By Jon Hill

Law360 (April 8, 2020, 12:06 PM EDT ) The Federal Reserve Board said Wednesday it will temporarily relax its $2 trillion asset size cap on Wells Fargo so the banking giant can lend more to small businesses during the coronavirus pandemic.

In a statement, the Fed said it would allow Wells Fargo to make loans to small businesses under the Paycheck Protection Program and a forthcoming "Main Street" loan program without those loans counting against the bank's size cap, which was imposed in 2018 over what the Fed called the bank's "widespread consumer abuses and other compliance breakdowns."

The Fed said the modification to the sanction will last as long as the two small business lending programs are active. Any fees or other benefits that Wells Fargo gets off these loans will have to be turned over to either the U.S. Treasury or nonprofits supporting small businesses, according to the Fed.

"The Board continues to hold [Wells Fargo] accountable for successfully addressing the widespread breakdowns that resulted in harm to consumers identified as part of that action and for completing the requirements of the agreement," the Fed said, referring to the terms of the enforcement action that levied the size restriction on the bank.

Wells Fargo is supposed to remain subject to the cap until it strengthens its internal controls and compliance programs to the Fed's satisfaction, but with the economy reeling from the effects of the COVID-19 crisis, there has been growing pressure on the Fed to loosen the restraints.

On Tuesday, for example, Rep. Adam Schiff, D-Calif., and two other Democrats from Wells Fargo's home state called on the Fed to give the bank some room under the size cap to increase its participation in the Paycheck Protection Program, which seeks to channel up to $349 billion in low-interest, forgivable loans to small businesses struggling to cover payroll and other expenses during the pandemic.

"We fully recognize and support the need for strong regulations on large lenders to ensure the stability of the financial system," the lawmakers said in a letter to the Fed. "However, under the present circumstances ... we believe that we must consider additional flexibility to ensure the rapid and efficient flow of relief funds to those who need it, regardless of their commercial bankers."

Some of Wells Fargo's toughest critics have even supported giving the bank a break. Last week, Dennis Kelleher, president and CEO of watchdog group Better Markets, turned heads by coming out in favor of such a move after a report that Wells Fargo had privately asked the Fed for provisional relief from the cap in light of the pandemic.

"The Federal Reserve should consider temporarily suspending the asset cap for the limited purpose of enabling Wells Fargo to help businesses and customers suffering from the coronavirus crisis," Kelleher said in a March 31 statement. "As one of the nation's largest lenders to small businesses, Wells Fargo could and should be a leader in providing expertise and capacity for the rapid implementation of the Paycheck Protection Program."

Kelleher also suggested Wells Fargo could use the opportunity to show whether it "has indeed addressed at least some of the prior deficiencies" that led to the cap in the first place.

But Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee, said Wednesday the Fed's decision to ease up on the cap was "troubling."

"Wells Fargo has demonstrated it is too large to manage, and time and time again that it can't be trusted to do right by their customers and employees," Brown said in a statement. "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."

Wells Fargo responded to the Fed's announcement Wednesday by saying it would immediately broaden its PPP lending to serve a wider range of its small business clients. Previously, the bank had said it was planning to make just $10 billion in PPP loans in light of the cap and would focus that on entities with fewer than 50 employees.

"Wells Fargo appreciates the targeted action of the Federal Reserve to support the needs of small businesses through PPP and looks forward to expanding relief to many more small businesses and nonprofits," CEO Charles Scharf said in a statement. "While the asset cap does not specifically restrict Wells Fargo's participation in this program, this action by the Federal Reserve will enable Wells Fargo to provide additional relief for our customers and communities."

Scharf also stressed that the bank knows it hasn't been excused from the self-improvement work it was tasked with when the Fed imposed the cap by consent order more than two years ago.

"The work required under the consent order is clear, has been outstanding for too long, and is a prerequisite for consideration of the asset cap being lifted," Scharf said. "Until our work is completed to the Federal Reserve's satisfaction, we will continue to actively make decisions on how to allocate our balance sheet to support the needs of our customers under the existing asset cap."

--Editing by Marygrace Murphy.

Update: This story has been updated with additional details and comment.

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