Alert December 28, 2010

Treasury Provides Details on Small Business Lending Fund; FDIC Issues Guidance on Small Business Lending Underwriting Standards When Using SBLF Funds

The Treasury has launched a website to provide further details on its Small Business Lending Fund (the “SBLF”), including term sheets and the application forms.  The SBLF was created under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion.

Under the SBLF, the Treasury will provide capital by purchasing Tier 1-qualifying preferred stock or equivalents from participating institutions.  The dividend rate for such capital will initially be set no higher than 5%.  If a participating institution’s small business lending increases by 10% or more, then the dividend rate for such institution will be reset to as low as 1%.  If the participating institution’s small business lending does not increase over the first two years of its participation in the SBLF, however, the dividend rate for such institution will increase to 7%.  After 4.5 years, the dividend rate will increase to 9% if the participating institution has not already repaid its SBLF funding.  Qualified small-business lending under the SBLF includes certain loans of up to $10 million to businesses with up to $50 million in annual revenues. Such loans include commercial and industrial loans; owner-occupied nonfarm, nonresidential real estate loans; loans to finance agricultural production and other loans to farmers; and loans secured by farmland. With the approval of its regulator, a participating institution may exit the SBLF at any time by repaying the funding provided along with any accrued dividends.  If the participating institution wishes to repay its SBLF funding in partial payments, each partial payment must be at least 25% of the original funding amount.

The SBLF also provides an option to refinance preferred stock issued to the Treasury through the Capital Purchase Program (“CPP”) or the Community Development Capital Initiative (“CDCI”) under certain conditions.  Simultaneous participation in the CPP or the CDCI and the SBLF is not permitted.  In order to refinance CPP or CDCI securities through the SBLF, an institution must be current on its dividend payments to the Treasury, cannot have previously missed more than one dividend payment, and must fully refinance or repay its CPP or CDCI securities.  Any warrants issued to the Treasury in connection with the CPP would remain outstanding until repurchased by the institution.  Compensation restrictions and other limitations imposed as a condition of participating in the TARP or the CPP do not apply to the SBLF. 

To participate in the SBLF, eligible banks must have assets of $10 billion or less and meet certain other requirements.  Institutions are not eligible if they are on the FDIC problem bank list (or similar list) or have been removed from that list in the previous 90 days.  The Treasury noted that generally this will include any bank with a CAMELS rating of 4 or 5. If an institution is controlled by a holding company, the combined assets of the holding company determine eligibility, and the holding company must apply for capital under the SBLF.  Institutions with total assets of $1 billion or less, may apply for SBLF funding in an amount equal to up to 5% of risk-weighted assets. Institutions with total assets of more than $1 billion, but less than $10 billion, may apply for SBLF funding in an amount that equals up to 3% of risk-weighted assets.  The minimum investment amount under the SBLF for all eligible institutions is 1% of risk-weighted assets.

Separately, the FDIC issued a Financial Institution Letter, FIL-90-2010, providing guidance to FDIC-insured institutions concerning prudent underwriting standards for small business loans made by FDIC-insured depository institutions using SBLF funds.