Is the Small Business Lending Fund Right For My Bank?
On December 21, 2010, the U.S. Treasury (“Treasury”) released the application form and instructions, preferred stock terms and other guidance on the $30 billion Small Business Lending Fund (“SBLF”). The goal of the SBLF is to stimulate small business lending by qualified community banks with assets of less than $10 billion. The SBLF was created, in part, to provide community banks access to Tier 1 capital that many have been unable to tap in recent years. Dividend rates for SBLF participants can be as low as 1%.
Most of you have already been overloaded with information on eligibility requirements, dividend rates and application procedures, so we are not regurgitating those to you here. The Treasury’s program website (available by clicking here) contains most of the specific business points you need; we have also embedded links to some of the core documents below. While the SBLF’s goals are admirable and the prospect of cheap capital is undeniably attractive, it is our view that banks should go beyond the terms and strategically consider whether participation is right for them. Having waded through many of the available details so you don’t have to, below are some issues your bank might consider before diving headfirst into SBLF.
Is the SBLF Right for My Bank?
- Small business lending exclusion of participations and guarantees. The Treasury’s interpretation of what constitutes small business lending is critical to your ability to obtain low dividend rates. Under SBLF, “qualified small business lending” includes loans of less than $10 million to borrowers with less than $50 million in revenues who fall in one of the following four categories: (1) commercial and industrial loans, (2) loans secured by owner-occupied nonfarm, nonresidential real estate, (3) loans to finance agricultural production and other loans to farmers and (4) loans secured by farmland. However, if any portion of the loan is guaranteed by the U.S. Government or if a third party has assumed an economic interest in any part of the loan, that portion is subtracted from the calculation of your bank’s small business lending and will not factor into your ability to obtain a reduced dividend rate. Keep this in mind as you compile your small business lending projections and estimate your future cost of capital.
- Dividend rates—they can increase too. One of the more publicized portions of the SBLF is the potential for dividend rates as low as 1%. For most banks, the initial dividend rate will be 5%, followed by 9 quarters of adjustments based upon the extent to which a bank’s small business lending increases—down to as low as 1% for banks that increase small business lending over 10% and to between 2% and 4% for many others. But remember that the dividend rate can increase as well. If a bank has not increased its small business lending after 8 quarters, the rate will increase to 7%. The dividend rate kicks up to 9% for all banks that have not repaid SBLF funds within 4.5 years from the date received (without regard to small business lending levels). In addition, TARP recipients who replace CPP with SBLF funds will be subject to an added 2% quarterly lending incentive fee if the bank’s small business lending has not increased in the 8th quarter after SBLF funding is received.
- What does the reduced Dividend Rate apply to? Less famous is that the potential lower dividend rates will only apply to the amount by which your bank’s small business lending has increased. For example, say a bank initially obtains a 5% dividend rate on $50 million in SBLF funds. The bank thereafter increases qualified lending by $10 million, representing a 5% increase over its small business lending baseline and decreasing its dividend rate from 5% to 3%. The 3% dividend rate, however, only applies to $10 million—the amount by which the bank’s small business lending increased—and the 5% rate continues to apply to the remaining $40 million.
- 90% Downstream Requirement and CPP Participants. Holding company recipients of SBLF funds are required to contribute at least 90% of the funds they receive to insured depository institution subsidiaries that originate the small business loans. At the same time, the Treasury appears to permit CPP participants to use SBLF funds to refinance CPP securities. However, the Treasury has not provided an exception for TARP recipients from the 90% downstream requirement; such recipients are still required to contribute 90% of SBLF funds received to subsidiary bank(s). Our expectation, and likely that of many bankers’, was that the SBLF funds could be used to refinance CPP and that CPP recipients would not be required to look beyond SBLF for funds to repay CPP (one clear rule is that participants in SBLF cannot have both CPP and SBLF securities outstanding). While that may be the Treasury’s intent, it is far from clear in the guidance released thus far. We have inquired with the Treasury on this point and will post on our blog when a definitive answer is provided.
- Dividend Restrictions. SBLF recipients may only make dividend payments or share repurchases if, after such repayment or repurchase, its Tier 1 capital is at least 90% of the amount existing at the time immediately after the closing date. After 2 years, the 90% requirement decreases by an amount equal to 10% of the bank’s SBLF funding for every 1% increase in small business lending over the baseline level. There are additional restrictions for recipients who miss dividend payments on their SBLF shares.
- Look Backs. The amount of your bank’s increase in small business lending is measured by your loans outstanding each quarter versus the average amount outstanding in the four quarters ending June 30, 2010. Thus, institutions that have increased qualified small business lending since then may already qualify for an initial dividend rate of less than 5%. For those institutions who will be required by Treasury to raise “matching” funds, they are allowed to include capital raises consummated after September 27, 2010.
- Is there an untapped market in Small Business Lending? As part of your application process, you will be required to submit a small business lending plan to your primary state and federal regulators. In connection with the SBLF, the FDIC recently issued guidance reminding SBLF participants that qualified small business loans must be made in accordance with safe and sound lending practices. Can you adequately grow your small business lending with creditworthy borrowers over the next two years? Is your primary regulator cautioning you about increasing agricultural lending? If your management does not foresee an opportunity in the small business lending markets, are the dividend rates still attractive? Will you be able to earn your way to a repayment in 4.5 years (when the dividend rate ticks up to 9% for all SBLF participants) or will you be required to hit the capital markets?
Please contact one of our financial services attorneys if you would like to consider in more detail whether the SBLF program is right for you, or if you otherwise have any questions on eligibility requirements, the application process or the terms of the program. Note that Treasury is still developing terms and guidance for mutuals, Subchapter S corporations and community development loan funds.
Relevant Treasury links regarding the SBLF program:
Stinson Files Lawsuit Challenging Missouri Ethics Law
Bill prevents state chartered banks from contributing to Political Action Committees
Stinson Morrison Hecker LLP attorneys Chuck Hatfield and Khris Heisinger filed a lawsuit Dec. 6 on behalf of Legends Bank to block a Missouri bill passed in 2010. The suit claims the law is invalid based on violation of the State’s Constitution (known as Hammerschmidt challenges) as well as violations of free speech and free association.
Missouri Senate Bill 844, which passed on the final day of the 2010 session and became effective in August, prevents state-chartered banks from contributing to political action committees, which they previously were allowed to do. The bill identified which specific entities were allowed to donate to PACs, but it failed to include state chartered banks in the language.
”The law prevents banks from participating in the political process, and it places an unreasonable restriction on speech and freedom of association,” said Hatfield, who serves as chair of Stinson’s Government Solutions Practice and as the managing partner for the firm’s Jefferson City, Mo., office.
The lawsuit also seeks to invalidate the law based on a “Hammerschmidt” challenge. The state constitution prohibits bills from containing multiple subjects and from departing too far from the original purpose of the bill. SB 844 started out in the general assembly as a procurement bill. At its passage, it contained the procurement provision, but also many campaign finance and ethics provisions.
Hatfield anticipates the litigation will eventually end up before the Missouri Supreme Court.
“We believe the Constitution is very clear that legislation cannot be passed in a way that lumps unrelated subjects together in a haphazard fashion. We will be moving this suit as quickly as possible.”
Federal Reserve Release: Expansion of Consumer Protection Regulations
The Federal Reserve Board on December 13th proposed two rules that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.
The proposed rules would amend Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) to implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Effective July 21, 2011, the Dodd-Frank Act requires that the protections of the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA) apply to consumer credit transactions and consumer leases up to $50,000, compared with $25,000 currently. This amount will be adjusted annually to reflect any increase in the Consumer Price Index.
TILA requires creditors to disclose key terms of consumer loans and prohibits creditors from engaging in certain practices with respect to those loans. Currently, consumer loans of more than $25,000 are generally exempt from TILA. However, private education loans and loans secured by real property (such as mortgages) are subject to TILA regardless of the amount of the loan.
The CLA requires lessors to provide consumers with disclosures regarding the cost and other terms of personal property leases. An automobile lease is the most common type of consumer lease covered by the CLA. Currently, a lease is exempt from the CLA if the consumer’s total obligation exceeds $25,000.
A link to the notices that will be published in the Federal Register are below. Comments on the proposals must be submitted by the later of 30 days after publication in the Federal Register or February 1, 2011.
Regulation M notice: http://edocket.access.gpo.gov/2010/pdf/2010-31530.pdf
Regulation Z notice: http://edocket.access.gpo.gov/2010/pdf/2010-31529.pdf
(Press Release of the Federal Reserve)
December 17, 2010 at 10:13 pm stinsonbanking Leave a comment
Interagency Appraisal and Evaluation Guidelines
On December 2, 2010, the federal financial institution regulatory agencies issued joint guidance relating to real estate appraisals and evaluations used to support real estate-related financial transactions (the “Guidance“). The Guidance supplements, and in some cases replaces, previously issued guidance dealing with appraisals and evaluations.
WHY IS THE GUIDANCE IMPORTANT TO YOUR BANK?
All federally regulated financial institutions are required to prepare and maintain appropriate real estate and appraisal evaluation programs. Those programs will be reviewed as part of the examination of the bank’s overall real estate lending activities. Examiners are increasingly citing banks for maintaining unsafe and unsound appraisal and evaluation programs. This newly issued Guidance will assist you in preparing and updating your program so that you may avoid any negative citations in your examination report and to help ensure the overall safety and soundness of your institution’s lending activities.
WHEN IS AN APPRAISAL REQUIRED?
Any real estate related financial transaction requires an appraisal unless it is specifically exempt from the appraisal requirement. Generally, a “real estate related financial transaction” is any transaction involving (i) the use of real property or interests in real property as security for a loan, (ii) the refinancing of real property, or (iii) the sale, lease, purchase, investment in or exchange of real property, or financing thereof. Here is a non-exclusive list of common exemptions from the appraisal requirement and a brief discussion of when those exemptions apply:
1. Appraisal Threshold. Transactions with a value equal to or less than $250,000.00 are exempt from the appraisal requirement. If a particular piece of real property has a value less than that amount, an appraisal is not needed. However, an evaluation consistent with safe and sound banking practices is required.
2. Abundance of Caution. With respect to business loans, this exemption applies when the loan is “well supported by the borrower’s cash flow or collateral other than real property.” The abundance of caution exemption is not available when the credit analysis shows that the loan would not be adequately secured by sources of repayment other than real estate, “even if the contributory value of the real estate collateral is low relative to the entire collateral pool and other repayment sources.” Banks should document and retain in the credit file the analysis performed to verify that the exemption was properly applied. Finally, if the performance or financial condition of the borrower deteriorates and the lender determines that the real estate will be relied upon as a repayment source, an appraisal should be obtained unless another exemption applies.
3. Real Estate Secured Business Loans. This exemption applies to business loans with a transaction value of $1 million or less when the primary source of repayment of the loan is operating cash flow from the business rather than rental income or the sale of real estate. The Guidance warns that “[t]his exemption will not apply to transactions in which the lender has taken a security interest in real estate, but the primary source of repayment is provided by cash flow or sale of real estate in which the lender has no security interest.”
4. Renewals, Refinancings and Other Subsequent Transactions. Renewals, refinancings, and other subsequent transactions, including loan workouts and restructurings, may be supported by evaluations rather than appraisals when either (i) there has been no obvious and material change in the property or market conditions that threatens the adequacy of the institution’s collateral protection, even with the advancement of new money, or (ii) no new money (i.e. increase in principal amount of the loan) is advanced other than funds to cover reasonable closing costs. “If a loan workout involves acceptance of new real estate collateral that facilitates the orderly collection of the credit, or reduces the institution’s risk of loss, an appraisal or evaluation of the existing and new collateral may be prudent, even if it is obtained after the workout occurs and the institution perfects its security interest.”
WHEN IS AN EVALUATION REQUIRED?
In short, evaluations are required in connection with transactions that are exempt from the appraisal requirement under one of the exemptions listed in items 1, 3 and 4 above. Although the appraisal regulations allow an institution to use an evaluation in some circumstances, the Guidance encourages institutions to establish policies and procedures for determining when to obtain an appraisal for those transactions. For example, appraisals should be considered as the bank’s portfolio risk increases or for higher risk real estate loans.
IS MY EXISTING APPRAISAL STILL VALID?
Institutions should establish criteria for determining whether an existing appraisal or evaluation “continues to reflect the market value of the property.” The facts and analysis used to determine whether an appraisal or evaluation remains valid should be documented in the credit file. Relevant factors include:
- passage of time
- volatility of local market
- changes in terms and availability of financing
- improvement of property
- changes in zoning
The Guidance covers a number of other important topics that are not discussed in this summary. Those topics include:
- the need for independence in the appraisal and evaluation functions of your bank
- selection of appraisers
- minimum appraisal standards
- how to choose the appropriate type of appraisal report
- evaluation content
- reviewing appraisals and evaluations for compliance with regulations and guidance
You should familiarize yourself with each of the topics discussed in the Guidance in order to maintain a safe and sound appraisal and evaluation policy.
A full copy of the Guidance may be found here.
FDIC Implementation Actions Re: Dodd-Frank Act
The FDIC took two actions recently related to the implementation of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that will affect all insured depository institutions. The first action was adoption of a final rule amending the FDIC’s deposit insurance regulations to implement section 343 of the Dodd-Frank Act, which provides for unlimited insurance for “noninterest-bearing transaction accounts” for two years starting December 31, 2010. A summary of the final rule is set out below and the text of the final rule is available at http://www.fdic.gov/news/board/Nov9no4.pdf.
The second action was approval of a proposed rule which would implement a provision in the Dodd-Frank Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. A summary of the proposed rule is set out below and the text of the proposed rule is available at http://www.fdic.gov/news/board/Nov9no6.pdf.
We will continue to monitor Dodd-Frank Act implementations by the federal banking regulators and bring you updates as new and amended regulations are proposed and finalized.
What This Means For Your Bank
- The provision of the Dodd-Frank Act providing unlimited insurance on certain accounts begins soon. Ensure your Bank has complied with the disclosure and notice requirements now.
- Be prepared for a significant change in the assessment base which will affect how your assessments are calculated.
Noninterest-Bearing Transaction Accounts Final Rule
The final rule revises the FDIC’s deposit insurance regulations to include noninterest-bearing transaction accounts as a new temporary deposit insurance account category. All funds held in such accounts are fully insured, without limit, and this coverage is separate from, and in addition to, the coverage provided to depositors for other accounts at an insured depository institution.
Noninterest-bearing accounts, as defined in the Dodd-Frank Act, include only traditional, noninterest-bearing demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held by a business, individual or other type of depositor.
The new temporary provision for unlimited coverage of deposit insurance for noninterest-bearing transaction accounts is similar to the FDIC’s Transaction Account Guarantee Program (TAGP) but differs significantly in the definition of “noninterest-bearing transaction account.” The TAGP, which expires December 31, 2010, includes low-interest NOW (negotiable order of withdrawal) accounts and Interest on Lawyer Trust Accounts (IOLTAs). The final rule expressly states that NOW and IOLTA accounts are not covered under the Dodd-Frank Act definition of noninterest-bearing transaction accounts and do not qualify for temporary unlimited coverage. It should also be noted that, unlike under TAGP, section 343 of the Dodd-Frank Act does not allow insured depository institutions to opt out of this statutory provision.
The final rule includes disclosure and notice requirements as part of the implementation of section 343. As explained in detail in the final rule: (1) insured depository institutions must post a prescribed notice in their main office, each branch, and if applicable, on their website; (2) no later than December 31, 2010 insured depository institutions currently participating in the TAGP must notify by mail NOW account depositors (that are currently protected under the TAGP because of interest rate restrictions on those accounts) and IOLTA depositors that, beginning January 1, 2011, those accounts no longer will be eligible for unlimited protection; and (3) insured depository institutions must notify customers individually of any action they take to affect the deposit insurance coverage of funds held in noninterest-bearing transaction accounts.
Deposit Assessment Proposed Rule
The proposed amendments to the FDIC’s Assessments regulations (12 CFR 327) are to:
(1) implement revisions to the Federal Deposit Insurance Act made by the Dodd-Frank Act regarding the definition of an institution’s deposit insurance assessment base by changing the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity;
(2) alter the unsecured debt adjustment in light of the changes to the assessment base;
(3) add an adjustment for long-term debt held by an insured depository institution where the debt is issued by another insured depository institution;
(4) eliminate the secured liability adjustment;
(5) change the brokered deposit adjustment to conform to the change in the assessment base and change the way the adjustment will apply to large institutions; and
(6) revise deposit insurance assessment rate schedules, including base assessment rates, in light of the changes to the assessment base, as the new base would be much larger than the current base.
Except as otherwise provided, the proposed rate schedule and other revisions to the assessment rules would take effect for the quarter beginning April 1, 2011, and would be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011. The proposal will have a 45-day comment period upon publication in the Federal Register.
Changes to Risk-Based Pricing Rules – Compliance Deadline Looming
(Original E-Alert dated November 12, 2010)
On January 1, 2011, the new risk-based pricing rules amending Regulation V issued by the Federal Reserve Board (Fed) and the Federal Trade Commission (FTC) on December 22, 2009, will become effective (Final Rules). The Final Rules are available by clicking here.
The Final Rules require any person (lender) who uses a consumer report in connection with the extension of credit to a consumer primarily for personal, family or household purposes and, based on that report, extends credit to the consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that lender, to provide a risk-based pricing notice to that consumer. The Final Rules apply to both extensions of new credit and reviews of existing accounts.
To assist lenders in determining which consumers must receive a risk-based pricing notice, the Final Rules provide two alternative methods: the “credit score proxy method” and the “tiered pricing method.” The Final Rules also have a special test for credit card issuers with multiple-rate offers.
The Final Rules specify the content of the risk-based pricing notice and include several model forms that can be used as a safe harbor. Generally, the notice must be given after the terms of credit have been determined, but prior to the consumer becoming contractually obligated; however, the Final Rules specify specific timing depending on the type of credit extended by the lender. The duty to provide the notice is imposed on the original lender, even where the credit is extended as part of a three-party financing arrangement. The Final Rules contain a special provision for indirect automobile lending, providing that the lender can either provide the notice itself within the required time period or arrange to have the automobile dealer provide the notice on its behalf if the lender maintains policies and procedures to verify the automobile dealer provides the notice within the required time period.
The Final Rules also contain numerous exceptions to the requirement to provide a risk-based pricing notice, including:
- Consumer applies for and receives specific material terms
- Consumer is provided an adverse action notice
- Lender obtains a consumer report that is a prescreened list and uses that consumer report to make a firm offer of credit to consumers
- Extension of credit will be secured by 1-4 units of residential real property and the consumer is provided a notice consisting of the consumer’s credit score and certain additional information
- Consumer is provided a credit score disclosure with certain additional information that provides context for the credit score disclosure
- Credit score is not available from the agency where the lender regularly obtains a credit score and the lender does not obtain a credit score from another consumer reporting agency and provides the consumer a notice containing specified information
FDIC, Federal Reserve Board, OCC, and OTS Announce Revisions to the Community Reinvestment Act Regulations
(Original E-Alert Dated October 19, 2010)
On October 4, 2010, the FDIC, the Federal Reserve Board, the OCC and the OTS (the Agencies) issued a joint final rule (the Rule), which revises the rules implementing the Community Reinvestment Act. The Rule implements certain statutory changes, and provides that the Agencies (i) will consider low-cost education loans to low-income borrowers and (ii) may consider capital investment, loan participation, and other ventures undertaken by financial institutions in connection with minority-owned or women-owned financial institutions or low-income credit unions as positive factors when determining a financial institution’s CRA rating. Specifically, the Rule:
- provides a definition of “low-income borrower” consistent with current CRA definitions (50% of area median income), including borrowers’ and co-borrowers’ income;
- defines “low-cost” based on the rates and fees charged under U.S. Department of Education lending programs;
- includes loans for higher education by accredited institutions listed by the U.S. Department of Education and loans covered by Truth in Lending protections;
- enables consideration of loans outside assessment areas if the needs are adequately addressed inside assessment areas;
- does not require any institution to make low-cost loans to low-income students or change how consumer loans are otherwise considered during CRA evaluations;
- incorporates the statutory language in Section 804(b) that the Agencies may consider as a factor capital investment, loan participation, and other ventures undertaken by the institution in cooperation with minority-owned and women-owned financial institutions and low-income credit unions in assessing the CRA rating of non-minority-owned and non-women-owned institutions; and
- clarifies that activities described in the previous bullet-point are not limited to the institution’s CRA assessment area, but such activities outside the assessment area will not compensate for poor lending performance within the assessment area.
The Rule will become effective November 3, 2010. A copy of the complete text of the Rule can be found here.
FDIC v. Colonial BancGroup
(Original E-Alert Dated October 4, 2010)
A September 1, 2010, United States Bankruptcy Court ruling could influence the FDIC’s attempt to collect billions of dollars on alleged capital maintenance commitments on behalf of various failed bank receiverships.
In a case before the United States Bankruptcy Court for the Middle District of Alabama titled “In re Colonial BancGroup, Inc.,” the court examined the failure of Colonial Bank and the subsequent bankruptcy filing of its holding company, Colonial BancGroup, Inc. In the case, the FDIC claimed that Colonial BancGroup agreed to shore up the capital of its subsidiary under three separate agreements between the Bank and the FDIC. The FDIC claimed there was a reserve deficiency of approximately $1 billion. The FDIC supported its claim by citing to portions of one of these agreements, which provided in relevant part, that Colonial BancGroup would make a “good faith” effort to take “corrective action” and to offer assistance to improve Colonial Bank’s declining status with the FDIC. In its request for relief, the FDIC asked the court to either require the Debtor to immediately pay a $1 billion deficiency in capital that the Bank was required to fund at the time of its failure or, in the alternative, convert the case to a Chapter 7 case under the Bankruptcy Code. Converting the case to a Chapter 7 would have required the liquidation of Colonial BancGroup’s assets.
The United States Bankruptcy Court disagreed with the FDIC’s interpretation of the statements in the agreements it had entered into with Colonial BancGroup. The court held that the agreements thereby required Colonial BancGroup to provide assistance to its flagging bank and did not represent Colonial BancGroup’s assumption of Colonial Bank’s liabilities. Moreover, the court held that a memorandum of understanding entered into between Colonial BancGroup, the Federal Reserve and state banking authorities, “as an informal supervisory action is not enforceable, and violation of the same cannot serve as a basis for assessing civil monetary penalty.” The court did take some care in distinguishing this case from others involving the FDIC in which firm commitments were made.
What this Means to You
Agreements between banks, holding companies, and either the FDIC, Federal Reserve Banks and state banking regulators will be under increased scrutiny for potential infirmities. Existing claims involving FDIC attempts to collect capital maintenance commitments may be affected. Moreover, future agreements between bank holding companies and federal authorities will need to be drafted with an eye towards this important case.
President Obama Signs Mini-TARP Legislation Into Law
(Original E-Alert Dated September 27, 2010)
President Obama signed the Small Business Jobs and Credit Act of 2010 (Act) into law on September 27, 2010. Among other goals, the Act aims to ease credit for small businesses by creating financial institution access to a Small Business Lending Fund (Fund) to incent lending to small businesses. Republicans have equated the Fund to a smaller version of the Troubled Assets Relief Program (TARP) at the center of the 2008 federal bank bailout.
The Act will allow banks and other eligible depository institutions with assets under certain thresholds to apply for and receive inexpensive capital investments from the $30 billion Fund, the oversight of which is tasked to the Treasury Department. Eligible financial institutions with assets of $1 billion or less could apply to borrow up to 5 percent of their risk-weighted assets from the Fund. For eligible financial institutions with assets between $1 billion and $10 billion, up to 3 percent of their risk-weighted assets would be available to borrow from the Fund.
For institutions other than a community development financial institution, the Treasury Department will use assets reported in the fourth-quarter call reports in calendar year 2009 to determine the institution’s eligibility. For community development financial institutions, the Treasury Department will look to the institution’s audited financial statements for calendar year 2009 as the indicator of eligibility. Institutions that are currently on or have been on the FDIC’s problem bank list within the past 90 days are not eligible to apply for capital investments from the Fund.
Capital investments received from the Fund must be used in small business lending. Excluded from the definition of small business lending are loans with an original amount of more than $10 million, or loans that are given to a business with more than $50 million in revenues. Recipient institutions will be required to issue a quarterly report detailing new loans to small businesses. In addition to other requirements in the Act, institutions receiving investments from the Fund will be required to provide a small business lending plan and a plan to provide “linguistically and culturally appropriate outreach” in their service area. Institutions are required to target minorities, women and veterans with such outreach efforts.
Capital investments from the Fund must be repaid within 10 years. Recipient institutions will issue preferred stock or other financial instruments to the Treasury Department in exchange for loans from the Fund. Dividends or financial instruments are required to pay an interest rate of 5 percent. That dividend or interest rate can be reduced by 1 percent (to a dividend/interest rate low of 1 percent) for each 2.5 percent increase in small business lending conducted by the institution. Changes in the amount of the institution’s small business lending will be measured against the average amount of small business lending reported in the four call reports of the institution immediately prior to September 27, 2010, with adjustments as permitted by the Act.
Additionally, the Act also permits eligible institutions that accepted monies under TARP to refinance securities issued to the Treasury Department under TARP and convert to the Small Business Lending Fund Program. The Treasury Department is directed to issue regulations governing TARP securities refinance.
Senate Approves “Mini-TARP” Legislation for Small Financial Institutions
(Original E-Alert Dated September 22, 2010)
On September 16, 2010, the Senate passed legislation which aims to ease credit for small businesses. The proposed Small Business Jobs and Credit Act of 2010 (Act), H.R. 5297, has been hailed as a “mini-TARP” by Republicans, drawing comparisons to the Troubled Assets Relief Program (TARP) at the center of the 2008 federal bank bailout.
As passed by the Senate, H.R. 5297 permits insured depository institutions, insured credit unions, and community development financial institutions with assets under certain thresholds to apply for a capital investment from a newly-created Small Business Fund (Fund). Eligible financial institutions with assets of $1 billion or less could apply to borrow up to five percent (5%) of their risk-weighted assets from the Fund. For eligible financial institutions with assets between $1 billion and $10 billion, up to three percent (3%) of their risk-weighted assets would be available to borrow from the Fund. Financial Institutions that are on the FDIC’s problem bank list, or have been on that list within the past ninety days, are ineligible to apply for capital investments from the Fund.
Any monies received by institutions from the Fund must be used in small business lending, although the proposed Act passed by the Senate permits a financial institution to include nonfarm, nonresidential real estate loans of under $10 million per loan in the aggregate amount of the institution’s small business lending. Recipient institutions will be required to issue a quarterly report detailing new loans to small businesses. In addition to other requirements in the proposed Act, applicant institutions will be required to provide a small business lending plan and a plan to provide “linguistically and culturally appropriate outreach” in their service area.
In exchange for loans from the Fund, recipient institutions will pay a five percent (5%) dividend to the Treasury Department. That dividend can be reduced by one percent (1%) (to a dividend low of 1%) for each two and a half percent (2.5%) increase in small business lending conducted by the institution. The proposed Act also permits community banks that accepted monies under TARP to convert to the Small Business Lending Fund Program.
While the Senate version of H.R. 5297 is similar to that passed by the House in June, changes made by the Senate in the proposed Act will require either House approval of the Senate Bill or reconciliation of the two bills by a conference committee.
