Small business lending

Texas National Bank in Mercedes, Texas, is testing how alternative data can improve the speed and accuracy with which it lends to its small-business customers.

Billions were lost to fraud during PPP. Now, prosecutors are increasing efforts to recoup taxpayer money, leaving lenders worried they could be put under the microscope next.

Despite growing concerns about fraud, bankers and credit union lenders say PPP provided a crucial source of capital, backstopping the economy as it faced an unprecedented challenge from the pandemic.

The regulation — mandated more than a decade ago to combat discrimination — will make lenders provide data on approvals and denials of small-business loan applications, the cost of credit and demographics of borrowers.

Lenders had started tightening as early as the fourth quarter in anticipation of a possible recession. Now, the banking crisis is driving community and regional banks in particular to hit the brakes harder, stoking renewed recessions fears.

About 40% of smaller firms applied for private-sector financing last year, which was up from 25% in 2021, according to a survey by the Federal Reserve banks. The results suggest a return to pre-pandemic credit needs, but borrowers now have different plans for the use of financing.

The small businesses said in a lawsuit that the bank used "misleading marketing and business practices" to rake in processing fees from oversized Paycheck Protection Program loans. A bank spokesperson placed responsibility on PPP borrowers for the representations they made in loan applications.

The lending software and shared services provider was created by bankers for bankers.

A new Risk Management Association survey found that 84% of small lenders cite credit quality as a leading worry for 2023 because of the likelihood of a recession.