After the financial wear-and-tear of a pandemic lasting more than 18 months, one might expect to see bankruptcy filings piling up.
But that’s not so, says attorney Richard Cook, of Cape Fear Debt Relief.
“Bankruptcy filings are still at near all-time lows,” he said in September. “The U.S. Courts put out a note last month that bankruptcy filings are at a level last seen in 1985. My belief is that with the foreclosure moratoriums being extended by the Consumer Financial Protection Bureau (CFPB) until Dec. 31, 2021, it could be a while before bankruptcy filings increase.”
The U.S. Courts report Cook cited states that personal and business bankruptcy filings plummeted 32.2% for the 12-month period ending June 30.
“According to statistics released by the Administrative Office of the U.S. Courts, the June 2021 annual bankruptcy filings totaled 462,309, compared with 682,363 cases in the previous year,” the Courts’ report stated. “The data reflect the first full 12-month period to begin after the coronavirus (COVID-19) pandemic crisis jolted the national economy.
“Business filings fell 17.7 percent, from 22,482 to 18,511 in the year ending June 30, 2021,” the report continued. “Non-business bankruptcy filings fell 32.7 percent, to 443,798 compared with 659,881 in the previous year.”
What caused the decline in filings? The report pointed to increased government benefits and moratoriums on evictions and certain foreclosures as possibly easing financial pressures in many households and businesses.
Small businesses may well be using government aid and a moratorium on collecting nonperforming loans to improve their financial position.
As the nation’s top SBA lender and a major processor of Paycheck Protection Program loans during the pandemic, Live Oak Bank is in a position to assess the health of small business loans nationwide.
In its July 21 second-quarter earnings report, Live Oak Bancshares officials expressed optimism about its borrowers’ financial position and thus the company’s credit position.
“I’ve been expecting to see reserves trending towards pre-COVID-period levels as a percentage of loans. This is proving to be the case, and I still expect to see this trend continue,” Steve Smits, Live Oak’s chief credit officer, said during the earnings call. “I believe this because first, we continue to see improvements in the financial condition of some of our most impacted businesses, which is evidenced by favorable trends in the servicing status ratings.
“Secondly, we’ve also noticed that many of our most impacted borrowers were actually able to build cash reserves during the pandemic, and that’s a result of the government stimulus and grant programs,” he added. “Thirdly, through our servicing efforts, we’ve started to receive encouraging reports as these businesses reopened and … folks are getting back to work. Finally, improving unemployment forecasts will, of course, influence our allowance as well.”
Smits said that as of the June 30 close of its Q2, Live Oak Bank had only 17 loans on payment deferral and, of those, 15 were a result of COVID-related stress.
He also pointed out that SBA loan subsidy payments were ebbing; in June, 13% of Live Oak’s SBA loans received some level of SBA subsidy payment support, with most borrowers having exhausted their eligibility for subsidies.
“As of the end of June, 87% of our borrowers are back to making regular payments, and past due is continued to be at an all-time low for us, which is very encouraging,” Smits concluded.
On the residential lending side, homeowners may be benefiting from the CFPB’s latest ruling that became final June 28 of this year. Called the Final Rule amending RESPA (Real Estate Settlement Procedures Act of 1974) Regulation X, it is designed as a temporary shield for borrowers against foreclosure through the end of this calendar year. It bars most new foreclosure filings until after Dec. 31.
Peter Gwaltney contends that it wasn’t government encouragement or mandates that prevented lending crises during the pandemic – it was the actions of the financial institutions themselves.
“Since the beginning of the pandemic, bankers have been committed to flexibility and patience with borrowers, just in full recognition of the circumstances we were all in,” said Gwaltney, president and CEO of the N.C. Bankers Association. “That has continued to this very day. Bankers continue to work with borrowers to help them navigate the financial tale we’ve been going through. It’s good for the borrowers, good for the banks and good for the economy, which we see in how the economy has performed.
“The financial performance of borrowers – mortgage and small business – has been counterintuitive [during the pandemic],” he continued. “All our member banks braced for the worst, and it just has not happened. Certainly, there have been weak spots, like restaurants and hotels, but overall, businesses and mortgage borrowers have performed extremely well. The last thing a bank wants to do is foreclose on a borrower.”
At least one local bank is not involved in any forbearance with regard to nonperforming loans, because it doesn’t have any.
“I’ve been with First Carolina Bank for a little over four years, and it’s been that way the whole time,” said David Rizzo, First Carolina’s market executive for Wilmington.
The bank makes residential mortgage, commercial and industrial loans.
Rizzo said that, like all lending institutions, First Carolina maintains a bad-debt reserve that’s a percentage of its outstanding loans, but so far that pool is untouched.
He said he credits the bank’s record to lending to the “right customers” and being “pretty rigorous” in its underwriting process. Just as Live Oak Bank prides itself on keeping a close eye on its borrowers and spotting potential problems before they affect a company’s health, Rizzo said that First Carolina encourages an early problem-solving approach when a borrower senses trouble.
“The best person to get you out of a bad situation,” he said, “is the client.”