President Obama Signs Bill Creating $30 Billion Small Business Lending Fund
On September 27, 2010 President Obama signed into law the Small Business Jobs and Credit Act of 2010, which includes the Small Business Lending Fund (SBLF).
Under the SBLF the United States Treasury (the Treasury) will make capital investments by purchasing securities in participating community banks, most likely in the form of senior preferred stock. The SBLF limits investment by the Treasury to 5 percent of risk-weighted assets for participating banks with total assets of $1 billion or less, and to 3 percent of risk-weighted assets for participating banks with more than $1 billion but less than $10 billion of total assets. Community banks with a 4 or 5 CAMELS rating (or have had such a rating in the past 90 days) may not participate in the SBLF. Although the dividend rate of SBLF securities would initially be set at 5 percent, the participating community bank could decrease the dividend rate by increasing its small business lending; as a general example, to decrease the dividend rate to 1%, small business lending must increase by 10% or more. However, four and a half years after issuance, the dividend rate on SBLF securities will increase to 7 percent regardless of the level of small business lending.
The Treasury will review applications to participate in the SBLF and will consult with each applicant’s federal and state regulators, as applicable, before deciding whether to award SBLF funds. The SBLF does not limit the Treasury’s discretion to deny an application for SBLF funds. The SBLF also authorizes the Treasury and federal banking regulators to consider making an SBLF investment in an otherwise eligible community bank conditioned on private matching investments. In circumstances where private matching investment is required, then Treasury may only invest up to 3% of risk-weighted assets of the community bank. When applying to participate in the SBLF a community bank must submit a plan describing how its business strategy allows it to address the needs of small businesses in its market area. This small business lending plan will be considered confidential supervisory information and will not be publicly available. Under the SBLF, “small business lending” is broadly defined to generally include all loans of less than $10 million to small businesses other than acquisition, development and construction loans.
The SBLF instructs the Treasury to issue regulations to permit eligible community banks to refinance preferred stock issued to the Treasury pursuant to the TARP program. Although such participation in the SBLF would not provide additional capital, a community bank refinancing in this manner could reduce the cost of capital issued to the Treasury and possibly eliminate TARP executive compensation restrictions.
The SBLF is not part of TARP and does not currently contain TARP-like executive compensation restrictions; however, the SBLF authorizes the Treasury to issue additional regulations regarding participation in the program in order to “manage risks associated with the administration of the [SBLF].” This provision gives the Treasury authority, if it desires, to implement regulations for SBLF participants similar to those imposed upon TARP participants. The SBLF also instructs the federal banking agencies to issue regulations regarding minimum underwriting standards for loans made by participating community banks.
The foregoing is only a summary of one of the many significant issues affecting financial institutions. If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.