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3 min read

Challenges for Community FIs Participating in the PPP Loan Program

A mixture of government assistance, and exponential increase in need on behalf of customers, and the continuous need to remain compliant has left many financial institutions (FIs) stretched thin, and scrambling. As I have written several times recently, the COVID-19 pandemic is creating a very complex operating environment for financial services companies and their customers. With the widespread stay-at-home orders and other limitations on commerce, the US and global economies and workers around them have been severely impacted. Governments are responding with a variety of economic programs to support idle workers and impacted businesses. One such program is the Paycheck Protection Program (PPP). Established as part of the CARES Act[1], PPP provides loans to small businesses to encourage them to keep employees on the payroll during the pandemic. Loans are made through Small Business Administration (SBA) 7(a) lenders, federally insured banks and credit unions, and participating Farm Credit System lenders. Initial program guidelines were issued shortly following the effective date of the Act and lenders began taking applications on April 3rd.

Due to the very high demand[2] and short window to get the application process up and running, many FIs participating in the program only have the resources to currently service existing customers, leaving many potential borrowers looking for any FIs taking applications. This increase in unanticipated business loan customers does present an opportunity for FIs to make unplanned fee revenue. Others may look at the program as a time to capture new customers. In either case, the high loan demand, is resulting in a FI acceptance rate number in the hundreds for new loan applications and customers daily.

While these new clients are focused on obtaining a PPP loan, FIs resources needed to process the volume of loans to non-customers can and are, being stretched dangerously thin. In normal times, many community FIs may not see this volume of new loan applications in a full year. Their staffs are stressed by the operating environment; their systems are stretched by the overwhelming level of PPP loan requests. With the existing burden to remain compliant from a regulatory perspective, this combination of volume and stress can cause FIs to fail to:

  • Carry out their ongoing obligation to perform CIP and verify beneficial ownership on new customers,
  • Properly risk rate these new customers, and
  • Adequately monitor these new customers under their risk-based compliance program.

Many community FIs have limited BSA/AML compliance resources and may be unable to properly monitor all of these new customers. While the loans themselves may not present significant money laundering risk, going forward, these new customers may have other transactions which will require monitoring. By onboarding large numbers of new customers without proper planning for the cascading impact on staff, operations and compliance systems, FIs may be creating future problems for which they are not prepared. Without fully assessing the risk a large group of new customers may present, an FI can leave itself open to unintended problems, such as:

  • Insufficient resources to absorb the increase in potential transaction activity,
  • Insufficient resources to perform high-risk/EDD customer reviews, or
  • Accepting new customers that is outside the FI’s risk appetite.

All FIs have a continuing responsibility to identify and report suspicious activity. With the volume of applications and amount of loan proceeds moving at high speed, the opportunity for fraud increases rapidly. How will community FIs comply with their monitoring and reporting obligations? How will this unprecedented operating climate be viewed in the next examination cycle? FinCEN has issued two items of guidance[3] reminding FIs of their ongoing BSA/AML compliance obligations during the pandemic; will a surge of new loan customers justify ineffective compliance efforts?

As community FIs work to meet the needs of those impacted by the pandemic it is important that they continue to operate their BSA/AML compliance programs at full capability and that federal regulatory agencies be transparent and open to any issues that arise. This time demands true partnership.


[1] Coronavirus Aid, Relief, and Economic Security Act, became law on March 27, 2020.

[2] According to The New York Times, as of April 8th, the SBA had received more than 381,000 applications valued at $100 billion.

[3] The Financial Crimes Enforcement Network (FinCEN) Encourages Financial Institutions to Communicate Concerns Related to the Coronavirus Disease 2019 (COVID-19) and to Remain Alert to Related Illicit Financial Activity; The Financial Crimes Enforcement Network Provides Further Information to Financial Institutions in Response to the Coronavirus Disease 2019 (COVID-19) Pandemic