Distorting the Small Business Jobs Act

America’s small businesses are essential to our nation’s economy and its recovery. They create two out or every three new jobs in the private sector. Their ability to hire and expand is crucial to putting our economy back on the right track. But in the wake of this recession, too many small businesses are struggling to find the loans they need to strengthen their companies.

And that’s why President Obama has called on the Senate to swiftly approve the Small Business Jobs Act – a set of tax breaks and lending incentives designed to spur hiring and growth at small businesses.

As we continue to fight for essential assistance to small businesses we know there will be a lot of misinformation and given what is at stake we want to provide the real facts.

Below is a point by point fact check of a story about the small business legislation the AP ran this weekend:

FICTION: “Congress is at work on a new program that would send $30 billion to struggling community banks”

FACT: To participate, a bank’s Federal regulator must deem it viable – helping to protect taxpayer investments and ensure that they can increase lending. Indeed, Treasury and the Administration have opposed any program that has a focus on “bailing out” struggling banks rather than supporting viable institutions that will extend more credit.

When banking groups or Members of Congress have proposed legislation that requires Treasury to allow weaker banks to participate, the Administration strongly and successfully opposed these measures. For example, when an amendment was added to the House bill to allow small banks to be able to put off recognizing losses in impaired real estate loans, the Secretary of the Treasury publicly and strongly opposed it, and worked so that this measure was not included in the Senate bill. In fact, the Administration supported in the House and Senate language that explicitly prohibits banks on the FDIC’s problem list from participating. 

FICTION: “Yet under the new program, the 775 banks on the government's ’problem’ list could qualify for bailouts for the first time.”

FACT: The legislation explicitly states that “an eligible institution may not receive any capital investment under the Program, if (i) such institution is on the FDIC problem bank list; or (ii) such institution has been removed from the FDIC problem bank list for less than 90 days.” 

FICTION: “For banks in the hardest-hit areas, it can be nearly impossible to recover once too many loans sour. Yet the bill would require that banks be protected against "discrimination based on geography." It says the money must be available to lenders in areas with high unemployment.”

FACT: The legislation requires that regulators or Treasury not “discriminate” on the basis of a bank’s location.  It does not remotely suggest that a weak bank can get capital simply because it is in a high unemployment area or distressed location. Not even close. To the contrary, the legislation is crystal clear that every bank must stand on its own and pass the same consistent, uniform viability test administered by its regulator – no matter where it is located. In addition, Treasury anticipates that the application process would allow for other Federal regulators to confirm the primary regulator’s decision where necessary. 

FICTION: “Many community banks are overseen by state regulators struggling under budget cuts and limited expertise. Many are ill-equipped to monitor banks during a crisis”

FACT: The legislation makes clear that every bank’s primary Federal regulator would play the key role in determining whether or not an institution was eligible for the program – not state regulators. In addition, the legislation provides for strong oversight by the Treasury Inspector General and the Government Accountability Office – institutions with extensive experience in overseeing programs that require similar expertise as the SBLF. 

FICTION: “This time, money is more likely to disappear as a result of bank failures or fraud”

FACT: The independent Congressional Budget Office – which initially projected significant losses under TARP’s Capital Purchase Program (even though it now forecasts taxpayer savings for the program) has estimated that the Small Business Lending Fund would provide taxpayers with $1.1 billion in savings over 10 years.  While CBO acknowledged there were other ways to do such scoring, the way the CBO chose and – by which Congress must abide – found that this program would not cost the taxpayer a penny. 

FICTION: “It's supposedly reserved for banks deemed ‘viable.’ But regulators won't consider whether banks are viable now.”

FACT: The only way a community bank (under $1 billion in assets) can get access to the full 5 percent of Risk-Weighted Assets in the program is to be found to be viable before it receives any government capital.

The Senate Legislation provides one narrow exception to this rule: in cases where a bank’s Federal regulator determines that the bank has sufficiently strong management and solid long-term prospects – but nevertheless has a small capital shortfall – the legislation allows the bank to get government capital equal 3% of risk-weighted assets provided that private investors will invest the same amount, dollar-for-dollar.  So not only must the government determine that the bank is otherwise viable, but private sector investors must be willing to contemporaneously put in at least as much of their own private sector capital at risk as the government for the bank to be eligible.  Furthermore, the new private capital must be junior to the government’s investment – meaning that Treasury gets repaid in full before any other new investors.  Indeed, when the Congressional Budget Office reviewed this new proposal, because of these protections, they did not think this narrow exception would add any costs to the program at all. None. 

FICTION: “But Federal Reserve Chairman Ben Bernanke and others have questioned whether the problem is lack of capital, or if there simply aren't enough creditworthy borrowers.”  

FACT: As Chairman Bernanke himself stated last month: “it seems clear that some creditworthy businesses--including some whose collateral has lost value but whose cash flows remain strong--have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.”

Indeed, the National Federation of Independent Business – which reported in a survey earlier this year that 45 percent of small businesses found that their borrowing needs were not being satisfied – stated recently that “the lending fund has the potential to help credit-worthy small businesses that have had difficulties obtaining credit, which is a good thing.” At the same time, the Small Business Jobs Act is designed specifically to address the range of problems facing small businesses – which is why it includes a series of targeted tax incentives for new investments, enhancements to SBA programs, and a new State Small Business Credit Initiative in addition to the SBLF. 

FICTION: “The administration's haziness about whom the program benefits has fueled comparisons to the $700 billion bailout known as the Troubled Asset Relief Program, or TARP.”

FACT: The Administration has been very clear about the intent of this program: it is to stimulate lending to small businesses by providing capital and incentives to the community banks on Main Street that make these loans. Indeed, the design of the program has been very explicit in addressing this goal – the program is directed only at small banks, which do the overwhelming amount of their commercial lending to small businesses, and the benefits banks receive are linked directly to their lending to small businesses. Loans over $10 million or to businesses with revenues over $50 million would not be counted. 

FICTION: One source quoted in AP story stated, "What we lack here is oversight and true accountability."

FACT: There is no doubt that the legislation establishing the Small Business Lending Fund would provide for strong oversight and accountability. As a new program established through new legislation separate from TARP, the Small Business Lending Fund – in addition to requiring a small business lending plan from participants and regular reports on the impact of SBLF capital – would be subject to robust oversight from the Treasury Inspector General and the Government Accountability Office. These two bodies have a strong record of expertise and experience suited to the task of overseeing this program. For example, Treasury Inspector General Eric Thorson – nominated by President Bush in 2007 – has substantial experience and existing responsibilities relevant to monitoring a program like the SBLF: overseeing the Office of the Comptroller of the Currency, conducting material loss reviews of Treasury-regulated financial institutions that cause losses over $25 million to the FDIC’s deposit insurance fund, and ensuring accountability for Recovery Act programs overseen by Treasury, to name a few.

Jen Psaki is Deputy Communications Director