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Many community bankers are still tepid about the Treasury Department's latest program to promote small-business lending. But they're making reservations while they can.
March 24 -
Recently released terms of the Small Business Lending Fund are fueling fears that may discourage participation in the program.
January 6 -
The Treasury Department has released an application form and a slew of other information about how banks can participate in the Small Business Lending Fund.
December 22 -
The Congressional Oversight Panel is planning to release a report Thursday that calls the administration's small business lending programs a failure and casts doubt on a proposal to give banks government funds in an attempt to spur more lending.
May 13
A bill that would impose restrictions on the Small Business Lending Fund may lead bankers to rethink participation in the program.
The measure, introduced by Sen. Olympia Snowe, R-Maine, aims to keep troubled banks out of the program by excluding any that ever received funds from Troubled Asset Relief Program. Industry observers say there are plenty of safeguards already in place to weed out unhealthy applicants, and that the bill would effectively kill the SBLF.
"She was not in favor of the program to begin with," said Kip Weissman, a partner at the law firm of Luse Gorman Pomerenk & Schick. "If you have the program, you'd think you would want to ... enable it to meet its objectives. It looks to me like pure politics."
Snowe has made no secret of her objection to the fund on the grounds that it could be costly to taxpayers and encourage unsound lending. The program allocated $30 billion to boost small-business lending at banks with assets of less than $10 billion.
"While I would prefer to terminate this fund altogether, it is unlikely based on the current political environment, which is why we must work to protect taxpayers from some of its most egregious provisions," Snowe said in a March 30 press release announcing her bill.
It would set higher benchmarks for small-business lending, bar the use of expected SBLF funds as Tier 1 capital, and require repayment within 10 years, no matter what. (Now, the Treasury Department, which administers the SBLF, is allowed to grant extensions.) It would require the Treasury to obtain approval from a bank's regulator — rather than merely consulting that agency — before distributing funds.
It's far from a lock that the bill will pass, observers said. It would most surely face opposition from the White House, which spearheaded the SBLF. But even without passage, the proposal may fan fears of a Tarp-like stigma among bankers already wary of participating in another government program.
"Changing the rules after the program is in place and enacted into law is the worst thing you could do," said Paul Merski, chief economist at the Independent Community Bankers of America. "The fear is always that Congress does what Congress does — they change the rules after the rules are in place."
Weissman said many of his clients have been tweaking their business plans for the year and ramping up small-business lending allocations. The threat of new legislation could force them to change their plans yet again.
Michael Mellon, the president and CEO of American Savings in Munster, Ind., is in the process of financing several projects, including a building for a local dentist. Mellon, whose bank owes $3.75 million in Tarp funds, said he wouldn't have made the loan without the prospect of SBLF capital. "Will we continue to move forward? Yes," he said. "But the next one that comes up, I don't know that I'm going to be as aggressive in trying to pull them in."
Observers say many of the bill's provisions are unnecessary or impractical. The SBLF is already closed to the most troubled banks: those on the Federal Deposit Insurance Corp.'s problem-bank list, those that have been on the list in the past 90 days, and Tarp participants that have missed more than one dividend payment.
Another argument against the bill is that requiring banks to repay SBLF funds within 10 years could deprive taxpayers of significant interest income. After four and a half years, all banks will pay a 9% dividend on SBLF capital.
Demanding repayment "just doesn't make any sense to me when you're making that kind of money on it," said Steven Huntington, a senior vice president at the investment bank Carson Medlin Co. "At best it seems unnecessary. At worst it seems like it's wasting a potentially profitable investment at that point."
As for barring all Tarp participants — not just those late on payments — from enrolling, Huntington said the logic seems to be that the taxpayers would get a worse deal if those banks use SBLF money to refinance out of Tarp. But only banks that increase their small-business lending would be eligible for a lower dividend rate.
"The only way [taxpayers] would get a worse interest rate would be through the banks specifically increasing small-business lending, which they say these amendments are supposed to be aimed at," Huntington said. "You can't have it both ways."
More than 600 banks have applied for the SBLF, and about half have outstanding funds from Tarp's Capital Purchase Program, according to the Treasury. Its officials have said there is no incentive for such banks to enroll in the SBLF other than repaying Tarp.
"Banks that refinance into SBLF only receive a dividend rate benefit if they increase their small-business lending," said Colleen Murray, a Treasury spokesman. "In general, CPP banks that do not increase their small-business lending would pay either the same dividend rate or a higher rate under SBLF."
And while Snow's bill shows a clear distaste for Tarp, a report issued last week by KBW Inc.'s Keefe, Bruyette & Woods Inc. said the proposed changes could stretch out that program, as banks delay repayment as long as possible.
The KBW report pegged the odds of the Snowe bill's passage at less than 50%, but Weissman said those chances could increase if she can attach the measure as an amendment to a less controversial bill. As of last week, Snowe was waiting to offer the bill as an amendment to the Small Business Innovation Research reauthorization bill, which was on the Senate floor but has since been delayed.
Other lawmakers have concerns about the program. Sen. Chuck Grassley, R-Iowa, has asked Treasury for assurances that SBLF would not be used as a "backdoor repayment system" for Tarp. Rep. Patrick McHenry, R-N.C., introduced a bill last week to place the fund under the jurisdiction of the special inspector general for Tarp.
If efforts to revamp SBLF succeed, Weissman said it would fuel more distrust of the government at a time when it needs banks to help get the economy going.
"It would be a mammoth waste of effort, in terms of the banks trusting the government, if they somehow pull the rug out from this one," he said. "That would just be very tough."
