults soaring. The moves suggest at best a pause and at worst an end to six-plus years of a bull run in credit, where financial firms have been eager to lend and underwriting standards for credit cards, auto loans and personal loans have been relatively loose.

Lenders are scrutinizing applications for credit cards and personal loans in particular because consumers often turn to them when they are in a bind. They are usually unsecured, which means lenders have little recourse if a borrower defaults, and they can be the first loans people stop paying when money is tight.

Many lenders have said they would work with existing borrowers who ask for help. Some lenders, for example, are increasing card spending limits or delaying due dates on loans.

But lenders are reluctant to take on additional risk from new customers.

"Even people who applied [for credit] in the last two weeks are more vulnerable [now] than when they applied," said Brian Riley, director of credit advisory services at Mercator Advisory Group.

Loan solicitations by email have dropped for both credit cards and personal loans, according to market-research firm Competiscan. AmEx, Bank of America and JPMorgan have sent almost no card solicitations in more than a week.

The changes could be most painful for low-wage workers such as wait staff and hotel employees uncertain when their next paycheck will arrive. Some lenders say they have noticed consumers applying for credit at several financial institutions at around the same time, a sign that consumers are reaching for credit lifelines while they can still get them.

To make matters worse, many Americans were already overstretched before the pandemic, tapping credit cards, auto loans and student loans as costs soared over the past decade but incomes largely failed to keep pace.

LendingClub Corp., US:LC an online lender that is one of the largest providers of personal loans, said last week it would approve fewer loans from first-time applicants, require more verification of income and employment status and reduce approval rates to "higher-risk borrower populations."

Small-business lenders also are getting stingier with credit. On Deck recently stopped making new loans to movie theaters, hotels and nightclubs. It also made other changes to "significantly tighten underwriting standards," the company said in a regulatory filing Monday.

Square Capital, the lending arm of the payments processor run by Jack Dorsey, made loan offers to some small-business customers earlier this month but then didn't fund them when customers tried to activate them in recent days.

A Square Capital spokeswoman said loan offers are expiring sooner in light of more recent data the lender gleans from processing customers' payments.

At AmEx, many salespeople tasked with calling small businesses to offer cards have been told to stand down, according to people familiar with the matter. The company also has reduced its number of loan offers to small businesses.

Lenders that make loans to subprime borrowers are particularly tightening standards. Capital One and Santander Consumer are lowering approval rates for applicants who have only the minimum required credit score or close to it, according to people familiar with the matter.

Synchrony Financial US:SYF which specializes in store credit cards, is also tweaking underwriting standards for new card applicants, according to people familiar with the matter.

Some lenders also are discussing whether they should lower spending limits on cards that consumers haven't used in a long time. They worry that consumers will pull out cards they have abandoned in drawers and use them to buy items they otherwise can't afford.

An expanded version of this story appears on WSJ.com.

Small Business Owners Frustrated With Troubled Paycheck Protection Program Launch - Forbes

Posted: 04 Apr 2020 01:19 PM PDT

The recently passed the Coronavirus Aid, Relief and Economic Security (CARES) Act included a potential lifeline for small businesses, a $349 billion loan program called the Paycheck Protection Program (PPP). The PPP Loan is designed to help small businesses keep their doors open during a time of social distancing and mandatory business closures.

Unfortunately, the program was rushed through the implementation process and was pushed live before banks had the ability to create stable processes for accepting and funding these loan applications.

The CARES Act was signed into law on Friday, March 27, 2020. The Small Business Administration (SBA) and Treasury announced that the first day banks would accept PPP Loan applications would be Friday, April 3, 2020, just one week after the Act was passed. The Interim Final Rule, which provides guidelines for how the program will be run, was released the evening of Thursday, April 2, 2020, only hours before the deadline banks were given to begin accepting loans.

Many Banks Simply Weren't Ready to Handle This Program

While some smaller banks began accepting PPP Loan applications right away, many of the larger commercial banks informed their customers they were not currently accepting applications. Many other banks were limiting applications to current customers only.

Some banks even went so far as to limit applications to customers that had both an established bank account, and an existing loan product, such as a small business loan, business credit card or business line of credit.

This latter limitation is especially frustrating for small business owners. Eric Isham is the Founder and CEO of OMNICOMMANDER, a veteran-owned website design and marketing company with locations in Florida and Tennessee. His bank denied him the opportunity to apply for the loan, even though he is a long-time customer.

Eric stated, "When I attempted to apply for the PPP through my bank, I was told that since I don't have a credit card or any loans through the bank, I did not qualify. Several commercial accounts and years of business together wasn't enough."

He continued, "Like any other small business owner, I am very worried about what a prolonged economic shutdown would look like and what effects that would have on my small business. I have 38 employees that are all counting on receiving their paycheck every 2 weeks, and we have made the commitment to all of them that we are not going to lay anyone off."

Small Business Owners Are Frustrated and Don't Know Where to Turn

Philip Taylor is the founder of FinCon, a financial media conference that regularly attracts over 2,000 attendees to its annual conference.

He said, "it's been frustrating to figure out how best to apply for the PPP. Specifically, which bank I need to work with (my bank has been slow to implement) and what exact information will be needed (it seems each bank is requiring different supporting documents). It's all been happening so fast and you can tell some banks and government agencies are struggling with the speed and nuanced nature of delivering 350 billion dollars to struggling small businesses. It's like building an airplane while you're flying it."

As a leader in his industry, Mr. Taylor hears the frustrations from many small business owners in the financial media space. The most common frustration they cite is a lack of clarity regarding the inclusion of 1099 contractors in their payroll cost calculations. It is common for many small businesses to pay their team members on a contractual basis.

Where Can Small Business Turn if Their Bank Isn't Accepting PPP Loan Applications?

The SBA has announced that business owners can apply at any participating SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution.

However, many banks are currently limiting PP Loan applications to current customers. 

If this describes your bank, then you have several choices: 

  • You can wait until your bank starts accepting PPP Loan applications;
  • You can try to open a new bank account elsewhere; 
  • or you can apply through another participating SBA 7(a) lender. There are some companies that specialize in small business loans that have already streamlined the application process for this program.

There are pros and cons to each of these options. 

Should Small Business Owners Wait Until Their Bank Begins Accepting Applications?

While the program is open through June 30, 2020, funds are limited. The CARES Act included $349 billion toward helping small businesses. Midway through the first day, Steven Mnuchin, the Secretary of the Treasury, tweeted that over $1.8 billion in PPP Loans had already been processed, primarily from community banks. Some big banks had already taken in large amounts as well, but were not included in those numbers.

Waiting is an option, but it is not without risk. The SBA expects this program to be oversubscribed and funds may run out in the next few weeks.

Should Small Business Owners Open an Account Elsewhere?

With many banks limiting access to current customers, opening a new business bank account is an option. However, this can take time, as opening a business bank account can take more time than opening a personal account, which can be opened online in just a few minutes.

In addition, some banks are limiting loan applications to clients that were already customers prior to the loan being announced. If you decide to open a new bank account, be sure to clarify whether or not you will be able to apply for the PPP loan.

Finding Another Participating SBA 7(a) Lender is Another Option

The SBA isn't limiting the PPP Loan funding to banks. You can try finding another lender that will fund these loans. The SBA website has a list of the top 100 most active SBA 7(a) lenders.

At this point, it may be worth working through that list to see which lenders are accepting applications at this time.

Will The PPP Loan Program Run Out of Funds?

At this point, it is almost a given that the funds will run out. The question is when? And right now, no one knows when that will happen.

In addition to the numbers tweeted by Steven Mnuchin, Bank of America tweeted they processed over $6 billion in PPP loans in just the first day of the program.

At the time of this writing, the total amount of processed loan applications has not been publicly released.

Will The PPP Loan Program Get Access to More Money if Funds Run Out?

This is still unknown at this point. However, President Trump tweeted, in part, "I will immediately ask Congress for more money to support small businesses under the #PPPloan if the allocated money runs out."

Small business owners shouldn't bank on this program gaining access to more funds of they run out. But they should be aware that it is already on the government's radar.

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