Bailout watchdog: Regulators dropped ball on small business lending fund

In an attempt to ensure that banks participating in the program would actually use the funds to increase lending, banks were required to submit a small-business lending plan along with an application. But the SIGTARP report found that wires were crossed when it came time to evaluate those plans — Treasury officials said the responsibility fell to bank regulators, while bank regulators thought it was Treasury's, resulting in "an overall lack of scrutiny."

The report found that bank regulators simply assessed the viability of the banks, while Treasury engaged in a "superficial" review of the lending plans. No banks saw their applications to participate in the fund rejected due to an insufficient lending plan.

"By not developing and implementing meaningful SBLF application review procedures that would achieve the intended purpose of promoting lending, Treasury and the regulators lost sight of Congress’ primary goal of the program – to increase lending to small businesses," the report stated.

The Treasury Department defended its handling of the program in a response to SIGTARP, calling it a "success" in boosting small-business lending.

"We disagree with the report's finding that these banks have not effectively increased small-business lending; the program's results to date directly contradict that conclusion," the Treasury wrote in its response.

The department pointed out that 90 percent of institutions participating in the program boosted their small-business lending, totaling $8.9 billion through the end of 2012. Eighty-three percent of participants boosted lending by 10 percent or more, officials added.

The department went on to argue the report had "numerous error and omissions." For example, Treasury officials contended that there was extensive communication between department officials and banking regulators, and that SIGTARP was relying on "misquotes or out-of context statements" to build its claim the parties failed to work together effectively.

The Treasury also pointed out that it was required by law to extend the lending fund to TARP banks.

The fund was created in 2010 as part of the Small Business Jobs Act, giving the Treasury up to $30 billion to provide to small banks to increase credit availability for small businesses by way of lower borrowing rates. The fund came to be in large part due to dissatisfaction from lawmakers that the broader bank bailout did nothing to encourage lending to businesses. 

But the program failed to live up to expectations, as the Treasury used just $4 billion of the available funds, and two-thirds of which went to banks already participating in TARP.

Members of both parties were critical of how the fund was implemented, noting how few dollars were making it out the door. Former Treasury Secretary Timothy Geithner defended the fund's performance, arguing regulators were closely scrutinizing bank applications in an effort to protect taxpayer dollars. The fund closed its doors in September 2011.

This post updated at 2:22 pm.