Guest Blog: Rep. Ed Royce on the Small Business Lending Fund

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The Small Business Lending Fund was cleverly named by its authors last Congress. Since its implementation, however, it would appear a more appropriate name would be the Bailed Out Bank Refinancing Fund.  When Barney Frank and other supporters proposed the SBLF, it was believed banks would leverage the fund leading to hundreds of billions in small business loans.  In their world, Congress was to allocate, Treasury was to disburse, banks were to lend and small businesses were to grow. Seems like an airtight plan, right? Then came reality.

More than half of $4 billion in funds dispersed by Treasury through the SBLF was used to repay, get this, Treasury for the money they received under the TARP bailout. By moving their Treasury loan to one with better terms, these banks can get out from under the restriction that came with their initial bailout and cash in on the lower rates. It wasn’t too hard to see this coming given that during consideration of the bill then Chairman Barney Frank said, “…there will be no TARP trappings, no TARP restrictions, and, I believe, no TARP oversight.” Mr. Frank got his wish. Even the program’s beneficiaries see the SBLF for what it is.  John Schmidt, chief operating officer of Heartland Financial USA Inc., acknowledged “It’s a bit of a shell game,” after Heartland received $81.7 million from the fund then used the full amount to pay down TARP obligations.

While I opposed its passage, TARP was a gift from taxpayers to the banking system. With it came the expectation that the funds would eventually be repaid, taxpayers would collect a premium for such an unprecedented intervention and the bailed out banks would adhere to certain restrictions (e.g. executive compensation).  These restrictions were intended to discourage banks from getting (and staying) on the government dole. By acting as bank refinancing program, SBLF is enticing those banks to get out from under the onerous restrictions and take advantage of the better terms. Among the undesirable consequences, providing an escape from these restrictions will strengthen that undesirable bond between our banking sector and government.

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One might ask why it took keen reporting to uncover this clear abuse of the system, especially when the taxpayers are yet again holding the bag. Where were the audits of SBLF? Why wasn’t a watchdog tasked with overseeing implementation?  Again, responsibility lies with Mr. Frank. When House Republicans attempted to give SIGTARP oversight authority over the SBLF program on the House floor, Mr. Frank and his Democrat colleagues blocked the amendment and argued that safeguards had already been put in place.  According to them, our efforts were just “another bureaucratic layer that will hinder the need of small businesses to access capital.”

Even if the SBLF hadn’t been treated as the ‘Get Out From Under TARP Fund,’ it was doomed for failure. It was conceived with the false assumption that job creation would magically appear by creating another program run out of the Treasury Department. Simply pull a lever in Washington and jobs will come out the other end. It didn’t address the uncertainty in the economy, it didn’t address the piles of red tape coming from this Administration and it did nothing to ease the fears of the looming tax bill likely to come on our small businesses.

We have begun to shift the tide on many of these fronts, but more work must be done. With respect to the SBLF, the first step should be to stop the bleeding and prevent additional funds from being dispersed. Then and only then can we end this debacle and get back to the reining in our deficits and providing some certainty for U.S. businesses.

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U.S. Representative Ed Royce (R-CA) is a senior member of the House Financial Services Committee and sat on the Dodd Frank Conference Committee one year ago.

The views expressed by guest bloggers on the Foundry do not necessarily reflect the views of The Heritage Foundation.

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