Fed eases Wells Fargo restrictions to boost struggling loan program

The Federal Reserve on Wednesday eased the punitive growth restrictions it placed on Wells Fargo after a raft of consumer abuse scandals, allowing the giant bank to bolster a nationwide effort to deliver billions of dollars in government-backed loans to struggling small businesses.

The move comes as big banks face growing pressure from customers and lawmakers to step up their so-called Paycheck Protection Program loans, which Congress created in last month's $2 trillion economic rescue package to help avert mass layoffs. The rollout of the program, which allows loans to be forgiven if a small business maintains its payroll, has been plagued with malfunctions and delays.

While Wells Fargo is one of the largest lenders in the country, the bank had warned in recent days that it only planned to offer $10 billion of the small business loans because of limits the Fed imposed on the growth of its balance sheet in 2018. By comparison, Bank of America said Tuesday it had received 250,000 applications requesting $40 billion.

Lawmakers including Rep. Adam Schiff (D-Calif.) urged the Fed this week to offer flexibility to Wells Fargo to participate in the government’s efforts to aid the ailing businesses. The central bank’s move Wednesday will also make room for Wells Fargo to provide loans under the Fed’s forthcoming “Main Street” lending facility, which will be aimed at medium-sized businesses with more than 500 employees.

"This is good news for small business owners and their employees," said Rep. Mike Thompson (D-Calif.), who had pressed the Fed to lift the restrictions.

The unleashing of Wells Fargo came as other banks across the country continued to struggle with the Paycheck Protection Program. Banks have been mired by technical problems and a lack of clear guidance from the federal government about how to get money to the businesses — complaints that have persisted since the program's launch last week.

Banks have faced massive demand, and lawmakers as soon as this week are planning to approve another $250 billion for the effort. Vice President Mike Pence said Wednesday that $98 billion had been "disbursed,"even as banks continued to report that they were unable to release money to borrowers.

The largest banks have been slow to offer the loans. Bank of America was the first of the biggest lenders to take applications Friday morning when the program started, though it limited the number of applications it would accept from customers, sparking a backlash. JPMorgan Chase and Citigroup took more time to begin taking applications.

The Fed unshackled Wells Fargo to a degree by saying the business loans issued in relation to the government’s emergency programs won’t count against the growth cap the central bank imposed. The Fed said the action "provides additional support to small businesses hurt by the economic effects of the coronavirus."

The Fed slapped Wells Fargo with strict limits on its growth after a litany of consumer abuses steadily came to light and rocked the banking industry. The lender’s reputation as a sleepy retail bank was destroyed after it opened millions of unauthorized customer accounts, forced people to buy unnecessary auto insurance coverage and overcharged members of the military for their mortgages, among other offenses.

Yet as the Fed today took steps to deliver more firepower to small business lending, bankers said they still lacked clarity over the exact documentation needed to complete Paycheck Protection Program loans and issue funds.

After days of banks raising those concerns, the Small Business Administration released new guidance Wednesday that said banks could use their own promissory notes to close out loans or use SBA forms to do so and that they had 10 days to disburse funds after approving a loan. But lenders said they wanted more details because they didn't want to risk using imperfect documentation that would jeopardize the government guarantee underpinning the loans in the months to come.

"Lenders still need more clarity on what documentation, certifications, and eligibility will satisfy loan program requirements," Sen. Pat Toomey (R-Pa.) said in a letter to Treasury and the SBA Wednesday. "Lenders that have wanted to finalize loans as soon as yesterday have struggled with this opaqueness."

Community Spirit Bank President and CEO Brad Bolton, who raised concerns about the program on a call with President Donald Trump Tuesday, said his bank had about 50 loans that were ready to be closed once he was able to proceed.

"We're all handicapped," said Bolton, based in Red Bay, Ala. "We're just paralyzed. We don't feel like we can move forward."

Tensions continued to escalate between the banking industry and the SBA, which was trying to deliver small business aid that was 15 times the size of its previous flagship lending program. While bankers complained about being left in the dark by SBA officials in Washington, lenders said the agency's local representatives also appeared to be out of the loop.

"We’ve seen stale guidance from local field offices, wrong information, things like that," said Noah Wilcox, chairman and CEO of Wilcox Bancshares in Grand Rapids, Minn. "They're about as confused about some of this stuff as the bankers are."

Wilcox, who also flagged problems with the program to Trump on the White House call Tuesday, argued that the administration should be more up front about the struggles in standing up the small business rescue and that more candor from officials might help reassure the public. Trump has tried to downplay those concerns, claiming Tuesday that there had been "very few" glitches.

"I don't know anybody in the country — certainly not a community banker — that has been able to fund a single loan," said Wilcox, the chairman of the Independent Community Bankers of America. "I can't even keep track of my inbox at this stage. It's overloaded with leadership bankers and rank-and-file community bankers from around the nation just ripping their hair out trying to figure out what to do."