President Obama Signs Mini-TARP Legislation Into Law

November 30, 2010 at 4:32 pm Leave a comment

(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.

Entry filed under: Client Alerts.

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