- Small Business Lending Fund Proposed for Community Banks
- February 12, 2010 | Authors: Jacob "Jake" A. Lutz; Thomas "Tom" O. Powell; Jerome Walker; Seth A. Winter
- Law Firms: Troutman Sanders LLP - Richmond Office; Troutman Sanders LLP - Atlanta Office; Troutman Sanders LLP - New York Office; Troutman Sanders LLP - Richmond Office
On February 2, 2010, President Obama announced a proposal (the Proposal) to establish a new Small Business Lending Fund (the SBLF) to encourage and facilitate increased lending by community banks to small businesses. As proposed, the SBLF would offer up to $30 billion for equity investments in community banks, which are defined as banks with assets under $10 billion. The SBLF would be separate and distinct from the Treasury’s TARP program but would be funded with $30 billion of repaid TARP capital.
Under the Proposal, a community bank would need approval from its primary federal regulator before it could participate in the SBLF. Once it obtains regulatory approval, the community bank would be eligible to receive capital investment either (1) up to 5% of its risk-weighted assets, if the bank has less than $1 billion in assets, or (2) up to 3% of its risk-weighted assets, if the bank has between $1 billion and $10 billion in assets. Community banks that participated in the Capital Purchase Program (CPP) would be eligible to convert their CPP capital to SBLF capital.
Capital investments made through the SBLF as proposed would incentivize small business lending through lower dividend rates and no TARP restrictions. Community banks could decrease the dividend rate they pay on SBLF capital by increasing small business lending over a baseline set using 2009 lending data. According to the Proposal, SBLF capital would carry an initial dividend rate of 5%, which would decrease by 1% for every 2.5% increase in “incremental business lending” achieved by the community bank over a two year period. The minimum dividend rate on SBLF capital would be 1%. However, after five years the dividend rate on SBLF capital would increase to encourage “timely repayment.” Importantly, the SBLF as proposed would not involve any TARP restrictions such as restrictions on executive compensation.
The Proposal, which would require approval by Congress, has drawn open support from some Democratic Congressmen, Senators on both sides of the aisle have voiced criticisms ranging from concerns regarding the cost of the SBLF to calls for the President to create the SBLF under the TARP program to more expeditiously provide capital to community banks. No specific terms or conditions of the SBLF will be available until the Proposal is enacted by Congress and implemented by the Obama Administration.