With legislation to provide simple, automatic forgiveness for PPP loans stalled in Congress, businesses and lenders face a long slough through the SBA’s forgiveness process. In response, some lenders are offloading their PPP portfolios to nonbank servicers in hopes of avoiding forgiveness hassles and boosting liquidity.
For example, New York-based Loan Source has purchased nearly $3 billion in PPP loans, according to its website. The nonbank works with ACAP SME, LLC—an SBA-approved partner—to service the loans. It has acquired portfolios from 14 lenders, with more in the pipeline.
So far, however, selling seems to be more popular for coastal banks than in the Midwest. On Aug. 6, WBA included a poll in the Wisconsin Banker Daily morning email:
Does your bank plan to sell its PPP loan originations?
A resounding 100% of respondents replied “No.”
Banks have many factors to consider when deciding whether to sell all or part of their PPP portfolio to a nonbank servicer, including the institution’s liquidity needs, capacity, expertise, and reputational risk.
Liquidity – Depending on the bank’s portfolio mix, PPP loans could be straining liquidity. SBA has changed both the timeline and the requirements for forgiveness since the program was launched, which also impacts net interest margin. Lenders didn’t anticipate needing to hold PPP loans for as long as they may need to now. Some banks may be looking for the ability to get back to “business as usual” and relend funds currently tied up in PPP loans.
Capacity – Banks also need to examine their internal capacity to service PPP loans moving forward and identify gaps, both in bandwidth (with staff already working overtime in many cases) and in expertise. Banks that are less familiar with SBA lending may find selling the loans to a service provides their borrowers with a higher level of service in this situation.
Compliance – As always, banks must evaluate the compliance risk of keeping PPP loans in their portfolio. SBA issued new guidance on the program by the hour, it seemed, and keeping up with all of the requirements for forgiveness, not to mention the potential for fraud, may strain a bank’s compliance management capabilities.
Reputation – Finally, banks must consider the reputational impact of selling (or not selling) their PPP loan portfolio. Many community banks participating in the program as a way to help their customers and communities during a time of crisis. As the state and national economy slowly recover, some lenders may choose to return to more tried-and-true methods of assistance rather than navigate the changing complexities of PPP. However, some institutions may see selling as a kind of abandonment of their clients. If those clients feel the same, the reputational risk may be too great to overcome.
If a lender is leaning towards selling, one final consideration is volume. Like student loans or credit cards, PPP servicing is a volume-driven business. Investors and servicers who are in the market to purchase PPP loans may have minimums for deals.
Ultimately, the decision of whether or not to sell PPP loans comes down to risk, not profit. Most likely, banks will not make money on the sale of their loans, so they must weigh the compliance risk of potential fraud or costly servicing errors with the reputational risk of selling.