Alert October 27, 2009

Obama Administration Announces New Program for TARP Funds That Will be Provided to Community Banks to Encourage Small Business Lending

The Obama Administration announced an initiative to encourage small business lending by providing capital support to community banks.  Under the plan, community banks with less than $1 billion in assets will be given access to lower-cost capital, provided that they submit a plan explaining how the capital will allow them to increase lending to small businesses.  Participants would also be required to submit quarterly reports detailing their small business lending activities.  Banks will be eligible to receive capital totaling up to 2% of risk‑weighted assets.  The capital would be available at an initial dividend rate of 3%, compared to the Capital Purchase Program’s (the “CPP”) 5%, with the dividend rate increasing to 9% after five years to encourage timely repayment.  A bank’s participation will be subject to approval by its primary federal banking regulator.  Final details on the terms of the program -- including the amount of capital available and how current CPP participants could replace existing capital with investments under this program -- will be developed in the coming weeks by the Treasury in consultation with community banks and small businesses.