Success is in the eyes of the beholder when it comes to government banking programs.
The Small Business Lending Fund — which invests money in lenders to stimulate credit for small firms — has ridden bankers' mistakes to stronger returns.
It collected $140 million in payments from banks since its inception last year through June 30, the Treasury Department recently reported. That figure included more than $4 million in penalties banks paid for compliance errors such as misunderstanding the program's qualifications and failing to certify their borrowers are not sex offenders.
Some banks paid more than $100,000 in higher dividend payments to the government as a result.
"We felt it was 'gotcha money'," says David Summers, chief executive of Virginia Heritage Bank, a $700 million-asset bank in Fairfax, Va. "We had the loan volumes to put us at a 1% dividend rate, but we got spanked."
Heritage paid a 5% dividend rate for the first quarter after it missed the March 31 deadline for the paperwork on borrowers' sex-offender status. The documentation is required in any business loan, but Summers says he did not realize an additional certification was required for SBLF among several certifications due at the same time.
The Treasury then notified him 75 days after the deadline that the document was past due and his dividend rate had jumped. His mistake cost him about $136,000 in additional dividend costs.
"Overall, we're pleased to be in the program and it's helped us to continue to lend," he says, "but I imagine … all hell would have broken loose" were banks to file notices more than three months late like the Treasury did.
Summers admitted that the Treasury sent an email reminding banks of the deadline beforehand. But failure to meet extensive documentation requirements and other mishaps were enough to add $4.2 million in additional dividend payouts to date for non-compliance penalties, according to the Treasury. The Treasury's no-excuses policy will likely prompt participating banks to pay off funds faster, observers say.
"Just because a government program sounds attractive, sometimes the cost of compliance doesn't make it attractive," says Paul Schaus, president of CCG Catalyst, a bank consultant. "It's not like you're dealing with another bank where you say, 'Sorry, let's fix this.' The government doesn't work that way."
SBLF's director, Jason Tepperman, said the Treasury made phone calls to each participant about the catchall March 31 deadline for compliance certifications and later emailed reminders — all before March 31. It also posted the deadlines online.
"We sought to communicate the compliance requirements in a very fulsome way," Tepperman says.
Noncompliance penalties were only 3% of the $140 million, Tepperman says.
"The institutions participating have come a long, long way toward recognizing the incentives and objectives," Tepperman says. "We found the results to date to be very encouraging now that we're one year past the end of the funding cycle."
Last week, the Treasury reported that the SBLF program grew by $1.5 billion in qualified loans from March 31 to June 30 - the most in a quarter since the program kicked off late last year. Nearly 91% of the 277 participating banks also qualified for the lowest dividend rate at June 30 because they reported 10% or greater growth in qualified loans. That's up from 82% of SBLF banks at March 31.
Even Summers says, aside from the "bizarre" sex-offender-status documentation requirement, the program's capital was a "godsend." His dividend rate dropped down to 1% in the second quarter.
"Really, we haven't had a significant amount of difficulty and the thresholds are pretty straightforward," he says.
But the thresholds can get tricky when it comes to sharing the small business loans with other banks through participations. The SBLF program only counts the portion of the loan that the SBLF bank decides to hold on its books. However, when it established the baseline to determine dividends, it included the overall average loan balance for the four quarters ended June 30, 2010.
This left certain banks like Pacific Coast Bankers' Bank, whose entire business model is loan participations, paying a higher dividend rate since its baseline was very large. Since then, the bankers' bank in Walnut Creek, Calif., posted a 37.5% drop in qualified loans from the baseline.
"We're growing it back, but the only thing is we have to get past that baseline," says Steve Brown, president and chief executive at Pacific Coast. "Because the snapshot was so high and based on loans that don't qualify …it will be a slow, steady climb for us."