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TARP Watchdog Report Raises Questions about Oversight of Small Business Lending Fund

July 12, 2010 

 

In a last-minute maneuver designed to secure votes in the Senate, the financial reform conference committee recently decided to remove a provision in the bill that would have imposed a $19 billion tax on big banks. Instead, the conferees agreed to re-allocate $11 billion that will be made available by bringing an early end to the Troubled Asset Relief Program (TARP).

But in the meantime, Congress is rapidly advancing a bill to create a new Small Business Lending Fund (SBLF), which some critics are already calling "TARP Jr." or "TARP 3.0." The idea behind the SBLF, which was first proposed by the Obama administration in February, is to create a new $30 billion fund that will be used to extend capital to community banks with assets of less than $10 billion, in an effort to increase their lending to small businesses.

The House passed its version of the legislation a few weeks ago, and the Senate will soon be voting on its bill. But POGO and others have been raising concerns about the decision to create this program outside of the oversight rules governing TARP, especially since the SBLF is strikingly similar to other TARP programs.

These concerns were driven home in a recent audit by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which examined how effective the Treasury Department has been at monitoring compliance with the TARP rules by companies receiving exceptional assistance. These companies include AIG, GM, Bank of America, and Citigroup.

The audit concluded that Treasury's oversight of these firms has been largely inadequate, raising additional concerns about the proposal to create an entirely new set of SBLF oversight rules for Treasury to monitor and enforce.

The SIGTARP's audit identifies three key concerns, which are listed below along with POGO's thoughts on how these issues might be impacted by the creation of the SBLF.

1. Treasury's implementation of compliance procedures has been too slow.

SIGTARP states in its audit that Treasury has not been submitting its compliance reviews in a timely manner, and is falling behind on its current obligations. According to the audit, Treasury has only reviewed compliance documentation for three of the six companies receiving "exceptional financial assistance" to date.

POGO wonders whether Treasury really has the capacity to conduct timely reviews of an entirely new set of documents from the participating SBLF banks.

2. Treasury's compliance procedures rely too heavily on the companies to detect and report requirement violations on their own.

When it comes to self-regulation in the financial sector, private companies have struggled to police themselves adequately. Yet Treasury currently relies on the TARP recipients to disclose their own violations of the TARP regulations. There does not appear to be any external controls or guidance in terms of enforcing these standards. Perhaps as a result of this lack of oversight, only one of the 'exceptional' companies, AIG, has reported any violations to Treasury.

Especially given the fact that the SBLF is targeted to small and medium-sized banks, the question arises as to whether these firms will have the personnel and expertise needed to make these judgment calls, and whether self-reporting is an effective model for oversight.

3. Treasury's compliance staffing levels continue to be inadequate.

The SIGTARP audit notes that Treasury officials would like to add 15 more staff members to their compliance department, but have been unable to find any qualified candidates. Given that the compliance office is still understaffed nearly two years into TARP, POGO is concerned that the addition of the SBLF will place even more of a burden on an already overextended staff.

Whether or not Treasury will be able to address these concerns with the SBLF remains to be seen. But, fortunately, in the meantime, Congress has taken the initiative to add more transparency and accountability requirements to the SBLF legislation.

These measures, which can be seen in the latest version of the bill that's before the Senate, include:

POGO remains concerned about Treasury's ability to monitor and enforce its compliance rules for the SBLF, as evidenced by the latest SIGTARP audit. But, although there are some major oversight concerns, Congress is trying to make the program more transparent and accountable, and POGO strongly urges the Senate to keep these provisions in the bill.


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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