Community banks are bemoaning Republican efforts to place restrictions on the Small Business Lending Fund several months after the program was enacted as part of the Small Business Jobs Act.
Sen. Olympia J. Snowe (R-Maine) recently introduced legislation to bar troubled banks from accessing the fund by raising the solvency standards and repayment requirements and creating a sunset provision. The measure takes direct aim at institutions that received money from the Troubled Asset Relief Program, excluding them from the fund altogether.
As it stands, banks with less than $10 billion in assets can tap the $30 billion fund to lend to mom-and-pop shops, rewarded with a dividend rate as low as 1 percent based on loan activity. If lending does not increase in the first two years, however, the rate would be hiked to 7 percent.
That incentive structure, Snowe cautions, could lead banks to make risky loans to avoid paying higher interest rates. Supporters of the fund argue there are enough protections in place to discourage such behavior, and the senator’s rigid approach would effectively cripple the program.
Snowe made it clear in a release announcing her bill that she “would prefer to terminate this fund altogether.” Since that is “unlikely based on the current political environment,” the senator wrote that she is trying to “protect taxpayers from some of its most egregious provisions.”
The bill would require banks to repay the fund within 10 years, preventing the Treasury Department, the administrator of the fund, from granting extensions. Treasury would also need approval, rather than consultation, from an institution’s regulator before distributing money. Banks would be prohibited from counting anticipated SBLF funds as Tier 1 capital to strengthen their books, and no TARP recipients could apply.
“You don’t change the rules once they’re in place,” said Paul G. Merski, senior vice president and chief economist for the Independent Community Bankers of America. “Many safeguards have been put into the law to address concerns.”
Merski pointed out that institutions are not eligible for the fund if they are on the Federal Deposit Insurance Corp.’s problem bank list now or within the past three months. What’s more, TARP recipients that have missed dividend payments are barred from participation.
So far, 637 banks have applied for about $9 billion in SBLF funding, according to the Treasury. A little less than half of those applicants have TARP funds and could use the new program to refinance at a lower rate.
That’s exactly what Ronald D. Paul, the chairman and chief executive of EagleBank in Bethesda, plans on doing with the funds. “If the small-business lending fund is regulated, monitored and followed through as proposed, it will be the ideal alternative for capital,” said Paul, a recipient of a $38.2 million injection from the Troubled Asset Relief Program.
EagleBank, with a $23.2 million balance on its TARP bill, recorded 25 percent loan growth in 2010, the primary result of small business lending. Lawmakers, nevertheless, want to ensure that institutions like EagleBank cannot use the lending fund as a “back-door repayment system” for TARP, as Sen. Charles E. Grassley (R-Iowa) put it in a letter to the Treasury last month.
“The private capital markets for small and midsize banks have remained largely frozen, so banks that have loan opportunities still find it difficult to raise fresh capital,” Merski said. “The extra capital they can pull down from the fund can help them meet demand.” Banks have until the end of May to apply for the fund.