The Small Business Lending Fund Legislation: A Source of Capital and Commitment

- Posted by L. Allyn Dixon, Jr.

  

This past week, President Obama signed the “Small Business Jobs and Credit Act of 2010” (the “Bill”) in an effort to stimulate lending by community banks.  While several weeks or months may pass before applications to participate or regulatory guidelines are issued, bankers need to be thinking about whether the program the Bill establishes can benefit them and their customers. 

  

The following are key points of the Bill:

  

• To be eligible to participate, a bank cannot be on the troubled bank list or have been on it within 90 days of application.  Apart from that, any bank or bank holding company (collectively, “financial institutions”) with assets of $10 billion or less may apply.
• Financial institutions with less than $1 billion in total assets may apply for an amount equal to up to 5% of risk-weighted assets.  Financial institutions with assets of more than $1 billion and not more than $10 billion may apply for an amount equal to up to 3% of risk-weighted assets.  Note that where a bank holding company has one or more bank subsidiaries, total assets are measured based on the combined assets in the call report of the subs as of the end of the fourth quarter of 2009, and risk-weighted assets are measured based on the combined risk-weighted assets of the subs as reported in the last call report filed before an application is submitted.
• A small business lending plan will have to accompany an application.  The plan must explain how the business strategy and operating goals will address small business needs in the market served by the financial institution, and, where appropriate, must contain a plan to provide linguistically and culturally appropriate outreach.  We believe this could mean offering dual language consumer materials, advertising in non-English media, etc.
• Applications will be submitted to the appropriate federal banking agency, or, for state banks, to the appropriate state banking regulator.  The Treasury Secretary will consult with these entities in determining whether to make an investment.
• Applications will not be accepted after one year from the date of the Bill’s enactment. 

Here are a few additional considerations regarding the Bill:

• The Treasury Secretary can ignore regulators’ “non-recommendation” and still consider an investment based on an applicant’s financial condition if certain other conditions are satisfied, including whether the applicant is getting capital from private investors, whether such additional capital is at least equal to the amount applied for under the program, and whether such private capital investment is subordinate to the Treasury’s investment.
• To make the program more appealing than TARP turned out to be, the Bill specifically provides that an investment recipient will not be considered a TARP recipient.  Consequently, investment recipients will not be subject to the executive compensation restrictions and stigma associated with TARP borrowings.  Note that recipients of capital under TARP’s Community Development Investment Fund or Capital Purchase Program—provided they have never missed a dividend payment—may be eligible to refinance securities issued under those programs using this new program, but the Treasury Secretary still must issue regulations and guidelines to allow this.
• Thanks to lending incentives, the capital’s cost can be as low as 1%, although initially, dividends or interest on the capital will be 5%.  The rate can move up or down based on lending volumes, and will go to 9.5% at the end of four and a half years.
• We do not yet know what the qualifying standards will be (apart from the disqualification standards pertaining to troubled banks) or whether the capital will count as Tier 1, but we will continue to monitor and communicate developments.

If you have any questions about the Small Business Lending Fund Bill, please contact Allyn Dixon at adixon@dickinsonlaw.com or at 515-246-4520.