Banks Used Taxpayer Money Intended for Small Business Loans to Pay Off Bailout Debts

By ANDRE FRANCISCO

Many community banks have taken government loans meant to increase lending to small businesses and used them to repay loans the banks received under the Troubled Asset Relief Program (TARP), according to a new analysis by The Wall Street Journal.  

The most recent loans came from the Small Business Lending Fund (SBLF), which was a $30 billion fund that was meant to increase the amount of money available to small businesses so they would turn around and create jobs. The small business loans came at a lower rate and with fewer restrictions than the TARP loans, which enabled some banks to use that money to get out from under TARP. Of the $4 billion loaned out through SBLF, $2.2 billion went right back to the government to pay off TARP loans, according to the WSJ.

Last year we raised concerns about the lack of oversight over SBLF loans. Even in the case of TARP, which came with greater restrictions, a lack of adequate oversight by the Treasury Department allowed some banks to spend the money on unintended activities like acquiring other banks and purchasing agency-mortgage backed securities. A lack of oversight of SBLF loans has now led to similar behavior.

Neil Barofsky, the former Special Inspector General for TARP, told the Boston Globe about his concerns about the amount of oversight of SBLF money. He said the program “has always been more about giving Treasury the opportunity to rebrand an unpopular TARP program than actually stimulating small business lending.”

To apply for SBLF funds, banks had to show that they had a plan to loan money to small businesses, yet many of those who received money used all or nearly all of it to pay back the government:

Of 332 banks that received cash through the lending fund, 137 used at least a portion—totaling $2.2 billion—to pay off their TARP obligations, Treasury Department data reviewed by The Wall Street Journal show. The fund began lending to small banks three months ago, and the program concluded last week. Of the total $30 billion available in the fund, only $4 billion in loans to banks were approved.

Banks that used the money to repay their TARP loans are defending the practice by saying that there have been some benefits to using the lower interest loans to repay a higher interest loan. The Wall Street Journal article used the example of Tom Duyrea, the chief executive of Summit State Bank, in Santa Rosa, CA:

Though the $8.5 million the bank used to repay TARP won’t be available now for small business loans, Mr. Duyrea says cheaper debt under the Small Business Lending Fund has freed up more than $40 million of the bank’s own capital for small-business borrowers.

The SBLF may have achieved a modest version of its goal in a roundabout way, but stronger initial oversight like what POGO recommended in a letter to Congress could have insured that the funds from this multi-billion-dollar program were directed and used appropriately.

Andre Francisco is a POGO Communications Associate 

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