Accessibility Resources

ACCION Cathy Bochat (left) stands in front of the motorcycle school she operates in San Antonio, Texas.

Ammar Askari, Community Development Expert, Office of the Comptroller of the Currency

The $30 billion Small Business Lending Fund (SBLF) is the flagship program of the Small Business Jobs Act of 2010 (SBJ Act). The SBLF supports community banks and small businesses. It provides Tier 1 capital by authorizing the U.S. Department of the Treasury to buy preferred stock and other debt instruments from eligible financial institutions. The Treasury Department’s capital investment is structured to reduce participants’ borrowing costs to rates as low as 1 percent as the participants generate more small business loans.

Under the SBLF, qualified lending includes commercial and industrial loans; loans secured by owner-occupied nonfarm, nonresidential real estate; loans to finance agricultural production and other loans to farmers; and loans secured by farmland.

The key conditions of the program are as follows:

• The original principal and commitments amount must be $10 million or less.
• The loan is not for a business with more than $50 million in revenues.
• The calculation of qualified small business loans excludes any guaranteed portions of government loans—both for the purpose of calculating a bank’s baseline as well as its ongoing quarterly lending. Because this adjustment is proportional for the calculation of a bank’s baseline and its ongoing quarterly lending, the adjustment does not affect banks that maintain a similar percentage of government-guaranteed lending over time. Under this condition, a bank’s unguaranteed portion of a Small Business Administration’s 504 loans, for example, would count as a qualified small business investment.
• A financial institution that receives capital from the SBLF must supplement its call report with a report that identifies qualified small business lending. For holding companies, small business lending is measured on the basis of combined small business lending reported in subsidiaries’ call reports.

Participating institutions must certify their compliance with federal regulations regarding loan applicants’ identity verification and other similar assurances. The regulatory agencies for banks and thrifts issued general underwriting guidelines that are consistent with safety and soundness principles. The underwriting should reflect all relevant credit factors, including:

• Capacity of the income from the business to service the debt.
• Value and quality of the collateral.
• Overall creditworthiness of the borrower.
• Level of equity invested in the business.
• Any secondary sources of repayment.
• Any additional collateral or credit enhancements.

These guidelines are in the Underwriting Standards for Small Business Loans originated under the SBLF program on the Office of the Comptroller of the Currency’s Web site.

According to the SBLF terms, participating institutions agree to pay a 5 percent dividend at the start of the capital investment and to repay the whole amount within 10 years. An institution can repay at any time without penalty. Upon funding and for the following nine calendar quarters, the dividend is adjusted on the basis of the institution’s qualified small business lending.

The dividend is adjusted according to the change in the financial institution’s small business lending from a baseline value. This baseline value is the average amount of small business lending (adjusted for related charge offs and gains) for the four full quarters before September 27, 2010, the date of the SBJ Act’s signing.

The rate adjusts according to the following guidelines:

• If the amount of small business lending has increased by less than 2.5 percent, the dividend or interest rate is 5 percent.
• If the amount of small business lending has increased by more than 2.5 percent, but less than 5 percent, the dividend or interest rate is 4 percent.
• If the amount of small business lending has increased by more than 5 percent, but less than 7.5 percent, the dividend or interest rate is 3 percent.
• If the amount of small business lending has increased by more than 7.5 percent, but less than 10 percent, the dividend or interest rate is 2 percent.
• If the amount of small business lending has increased by 10 percent or more, the dividend or interest rate is 1 percent.

After the ninth quarter, the rates mentioned above apply through the end of the first 4½ years if the lending amount remains higher than the baseline value. If the lending amount remains the same or decreases from the baseline value, the rate is 7 percent until the expiration of the 4½-year period. In either scenario, the rate increases to 9 percent after the initial 4½-year period.

Rate adjustments occur in the calendar quarter after the publication of call report data and are payable at the start of the subsequent quarter.

One important caveat: The financial institution has to grow its small business lending portfolio by at least the amount of capital provided to take advantage of the discounted investment rate on the whole investment amount. If the increase in small business lending is less than the amount invested by the Treasury Department, then the discounted rate applies only to the amount of the increase in small business lending.

There are several programs designed to enhance a bank’s capacity to extend credit to small businesses. For example, a bank may partner with a Community Development Financial Institution (CDFI) to promote its small business lending. CDFIs typically provide credit and financial counseling in low- and moderate-income communities. They serve as primary sources of funding for many small businesses in these communities. In addition to expanding their small business lending opportunities through these partnerships, banks may earn positive consideration under the Community Reinvestment Act for initiatives with CDFIs. (For details, see "Interagency CRA Questions and Answers" on the Federal Financial Institutions Examination Council Web site.)

One venue for expanding small business lending is the Capital Access Program, which is offered in many states. (See article titled “States Get $1.5 Billion to Support Small Businesses.”) These portfolio insurance programs allow a borrower and a lender to split an insurance fee that is kept in a reserve fund at the lending bank and matched by the state government. The reserve fund is used to support loans to small businesses. Loans obtained under these programs enable community banks to serve small business borrowers whom they deem creditworthy but are unable to approve for a variety of reasons.

Banks participating in the SBLF may consider extending U.S. Small Business Administration (SBA) 504 loans. In these loans, the bank assumes 50 percent of the loan, the SBA guarantees 40 percent, and the borrower pledges 10 percent. The bank’s portion of the loan can be considered a qualified small business loan under the SBLF.

Another venue for partnerships to expand small business lending is the network of U.S. Export Assistance Centers. The SBA partners with the U.S. Department of Commerce and the Export-Import Bank of the United States in this national network. These centers are small businesses’ one-stop shops for trade promotion, financing, and export insurance programs. (See article titled “Promoting Small Business Job Growth Through Exports.”) The SBA also supports Small Business Development Centers that offer small businesses assistance with financial planning, marketing, production, organization, engineering, technical problems, and feasibility studies.

Banks may also consider making small business loans to businesses receiving equity investments from Small Business Investment Corporations (SBIC). The SBICs are privately owned and managed investment firms that are overseen by the SBA and provide funding for small businesses. Since its creation in 1958, the SBIC program has provided more than $50 billion in capital to more than 100,000 small businesses, some of which became well-known names. The SBA Web site has more information on the SBIC program.

Finally, an eligible institution may refinance securities previously issued to the Treasury Department under the Community Development Capital Initiative or the Capital Purchase Program, provided the institution has not missed more than one dividend payment under the Capital Purchase Program. The Treasury Department Web site includes more information on the treatment of these securities under this program.

To participate in the SBLF, applications should have been submitted by May 16, 2011. The authority to make capital investments under the SBLF ends September 27, 2011.

The Treasury Department published four sets of terms, one for community banks, one for mutual institutions, one for subchapter S corporations, and one for community development loan funds. These guides are available on the Treasury Department Web site. It should be noted that the SBLF is not related to the Troubled Asset Relief Program.

A list of banks receiving SBLF money will be published on the OCC small business Web resource directory once the information is released by the Treasury Department. For more information, visit the Treasury Department Web site. For general inquiries, call the SBLF information line at (888) 832-1147; for questions about a specific institution, e-mail the Treasury Department, a confidential e-mail address.

The Small Business Jobs Act of 2010 (SBJ Act) allows Community Development Loan Funds (CDLF) to access Treasury’s Small Business Lending Fund.

CDLFs are a type of Community Development Financial Institution (CDFI). CDLFs are unregulated, non-depository institutions that provide flexible credit to underserved communities and borrowers unable to secure credit through traditional lenders. Typically, CDLFs also provide technical assistance and other services that improve borrowers’ creditworthiness.

The SBJ Act requires that eligible CDLFs are tax-exempt, have at least three years of operating experience, have clean audited financial statements for the three most recent fiscal years, have total assets of $10 billion at most, and are certified by the CDFI Fund.

The U.S. Department of the Treasury released terms and guidelines for CDLFs in May 2011. The application deadline was June 22, 2011. CDLFs can receive investments of up to 5 percent of their total assets as reported in their audited financial statements for calendar year 2009. The funding is provided by the Treasury Department by purchasing equity equivalent (EQ2) securities from each participating CDLF. Any EQ2 issued to the CDLF carries an interest rate of 2 percent for the first eight years and 9 percent thereafter. In addition, CDLFs must, at a minimum, meet the following financial requirements, as listed in the fact sheet:

• Average net income for the past three years must be positive.
• Cash and cash equivalents should be greater than or equal to operating expenses for each of the four most recent quarters.
• Year-end cash and cash equivalents are equal to or greater than 25 percent of annual operating expenses for at least one of the two most recent fiscal years.
• Net assets plus EQ2 as a percentage of total assets must be at least 20 percent.
• The ratio of loan loss reserves to loans and leases 90 days or more delinquent should be at least 30 percent.
• The ratio of loans and leases 90 or more days delinquent to total equity plus loan loss reserves should be less than 40 percent.
• At least 10 percent of total loans must be Qualified CDLF Small Business Lending (as defined in the SBLF Initial Call Report for Community Development Loan Funds).

In December 2010, the U.S. Small Business Administration (SBA) announced two new loan initiatives—Small Loan Advantage and Community Advantage—that increase the number of lower-dollar SBA 7(a) loans going to small businesses and entrepreneurs in underserved communities. Research has shown that smaller loans are more likely to benefit traditionally disadvantaged borrowers.

Both Small Loan Advantage and Community Advantage offer a streamlined application process for SBA-guaranteed 7(a) loans up to $250,000. These loans come with the regular 7(a) government guarantee: 85 percent for loans up to $150,000 and 75 percent for those greater than $150,000.

Small Loan Advantage is available to more than 600 financial institutions in the SBA’s Preferred Lender Program (PLP). Under the PLP, which includes most of the SBA’s highest volume lenders, final credit decisions are delegated to lenders. There is no requirement that the small business borrower is in an underserved market.

With Community Advantage, the SBA has expanded the number of lenders by opening SBA’s 7(a) loan program to “mission-focused” financial institutions, including non-supervised Community Development Financial Institutions, Certified Development Companies, and SBA-authorized microloan intermediaries. At least 60 percent of a Community Advantage lender’s SBA loan portfolio must be in underserved markets.

Visit the SBA’s Web site for more information about Advantage Loan Initiatives.

A temporary provision in the Small Business Jobs Act of 2010 allows small businesses to refinance eligible fixed assets, such as owner-occupied real estate, machinery, and equipment, through the U.S. Small Business Administration’s (SBA) 504 program without the usual business expansion requirement.

The program is intended for small businesses that are performing well and making their payments on time but, because of the downturn in real estate values, may have a hard time refinancing their loans. Loans with federal guarantees, such as existing 504, 7(a), or U.S. Department of Agriculture loans, cannot be refinanced through this program.

The program is structured like the SBA’s traditional 504 program:

• A bank provides a loan, secured by a first lien, covering at least 50 percent of the project’s cost.
• A loan from an SBA Certified Development Company, secured with a second lien and backed by a 100 percent SBA-guaranteed debenture (unsecured bond), covers up to 40 percent of the costs.
• The small business borrower contributes at least 10 percent of the project cost.

The bank portion of the SBA 504 loan may count as a qualified small business loan under the Small Business Lending Fund guidelines.

Applicants must demonstrate that their loans are current and that they have made all required payments in the year before their application. The program began accepting applications on February 28, 2011. The application deadline is September 27, 2012.

See the SBA’s 504 Loan Refinancing Program fact sheet for more details about the program.

OCC's Community Affairs Department