Fed relaxes growth cap to let Wells Fargo make more small-business stimulus loans

The Federal Reserve said Wednesday that it would “temporarily and narrowly” relax the growth cap it placed on Wells Fargo so the bank can make more federal stimulus loans to small-businesses.

The Fed said in a Wednesday order that Wells Fargo will be allowed to exclude loans through the Paycheck Protection Program and forthcoming mid-size business lending program from counting towards the bank’s asset cap.

The bank will also have to send the fees it collects through the program to either the U.S. Treasury or to certain nonprofits.

On Sunday, the bank said that it wouldn’t accept any more applications for federal small-business stimulus loans, as it would encroach on the growth cap it’s operated under since 2018, a consequence of the bank’s fake-account scandal.

After the Fed’s announcement, Wells Fargo announced it was expanding its participation in the program.

“While we are pleased to be able to help more small businesses through the Paycheck Protection Program, we note that the Federal Reserve’s action does not – and should not – in any way relieve us of our obligations under the consent order,” said CEO Charlie Scharf in a statement, referring to the 2018 Fed order punishing the bank.

Before the Fed made the change, small businesses who banked with Wells Fargo reported that, because of the structure of the program, they were having difficultly getting the loans at other banks in the midst of the novel coronavirus pandemic.

At issue were small-business loans from the Paycheck Protection Program, a $349 billion part of the $2 trillion federal stimulus package that Congress passed last month.

In the program, a business with fewer than 500 workers can get a federally-guaranteed loan of up to $10 million, and have it forgiven if the loan is spent mostly on payroll.

When Wells Fargo rolled out the program this weekend, it quickly hit a self-imposed $10 billion cap. It worried that if it took in any more applications, it would breach the $1.95 trillion cap on assets imposed on it by the Fed.

In February 2018, the Fed put in place the cap as a punishment for the internal issues exposed by Wells Fargo’s sham sales scandal.

For over a decade, a toxic culture at the bank led to the creation of millions of accounts in customers’ names without their consent. Until the bank fixed its issues and proved it to the Fed, the cap was going to stay in place.

But that was before the federal government started asking banks to make billions of federally-guaranteed loans. At the beginning of the year, Wells Fargo only had $20 billion in space between its current assets and the cap.

The Fed was clear to say that this doesn’t mean it’s easing up on the bank: outside of the two federal stimulus programs, all the prior restrictions it put on the bank stay in place.

Still, some Wells critics weren’t happy with the move, thinking that Wells should’ve made room below the cap for the small-business loans.

“If the Fed wants Wells to focus on community lending, and if Wells is truly committed to its communities and customers, the bank could instead have given up other risky lines of business in order to serve small businesses,” said Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee.

Wells Fargo has 27,000 employees in the Charlotte area, the most of any city the bank has a presence in. That is a legacy of its 2008 acquisition of Wachovia.

This story was originally published April 8, 2020 at 11:50 AM.