Cathy Bochat (left) stands in front of the motorcycle school she operates in San Antonio, Texas.
$30 Billion Fund Targets Small Business Lending
Ammar Askari, Community Development Expert, Office of the Comptroller of the Currency
The $30 billion Small Business Lending Fund (SBLF) is the flagship program of the Small Business Jobs Act of 2010 (SBJ Act). The SBLF supports community banks and small businesses. It provides Tier 1 capital by authorizing the U.S. Department of the Treasury to buy preferred stock and other debt instruments from eligible financial institutions. The Treasury Department’s capital investment is structured to reduce participants’ borrowing costs to rates as low as 1 percent as the participants generate more small business loans.
What Qualifies as Small Business Lending?
Under the SBLF, qualified lending includes commercial and industrial loans; loans secured by owner-occupied nonfarm, nonresidential real estate; loans to finance agricultural production and other loans to farmers; and loans secured by farmland.
The key conditions of the program are as follows:
What Other Conditions Apply?
- The original principal and commitments amount must be $10 million or less.
- The loan is not for a business with more than $50 million in revenues.
- The calculation of qualified small business loans excludes any guaranteed portions of government loans—both for the purpose of calculating a bank’s baseline as well as its ongoing quarterly lending. Because this adjustment is proportional for the calculation of a bank’s baseline and its ongoing quarterly lending, the adjustment does not affect banks that maintain a similar percentage of government-guaranteed lending over time. Under this condition, a bank’s unguaranteed portion of a Small Business Administration’s 504 loans, for example, would count as a qualified small business investment.
- A financial institution that receives capital from the SBLF must supplement its call report with a report that identifies qualified small business lending. For holding companies, small business lending is measured on the basis of combined small business lending reported in subsidiaries’ call reports.
Participating institutions must certify their compliance with federal regulations regarding loan applicants’ identity verification and other similar assurances. The regulatory agencies for banks and thrifts issued general underwriting guidelines that are consistent with safety and soundness principles. The underwriting should reflect all relevant credit factors, including:
- Capacity of the income from the business to service the debt.
- Value and quality of the collateral.
- Overall creditworthiness of the borrower.
- Level of equity invested in the business.
- Any secondary sources of repayment.
- Any additional collateral or credit enhancements.
These guidelines are in the Underwriting Standards for Small Business Loans originated under the SBLF program on the Office of the Comptroller of the Currency’s Web site.
How Does the SBLF Stimulate Small Business Lending?
According to the SBLF terms, participating institutions agree to pay a 5 percent dividend at the start of the capital investment and to repay the whole amount within 10 years. An institution can repay at any time without penalty. Upon funding and for the following nine calendar quarters, the dividend is adjusted on the basis of the institution’s qualified small business lending.
The dividend is adjusted according to the change in the financial institution’s small business lending from a baseline value. This baseline value is the average amount of small business lending (adjusted for related charge offs and gains) for the four full quarters before September 27, 2010, the date of the SBJ Act’s signing.
The rate adjusts according to the following guidelines:
- If the amount of small business lending has increased by less than 2.5 percent, the dividend or interest rate is 5 percent.
- If the amount of small business lending has increased by more than 2.5 percent, but less than 5 percent, the dividend or interest rate is 4 percent.
- If the amount of small business lending has increased by more than 5 percent, but less than 7.5 percent, the dividend or interest rate is 3 percent.
- If the amount of small business lending has increased by more than 7.5 percent, but less than 10 percent, the dividend or interest rate is 2 percent.
- If the amount of small business lending has increased by 10 percent or more, the dividend or interest rate is 1 percent.
After the ninth quarter, the rates mentioned above apply through the end of the first 4½ years if the lending amount remains higher than the baseline value. If the lending amount remains the same or decreases from the baseline value, the rate is 7 percent until the expiration of the 4½-year period. In either scenario, the rate increases to 9 percent after the initial 4½-year period.
Rate adjustments occur in the calendar quarter after the publication of call report data and are payable at the start of the subsequent quarter.
One important caveat: The financial institution has to grow its small business lending portfolio by at least the amount of capital provided to take advantage of the discounted investment rate on the whole investment amount. If the increase in small business lending is less than the amount invested by the Treasury Department, then the discounted rate applies only to the amount of the increase in small business lending.
How Can Participating Institutions Maximize Small Business Lending?
For Best Interest Rate, New Lending Must Equal or Surpass Treasury Investment
Suppose Bank A has $200 million in “risk-weighted” assets and $20 million (or 10 percent of assets) in its small business lending portfolio. Bank A has less than $1 billion in assets, so it qualifies for the 5 percent (or $10 million) in new capital under this program.
If, as a result of this program, Bank A increases its small business lending from $20 million to $22 million (an increase of 10 percent), then, at first glance, it seems the bank should qualify for the 1 percent dividend rate. But because the increase in small business lending ($2 million) is less than the $10 million in new capital, Bank A would qualify for the 1 percent dividend rate only on the $2 million increase in small business lending and it will have to pay a 5 percent dividend rate on the remaining capital balance of $8 million.
Conversely, if Bank B has the same level of assets, but has $100 million in its small business portfolio, and it succeeds in realizing an increase of 10 percent ($10 million) as a result of this program, then the entire $10 million in borrowed capital would be eligible for the 1 percent dividend rate.
There are several programs designed to enhance a bank’s capacity to extend credit to small businesses. For example, a bank may partner with a Community Development Financial Institution (CDFI) to promote its small business lending. CDFIs typically provide credit and financial counseling in low- and moderate-income communities. They serve as primary sources of funding for many small businesses in these communities. In addition to expanding their small business lending opportunities through these partnerships, banks may earn positive consideration under the Community Reinvestment Act for initiatives with CDFIs. (For details, see "Interagency CRA Questions and Answers" on the Federal Financial Institutions Examination Council Web site.)
One venue for expanding small business lending is the Capital Access Program, which is offered in many states. (See article titled “States Get $1.5 Billion to Support Small Businesses.”) These portfolio insurance programs allow a borrower and a lender to split an insurance fee that is kept in a reserve fund at the lending bank and matched by the state government. The reserve fund is used to support loans to small businesses. Loans obtained under these programs enable community banks to serve small business borrowers whom they deem creditworthy but are unable to approve for a variety of reasons.
Banks participating in the SBLF may consider extending U.S. Small Business Administration (SBA) 504 loans. In these loans, the bank assumes 50 percent of the loan, the SBA guarantees 40 percent, and the borrower pledges 10 percent. The bank’s portion of the loan can be considered a qualified small business loan under the SBLF.
Another venue for partnerships to expand small business lending is the network of U.S. Export Assistance Centers. The SBA partners with the U.S. Department of Commerce and the Export-Import Bank of the United States in this national network. These centers are small businesses’ one-stop shops for trade promotion, financing, and export insurance programs. (See article titled “Promoting Small Business Job Growth Through Exports.”) The SBA also supports Small Business Development Centers that offer small businesses assistance with financial planning, marketing, production, organization, engineering, technical problems, and feasibility studies.
Banks may also consider making small business loans to businesses receiving equity investments from Small Business Investment Corporations (SBIC). The SBICs are privately owned and managed investment firms that are overseen by the SBA and provide funding for small businesses. Since its creation in 1958, the SBIC program has provided more than $50 billion in capital to more than 100,000 small businesses, some of which became well-known names. The SBA Web site has more information on the SBIC program.
Finally, an eligible institution may refinance securities previously issued to the Treasury Department under the Community Development Capital Initiative or the Capital Purchase Program, provided the institution has not missed more than one dividend payment under the Capital Purchase Program. The Treasury Department Web site includes more information on the treatment of these securities under this program.
To participate in the SBLF, applications should have been submitted by May 16, 2011. The authority to make capital investments under the SBLF ends September 27, 2011.
Where Are the SBLF Participation Guidelines?
The Treasury Department published four sets of terms, one for community banks, one for mutual institutions, one for subchapter S corporations, and one for community development loan funds. These guides are available on the Treasury Department Web site. It should be noted that the SBLF is not related to the Troubled Asset Relief Program.
For More Information
A list of banks receiving SBLF money will be published on the OCC small business Web resource directory once the information is released by the Treasury Department. For more information, visit the Treasury Department Web site. For general inquiries, call the SBLF information line at (888) 832-1147; for questions about a specific institution, e-mail the Treasury Department, a confidential e-mail address.