How Is the COVID-19 Pandemic Affecting the Loan Industry?

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As business owners rush to implement CDC guidelines to effectively flatten the curve and minimize the spread of the pandemic, there’s also a need to identify ways to fuel our world’s economies while protecting the health and safety of our communities.

In the wake of the COVID-19’s ruin, the loan industry has faced an unprecedented crisis. More people than ever are turning to these loan providers for financial relief due to job losses, a decline in sales and profits, and difficulties in repaying existing loans.

To respond to this rising need, it’s essential for borrowers and lenders to thoughtfully adapt to these changing times and find ways to navigate the crisis at-hand. So, how exactly is the COVID-19 pandemic affecting the loan industry today? Here are seven ways your loan provider may be impacted by quarantine protocol and spiking unemployment rates.

Increased use of digital lending

Digital lending offers excellent benefits to borrowers, including speed, convenience, inclusiveness, and ease of application. Lending platforms like LoanPro provide much-needed user-friendliness as the world continues to practice social distancing and implement quarantine measures. Lenders who have transitioned their systems of operation to a digital platform have benefited dramatically as its popularity increases. With online-intensive lending services, a loan provider can easily adjust to the era of COVID-19 while still offering lower lending costs.

Along with the COVID-19 crisis, increased internet use, changes in consumer behavior, technological innovations, and the introduction of favorable regulatory measures also drive loan providers to adopt digital lending services.

According to recent studies, there has been a significant rise in daily phone use and increasing dependence on mobile and online banking options. Since December 2019, there has been an 8% increase in log-ins from desktop computers and a 1% rise in mobile log-ins rates in North America, alone.

Changes in information delivery

Typically, borrowers mandate direct delivery of any financial statements and public filings like the Securities and Exchange Commission (SEC) to lenders or administrative agents. However, borrowers located in areas under full or partial lockdowns may struggle in delivering their external audits in a timely fashion. While abiding by tight deadlines should be a priority, a borrower is still subject to government regulations and must obey the CDC’s guidelines.

To curb the issue of delays, the SEC granted COVID-19-affected companies that deal with SEC-reporting 45 more days to complete disclosure reports such as quarterly and annual reports with financial statements. Doing so prevents the violation of a loan agreement’s information delivery covenant.

A decrease in interest rates

The world’s central banks have slashed interest rates in the interest of combating the devastating effects of COVID-19 on the world’s economies. Decreasing the interest rates makes it cheaper to borrow money, which encourages households and businesses to take out and spend loans—stimulating the economy. Low-interest rates translate to a decrease in saving returns, encouraging individuals and companies to spend money rather than storing their paychecks in savings accounts.

Although many people have fixed interest rates on their mortgages, the decline in interest rates makes it cheaper to remortgage. If a family chooses to remortgage their home, they’ll be able to enjoy these extra savings. Remortgaging also makes it easier to purchase assets like property, empowering those experiencing financial instability to buy a brand-new home. In simple terms, lower mortgage rates mean an influx of mortgages taken out. 

The conditions of material adverse change (MAC)

Several loan agreements include a MAC clause. To adhere to these MAC clauses, lenders always proceed with caution before calling for a material adverse change default event. Unlike other lending conditions, the spread of COVID-19 hasn’t impacted how this clause works. However, borrowers and lenders should still carefully review this provision in their loan agreements and understand a MAC clause’s effects if applied.

Although lenders don’t invoke a MAC haphazardly, they also don’t guarantee that lenders will be spared from a material adverse change simply because of the pandemic. Therefore, lenders should still tread carefully and familiarize themselves with possible difficulties, as borrowers continue to navigate these uncertain times.

A shift in borrowing habits

As a result of this worldwide pandemic, the number of businesses and consumers taking loans outside government-sponsored programs has declined. The trend will continue on its downward trajectory as more people face unemployment, a reduction in credit ratings, and a rise in short-term contract work. Unfortunately, this increase in default rates and non-performing loans will put pressure on credit suppliers.

Amendments and waivers

In the era of COVID-19, more people are requesting waivers and loan extensions due to their inability to make payments. Therefore, lenders should expect a surge in requests for waivers and amendments from their clients. All parties involved should ensure that they are well-informed about provisions like yank-a-bank, as well as voting requirements for various waivers and amendments types. Overall, this knowledge will prop you into a better position to deal with the situation appropriately.

Effects on LIBOR transition

Several loan agreements will need to be amended before LIBOR is permanently discontinued at the end of 2021. This move to abolish LIBOR has been described as back-breaking by a crowd of commentators, regulators, and market participants. Now, it looks more complicated than ever.

As lenders and borrowers devote time and energy to tackling the difficulties caused by COVID-19,  they’ll need to work on LIBOR transition to avoid falling behind. However, as they address these waivers and amendments, the loan industry should include the transition provisions.

Conclusion

The loan industry plays a significant role in sustaining the global economy, as it ensures that private individuals and businesses continue to stay afloat, even during these unprecedented times. Dealing with the impacts of COVID-19 on the industry will be vital to overcoming the economic devastation inflicted by quarantine mandates.

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