The past week has been a tough one for federal coronavirus loan programs targeting businesses. First, JPMorgan Chase sent a cryptic warning in a note to its 250,000+ employees around the world, stating that it had “seen conduct”, including misuse of loans by customers and staff, “which falls short of our business and ethical principles – and may even be illegal “.
It was then reported that the bank fired several employees who inappropriately requested and received funds under the Economic Disaster Lending Program (EIDL) after noticing suspicious sums of money being deposited. on checking accounts belonging to bank employees. The Inspector General of the Small Business Administration (SBA) in July called for closer monitoring of the program due to fraud issues.
Then Project On Government Oversight (POGO) found banks in July more than double the number of reports of suspected commercial loan fraud in the previous month. June’s number – the previous record – was more than triple the monthly average recorded by the Financial Crimes Enforcement Network (FinCEN) since 2014. The report came on the same day that the Justice Department announced it had loaded 57 people with the Paycheck Protection Program (PPP) fraud since April.
Considering those twin black eyes, it’s no wonder lawmakers go to such lengths to see that the other another coronavirus rescue plan – the Main Street Lending Program – is succeeding.
The problem is the program’s moribund interest level on the part of potential borrowers. Only $ 1.2 billion of the $ 600 billion earmarked for the program had been loaned between the Main Street launch on June 15 and September 3. By comparison, the first wave of $ 350 billion PPP sold out in 13 days.
Legislators and experts during a hearing on Wednesday debated how to showcase the program. Suggestions ranged from reducing the amount of risk banks would bear to lowering the minimum lending threshold so more businesses would qualify. The Fed already has tried each of these measures – leave the banks responsible for 5% of the riskiest loans in the program instead of 15%, and lower the minimum to $ 250,000 from $ 1 million.
The latter failed to convince small borrowers. Alone 11 of 118 loans approved under the program at the end of August were less than $ 1 million.
Nevertheless, Hal Scott, Chairman of the Committee on Capital Markets Regulation, testified on Wednesday he recommended that the Fed buy 100% of the Main Street loans from the banks and reduce the minimum loan threshold to $ 100,000. He also suggested a much longer repayment term for borrowers. The Fed also extended the loan term from four to five years in June. Scott in research 10.
Borrowers can now defer principal payments on their loans for two years.
“The current approach has been tried and found to be insufficient,” Scott said at the hearing.
A long-held theory regarding the relative paucity of demand for Main Street loans is that borrowers find credit elsewhere. Senator Pat Toomey, R-Pa., Supported this hypothesis during Wednesday’s hearing, saying that this scenario was “entirely possible”, but that it was “still too early to call this program a failure. “.
Still, Toomey added, creating a system in which the Fed buys 100% of Main Street loans, rather than 95%, poses “an obvious challenge.”
The 5% creditors’ buy-in is “meant to encourage banks to make an appropriate underwriting,” Toomey said.
Senator Tim Scott, RS.C., recommended softening another benefit. “How could the Fed and the Treasury reconsider the program’s administrative fee model to better incentivize lenders and small service providers?” ” He asked.
Eric Rosengren, chairman of the Boston Fed, which administers the Main Street program, cautioned against adding too much risk.
“It is important that Congress make it clear what level of risk it wants,” said Rosengren The Washington Post. “Right now it’s easy to say, ‘We want a lot of loans.’ But in a year and a half people will want to know why these loans have gone badly. “
The restrictions, not the risks, were at the origin of the Senate Banking Committee Chairman Mike Crapo’s reservations about the program.
“I am still concerned that incorporating widespread restrictions into these facilities will render the facilities inefficient and leave businesses and their employees without critical resources they desperately need,” said the Republican of Idaho.
The restrictions – or perhaps their constant modification – may have contributed to the loss of PPP. Between April and August, the SBA released no less than 20 updates to its guidance, which may have cast doubt on lenders as to whether they would be left behind. The changed criteria also left borrowers wondering if their loans would be canceled.
Scott testified that Treasury Secretary Steven Mnuchin has adjusted his own expectations on Main Street production – estimating the program will end with around $ 50 billion in loans out of its $ 600 billion pot.
It’s understandable that lawmakers, federal agencies, and those affected want to optimize Main Street. Maybe some extra tinkering will help him finally find his audience and succeed where other coronavirus relief programs have failed. But one thing is certain: lawmakers and federal agencies have no room for a third black eye.