US banks have struggled to handle an avalanche of applications for $350bn in government-backed loans for small businesses, prompting bipartisan concern in Congress and a new Federal Reserve funding facility aimed at easing the logjam at lenders.
The programme, launched as part of the US government’s effort to cushion the coronavirus outbreak’s economic impact by quickly getting money into the hands of those who need it, relies on banks to arrange loans, which will be forgiven if the borrowers use the money for payroll or other eligible costs.
But operational issues have led to a wave of complaints from frustrated applicants that began with the scheme’s launch on Friday and continued on Monday.
Bruce Elder, chief executive of JD Bancshares, a small community lender in Jennings, Louisiana, said submitting applications to the Small Business Administration was a fraught process. The online portal has "a tremendous number of fields" and it is not clear which are required, he said.
"When you hit the submit button, you hope you will get approval, not an error message," he said, adding that while his bank had so far submitted two applications and "what we don’t know is if we submitted them correctly". He said JD Bancshares had "hundreds” of people “lined up with applications ready to go".
Industry giants including JPMorgan Chase and Citigroup delayed the launch of their facilities on Friday, claiming they were given information too late to set them up on time.
The challenges continued into Monday, with Chase suspending its online portal from mid-morning until almost 5pm after technical issues. By Monday evening Citigroup and Capital One had yet to launch their portals.
Wells Fargo, which has a 9 per cent share of America’s lending market, said it could only lend $10bn under the programme because of an asset cap imposed on the bank as a result of its 2016 accounts mis-selling scandal, and that it had already had demands for more than that by Monday morning.
"The ability of small businesses to access this money in a matter of days could determine whether or not they will need to shut their doors to their employees and customers forever," Democratic senators Elizabeth Warren and Edward Markey wrote in a letter on Monday to Treasury secretary Steven Mnuchin and Jovita Carranza, head of the SBA.
They urged Mr Mnuchin and Ms Carranza to "take whatever steps are necessary to fix the existing operational and technological problems with the system, provide additional guidance to banks that clarifies the questions they still have, and act quickly to stand up this programme so it works in the way that Congress intended".
Rick Scott, a Republican senator from Florida, wrote to Mr Mnuchin and Ms Carranza on Sunday, saying he had received reports of small businesses who were “simply unable” to begin applying for loans from their financial institutions.
The Fed is hoping that a new funding facility announced on Monday will increase banks’ appetite for lending. The original terms of the programme required banks to lend their own money to borrowers, and then ask the SBA for repayment in seven weeks. If the borrowers had honoured the terms of the loans and spent the money on eligible costs, their loans would be repaid in full by the SBA. If the borrowers spent the money on other things, they would have two years to repay the banks themselves.
The new facility offers the banks the opportunity to sell the loans as soon as the facility is up and running, likely in around three weeks. That means it will be easier for them to lend more money without it costing the banks more capital.
The issue is most relevant for Wells Fargo, which says its participation is constrained by its asset cap. The bank, which is pushing regulators to lift its asset cap at least temporarily, would not say whether it would increase its $10bn target for SBA lending in light of the new Fed facility.
Other banks are expecting a surge in demand on Tuesday. A spokeswoman for Chase, which has not yet revealed its tally of applications so far, said they would be able to process higher volumes with their updated application system.
Citigroup hopes to begin accepting applications for the first time, as will Capital One. Bank of America, the first of the big US banks to launch its portal, said it had received 212,000 applications totalling $36bn by Monday. A spokesman could not say how many of those had been processed.
The SBA said it had processed almost $38bn of loans from 130,000 applications filed by 2,400 lenders by Monday morning. Larry Kudlow, the director of the White House National Economic Council, told CNBC television the programme had received a "terrific start".
(Published by Financial Times, April 7, 2020)
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