The Main Street Lending Program: A Digital Transformation Stress Test For Lenders

To say that 2020 has been hectic for lenders would be an understatement. The convergence of stimulus packages, a fickle yet robust housing market, and financial uncertainty forced lenders to rally behind government programs to secure necessary liquidity. We've seen plenty of stimulus iterations. From the buckets of relief packaged into CARES to middle-market business loan programs like The MainStreet Lending Program, mortgage companies are under pressure to expedite lending applications to secure their borrowers water from the finite pool of government assistance.

In particular, the Main Street Lending Program stands out.


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Understanding The Main Street Lending Program

"Lenders are concerned about the underwriting expectations." — Fed Chair Jerome Powell

The Main Street Lending Program is a $600 billion lending program run by the Federal Reserve designed to provide support for SMBs that suffered at the hands of COVID-19. Sounds familiar, right? Well, the Main Street Lending Program is a little different than PPP. For starters, the Federal Reserve will only buy up to 95% of any Main Street loans. The bank keeps the other 5%. According to Powell, this is to offset risky issuing.

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To secure this loan, businesses must:

  • Have fewer than 15,000 workers and at least 10 employees
  • Be a 501(c)(3) or 501(c)(19) that's been in operation (continuously) since January 1st, 2015
  • Have less than $3 billion in endowment
  • Work on an operating margin of <2% in 2019
  • Have 60 days cash-on-hand
  • Not have received support under Subtitle A of Title IV of the CARES Act
  • Not have participated in the Primary Market Corporate Credit Facility
  • Not be ineligible for PPP (though businesses can take both PPP and Main Street loans)

Currently, The Main Street Lending Program operates under five umbrellas:

Each of these programs has different requirements and benefits, and borrowers can only secure loans from one of these programs. Currently, lenders can register to lend under any of these programs via the Federal Reserve Main Street Lending Portal.

Sounds pretty fair overall, right? So, why is that only 0.3% (or 2 billion) of Main Street Lending money been utilized? There are a few reasons. For starters, lenders have to take on risk. According to a recent press conference with Powell, this may change. Powell added that "Banks are approaching this loan like any other underwritten loan." Having to take on 5% of the loan risk in the midst of a pandemic with unstable market conditions isn't exactly ideal for lenders. Luckily, Powell added that the Fed will be "making some changes in that respect."

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But, even with the risk, the Main Street Lending Program was simply a lot to unpack. Between the underwriting requirements, data gathering needs, and internal lending decision-making requirements, lenders have been slow to absorb the Main Street Lending Program. Sure, there's a possibility that Main Street is getting lost in the overwhelming confusion and chaos of the stimulus tsunami crashing across our shores. But there's obviously another reason that Main Street hasn't been issued to more businesses. Lenders are still struggling to modernize their lending process, and this is causing many to struggle with the risk components of the Main Street Program.

The Digitization Altercation: How Digital Lending is Converging With Stimulus Dollars

On average, it takes lenders three to five weeks to make a decision on an application. Then, it takes up to two months for cash to actually enter borrowers' pockets. That's a problem. When we look at other industries across the commercial space, we see a landscape of digitization where results are nearly instantaneous and personalized. Yet lending institutions lag. According to Fannie and Freddie data, 75% of borrowers expect it to take less than one month to get their mortgage. Unfortunately, 37% of mortgages take over a month to process.

But that's mortgages. Business loans have an average time-to-cash of three months. And, even during regular operating conditions, the majority of lenders admit to frustration and woes securing loans. During a pandemic, time-to-cash is make-or-break for struggling businesses. At the same time, there's friction on the lending end. How do you process applications rapidly while still vetting them against specific criteria? After all, Main Street loans have inherent risks.

We present a path forward—a path that isn't riddled in mundane, repetitive, and manual touchpoints, and a path that isn't fraught with verification frictions and processing woes.

The answer is digitization.

Digitization is the fuel that can keep your lending operations functional and resilient in the face of mortgage hype and stimulus floods. 78% of CFOs say that the introduction of digital processes and analytics tools will lead to improved decision making and better outcomes. 82% believe that digitization will reduce loan processing costs (which sit at roughly $9,000 on average) by over 10%—with 46% expecting savings of 26% or more. And 96% believe that digitization will lower origination costs and reduce risk.

Here's the truth: lenders are under immense pressure. The 95/5 risk blend isn't the primary barrier blocking the Main Street Program. And it's certainly not technical woes. It's that lenders simply can't keep up with the pace. Systems are crashing under the weight of stimulus programs and housing market fluctuations. Never before have lenders had to deal with so many unique programs and applications coming in simultaneously. Really, this is a stress test for the future: 59% of lenders believed that mortgage digitization would happen by 2025. That timeline has flown out the window. The time to digitize is now, and we see the chaos of a lagging lending ecosystem.

DRS Can Help

You know you need to digitize. In fact, almost every lender understands the need for digital transformation. But need and capability are two different monsters. 76% of CEOs say that internal silos are the barrier preventing them from fully transforming. Chances are, you can't do it alone. There's a reason that 54% of firms have already turned to external providers for digitization and another 38% are planning to do the same in the near future—digitization is a costly, highly-technical, and all-or-nothing technology.

At DRS, we've built an end-to-end digitization platform to help you navigate the torrential waters of the lending process. Are you interested in streamlining your loan process? Contact us. Let's embrace the future of lending—together.