President Announces Community Bank Program to Increase Credit Flow to Small Businesses

October 21, 2009 at 10:11 pm Leave a comment

The President announced plans today that, if put into action, would lead to the realization of at least some much-needed and long-sought-after assistance for community banks.  A copy of the President’s announcement is available here. (Skip to Page 2 for Details).

According to the President’s proposal, which is part of the White House’s “Financial Stability Plan,” the program would target small business lending, but would also offer a mechanism for banks with less than $1 billion in assets to access capital with an annual dividend rate of 3%.  The announcement is short on specifics, but here are the basics:

(1) Banks will receive capital in an amount equaling up to 2% of risk-weighted assets; 

(2) The annual dividends on the capital will equal 3% for the first five years and 9% thereafter; and 

(3) Banks seeking to participate in the program will submit a “small business lending plan” in which the bank explains how additional capital will help increase its lending to small businesses.  (Banks approved for the program that elect to participate will also be required to follow up with quarterly reports detailing small business activities).

Over the next few weeks, Treasury will work with community banks and the small business community to hammer out the program’s specifics.  Notably, the release contemplates that banks already participating in the capital purchase program will be able to replace existing capital, which carries a 5% dividend (7.7% for S-Corps), with investments under the new program.   

 The President also announced support for legislation that would increase the size of key Small Business Administration (SBA) loans. The aim of the increase would (supposedly) allow the SBA to ensure that more small businesses can get access to credit.

 The first prong of the proposed legislation would increase the Maximum 7(a) loan from $2 million to $5 million, providing greater access to capital that businesses could use to boost working capital as well as purchase machinery equipment and real estate.  

The second prong of the proposed legislation would increase the maximum 504 project loan from $2 million to $5 million for standard borrowers (supporting a total project of $12.5 million) and from $4 million to $5.5 million for manufacturers (supporting a total project of $13.75 million), thereby increasing the qualifying borrowers’ ability to undertake larger projects.

And the third prong of the proposed legislation would increase the maximum loan size of the SBA microloan programs from $35,000 to $50,000.

Entry filed under: Capital Purchase Programs, EESA, Executive Compensation, Financial Institutions, Small Business/SBA/Community Banks, TARP.

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