Fed Pledges Ambiguous Support to Banks Making SBA Loans

The Federal Reserve announced today it will create a program “to help speed the flow of funds to small companies through the government’s coronavirus stimulus,” providing hope to thousands of small-business owners wondering if the purported $350 billion in small-business-loan capital in the CARES (Coronavirus Aid, Relief, and Economic Security) Act would ever actually find its way to businesses in desperate need of assistance.

The Fed said it will provide “term financing to banks against loans issued under the Small Business Administration (SBA)’s Paycheck Protection Program (PPP). That program has stalled in the application stage because lenders have been unable to determine how many of the forgivable loans would be purchased by the federal government and in what time frame. Community banks have been lending, but say they lack liquidity to continue doing so without clarification on the subject[1].

Although most lenders say the vague assurances from the Fed represent progress, they say they still need full clarity in order to make decisions about how to make these PPP loans. Furthermore, if the loans are not purchased from lenders in real time, most lenders say they will not be able to make as many loans as the SBA program has capital anyway because they will not have the capacity to carry those loans on their balance sheets.

“I urge the Treasury and the Federal Reserve to launch a secondary market facility to purchase program loans from originating institutions. The program should not be limited by the balance sheet capacity of participating lenders,” wrote Rebecca Rainey, president of the Independent Community Bankers of America, in an open letter to U.S. Treasury Secretary Steven Mnuchin and other government officials.

The slow roll-out of the program has led to increased skepticism from lenders and economists as even mega-banks like Citigroup and Wells Fargo have publicly questioned how the funds will be dispersed and whether they can even accept applications. Citigroup had not, as of yesterday, activated an online application portal, and JPMorgan Chase was only permitting customers the opportunity to “express their interest” in the program[2]. Wells Fargo has already stopped taking applications, saying it has reached its $10-billion lending limit.

Do you think the SBA loan program will ultimately work out and provide small businesses with financial relief?

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[1] https://www.washingtonpost.com/business/on-small-business/fed-to-provide-financing-for-small-business-stimulus-loans/2020/04/06/723785ee-783c-11ea-a311-adb1344719a9_story.html

[2] https://www.nytimes.com/2020/04/06/business/economy/federal-reserve-small-business-loans.html

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