The Continuing Saga of Banking's Battle with Uncle Sam.

It was a few months ago that this story came to light and we wrote about it; here was Uncle Sam once again using its giant governmental mitt to meddle with the banking system. First, with making the postal service a financial services provider, and then with this notion that it’s a good idea to take banks out of the lending business.

At the time, Alex Sanchez, President and CEO of the Florida Bankers Association said that legislation approved by the House Small Business Committee “included an option for the SBA to originate and disburse direct loans” and that this was yet "another zany idea” that’s been floated out by the current administration.

Well, the saga continues. In a recent Center Square article, “Kennedy warns against proposed SBA direct lending program, Louisiana’s Senator Kennedy talks about sensible efforts to put this to bed once and for all. He, along with several other Republican lawmakers and multiple banking associations, warn against crowding out private lending entities in favor of a government agency. Kennedy and others have sent a letter to Senate leadership, focusing on a critical piece of the story: past abuses regarding singular SBA direct loan initiatives. Just a few weeks ago, Kennedy along with U.S. Sen. Tim Scott, R-S.C., and 18 cosponsors, including Louisiana Republican U.S. Sen. Bill Cassidy, introduced legislation to block the proposed 7(a) practice outright. In a nutshell, their letter leveled this criticism: “The report (referring to the Office of the Inspector General’s report),) estimates that the government-run lending initiative advanced $79 billion in potentially fraudulent loans.”

 When this conversation started, Ian McKendry, a spokesman for the American Bankers Association, was quoted in “Proposed SBA expansion into direct lending irks banks, credit unions,” as saying that his group “wants to better understand why it makes sense to create a direct lending program to compete with banks that are already meeting demand for 7(a) loans. This could have the unintended effect of making it more difficult for some lenders to continue participation in the 7(a) program.”

Well, a few months have passed now and Mr. McKendry is really no closer to getting a “better understanding.” It just doesn’t make sense for the SBA to make direct loans. Unless, of course, we’re willing to see billions of dollars go out to fraudulent loan applicants.  And unless, of course, we’re also unwilling to believe what’s in the Office of the Inspector General’s report, which states: “Additionally, we have found indications of deficiencies with internal controls related to disaster assistance for the COVID-19 pandemic. Our review of SBA’s initial disaster assistance response has identified $250 million in economic injury loans and advance grants given to potentially ineligible recipients. We have also found approximately $45.6 million in potentially duplicate payments.”

Proponents of the provision, known as Section 100502, or the Funding for Credit Enhancement and Small Dollar Loan Funding, are still adamant about not leaving lending with banks. Just a few days ago, on January 12, Hon. Rep. Nydia Velazquez, chairwoman of the House Small Business Committee, wrote on The Committee on Small Business website:

“Since 2020, SBA has distributed nearly $1 trillion in economic relief to small firms. This figure surpasses the amount of money distributed in all other years of SBA’s existence combined. This is an enormous achievement and helped keep millions of small businesses afloat during the pandemic. However, with any emergency effort of this magnitude, problems will inevitably occur. According to investigations, the COVID-EIDL and Paycheck Protection Programs have been vulnerable to fraud. Much of this potential fraud can be traced back to the early days of the pandemic when programs were new, loan volume was high, and the need to get the loans out quickly was the priority. Your report also notes that in 2020, the previous administration “relaxed internal controls,” adding significant stress to the system and creating an environment ripe for fraud.”

Ah, so it was the previous administration’s fault. Isn’t it always? It is, at worst, an interesting story to follow and I can’t wait to see how it ends. Or, should I say IF it ends?

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