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Senate Adopts Small Business Lending Fund

On September 16, 2010, the Senate adopted H.R. 5297, the Small Business Jobs Act of 2010, which includes the creation of the $30 billion Small Business Lending Fund.  The House passed the Senate’s version of the bill in full on September 23, 2010, thereby sending it to President Obama for his signature.  This legislation would (finally) implement the program described in President Obama’s State of the Union address (and first announced almost one year ago) from the beginning of the year to provide additional funds to community banks to lend to small businesses.

The version of the legislation is generally comparable to the version the Senate began considering in July but contains many differences from the version previously adopted by the House in June.  Most significantly, the Senate-adopted bill does not permit eligible institutions to amortize losses and write-downs on certain OREO and NPAs secured by real estate.  For convenience, we have posted the text of the Small Business Lending Fund provisions contained in the Senate-passed bill.


Under the terms of the Senate-adopted bill, eligible depository institutions with $10 billion or less in consolidated assets (as of December 31, 2009) may apply to receive a capital infusion of up to between 3% and 5% of the institution’s risk-weighted assets, less any existing TARP CPP or CDCI funds.  Institutions with $1 billion or less in consolidated assets are eligible for up to a 5% investment, while those institutions between $1 and $10 billion are only eligible for 3%.  (Under TARP, only institutions with $500 million or less in consolidated assets were eligible for capital up to 5% of risk-weighted assets, so this potentially represents an increase in available funding for institutions between $500 million and $1 billion.)

Institutions on the FDIC’s problem bank list are explicitly excluded from eligibility under the Small Business Lending Fund.  The bill defines the problem bank list as the list of depository institutions having a current CAMELS composite rating of 4 or 5, or such other list designated by the FDIC.  The bill explicitly emphasizes that merely because a bank has a CAMELS rating of 3 or better does not limit the discretion of the Treasury Department to deny an application for funds.

Matching with Private Funds.

The Small Business Lending Fund explicitly authorizes the Treasury and federal regulators to consider making an investment conditioned on private matching investments.  This authorization is not available for institutions that are specifically ineligible (i.e., those on the troubled bank list) but rather is only available to otherwise eligible institutions that the regulators or Treasury determine not to recommend to receive capital infusions.

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Regulators Issue Statement on Lending to Creditworthy Small Businesses

On February 5, 2010, the federal banking regulators and the Conference of State Bank Supervisors issued an Interagency Statement on the Credit Needs of Creditworthy Small Business Borrowers.  The Statement builds upon principles set forth in the October 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts.  After noting the overall decline in loans to small businesses and the reasons for that decline the regulators suggested that lenders may have become overly cautious with respect to small business lending.  They encourage lenders to engage in prudent small business lending and that that examiners will not criticize lenders for working in prudent and constructive manner with small businesses.

The decline in small business lending has many reasons, not the least of which is that loan demand is actually down.  Lenders are also naturally cautious of lending to those businesses that are reliant solely on cash flow that has slowed due to the slowdown in consumer spending and the decline ion the personal wealth of the owners of the businesses.  Despite the assertions to the contrary by the regulators, lenders are concerned that there is a disconnect between statements from Washington, DC and what actually happens in the field when examiners are onsite at financial institutions.  Our experience seems to show that local federal regulators do not see any upside in being flexible when faced with making decisions about how to rate credits.  Lenders are therefore naturally reluctant to maker decisions based on guidance until they see it actually implemented on the ground.

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President Obama Proposes $30 Billion Small Business Lending Fund

Carrying through with his announcement in the State of the Union, on February 2, 2010, President Obama provided the outlines of a proposed $30 billion Small Business Lending Fund to provide capital to community banks, with incentives to increase small business lending.  As proposed, the program will require Congressional approval to move the funds outside of TARP, which should remove the applicability of the executive compensation and governance restrictions and is also hoped to remove the stigma associated with TARP funds.

Based on the initial fact sheet, the terms appear generally comparable to the financial terms under the Capital Purchase Program, with reductions in the dividend rate for the first five years triggered by increases in small business lending.  Every 2.5% increase in small business lending through December 31, 2011 over 2009 levels would trigger a 1% decrease in dividend rate, down to a minimum rate of 1%.

Banks with less than $1 billion in assets would be eligible to receive a capital investment of up to 5% of their risk-weighted assets.  Banks with between $1 and $10 billion in assets would be eligible to receive a capital investment of up to 3% of their risk-weighted assets.  Participation in the program will require approval by the bank’s primary federal regulator, although no details are available as to the standards that will be employed.

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TARP Extension – Capital for Community Banks?

On December 9, 2009, Treasury Secretary Geithner exercised his discretion to extend the TARP program through October 3, 2010.  In his letter to Congress certifying the extension, Geithner indicated that the Treasury Department would limit new commitments in 2010 to three areas:

  • mitigating foreclosure;
  • “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses”  (including additional efforts to facilitate small business lending); and
  • increasing Treasury’s commitment to the Term Asset-Backed Securities Loan Facility (TALF).

The “recently launched initiatives to provide capital to small and community banks, which are important sources of credit for small businesses” presumably refers to the new capital program for community banks previously announced by President Obama on October 21, 2009. President Obama had indicated that the Treasury would be developing a program to provide TARP capital to community banks with less than $1 billion in total assets who committed to increase small business lending.  The capital investment, as proposed, would be limited to 2% of risk-weighted assets and would carry a 3% dividend rate for the first five years.  No indications were provided that the Treasury’s viability standard would be modified to permit additional banks to participate.

Secretary Geithner’s reference to this program is the first follow-up we’ve heard since Obama’s announcement.  As recently as last week, local FDIC officials were telling us that the program appeared to be “dead on arrival” in DC, and there appeared to be little support in Washington for further developments.  We understand the FDIC was advising interested banks to not anticipate any further action, and to seek capital elsewhere.

It remains to be seen whether Secretary Geithner’s letter to Congress represents a renewed interest in this program, merely a political statement indicating a focus on small business lending, or a simple preservation of flexibility going forward.

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President Obama Announces Additional TARP Capital for Community Banks

On October 21, 2009, President Obama announced the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business.

Actual facts about the new program are currently very sparse.  A review of the currently available information does provide some details that may be attractive to community banks that current have TARP CPP funds, as well as those that currently do not have funds.  However, it does not appear that there will be any change in the Treasury’s determination of which community banks are eligible for TARP funds; participating institutions appear to still need to be viable without the funds.

There are three basic sources of official information:

  1. the text of President Obama’s speech in Landover, Maryland;
  2. the press release announcing the speech; and
  3. a fact sheet on the President’s Small Business Lending Initiatives.

Known Facts

  • The funds will be available to “viable banks with less than $1 billion in assets.”  The announcement does not give any indication that the Treasury will alter its existing viability standards.
  • Participants will be required to submit a small business lending plan explaining how the additional capital will allow them to increase lending to small businesses, and will be required to submit quarterly reports detailing their small business lending activities.
  • The initial dividend rate will be 3% rather than the 5% required under the current TARP Capital Purchase Program.  The dividend will rise to 9% after five years, consistent with the existing TARP Capital Purchase Program.  Presumably, Subchapter S institutions will receive a comparable reduction in the rate paid on the subordinated debt.
  • The amount of capital is limited to 2% or the institution’s risk-weighted assets.  This is less than the 3% permitted under the existing TARP Capital Purchase Program, and less than the 5% currently permitted for institutions that are less than $500 million in total assets.
  • The Treasury is working to finalize program terms “in the coming weeks.”
  • The Treasury will also determine how to handle existing Capital Purchase Program participants to allow them to replace existing capital with investments under the new program (effectively reducing their dividend costs in exchange for a commitment to increase small business lending).
  • Community Development Financial Institutions (CDFIs), including CDFI credit unions, will be able to apply for funds with a dividend rate of 2% for eight years, after which it will increase to 9%.
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Commentary: NYTimes Recognizes Community Banks

The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?”  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

The focus of the mainstreet press, and the Treasury Department, continues to be on the largest institutions, whether it be the initial nine TARP Capital recipients, or the nineteen that underwent the stress test.  There is some rationality for this focus, the majority of assets, deposits and loans are held by these institutions.  But just like small businesses generally, community banks play a critical role in the American economy.

Community banks may have weathered the current crisis better than larger banks, but they remain an American oddity. Most other countries have 5 or 10 na­tional banks, and when they get in trouble, as they did in Iceland, it can be devastating. The balance in this country is tipped toward big institutions (the four largest control half the assets held by American banks and 40 percent of all deposits), but community banks still make 43 percent of all small business loans under $1 million. Since January 2008, fewer than 1 percent of all community banks have failed.

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Stimulus for Small Businesses — Unlocking the Credit Market

On March 16, 2009, the Treasury announced the terms of new program, Unlocking Credit for Small Businesses, aimed at helping jump start credit markets for small business loans.  The program includes the following significant provisions:

  1. The Treasury will purchase up to $15 billion in securities backed by Small Business Administration (SBA) loans;
  2. The SBA may guarantee up to 90% of Section 7(a) loans, which are loans to support the business operations of small businesses;
  3. The SBA will temporarily eliminate loan fees for certain Section 7(a) loans and 504 Program loans, which provide long-term financing to directly support economic development within a community;
  4. The largest Financial Stability Plan Assistance recipients must weekly report their SBA lending activities, and all financial institutions may have to monthly report their SBA lending activities; and
  5. The Treasury will issue guidance for the tax-related provisions, aimed at providing liquidity to small businesses and encouraging investments in small businesses.

Together, these provisions are aimed at increasing small business lending, which is extremely important in these flagging economic times because small businesses have generated approximately 70% of net new jobs annually over the past decade.  These provisions should also provide a liquidity boost for community banks, credit unions, and small lenders, who together account for approximately 40% of all SBA-backed loans, by allowing these institutions to sell existing SBA loans and then to extend more credit to other borrowers.

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