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The Small Business Lending Fund
Robert Jay Dilger
Senior Specialist in American National Government
November 14, 2011January 27, 2012
Congressional Research Service
7-5700
www.crs.gov
R42045
CRS Report for Congress
Prepared for Members and Committees of Congress
c11173008
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The Small Business Lending Fund
Summary
Congressional interest in small business access to capital reflects, in part, concerns about
economic growth and unemployment. Small businesses, defined as having fewer than 500
employees, have played an important role in net employment growth during previous economic
recoveries. However, recent data show that net employment growth at small businesses is not
increasing at the same rate as in previous economic recoveries.
Some, including President Obama, have argued that current economic conditions make it
imperative that the federal government provide additional resources to assist small businesses in
acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry
about the long-term adverse economic effects of spending programs that increase the federal
deficit. They advocate business tax reduction, reform of financial credit market regulation, and
federal fiscal restraint as the best means to assist small businesses and create jobs.
Several laws were enacted during the 111th Congress to enhance small business access to capital.
For example, P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA),
provided the Small Business Administration (SBA) an additional $730 million, including funding
to temporarily subsidize SBA fees and increase the 7(a) loan guaranty program’s maximum loan
guaranty percentage to 90%. P.L. 111-240, the Small Business Jobs Act of 2010, authorized the
Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) ($4.0
billion was issued) to encourage community banks with less than $10 billion in assets to increase
their lending to small businesses, a $1.5 billion State Small Business Credit Initiative to provide
funding to participating states with small business capital access programs, numerous changes to
the SBA’s loan guaranty and contracting programs, funding to continue the SBA’s fee subsidies
and the 7(a) program’s 90% maximum loan guaranty percentage through December 31, 2010, and
about $12 billion in tax relief for small businesses. P.L. 111-322, the Continuing Appropriations
and Surface Transportation Extensions Act, 2011, authorized the SBA to continue its fee subsidies
and the 7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011, or until
available funding was exhausted, which occurred on January 3, 2011.
This report focuses on the SBLF. It opens with a discussion of the supply and demand for small
business loans. The SBLF’s advocates argued that the SBLF was needed to enhance the supply of
small business loans. The report then examines other arguments which were presented both for
and against the program. Advocates argued that the SBLF would increase lending to small
businesses and, in turn, create jobs. Opponents argued that the SBLF could lose money, lacked
sufficient oversight provisions, did not require lenders to increase their lending to small
businesses, could serve as a vehicle for TARP recipients to effectively refinance their TARP loans
on more favorable terms with little or any resulting benefit for small businesses, and could
encourage a failing lender to make even riskier loans to avoid higher dividend payments.
The report concludes with an examination of the program’s implementation and a discussion of
bills introduced during the 112th Congress to amend the SBLF. For example, S. 681, the Greater
Accountability in the Lending Fund Act of 2011, would limit the program’s authority to 15 years
from enactment and prohibit TARP recipients from participating in the program. H.R. 2807, the
Small Business Leg-Up Act of 2011, would transfer any unobligated and repaid funds from the
SBLF to the Community Development Financial Institutions Fund “to increase the availability of
credit for small businesses.” H.R. 3147, the Small Business Lending Extension Act, would extend
the Treasury Department’s investment authority from one year to two years.
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Contents
Small Business and Job Creation..................................................................................................... 1
The Supply and Demand for Small Business Loans........................................................................ 34
Factors that May Have Contributed to the Decline in the Supply of Small Business
Loans ...................................................................................................................................... 5
Factors that May Have Contributed to the Decline in the Demand for Small Business
Loans ...................................................................................................................................... 6
The Congressional Response to the Decline in the Supply and Demand for Small
Business Loans ....................................................................................................................... 7
The SBLF’s Legislative Origin........................................................................................................ 9
The House-Passed Version of the SBLF........................................................................................ 10
The Senate-Passed Version of the SBLF ....................................................................................... 12
Arguments For and Against the SBLF........................................................................................... 14
The SBLF’s Implementation.......................................................................................................... 18
Treasury’s Roll Out of the Program......................................................................................... 19
Small Business Lending Progress Reports .............................................................................. 21
Proposed Legislation ..................................................................................................................... 2123
Concluding Observations............................................................................................................... 2225
Figures
Figure 1. Outstanding Small Business Loans, 2005-2011 ............................................................... 2
Figure 2. Small Business Lending Environment, 2000-2011 .......................................................... 45
Tables
Table 1. Small Business Lending Increases and Dividend Rates Under the House-Passed
Version of H.R. 5297 .................................................................................................................. 11
Contacts
Author Contact Information........................................................................................................... 2527
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The Small Business Lending Fund
Small Business and Job Creation
Congressional interest in small business access to capital reflects, in part, concerns about
economic growth and unemployment.1 Small businesses, defined as having fewer than 500
employees, have played an important role in net job growth during previous economic recoveries,
particularly in the construction, housing, and retail sectors.2 For example, after the eight-month
recession that began in July 1990 and ended in March 1991, small businesses increased their net
employment in the first year after the recession, while larger businesses continued to experience
declines in employment.3 In the recession that began in March 2001 and ended in November
2001, small businesses added 1.15 million net new jobs while larger businesses lost 0.15 million
net new jobs.4 However, recent payroll data show that net job growth at small businesses is not
increasing at the same pace as in previous economic recoveries.5 For example, payroll data
suggest that about 81% of the 7.5 million jobs lost during the recession (December 2007-June
2009) were in small businesses.6 During the first year following the recession (July 2009-July
2010)Small businesses accounted for almost 60% of the net job losses during the
December 2007-June 2009 recession.5 Following the recession, small businesses continued to
lose jobs (-287,000for three consecutive quarters (-1.0 million jobs), as did larger firms (-258522,000
jobs). 6
Since then, small businesses have been adding jobs (1.60 million jobs from July 2010AugustJune 30th of 2010
through September 30th of 2011) more rapidly than larger businesses (47563,000 jobs from July 2010-August 2011), but
more slowly than in previous recoveries.7
In addition, as shown in Figure 1, total outstanding small business loans peaked at $780.6 billion
as of June 30, 2008, and have decreased by 13.8% (-$107.8 billion) to $672.8 billion as of June
30, 2011.8 As a result, there has been increased concern in Congress that small businesses might
1
June 30th
of 2010 through September 30th of 2011), but more slowly than in previous recoveries.7
The Federal Deposit Insurance Corporation has maintained comparable small business lending
data for the second quarter (June 30th) of each year since 2002. Figure 1 shows the amount of
outstanding small business loans as of June 30th for each year since 2005. As shown in Figure 1,
1
The United States does not have a statutory definition for medium-sized businesses and a business concern can either
be considered “small” or not small under section 3(a)(1) of the Small Business Act, 15 U.S.C. § 632(a)(1), which
indicates that a small business concern “shall be deemed to be one that is independently owned and operated and which
is not dominant in its field of operation.” The act authorizes the SBA’s Administrator to define small business size
standards based on industry classifications and the SBA has denominated 42 separate size standards covering 1,158
business classifications which may be found at 13 C.F.R. §121.201. A statistical analysis of the SBA’s size standards
database reveals that the median size of small business is 500 employees. In contrast, the European Union defines small
business as those with fewer than 50 employees, medium-sized business as those employing between 50 to 500
workers, and large businesses as those with over 500 employees. Under the SBA size standards a small business
concern can have up to 1,500 employees for certain industry categories. For additional information and analysis see
CRS Report R40860, Defining Small Business: A Historical Analysis of Contemporary Issues, by Robert Jay Dilger.
2
U.S. Small Business Administration, Office of Advocacy, “Small Business Economic Indicators for 2003, August
2004, p. 3, http://www: A
reference guide to the latest data on small business activity, including state and industry data,” Washington, DC,
August 2004, p. 3, http://archive.sba.gov/advo/stats/sbei03.pdf; and Brian Headd, “Small Businesses Most Likely to Lead
Lead Economic Recovery,” The Small Business Advocate, vol. 28, no. 6 (July 2009), pp. 1, 2, http://www.sba.gov/advo/
july_09.pdf.
3
U.S. Small Business Administration, Office of Advocacy, “Small Business Economic Indicators for 2003: A reference
reference guide to the latest data on small business activity, including state and industry data,” Washington, DC, 2003, pp. 3,
footnote
August 2004, p. 3, http://archive.sba.gov/advo/stats/sbei03.pdf.
4
Ibid.
5
U.S. Small Business Administration, “The Small Business Economy, 2010: A Report to the President,” Washington,
DC, 2010, pp. 2, 5, 21, 22, http://www.sba.gov/sites/default/files/sb_econ2010.pdf; and U.S. Small Business
Administration, Fiscal Year 2010 Congressional Budget Justification (Washington, DC: GPO,
2009), p. 1,
http://www.sba.gov/sites/default/files/Congressional_Budget_Justification_2010.pdf.
6
Automatic Data Processing, Inc. (ADP), “National Employment Report, December 2007,” Roseland, NJ, p. 2,
http://www.adpemploymentreport.com/pdf/FINAL_Report_DEC_07.pdf; and ADP, “National Employment Report,
September 2009,” Roseland, NJ, p. 2, http://www.adpemploymentreport.com/PDF/FINAL_Report_September_09.pdf.
7
Automatic Data Processing, Inc. (ADP), “National Employment Report, Historical Data,” Roseland, NJ,
http://www.adpemploymentreport.com/data/History_August_2011.xlsx.
8
Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” http://www2.fdic.gov/SDI/main.asp.
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be prevented from accessing sufficient capital to enable them to lead job growth during the
current recovery.
Figure 1. Outstanding Small Business Loans, 2005-2011
(billions of $)
$780.6
$765.5
$755.9
$722.1
$700.7
$672.8
$665U.S. Small Business Administration, Office of Advocacy, “Small Business Quarterly Bulletin: Second Quarter 2011,”
Washington, DC, http://www.sba.gov/sites/default/files/files/SBQB_2011q2.pdf; and U.S. Small Business
Administration, Office of Advocacy, “Small Business Quarterly Bulletin: Third Quarter 2011,” Washington, DC,
http://www.sba.gov/sites/default/files/SBQB_2011q3.pdf.
7
U.S. Small Business Administration, Office of Advocacy, “Small Business Quarterly Bulletin: Second Quarter 2011,”
Washington, DC, http://www.sba.gov/sites/default/files/files/SBQB_2011q2.pdf; and U.S. Small Business
Administration, Office of Advocacy, “Small Business Quarterly Bulletin: Third Quarter 2011,” Washington, DC,
http://www.sba.gov/sites/default/files/SBQB_2011q3.pdf.
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the amount of outstanding small business loans peaked at $711.5 billion as of June 30, 2008, and
had decreased by 14.7% (-$104.5 billion) to $607.0 billion as of June 30, 2011.8 Since then, the
amount of outstanding small business loans has continued to fall, to $599.7 billion as of
September 30, 2011.9 As a result, there has been increased concern in Congress that small
businesses might be prevented from accessing sufficient capital to enable them to lead job growth
during the current recovery.
Figure 1. Outstanding Small Business Loans, 2005-2011
(billions of $)
$711.5
$695.2
$696.8
$652.2
$634.2
$607.0
$601.5
2005
2006
2007
2008
2009
2010
2011
Source: Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” Washington, DC,
http://www2.fdic.gov/SDI/main.asp.
Note: Data as of June 30 each year.
Some, including President Obama, have argued that current economic conditions make it
imperative that the federal government provide additional resources to assist small businesses in
acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry
about the long-term adverse economic effects of spending programs that increase the federal
deficit. They advocate business tax reduction, reform of financial credit market regulation, and
federal fiscal restraint as the best means to assist small businesses and create jobs.
Several laws were enacted during the 111th Congress to enhance small business access to capital.
For example, P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA),
provided the Small Business Administration (SBA) an additional $730 million, including $375
million to temporarily subsidize SBA fees and increase the 7(a) loan guaranty program’s
8
9
Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” http://www2.fdic.gov/SDI/main.asp.
Ibid.
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maximum loan guaranty percentage from 85% on loans of $150,000 or less and 75% on loans
exceeding $150,000 to 90% for all regular 7(a) loans. P.L. 111-240, the Small Business Jobs Act
of 2010, authorized the Secretary of the Treasury to establish a $30 billion Small Business
Lending Fund (SBLF) ($4.0 billion was issued) to encourage community banks with less than
$10 billion in assets to increase their lending to small businesses, a $1.5 billion State Small
Business Credit Initiative to provide funding to participating states with small business capital
access programs, numerous changes to the SBA’s loan guaranty and contracting programs,
funding to continue the SBA’s fee subsidies and the 7(a) program’s 90% maximum loan guaranty
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percentage through December 31, 2010, and about $12 billion in tax relief for small businesses.
P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011,
authorized the SBA to continue its fee subsidies and the 7(a) program’s 90% maximum loan
guaranty percentage through March 4, 2011, or until available funding was exhausted, which
occurred on January 3, 2011.
According to the SBA, the temporary fee subsidies and 90% maximum loan guaranty for the 7(a)
program “engineered a significant turnaround in SBA lending.... The end result is that the agency
helped put more than $42 billion in the hands of small businesses through the Recovery Act and
Jobs Act combined.”910
This report focuses on the SBLF. It begins with a discussion of the supply and demand for small
business loans. The SBLF’s advocates argued that the SBLF was an important part of a larger
effort to enhance the supply of small business loans. After describing the program’s structure, the
report then examines other arguments that were presented both for and against the program’s
enactment. Advocates argued that the SBLF would increase lending to small businesses and, in
turn, create jobs. Opponents argued that the SBLF could lose money, lacked sufficient oversight
provisions, did not require lenders to increase their lending to small businesses, could serve as a
vehicle for TARP recipients to effectively refinance their TARP loans on more favorable terms
with little or any resulting benefit for small businesses, and could encourage a failing lender to
make even riskier loans to avoid higher dividend payments.
The report concludes with an examination of the SBLF’s implementation by the Department of
the Treasury and a discussion of bills introduced during the 112th Congress to amend the SBLF.
For example, S. 681, the Greater Accountability in the Lending Fund Act of 2011, would, among
other provisions, limit the program’s authority to 15 years from enactment and prohibit TARP
recipients from participating in the program. H.R. 2807, the Small Business Leg-Up Act of 2011,
would transfer any unobligated and repaid funds from the SBLF when its investment authority
expires on September 27, 2011, to the Community Development Financial Institutions Fund “to
continue the program of making capital investments in eligible community development financial
institutions in order to increase the availability of credit for small businesses.”1011 H.R. 3147, the
Small Business Lending Extension Act, would, among other provisions, extend the Treasury
Department’s investment authority from one year following the date of enactment to two years.
10
U.S. Small Business Administration, “Jobs Act Supported More Than $12 Billion in SBA Lending to Small
Businesses in Just Three Months,” Washington, DC, January 3, 2010, http://www.sba.gov/content/jobs-act-supportedmore-12-billion-sba-lending-small-businesses-just-three-months.
11
H.R. 2807, the Small Business Leg-Up Act of 2011.
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The Supply and Demand for Small Business Loans
Each quarter, the Federal Reserve Board surveys senior loan officers concerning their bank’s
lending practices. The survey includes questions about both the supply and demand for small
business loans. For example, the survey includes a question concerning their bank’s credit
standards for small business loans: “Over the past three months, how have your bank’s credit
standards for approving applications for C&I [commercial and industrial] loans or credit lines—
other than those to be used to finance mergers and acquisitions—for small firms (defined as
having annual sales of less than $50 million) changed?” The senior loan officers are asked to
9
U.S. Small Business Administration, “Jobs Act Supported More Than $12 Billion in SBA Lending to Small
Businesses in Just Three Months,” Washington, DC, January 3, 2010, http://www.sba.gov/content/jobs-act-supportedmore-12-billion-sba-lending-small-businesses-just-three-months.
10
H.R. 2807, the Small Business Leg-Up Act of 2011.
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indicate if their bank’s credit standards have “Tightened considerably,” “Tightened somewhat,”
“Remained basically unchanged,” “Eased somewhat,” or “Eased considerably.” Subtracting the
percentage of respondents reporting “Eased somewhat” and “Eased considerably” from the
percentage of respondents reporting “Tightened considerably” and “Tightened somewhat”
provides an indication of the market’s supply of small business loans.
As shown on Figure 2, senior loan officers reported that they tightened small business credit
standards from 2000-2004, loosened them from 2004-late 2006, tightened them somewhat in
2007, and tightened them considerably in 2008 and 2009.1112 Since 2009, senior loan officers report
that they have eased their small business credit standards somewhat, and most senior loan officers
report that they are no longer tightening those standards. However, the Federal Reserve Board
notes that those lending standards “remain quite stringent following the prolonged and
widespread tightening that took place over the past few years.”12
Figure 2. Small Business Lending Environment, 2000-2011
(senior loan officers’ survey responses)
80
60
Tightening Standards
Increasing Demand
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-20
Loosening Standards
-40
-60
Decreasing Demand
-80
Bank Lending Standards
Small Businesses Demand for Loans
Source: Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington,
DC, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/; and Brian Headd, “Forum Seeks Solutions To
11
Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington, DC,
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/; and Brian Headd, “Forum Seeks Solutions To Thaw Frozen
Small Business Credit,” The Small Business Advocate, vol. 28, no. 10 (December 2009), p. 3, http://www.sba.gov/sites/
default/files/The%20Small%20Business%20Advocate%20-%20December%202009.pdf.
12
Federal Reserve Board, “The April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices,”
Washington, DC, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201005/default.htm.
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Thaw Frozen Small Business Credit,” The Small Business Advocate, vol. 28, no. 10 (December 2009), p. 3,
http://www.sba.gov/sites/default/files/The%20Small%20Business%20Advocate%20-%20December%202009.pdf.
The survey also includes a question concerning the demand for small business loans: “Apart from
normal seasonal variation, how has demand for C&I loans changed over the past three months for
small firms (annual sales of less than $50 million)?” Senior loan officers are asked to indicate if
demand was “Substantially stronger,” “Moderately stronger,” “About the same,” “Moderately
weaker,” or “Substantially weaker.” Subtracting the percentage of respondents reporting
“Moderately weaker” and “Substantially weaker” from the percentage of respondents reporting
“Substantially stronger” and “Moderately stronger” provides an indication of the market’s
demand for small business loans.
As shown on Figure 2, senior loan officers reported that the demand for small business loans
declined from 2000-2004, increased from 2004-late 2006, declined somewhat in 2007 and 2008,
and declined significantly in 2009. Demand then leveled off (at a relatively reduced level) during
the first half of 2010, declined somewhat during the third quarter of 2010, increased somewhat
during the fourth quarter of 2010 and into 2011, and then declined somewhat during the latter half
of 2011.1313
The survey also includes a question concerning the demand for small business loans: “Apart from
normal seasonal variation, how has demand for C&I loans changed over the past three months for
small firms (annual sales of less than $50 million)?” Senior loan officers are asked to indicate if
demand was “Substantially stronger,” “Moderately stronger,” “About the same,” “Moderately
weaker,” or “Substantially weaker.” Subtracting the percentage of respondents reporting
“Moderately weaker” and “Substantially weaker” from the percentage of respondents reporting
“Substantially stronger” and “Moderately stronger” provides an indication of the market’s
demand for small business loans.
As shown on Figure 2, senior loan officers reported that the demand for small business loans
declined from 2000-2004, increased from 2004-late 2006, declined somewhat in 2007 and 2008,
and declined significantly in 2009. Demand then leveled off (at a relatively reduced level) during
the first half of 2010, declined somewhat during the third quarter of 2010, increased somewhat
during the fourth quarter of 2010 and into 2011, and then declined somewhat during the latter half
of 2011.14
12
Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington, DC,
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/; and Brian Headd, “Forum Seeks Solutions To Thaw Frozen
Small Business Credit,” The Small Business Advocate, vol. 28, no. 10 (December 2009), p. 3, http://www.sba.gov/sites/
default/files/The%20Small%20Business%20Advocate%20-%20December%202009.pdf.
13
Federal Reserve Board, “The April 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices,”
Washington, DC, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/201005/default.htm.
14
Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington, DC,
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/.
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Figure 2. Small Business Lending Environment, 2000-2011
(senior loan officers’ survey responses)
80
60
Tightening Standards
Increasing Demand
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-20
Loosening Standards
-40
-60
Decreasing Demand
-80
Bank Lending Standards
Small Businesses Demand for Loans
Source: Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington,
DC, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/; and Brian Headd, “Forum Seeks Solutions To
Thaw Frozen Small Business Credit,” The Small Business Advocate, vol. 28, no. 10 (December 2009), p. 3,
http://www.sba.gov/sites/default/files/The%20Small%20Business%20Advocate%20-%20December%202009.pdf.
Factors that May Have Contributed to the Decline in the Supply of
Small Business Loans
According to an SBA-sponsored study of small business lending, several factors have contributed
to the recent decline in small business lending.1415 The report’s authors noted that the 30% decline
in home prices from their peak in 2006 to 2010 diminished the value of collateral for many small
business borrowers. Many small business owners had relied on home equity loans to finance their
small businesses during the real estate boom. They concluded that the absence of this additional
source of collateral may have contributed to a decline in lending to small businesses.1516 They also
argued that many small businesses found it increasingly difficult to renew existing lines of credit
as lenders became more cautious as a result of slow economic growth and an increasing risk of
loan defaults, especially among small business startups which are generally considered among the
most risky investments.16 About half of all new small businesses fail in their first year. They also
argued that
•
in this newly regulated market, smaller lenders are likely to be less profitable
because they have fewer sales of products and services to spread out over the
higher auditing and FDIC costs. Hence, they have less money to lend to small
businesses and others, and
13
Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington, DC,
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/.
14
15
George W. Haynes and Victoria Williams, Lending by Depository Lenders to Small Businesses, 2003 to 2010, U.S.
Small Business Administration, Office of Advocacy, Washington, DC, March 2011, http://www.sba.gov/sites/default/
files/rs380tot.pdf.
15
Ibid., p. 25.
16
Ibid., p. 26. One possible contributing factor for at least some lenders becoming more cautious is that in recent years
many lenders experienced an increase in non-performing loans and a depletion of their loan loss reserves, limiting the
funds available for lending to small businesses.
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Ibid., p. 25.
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most risky investments.17 About half of all new small businesses fail in their first year. They also
argued that
•
in this newly regulated market, smaller lenders are likely to be less profitable
because they have fewer sales of products and services to spread out over the
higher auditing and FDIC costs. Hence, they have less money to lend to small
businesses and others, and
•
the relative difficulty in assessing creditworthiness due to the lack of information
about potential financial performance is very high in small business lending,
especially in financial markets driven by factor—rather than relationship—
lending. Therefore, one would expect the small business loan market to recover
more slowly than other financial markets.1718
The authors also noted that FDIC data indicated that in recent years small business lending had
not only declined in absolute terms (the total amount of dollars borrowed and the total number of
small business loans issued), but in relative terms as well (the market share of business loans):
Over the eight years from 2003 through 2010, small business loans as a share of total
business loans declined by more than 12 percentage points, from 81.7% in 2003 to 68.9% in
2010. Perhaps of most concern is the further decline in the ratios of small business loans to
total assets and small business loans to total business loans. Small business loans constituted
about 16.8% of total assets in 2005, but only 15.3% in 2010; hence, small business lending is
becoming less significant for these lenders. Small business lending is also losing market
share in the business loan market. In the eight-year period from 2003 to 2010, small business
loans as a share of total business loans declined more than 10 percentage points from 81.7%
in 2003 to 68.9% in 2010.1819
Factors that May Have Contributed to the Decline in the Demand
for Small Business Loans
According to the previously mentioned SBA-sponsored study of small business lending, the
demand for small business loans fell during the recession primarily because many small
businesses experienced a decline in sales, and many small business owners had a heightened level
of uncertainty concerning future sales. The study’s authors argued that given small business
owners’ lack of confidence in the demand for their goods and services, many small business
owners decided to save capital instead of hiring additional employees and borrowing capital to
invest in business expansions and inventory.1920
The responses of small business owners to a monthly survey by the National Federation of
Independent Business Research Foundation (NFIB) concerning small business owner’s views of
the economy support the argument that declining sales contributed to the decline in the demand
for small business loans. Since 2008, small business owners responding to the NFIB surveys have
identified poor sales as their number one problem. Prior to 2008, taxes had been reported as their
number one problem in nearly every survey since the monthly surveys began in 1986.20 Also,
payroll data suggests that small businesses were particularly hard hit by the recession. As
mentioned previously, about 81% of the 7.5 million jobs lost during the recession (December
2007-June 2009) were in small businesses.21 During the first year following the recession (July
17
Ibid., p. 26.
Ibid., p. 25.
19
Ibid.
20
William C. Dunkelberg and Holly Wade, Small Business Economic Trends (Washington, DC: NFIB Research
Foundation, September 2011), p. 18, http://www.nfib.com/Portals/0/PDF/sbet/sbet201109.pdf; and William J. Dennis,
Jr., Small Business Credit in a Deep Recession (Washington, DC: NFIB Research Foundation, June 2008), p. 1,
http://www.nfib.com/LinkClick.aspx?fileticket=IPeviHUzXfE%3D&tabid=90&mid=3121.
21
Automatic Data Processing, Inc. (ADP), “National Employment Report, December 2007,” Roseland, NJ, p. 2,
http://www.adpemploymentreport.com/pdf/FINAL_Report_DEC_07.pdf; and ADP, “National Employment Report,
(continued...)
18
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2009-July 2010), small businesses continued to lose jobs (-287,000 jobs), as did larger firms (258,000 jobs). Since then, small businesses have been adding jobs (1.6 million jobs from July
2010-August 2011) more rapidly than larger businesses (47,000 jobs from July 2010-August
2011), but more slowly than in past recoveries17
Ibid., p. 26. One possible contributing factor for at least some lenders becoming more cautious is that in recent years
many lenders experienced an increase in non-performing loans and a depletion of their loan loss reserves, limiting the
funds available for lending to small businesses.
18
Ibid., p. 26.
19
Ibid., p. 25.
20
Ibid.
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identified poor sales as their number one problem. Prior to 2008, taxes had been reported as their
number one problem in nearly every survey since the monthly surveys began in 1986.21 Also,
employment data suggests that small businesses were particularly hard hit by the recession. As
mentioned previously, small businesses accounted for almost 60% of the net job losses during the
December 2007-June 2009 recession.22
According to testimony by the Secretary of the Treasury before the House Small Business
Committee on June 22, 2011, small businesses were especially hard hit by the recession because
Small businesses are concentrated in sectors that were especially hard hit by the recession
and the bursting of the housing bubble: construction and real estate. More than one-third of
all construction workers are employed by firms with less than 20 workers, and an additional
third are employed by businesses with fewer than 100 employees. Just over half of those
employed in the real estate, rental, and leasing sectors work for businesses with less than 100
workers on their payrolls. More broadly, the rate of job losses was almost twice as high in
small businesses as it was in larger firms during the depths of the crisis.23
Also, as mentioned previously, in recent months small businesses have been adding jobs more
rapidly than larger businesses. However, they are adding jobs more slowly than in previous
economic recoveries.24
The Congressional Response to the Decline in the Supply and
Demand for Small Business Loans
During the 111th Congress, legislation designed to increase both the supply and demand for small
business loans was adopted. For example, Congress provided over $1.1 billion to temporarily
subsidize fees for the SBA’s 7(a) and 504/CDC loan guaranty programs and to increase the 7(a)
program’s maximum loan guaranty percentage from 85% on loans of $150,000 or less and 75%
on loans exceeding $150,000 to 90% for all regular 7(a) loans (funding was exhausted on January
3, 2011).2425 The fee subsidies were designed to increase the demand for small business loans by
reducing the cost of borrowing. The 90% loan guarantee was designed to increase the supply of
small business loans by reducing the risk of lending.
(...continued)
September 2009,” Roseland, NJ, p. 2, http://www.adpemploymentreport.com/PDF/FINAL_Report_September_09.pdf.
22
Automatic Data Processing, Inc. (ADP), “National Employment Report, Historical Data,” Roseland, NJ,
http://www.adpemploymentreport.com/data/History_August_2011.xlsx.
23
U.S. Congress, House Committee on Small Business, The State of Small Business Access to Capital and Credit: The
View from Secretary Geithner, 112th Cong., 1st sess., June 22, 2011, p. 1.
2421
William C. Dunkelberg and Holly Wade, Small Business Economic Trends (Washington, DC: NFIB Research
Foundation, September 2011), p. 18, http://www.nfib.com/Portals/0/PDF/sbet/sbet201109.pdf; and William J. Dennis,
Jr., Small Business Credit in a Deep Recession (Washington, DC: NFIB Research Foundation, June 2008), p. 1,
http://www.nfib.com/LinkClick.aspx?fileticket=IPeviHUzXfE%3D&tabid=90&mid=3121.
22
U.S. Small Business Administration, “The Small Business Economy, 2010: A Report to the President,” Washington,
DC, 2010, pp. 2, 5, 21, 22, http://www.sba.gov/sites/default/files/sb_econ2010.pdf; and U.S. Small Business
Administration, Fiscal Year 2010 Congressional Budget Justification (Washington, DC: GPO, 2009), p. 1,
http://www.sba.gov/sites/default/files/Congressional_Budget_Justification_2010.pdf.
23
U.S. Congress, House Committee on Small Business, The State of Small Business Access to Capital and Credit: The
View from Secretary Geithner, 112th Cong., 1st sess., June 22, 2011, p. 1.
24
U.S. Small Business Administration, Office of Advocacy, “Small Business Quarterly Bulletin: Second Quarter
2011,” Washington, DC, http://www.sba.gov/sites/default/files/files/SBQB_2011q2.pdf; and U.S. Small Business
Administration, Office of Advocacy, “Small Business Quarterly Bulletin: Third Quarter 2011,” Washington, DC,
http://www.sba.gov/sites/default/files/SBQB_2011q3.pdf.
25
P.L. 111-5, the American Recovery and Reinvestment Act of 2009, provided the SBA $375 million to subsidize fees
for the SBA’s 7(a) and 504/CDC loan guaranty programs and to increase the 7(a) program’s maximum loan guaranty
percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90% for all
regular 7(a) loans through September 30, 2010, or when appropriated funding for the subsidies and loan modification
was exhausted. P.L. 111-118, the Department of Defense Appropriations Act, 2010, provided the SBA $125 million to
continue the fee subsides and 90% maximum loan guaranty percentage through February 28, 2010. P.L. 111-144, the
Temporary Extension Act of 2010, provided the SBA $60 million to continue the fee subsides and 90% maximum loan
guaranty percentage through March 28, 2010. P.L. 111-150, an act to extend the Small Business Loan Guarantee
Program, and for other purposes, provided the SBA authority to reprogram $40 million in previously appropriated
funds to continue the fee subsides and 90% maximum loan guaranty percentage through April 30, 2010. P.L. 111-157,
the Continuing Extension Act of 2010, provided the SBA $80 million to continue the SBA’s fee subsides and 90%
maximum loan guaranty percentage through May 31, 2010. P.L. 111-240, the Small Business Jobs Act of 2010,
provided $505 million (plus an additional $5 million for administrative expenses) to continue the SBA’s fee subsides
and 90% maximum loan guaranty percentage from the act’s date of enactment (September 27, 2010) through December
31, 2010. P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorizes
the SBA to use funds provided under the Small Business Jobs Act of 2010 to continue the SBA’s fee subsides and 90%
maximum loan guaranty percentage through March 4, 2011, or until available funding is exhausted—which occurred
on January 3, 2011.
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reducing the cost of borrowing. The 90% loan guarantee was designed to increase the supply of
small business loans by reducing the risk of lending.
Congress also provided the SBA additional resources to expand its lending to small businesses.
For example, ARRA included a $255 million temporary, two-year small business stabilization
program to guarantee loans of $35,000 or less to small businesses for qualified debt
consolidation, later named the America’s Recovery Capital (ARC) Loan program (the program
ceased issuing new loan guarantees on September 30, 2010); an additional $15 million for the
SBA’s surety bond program and a temporary increase in that program’s maximum bond amount
from $2 million to $5 million, and up to $10 million under certain conditions (the higher
maximum bond amounts ended on September 30, 2010); an additional $6 million for the SBA’s
Microloan program’s lending program and an additional $24 million for the Microloan program’s
technical assistance program; and increased the funds (“leverage”) available to SBA-licensed
Small Business Investment Companies (SBICs) to no more than 300% of the company’s private
capital or $150,000,000, whichever is less.2526
Several other programs were also enacted during the 111th Congress to increase the supply of
small business loans. For example, ARRA authorized the SBA to establish a temporary secondary
market guarantee authority to provide a federal guarantee for pools of first lien 504/CDC program
loans that are to be sold to third-party investors. ARRA also authorized the SBA to make below
market interest rate direct loans to SBA-designated “Systemically Important Secondary Market
(SISM) Broker-Dealers” who would use the loan funds to purchase SBA-guaranteed loans from
commercial lenders, assemble them into pools, and sell them to investors in the secondary loan
market.2627
P.L. 111-240, the Small Business Jobs Act of 2010, extended the SBA’s secondary market
guarantee authority from two years after the date of ARRA’s enactment to two years after the date
of the program’s first sale of a pool of first lien position 504/CDC loans to a third-party investor
(which took place on September 24, 2010).2728 The act also increased the loan guarantee limits for
the SBA’s 7(a) program from $2 million to $5 million, and for the 504/CDC program from $1.5
million to $5 million for “regular” borrowers, from $2 million to $5 million if the loan proceeds
are directed toward one or more specified public policy goals, and from $4 million to $5.5 million
for manufacturers. It also increased the SBA’s Microloan program’s loan limit for borrowers from
$35,000 to $50,000 and for microlender intermediaries after their first year in the program from
$3.5 million to $5 million.28 It also temporarily increased for one year (through September 26,
2011) the SBA 7(a) Express Program’s loan limit from $350,000 to $1 million. The act also
authorized the Secretary of the Treasury to establish the $30 billion SBLF and a $1.5 billion State
Small Business Credit Initiative to provide funding to participating states with small business
capital access programs.
25
P.L. 111-5, the American Recovery and Reinvestment Act of 2009.
Ibid.
27
U.S. Small Business Administration, Office of Congressional and Legislative Affairs, correspondence with the
author, Washington, DC, January 4, 2010.
28
The act also temporarily allows the SBA to waive, in whole or in part, for successive fiscal years, the non-federal
share requirement for loans to the Microloan program’s intermediaries and for grants made to Microloan intermediaries
for small business marketing, management, and technical assistance under specified circumstances (e.g., the economic
conditions affecting the intermediary). See P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1401. Matching
Requirements Under Small Business Programs.
26
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Temporary Extension Act of 2010, provided the SBA $60 million to continue the fee subsides and 90% maximum loan
guaranty percentage through March 28, 2010. P.L. 111-150, an act to extend the Small Business Loan Guarantee
Program, and for other purposes, provided the SBA authority to reprogram $40 million in previously appropriated
funds to continue the fee subsides and 90% maximum loan guaranty percentage through April 30, 2010. P.L. 111-157,
the Continuing Extension Act of 2010, provided the SBA $80 million to continue the SBA’s fee subsides and 90%
maximum loan guaranty percentage through May 31, 2010. P.L. 111-240, the Small Business Jobs Act of 2010,
provided $505 million (plus an additional $5 million for administrative expenses) to continue the SBA’s fee subsides
and 90% maximum loan guaranty percentage from the act’s date of enactment (September 27, 2010) through December
31, 2010. P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorizes
the SBA to use funds provided under the Small Business Jobs Act of 2010 to continue the SBA’s fee subsides and 90%
maximum loan guaranty percentage through March 4, 2011, or until available funding is exhausted—which occurred
on January 3, 2011.
26
P.L. 111-5, the American Recovery and Reinvestment Act of 2009, Sec. 505, Increasing Small Business Investment.
27
Ibid.
28
U.S. Small Business Administration, Office of Congressional and Legislative Affairs, correspondence with the
author, Washington, DC, January 4, 2010.
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$35,000 to $50,000 and for microlender intermediaries after their first year in the program from
$3.5 million to $5 million.29 It also temporarily increased for one year (through September 26,
2011) the SBA 7(a) Express Program’s loan limit from $350,000 to $1 million. The act also
authorized the Secretary of the Treasury to establish the $30 billion SBLF and a $1.5 billion State
Small Business Credit Initiative to provide funding to participating states with small business
capital access programs.
The SBLF’s Legislative Origin
On March 16, 2009, President Obama announced the first SBLF-like proposal. Under that
proposal, the Department of the Treasury would have used TARP funds to purchase up to
$15 billion of SBA-guaranteed loans.2930 The purchases were intended to “immediately unfreeze
the secondary market for SBA loans and increase the liquidity of community banks.”3031 The plan
was dropped after it met resistance from lenders. Some lenders objected to TARP’s requirement
that participating lenders comply with executive compensation limits and issue warrants to the
federal government. Smaller, community banks objected to the program’s paperwork
requirements, such as the provision of a small-business lending plan and quarterly reports.3132
In his January 2010 State of the Union address, President Obama proposed the creation of a
$30 billion SBLF to enhance access to credit for small businesses:
when you talk to small business owners in places like Allentown, Pennsylvania, or Elyria,
Ohio, you find out that even though banks on Wall Street are lending again, they’re mostly
lending to bigger companies. Financing remains difficult for small business owners across
the country, even those that are making a profit.
Tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid
and use it to help community banks give small businesses the credit they need to stay
afloat.32
In response to the opposition community lenders had expressed concerning TARP’s restrictions in
2009, the Obama Administration proposed that Congress approve legislation authorizing the
transfer of up to $30 billion in TARP spending authority to the SBLF, and statutorily establish the
new program as distinct and independent from TARP and its restrictions.33 The Administration’s
legislative proposal was finalized and sent to Congress on May 7, 2010. 34 Representative Barney
29
33
29
The act also temporarily allows the SBA to waive, in whole or in part, for successive fiscal years, the non-federal
share requirement for loans to the Microloan program’s intermediaries and for grants made to Microloan intermediaries
for small business marketing, management, and technical assistance under specified circumstances (e.g., the economic
conditions affecting the intermediary). See P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 1401. Matching
Requirements Under Small Business Programs.
30
P.L. 110-343, the Emergency Economic Stabilization Act of 2008, was designed to enhance the supply of loans to
businesses of all sizes. The act authorized the Troubled Asset Relief Program (TARP) to “restore liquidity and stability
to the financial system of the United States” by purchasing or insuring up to $700 billion in troubled assets from banks
and other financial institutions. TARP’s purchase authority was later reduced from $700 billion to $475 billion by P.L.
111-203, the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Department of the Treasury has
disbursed $389 billion in TARP funds, including $337 million to purchase SBA 7(a) loan guaranty program securities.
The authority to make new TARP commitments expired on October 3, 2010. U.S. Department of the Treasury,
Troubled Assets Relief Program Monthly 105(a) Report—November 2010, Washington, DC, December 10, 2010, pp.
2-4, http://www.financialstability.gov/docs/November%20105(a)%20FINAL.pdf. For further analysis see CRS Report
R41427, Troubled Asset Relief Program (TARP): Implementation and Status, by Baird Webel.
3031
The White House, “Remarks by the President to Small Business Owners, Community Leaders, and Members of
Congress,” March 16, 2009, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-to-small-businessowners/.
3132
Emily Flitter, “Fix for SBA Snagged by Tarp’s Exec Comp Limits,” American Banker, vol. 174, no. 61 (March 31,
2009), p. 1.
3233
The White House, “Remarks by the President in State of the Union Address,” January 27, 2010,
http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address.
33
The White House, “President Obama Outlines New Small Business Lending Fund,” February 2, 2010,
http://www.whitehouse.gov/the-press-office/president-obama-outlines-new-small-business-lending-fund.
34
The White House, “Remarks by the President on the Monthly Job Numbers,” May 7, 2010, http://m.whitehouse.gov/
the-press-office/remarks-president-monthly-jobs-numbers.
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(continued...)
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In response to the opposition community lenders had expressed concerning TARP’s restrictions in
2009, the Obama Administration proposed that Congress approve legislation authorizing the
transfer of up to $30 billion in TARP spending authority to the SBLF, and statutorily establish the
new program as distinct and independent from TARP and its restrictions.34 The Administration’s
legislative proposal was finalized and sent to Congress on May 7, 2010. 35 Representative Barney
Frank, then-chair of the House Committee on Financial Services, introduced H.R. 5297, the Small
Business Lending Fund Act of 2010, on May 13, 2010.
The House Committee on Financial Services held a hearing on H.R. 5297 on May 18, 2010, and
passed it, as amended to include a State Small Business Credit Initiative, the following day. The
House passed the bill, as amended to include a Small Business Early-Stage Investment Program,
a Small Business Borrower Assistance Program, and some small business tax reduction
provisions, on June 17, 2010.
The House-Passed Version of the SBLF
Title I of the House-passed version of H.R. 5297 authorized the Secretary of the Treasury to
establish a $30 billion SBLF “to address the ongoing effects of the financial crisis on small
businesses by providing temporary authority to the Secretary of the Treasury to make capital
investments in eligible institutions” with total assets equal to or less than $1 billion or $10 billion
(as of the end of the fourth quarter of calendar year 2009) “in order to increase the availability of
credit for small businesses.”3536 The authority to make capital investments in eligible institutions
was limited to one year after enactment.
Eligible financial institutions having total assets equal to or less than $1 billion as of the end of
the fourth quarter of calendar year 2009 could apply to receive a capital investment from the
SBLF in an amount not exceeding 5% of risk-weighted assets, as reported in the FDIC call report
immediately preceding the date of application. During the fourth quarter of 2009, 7,340 FDICinsured lending institutions reported having assets amounting to less than $1 billion. 3637
Eligible financial institutions having total assets equal to or less than $10 billion as of the end of
the fourth quarter of calendar year 2009 could apply to receive a capital investment from the fund
in an amount not exceeding 3% of risk-weighted assets, as reported in the FDIC call report
immediately preceding the date of application. During the fourth quarter of 2009, 565 FDICinsured lending institutions reported having assets of $1 billion to $10 billion.37
Risk-weighted assets are assets such as cash, loans, investments, and other financial institution
assets that have different risks associated with them. FDIC regulations (12 C.F.R. §567.6)
establish that cash and government bonds have a 0% risk-weighting; residential mortgage loans
have a 50% risk-weighting; other types of assets (such as small business loans) have a higher
risk-weighting.38
35
(...continued)
http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address.
34
The White House, “President Obama Outlines New Small Business Lending Fund,” February 2, 2010,
http://www.whitehouse.gov/the-press-office/president-obama-outlines-new-small-business-lending-fund.
35
The White House, “Remarks by the President on the Monthly Job Numbers,” May 7, 2010, http://m.whitehouse.gov/
the-press-office/remarks-president-monthly-jobs-numbers.
36
H.R. 5297, the Small Business Jobs and Credit Act of 2010, Sec. 101. Small Business Lending Fund Purpose. In
2011, there were 7,513 FDIC-insured lending institutions in the United States. Of that number, 6,846 lending
institutions had assets amounting to less than $1 billion (totaling $1.42 trillion), 561 lending institutions had assets of
$1 billion to $10 billion (totaling $1.43 trillion), and 106 lending institutions had assets greater than $10 billion
(totaling $10.76 trillion). See FDIC, “Quarterly Banking Profile: Second Quarter 2011,” Washington, DC,
http://www2.fdic.gov/qbp/2011jun/qbp.pdf.
3637
FDIC, “Quarterly Banking Profile: Fourth Quarter 2009,” Washington, DC, http://www2.fdic.gov/qbp/2009dec/
qbp.pdf.
37
Ibid. In the fourth quarter of 2009, 107 FDIC-insured lending institutions had assets greater than $10 billion.
38
For further analysis of risk-weighted assets, see CRS Report R40249, Who Regulates Whom? An Overview of U.S.
Financial Supervision, by Mark Jickling and Edward V. Murphy.
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immediately preceding the date of application. During the fourth quarter of 2009, 565 FDICinsured lending institutions reported having assets of $1 billion to $10 billion.38
Risk-weighted assets are assets such as cash, loans, investments, and other financial institution
assets that have different risks associated with them. FDIC regulations (12 C.F.R. §567.6)
establish that cash and government bonds have a 0% risk-weighting; residential mortgage loans
have a 50% risk-weighting; other types of assets (such as small business loans) have a higher
risk-weighting.39
Lending institutions on the FDIC problem bank list, or institutions that have been removed from
the FDIC problem bank list for less than 90 days were ineligible to participate in the program.
Lending institutions could refinance securities issued through the Treasury Capital Purchase
Program (CPP) and the Community Development Capital Incentive (CDCI) program under
TARP, but only if the institution had not missed more than one dividend payment due under those
programs.
Participating banks would be charged a dividend rate of 5% per annum initially, with reduced
rates available if the bank increased its small business lending. For example, during any calendar
quarter in the initial two years of the capital investments under the program, the bank’s rate would
be lowered if it had increased its small business lending compared to the average small business
lending it made in the four previous quarters immediately preceding the enactment of the bill,
minus some allowable adjustments. A 2.5% to 5% increase in small business lending would have
lowered the rate to 4%, a 5% to 7.5% increase would have lowered the rate to 3%, a 7.5% to 10%
increase would have lowered the rate to 2%, and an increase greater than 10% would have
lowered the rate to 1%. Table 1 shows the dividend rates associated with small business lending
increases by financial institutions.
Table 1. Small Business Lending Increases and Dividend Rates Under the
House-Passed Version of H.R. 5297
Small Business Lending Increase
Dividend Rate
10% or greater
1%
at least 7.5% but less than 10%
2%
at least 5% but less than 7.5%
3%
at least 2.5% but less than 5%
4%
Less than 2.5%
5%
No increase
7%
Source: H.R. 5297, the Small Business Jobs and Credit Act of 2010, Sec. 103. Small Business Lending Fund.
Note: The dividend rate would increase to 9% at the end of the five-year period that begins on the date of the
capital investment under the program. The Senate-passed version of H.R. 5297, which became the Small Business
Jobs Act of 2010, authorizes the same dividend rates.
38
Ibid. In the fourth quarter of 2009, 107 FDIC-insured lending institutions had assets greater than $10 billion.
For further analysis of risk-weighted assets, see CRS Report R40249, Who Regulates Whom? An Overview of U.S.
Financial Supervision, by Mark Jickling and Edward V. Murphy.
39
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SBLF applicants were also required to submit a small business lending plan to the appropriate
federal banking agency and, for applicants that are state-chartered banks, to the appropriate state
banking regulator. The plan was to describe how the applicant’s business strategy and operating
goals will allow it to address the needs of small businesses in the areas it serves, as well as a plan
to provide linguistically and culturally appropriate outreach, where appropriate. The plan was to
be treated as confidential supervisory information. The Secretary of the Treasury was required to
consult with the appropriate federal banking agency or, in the case of an eligible institution that is
a non-depository community development financial institution, the Community Development
Financial Institution Fund, before determining if the eligible institution was to participate in the
program.39
39
If the appropriate banking agency would not otherwise recommend that the eligible institution receive the capital
investment, the Secretary of the Treasury was authorized, in consultation with the appropriate banking agency, to
consider allowing the eligible institution to participate in the program if the eligible institution provided matching
(continued...)
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40
The bill specified that the SBLF would be “established as separate and distinct from the Troubled
Asset Relief Program established by the Emergency Economic Stabilization Act of 2008. An
institution shall not, by virtue of a capital investment under the Small Business Lending Fund
Program, be considered a recipient of the Troubled Asset Relief Program.”4041
The bill also directed that all funds received by the Secretary of the Treasury in connection with
purchases made by the SBLF, “including interest payments, dividend payments, and proceeds
from the sale of any financial instrument, shall be paid into the general fund of the Treasury for
reduction of the public debt.”4142
The Senate-Passed Version of the SBLF
Title IV of the Senate-passed version of H.R. 5297, which later became law, authorized the
Secretary of the Treasury to establish a $30 billion SBLF to make capital investments in eligible
community banks with total assets equal to or less than $1 billion or $10 billion. There were
several differences between the Senate-passed version of H.R. 5297’s SBLF provisions and the
SBLF provisions in the House-passed version of H.R. 5297. Specifically,
•
the House-passed version of H.R. 5297 indicated that eligible institutions may be
insured depository institutions that are not controlled by a bank holding company
or a savings and loan holding company that is also an eligible institution and is
not directly or indirectly controlled by any company or other entity that has total
consolidated assets of more than $10 billion, bank holding companies, savings
and loan holding companies, community development financial institution loan
funds, and small business lending companies, all with total assets of $10 billion
or less (as of the end of 2009).42 The Senate-passed version of H.R. 5297 did not
provide eligibility to small business lending companies.43
•
the House-passed version of H.R. 5297 defined small business lending “as small
business lending as defined by and reported in an eligible institution’s quarterly
call report, where each loan comprising such lending is made to a small business
and is one the following types: (1) commercial and industrial loans; (2) owneroccupied nonfarm, nonresidential real estate loans; (3) loans to finance
agricultural production and other loans to farmers; (4) loans secured by farmland;
(5) nonowner-occupied commercial real estate loans; and (6) construction, land
(...continued)
40
If the appropriate banking agency would not otherwise recommend that the eligible institution receive the capital
investment, the Secretary of the Treasury was authorized, in consultation with the appropriate banking agency, to
consider allowing the eligible institution to participate in the program if the eligible institution provided matching
capital from private, non-governmental sources that is equal to or greater than 100% of the SBLF investment and that
matching capital was subordinate to the capital investment from the SBLF.
4041
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 111. Assurances.
4142
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 103. Small Business Lending Fund. Using a costbased estimate, the Congressional Budget Office estimated that the SBLF would result in net outlays of $3.3 billion
over 2010-1015, and would reduce outlays by $1.1 billion over the 2010-2020 period. Using an alternative fair-value
estimate, the Congressional Budget Office estimated that the SBLF would result in net outlays of $6.2 billion over the
2010-2020 period. See U.S. Congressional Budget Office, “Cost Estimate: H.R. 5297, Small Business Lending Fund
Act of 2010,” Washington, DC, June 28, 2010, pp. 3, 4, http://www.cbo.gov/ftpdocs/115xx/doc11595/
hr5297_HousePassed.pdf.
42
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 102. Definitions.
43
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4102. Definitions.
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development and other land loans.”44
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or less (as of the end of 2009).43 The Senate-passed version of H.R. 5297 did not
provide eligibility to small business lending companies.44
•
the House-passed version of H.R. 5297 defined small business lending “as small
business lending as defined by and reported in an eligible institution’s quarterly
call report, where each loan comprising such lending is made to a small business
and is one the following types: (1) commercial and industrial loans; (2) owneroccupied nonfarm, nonresidential real estate loans; (3) loans to finance
agricultural production and other loans to farmers; (4) loans secured by farmland;
(5) nonowner-occupied commercial real estate loans; and (6) construction, land
development and other land loans.”45 The Senate-passed version of H.R. 5297’s
definition of small business lending did not include nonowner-occupied
commercial real estate or construction, land development and other land loans.45
46
•
the Senate-passed version of H.R. 5297 had an exclusion provision prohibiting
recipient lending institutions from using the funds to issue loans that have an
original amount greater than $10 million or that would be made to a business
with more than $50 million in revenues.4647 The House-passed version of H.R.
5297 did not contain this provision.
•
the House-passed version of H.R. 5297 indicated that the incentives received in
the form of reduced dividend rates during the first 4.5-year period following the
date on which an eligible institution received a capital investment under the
program would be contingent on an increase in the number of loans made.4748 If the
number of loans made by the institution did not increase by 2.5% for each 2.5%
increase of small business lending, then the rate at which dividends and interest
would be payable during the following quarter on preferred stock or other
financial instruments issued to the Treasury by the eligible institution would be
(i) 5%, if this quarter is within the two-year period following the date on which
the eligible institution received the capital investment under the program; or (ii)
7%, if the quarter is after the two-year period. The Senate-passed version of H.R.
5297 did not contain this legislative language.
•
the House-passed version of H.R. 5297 included an alternative computation
provision that would have allowed eligible institutions to compute their small
business lending amounts for incentive purposes as if the definition of their small
business lending amounts did not require that the loans comprising such lending
be made to small business.4849 This alternative computation would have been
allowed if the eligible institution certified that all lending included by the
institution for purposes of computing the increase in lending was made to small
businesses. The Senate-passed version of H.R. 5297 did not contain this
provision.
43
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 102. Definitions.
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4102. Definitions.
45
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 102. Definitions.
46
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4102. Definitions.
47
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 103. Small Business Lending Fund.
48
Ibid.
49
Ibid.
44
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•
the House-passed version of H.R. 5297 indicated that an eligible institution that
is a community development loan fund may apply to receive a capital investment
from the SBLF in an amount not exceeding 10% of total assets, as reported in the
audited financial statements for the fiscal year of the eligible institution that
ended in calendar year 2009.4950 The Senate-passed version of H.R. 5297 specifies
5%.5051
•
the House-passed version of H.R. 5297 would have required the Secretary of the
Treasury, in consultation with the Community Development Financial
Institutions Fund, to develop eligibility criteria to determine the financial ability
44
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 102. Definitions.
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4102. Definitions.
46
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 103. Small Business Lending Fund.
47
Ibid.
48
Ibid.
49
Ibid.
50
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4103. Small Business Lending Fund.
45
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of a Community Development Loan Fund to participate in the program and repay
the investment. It provided a list of recommended eligibility criteria that the
Secretary of the Treasury could use for this purpose.5152 The Senate-passed version
of H.R. 5297 provided a similar, but mandatory, list of eligibility criteria that
must be used for this purpose.52
53
•
the House-passed version of H.R. 5297 contained a temporary amortization
authority provision which would have allowed an eligible institution to amortize
any loss or write-down on a quarterly straight-line basis over a period of time,
adjusted to reflect the institution’s change in the amount of small business
lending relative to the baseline.5354 The Senate-passed version of H.R. 5297 did not
contain this provision.
The Senate’s version of H.R. 5297 was agreed to in the Senate on September 16, 2010, after
considerable debate and amendment to remove the Small Business Early-Stage Investment
Program and Small Business Borrower Assistance Program, revise the SBLF, and add numerous
other provisions to assist small businesses, including additional small business tax reduction
provisions.5455 The House agreed to the Senate amendments on September 23, 2010, and President
Obama signed the bill, renamed the Small Business Jobs Act of 2010 (P.L. 111-240), into law on
September 27, 2010.
Arguments For and Against the SBLF
The SBLF’s advocates argued that it would create jobs by encouraging lenders, especially those
experiencing liquidity problems (access to cash and easily tradable assets),5556 to increase their
lending to small businesses. For example, the House report accompanying H.R. 5297 argued that
the SBLF was needed to enhance small business’s access to capital, which, in turn, was necessary
to enable those businesses to create jobs and assist in the economic recovery:
50
Ibid.
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4103. Small Business Lending Fund.
52
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 103. Small Business Lending Fund.
53
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4103. Small Business Lending Fund.
54
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 113. Temporary Amortization Authority.
55
For additional information and analysis concerning P.L. 111-240, the Small Business Jobs Act of 2010, see CRS
Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay Dilger.
56
For further information and analysis concerning lender liquidity issues see CRS Report R41073, Government
Interventions in Response to Financial Turmoil, by Baird Webel and Marc Labonte.
51
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There has been a dramatic decrease in the amount of bank lending in the past several
quarters. On May 20, 2010, the Federal Deposit Insurance Corporation (FDIC) released its
Quarterly Banking Profile for the first quarter of 2010. The report shows that commercial
and industrial loans declined for the seventh straight quarter, down more than 17% from the
year before.
Many companies, particularly small businesses, claim that it is becoming harder to get new
loans to keep their business operating and that banks are tightening requirements or cutting
off existing lines of credit even when the businesses are up to date on their loan repayments.
Treasury Secretary Timothy F. Geithner recently acknowledged the problem encountered by
some banks, both healthy and troubled, which have been told to maintain capital levels in
excess of those required to be considered well capitalized.
51
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 103. Small Business Lending Fund.
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4103. Small Business Lending Fund.
53
H.R. 5297, the Small Business Lending Fund Act of 2010, Sec. 113. Temporary Amortization Authority.
54
For additional information and analysis concerning P.L. 111-240, the Small Business Jobs Act of 2010, see CRS
Report R40985, Small Business: Access to Capital and Job Creation, by Robert Jay Dilger.
55
For further information and analysis concerning lender liquidity issues see CRS Report R41073, Government
Interventions in Response to Financial Turmoil, by Baird Webel and Marc Labonte.
52
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Some banks say they have little choice but to scale back lending, even to creditworthy
borrowers, and the most recent Federal Reserve data shows banks are continuing to tighten
lending terms for small businesses.5657
A dissenting view, endorsed by the House Committee on Financial Services’ minority members,
was included in the report. They argued that the SBLF does not properly deal with the lack of
financing for small businesses:
Instead of addressing the problem by stimulating demand for credit by small businesses,
H.R. 5297 injects capital into banks with no guarantees that they will actually lend. The bill
allows a qualifying bank to obtain a capital infusion from the government without even
requiring the bank to make a loan for two years. In fact, if a bank reduces or fails to increase
lending to small business during those first two years, it would not face any penalty. It defies
logic that the Majority would support a bill to increase lending that does not actually require
increased lending. A more effective response to the challenges facing America’s small
businesses was offered by Representatives Biggert, Paulsen, Castle, Gerlach, and King,
whose amendment would have extended a series of small business tax credits before
implementing the Small Business Lending Fund.5758
They also argued that even if the SBLF was authorized “the program probably would not be fully
operational for months; banks could shun the program for fear of being stigmatized by its
association with TARP; and many banks would avoid taking on new liabilities when their existing
assets are troubled.”5859 They also argued that the bill did not provide sufficient oversight for
effectively monitoring the program because the Inspector General of the Department of the
Treasury, who was given that responsibility under the bill, “might not be able to direct sufficient
attention to this task given its other responsibilities.”5960 They argued that the Special Inspector
General of TARP would be in a better position to provide effective oversight of the program.6061
These, and other, arguments were presented during House floor debate on the bill. For example,
Representative Melissa Bean advocated the bill’s passage, arguing that the SBLF
57
H.Rept. 111-499, To Create the Small Business Lending Fund Program to Direct the Secretary of the Treasury to
Make Capital Investments in Eligible Institutions in order to Increase the Availability of Credit for Small Businesses,
and for other purposes, p. 16.
58
Ibid., p. 37.
59
Ibid., pp. 37, 38.
60
Ibid., p. 38.
61
Ibid.
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builds on the effective financial stabilization measures Congress has previously taken by
establishing a new $30 billion small business loan fund to provide additional capital to
community banks that increase lending to small businesses. This $30 billion investment on
which the government will be collecting dividends and earning a profit per the CBO
estimates can be leveraged by banks into over $300 billion in new small business loans. This
is an important investment by the Federal Government in our small business that brings
tremendous returns.
The terms of the capital provided to banks are performance based; the more a bank increases
its small business lending, the lower the dividend rate is for the SBLF capital. If a bank
decreases its small business lending, it will be penalized with higher dividend rates.
This legislation includes strong safeguards to ensure that banks adequately utilize available
funds to increase lending to small businesses, not for other lending or to improve their
56
H.Rept. 111-499, p. 16.
Ibid., p. 37.
58
Ibid., pp. 37, 38.
59
Ibid., p. 38.
60
Ibid.
57
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balance sheet. There will be oversight consistently throughout the program, plus it requires
that the capital be invested only in strong financial institutions at little risk of default and the
best positioned to increase small business lending.
It’s important for Americans to understand that although this fund has a maximum value of
$30 billion, it is estimated to make a profit for taxpayers in the long run. And the money will
ultimately go not to banks, but to the small businesses and their communities that they lend
to. As our financial system stabilizes and our community banks recapitalize, these funds will
be repaid to Treasury with full repayment required over the next 10 years.6162
Representative Nydia Velázquez, then the chair of the House Committee on Small Business,
added that the legislation had sufficient safeguards in place to ensure that the funds were targeted
at small businesses:
First, banks must apply to the Treasury to receive funds, with a detailed plan on how to
increase small business lending at their institution. This language was included at my
insistence that we need to make sure that small businesses will get the benefit of this
legislation.
Second, this capital, repayment of the government loans will be at a dividend rate starting at
5% per year. This rate will be lowered by 1% for every 2.5% increase in small business
lending over 2009 levels. It can go as low as a total dividend rate of just 1% if the bank
increases its business lending by 10% or more, incentivizing banks to do the right thing. To
ensure that banks actually use the funding they receive, the rate will increase—and there are
penalties—to 7% if the bank fails to increase its small business lending at their institution
within 2 years. To ensure that all federal funds are paid back within 5 years, the dividend rate
will increase to 9% for all banks, irrespective of their small business lending, after 4 1/2
years.6263
Representative Velázquez added “let me just make it clear … CBO estimates that [the SBLF] will
save taxpayers $1 billion over 10 years, as banks are expected to pay back this loan over 10 years,
with interest.”63
64
62
Representative Melissa Bean, “Consideration of the Small Business Jobs and Credit Act of 2010,” House debate,
Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4514.
63
Representative Nydia Velázquez, “Consideration of the Small Business Jobs and Credit Act of 2010,” House debate,
Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4518.
64
Ibid.
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Representative Randy Neugebauer opposed the bill’s adoption, arguing that
the majority is repeating the same failed initiatives that have helped our national debt grow
to $13 trillion in the past 2 years. This bill follows the model of the TARP program, minus
[TARP’s] stronger oversight, and it puts another $30 billion into banks in the hopes that
lending to small businesses will increase. In the words of Neil Barofsky, the Special
Inspector General who oversees the TARP, “In terms of its basic design,” he says, “its
participants, its application process, from an oversight perspective, the Small Business
Lending Fund would essentially be an extension of the TARP’s Capital Purchase Program.”
From the Congressional Oversight Panel for TARP, chaired by Elizabeth Warren, she says,
“The SBLF’s prospects are far from certain. The SBLF also raises questions about whether,
in light of the Capital Purchase Program’s poor performance in improving credit access, any
capital infusion program can successfully jump-start small business lending.”
61
Representative Melissa Bean, “Consideration of the Small Business Jobs and Credit Act of 2010,” House debate,
Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4514.
62
Representative Nydia Velázquez, “Consideration of the Small Business Jobs and Credit Act of 2010,” House debate,
Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4518.
63
Ibid.
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This bill allows for another $33 billion in spending that will be added to the government’s
credit card. The CBO tells us that the bank lending portion will ultimately cost taxpayers
$3.4 billion when market risk is taken into account.6465
The arguments presented during House floor debate on H.R. 5297 were also presented during
Senate consideration of the bill. Advocates argued that the SBLF would encourage higher levels
of small business lending and jobs. For example, Senator Mary Landrieu argued on July 21, 2010,
that the SBLF should be adopted because it “is not a government program for banks. It is a
public-private partnership lending strategy for small business.”6566 She added that as chair of the
Senate Committee on Small Business and Entrepreneurship she talked with her colleagues,
including the SBLF’s opponents, and revised the program to address their concerns. She also
argued that the SBLF has
hundreds of endorsements from independent banks, the community banks and almost every
small business association in America … makes $1 billion [according to the CBO score] …
is not direct lending from the federal government. It is not creating a new bureaucracy … [It
is] voluntary … there are no onerous restrictions.… The small business gets the loans. We
create jobs. People are employed. The recession starts ending…. It has nothing to do with
TARP money. It is not a TARP program. It is not a bank program. It doesn’t have anything
to do with banks except that we are working in partnership with banks to lend money to
small businesses which are desperate for money.6667
Opponents argued that the SBLF could lose money, lacked sufficient oversight provisions, did not
require lenders to increase their lending to small businesses, could serve as a vehicle for TARP
recipients to effectively refinance their TARP loans on more favorable terms with little or any
resulting benefit for small businesses, and could encourage a failing lender to make even riskier
loans to avoid higher dividend payments. In addition, there were disagreements over the number
of amendments that could be offered by the minority, which led several Senators to oppose
further consideration of the bill until that issue was resolved to their satisfaction. For example, on
July 22, 2010, Senator Olympia Snowe argued that although “under a cash-based estimate, CBO
listed the official score for the lending fund as raising $1.1 billion over 10 years,” SBLF
65
Representative Randy Neugebauer, “Consideration of the Small Business Jobs and Credit Act of 2010,” House
debate, Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4515.
66
Senator Mary Landrieu, “Small Business Lending,” remarks in the Senate, Congressional Record, daily edition, vol.
156, no. 108 (July 21, 2010), p. S6070.
67
Ibid., p. S6071.
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proponents “fail to mention” that when CBO scored the SBLF using an alternative methodology
that adjusts for market risk, it estimated that the SBLF could cost $6.2 billion.6768 Senator Snowe
also argued that the bipartisan Congressional Oversight Panel for TARP stated in its May 2010
oversight report that the proposed SBLF “substantially resembles” the TARP program and “is a
bank-focused capital infusion program that is being contemplated despite little, if any, evidence
that such programs increase lending.”6869 Senator Snowe also stated that she regretted “that we are
in a position where we have not been able to reach agreement allowing the minority to offer
amendments, which is confounding and perplexing as well as disappointing.”69 Senator Snowe
64
Representative Randy Neugebauer, “Consideration of the Small Business Jobs and Credit Act of 2010,” House
debate, Congressional Record, daily edition, vol. 156, no. 90 (June 16, 2010), p. H4515.
65
Senator Mary Landrieu, “Small Business Lending,” remarks in the Senate, Congressional Record, daily edition, vol.
156, no. 108 (July 21, 2010), p. S6070.
66
Ibid., p. S6071.
67
Senator Olympia Snowe, “Small Business Lending,” remarks in the Senate, Congressional Record, daily edition, vol.
156, no. 108 (July 22, 2010), pp. S6158.
68
Ibid.
69
Ibid., p. S6156.
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70 Senator Snowe
later added that the SBLF’s incentives to encourage lending to small businesses also “could
encourage unnecessarily risky behavior by banks … to avoid paying higher interest rates.”7071
Opponents also questioned the SBLF’s use of quarterly call report data as submitted by lenders to
their appropriate banking regulator to determine what counts as a small business loan.7172 Call
report data denotes loans of $1 million or less as small business loans, regardless of the size of the
business receiving the loan. As a result, the SBLF’s opponents argued that “the data used to
measure small business lending in the SBLF covers an entirely different set of small businesses
than those that fall within the definition set out in the Small Business Act or used by the SBA.”7273
As mentioned previously, the Senate’s version of H.R. 5297 was agreed to on September 16,
2010, by a vote of 68-38.7374 The House agreed to the Senate-passed version of H.R. 5297 on
September 23, 2010, by a vote of 237-187, and the bill was signed into law by President Obama
on September 27, 2010.
The SBLF’s Implementation
On February 14, 2011, the Obama Administration issued its budget recommendation for FY2012.
It anticipated that the SBLF would provide $17.399 billion in financings, well below its
authorized amount of $30 billion.74 This was the first indication that the SBLF’s implementation
may not proceed as expected.75 The second indication that the program’s implementation may not
proceed as expected was an unanticipated delay in the writing of the program’s regulations.
The U.S. Treasury was criticized by some for not implementing the program quickly enough.76
The first financing took place on June 21, 2011, about nine months after the program’s enactment.
The delay was largely due to the Treasury’s need to finalize the SBLF’s investment decision
70
75 This was the first indication that the SBLF’s implementation
68
Senator Olympia Snowe, “Small Business Lending,” remarks in the Senate, Congressional Record, daily edition, vol.
156, no. 108 (July 22, 2010), pp. S6158.
69
Ibid.
70
Ibid., p. S6156.
71
Senator Olympia Snowe, “Small Business Lending Fund Act of 2010,” remarks in the Senate, Congressional Record,
daily edition, vol. 156, no. 125 (September 16, 2010), pp. S7157.
7172
The act specified that the SBLF could not be used to provide loans greater than $10 million or that go to a business
with more than $50 million in revenues. See P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4102.
Definitions.
7273
Representative Sam Graves, “Full Committee Hearing, The State of Small Business Access to Credit and Capital:
The View from Secretary Geithner,” Letter to Members of the House Small Business Committee, Washington, DC,
June 20, 2011, p. 19, http://smbiz.house.gov/UploadedFiles/6-22_Memo.pdf.
7374
Senator Kay Hagen, “Motion to Invoke Cloture on H.R. 5297, the Small Business Lending Fund Act of 2010,”
Rollcall Vote No. 236 Leg., Congressional Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158;
and Senator Al Franken, “Small Business Lending Fund Act of 2010,” Rollcall Vote No. 237 Leg., Congressional
Record, daily edition, vol. 156, part 125 (September 16, 2010), p. S7158.
7475
U.S. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2012, Appendix:
Department of the Treasury (Washington DC, GPO, 2011), p. 989, http://www.whitehouse.gov/sites/default/files/omb/
budget/fy2012/assets/tre.pdf
75
The Department of the Treasury based its forecast on an “analysis of demand for the program.” See U.S. Department
of the Treasury, “FY2012 Congressional Justification, Small Business Lending Fund,” Washington, DC, page 7,
http://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_SBLF_508.pdf
76
Representative Sam Graves, Press Release, “Graves Questions Treasury Secretary Timothy Geithner on Access to
Capital for Small Businesses,” Washington, DC, June 22, 2011, http://www.smallbusiness.house.gov/News/
DocumentSingle.aspx?DocumentID=248058; and U.S. Congress, House Committee on Small Business, The State of
Small Business Access to Capital and Credit: The View From Secretary Geithner, 112th Cong., 1st sess., June 22, 2011,
Small Business Committee Document No. 112-023 (Washington: GPO, 2011), pp. 3, 9-11, 22, 25.
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process with federal banking agencies77
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may not proceed as expected.76 The second indication that the program’s implementation may not
proceed as expected was an unanticipated delay in the writing of the program’s regulations.
Treasury’s Roll Out of the Program
The U.S. Treasury was criticized by some for not implementing the program quickly enough.77
The first financing took place on June 21, 2011, about nine months after the program’s enactment.
The delay was largely due to the Treasury’s need to finalize the SBLF’s investment decision
process with federal banking agencies78 and the need to create separate SBLF regulations for
financial institutions established as C Corporations, Subchapter S Corporations, mutual lending
institutions, and community development financial institutions (CDFIs).
A “C corporation” is a legal entity established under state law and includes shareholders,
directors, and officers. The profit of a C corporation is taxed to the corporation when earned, and
then is taxed to the shareholders when distributed as dividends.7879 The majority of insured
depository institutions, bank holding companies, and savings and loan holding companies are C
corporations.7980 A “Subchapter S Corporation” refers to a section of the Internal Revenue Code
(IRS) that allows a corporation to pass corporate income, losses, deductions, and credits through
to their shareholders for federal tax purposes. Shareholders of S corporations report the flowthrough of income and losses on their personal tax returns and are assessed tax at their individual
income tax rates. This allows S corporations to avoid double taxation on the corporate income.8081
Mutual lending institutions, which include many thrifts and savings and loans associations, are
owned by its depositors or policyholders. They have no stockholders. CDFIs are financial entities
certified by the Community Development Financial Institutions Fund (CDFI Fund) in the U.S.
76
The Department of the Treasury based its forecast on an “analysis of demand for the program.” See U.S. Department
of the Treasury, “FY2012 Congressional Justification, Small Business Lending Fund,” Washington, DC, page 7,
http://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_SBLF_508.pdf
77
Representative Sam Graves, Press Release, “Graves Questions Treasury Secretary Timothy Geithner on Access to
Capital for Small Businesses,” Washington, DC, June 22, 2011, http://www.smallbusiness.house.gov/News/
DocumentSingle.aspx?DocumentID=248058; and U.S. Congress, House Committee on Small Business, The State of
Small Business Access to Capital and Credit: The View From Secretary Geithner, 112th Cong., 1st sess., June 22, 2011,
Small Business Committee Document No. 112-023 (Washington: GPO, 2011), pp. 3, 9-11, 22, 25. Also see U.S.
Government Accountability Office, Additional Actions Needed to Improve Transparency and Accountability, GAO-12183, December 14, 2011, http://www.gao.gov/products/GAO-12-183.
78Department of the Treasury, and provide capital and financial services to underserved
communities.
The establishment of separate regulations for each of these different types of financial institutions
was largely related to issues involving whether the SBLF’s financings would be counted by
banking regulatory agencies as Tier 1 capital (core capital that is relatively liquid, such as
common shareholders’ equity, disclosed reserves, most retained earnings, and perpetual noncumulative preferred stocks) or as Tier 2 capital (supplementary capital that consists mainly of
undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and
subordinated term debt).81
77
Treasury and the federal banking agencies ultimately agreed that the banking agencies “would advise Treasury only
on the financial viability of applicants and their capacity to increase small business lending, and that they would not
make investment recommendations as they had for TARP. It was agreed that an applicant would be considered “viable”
if it was (1) adequately capitalized; (2) not expected to become undercapitalized; and (3) not expected to be placed into
conservatorship or receivership. Further, the [agencies’] validation of viability of an applicant would reflect only
currently available supervisory information and rating assessments at the time the validation was made and would not
predict Treasury’s loss from making an investment in the institution.” See U.S. Department of the Treasury, Office of
the Inspector General. Small Business Lending Fund: Investment Decision Process for the Small Business Lending
Fund, Washington, DC, May 13, 2011, p. 8, http://www.treasury.gov/about/organizational-structure/ig/Documents/
SBLF%20Report%20(OIG-SBLF-11-001).pdf.
7879
Internal Revenue Service, “Corporations,” Washington, DC, http://www.irs.gov/businesses/small/article/0,,id=
98240,00.html.
7980
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Investment
Decision Process for the Small Business Lending Fund, Washington, DC, May 13, 2011, p. 7, http://www.treasury.gov/
about/organizational-structure/ig/Documents/SBLF%20Report%20(OIG-SBLF-11-001).pdf..
8081
Internal Revenue Service, “S Corporations,” Washington, DC, http://www.irs.gov/businesses/small/article/0,,id=
98263,00.html.
81
12 C.F.R. §325.2: “Tier 1 capital or core capital means the sum of common stockholders’ equity, noncumulative
perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, minus all
intangible assets (other than mortgage servicing assets, nonmortgage servicing assets, and purchased credit card
relationships eligible for inclusion in core capital pursuant to §325.5(f)), minus credit-enhancing interest-only strips
that are not eligible for inclusion in core capital minus deferred tax assets in excess of the limit set forth in §325.5(g),
minus identified losses (to the extent that Tier 1 capital would have been reduced if the appropriate accounting entries
to reflect the identified losses had been recorded on the insured depository institution’s books), and minus investments
in financial subsidiaries subject to 12 CFR part 362, subpart E, and minus the amount of the total adjusted carrying
(continued...)
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Department of the Treasury, and provide capital and financial services to underserved
communities.
The establishment of separate regulations for each of these different types of financial institutions
was largely related to issues involving whether the SBLF’s financings would be counted by
banking regulatory agencies as Tier 1 capital (core capital that is relatively liquid, such as
common shareholders’ equity, disclosed reserves, most retained earnings, and perpetual noncumulative preferred stocks) or as Tier 2 capital (supplementary capital that consists mainly of
undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and
subordinated term debt).82
The treatment of the SBLF’s financings was important given that banks must maintain a
minimum total risk-based capital ratio of 8% (the ratio measures bank capital against assets, with
asset values risk-weighted, or adjusted on a scale of riskiness) to be considered adequately
capitalized by federal banking regulators. In addition, banks must maintain a minimum Tier 1
risk-based ratio to assets, typically 3% for banking institutions with the highest financial ratings
and 4% for others.8283
According to Treasury officials, under Internal Revenue Service (IRS) rules, S corporations can
have only a single class of stock (common shares). Consequently, these institutions cannot issue
preferred stock to Treasury. As a result, Treasury had to consider purchasing subordinated debt
from these institutions, which the banking regulatory agencies would likely designate as Tier 2
capital.8384 Treasury officials believed that providing Tier 2 capital would probably result in fewer S
corporation participants. Additionally, because mutual institutions do not issue stock, Treasury
officials were unable to receive preferred stock as consideration for an investment in this type of
institution. Therefore, Treasury had to consider purchasing subordinated debt from these
institutions as well.8485
Treasury completed its regulations for C corporation banks first. For C Corporations, SBLF funds
will be treated as Tier I capital and the Treasury will purchase senior perpetual noncumulative
preferred stock (or an equivalent). The stock will pay a quarterly dividend on the first day of each
quarter after closing of the SBLF capital program funding. Tier 1 capital is the core measure of a
bank’s financial strength from a regulator’s point of view. It is composed of core capital, which
consists primarily of common stock and disclosed reserves (or retained earnings), but may also
include non-redeemable non-cumulative preferred stock. In contrast, S Corporations and mutual
lending institutions will receive unsecured subordinated debentures from the Treasury, which will
be considered Tier 2 capital for regulatory capital requirements.85
The application deadline for C corporation banks was May 16, 2011. The application deadline for
Subchapter S corporations and mutual lending institutions was June 6, 2011, and the application
deadline for CDFIs was June 22, 2011. A total of 926 institutions applied for $11.8 billion in
SBLF funding.86
(...continued)82
12 C.F.R. §325.2: “Tier 1 capital or core capital means the sum of common stockholders’ equity, noncumulative
perpetual preferred stock (including any related surplus), and minority interests in consolidated subsidiaries, minus all
intangible assets (other than mortgage servicing assets, nonmortgage servicing assets, and purchased credit card
relationships eligible for inclusion in core capital pursuant to §325.5(f)), minus credit-enhancing interest-only strips
that are not eligible for inclusion in core capital minus deferred tax assets in excess of the limit set forth in §325.5(g),
minus identified losses (to the extent that Tier 1 capital would have been reduced if the appropriate accounting entries
to reflect the identified losses had been recorded on the insured depository institution’s books), and minus investments
in financial subsidiaries subject to 12 CFR part 362, subpart E, and minus the amount of the total adjusted carrying
value of nonfinancial equity investments that is subject to a deduction from Tier 1 capital as set forth in section II.B.(6)
of appendix A to this part.”
8283
For further information and analysis of federal banking regulations see CRS Report R40249, Who Regulates Whom?
An Overview of U.S. Financial Supervision, by Mark Jickling and Edward V. Murphy.
8384
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Investment
Decision Process for the Small Business Lending Fund, Washington, DC, May 13, 2011, p. 7, http://www.treasury.gov/
about/organizational-structure/ig/Documents/SBLF%20Report%20(OIG-SBLF-11-001).pdf.
8485
Ibid.
85
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include non-redeemable non-cumulative preferred stock. In contrast, S Corporations and mutual
lending institutions will receive unsecured subordinated debentures from the Treasury, which will
be considered Tier 2 capital for regulatory capital requirements.86
The application deadline for C corporation banks was May 16, 2011. The application deadline for
Subchapter S corporations and mutual lending institutions was June 6, 2011, and the application
deadline for CDFIs was June 22, 2011. A total of 926 institutions applied for $11.8 billion in
SBLF funding.87
Treasury approved $4,027,703,880 in SBLF financing to 332 lending institutions.88 SBLF
recipients have offices located in 47 states and the District of Columbia. The average financing
was $12,131,638, ranging from $42,000 to $141,000,000.89
Of the 332 lending institutions which received financing, 137 institutions had participated in
TARP’s Community Development Capital Initiative or its Capital Purchase Program. These
institutions received $2,689,763,790 in SBLF financing (66.8% of the total).90
Small Business Lending Progress Reports
Treasury is required to publish monthly reports describing all of the transactions made under the
SBLF program during the reporting period. It is also required to publish a semiannual report
(each March and September) providing all projected costs and liabilities, all operating expenses,
and all transactions made by the SBLF, including a list of all participating institutions and the
amounts each institution has received under the program. Treasury is also required to publish a
quarterly report describing how participating institutions have used the funds they have received
under the program.91
Institutions participating in the SBLF are required to submit an Initial Supplemental Report to
Treasury, no later than five business days before closing. It provides information from the
institution’s FDIC call reports or, for holding companies, from their subsidiaries’ FDIC call
reports, that Treasury uses to establish an initial baseline for measuring the SBLF participants’
progress in making loans to small businesses.92
86
12 C.F.R. Appendix A to Part 3 - Risk-Based Capital Guidelines: “The following elements comprise a national
bank’s Tier 2 capital: (1) Allowance for loan and lease losses, up to a maximum of 1.25% of risk-weighted assets, 3
subject to the transition rules in section 4(a)(2) of this appendix A; 3 The amount of the allowance for loan and lease
losses that may be included in capital is based on a percentage of risk-weighted assets.”
8687
U.S. Department of the Treasury, “Small Business Lending Fund Cost Report, Report to Congress submitted
pursuant to Section 4106(2) of the Small Business Jobs Act of 2010,” Washington, DC, July 19, 2011, p. 1,
http://www.treasury.gov/resource-center/sb-programs/DocumentsSBLFTransactions/
SBLF%204106(2)%20Cost%20Report.pdf.
88
U.S. Department of the Treasury, “SBLF Investments as of September 27, 2011,” Washington DC,
http://www.treasury.gov/resource-center/sb-programs/DocumentsSBLFTransactions/SBLF_BiWeekly_Transactions_Report_THRU_09272011.pdf.
89
Ibid.
90
Ibid.
91
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4106. Reports.
92
U.S. Department of the Treasury, “SBLF: Getting Started Guide,” Washington DC, June 27, 2011, p. 13,
http://www.treasury.gov/resource-center/sb-programs/Documents/SBLF%20Getting%20Started%20Guide.pdf.
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Treasury approved $4,027,703,880 in SBLF financing to 332 lending institutions.87 SBLF
recipients have offices located in 47 states and the District of Columbia. The average financing
was $12,131,638, ranging from $42,000 to $141,000,000.88
Of the 332 lending institutions which received financing, 137 institutions had participated in
TARP’s Community Development Capital Initiative or its Capital Purchase Program. These
institutions received $2,689,763,790 in SBLF financing (66.8% of the total).89The initial baseline small business lending amount is the average amount of qualified small
business lending that was outstanding for the four-full quarters ending on June 30, 2010.93 This
initial baseline amount is derived by first adding the outstanding amount of lending reported for
all 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. Then, the outstanding amount of lending for large loans (defined as any loan or group
of loans greater than $10 million), loans to large businesses (defined as businesses with annual
revenues greater than $50 million), and the portion of any loans guaranteed by the U.S.
government or for which the risk is assumed by a third party is subtracted from that amount. The
lending institution then adds back any cumulative charge-offs with respect to such loans since
July 1, 2010. This last adjustment is done to prevent lending institutions from being penalized for
appropriately charging off loans.94
According to the Initial Supplemental Reports submitted by the SBLF’s participants, the baseline
level of small business lending for future comparisons is $35.9 billion.95 This initial baseline
amount is expected to remain fairly constant. However, it will be adjusted to take into account
any gains in qualified small business lending during the four baseline quarters resulting from
mergers, acquisitions, and loan purchases by the SBLF’s participants. This adjustment is designed
to ensure that future dividend rate reductions provided to any SBLF participant corresponds to
additional lending to small businesses and not to the acquisition of existing loans.96
SBLF institutions are also required to submit Quarterly Supplemental Reports, due in the calendar
quarter following submission of the Initial Supplemental Report and in each of the next nine
quarters, to determine their dividend rate for the next quarter.97
Using information contained in the Quarterly Supplemental Reports, Treasury announced in its
quarterly “Use of Funds” report released on January 9, 2012, that, as of September 30, 2011,
institutions participating in SBLF have made important progress in increasing their small
business lending, helping to support small businesses and local economies across the nation:
•
In total, SBLF participants have increased their small business lending by $3.5 billion
over a $35.9 billion baseline.
•
Increases in small business lending are widespread across SBLF participants, with 78%
of participants [259 of 332] having already increased their small business lending over
baseline levels.
•
A substantial majority of SBLF participants—more than 60% of participants [203 of
332] ─have now increased their small business lending by 10% or more.98
93
Ibid.
Ibid., p. 15.
95
U.S. Department of the Treasury, “SBLF Quarterly 4106(3) Report – 4Q 2011,” Washington, DC,
http://www.treasury.gov/resource-center/sb-programs/DocumentsSBLFTransactions/
Use%20of%20Funds%204016(3)%20Report%20-%2001-09-12.pdf. SBLF institutions are also required to complete a
short annual lending survey and provide annual certifications to Treasury that attest the accuracy of their reports,
among other things.
96
Ibid.
97
U.S. Department of the Treasury, “SBLF: Getting Started Guide,” Washington DC, June 27, 2011, p. 13,
http://www.treasury.gov/resource-center/sb-programs/Documents/SBLF%20Getting%20Started%20Guide.pdf.
94
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On January 10, 2012, Donald Graves, Deputy Assistant Secretary at Treasury, announced that the
Quarterly Use of Funds report released the previous day “contains strong evidence that the Small
Business Lending Fund is working.”99 He added that “this report on SBLF is encouraging, and we
look forward to even stronger reports in the future.”100
Some financial commentators had a somewhat less sanguine view of the report’s findings. For
example, one commentator noted that while the report of increased small business lending was
positive news “it is difficult to isolate the proportion of new lending that would have occurred
anyway” due to improvements in the economy.101 Another commentator noted that the data may
have been skewed by SBLF participants who were entering the small business lending market for
the first time, making the increases appear larger and more significant than they actually are;
another noted that the reported growth in small business lending occurred over six quarters (since
June 30, 2010) and that the results, while positive, are “not as impressive as it may seem.”102
Proposed Legislation
Several bills have been introduced in the 112th Congress to amend the SBLF. For example,
Senator Snowe introduced S. 681, the Greater Accountability in the Lending Fund Act of 2011,
on March 30, 2011. Senator Snowe argued that
While I would prefer to terminate this fund altogether, it is unlikely based on the current
political environment, which is why we must work to protect taxpayers from some of its
most egregious provisions. My goal with this legislation is to ensure that only healthy banks
have access to taxpayer money, that they are required to repay loans within a reasonable
period of time, and that small businesses find the affordable credit they need.90103
The bill would, among other things,
•
require recipients to repay SBLF distributions within 10 years of the receipt of
the investment,91104
•
terminate the program no later than 15 years after the date of the bill’s
enactment,92
•
prohibit the Secretary of the Treasury from making capital investments under the
program if the FDIC is appointed receiver of 5% or more of the institutions
receiving an investment under the program,
•
prohibit participation by any institution that received an investment under TARP
(effective on the date of the bill’s enactment),
87
U.S. Department of the Treasury, “SBLF Investments as of September 27, 2011,” Washington DC,
http://www.treasury.gov/resource-center/sb-programs/DocumentsSBLFTransactions/SBLF_BiWeekly_Transactions_Report_THRU_09272011.pdf.
88
Ibid.
89
Ibid.
90105
(...continued)
98
U.S. Department of the Treasury, “SBLF Quarterly 4106(3) Report – 4Q 2011,” Washington, DC, pp. 1-3,
http://www.treasury.gov/resource-center/sb-programs/DocumentsSBLFTransactions/
Use%20of%20Funds%204016(3)%20Report%20-%2001-09-12.pdf.
99
U.S. Department of the Treasury, “Small Business Lending Successes,” Washington, DC, January 10, 2012,
http://www.treasury.gov/connect/blog/Pages/Small-Business-Lending-Successes.aspx.
100
Ibid.
101
Harry Terris, “Former TARP Banks Lag Peers in SBLF Lending,” American Banker, Vol. 177, No. 16, January 25,
2012.
102
Kate Davidson, “Was the SBLF Program a Success?” American Banker, Vol. 177, No. 8, January 12, 2012.
103
U.S. Senator Olympia Snowe, “Snowe Calls for Comprehensive Fixes to Small Business Lending Fund,”
Washington DC, March 30, 2011, http://snowe.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=
b1507369-8193-44ff-94ae-ceb94d5debe8&ContentType_id=ae7a6475-a01f-4da5-aa94-0a98973de620&Group_id=
2643ccf9-0d03-4d09-9082-3807031cb84a&MonthDisplay=3&YearDisplay=2011.
91104
Current law provides the Treasury Secretary the discretion to extend the repayment period beyond 10 years. P.L.
111-240, the Small Business Jobs Act of 2010, Sec. 4103(d)(5)(h); 12 U.S.C. § 4741.
92
Current law does not include a termination date for the program, other than terminating the authority to make capital
investments in eligible institutions one year after the date of enactment. P.L. 111-240, the Small Business Jobs Act of
2010, Sec. 4109. Termination and Continuation of Authorities.
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•
prohibit the Secretary of the Treasury from making capital investments under the
program if the FDIC is appointed receiver of 5% or more of the institutions
receiving an investment under the program,
•
prohibit participation by any institution that received an investment under TARP
(effective on the date of the bill’s enactment),
•
remove provisions allowing the Secretary of Treasury to make a capital
investment in institutions that would otherwise not be recommended to receive
the investment based on the institution’s financial condition, but are able to
provide a matching investment from private, nongovernmental investors,
•
require the approval of appropriate financial regulators when determining
whether an institution should receive a capital investment,93106 and
•
revise the benchmark against which changes in the amount of small business
lending is measured from the four full quarters immediately preceding the date of
enactment to calendar year 2007.94107
Representative Patrick McHenry introduced H.R. 1387, the Small Business Lending Fund
Accountability Act of 2011, on May 2, 2011. It would give the Special Inspector General for
TARP responsibility for providing oversight over the SBLF.
Senator Tom Coburn proposed S.Amdt. 279 to S. 493, the Small Business Innovation Research,
Small Business Technology Transfer Reauthorization Act of 2011, on March 31, 2011. It would
prevent TARP recipients from using funds received in any form under any other federal assistance
program, including the SBLF program.
Representative Cedric Richmond, introduced H.R. 2807, the Small Business Leg-Up Act of 2011,
on August 5, 2011. It would transfer any unobligated and repaid funds from the SBLF to the
Community Development Financial Institutions Fund beginning on the date when the Secretary
of the Treasury’s authority to make capital investments in eligible institutions expires (on
September 27, 2011). The bill’s stated intent is “to increase the availability of credit for small
businesses.”95108
Representative John Carney introduced H.R. 3147, the Small Business Lending Extension Act, on
October 21, 2011. It would extend the Treasury Department’s investment authority from one year
following enactment to two years and require the Treasury Secretary to provide any institution not
selected for participation in the program the reason for the rejection, ensure that the rejection
reason remains confidential, and establish an appeal process that provides the institution an
opportunity to contest the reason provided for the rejection of its application.
Concluding Observations
The SBLF was enacted as part of a larger effort to enhance the supply of capital to small
businesses. Advocates argued that the SBLF would help to address the recent decline in small
93
(...continued)
105
Current law does not include a termination date for the program, other than terminating the authority to make capital
investments in eligible institutions one year after the date of enactment. P.L. 111-240, the Small Business Jobs Act of
2010, Sec. 4109. Termination and Continuation of Authorities.
106
Current law requires the Treasury Secretary to consult with appropriate financial regulators to determine if the
eligible institution may receive a capital investment under the program. P.L. 111-240, the Small Business Jobs Act of
2010, Sec. 4103(d); 12 U.S.C. § 4741.
94107
Senator Snowe indicated that this change “would address concerns that the existing benchmark may be too low, by
historical standards, and that an adjustment could result in additional small business lending. See U.S. Senator Olympia
Snowe, “Snowe Calls for Comprehensive Fixes to Small Business Lending Fund,” Washington DC, March 30, 2011,
http://snowe.senate.gov/public/index.cfm/pressreleases?ContentRecord_id=b1507369-8193-44ff-94ae-ceb94d5debe8&
ContentType_id=ae7a6475-a01f-4da5-aa94-0a98973de620&Group_id=2643ccf9-0d03-4d09-9082-3807031cb84a&
MonthDisplay=3&YearDisplay=2011.
95108
H.R. 2807, the Small Business Leg-Up Act of 2011.
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following enactment to two years and require the Treasury Secretary to provide any institution not
selected for participation in the program the reason for the rejection, ensure that the rejection
reason remains confidential, and establish an appeal process that provides the institution an
opportunity to contest the reason provided for the rejection of its application.
Concluding Observations
The SBLF was enacted as part of a larger effort to enhance the supply of capital to small
businesses. Advocates argued that the SBLF would help to address the recent decline in small
business lending and create jobs. Opponents were not convinced that it would enhance small
business lending, and worried about the program’s potential cost to the federal treasury and its
similarities to TARP.
It is still too early to determine the extent, if any, of the program’s affect on small business lending.
Under the Small Business Jobs Act, the Department of the Treasury’s Inspector General is
required to conduct audits and investigations of the SBLF and to report its findings to Congress
and the Secretary of the Treasury no less than two times a year. The Inspector General’s first
semiannual audit was reported on May 13, 2011.96 In addition, the Government Accountability
Office is required to audit the program annually.97 Although not specifically mandated by law,
these audits could address the program’s affect on small business lending.98 However, any
analysis of the program’s influence on small business lending is likely to be more suggestive than
definitive because differentiating the SBLF’s affect on small business lending from other factors,
such as changes in the lender’s local economy, is methodologically challenging, especially given
the relatively small amount of financing involved relative to the national market for small
business loans. The SBLF’s $4.0 billion in financing represents less than 0.6% of outstanding
To date, Treasury’s Inspector
General has released two semiannual audits, the first on May 13, 2011, and the second on
December 22, 2011.109 The first audit focused on Treasury’s investment decision process for
evaluating SBLF applicants. The second audit focused on Treasury’s cost and liabilities
projections for the program. In addition, the Government Accountability Office is required to
audit the program annually.110
Although not specifically mandated by law, these audits could address the program’s affect on
small business lending.111 However, any analysis of the program’s influence on small business
lending is likely to be more suggestive than definitive because differentiating the SBLF’s affect
on small business lending from other factors, such as changes in the lender’s local economy, is
methodologically challenging, especially given the relatively small amount of financing involved
relative to the national market for small business loans. The SBLF’s $4.0 billion in financing
represents less than 0.6% of outstanding small business loans.
It is also too early to fully address opponents’ concerns about the program’s potential cost to the
Treasury. However, one issue that has arisen relative to the program’s cost is the non-cumulative
treatment . In
December 2010, before accepting any applicants, Treasury initially estimated that the SBLF could
cost taxpayers up to $1.26 billion (excluding administrative costs that are an estimated $26
million annually).112 It based that estimate with an expectation that about $17 billion in SBLF
109
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Investment
Decision Process for the Small Business Lending Fund, Washington, DC, May 13, 2011, http://www.treasury.gov/
about/organizational-structure/ig/Documents/SBLF%20Report%20(OIG-SBLF-11-001).pdf; and U.S. Department of
the Treasury, Office of the Inspector General. Small Business Lending Fund: Treasury Should Consider Concerns
Regarding Participants Management and Historical Retained Earnings When Estimating the Cost of the SBLF
Program, Washington, DC, December 22, 2011, http://www.treasury.gov/about/organizational-structure/ig/
Agency%20Documents/Cost%20of%20SBLF%20Program%20-%20Final%20Report%20for%20Internet.pdf.
110
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4107. Oversight and Audits.
111
Representative Sam Graves, “Full Committee Hearing, The State of Small Business Access to Credit and Capital:
The View from Secretary Geithner,” Letter to Members of the House Small Business Committee, Washington, DC,
June 20, 2011, p. 19, http://smbiz.house.gov/UploadedFiles/6-22_Memo.pdf.
112
Program administrative costs (e.g., monitoring the performance and compliance of participants, reporting on the
program’s performance and costs, and managing the securities purchased through the SBLF program) must be excluded
from subsidy cost estimates in accordance with guidelines in the Federal Credit Reform Act of 1990. See OMB
(continued...)
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financings would be disbursed. In October 2011, Treasury estimated the program’s costs based on
actual participant data. It estimated that the SBLF will generate a savings of $0.08 billion, with
the savings coming primarily from a lower than expected financing level and, to a lesser extent,
improvements in projected default rates “due to higher participant quality than expected” and
lower market interest rates.113
One issue that has arisen relative to the program’s projected cost is the non-cumulative treatment
of dividends. The Treasury’s Inspector General reported in May 2011 that
Under the terms set by legislation, dividend payments are non-cumulative, meaning that
institutions are under no obligation to make dividend payments as scheduled or to pay off
previously missed payments before exiting the program. This dividend treatment differs from
the TARP programs, in which many dividend payments were cumulative. This change in
dividend treatment was driven by changes in capital requirements mandated by the Collins
Amendment to the Dodd-Frank Act.
The amendment equalizes the consolidated capital requirements for Tier 1 capital of bank
holding companies by requiring that, at a minimum, regulators apply the same capital and
risk standards for FDIC-insured banks to bank holding companies. Under TARP, the FRB
[Federal Reserve Board] and FDIC treated capital differently at the holding company and
depository institution levels. The FRB treated cumulative securities issued by holding
companies as Tier 1 capital, while FDIC treated non-cumulative securities issued by
depository institutions as Tier 1 capital. In order to comply with the Dodd-Frank Act
requirement that securities purchased from holding companies receive the same capital
treatment as those purchased from depository institutions, Treasury made the dividends
under SBLF non-cumulative.
96
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Investment
Decision Process for the Small Business Lending Fund, Washington, DC, May 13, 2011, http://www.treasury.gov/
about/organizational-structure/ig/Documents/SBLF%20Report%20(OIG-SBLF-11-001).pdf.
97
P.L. 111-240, the Small Business Jobs Act of 2010, Sec. 4107. Oversight and Audits.
98
Representative Sam Graves, “Full Committee Hearing, The State of Small Business Access to Credit and Capital:
The View from Secretary Geithner,” Letter to Members of the House Small Business Committee, Washington, DC,
June 20, 2011, p. 19, http://smbiz.house.gov/UploadedFiles/6-22_Memo.pdf.
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Additionally, given that Tier 1 capital must be perpetual and cannot have a mandatory
redemption date, the 10-year repayment period in the Small Business Jobs Act cannot be
enforced.99114
Treasury has addressed this issue by placing the following additional requirements and
restrictions on participants who miss dividend payments:
•
the participant’s CEO [Chief Executive Office] and CFO [Chief Financial
Officer] must provide written notice regarding the rationale of the board of
directors (BOD) for not declaring a dividend,
•
no repurchases may be affected and no dividends may be declared on any
securities for the applicable quarter and the following three quarters,
(...continued)
Circular A-11, section 185.2.
113
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Treasury Should
Consider Concerns Regarding Participants Management and Historical Retained Earnings When Estimating the Cost
of the SBLF Program, Washington, DC, December 22, 2011, pp. 1-3, http://www.treasury.gov/about/organizationalstructure/ig/Agency%20Documents/Cost%20of%20SBLF%20Program%20%20Final%20Report%20for%20Internet.pdf.
114
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Investment
Decision Process for the Small Business Lending Fund, Washington, DC, May 13, 2011, p. 19,
http://www.treasury.gov/about/organizational-structure/ig/Documents/SBLF%20Report%20(OIG-SBLF-11-001).pdf.
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•
after four missed payments (consecutive or not), the issuer’s BOD must certify in
writing that the issuer used best efforts to declare and pay dividends
appropriately,
•
after five missed payments (consecutive or not), Treasury may appoint a
representative to serve as an observer on the issuer’s BOD, and
•
after six missed payments (consecutive or not), Treasury may elect two directors
to the issuer’s BOD if the liquidation preference is $25 million or more.100115
The Treasury’s Inspector General agreed that Treasury’s equity investment policy is consistent
with the legislation and that “it has reasonably structured the program to incentivize payment of
dividends.”101116 However, it recommended that “Congress consider whether an amendment to the
Small Business Jobs Act and/or waiver from the Collins Amendment to the Dodd-Frank Act is
needed to make the repayment of dividends a requirement for exiting the program.”102117
In conclusion, congressional oversight of the SBLF is currently focused on the program’s
potential long-term costs and affect on small business lending. Underlying those concerns are
fundamental disagreements concerning the best way to assist small businesses. Some advocate
the provision of additional federal resources to assist small businesses in acquiring capital
necessary to start, continue, or expand operations and create jobs. Others worry about the longterm adverse economic effects of spending programs that increase the federal deficit. They
advocate business tax reduction, reform of financial credit market regulation, and federal fiscal
restraint as the best means to assist small businesses and create jobs.
99
U.S. Department of the Treasury, Office of the Inspector General. Small Business Lending Fund: Investment
Decision Process for the Small Business Lending Fund, Washington, DC, May 13, 2011, p. 19,
http://www.treasury.gov/about/organizational-structure/ig/Documents/SBLF%20Report%20(OIG-SBLF-11-001).pdf.
100
Ibid., pp. 19, 20.
101
Ibid., p. 20.
102
Ibid., p. 25.
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Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110
115
Ibid., pp. 19, 20.
Ibid., p. 20.
117
Ibid., p. 25.
116
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