Small Business Rescue Earned Banks $10 Billion In Fees

Originally published on April 22, 2020 9:21 am

Banks handling the government's $349 billion loan program for small businesses made more than $10 billion in fees — even as tens of thousands of small businesses were shut out of the program, according to an analysis of financial records by NPR.

The banks took in the fees while processing loans that required less vetting than regular bank loans and had little risk for the banks, the records show. Taxpayers provided the money for the loans, which were guaranteed by the Small Business Administration.

According to a Department of Treasury fact sheet, all federally insured banks and credit unions could process the loans, which ranged in amount from tens of thousands to $10 million. The banks acted essentially as middlemen, sending clients' loan applications to the SBA, which approved them.

For every transaction made, banks took in 1% to 5% in fees, depending on the amount of the loan, according to government figures. Loans worth less than $350,000 brought in 5% in fees while loans worth anywhere from $2 million to $10 million brought in 1% in fees.

For example, on April 7, RCSH Operations LLC, the parent company of Ruth's Chris Steak House, received a loan of $10 million. JPMorgan Chase & Co., acting as the lender, took a $100,000 fee on the one-time transaction for which it assumed no risk and could pass through with fewer requirements than for a regular loan.

In total, those transaction fees amounted to more than $10 billion for banks, according to transaction data provided by the SBA and the Treasury Department.

NPR reached out to several of the largest banks involved in collecting the fees, including JPMorgan, PNC Bank and Bank of America. Many did not respond to specific questions, but said they were working to help as many small business clients as they could.

In a statement, Bank of America said the bank had more than 8,000 employees working for clients and preparing to get them in on the next round of the program should it be passed by Congress. The program has "significant vetting requirements," the bank said in an email, including "collecting, personally examining, and storing data" that is required for each application.

Still, Treasury Department guidelines make clear the requirements are less rigorous for the banks compared to processing regular customer loans where banks must verify clients' asset claims.

"Lenders are permitted to rely on borrower certifications and representations," the department told lenders.

To be sure, banks do collect fees when processing any SBA loan, but rarely, if ever, have banks processed this volume of loans this quickly with fees ranging past $10 billion in a two-week period. The SBA did not respond to detailed questions about the program.

Congress is now poised to add $320 billion more into the program, called the Paycheck Protection Program, as it looks to pass a $484 billion additional stimulus package this week. President Trump said on Twitter that he supports the bill.

Senate Majority Leader Mitch McConnell, a Republican from Kentucky, said on the Senate floor that the program was "saving millions of small-business jobs and helping Americans get paychecks instead of pink slips."

Even so, Sen. Gary Peters, a Democrat from Michigan, called on the Government Accountability Office to look into the program after tens of thousands of small businesses were left out and larger companies got millions.

One law firm, the Stalwart Law Group, filed five class action lawsuits this week — four in California and one in New York — alleging that banks processed clients with larger loans first because they stood to generate more money in fees. By the time the banks tried to process loans from their smaller clients, the lawsuit alleges, the program had run dry.

"Rather than processing Paycheck Protection Program applications on a first-come, first-served basis as required by the rules governing that program," the lawsuit says, "[the banks] prioritized loan applications seeking higher loan amounts because processing those applications first generated larger loan origination fees for the banks."

Banks dispute these allegations. JPMorgan said it handled the applications fairly.

"We funded more than twice as many loans for smaller businesses than the rest of the firm's clients combined," the bank said in a statement to clients. "Each business worked separately on loans for its customers. Business Banking, Chase's bank for our smaller business customers, processed loan applications generally sequentially, understanding that a given loan may take more or less time to process. Our intent was to serve as many clients as possible, not to prioritize any clients over others."

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Right now, small businesses are desperate for loans. Congress allocated $349 billion for small businesses. That money was gone in less than two weeks. But not all of it went to small businesses. Around $10 billion went to banks to cover processing fees. NPR's Laura Sullivan has been looking into financial records. Good morning, Laura.


KING: So $10 billion is a lot of money. What are banks doing to earn that money?

SULLIVAN: So banks like JP Morgan Chase, Bank of America, PNC and dozens of others are processing the loans. They're essentially the middlemen. They take the applications from their small business clients. And they funnel those requests up to the Small Business Administration, which approves the loan. And what's important to note here is that the money the banks are getting for their clients isn't their money. I mean, this isn't bank money. This is taxpayer money. Taxpayers are funding loans for small businesses to cover things like payroll, rent and utilities during the crisis.

KING: OK, something for taxpayers to think about. Let me ask you, what's the incentives for the banks to process all these small-business loans?

SULLIVAN: So fees - we took a deep dive into the public financial records of companies and banks. And we found the banks are making billions of dollars in fees. According to the program's rules, banks can take anywhere from one to 5% of the entire loan and keep it as a fee depending on how much the loan is worth. So any loan up to $350,000, the banks get 5% of that money. A loan between 2 million and $10 million, the banks get 1% of that money. So for example, the parent company of Ruth's Chris Steak House got a $10 million loan from the program.

JP Morgan Chase, which, according to financial records, processed that loan, got a $100,000 fee for this one-time transaction. And remember, these loans carry no risk for JP Morgan or the other banks. It's taxpayer money guaranteed by the Small Business Administration. And the loans require less work. The government is requiring less vetting compared to when a bank is lending its own money. Now, banks do normally get fees for processing SBA loans, but not in this volume, with these dollar amounts or over a two-week period.

KING: And you've been looking into it. And the dollar amount that you found, as I said, is about $10 billion have gone to banks so far.

SULLIVAN: Yes. When you break down the value of the loans and use the formula government established, it adds up to more than $10 billion in fees that went to the banks just in the past two weeks.

KING: So what are the banks saying? Are the bank saying, well, look; we're doing our job? We're supposed to get paid.

SULLIVAN: So we reached out to some of the biggest banks involved in the program including, PNC, JP Morgan, Bank of America. Some said they have to pay for thousands of employees that are working 12 and 18-hour days to get the loans pushed through and are now preparing - or hoping - for Congress to authorize another round.

They said, while vetting might not be as thorough as it would be for a regular bank loan, there is still significant, like, document collection and review. Wells Fargo says it's going to donate its money to charity. But it was required to do that as part of a government agreement following problems the bank had in 2018. None of the other banks have said that they intend to follow suit.

KING: So there's a really interesting question here, which is that, you know, thousands of small businesses said they were shut out. They couldn't get loans. Is there a reason to think that they didn't get loans because the banks knew they could make more in fees if they just worked with clients with really, really large loans?

SULLIVAN: There are currently five class action lawsuits in California and New York alleging just that. And the data does suggest more large loans were processed before smaller loans. But banks say that is simply not true. JP Morgan's - for one says they had different offices handling different loan sizes. And there were simply fewer large loans. So they were able to get through more of them.

KING: Really interesting stuff. NPR's Laura Sullivan. Thanks, Laura.

SULLIVAN: Thanks so much. Transcript provided by NPR, Copyright NPR.