U.S. Small-Business Fund Pads Its Returns with Bank Fines

By Witkowski, Rachel | American Banker, October 16, 2012 | Go to article overview

U.S. Small-Business Fund Pads Its Returns with Bank Fines


Witkowski, Rachel, American Banker


Byline: Rachel Witkowski

Success is in the eyes of the beholder when it comes to government banking programs.

The Small Business Lending Fund program a which invests money in lenders to stimulate credit for small firms a 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 a[bar] 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. …

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