Senate Approves “Mini-TARP” Legislation for Small Financial Institutions

November 30, 2010 at 4:27 pm Leave a comment

(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.

Entry filed under: Client Alerts.

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