Proposed Small Business Lending Fund Would Provide $30 Billion in Capital Investment to Community Banks
The United States Senate, upon returning from its August recess, will resume consideration of the Small Business Jobs and Credit Act of 2010 (H.R. 5297), which would create the Small Business Lending Fund (the SBLF). The SBLF would provide $30 billion in capital investment for banks and other depository institutions with less than $10 billion in assets and provide certain incentives for participants to increase small business lending.
Under the SBLF, the United States Treasury (the Treasury) would make capital investments by purchasing securities in participating community banks, most likely in the form of senior preferred stock. As proposed, 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 and less than $10 billion of total assets. The SBLF aims to stimulate small business lending by reducing the dividend rate on SBLF capital investments as a participating community bank increases lending to small businesses. Although the dividend rate would initially be set at 5 percent, the participating community bank could decrease the dividend rate to 1 percent by increasing its small business lending, thus providing the bank with an attractive and relatively inexpensive source of capital.
As proposed, the SBLF also provides an attractive option for many community banks to refinance preferred stock issued to the Treasury pursuant to the TARP program. The primary advantages of such a refinancing would be: (1) by increasing small business lending, the participating community bank could decrease the dividend rate on SBLF securities well below the 5 percent (and 9 percent after five years) TARP dividend rates; and (2) participation in the SBLF is likely to impose fewer restrictions on the participating community bank than TARP participation, including fewer restrictions on executive compensation. However, community banks participating in the SBLF to refinance TARP securities would be required to be current on their dividend payments to the Treasury.
Senate approval appears to be the only remaining obstacle to the SBLF, as the House has already approved H.R. 5297 and the President is a strong advocate who intends to sign the bill into law as a jobs creation initiative. Thereafter, the Treasury would be required to announce eligibility requirements and application processes for community banks to participate in the SBLF. The Financial Institutions Practice Group at Troutman Sanders will continue to monitor all developments regarding the SBLF and will notify its clients and friends of any opportunity to participate in this capital investment program.
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.