With the signing of the Dodd-Frank Act into law last week, the Treasury Department’s authority to tap into the $700 billion Troubled Asset Relief Program (TARP) came to a sudden and largely unheralded end. But at the same time, a bill was progressing through the U.S. Senate that would create a new TARP-like program allowing Treasury to make TARP-like investments in community banks to promote small-business lending.
Democrats have secured the votes of at least two Senate Republicans on the measure, and passage is expected sometime this week. Most opponents (and even some supporters) of the original TARP feared that its passage would inaugurate an era of politicized bank lending, in which Congress and Treasury would use taxpayer money to extend credit to a variety of special-interest groups. The proposed creation of the Small Business Lending Fund confirms those fears.
The new fund would allow Treasury to use $30 billion to purchase preferred stock or other debt instruments from community banks, defined as banks with less than $10 billion in total assets. The bill then directs Treasury to charge the banks a rate of interest (or calculate a dividend) that varies depending on how aggressively they lend out the money: The more aggressively they lend, the less they pay, and vice versa. Supporters of the bill argue that banks could leverage the $30 billion to make up to $300 billion in loans available to small businesses. But, as with any money coming from the government, it comes with many strings attached.
Treasury would require each bank applying for funds to submit a small-business lending plan “describing how the applicant’s business strategy and operating goals will allow it to address the needs of small businesses in the areas it serves, as well as a plan to provide linguistically and culturally appropriate outreach, where appropriate.” The bill specifies that this outreach is to include advertising in print, radio, television, or electronic media targeting minorities, women, and military veterans. Furthermore, the bill instructs Treasury to give priority to banks that serve “small businesses that are minority-, veteran-, and women-owned and that also serve low- and moderate-income, minority, and other underserved or rural communities.”
This is the kind of politicized bank lending that the government has encouraged for decades through laws such as the Community Reinvestment Act and through mandates requiring Fannie Mae and Freddie Mac to promote homeownership in low-income communities. At best, such measures provided a politically palatable justification for irresponsible lending during the housing boom. At worst, they actively drove the deterioration of lending standards that led to the bust.