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RODERICK CARMODY: Hi, I'm Roderick Carmody and today's topic is the CARES Act and how to stay out of the headlines.
I'm joined today by Keith St. Germain, a Director in CrossCountry's Financial Services Practice. Hi, Keith. Thank you for joining me.
KEITH ST. GERMAIN: Hi, Roderick. Thank you for having me.
RODERICK CARMODY: Absolutely. Good to see you again. There has been a lot of talk about the PPP still, particularly now that the borrower names and loan amounts have been released to the public. What do you make of the news?
KEITH ST. GERMAIN: Yes, there has been a lot of noise regarding who has received loans, for how much, the number of positions they have indicated they've saved during the loan applications. And frankly, we expect this scrutiny to continue. It's also important to note that the lenders for each recipient have also been disclosed.
And so, as we think about looking at how lenders can stay out of the headlines, I think it's really important to consider five things: the lack of due diligence (were calculations made correctly to make sure that the correct loan amounts were approved and disbursed, double-dipping, have multiple applications been received by the same entity - potentially from the same person or others), were large borrowers favored, was funding unfairly prioritized based on the size of the loan request, discriminatory lending, overlooked due diligence practices while managing the influx of new loan applicants.
There was a huge rush at the beginning, and how was that handled? And then unsubstantiated forgiveness. Was there enough evidence provided to support forgiveness calculations, and therefore the forgiveness of all or part of a loan?
So, a lot for lenders to consider as they think about trying to stay out of the headlines.
RODERICK CARMODY: Absolutely, it seems like a combination of reputational and operational risk needs to be considered. How should the lenders begin to approach this challenge?
KEITH ST. GERMAIN: Yes. You know, Roderick, I think it's sort of more holistic, not just operational reputational risk; kind of a more broad view. Like we've seen with most government - large government programs, a special Inspector General has been assigned and their team is really going to want to see a loan program that handles about six areas.
With compliance, did you follow standard BSA and AML protocol? Fraud - did any fraudulent applications make it through the process in kind of the rush to get loans out the door? Third, accuracy. Did we verify loan amounts correctly against the payroll evidence that was required to be provided? Fourth, credit. How were borrower credit profiles handled? Do attestations match the existing information on file for current clients or any changes documented? And then for new clients, were the work credit profiles filled out correctly, completely, and accurately? Operational risk - did loans process in the order that they were received in? And then finally, reputational - were loans processed in a timely and efficient manner?
RODERICK CARMODY: Okay. More considerations than maybe I first expected. How should organizations go about beginning to address these risks?
KEITH ST. GERMAIN: Sure, Roderick. I recommend looking backward at loan origination and then forward to loan forgiveness. For origination look backs, we recommend taking a review of loans focused on all the risks we just discussed. So developing a comprehensive risk and control framework specifically for CARES Act programs like PPP and soon the Main Street Lending that can detect any of the landmines that may have arisen during the loan processing period and prepare for audits from this alphabet soup of regulatory agencies - the SBA, the CFPB, the FDIC, potentially the Fed and maybe the Department of Justice.
So, if you can establish a good framework going in, lenders will be able to mitigate reputational risks that's going to come with these programs. And then looking forward to forgiveness applications, which are just now kind of beginning to hit for that first round of PPP borrowers, lenders should really focus on thinking through an automated risk-based process for forgiveness. That's going to help protect lenders from future audit findings because we were able to automate the low value-add processes - like validating payroll records, validating that loan proceeds were used in a manner consistent with the statute and able to add scale and develop efficiency which we can also take and convert to portfolio management processes when business as usual returns.
Lenders are going to be able to process loan forgiveness applications with a high degree of accuracy and efficiency, take a look at large volumes of applications to ensure regulatory compliance, and detect fraud. And I think as a result of taking a look at this automated process, lenders will be able to emerge from the CARES Act with evidence of controls followed, documentation received, and an investigation-ready audit trail. We are estimating that a really efficient automated process can save about 80% in processing time.
RODERICK CARMODY: Wow. So it seems that between PPP and Main Street Lending, banks are going to be pretty busy for the next couple of months. Are there any areas, from your perspective, outside of the CARES Act that they should also have on the radar?
KEITH ST. GERMAIN: Yes, when it rains, it pours. In addition to all of this, federal regulators recently issued inter-agency guidance outlining risks kind of as they see it for banks and where they're going to focus extra attention, upcoming examinations and reviews.
And so, in addition to the CARES Act, kind of three things to consider. Capital adequacy - CCAR and DFAST were run, there was not a pandemic scenario included because it was pre-COVID. And so, banks are going to have to re-run their CCAR and DFAST models to include a new pandemic scenario developed by regulators. This is going to really put a crunch on banks right now in terms of resources and being able to get through this.
Credit risk - I'm going to take a look at the credit risk review process and all of their methodology around loan modifications, non-accrual loans of ALLL. This is all related to the increase in forbearance that we've seen as a result of the CARES Act and the COVID pandemic.
And then finally, operational risk. Work environments have changed significantly, as we all know - I'm coming to you from my kitchen - and there's been a rush to adapt to these programs. And so, consequently, there's a concern generally around fraud-related risks, cyber-related risk and third-party related risk because we're making a rapid large-scale change in our working environment. And regulators are going to be really interested to see how that plays out.
RODERICK CARMODY: Keith, thank you very much for your time. I really appreciate your thoughts, perspectives and insights in talking about the CARES Act and how to stay out of the headlines.