U.S. Treasury Launches Small Business Lending Fund
On December 21, 2010, the United States Department of the Treasury (Treasury) released significant guidance and application materials, including the application form and term sheets, for the Small Business Lending Fund (the SBLF) on
Treasury’s SBLF
website. The release does not include the transaction documents that Treasury will use, nor does it include terms and guidance for Subchapter S corporations, mutual institutions or community development loan funds. The SBLF is
separate from the TARP Capital Purchase Program (CPP) and is administered by a distinct office within the Treasury. The SBLF was established by the Small Business Jobs and Credit Act of 2010 (H.R. 5297), which was signed into law
by President Obama on September 27, 2010.
Eligibility. Institutions with less than $10 billion in combined assets are eligible to participate in the SBLF. If an institution is controlled by a holding company, the holding company must apply to participate
in the SBLF and the holding company’s combined assets determine eligibility. Banks that are on the FDIC’s problem bank list, or have been on this list in the previous 90 days, and associated holding companies may not
participate in the SBLF. While this requirement would exclude institutions with composite CAMELS ratings of 4 or 5, the SBLF guidance would apparently allow institutions with composite CAMELS ratings of 3 (in addition to 1 or 2)
to participate. Institutions rated 3 were generally excluded from TARP CPP participation.
Terms. Treasury will make capital investments by purchasing senior preferred stock in participating institutions (including community banks or their holding companies), up to 5 percent of risk-weighted assets
for participating institutions with total assets of $1 billion or less, or up to 3 percent of risk-weighted assets for participating institutions with more than $1 billion and less than $10 billion of total assets. Preferred stock
purchased by Treasury through the SBLF will be treated as Tier 1 capital by bank regulators. The SBLF preferred stock will carry an initial dividend rate of 5 percent, although the dividend rate may decrease to as low as 1 percent
or increase to as high as 7 percent during the first 4.5 years depending on how much the participating institution increases lending to small businesses. After 4.5 years, the dividend rate will increase to 9 percent for all
SBLF participants. In contrast to the CPP, participation in the SBLF does not require any warrants to be issued and does not currently carry executive compensation restrictions.
Application Process. Eligible institutions must (1) submit a completed SBLF application to Treasury and (2) submit a small business lending plan to the institution’s federal and state regulators, as
applicable. The one-page SBLF application solicits general information about the applicant, similar to Treasury’s CPP application. The two-page small business lending plan requires the applicant (a) to describe how participation
in the SBLF will enable the applicant to better address the needs of small businesses in its markets, (b) to project the increase (in dollars) of small business lending following participation in the SBLF, and (c) to describe the
applicant’s approach to community outreach for small business lending. Treasury’s SBLF materials state that any such lending plan will be confidential supervisory information and will only be used in the context of
the SBLF. Applications to participate in the SBLF must be submitted by March 31, 2011.
Retiring TARP CPP Capital. Participants in the TARP CPP may refinance all of their outstanding CPP preferred stock with SBLF preferred stock if the CPP participant is in material compliance with all CPP terms
and conditions and has not missed more than one CPP dividend payment, subject to certain other conditions. However, any warrants issued to Treasury under the CPP will remain outstanding after such a refinancing unless the bank repurchases
the warrants from Treasury.
Lending Guidance for SBLF Participants. Concurrently with the launch of the SBLF, the federal banking agencies released Underwriting Standards for Small Business Loans Originated under the Small Business Lending Fund Program,
which are available
here. This guidance states that the federal banking agencies expect “SBLF participants to extend credit in a safe and sound manner with prudent risk selection and credit risk management processes,” and promotes
prudent credit underwriting practices by focusing on all relevant credit factors.
The foregoing is only a summary of one of the many significant issues affecting financial institutions. If you have any questions about participating in the Small Business Lending Fund 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.