Federal Reserve announces support for small business lending program
The Federal Reserve is contemplating creating a quasi-government entity — similar to Fannie Mae or Freddie Mac — to speed up a program designed to provide emergency loans to small businesses via U.S. banks. The move is designed to alleviate continuing hurdles to implementing a pivotal part of Washington’s $2 trillion stimulus plan.
The Treasury Department and the Small Business Administration launched the $350 billion Payment Protection Program a week ago Friday. While both touted the initial flurry of loan applications, banks quickly reported technical difficulties and demanded more guidance on how these loans would count against their own loan-to-capital ratios.
Treasury Secretary Steven Mnuchin had promised guidance — and the accompanying forms and procedures — by Monday to frustrated banks and the small businesses that have struggled to apply for the promised loans.
Many of those businesses will have to wait a bit longer.
Monday afternoon, the Federal Reserve issued an unusual two-sentence statement announcing it would soon step in with a solution.
“To facilitate lending to small businesses via the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve will establish a facility to provide term financing backed by PPP loans,” the Fed said. “Additional details will be announced this week.”
The Fed contemplates a program similar to Fannie Mae or Freddie Mac, the quasi-government entities that buy mortgages from banks so lenders don’t keep them on their balance sheets and are free to keep lending to consumers and businesses. The entities represent a secondary market for mortgages; something similar would be created for these short-term loans to businesses with fewer than 500 workers.
“They are figuring out a mechanism, which is an important part of the puzzle,” said Ami Kassar, CEO of MultiFunding, a small business loan advisory firm.
The PPP passed by Congress on March 27 required that banks kept the emergency loans on their books for at least seven weeks before selling them off to third parties. The low-interest loans were envisioned to give business access to capital until the stay-at-home orders are lifted and companies can get back to work. Loans can be forgiven if these businesses retain employees.
The Independent Community Bankers Association, whose members do the bulk of lending to small businesses nationwide, pushed for the Fed’s involvement.
“This concept works well in the American mortgage market and should be replicated to meet program loan demand in this crisis,” Rebecca Romero Rainey, the group’s president, wrote in a letter Sunday to Mnuchin.
The announcement addresses one of the three main challenges banking officials say they continue to face in getting the program off the ground: balance sheet requirements.
“We can’t exceed [capital standards],” said Tom Wells IV, CEO of First American bank, which acquired longtime Miami institution Continental National Bank in October. “And based on the demand we’re seeing, we won’t be able to liquidate enough to create room in our capital base to support the demand that’s there.”
Banks say they are seeing unprecedented demand for the loans, which can total up to $10 million and come with a 1% interest rate.
That’s led to the second challenge: The filing system for processing Small Business Administration-backed loans — called E-Tran — continues to see outages.
“That’s [banks’] I-95,” said Alex Sanchez, president and CEO of the Florida Bankers Association. “And you know what happens when I-95 is jammed up.”
Sen. Marco Rubio, the architect of the stimulus plan’s PPP program, said Monday that the SBA was working with Amazon on trying to upgrade that system. Amazon did not immediately respond to a request for comment. On March 31, CNN reported that the SBA was working with Amazon and Microsoft to implement the PPP.
And there’s a third challenge: Community banks like First American operate on slim margins — so taking on a 1% SBA loan, when the bank could be originating loans of 2% or 3%, will end up cutting into the bank’s bottom line.
“The question for banks like ours is, why would we fill up our balance sheet with these loans when we’re not going to get compensated for taking them,” he said.
Some smaller banks remain hesitant about advertising where they stand in their PPP applications. On Monday, representatives for Professional Bank and BankUnited said they were declining to comment on the program at this time.
Big banks have similar concerns. In a note to customers posted Monday, Citi Group said that it was not yet able to accept PPP applications. And Wells Fargo announced Monday that it would cap the number of loans it would take in at $10 billion out of concern that any more would push it over regulatory limits agreed to in a past settlement with the federal government over lending abuses.
National giant Bank of America said Monday that it had received 212,000 applications seeking $36 billion in loans. It declined to state how much that it had distributed.
Asked by reporters at the daily White House coronavirus briefing about the rollout problems with the PPP, President Donald Trump criticized the media for “asking in such a negative way” and singled out Bank of America for praise for the number of applications it has taken. He did not mention the Fed’s planned backstop efforts or criticism from community banks.
Sanchez, with the Florida Bankers Association, remains optimistic that small businesses should start to see money hit their bank accounts no later than the end of the month — and in some cases, as early as the end of this week.
The pace will largely depend on the E-Tran system’s ability to handle the crush of loan documents being fed into the system, he said.
“The portal access, it’s on overload,” he said. “The SBA needs to move quicker with technicians and third parties to allow more bankers to have access.”
This story was originally published April 6, 2020 at 6:37 PM.
