Kate Davidson, American Banker
WASHINGTON — A top Treasury Department official said Thursday it is planning to distribute the first round of Small Business Lending Fund money to banks by next month — but that's not soon enough for some lawmakers.
At a Senate Small Business Committee hearing, members pressed the administration for answers about what has taken so long to get the program off the ground. Treasury has received 702 applications for the program, enacted last September as part of the Small Business Jobs Act, but has yet to distribute any of the $30 billion authorized by the bill.
"We need better answers," Sen. Ben Cardin, D-Md., said at the hearing. "We need to know how much is getting out there. I'm a little disappointed it's taken this long. I think many of us thought this would get out a lot quicker."
Sen. Olympia Snowe, the committee's top Republican and staunch opponent of the program, also questioned whether the program is being overrun with applicants in the Troubled Asset Relief Program eager to get in on a better deal.
"These institutions would essentially be paying off one taxpayer-funded credit card with another … to obtain lower interest rates without restrictions, like those on executive compensation," she said.
Don Graves, the deputy assistant Treasury secretary in charge of SBLF, said Treasury will make decisions on the first round of funding within the next few weeks, and banks should receive the money in June. The deadline to distribute funds is Sept. 27, and Graves said all eligible applications will be approved by then.
"I think it's important to remember that while we're moving as quickly as we can in these programs, you required us to ensure that we balance both the speed with which we get the programs implemented, with the need to ensure that we're making prudent investment decisions and protecting the taxpayers' dollars," Graves told the committee.
Chairman Mary Landrieu, D-La., also asked Graves to explain why Treasury hasn't yet approved any funds, and when banks can expect hear back on their applications.
"There are several in Louisiana that are actually excited about this opportunity," she said.
Graves said Treasury has a "robust system" to review applications, which includes an eligibility screening to determine each applicant's financial condition and their ability to increase small business lending, as well as a more in-depth review by an internal investment team.
Graves said the new SBLF team has conducted significant outreach and has held more than 30 Webinars and teleconferences to promote the program, and established a dedicated Web page and call center.
"We are talking with community banks across the country every day of the week," he said.
But Snowe pointed out that a May 13 report from the Treasury Inspector General has found interest in the program is "tepid at best."
As of April 18, banks had requested just $9.2 billion, less than one-third of the funding authorized. While Subchapter S Corporations and mutuals have until June 6 to apply for funding, Treasury expects less than two-thirds of the $30 billion will be requested, according to the report.
The report also found that, while applicants are required to submit a small business lending plan, neither Treasury nor the federal banking regulators — with whom Tresaury must consult before approving an application — intend to review the plans for the likelihood of achieving that goal.
In addition, nearly half of the program's applicants are Tarp participants, who may be able to refinance into SBLF. Those banks are not expected to get much additional capital beyond their outstanding Tarp balances, "placing in doubt how much new lending will actually take place," Snowe said.
"From what I understand, it's not exactly happening with the maximum effect," she said. "That's the problem here, because of the perverse incentives that have been created in the program."
Graves insisted that there are no incentives for Tarp banks to enroll in SBLF, unless they can boost their small business lending.
Under Tarp, banks pay the Treasury Department a 5% dividend, and that will rise to 9% in 2013.
Through SBLF, banks with less than $10 billion of assets can apply for capital with an initial dividend payment of 5%, which could drop to as low as 1% for a few years as banks boost their lending.
There is a downside, however. After the first two years, banks that haven't increased their small-business lending will pay a 7% dividend for the next two and a half years. After that, the dividend increases to 9% for all banks.
"This is not a program to assist CPP banks," Graves said, referring to Tarp's Capital Purchase Program. "In fact, there's no opportunity for an institution to decrease their interest rate without increasing the amount of small business lending that they're doing."
Snowe also complained that the baseline for increasing small business lending is so low that it won't encourage much new lending beyond what is already taking place as a result of the economy turning around.
"If institutions were given a baseline that was significantly higher, those institutions would not participate in the program," Graves said. "So what we are trying to do is incentivize banks to increase their lending."
Snowe has made no secret of her opposition to the fund, which she reiterated at the start of the hearing.
She introduced a bill last month March that 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. (Under last year's law, 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.
"The objective isn't to assist the Tarp recipients, but as a matter of fact it is happening," Snowe said. "So that's the point here. Are we just turning over the same money and now benefiting those who've already received a great benefit from the United States government?"