Update: The Fed said in a Wednesday order that Wells Fargo will be allowed to exclude loans through the Paycheck Protection Program from counting towards the bank’s asset cap. The move allows for Wells Fargo to participate fully in the program.
Michael Brawley is one of the thousands of business owners who are desperate to get the stimulus money the federal government pledged to small businesses in the $2 trillion package Congress passed last month.
He owns Brawley’s Beverage, a bottle shop in south Charlotte with four workers. The statewide stay-at-home order to prevent the spread of COVID-19 has decimated his business.
Brawley went to his Wells Fargo branch last week and they said the program wasn’t ready. This weekend, he filled out an online form that said he would want to apply when the application was up. But like thousands of other small businesses who bank with Wells Fargo, he never got the chance.
In one weekend, the bank reached a self-imposed $10 billion cap it set for its participation in the program. It closed the application to new submissions late Sunday. Any more and Wells Fargo ran the risk of breaching a regulator’s cap on the bank’s assets, a legacy of the bank’s sales scandals, it said.
That leaves Brawley and others in the lurch.
Wells told Brawley he should apply elsewhere to increase his chances of getting an application in. But most major banks, including Bank of America and JPMorgan Chase, only let current customers apply for the loans, so going elsewhere isn’t an easy option.
The few banks that do offer the loans to new customers, like Aquesta Bank in Cornelius, tell potential applicants to try multiple banks because of limited capacity, and that applicants should expect delays if they’re not already a customer.
Brawley went through five banks, none of which would take his application because he wasn’t already a customer, before a friend of a friend found one that would take him.
Paycheck Protection Program
At stake are billions in loans to small businesses designed to keep people in jobs and businesses above water.
Through the Paycheck Protection Program, a $349 billion part of the $2 trillion federal stimulus package that passed last month, a business with fewer than 500 workers can get a loan of up to $10 million. If certain criteria are met, including if the loans are primarily spent on payroll, the loans will be forgiven.
For the banks, there’s no default risk: the loans are fully guaranteed by the government. The federal government will also pay banks fees for making the loans.
The program was designed to get lots of money into the hands of small businesses very quickly, with banks as the conduit. But it’s a legacy issue at one of the country’s small-business lenders, Wells Fargo, that’s been one of the biggest obstacles to achieving that mission so far.
Since early 2018, the Federal Reserve has restricted Wells Fargo from growing larger than $1.95 trillion in assets.
After the bank was caught committing creating millions of accounts in customers’ names without their consent, amid other misconduct, regulators needed a way to keep the bank in line. The rationale was that once the bank fixed the structural issues exposed in the sales scandal, it would be allowed to grow.
That was a punishment made in a more predictable economic time.
Now, with the federal government asking banks to help make billions of loans at a rapid clip, that punishment is keeping Wells Fargo’s small business customers from getting access to the aid many of them need to survive.
“We are committed to helping our customers during these unprecedented and challenging times, but are restricted in our ability to serve as many customers as we would like under the PPP,” the bank’s CEO Charlie Scharf said in a Sunday statement.
$20 billion left
As of the beginning of the year, Wells had just $20 billion in breathing room between its assets and the ceiling. The bank declined to say how close it was to the cap currently.
The asset cap is just one of the punishments from regulators for the Wells Fargo sales scandal. In February, the bank paid $3 billion to settle multiple federal probes into the practices.
Federal Reserve officials are considering easing lending restrictions on Wells, the New York Times reported Monday.
A Fed spokesman declined to comment.
“I feel like I’m a hostage that Wells Fargo is using to try to lift their asset cap,” Brawley said.
“They’re using the potential that we won’t be able to receive funding to pay our employees to kind of blackmail the federal government, the Fed, to lift the cap and say ‘Oh, we’ll let you grow.’ I feel like collateral damage,” Brawley said. He’s taking his money out of the bank.
Mason Marino, who owns the parts maker M2 Performance Solutions in Concord, found himself in a similar position. He employs two to three people part-time, who have been begging him for work, but he’s struggling just to keep the lights on.
A PPP loan was going to be important: if he loses more business, he may have to file for bankruptcy. When he checked the Wells Fargo website late Sunday, he got the same message that thousands of others got: you’re too late.
“This affects so much more than a bunch of CEOs making money — this is affecting daily life,” Marino said.
He thinks the Fed should, at minimum, lift the cap just for the PPP loans. “Everybody wants to demonize the banks and demonize corporate America but at the end of the day the people who suffer are smaller people,” he said.
While Wells waits to see what the Fed will do, the bank said it will focus its participation in the program on businesses with fewer than 50 employees and nonprofits. It will also return the fees it collects from the program to charity.
Wells Fargo has 27,000 employees in the Charlotte area, the most of any city the bank has a presence in, a legacy of its 2008 acquisition of Wachovia.
The unique nature of both the loan program and Wells Fargo’s punishment has led to unusual bedfellows.
“There’s a huge negative impact on Wells Fargo’s small business customers. They’re basically going to be shut out of the program,” said Dennis Kelleher, chief executive officer of Better Markets, a financial regulatory advocacy group in Washington D.C. His group has been critical of Wells Fargo in the past, but said recently that the cap should be conditionally lifted for the coronavirus pandemic.
“If you’re a small business owner who banks with Wells Fargo, you likely can’t get access to the PPP because you don’t have a know-your-customer relationship with another bank,” Kelleher said, referring to the regulations that require banks to research their customers.
Demand for the program flooded both banks and the Small Business Administration, which runs the program. Bankers reported this week that the SBA’s system to handle the loans was plagued with technical difficulties.
So far, $70 billion in PPP loans have been processed, President Donald Trump said on Tuesday. Much more is expected soon.
As of Tuesday, Bank of America took in more than 230,000 loan applications requesting $38 billion in funds, more than a tenth of the total funds allotted to the program. JPMorgan had 375,000 requests as of Tuesday afternoon for about $40 billion in loans, an executive said at a White House meeting.
With concerns mounting that demand will outstrip the funds available to small businesses, Senate Majority Leader Mitch McConnell, R-Ky., said Tuesday that he plans to vote on additional funding for the program this week.
In the meantime, small businesses are scrambling to submit their applications if they can, dealing with slapdash systems and mixed participation.
“It struck me that this would be oversubscribed. If you didn’t get in line soon, you wouldn’t be able to get access,” said Paul Krause, president of Fanalytical, a sports analytics firm in Chapel Hill, who got an application in for PPP funds with Bank of America.
And with some banks, like Citi, not yet participating in the program, some customers are left out. “It’s a big problem. A small business owner called me and said her bank wasn’t participating. So she called 30 other banks and none of them would accept her,” said Karen Mills, who ran the SBA in the Obama administration.
At a conversation with bankers at the White House Tuesday, Trump acknowledged the bumpiness of the rollout. “Remember when banking used to be a nice, simple business, fellas? You remember that? Nice and simple? Not simple anymore.”
McClatchy White House reporter Michael Wilner contributed to this report.