WASHINGTON — The banking regulators will remain open in the event of a government shutdown, but the ongoing fiscal battle in Congress could still have significant implications for the financial services industry.
The shutdown will go into effect after midnight on Monday, the end of the fiscal year, unless lawmakers in the House and Senate are able to strike a last minute deal to at least temporarily fund the government for several more weeks.
The two chambers remained at an impasse Monday over House Republicans' efforts to use the fight as an opportunity to defund or delay President Obama's healthcare law. Analysts predicted that the government will likely have to shutter its doors, though for how long is unclear. Such an event raises questions about pending regulations, certain mortgage and small business loans and the broader impact on the economy. Following is our guide to how a shutdown will affect banks.
FHA, SBA, Farm Loans Will Grind to a Halt
Banks that make government-guaranteed small-business, mortgage or farm loans — and customers seeking those loans — will feel the impact of the shutdown immediately.
The U.S. Small Business Administration, the Federal Housing Administration, and the Farm Service Agency, an arm of the Department of Agriculture, will largely stop processing loan applications if the government is closed, resulting in potentially large backlogs at banks that originate the loans.
The SBA said in its 36-page shutdown plan that it will shutter all of its loan programs except one that makes direct loans to home and business owners affected by natural or man-made disasters. In its two main programs, 7(a) and 504, the SBA provided guarantees on more than 55,000 loans last year totaling more than $30 billion in fiscal year 2012 and was on pace to approve similar volumes in fiscal year 2013. The SBA said that nearly 2,200 of its employees, or 62% of its workforce, will be furloughed.
With a shutdown looming, lenders have been feverishly completing loan applications and SBA employees have been working overtime to process them before their offices go dark. Tony Wilkinson, the chief executive at the National Association of Government Guaranteed Lenders, said that the SBA has approved $1.2 billion of 7(a) loan requests in the last two weeks — roughly double the normal level of activity — and was on pace to approve $400 million on Monday alone.
"I'm hearing that they plan to process loans up until 11:30 tonight," Wilkinson said Monday afternoon.
Craig Street, the head of SBA lending at the $56 billion-asset Huntington Bancshares (HBAN) in Columbus, Ohio, said that the impact of the shutdown on the bank and its customers will be directly related to how long it lasts.
"If it's only a few days then the impact would be fairly benign," Street said. "If it were to last longer than a week then it could become problematic."
Complicating matters is that several new SBA rules take effect Tuesday, the start of the new fiscal year, including one that will eliminate fees on all SBA loans of less than $150,000. Business owners that waited to apply for the loans to avoid the guarantee fee will have their applications put on hold until the shutdown ends.
The FHA, meanwhile, will be unable to underwrite and approve new loans, according to a report from the Department of Housing and Urban Development, which oversees the agency. However, Ginnie Mae, which guarantees timely payments to investors in government-insured mortgage-backed securities, will continue operating. Fannie Mae and Freddie Mac also will also be largely unaffected.
For the most part, HUD will maintain minimum operations during a shutdown. As a result, FHA lenders cannot be assigned case numbers for new loans and they take some risk in closing loans since they do not know when the government will reopen. A loan has to be submitted to FHA within 60 days of closing to receive insurance.
"An interruption in operations would create immediate and significant market disruption that would lead to financial losses for investors and increased mortgage rates for government-insured mortgage loans," HUD said in a 67-page report detailing the impact of a shutdown.
Only 350 of HUD's 8,700 employees will be working full-time during a hiatus, HUD said. But the agency anticipated another 400 employees will be able to work on an intermittent basis during the first few days of an appropriations lapse.
The Farm Service Agency, which offers loan guarantees on bank loans to farmers and ranchers, is already dealing with a large backlog of loans that could be made substantially worse by an extended shutdown, said John Blanchfield, the senior vice president at the American Bankers Association's Center for Rural and Agricultural Banking.
The agency, which guarantees roughly $2.5 billion of farm loans each year, has said that it will close all of its field and district offices during a shutdown, and though it will still accept applications online, no one will be around to read them.
Blanchfield said that because the Department of Agriculture has been operating under a continuing resolution all year, roughly 1,000 farm real estate loans — totaling $430 million — have gone unprocessed because the Farm Service Agency is awaiting funding.