On May 26, 2011, almost two weeks after the deadline for C-Corporation financial institutions to apply, the Treasury further restricted eligibility for participation in the Small Business Lending Fund.  The Treasury has determined that only institutions without any dividend restrictions may participate in the SBLF.

In order to be eligible to participate in the SBLF, the Treasury has determined that applicants must be able to pay dividends without being subject to approval by any third party, including the federal banking regulators. This requirement goes beyond the eligibility standards included in the authorizing statute, which provided that banks on the FDIC’s troubled bank list were ineligible.  In light of the Federal Reserve’s propensity to impose dividend restrictions, Treasury’s decision will further limit the potential positive impact of the Small Business Lending Fund.

This decision was communicated to applicants via an “Inquiry Regarding Dividend Payments” and an undated update to the SBLF Frequently Asked Questions website. While the Treasury’s communication makes it sound as though the decision was out of its control, it appears to be Treasury’s determination that the ability to pay dividends should be an eligibility factor, as nothing in the original SBLF documentation provided similar requirements.

As noted by the Treasury, dividends may not be subject to approval by any third party, including a governmental entity.  This requirement includes restrictions imposed as a result of federal or state supervisory enforcement actions (such as a memorandum of understanding, cease and desist order, or board resolution) or federal or state laws or regulations.  This interpretation will also effectively eliminate all de novo institutions from participation in the SBLF.  Treasury has indicated that any such restrictions must be removed or waived before Treasury will continue to process an application.