Did Main Street Get Shorted by Treasury’s Small Business Lending Fund?

The U.S. Treasury Building in Washington

Photograph by Andrew Harrer/Bloomberg

The U.S. Treasury Building in Washington

When President Obama announced the Treasury Department’s Small Business Lending Fund in his 2010 State of the Union address, its goal was to boost credit to Main Street entrepreneurs by funneling $30 billion to community banks. The $30 billion would come from loan repayments to the federal government from Wall Street banks participating in a separate, better-known Treasury program: the Troubled Asset Relief Program. At the time, the head of one industry group projected the SBLF could translate into $300 billion in small business loans.

But as John Tozzi reported in October, only $4 billion was disbursed to community banks through the program, and a majority of that funding was used to help the lenders repay previous government loans, not lend to small businesses.

Critics at the time, such as Raj Date, predicted this. Date, now a deputy director of the Consumer Financial Protection Bureau, two years ago was an outside analyst who called the plan “TARP Junior.” He said most of the capital would go to patching holes in bank balance sheets left by legacy assets such as commercial real estate loans gone bad.

How did Treasury get from the $30 billion President Obama proposed to the $4 billion actually disbursed? The SBLF received applications for a total of $11.8 billion in funding, but only $7.3 billion met program criteria, according to a Treasury official. The Treasury granted preliminary approval for $4.8 billion in funding, and closed on $4 billion. Most of the 332 banks that participated in the program received funding in the third quarter of 2011, when the Treasury stopped making disbursements.

Last week the Treasury released SBLF data through the end of 2012 showing participants loaned small businesses $8.9 billion more than they would have without the program. That works out to a 38 percent increase, compared with an 8 percent increase for a sample of 500 community banks that didn’t participate, Treasury said.

According to Treasury Deputy Assistant Secretary Don Graves, Obama’s $30 billion proposal was designed to provide some cushion, ensuring that demand for the SBLF program didn’t outstrip available funds. “The key was to find ways to help these institutions pay back the taxpayer responsibly, and to increase small business lending,” he says. “We didn’t want to be in the position where we had a competitive process for these dollars.”

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