By Jon Hill

Law360 (May 12, 2020, 11:00 PM EDT) -- U.S. Senators told federal banking regulators Tuesday that the government's efforts to blunt the economic impact of the coronavirus pandemic may leave some communities, businesses and nonprofits behind, pushing for broader responses and stressing the need for speed.

In their first remote hearing since the pandemic began, members of the Senate Banking Committee quizzed top officials with the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration on the various initiatives underway to provide financial support to different segments of the U.S. economy during the COVID-19 crisis.

Among the highest-profile to date is the Small Business Administration's Paycheck Protection Program, which has enlisted banks and other private-sector lenders to provide forgivable low-cost loans to help small businesses avoid layoffs while much of the country is shut down.

More than $500 billion in PPP loans have been approved so far, but reports that minority-owned businesses have struggled to access the program drew criticism from Sen. Bob Menendez, D-N.J., who faulted the regulators for not being more assertive in directing PPP lenders on compliance with fair lending laws.

"The Center for Responsible Lending estimates that 95% of black-owned businesses and 91% of Latino-owned businesses are unlikely to receive PPP loans," Menendez said. "That's just an absolute failure that I think regulators should be at the very forefront of making sure there is very clear guidance as to when we expect fair lending to take place."

The OCC issued a bulletin in April encouraging the banks it regulates to "prudently document" their PPP lending policies and decisions, calling the practice "consistent with the principles of safety and soundness and fair access and fair treatment of borrowers."

Appearing at Tuesday's hearing, the agency's Comptroller Joseph Otting flagged this bulletin for Menendez when asked what fair lending-related guidance has been sent out about PPP participation. FDIC Chairwoman Jelena McWilliams said her agency has also issued a letter to banks "that stipulates how these programs are done."

"To the extent that we need to do anything more, we're open to considering what else needs to be done, but the fair lending laws [apply] whether or not we issued specific guidance in connection with PPP," McWilliams said. "Banks know they have to abide by them; otherwise, we will enforce the law as it stands."

NCUA Chairman Rodney Hood added his agency takes "that same posture," but Menendez responded to the regulators that "encouraging is not the same thing as giving exact guidance on how fair lending applies to PPP loans."

"You all have a duty to ensure that minority small-business owners and underserved communities have access to the PPP," the senator said.

The PPP is one of several emergency lending efforts to grow out of the Coronavirus Aid, Relief, and Economic Security Act, which also paved the way for the Federal Reserve's Main Street Lending Program aimed at providing financing support for struggling mid-sized companies and the Municipal Liquidity Facility for cash-pinched state and local governments.

The highly anticipated programs were announced more than a month ago but aren't yet up and running, a point that committee members from both sides of the aisle raised Tuesday with the Fed's Vice Chair for Supervision Randal Quarles.

"I'm very interested and frankly concerned about how quickly we can get the Main Street facility and the municipal facilities active and operating," committee Chairman Mike Crapo, R-Idaho, said.

Quarles assured the senators that standing up the programs is the Fed's "top priority" right now and is expected to move "quite, quite quickly," on the order of weeks rather than months, but Sen. Mark Warner, D-Va., pushed for an even faster timeline.

"I would hope it would not be weeks," Warner said, cautioning that much more delay wouldn't be consistent with what Congress intended in crafting the CARES Act.

Both Fed programs have been expanded since they were initially announced in early April, but senators argued Tuesday that there are still gaps in the programs that may need to be addressed. Crapo, for example, took issue with the minimum population sizes needed for counties and cities to take advantage of the MLF.

The program will purchase securities issued by counties with at least 500,000 residents or cities with at least 250,000 residents, thresholds that Crapo said no county or city in Idaho would clear. Although states can borrow through the program and channel some of that funding to their smaller localities, there are worries "about whether that will work well, or whether the states will actually do that job well," Crapo said.

Quarles explained the thresholds were picked in an attempt to help the Fed deploy the program as effectively and quickly as possible, saying the idea was to deal directly with larger jurisdictions at the top and then let them "allocate down to smaller jurisdictions underneath them."

But he added that the Fed is "continuing to look at ways to improve the administration of the facility in ways that do balance that requirement for speed."

In a similar vein, Sen. Thom Tillis, R-N.C., worried that some businesses are too big to qualify for the PPP, which is generally limited to entities with 500 or fewer employees, yet are nevertheless not cut out financially for the MSLP, which has a minimum loan size of $500,000.

"The thing that I'm hearing increasingly is we've got a bit of a doughnut hole in the CARES Act," Tillis said. "I think that's an area that we need to work on, particularly if we can get bipartisan, bicameral consensus."

Sen. Jack Reed, D-R.I., noted that some hospitals and other larger nonprofit organizations might also not qualify for the PPP but may still need a financial lifeline.

Quarles told the senator that the Fed is working with the U.S. Department of the Treasury on eligibility criteria that might allow these organizations to access emergency funding through the Fed's facilities, saying the metrics developed for lending to for-profit companies through the MSLP don't necessarily translate to nonprofits.

"You're absolutely right that nonprofits play a significant role in the economy generally, and particularly at this time," Quarles said. "They're also special breeds of cat."

--Editing by Breda Lund.

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