The Small Business Administration and Treasury Department have favored small lenders over bigger banks during the Paycheck Protection Program’s second round, leading some to accuse the White House of letting reelection politics interfere with saving companies pushed to the brink of insolvency by the coronavirus.
Congress set aside $30 billion of the $310 billion in new PPP funds provided in the fourth spending package for lenders with less than $10 billion in assets, and another $30 billion for banks with between $10 billion and $50 billion. But the administration took additional steps to ensure those lenders get access to the funds, after the first round’s $349 billion went disproportionately to larger companies applying through bigger banks.
In the first round, just 4 percent of the authorized applications asked for more than $1 million, but they scooped up 45 percent of the forgivable loan program’s funds, according to SBA data. Those figures, along with reports that more than 150 publicly traded companies received PPP funds, led critics to complain that richer companies snapped up loans they didn’t really need at the expense of struggling mom-and-pop businesses.
The PPP allows businesses affected by the COVID-19 pandemic and government-ordered shutdowns of economic activity to apply for loans that will be forgiven as long as most of the money goes to paying employees. Borrowers need to certify that the loans are “necessary” to get through the economic uncertainty caused by the pandemic.
Speaking on CNBC on Tuesday, Treasury Secretary Steven Mnuchin slammed companies that took out the low-interest loans that didn’t need them.
“It’s the borrowers who have criminal liability if they made the certification and it’s not true, and we’re going to do a full audit of every loan over $2 million,” Mnuchin said. “This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity.”
That criticism confused Douglas Holtz-Eakin, president of the center-right American Action Forum and former chief economist of the Council of Economic Advisers under President George W. Bush.
“I don’t understand, on the merits of it, why that’s a concern, because if the whole idea is to support employees and you have a lot of them, then that’s a success,” Holtz-Eakin said. “I thought it was wrong to call them out.”
FiscalNote, parent company of CQ Roll Call, has received a loan under the Paycheck Protection Program.
The politics of small business
Holtz-Eakin called the SBA’s moves to give smaller lenders a leg up in PPP applications “largely politics.”
“It’s a legacy of 2008, where people reflexively think this is just like ’08, and once again the big guys screwed us and we’re giving them money anyway,” he said. “This is not ’08. This is not a man-made crisis.”
“I think this has more to do with the administration positioning the president for his reelection than anything else,” he added.
When the second round launched Monday, the SBA placed limits on the number of applications per hour that banks could submit. After running into hiccups early on, the administration tweaked those rules throughout the week, but big banks in particular complained that they were being kicked off the SBA’s E-TRAN application system.
On Wednesday, the SBA announced it would restrict the system to banks with less than $1 billion in assets for eight hours that night “in order to ensure special access to the PPP loan program for the smallest lenders and their small business customers.”
Trade groups representing larger banks complained the policy amounted to the government picking winners and losers.
“There was already a carve out for small banks and now this,” Richard Hunt, president of the Consumer Bankers Association, tweeted Wednesday. “Don’t play favorites with small businesses. All need a lifeline right now.”
The Financial Services Forum, which represents the nation’s largest banks, also panned the decision.
“With the SBA blocking nearly 800 banks, relief for potentially thousands of small business owners and their employees will be delayed,” FSF President Kevin Fromer said in a statement. “A better solution would be a fully operational system that allows banks of all sizes to provide support to Main Street.”
Later Wednesday night, the SBA reported that the smallest lenders had already gone through the $30 billion earmarked for them, with more than $43 billion being provided through 587,000 loans.
The SBA’s move came after pressure from congressional leaders in both parties to set aside more of the PPP funds for lenders that work with minority-owned businesses and other communities that often lack relationships with more traditional lenders.
Senate Small Business and Entrepreneurship Chairman Marco Rubio, R-Fla., wrote a letter Monday urging the SBA and Treasury to set aside $2 billion of the $30 billion for smaller lenders for community development financial institutions and minority depository institutions and to prioritize their approval as eligible PPP lenders.
Democrats, including Speaker Nancy Pelosi and Senate Minority Leader Charles E. Schumer, made a similar request over the weekend, asking for a $10 billion set aside. Senate Banking ranking member Sherrod Brown, D-Ohio, and Sen. Brian Schatz, D-Hawaii, reiterated those demands in a letter Tuesday and urged the administration to prioritize smaller loan applications for approval.
Since his failed bid for the 2016 Republican presidential nomination, Rubio has taken a populist turn in his economic policies, advocating more government intervention to help smaller businesses and expressing a distrust of Wall Street. That’s led him to find common cause with some of his more progressive colleagues from the other side of the aisle on issues like this and on discouraging stock buybacks.
Tipping the scales in favor of small lenders wasn’t surprising for this administration, Holtz-Eakin said, even if it is a break from the GOP’s long-held free-market views.
The PPP rules put out by the SBA and Treasury have also excluded certain types of businesses from accessing funds. State-licensed marijuana businesses can’t participate, nor can strip clubs. Oil and gas speculators have also been excluded, as have casinos, although the SBA loosened restrictions earlier this week to allow some companies that only receive some revenue from legal gambling to apply.
“Leaders set the tone and this president is not out of that traditional Republican mold at all,” he said. “He openly picks winners and losers. So, it’s not surprising to me that those who were elected under his tenure and those who have come to prominence under this tenure share some of that industrial policy orientation.”
Republicans excoriated President Barack Obama for similar actions, repeatedly slamming Democrats for supporting renewable energy companies through loan guarantees under the 2009 stimulus law and discouraging banks from working with payday lenders and firearm dealers through a 2013 Department of Justice initiative called Operation Choke Point.
Trump himself regularly took to Twitter to attack Obama over $535 million in loan guarantees to Solyndra, a solar panel maker that eventually went bankrupt. “[Obama] has wasted billions of our tax dollars on speculative green projects like Solyndra. He is an economic ignoramus.” Trump said in one such 2012 tweet.