Fed Eases Wells Fargo's Asset Cap to Lend to Small Businesses Harmed by Coronavirus -- 2nd Update

By Ben Eisen and Andrew Ackerman

The Federal Reserve temporarily lifted restrictions on Wells Fargo & Co.'s growth, allowing the troubled bank to make more loans during the coronavirus crisis and giving it a chance to improve its tarnished reputation.

The bank's lending capacity has been limited by a $1.95 trillion cap on assets imposed by the Fed in 2018. The bank will now be able to exceed that overall limit via loans it makes through two of the government's small-business lending programs, the central bank said Wednesday. The cap will remain in place for all other types of lending.

The central bank said it would "temporarily and narrowly modify the growth restriction on Wells Fargo so that it can provide additional support to small businesses."

Exemptions to the limit apply to loans made through the $350 billion Paycheck Protection Program and the Federal Reserve's Main Street Lending Program, which has yet to be rolled out. Any profits must go to the Treasury or a nonprofit focused on small businesses.

The change will amount to a real-time test of whether the nation's No. 4 bank has fixed the compliance failures that led to the cap, which was imposed after the bank was found to have created perhaps millions of fake accounts. In October, the bank brought in Charles Scharf as its chief executive officer, an outsider tasked with helping the bank resolve outstanding regulatory issues.

"The Federal Reserve's action does not -- and should not -- in any way relieve us of our obligations" under the Fed's asset cap, Mr. Scharf said in a statement.

However, the temporary reprieve may help Mr. Scharf to rebuild the bank's reputation among regulators and politicians who have long taken a critical view of the bank, according to Jaret Seiberg, a policy analyst at Cowen.

House Financial Services Committee Chairwoman Maxine Waters (D., Calif.) told Mr. Scharf last month: "The bank you inherited is essentially a lawless organization that has caused widespread harm to millions of consumers throughout the nation."

In recent days, Wells Fargo has been more vocal about the burdens of the asset cap in the current crisis. It said on Sunday that the balance-sheet restrictions forced it to limit lending through the Paycheck Protection Program to $10 billion. It has been prioritizing loans to business customers and nonprofits with fewer than 50 employees.

Kim Gorton, CEO of Slade Gorton & Co., a Boston-based seafood processor and distributor, said she hasn't been able to get a Payment Protection Program loan through Wells Fargo despite repeated attempts that began on Friday. The bank is her primary lender.

A Wells Fargo representative told her Monday morning that her company wouldn't be eligible because the asset cap had limited the bank's ability to handle loans, she said. Slade Gorton employs roughly 85 people, including about 25 who are on furlough. Wells Fargo is a large commercial lender in the $100 billion seafood industry, which is struggling right now as restaurants shut down.

"It's not just my little company getting put in this situation," she said on Monday. "It's thousands of other companies."

Wells Fargo said on Wednesday afternoon that it would widen its criteria to accept applications from those who meet the program requirements and had a business account with the bank on Feb. 15. In the first two days of the program, more than 170,000 potential applicants expressed interest, the bank said.

The bank's shares rose about 4.4% in afternoon trading, topping the S&P 500's 2.9% climb.

Write to Ben Eisen at ben.eisen@wsj.com and Andrew Ackerman at andrew.ackerman@wsj.com

(END) Dow Jones Newswires

April 08, 2020 15:18 ET (19:18 GMT)

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