2020 was a busy time for lenders—and highly stressful too. A slew of government stimulus packages, a pandemic-affected housing market, and financial uncertainties forced lenders into participating in various government programs to maintain their liquidity.
The government rolled out several relief packages to prevent an economic collapse—like the Paycheck Protection Program (PPP), CARES, and business loan programs like the Main Street Lending Program. Lenders scrambled around to accelerate their application processes and help their borrowers to claim their share of funds from the limited government relief packages.
Main Street Lending Program: A promising program for small and medium-sized businesses to access funding support
The Federal Reserve established the $600 billion Main Street Lending Program to support lending to small and medium-sized business and non-profit organizations that were in sound financial condition before the onset of the pandemic.
Under the Main Street Lending Program, the Federal Reserve promised to purchase 95% of the loans disbursed to SMBs by lenders. Lenders must retain 5% of the loans—a condition put in ostensibly to discourage irresponsible lending.
Here's a summary of some of the criteria businesses must meet to qualify for the Main Street Program:
- Be a US company established before March 13, 2020, and must be in operation continually since January 1, 2015
- Have fewer than 15,000 workers
- Have had less than $ 5 billion revenue in 2019
- Have not have received support under the CARES Act nor participated in the Primary Market Corporate Credit Facility
- Not be ineligible under the PPP
Sounds great? Why was the Main Street Program uptake so poor?
With such a far-reaching attempt to provide stimulus to businesses, employers and employees, there appeared to be ample opportunities for lenders. But till October 30, 2020, only $ 3.7 billion worth of Main Street loans had been issued—only over half a percent.
Why did the $600 billion Main Street Lending Program not live up to its promise? In an article in Mortgage Professional America, Asnardo Garro, a partner with the law firm ARHMF's corporate and financial practice, mentions three primary reasons. In Garro's estimation, the real problem with Main Street's failure to launch is more on the lender's side.
For starters, lenders must be willing to take some risk. Taking on 5% of the loan risks in a pandemic-affected unstable market is not a very attractive proposition. Risk-averse lenders were slow to respond to the program primarily due to this reason. Other factors included the confusion over a flood of stimulus packages, frequent changes in their eligibility criteria, and their approval processes - making it difficult for lenders to deal with the volume of applications for the funding. Not an easy scenario for sure!
But one significant reason why the Main Street program failed to reach scale is the cumbersome and time-consuming lending processes. Many lenders struggled to cope with the volume and underwrite the loans within a reasonable time.
Generally, a lender takes up to five weeks to decide on a mortgage application and then it is another two months before the borrower sees the cash. In these challenging times, most borrowers are desperate to access loans in about a month—in a bid to stay solvent. Unfortunately, this is not how it works on the ground!
For business loans, the average time-to-cash is much higher—about three months. A Washington Post report indicates that many borrowers find the lending process slow even in normal times, replete with unexpected problems and frustrations. During a pandemic, time-to-cash is critical for a business to stay afloat. The problem for lenders is how to process applications quickly against the various criteria laid down in the different stimulus packages.
Digital Transformation: Accelerate lending processes to help businesses get funds in time
In 2020, lenders struggled to keep pace with market fluctuations, the numerous stimulus packages, and higher expectations of borrowers. They were overwhelmed by a large number of applications coming in simultaneously under the different relief schemes. Programs meant to provide relief may have proved to be obstacles to quick loan disbursements.
Complete digitization of loan application and verification processes is the key to accelerating fund disbursements. From application to approval, large lenders estimated end-to-end lending digitization to be achieved by 2025. But COVID-19 changed the market scenario and today's business environment demands that digital transformation happen right now! The current chaos and inability of lending institutions to cope with the sudden surge in loan demand point to their failure to adopt critical digitization and modernization in time.
Digitization keeps lending operations resilient and functional during periods of high demand. Digital processes and emerging technologies like AI and RPA speed up decision-making, reduce costs and mitigate lending risks.
MES: Your digital transformation partner
The need to digitize now is established and understood. But many lenders still face internal issues that prevent them from a complete transformation. And that's why most lending institutions prefer to partner with an external digitization provider. Digitization is highly technical, complex and expensive. It is imperative that you get it right the first time.
MES offers you solutions for the end-to-end digitization of your lending process.
We work with lending institutions to convert paper-based processes into automated workflows. We convert paper documents into digital formats that are easy to store, retrieve, and accessible from anywhere and any device. Our Document Management System (DMS) solutions offer full support to your business goals and competitive strategy.
Contact us today to learn how we help you achieve digital transformation and keep your customers happy with on-time funding support.