Wells Fargo forced to close loan applications due to asset cap

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Wells Fargo has stopped accepting loan applications from small businesses under the Small Business Administration's (SBA) $350 billion Paycheck Protection Program (PPP), less than two days after it opened its portal, per CBS News.

The bank said in a statement that it is limited to distributing a maximum of $10 billion in loans to small businesses due to its asset cap imposed by the Federal Reserve in 2018 - the volume of loan applications Wells Fargo received between April 4 and April 5 was high enough that it would certainly hit that capacity, and it closed applications as a result.

The bank added that it will focus its lending on nonprofits and small businesses with fewer than 50 employees. Of note, technical glitches prevented many banks from being able to initially accept loan applications on April 3, when the PPP officially launched - only Bank of America (BofA) and JPMorgan Chase were able to accept applications that day, whereas Wells Fargo's portal opened on the next day.

Wells Fargo has tried to shake the asset cap in order to extend greater coronavirus relief to consumers and businesses. The $1.95 trillion asset cap was imposed in response to the bank's 2016 fake account scandal, and it limits how much Wells Fargo can hold on its balance sheet. The bank asked the Fed in late March to remove the cap, at least temporarily, so that it could meaningfully increase its lending activity to those impacted by the economic fallout of the pandemic - but the Fed has not complied, and reportedly remains skeptical that Wells Fargo has fully addressed the concerns that first led to the cap.

Wells Fargo's lending limitations will curb its ability to benefit from facilitating SBA loans, though that could increase the opportunity for other US banks, especially given the massive volume of loan applications thus far.

• The US government is paying banks fees to facilitate SBA loans - and they're expected to bring in billions as a result. To incentivize banks to facilitate loans, the government is paying banks a fee ranging from 5% for a loan under $350,000 to 1% for a loan over $2 million. Given the volume of businesses that are already applying for these loans, banks will likely reap fees in the billions. But Wells Fargo will be eligible for only a relatively small portion of those fees, given its lower lending capacity.
• Other banks are already dwarfing Wells Fargo in terms of potential loans, with BofA's application volume accounting for nearly 10% of the $350 billion allocated for small business relief by Congress. As of Monday, BofA reported having already received applications from 177,000 small businesses, totaling $32.6 billion in potential loans, pending approval, CNBC reports. As the pool of available funds shrinks, US small businesses could find themselves in a race to access loans, and Wells Fargo won't be in the running as a potential lending partner.
• Going forward, Wells Fargo's loss could be other banks' gain. With Wells Fargo unable to facilitate loans beyond $10 billion, there could be an opening for other banks to take on applicants that were shut out by the cap. Wells Fargo arranged more small business loans than any other lender in the country last year, per CBS, but even businesses that were already Wells Fargo customers may be forced to take their business elsewhere - and they may keep it with other banks, even after the current crisis ends.

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