SMALL BUSINESS 

LENDING FUND

Additional Actions 

Needed to Improve 

Transparency and 

Accountability

Report to Congressional Committees

December 2011

GAO-12-183

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-183, a report to 

congressional committees

December 2011

SMALL BUSINESS LENDING FUND

Additional Actions Needed to Improve Transparency 

and Accountability

Why GAO Did This Study

The Small Business Jobs Act of 2010 

aimed to stimulate job growth by 

establishing the Small Business 

Lending Fund program (SBLF) within 

the U.S. Department of the Treasury 

(Treasury), among other activities. 

The SBLF program was designed to 

encourage community banks and 

community development loan funds 

with assets of less than $10 billion to 

increase their lending to small 

businesses.

The act also requires GAO to audit 

SBLF annually. This initial report 

examines (1) Treasury’s procedures 

for evaluating applications for SBLF 

funds, (2) characteristics of institutions 

that applied for and received funds 

from SBLF and factors that influenced 

banks’ decision to participate, and (3) 

Treasury’s plans to monitor 

participants and measure SBLF’s 

progress in increasing small business 

lending. GAO reviewed documents on 

Treasury’s procedures and controls; 

analyzed data on applicants; compared 

SBLF banks with a peer group of 

nonparticipating banks; surveyed a 

representative sample of banks (for a 

weighted response rate of 66 percent); 

and interviewed Treasury, federal 

banking regulators, and 

representatives from industry 

associations. 

What GAO Recommends

To improve transparency and 

accountability, Treasury should (1) 

enhance its strategy for communicating 

with participants and other 

stakeholders, (2) finalize procedures 

for monitoring participants’ compliance 

with program requirements, and (3) 

complete plans for assessing the 

program’s effectiveness. Treasury 

agreed with GAO’s recommendations.

What GAO Found

Treasury adopted procedures to help ensure that applicants were evaluated 

consistently and were likely to repay funds, but its lack of clarity in explaining 

program requirements and decisions created confusion among applicants. The 

evaluation process included input from federal and state regulators, reviews of 

small business lending plans, and estimates of the applicants’ ability to repay 

funds. GAO’s analysis of the inputs Treasury relied on for its decisions showed 

that Treasury generally followed its process, although additional steps were 

taken for some applicants, such as revising repayment estimates to include 

updated information provided by federal regulators. Also, Treasury’s initial 

announcement of program requirements did not make clear that applicants could 

not have restrictions on paying dividends, affecting over 200 applicants. Treasury 

also did not explain the rationale for its funding decisions to applicants and other 

stakeholders, and many applicants who were not approved were not notified until 

September 2011—almost 4 months after the application deadline and initial 

disbursements of funds. Although Treasury had several outreach efforts to 

communicate with the public about SBLF, such efforts have not always been 

timely or clear to applicants and other stakeholders and could contribute to SBLF 

being poorly understood by the public and Congress. 

Fewer institutions applied to SBLF and received funding than initially anticipated, 

in part because many banks did not anticipate that demand for small business 

loans would increase. SBLF was authorized to invest up to $30 billion, but 

Treasury funded just 332 of the 935 applications, investing about $4 billion, or 13 

percent, of the authorized funds. The institutions that applied to and were funded 

by SBLF were primarily institutions with total assets of less than $500 million. In 

addition, GAO’s analysis showed that compared with banks that did not apply to 

SBLF, funded banks had fewer problem loans and small loans (under $1 million) 

and less capital. GAO’s nationally representative survey of community banks 

showed that respondents’ most common reason for not applying to the SBLF 

program was a lack of demand for small business loans.

Treasury has not finalized plans for assessing SBLF’s impact on small business 

lending or procedures for monitoring recipients for compliance with program 

requirements. GAO’s analysis shows that credit is still difficult to obtain, although 

it has eased some compared with 2009, confirming that the lending environment 

remains challenging. Such an environment makes Treasury’s planned monitoring 

and assessments increasingly important. Treasury officials told GAO that they 

have been developing procedures for monitoring compliance, but they are not yet 

finalized. Similarly, Treasury is considering various options for evaluating SBLF’s 

performance, but complex economic relationships will make linking the SBLF 

program to job growth difficult. Treasury officials said that they had been focused 

on approving applicants and disbursing funds by the statutory deadline of 

September 27, 2011, and that finalizing procedures and performance indicators 

had lagged as a result. Now that funding decisions and disbursements have 

been made, finalizing plans for monitoring compliance and assessing SBLF’s 

progress can take precedence. Without a full and robust assessment, Treasury 

will not be able to provide useful information to policymakers about the 

participants’ compliance and the effectiveness of a capital infusion program as a 

means of increasing small business lending.

View GAO-12-183. For more information, 

contact A. Nicole Clowers at (202) 512-8678 

or clowersa@gao.gov.
Page i GAO-12-183 Small Business Lending Fund

Letter 1 

Background 5

Treasury’s Application Requirements and Decisions Were Not 

Always Transparent 9

Characteristics of Applicants and Participants and Factors 

Affecting SBLF Participation 23

Treasury Has Not Finalized Plans to Monitor SBLF Participants or 

Track SBLF’s Impact 28

Conclusions 32

Recommendations for Executive Action 33

Agency Comments and Our Evaluation 34

Appendix I Objectives, Scope, and Methodology 37

Appendix II Responses to Questions from GAO’s Survey on the SBLF Program 43

Appendix III Comments from the Department of the Treasury 47

Appendix IV GAO Contact and Staff Acknowledgments 48

Tables

Table 1: Main Parameters Treasury Used for Evaluating SBLF 

Applicants 38

Table 2: Population, Sample Size, and Respondent Information for 

GAO Survey 41

Table 3: Has your bank applied, or does it plan to apply, to the 

SBLF program? 43

Table 4: What are the reasons your bank had for applying for 

funding through the SBLF program? 43

Table 5: Of all the reasons your bank had for applying for funding 

through the SBLF program, which one was the most 

important reason for applying? 44

Table 6: What are the reasons your bank had for NOT applying for 

funding through the SBLF program? 45

Contents
Page ii GAO-12-183 Small Business Lending Fund

Table 7: Of all the reasons your bank had for NOT applying for 

funding through the SBLF program, which one was the 

most important reason for NOT applying? 46

Figures

Figure 1: Treasury’s Process for Evaluating SBLF Applicants 10

Figure 2: Timeline for the Implementation of SBLF, September 

2010 through October 2011 18

Figure 3: SBLF Applicant and Participant Data 24

Figure 4: SBLF Investments by State 25

Figure 5: Factors Affecting Banks’ Participation in SBLF 27

Figure 6: Indicators of Small Business Credit Conditions, Third 

Quarter 2003-Third Quarter 2011 28
Page iii GAO-12-183 Small Business Lending Fund

Abbreviations 

ABA American Bankers Association

call reports consolidated reports of condition and income

CAMELS C-Capital adequacy, A-Asset quality, 

M-Management quality, E–Earnings, 

L–Liquidity, and S-Sensitivity to market risk

CDCI community development capital initiative

CDFI community development financial institution 

CDLF Community Development Loan Funds

CPP Capital Purchase Program 

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve System 

GPRA Government Performance and Results Act of 1993 

ICBA Independent Community Bankers Association

NFIB National Federation of Independent Business

OCC Office of the Comptroller of the Currency

OTS Office of Thrift Supervision

SBLF Small Business Lending Fund

SBLI Small Business Lending Index

SNL SNL Financial–collects and publishes financial 

 data and analyses

TARP Troubled Asset Relief Program

Treasury Department of the Treasury

IG Inspector General 

 

 

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Page 1 GAO-12-183 Small Business Lending Fund

United States Government Accountability Office

Washington, DC 20548

December 14, 2011

Congressional Committees

Congressional interest in assisting small businesses has increased in 

recent years, primarily because of continued concerns about 

unemployment and the sustainability of the current economic recovery. In 

particular, Congress has grown increasingly concerned that in the current 

economic recovery small businesses might not be able to access enough 

capital to create needed jobs. In 2008 and early 2009, major disruptions 

of business credit markets made accessing credit difficult for small 

businesses. For example, a Wells Fargo survey shows that the number of 

small businesses having difficulty accessing credit more than tripled from 

2007 to 2010, with ultimately almost 40 percent of small businesses 

indicating that credit was difficult to obtain. Further, the Secretary of the 

Treasury testified in June 2011 that small businesses were concentrated 

in sectors that had been especially hard hit by the recession, including 

construction-related industries. As a result, during the depths of the 2007-

2009 crisis, the rate of job losses was almost twice as high for small 

businesses as it was for larger firms.1

To address these concerns, on September 27, 2010, President Obama 

signed into law the Small Business Jobs Act of 2010.2 Among other 

things, this legislation aims to stimulate job growth by establishing the 

Small Business Lending Fund program (SBLF). The SBLF program is 

designed to encourage banks and community development loan funds 

(CDLF) with assets of less than $10 billion to increase their lending to 

small businesses with up to $50 million in annual revenues.3

 

1

House Committee on Small Business, The State of Small Business Access to Capital 

and Credit: The View from Secretary Geithner, 112th Cong., 1st sess., 2011. 

The act 

authorizes the Treasury Secretary to make up to $30 billion of capital 

available and offers incentives to increase small business lending.

2

Pub. L. No. 111-240, 124 Stat. 2504 (2010). 

3

In this report, “banks” refers to banks, thrifts, and bank and thrift holding companies. For 

the purposes of the SBLF program, a CDLF is an entity that is certified by Treasury as a 

community development financial institution (CDFI) loan fund. CDFI is a specialized 

financial institution that works in market niches that are underserved by traditional financial 

institutions.

 
 

Page 2 GAO-12-183 Small Business Lending Fund

Although the SBLF program has received support from some members of 

Congress and banking and business trade groups, other congressional 

members and groups have raised concerns about the program. These 

concerns include protecting taxpayer money (that is, ensuring that the 

funds will be paid back), ensuring that only healthy institutions have 

access to the funds, and ensuring that the institutions receiving the funds 

will actually increase new business lending. Some others have also 

expressed concerns that allowing institutions that received funds under 

the Troubled Asset Relief Program (TARP) to draw on SBLF funds would 

offer a way to refinance out of TARP with lower dividend rates and fewer 

program restrictions but without any guarantee of increasing business 

lending. Legislation has been introduced in Congress intended to address 

program concerns.4

The 2010 Small Business Jobs Act requires GAO to conduct an annual 

audit of the SBLF program. Under this statutory mandate, this initial report 

assesses (1) the Department of the Treasury’s (Treasury) procedures to 

implement SBLF and evaluate applications for SBLF funds, (2) 

characteristics of institutions applying for and receiving SBLF funds and 

the factors that influenced banks’ decision to participate, and (3) 

Treasury’s plans to monitor SBLF participants and measure the SBLF’s 

progress in increasing small business lending.

To assess Treasury’s evaluation process for SBLF applications, we 

reviewed Treasury’s policies, procedures, and internal controls for SBLF, 

including nonpublic documents and publicly available material from the 

SBLF website. We reviewed Treasury’s and the four federal banking 

regulators’— Federal Deposit Insurance Corporation (FDIC), Board of 

Governors of the Federal Reserve System (Federal Reserve), the Office 

of the Comptroller of the Currency (OCC), and the Office of Thrift 

Supervision (OTS)—respective roles and responsibilities and compared 

them with their roles for the Capital Purchase Program (CPP), a capital 

 

4

S. 681, 112th Cong. (2011). On April 6, 2011, members of the House also introduced a 

bill to give TARP’s Special Inspector General oversight of the SBLF. H.R. 1387, 112th

Cong.(2011). 
 

Page 3 GAO-12-183 Small Business Lending Fund

infusion program under TARP that is similar to SBLF.5 To identify 

applicants that fell outside of Treasury’s stated evaluation parameters, we 

analyzed data that Treasury used to inform its funding decisions, 

including CAMELS composite ratings, repayment probabilities, 

performance ratios, lending plan scores, dividend restriction information, 

and results of regulators’ financial condition assessments.6 We also 

analyzed data from Treasury, FDIC, and SNL Financial (SNL)—a 

financial institution database—for all applicants. We then compared the 

applicants that Treasury approved and did not approve to its evaluation 

thresholds and identified a number of approved and nonapproved 

applicants that fell outside of these general parameters. Using the results 

of this analysis, we then selected a judgmental sample of 15 applicants 

that appeared to be particularly out of line with the parameters Treasury 

had set for additional review. We obtained the relevant minutes from 

Treasury’s Application Review Committee and Investment Committee for 

these 15 applicants to review Treasury’s rationale for their decisions on 

these applicants. We interviewed Treasury officials for further clarification.

We also interviewed representatives of industry trade groups to obtain 

their perspectives on SBLF and the application process. Our criteria for 

assessing Treasury’s evaluation process drew from GAO’s Standards for 

Internal Control in the Federal Government and past IG and GAO work, 

particularly on CPP.7

 

5

The Dodd-Frank Act eliminated the OTS, which chartered and supervised federally 

chartered savings institutions and savings and loan holding companies. Rulemaking 

authority previously vested in the OTS was transferred to the OCC for savings 

associations and to the Federal Reserve for savings and loan holding companies.

Supervisory authority was transferred to the OCC for federal savings associations, to the 

FDIC for state savings associations, and to the Federal Reserve for savings and loan 

holding companies and their subsidiaries, other than depository institutions. The transfer 

of these powers was completed on July 21, 2011, and OTS was officially abolished 90 

days later (Oct. 19, 2011). 12 U.S.C. §§ 5411-5413. 

6

The CAMELS rating system is a U.S. supervisory tool that describes a bank’s overall 

condition and that is used to classify the nation’s banks. The composite rating is based on 

financial statements and regulators’ on-site examinations and has six components—

capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market 

risk—that make up the acronym. It rates banks on a scale of 1 to 5, with 1 being the 

strongest. Evaluations of the six CAMELS components take into consideration a bank’s 

size and sophistication, the nature and complexity its banking activities, and its risk profile. 

7

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999).
 

Page 4 GAO-12-183 Small Business Lending Fund

To describe the characteristics of the institutions that applied to and 

received SBLF program funds, we analyzed data from Treasury on 

applicants and participants, including the number of institutions that were 

approved, not approved, and those that were refinancing their CPP or 

CDCI funds through SBLF.8 We also analyzed the geographic distribution 

of participants and assessed the extent to which institutions receiving 

SBLF funds tended to be located in high unemployment areas. We also 

developed a comparable peer group of banks that did not apply for SBLF 

program funds and compared their financial condition and past lending 

patterns with those of SBLF program applicants and participants that are 

also banks. The data we analyzed from Treasury, FDIC, and regulatory 

filings were sufficiently reliable to describe the characteristics of SBLF 

bank applicants and their peers. Finally, we conducted a Web-based 

survey of a nationally representative sample of banks with assets of $10 

billion or less to obtain their reasons for applying or not applying to the 

program. The weighted response rate was 66 percent.9

To assess Treasury’s plans to measure SBLF’s effectiveness, we 

interviewed Treasury officials about their intended work. To describe 

trends in small business lending, we used a number of indicators that 

provide a variety of perspectives on small business credit market 

conditions leading up to the implementation of SBLF. Appendix I contains 

more information on our objectives, scope, and methodology.

On the basis of 

our application of generally accepted survey design practices, we 

determined that the data collected via our survey were of sufficient quality 

for our purposes.

We conducted this performance audit from December 2010 to December 

2011 in Washington, D.C., in accordance with generally accepted 

government auditing standards. Those standards require that we plan 

and perform the audit to obtain sufficient, appropriate evidence to provide 

a reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our audit objectives.

 

8

Community Development Capital Initiative (CDCI) is part of the TARP program that 

makes capital available to certain certified CDFIs for the purposes of increasing lending to 

small businesses and other community development projects. 

9

The weighted response rate accounts for the differential sampling fractions within strata. 

More information can be found in appendix II.
 

Page 5 GAO-12-183 Small Business Lending Fund

SBLF was one of the key provisions under the 2010 Small Business Jobs 

Act to address the ongoing effects of the financial crisis on small 

businesses. The act provided temporary authority to the Secretary of the 

Treasury to make capital investments in eligible banks and CDLFs in 

order to increase the availability of credit for small businesses. The 

legislation directed Treasury to consider the following in exercising its 

authorities for the SBLF program:

• increasing the availability of credit for small businesses;

• providing funding to minority-owned eligible institutions and other 

eligible institutions that served small businesses that were minority-, 

veteran-, and women-owned and that also served low- and moderateincome, minority, and other underserved or rural communities;

• protecting and increasing American jobs;

• increasing the opportunity for small business development in highunemployment areas;

• ensuring that all eligible institutions can apply, without regard to 

geographic location;

• providing transparency with respect to the use of SBLF funds;

• minimizing costs to taxpayers;

• promoting and engaging in financial education for would-be 

borrowers; and

• providing funding to eligible institutions that served small businesses 

directly affected by the Deepwater Horizon spill.

SBLF is intended to increase small business lending. For the purposes of 

the program, the legislation defined qualified small business lending—as 

Background 

SBLF Goals, 

Considerations, and 

Eligibility Requirements
 

Page 6 GAO-12-183 Small Business Lending Fund

defined in an institution’s quarterly regulatory filings (call reports)—as one 

of the following:10

• 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.

In addition, qualifying loans cannot be for more than $10 million, and the 

business may not have more than $50 million in revenue.11

The act specifically restricts applications from institutions that are on the 

FDIC problem bank list (i.e., defined in the act as banks with a composite 

CAMELS ratings of 4 or 5) or have been removed from that list in the 

previous 90 days.12 Treasury determines whether to provide SBLF 

funding to a bank after consulting with the appropriate federal and, if 

applicable, state banking regulator. The Small Business Jobs Act outlined 

different statutory financial eligibility criteria for CDLFs. To qualify for 

SBLF, CDLFs must meet a number of requirements, including having at 

least 3 years of operating experience.

Applicants submitted a 1-page application to Treasury and a 3-page small 

business lending plan to their primary federal regulator to (1) describe 

how they would use SBLF funds to address the needs of small 

businesses in the communities they served; (2) specify the projected 

 

10A call report is the common reference name for the quarterly reports of condition and 

income filed with regulators by every national bank, state-chartered Federal Reserve 

member bank, and insured state nonmember bank.

11Treasury’s guidance also excludes loan portions guaranteed by the Small Business 

Administration and those for which a third party assumes risk. 

12The problem bank list is a confidential list created and maintained by the FDIC listing 

banks that are in jeopardy of failing. In general, “problem” institutions are those institutions 

with financial, operational, or managerial weaknesses that threaten their continued 

financial condition. Depending upon the degree of risk and supervisory concern, they 

received a composite CAMELs rating of either “4” or “5”. 

SBLF Application Process 

and Requirements
 

Page 7 GAO-12-183 Small Business Lending Fund

increase in small business lending they expected to achieve 2 years after 

receiving SBLF funds; and (3) describe their approach to community 

outreach and advertising for small business lending, especially to 

minority-, veteran-and women-owned businesses via radio, television, or 

electronic media.

For banks, Treasury implemented the SBLF program with supervisory 

consultation from the four federal banking regulators: FDIC, Federal 

Reserve, OCC, and OTS. After Treasury conducted an initial eligibility 

review for each applicant, Treasury requested that the regulators provide 

a supervisory consultation for eligible applicants, focusing on their 

financial condition and the results of the most recent examination. 

Regulators recorded their assessment in a Supervisory Consultation 

Memo to Treasury. For CDLFs, Treasury sought input from the 

Community Development Financial Institutions Fund, a bureau in 

Treasury that certifies these institutions.

Under SBLF, Treasury can make capital investments in eligible 

institutions with total assets of less than $10 billion. Treasury provides 

institutions with capital by purchasing preferred stock or subordinated 

debt in each bank.13,14

 

13Some banking institutions areformed as either S-corporations (S-corps) or mutual 

organizations (mutuals) which will affect the form of Treasury’s investment. An Scorporation makes a valid election to be taxed under subchapter S of chapter 1 of the 

Internal Revenue Code and thus does not pay any income taxes. Instead, the 

corporation’s income or losses are divided among and passed through to its shareholders. 

A mutual organization is a company that does not issue capital stock and, therefore, has 

no shareholders. It is also “owned” by its members (e.g., deposit customers) rather than 

by stockholders. Many thrifts and insurance companies are mutuals. Insurance companies 

are not eligible to participate in SBLF. 

The amount of funding a institution could receive 

depended on its asset size as of the end of the fourth quarter of calendar 

year 2009. Specifically, if the qualifying bank had total assets of $1 billion 

14The capital is in the form of Tier 1 capital for banks that issue preferred stock to 

Treasury. Tier 1 capital is considered the most stable and readily available capital for 

supporting a bank’s operations. It covers core capital elements, such as common 

stockholder’s equity and noncumulative perpetual preferred stock. The SBLF funds are 

Tier 2 capital for institutions that are subchapter S Corps and Mutuals and that issue 

subordinated securities to Treasury. According to the June 13, 2011, interim final rule from 

the Federal Reserve, S-Corp and Mutual bank holding companies with less that $500 

million in consolidated assets may exclude the SBLF subordinated securities from debt.

CDLFs issue unsecured equity equivalent capital that does not constitute a class of stock 

or represent equity ownership in the issuer.

SBLF Funding and 

Incentives for Small 

Business Lending
 

Page 8 GAO-12-183 Small Business Lending Fund

or less, it could apply for SBLF funding that equals up to 5 percent of its 

risk-weighted assets (as reported in the call report immediately preceding 

the date of application).15

Participating banks must pay dividends or interest of 5 percent per year 

initially, with reduced rates available if they increase their small business 

lending. Specifically, the dividend rate payable will decrease as banks 

increase small business lending over their baselines. While the dividend 

rate will be no more than 5 percent for the first 2 years, a bank can 

reduce the rate to just 1 percent by generating a 10 percent increase in its 

lending to small businesses compared with its baseline. After 2 years, the 

dividend rate on the capital will increase to 7 percent if participating banks 

have not increased their small business lending and, after 4 1/2 years, the 

dividend rate on the capital will increase to 9 percent for all banks. For 

CDLFs, the initial dividend rate will be 2 percent for the first 8 years. After 

the eighth year, the rate will increase to 9 percent if the CDLF has not 

repaid the SBLF funding. This structure is designed to encourage CDLFs 

to repay the capital investment as soon as practicable. With the approval 

of its regulator, Treasury will allow SBLF participants to exit the program 

at any time simply by repaying the funding provided along with dividends 

owed for that period. Treasury requires that institutions that are 

participants in CPP or CDCI must increase their small business lending to 

receive a reduced dividend rate benefit from refinancing. Specifically, if a 

If the qualifying bank had assets of more than 

$1 billion, but less than $10 billion, it could have applied for funding that 

equals up to 3 percent of its risk-weighted assets. The SBLF program 

also provides an option for eligible institutions to refinance preferred stock 

issued to the Treasury through TARP’s CPP or CDCI. If the qualifying 

institution is a CPP or CDCI recipient, any capital that remains 

outstanding from these investments is deducted from the SBLF program 

limits. All CPP and CDCI outstanding amounts must be repaid when 

SBLF funding is received.

 

15Treasury may require matching private capital and limit SBLF funding to 3 percent of 

risk-weighted assets. Risk-weighted assets are weighted according to credit risk and are 

used in the calculation of required capital levels. Specifically, all assets are assigned a risk 

weight according to the credit risk of the obligor or the nature of the exposure and the 

nature of any qualifying collateral or guarantee, where relevant. Off-balance sheet items, 

such as credit derivatives and loan commitments, are converted into credit equivalent 

amounts and also assigned risk weights. The risk weight categories are broadly intended 

to assign higher-risk weights to—and require banks to hold more capital for—higher-risk 

assets, and vice versa. See 12 C.F.R. Part 3 (OCC); 12 C.F.R Part 208 and Part 225, 

App. A & B (Federal Reserve); 12 C.F.R. Part 325 (FDIC); and 12 C.F.R. Part 567 (OTS). 
 

Page 9 GAO-12-183 Small Business Lending Fund

institution’s business lending has not increased over its baseline (i.e., the 

amount that was outstanding in the four quarters ending June 30, 2010) 

amount by the ninth quarter, it will be required to pay a “lending incentive 

fee” equal to 2 percent per year on the total amount of outstanding SBLF 

funding.

Institutions chosen to participate in SBLF must submit an Initial 

Supplemental Report to Treasury that calculates the baseline level of 

small business lending and the initial dividend rate. SBLF institutions 

must continue submitting Quarterly Supplemental Reports to calculate 

dividend rates for the next quarter. The goal is to measure the institution’s 

changes in qualified small business lending to determine changes, if any, 

to the dividend rate. In addition, SBLF institutions must complete a short 

annual lending survey and annual certifications to Treasury that attest the 

accuracy to the institutions’ reports, among other things. In accordance 

with the act, Treasury plans to measure institutions’ changes in qualified 

small business lending by the amount of loans outstanding each quarter 

against the baseline level. 

Treasury’s process for evaluating SBLF applicants included several levels 

of review and input from multiple sources to help ensure that applicants 

were treated consistently and that banks approved for funding were 

financially viable and could repay the investments. Such procedures are 

an important control activity that helps ensure agency accountability over 

the use of government resources. Treasury’s review focused primarily on 

the financial condition of applicants and drew not only on regulators’ 

supervisory consultation, but also on an independent credit analysis of 

applicants’ financial health—specifically, the likelihood that they would be 

able to repay SBLF investments and accompanying dividends—and to a 

lesser extent on the applicants’ small business lending plans. Figure 1 

provides an overview of the process for evaluating SBLF applicants.

Treasury’s Application 

Requirements and 

Decisions Were Not 

Always Transparent

Treasury’s Review Process 

Required Additional Steps 

to Evaluate Some 

Applicants 
 

Page 10 GAO-12-183 Small Business Lending Fund

Figure 1: Treasury’s Process for Evaluating SBLF Applicants

First, Treasury checked whether applicants were eligible to participate in 

SBLF. For example, Treasury checked to make sure that the applicants 

had less than $10 billion in assets and were not on FDIC’s problem bank 

list. Treasury also checked with the regulators to determine whether the 

applicants could pay dividends to Treasury, a process which we describe 

in more detail later. Furthermore, for applicants seeking to refinance their 

CPP or CDCI funds, Treasury checked to ensure that they had not 

missed more than one dividend payments under the program. The 

program office then entered applicants’ information into a database.

Second, the Application Review Team considered various inputs for 

eligible applicants to help develop a preliminary recommendation to 

forward to the Investment Committee. According to Treasury, the 

Application Review Team included five members from Treasury with 

investment analysis experience to manage the application review 

process.16

 

16As the number of applications increased over time, Treasury requested additional 

support from the regulators. The Federal Reserve, FDIC, and OTS provided a total of four 

senior financial analysts as detailees, who acted as Treasury employees, to review 

applicants. 

The inputs that the Application Review Team considered 

included the following:
 

Page 11 GAO-12-183 Small Business Lending Fund

• Supervisory consultation memo: As part of the evaluation process, 

Treasury obtained supervisory consultation from the appropriate 

federal banking regulators to determine the financial condition and 

performance of applicant banks. In the memo, the regulators did not 

recommend whether the applicant should be approved; rather the 

memo summarized supervisory information (e.g., CAMELS composite 

ratings and a description of material supervisory issues, if any) about 

the applicant’s financial condition and performance and specifically 

indicated whether the applicant was viable.17 “Viable” was defined as 

adequately capitalized, not expected to become undercapitalized, and 

not expected to be placed into conservatorship or receivership.18

• Repayment probability: The Application Review Team also considered 

an independent credit analysis of applicant’s ability to repay SBLF 

investments while making consistent dividend payments to 

Treasury—which was referred to as the “repayment probability.” 

Treasury hired financial agents to conduct this analysis. Using publicly 

available information, these agents examined applicants’ capital 

structure, asset quality, earnings capacity, and access to funding to 

develop a repayment probability estimate. According to Treasury 

officials, the purpose of the repayment probability analysis was to 

provide a forward-looking approach to help ensure that participants 

would generate enough future income to repay the SBLF investments 

and not solely rely on a determination of the applicant’s financial 

condition information from their respective regulators. According to 

Treasury officials, the Application Review Team reviewed the 

repayment probability estimate and, if needed, updated the estimate 

to incorporate confidential supervisory information.

• Sector analysis: The Application Review Team reviewed sector 

analyses, on an as needed basis, on current industry trends and 

developments in the small bank credit sector because comparatively 

little market research was available. For example, some of the sector 

analyses included analysis of regional economies or summaries of 

important industry information, such as proposed regulatory and 

 

17Specifically, OCC used three conclusions: (1) nonobjection, (2) nonobjection conditioned 

on private capital raised of a specified amount, or (3) unable to support the request for 

SBLF funding to provide information for Treasury’s evaluation. OTS also provided a 

“positive” or “negative” assessment on each applicant.

18SBLF staff also requested input from state banking regulators, but state regulators were 

not required to provide it. 
 

Page 12 GAO-12-183 Small Business Lending Fund

legislative changes. Treasury hired financial agents to perform the 

sector analysis.

• Small business lending plans: The Application Review Team 

summarized input from SBLF Program Office’s evaluation of 

applicants’ small business lending plans. The evaluation included the 

projected increase in small business lending, experience in small 

business lending, and plans to meet the needs of small businesses or 

provide appropriate outreach.19

• Application Review Committee input: The Application Review Team 

considered input from the Application Review Committee, which was 

made up of detailees from the FDIC, Federal Reserve, and OCC who 

were experienced in bank examinations.20 Treasury established the 

Application Review Committee to further help ensure consistent 

treatment of bank applicants. The Application Review Committee was 

responsible for all bank applications that may have warranted 

additional review. For example, the Committee reviewed all applicants 

that receive a CAMELS composite rating of “3,” had adverse 

performance ratios, or received inconsistent supervisory consultation 

from the relevant state and federal regulators.21

 

19In particular, the SBLF Program Office reviewed the Small Business Lending Plans to 

determine if applicants include key information, such as (1) the communities served and 

the SBLF’s ability to meet their lending needs; (2) loan demand in the communities 

served, including a quantitative assessment by loan or business type; (3) the applicant’s 

historical small business lending growth and experience; (4) participation in Small 

Business Administration, U.S. Department of Agriculture, or state small business lending 

programs; (5) the resources that the applicant dedicated to small business lending 

activities; (6) the role of small business lending within the applicant’s overall corporate 

strategies and business objectives; (7) current qualified small business lending as a 

percentage of total loan portfolios; and (8) the applicant’s use of general media outlets for 

outreach; and (9) the applicant’s targeting of individuals that represent, work with or are 

women, minorities, or veterans. 

In addition, the 

Application Review Committee took a “second look” at applicants 

deemed not viable by their respective regulators to ensure that the 

supervisory consultation process had been applied consistently 

20These detailees worked as Treasury employees and were compensated by Treasury 

during their assignment on the Application Review Committee. They were not serving on 

behalf of their respective regulators. 

21Treasury used three key performance ratios for evaluating applicants that measured the 

following types of assets, as a percentage of capital reserves: classified assets, 

nonperforming loans, and construction and development loans. For a more detailed 

discussion on the specific parameters for these key ratios, see appendix I. 
 

Page 13 GAO-12-183 Small Business Lending Fund

across bank applicants. Treasury said that it added this additional 

review by the Application Review Committee in response to a 

previous GAO recommendation.22

Third, the Application Review Team then prepared a recommendation for 

the Investment Committee. The Investment Committee was a fivemember body that included the SBLF Director (Chairman) and the 

Assistant Secretaries for Financial Institutions, Financial Markets, 

Economic Policy, and Management or their delegates. The Investment 

Committee was charged with reviewing and recommending applicants for 

funding and reviewed the information compiled by the Application Review 

Team to inform its recommendations. Applications recommended by the 

Investment Committee were presented for preliminary approval to the 

Deputy Assistant Secretary for Small Business, Community Development, 

and Affordable Housing Policy. After preliminary approval, the approved 

bank had 30 days to close the transaction.

The review process ends at this 

stage for applicants that the Application Review Committee did not 

recommend for further consideration and they are no longer 

considered for SBLF funding. According to Treasury, these decisions 

were further reviewed and affirmed by the Deputy Assistant Secretary.

23

Because CDLFs are unregulated institutions, they do not face the same 

regulatory reporting requirements as banks and, because of differences in 

legislative requirements, Treasury developed a separate set of processes 

to evaluate their ability to meet the eligibility requirements and financial 

conditions. Treasury consulted with the CDFI fund to determine whether a 

CDLF applicant could receive SBLF funding on the basis of factors such 

as prior award history, compliance status, and certification requirements.

To evaluate the CDLF’s financial condition, Treasury hired a financial 

agent to perform a desk review and on-site visit to evaluate the CDLF’s 

 

22In our 2010 report on CPP, we found that because Treasury relied on the regulators to 

make recommendations for CPP investments, it had limited oversight of regulators’ 

reasons for recommending withdrawals from the program. As a result, CPP participants 

might not have received equal treatment. We recommended that Treasury establish a 

process to monitor applicants for programs similar to CPP to ensure that they were treated 

equitably. For more information on our recommendation, see GAO, Troubled Asset Relief 

Program: Opportunities Exist to Apply Lessons Learned from the Capital Purchase 

Program to Similarly Designed Programs and to Improve the Repayment Process, 

GAO-11-47 (Washington, D.C.: Oct. 4, 2010). 

23Some applicants had less than 30 days to close because Treasury’s decisions to 

approve them were made after August 30, 2011. 
 

Page 14 GAO-12-183 Small Business Lending Fund

financial statements, risk management and control procedures, adequacy 

of information systems, and management structure. The Application 

Review Team considered these inputs and then made a funding 

recommendation for the Investment Committee. CDLF applicants 

recommended for approval by the Investment Committee were then 

provided to the Deputy Assistant Secretary for preliminary approval. 

Those that were not recommended were also reviewed and affirmed by 

the Deputy Assistant Secretary.

Our analysis of funding decisions found that Treasury generally followed 

its procedures, but we also identified some decisions that appeared to fall 

outside certain key parameters Treasury had established to guide its 

evaluation process. Treasury established specific parameters to evaluate 

SBLF applicants’ financial conditions and, to a lesser extent, their small 

business lending plans. These parameters included that applicants 

should have at least an 80 percent probability of repayment and 

satisfactory performance ratios (e.g., nonperforming loan ratios of less 

than 40 percent, and construction and development loan ratios of less 

than 300 percent, Treasury’s stated thresholds).24

• Approved applicants. Our review of Treasury data showed that 400 of 

the 935 applicants were approved. Treasury gave preliminary 

approval to a total of 400 SBLF applicants and funded 332. The 

remaining 68 of the approved applicants either chose not to 

participate in SBLF or were ultimately not approved because Treasury 

had evaluated updated information after they sent out the preliminary 

approval letter. All the approved applicants did not have restrictions 

on paying dividends. We also found that all approved applicants had 

CAMELS composite ratings of 1, 2, or 3 and had construction and 

development loan ratios of less than 300 percent. In addition, all but 

two approved applicants had what Treasury considered “responsive 

Treasury also 

considered the applicants’ CAMELS composite ratings. For the evaluation 

criteria that we reviewed, we found the following for approved and 

nonapproved applicants:

 

24We selected key inputs used by Treasury to guide its decisions and performed an 

analysis for all 935 applicants to determine which applicants, both approved and 

nonapproved, fell out of Treasury’s stated parameters for the various inputs. We did not 

review the evaluation documents, such as regulator’s supervisory consultation memos, 

minutes from the Application Review and Investment Committees for all 935 applicants.

For a more information on our methodology, see appendix I. 
 

Page 15 GAO-12-183 Small Business Lending Fund

lending plans.”25 However, we found that 44 of the 400 (11 percent) 

approved applicants had an initial calculation of repayment probability 

of less than 80 percent. The lowest repayment probability estimate for 

an approved bank was 48 percent. In addition, we found that 13 of the 

400 (3.2 percent) approved applicants had nonperforming loan ratios 

(as a percentage of capital and loan loss reserves) greater than 40 

percent (based on first quarter 2011 data).26

• Nonapproved applicants. Our analysis showed that, out of 935 

applicants, a total of 535 applicants were not approved.27 Fifty-three 

of the nonapproved applicants were not eligible based on Treasury’s 

initial eligibility check. Of the nonapproved applicants, 175 applicants 

considered viable by their respective regulator(s) and able to pay 

dividends were ultimately not approved.28 Of these nonapproved 

applicants, 85 (48.6 percent) had a CAMELS composite rating of 2, 

and 49 (28 percent) had both a CAMELS composite rating of 2 and an 

initial calculation of repayment probability of higher than 80 percent.29

To examine the decisions that appeared to fall outside of Treasury’s 

stated parameters in more depth, we judgmentally selected 15 applicants 

that appeared to be particularly out of line with Treasury’s evaluation 

parameters. As part of this analysis, we reviewed minutes from the 

Application Review Committee and Investment Committee and 

interviewed Treasury officials. According to Treasury, these committees 

had the flexibility to consider all factors—supervisory information, financial 

data, as well as repayment probability—relating to the applicants’ 

financial health in making their decisions. For 12 of the 15 applicants, the 

 

25For the remaining two, the lending plan was not responsive because the projected small 

business lending increase was not greater than or equal to amount requested. Treasury’s 

documents indicated that one was rewarded less than what they asked for, and the other 

one had an amount that was a bit shy of this threshold, but was ultimately approved.

26Treasury officials suggested that loss share agreements and other guarantees—that 

protect banks against risk of losses from certain nonperforming assets—could explain 

accepted applicants with elevated ratios of nonperforming loans. 

27Treasury officials noted that a number of the 535 nonapproved applicants withdrew from 

the application process prior to Treasury’s evaluation. 

28Treasury indicated that they subsequently found that 16 of the 175 applicants either had 

dividend restrictions or withdrew before Treasury’s consideration. 

29None of these banks had a CAMELS score of 1.
 

Page 16 GAO-12-183 Small Business Lending Fund

Investment Committee’s minutes and other documents provided 

additional explanation for their decisions. In particular, Treasury’s 

Investment Committee minutes generally indicated that the financial 

agent’s probability estimate was deemed too conservative for the 

approved applicants with repayment probabilities of less than 80 percent 

because, for example, the estimates did not include confidential 

supervisory information. For the remaining three applicants, Treasury 

officials were able to explain the rationale for their decisions—for 

example, we learned that the Application Review Committee or 

Investment Committee discussed concerns about the applicants’ financial 

condition, but these concerns were not clearly documented in the 

committees’ minutes. Treasury officials were able to clarify their decisions 

in subsequent conversations with us. Specifically, 2 nonapproved 

applicants from the 15 applicants that we reviewed in more depth were 

deemed viable by their regulators, were able to pay dividends, and had a 

96 percent repayment probability. However, the Application Review 

Committee did not recommend that these applicants go forward and the 

committee’s minutes documented that both applicants had asset quality 

problems. Treasury officials further explained that financial agents 

estimated a high repayment probability for these applicants but lacked 

access to certain confidential supervisory information that would have 

lowered the repayment probability estimates. In particular, the financial 

agent projected a low level of losses, but the Application Review Team 

estimated that the applicants could have a higher level of losses based on 

confidential supervisory information about the applicants’ classified 

assets—a measure of assets with well-defined weaknesses that 

jeopardize the liquidation of debts.

Treasury officials acknowledged that the initial repayment probability 

provided by the financial agents did not reflect regulators’ views of the 

financial condition of the banks, especially confidential information 

concerning adversely classified assets. According to Treasury officials, 

this was due to the financial agents’ reliance on only publicly available 

information to develop the repayment probability. Therefore, additional 

steps were taken to revise the estimates in certain cases. Treasury 

officials explained that the Application Review Team updated the 

probability estimate with confidential supervisory information in certain 

cases to help inform Investment Committee’s evaluations. While these 

updated repayment probability estimates were considered, they were not 

recorded in Treasury’s database. However, Treasury officials explained 
 

Page 17 GAO-12-183 Small Business Lending Fund

that this updated information was typically included in either the 

Application Review Team’s recommendation memorandum to the 

Investment Committee or the Investment Committee minutes.30

Treasury faced multiple delays in implementing the SBLF program and 

disbursing SBLF funds by the statutory deadline of September 27, 2011. 

Treasury launched the program in December 2010 and had initially 

intended to start approving applications by mid-January 2011 and begin 

closing the application window by early April 2011. However, Treasury 

extended the application deadline for community banks from March 31 to 

May 16, 2001. In addition, Treasury did not begin the application process 

for banks that were S Corps and Mutuals and CDLFs until May 12, 2011, 

and set application deadlines for these institutions for June 6, 2011, and 

June 22, 2011, respectively. Because of these implementation delays, 

Treasury did not disburse any funds until the end of June 2011, and 

finished approving the applicants on September 26, 2011, a day before 

the funding deadline (see fig. 2).

 

30A Treasury IG official told us that the next IG report will focus on Treasury’s evaluation 

process and will review a sample of decisions more in depth, including the role of the 

repayment probability estimates in Treasury’s funding decisions. 

Time to Review 

Applications Was Affected 

by Implementation 

Challenges and Funding 

Deadline
 

Page 18 GAO-12-183 Small Business Lending Fund

Figure 2: Timeline for the Implementation of SBLF, September 2010 through October 2011

Treasury officials said that they encountered a number of implementation 

challenges that delayed the disbursement of SBLF funds. First, the need 

to develop SBLF’s infrastructure, including hiring staff and contractors, 

contributed to delays in starting the applicant review process. Second, 

Treasury officials noted that while they wanted to expeditiously disburse 

the funds, they were committed to developing and implementing a robust 

set of internal controls, which can take time. Third, negotiations over the 

regulators’ role in reviewing SBLF applicants for investments took much 

longer than anticipated, and an agreement was not reached until March 

2011. According to Treasury, this delay resulted from differing views 

among the federal regulators—FDIC, Federal Reserve, OCC, and OTS—

about whether they should make recommendations to Treasury.

Ultimately, the regulators and Treasury agreed that the regulators would 

not be required to make recommendations on whether the applicant 

should be approved for SBLF but instead would document their analyses 

of SBLF applicant’s financial condition and performance and

determination of the applicant’s viability in the Supervisory Consultation 
 

Page 19 GAO-12-183 Small Business Lending Fund

Memo to inform Treasury’s evaluation.31

Treasury also reconsidered applicants that had not been approved upon 

their initial review through September, when new supervisory information 

became available. Treasury officials explained that they continued to 

receive updated supervisory information from regulators through 

September, often because some banks had gone through a more recent 

examination. Treasury officials wanted to reevaluate the nonapproved 

bank applicants using this updated information to ensure that these 

applicants were fully considered. Therefore, Treasury delayed making 

final decisions for some applicants so that updated supervisory 

information could be considered. According to Treasury officials, waiting 

for such information proved beneficial for 18 applicants that were 

ultimately approved to participate in SBLF.

Treasury also agreed to protect 

the privacy of the confidential supervisory information the regulators 

provided through a memorandum of understanding or similar letter 

agreements.

Treasury did not explicitly explain to applicants all SBLF program 

requirements at the beginning of the application period and did not inform 

nonapproved applicants of their status in a timely manner, which created 

confusion among applicants. Treasury initiated several outreach efforts to 

educate the public and potential applicants about SBLF. These efforts 

included a website with background and guidance on the program and 

frequently asked questions. Treasury also established a call center to 

respond to inquiries from interested institutions and held several webinars 

to explain the program. However, these communication efforts were not 

sufficient to address unexpected developments and the delays in the 

program. Furthermore, Treasury’s communication strategy did not appear 

to be effective in communicating with external stakeholders such as the 

banking regulators, industry associations, and Congress. Two key 

developments illustrate these weaknesses.

Treasury did not clearly explain one of the program requirements to SBLF 

applicants—that they needed to be able to pay dividends on SBLF funds 

 

31Specifically, OCC used three conclusions: (1) nonobjection, (2) nonobjection conditioned 

on private capital raised of a specified amount, or (3) unable to support the request for 

SBLF funding to provide information for Treasury’s evaluation. OTS also provided a 

“positive” or “negative” assessment on each applicant. 

Lack of Clarity about 

Program Requirements 

and Transparency of Some 

Decisions Created 

Confusion 

Program Requirements and 

Dividend Restrictions
 

Page 20 GAO-12-183 Small Business Lending Fund

they received—during the application process, leading to confusion 

among many applicants about the program. After the application deadline 

for banks, Treasury realized that the information from federal regulators 

would not necessarily indicate whether banks had dividend restrictions.

For example, dividend restrictions may come from state regulators and 

the applicant’s own board of directors and, therefore, would not be 

reflected in the federal regulators’ supervisory information.32

According to industry representatives, many banks had not realized that 

demonstrating their ability to pay dividends was a requirement for 

eligibility and, therefore, viewed Treasury’s request for information on 

dividend restriction as a new requirement that was added subsequent to 

the application process. These representatives noted that the requirement 

that participants be able to pay dividends was not explicitly communicated 

when the information on SBLF was first posted on SBLF’s website in 

December 2010.

To obtain 

this information, in May 2011, Treasury sent applicants an e-mail asking 

them to fill out a new form about their ability to pay dividends. In its 

request, Treasury did not explain that this was not a new requirement.

33

Treasury officials noted that the requirement was described in the 

program’s published Summary of Preferred Terms posted on December 

20, 2010, and was not a new eligibility criterion or policy change.

Specifically, Treasury officials pointed out that the summary of terms 

stated that the main policy instrument for SBLF was the dividend rate, 

which would be an incentive for institutions to lend to small businesses 

For example, it was not included in the initial guidance, 

the application form, or the question-and-answer section on the website.

This program requirement was also not mentioned in Treasury’s initial 

outreach efforts (e.g., webinars and conferences). Similarly, officials from 

FDIC, Federal Reserve, and OCC also told us that Treasury’s decision to 

not fund banks with dividend restrictions had not been explicitly stated 

when the program was established in December 2010. In addition, the 

regulators noted that Treasury officials did not discuss this issue with 

them until early May 2011.

 

32According to Treasury, they also tried to obtain dividend restriction information from the 

state regulators. However, state regulators did not consistently report this information, and 

certain states subsequently decided not to participate in the supervisory consultation 

process. 

33Treasury subsequently posted this information on its website in May 2011.
 

Page 21 GAO-12-183 Small Business Lending Fund

and repay SBLF funding within a certain time frame. Given the program’s 

focus on the dividend rate, Treasury officials assumed that applicants 

would understand that they needed to be free of restrictions on paying 

dividends.

The confusion about the dividend restriction program requirement 

resulted in a number of banks unable to currently pay dividends applying 

for the program. Specifically, our analysis showed that 231 of the 

applicants had some form of dividend restrictions.34

Although approved institutions began receiving funds in June 2011, many 

applicants that were not selected to participate in SBLF were not told of 

their status until September 2011, almost 4 months after the application 

deadline. Treasury officials explained that by waiting to make final 

decisions for some applicants that would not receive approval on the 

basis of results from the first-quarter call reports, Treasury was able to 

consider results from the second-quarter call reports that contained data 

on the banks’ financial conditions through June 2011.

According to industry 

representatives we spoke with, if Treasury had communicated this 

requirement more clearly from the outset, banks might not have spent 

time and effort applying to the program or would have had more time to 

work with their regulators on lifting the restrictions to increase their 

chances of being accepted.

When Treasury informed applicants of their status, it did not initially 

communicate why the banks were not approved. This lack of information 

created confusion and frustration among some applicants. For instance, 

representatives from one banking trade group told us that some members 

were confused about not being approved because they had high 

CAMELS composite ratings and no dividend restrictions and their 

respective regulators had informed them that they had received a positive 

viability determination. As we noted earlier, our analysis of Treasury’s 

funding decisions found some applicants that fell within the established 

parameters but were not approved. Specifically, we found 85 applicants 

that were not approved by Treasury despite (1) receiving a positive 

viability determination, (2) having a CAMELS composite rating of 2, and 

(3) being able to pay dividends. Treasury officials told us that they did not 

 

34Fifty-three of these applicants would have been ineligible regardless of whether they had 

dividend restrictions because they did not meet the eligibility criteria established by the act 

by either being on FDIC’s problem bank list or having more than $10 billion in assets. 

Status of Applications
 

Page 22 GAO-12-183 Small Business Lending Fund

initially explain to the applicants as to why they were not approved 

because relevant supervisory information was confidential, and Treasury 

was prohibited by law from disclosing this information. However, 

according to OCC, they were also not initially consulted about Treasury’s 

decision about what to communicate to applicants who were denied, and 

when such discussions did take place, OCC encouraged Treasury to 

provide explanations to applicants. In addition, FDIC and the Federal 

Reserve noted that the regulator’s confidential information was only one 

input into Treasury’s decision-making process, and the investment 

decisions were Treasury’s, not the regulators. Nevertheless, Treasury’s 

emphasis on the confidential supervisory information contributed to the 

delay in notifying applicants of the reasons for not being approved and 

reduced the transparency of the decisions. Treasury informed us that they 

have subsequently reached an agreement with the regulators to share 

more information on those decisions with the affected SBLF applicants 

and has finished contacting nonapproved applicants with additional 

information regarding its decision.

Treasury’s ineffective communication about the dividend restriction 

program requirement, delays in communicating the status of 

applicantions, and lack of explanation for its nonapproval decisions 

resulted in confusion among applicants and may also have negatively 

affected how the potential pool of applicants and the public perceived the 

program. Federal government internal control standards state that

management should ensure that the agency has adequate means of 

communicating with and obtaining information from external stakeholders 

when such information could have a significant impact on the agency’s 

achieving its goals.35 The experience and lessons from the first year 

implementing SBLF could be instructive to Treasury’s communication 

strategy about the status of the program going forward. Without a more 

effective communication strategy that enhances understanding of the 

program’s goals and requirements and recognizes the need for timely 

communication with external stakeholders, SBLF will continue to be 

poorly understood by the public and Congress.

 

35GAO/AIMD-00-21.3.1. 
 

Page 23 GAO-12-183 Small Business Lending Fund

Fewer institutions applied to SBLF and received funding than initially 

anticipated. Although SBLF’s authorizing legislation provided up to $30 

billion for investing, Treasury expected program participation to be lower 

and budgeted $17.4 billion in SBLF investments in its fiscal year 2011 

budget request, based on an internal analysis of projected program 

activity.36

The program attracted smaller institutions including those seeking to 

refinance CPP and CDCI funds. Sixty-five percent (612) of SBLF 

applicants were small institutions with total assets of $500 million or less, 

and 61 percent (204) of participants fall within this category.

However, interest in SBLF was lower than Treasury anticipated, 

with 935 financial institutions applying to the program for a combined 

funding request of $11.7 billion. Ultimately, 332 institutions received $4.03 

billion in SBLF investments. Of the 332 program participants, 281 (85 

percent) were banks, while the remaining 51 institutions (15 percent) 

were CDLFs.

37

 

36The $17.4 billion figure was reported in Treasury’s submission to the President’s 2012 

budget.

In addition, 

about one-third (320) of the total number of applicants were seeking to 

refinance CPP and CDCI funds, and these applicants requested $6.7 

billion in funds—representing about 57 percent of the total dollar amount 

requested (see fig. 3). Treasury approved 137 of the applicants seeking 

to refinance CPP and CDCI funds, investing a total of $2.7 billion in these 

institutions. This represented about 67 percent of all SBLF investments.

37The amounts for total assets were obtained from the institutions’ call reports and 

exclude CDLFs, which do not submit call reports and did not report total assets.

Characteristics of 

Applicants and 

Participants and 

Factors Affecting 

SBLF Participation
 

Page 24 GAO-12-183 Small Business Lending Fund

Figure 3: SBLF Applicant and Participant Data

Note: Of the $6.7 billion in requested to refinance CPP and CDCI funds, $5.69 billion was to repay 

CPP/CDCI principal. $2.2 billion of the ultimate $2.7 billion CPP/CDCI investments were for 

refinancing outstanding CPP and CDCI funds.

The program also attracted institutions from across the country. Figure 4 

shows the geographic distribution of SBLF investments by number of 

institutions per state and SBLF dollars per state. The Small Business 

Jobs Act required the Secretary of Treasury to consider, among other 

factors, increasing opportunities for small business development in high 

unemployment areas—a consideration Treasury sought to address by 

focusing outreach activities in 10 states with the highest unemployment 

(as well as the District of Columbia), which included direct outbound 

calling efforts to eligible institutions in these states. We found that higher 

levels of state unemployment were not associated with greater SBLF 

funding in the state.38

 

38Statistically, the correlation between unemployment and the amount of funding (or the 

number of funded institutions) is indistinguishable from zero. More funding did tend to go 

to states with greater GDP, but there is no relationship between unemployment and the 

amount of funding even after controlling for state GDP. There is variation in 

unemployment rates within states, and our analysis at the state level does not account for 

this.
 

Page 25 GAO-12-183 Small Business Lending Fund

Figure 4: SBLF Investments by State

Note: Five states did not have institutions that received SBLF funds: Alaska, Hawaii, New Mexico, 

Oregon, and Rhode Island.

To better put the financial characteristics of SBLF applicant and 

participant banks in context and to describe the types of institutions that 

were attracted to and funded by SBLF, we generated a group of peer 

institutions that had not applied to SBLF and compared them with SBLF 

applicants and participants (funded banks), in addition to comparing 

SBLF participants with applicants that were not funded.39

 

39We developed a peer group of institutions by matching each applicant with an institution 

in the same general category of institutions (e.g., thrifts) and in the same state. We did not 

assess banks’ individual financial condition; rather, we looked at averages of certain 

indicators to make comparisons between the groups. In order to make the two groups 

more comparable, we also omitted problem banks from both applicants and peers when 

comparing these groups, as these institutions are ineligible for SBLF. We excluded CDLFs 

for the analysis of both applicants and peers. The lack of supervisory information for 

CDLFs did not enable us to describe comparable financial characteristics. For more 

information, see appendix I.

For example, 

SBLF participants had lower capital ratios and a smaller proportion of 

certain small business loans (as a percentage of total domestic business 

Comparison of SBLF 

Applicants and Banks to 

Non-SBLF Peer Banks
 

Page 26 GAO-12-183 Small Business Lending Fund

and farm loans) than the peer group. Participants also had higher asset 

quality than peers.

• Capital ratios. Both SBLF applicants and participants had less capital 

than their nonapplicant peers. The risk-based capital ratio—the ratio 

of total capital to risk-weighted assets—was about 15 percent for both 

SBLF applicants and participants, compared with roughly 19 percent 

for peers.40

• Small loan portfolio. Both SBLF applicants and participants had a 

smaller proportion of certain small loans on their balance sheets—that 

is, loans of less than $1 million for business and commercial real 

estate and less than $500,000 for farms—than nonapplicants.41

• Asset quality. SBLF participants compared more favorably to 

applicants that were not funded and their peers in asset quality. 

Problem loans, a measure of asset quality, averaged 2.5 percent for 

SBLF participants compared with 5.7 percent for applicants that were 

not funded and 3.8 percent for peers.

For 

SBLF applicants small loans on average comprised 57 percent of 

loans, whereas participants had an average of 56 percent. For peer 

banks, the average was 62 percent.

• CAMELS composite ratings. On average, SBLF participants also had 

better CAMELS composite ratings than applicants that were not 

funded. SBLF banks averaged a CAMELS composite rating of 2.0, 

while applicants that were not funded averaged a CAMELS rating of 

2.7, indicating some areas of supervisory concern. Nonapplicant 

peers had an average CAMELS composite rating of 2.1.42

 

40For risk-based capital ratios, the adequately capitalized minimum is 8 percent and is 

equivalent to internationally adopted Basel minimums that apply to both banks and bank 

holding companies.

41This definition of small loans is based on regulatory submissions and is different from 

the SBLF definition, which defines qualified small business lending as loans below $10 

million to firms with revenue less than $50 million annually. Regulatory submissions do not 

include information according the SBLF definition of qualified small business lending.

42The comparison of applicants to peer banks excludes problem banks. When we 

included problem banks in the applicant and peer groups, both had average CAMELS 

ratings of about 2.5.
 

Page 27 GAO-12-183 Small Business Lending Fund

In our nationally representative survey of banks, about four-fifths 

responded that they did not apply or plan to apply to the SBLF program.43

Figure 5: Factors Affecting Banks’ Participation in SBLF

The most important reason cited for not applying to the SBLF program 

was little or no anticipated demand for small business credit followed 

closely by a preference not to participate in government programs, as 

shown in figure 5. The banks that did apply anticipated loan demand in 

their respective areas, but indicated that their most important reason for 

applying was because SBLF was a source of capital to meet a growing 

demand for small business credit (as shown in fig. 5). Other reasons for 

applying to SBLF were that the program’s cost of capital was more 

attractive relative to market alternatives and that the program offered the 

option of refinancing CPP/CDCI funds.

Note: The 95 percent confidence intervals around the estimates for not applying to the SBLF do not 

exceed plus or minus 5 percentage points. The 95 percent confidence intervals around the estimates 

for applying to the SBLF do not exceed plus or minus 12 percentage points.

 

43GAO conducted a nationally representative survey of 794 banks, thrifts, and bank and 

thrift holding companies with total assets of less than $10 billion to gather information on 

their reasons for choosing to apply or not apply for SBLF. The final sample included 794 

banks out of a total population of 6,733. 510 banks, or 64 percent, responded to the 

survey. The weighted response rate was 66 percent.

Banks Frequently Cited 

Lack of Demand as the 

Most Important Reason for 

Not Applying to the 

Program
 

Page 28 GAO-12-183 Small Business Lending Fund

The SBLF program was designed to improve small businesses’ access to 

credit, which had become difficult to obtain since 2008. We examined 

trends in the credit markets from late 2003 through the third quarter of 

2011 to document the credit market environment in which the program 

and its participants must operate. As shown in figure 6, from the second 

half of 2003 through early 2008, credit conditions were stable and credit 

was relatively easy to obtain. Credit became increasingly difficult to obtain 

(tight) from 2008 through 2009 in the midst of the financial crisis, and it 

peaked between mid-2009 and mid-2010. Credit availability has eased 

somewhat since its peak.

Figure 6: Indicators of Small Business Credit Conditions, Third Quarter 2003-Third Quarter 2011

Treasury Has Not 

Finalized Plans to 

Monitor SBLF 

Participants or Track 

SBLF’s Impact

Credit Conditions Remain 

Challenging for Small 

Businesses 
 

Page 29 GAO-12-183 Small Business Lending Fund

Note: The indicators in the figure and the organizations that measure them are the following: (1) the 

National Federation of Independent Business, a small business trade association, surveys its 

members on whether or not their borrowing needs have been satisfied; (2) Wells Fargo conducts a 

survey of small business with a sample constructed by Gallup and Dun & Bradstreet; and (3) the 

Federal Reserve surveys banks on the price of credit for loans of various sizes.

Other indicators that we reviewed also demonstrate easier access to 

credit since the 2007-2009 financial crisis. According to a Federal 

Reserve survey of relatively large banks, more banks began easing than 

tightening standards for loans to small firms starting in the third quarter of 

2010. Further, lending to small businesses began increasing in the 

second half of 2009, according to a measure of loan originations.44 While 

credit availability has eased since 2009, movement in each indicator of 

small business lending has been volatile in the last few years, and small 

business credit remains tight relative to historical averages. However, a 

return to credit conditions of the boom years prior to the financial crisis 

would not necessarily be expected. Although small business credit 

conditions have improved since the 2007-2009 financial crisis, uncertainty 

about future credit conditions and the economic outlook increases the 

importance of monitoring SBLF participants going forward. 

Treasury has not finalized plans to monitor SBLF participants. Treasury 

officials acknowledged the need for ongoing analysis, monitoring, and 

reporting on SBLF participants, but at this time only has some procedures 

in place and preliminary plans for other procedures. These plans include 

potentially hiring outside firms to assist in managing the $4.03 billion 

SBLF portfolio, using such firms to evaluate the financial data that SBLF 

institutions provide, and developing a system to detect inconsistent or 

inaccurate information that might be submitted in participants’ quarterly 

supplemental reports. Treasury has taken some steps toward monitoring 

and reporting on SBLF participants. For example, in October 2011, 

Treasury began publishing, on its website, SBLF transaction reports that 

include dividend payment information. These reports include, among 

other things, all SBLF participants, the dividend payments expected and 

received, and total payments to date.

Similarly, Treasury has not finalized plans to assess the impact of the 

SBLF program. Treasury is required to provide a written report to 

 

44The Small Business Lending Index (SBLI) is a measure of new loans to small 

businesses developed by Thomson Reuters and PayNet Inc.

Treasury Has Not Finalized 

Plans for Monitoring SBLF 

Participants and the 

Program’s Impact Because 

Focus Has Been on 

Implementation 
 

Page 30 GAO-12-183 Small Business Lending Fund

Congress on a quarterly basis that includes information about how 

participating institutions have used the SBLF funds they received.

Treasury officials stated that their plans for assessing impact are still 

being developed. However, Treasury officials told us that they have some 

preliminary plans, including tracking the number of small business loans 

using data from SBLF participants’ quarterly supplemental reports in 

order to gauge increased small business lending; conducting an annual 

survey of small business lending; and conducting a study on how womenand minority-owned small businesses have been impacted by the 

program. Treasury officials have also considered comparing SBLF banks 

and a non-SBLF bank peer group to identify any relationships between 

the program and small business lending. Officials noted that they are still 

considering various approaches for how to assess the program’s impact, 

including how to collect and report needed data. In addition, Treasury 

officials acknowledged particular difficulties associated with linking SBLF 

to growth in employment, including how to account for the role of loans in 

keeping businesses operating that might otherwise have shut down, and 

how to treat loan refinancing.

Treasury officials told us that they have not finalized their plans for 

monitoring SBLF participants or assessing the impact of the program 

because they have been focused on implementing the program. As 

discussed, Treasury was evaluating applicants and making funding 

decisions through most of September. While Treasury officials said they 

recognize the importance of such assessments, they stated that they 

have not had sufficient time to devote to fully developing their plans.

Treasury faces a number of challenges as it moves forward in finalizing 

long-term plans to monitor SBLF participants and evaluate the SBLF 

program. First, Treasury will likely need to monitor SBLF participants 

without direct input from the federal regulators. According to Federal 

Reserve, OCC, and FDIC officials, there are currently no plans to 

coordinate with Treasury in monitoring SBLF banks. Regulators noted 

that their role, as defined by the statute, was to provide input to Treasury 

about the banks’ financial viability during the application process. The 

statute does not give the regulators a role in monitoring SBLF banks, and 

regulators stated that SBLF banks will not be treated differently or have 

their own set of exam procedures during their supervisory examinations.

One agency noted that they will review bank lending practices as part of 

the regular examination process. Second, the relationship between small 

business lending and job growth is complex, and making conclusions 

about the impact of the program on employment based on lending at 

SBLF banks will not be straightforward. Third, while using a control group 
 

Page 31 GAO-12-183 Small Business Lending Fund

to assess performance is a best practice, any assessment could be 

complicated by the fact the SBLF banks will report their small business 

lending in a way that is inconsistent with call reports of non-SBLF banks 

(the peer group). For example, as noted earlier, SBLF considers small 

loans to be those under $10 million, whereas the call reports collect data 

on loans under $1 million (or under $500,000 in the case of farm-related 

loans). Without comparable data for peers, measuring the impact it of 

SBLF on small business credit availability will be difficult.

Internal control standards for the federal government state that internal 

control activities are a major part of efficiently and effectively managing a 

program.45 Control activities, such as (1) proper execution of transactions 

and events, (2) accurate and timely recording of transactions and events, 

(3) and establishing and reviewing performance measures, are an integral 

part of an agency’s planning, implementing, reviewing, and accountability 

for stewardship of government resources and achieving effective results.

Establishing performance measures and developing a process for 

monitoring participating financial institutions will be critical to identifying 

and addressing any potential problems in these institutions’ compliance 

with program requirements.46

 

45

Until Treasury finalizes its plans for 

monitoring compliance and assessing impact in a timely manner, it will 

not be positioned to anticipate and manage payment problems and other 

program risks. For example, if the macroeconomic conditions deteriorate, 

SBLF participants may not have as many opportunities to lend to small 

businesses as originally planned, and participants may be obliged to pay 

a higher dividend rate than they originally anticipated. Participants may 

also need to preserve their capital and thus may be unable to pay 

dividends or their respective regulators may restrict their ability to do so if 

their condition warrants such a restriction, for example, if economic 

conditions deteriorate sufficiently. Furthermore, SBLF participants may 

loosen their underwriting standards to meet higher lending targets, a 

concern shared by OCC. Such factors will also need to be considered as 

Treasury develops its plans for monitoring and assessing the impact of 

GAO/AIMD-00-21.3.1.

46Once risks have been identified, they should be analyzed for their possible effect. Risk 

analysis generally includes estimating the risk’s significance, assessing the likelihood of its 

occurrence, and deciding how to manage the risk and what actions should be taken. 

Because governmental, economic, industry, regulatory, and operating conditions 

continually change, mechanisms should be provided to identify and deal with any special 

risks prompted by such changes.
 

Page 32 GAO-12-183 Small Business Lending Fund

the SBLF program. Until Treasury’s plans are finalized and implemented, 

it will not be able to provide information on the effectiveness of the SBLF 

program.47

Intended to improve the flow of credit to small businesses, the SBLF 

program attracted fewer banks and community development loan funds 

than expected and encountered significant delays in providing funding.

Instances of poor communication during the first year of the SBLF 

program created confusion among applicants. Although Treasury 

conducted numerous outreach efforts to inform potential applicants and 

the public about the program, some communications were incomplete or 

unclear. Specifically, Treasury did not initially make clear that participants 

would have to be free of restrictions on paying dividends, and more than 

200 applicants that could not make such payments applied to the 

program without knowing that they would not meet program requirements.

Moreover, Treasury did not explain to applicants its reasons for not 

accepting them in the SBLF program, and many of these applicants did 

not find out that they had not been approved until months after applying. 

Treasury later took steps to improve communications by working with the 

bank regulators to determine how to communicate to banks the reasons 

for not being approved. However, the experience of SBLF applicants 

highlights the importance of timely, transparent communications 

throughout the program implementation process, a lesson that will 

continue to be important going forward.

SBLF’s impact on small business lending will be difficult to measure, both 

because Treasury has yet to finalize evaluation plans and because 

multiple factors affect lending trends. Treasury has not fully developed 

procedures to monitor participants for compliance with the program’s 

requirements or measures to assess SBLF’s effectiveness in increasing 

small business lending. Establishing procedures is an important 

component of accountability for stewardship of government resources. As 

we found in reviewing Treasury’s application evaluation process, 

procedures also may need to adapt to changing circumstances, and such 

adjustments should be clearly documented. Monitoring compliance, 

 

47In prior reports, we have reported that internal controls are a major part of efficiently and 

effectively managing a program, and developing a process for monitoring participating 

financial institutions will be critical to identifying and addressing any potential problems in 

these institutions’ compliance with program requirements. 

Conclusions 
 

Page 33 GAO-12-183 Small Business Lending Fund

including compliance with program terms such as dividend payments, and 

taking steps to ensure that the data participants provide on their small 

business lending are accurate, is important going forward. In addition, the 

reports on small business lending will be an important component of 

measuring the effectiveness of SBLF. Efforts to measure SBLF’s impact 

will be difficult because many factors affect trends in small business and 

other lending. In addition, limited participation in the program highlights 

the challenge of balancing the need to protect taxpayer interests with the 

desire to distribute SBLF funds to struggling areas of the economy.

Treasury’s efforts to consider approaches for isolating the impact of SBLF 

will be critical to providing a rigorous assessment of whether the program 

is effective. While Treasury officials said that they had been unable to 

complete plans to monitor compliance and assess SBLF’s impact on 

small business lending during the application and initial disbursement 

process, now is the time for Treasury to finalize its plans for monitoring 

compliance and assessing SBLF. Without a thorough assessment of the 

SBLF program’s performance, Congress and other policymakers will lack 

important information about the effectiveness of capital infusion programs 

for increasing small business lending.

While Treasury took steps to evaluate SBLF applicants in a consistent 

manner and provide information about the program through numerous 

outreach efforts, we recommend that the Secretary of the Treasury take 

the following three additional actions going forward:

• To promote transparency and improve communication with SBLF 

participants and other interested stakeholders, such as Congress and 

the bank regulators, Treasury should apply lessons learned from the 

application review phase of SBLF to help improve its communication 

strategy going forward.

• To enhance the transparency and accountability of the SBLF 

program, Treasury should finalize (1) procedures for monitoring 

participants, including procedures to ensure that Treasury is receiving 

accurate information on participants’ small business lending and (2) 

plans for assessing the performance of the SBLF program, including 

measures that can isolate the impact of SBLF from other factors that 

affect small business lending.

Recommendations for 

Executive Action
 

Page 34 GAO-12-183 Small Business Lending Fund

We provided a draft of this report to Treasury, FDIC, Federal Reserve, 

and OCC for review and comment. Treasury provided written comments, 

which are reprinted in appendix III. In its comments, Treasury agreed with 

our three recommendations and stated it is taking steps to incorporate 

these recommendations into existing plans and procedures to further 

support transparency and accountability. Treasury noted that it has 

worked to achieve a high level of transparency and accountability 

throughout the implementation of the SBLF program. For example, 

Treasury stated that it had conducted extensive outreach with potential 

applicants, including participating in industry events, teleconferences, and 

webinars. Treasury also provided technical comments, which we 

incorporated as appropriate. In addition, FDIC, Federal Reserve, and 

OCC provided technical comments, which we incorporated as 

appropriate.

We are sending copies of this report to the appropriate congressional 

committees, Treasury, FDIC, Federal Reserve, and OCC. The report also 

is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please 

contact A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. GAO staff who made 

major contributions to this report are listed in appendix IV. 

A. Nicole Clowers

Director

Financial Markets and Community Investment

Agency Comments 

and Our Evaluation
 

Page 35 GAO-12-183 Small Business Lending Fund

List of Committees

The Honorable Debbie Stabenow

Chairwoman

The Honorable Pat Roberts

Ranking Member

Committee on Agriculture, Nutrition and Forestry

United States Senate

The Honorable Daniel K. Inouye

Chairman

The Honorable Thad Cochran

Vice Chairman

Committee on Appropriations

United States Senate

The Honorable Tim Johnson

Chairman

The Honorable Richard C. Shelby

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Kent Conrad

Chairman

The Honorable Jeff Sessions

Ranking Member

Committee on the Budget

United States Senate

The Honorable Max Baucus

Chairman

The Honorable Orrin G. Hatch

Ranking Member

Committee on Finance

United States Senate

The Honorable Mary L. Landrieu

Chairman

The Honorable Olympia J. Snowe

Ranking Member

Committee on Small Business and Entrepreneurship

United States Senate
 

Page 36 GAO-12-183 Small Business Lending Fund

The Honorable Frank D. Lucas

Chairman

The Honorable Collin Peterson

Ranking Member

Committee on Agriculture

House of Representatives

The Honorable Hal Rogers

Chairman

The Honorable Norm Dicks

Ranking Member

Committee on Appropriations

House of Representatives

The Honorable Paul Ryan

Chairman

The Honorable Chris Van Hollen

Ranking Member

Committee on the Budget

House of Representatives

The Honorable Spencer Bachus

Chairman

The Honorable Barney Frank

Ranking Member

Committee on Financial Services

House of Representatives

The Honorable Sam Graves

Chairman

The Honorable Nydia Velazquez

Ranking Member

Committee on Small Business

House of Representatives

The Honorable Dave Camp

Chairman

The Honorable Sander Levin

Ranking Member

Committee on Ways and Means

House of Representative 
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-12-183 Small Business Lending Fund

The objectives of our report were to examine (1) the procedures that the 

Department of the Treasury (Treasury) developed to implement SBLF 

and evaluate applications for Small Business Lending Fund (SBLF) funds; 

(2) the characteristics of institutions applying to and receiving SBLF funds 

and the factors that may have influenced banks’ decision to participate; 

and (3) Treasury’s plans to monitor SBLF participants and measure the 

SBLF’s progress in increasing small business lending.

To assess Treasury’s evaluation process for SBLF applications, we 

reviewed Treasury’s policies, procedures, and internal controls for SBLF, 

including nonpublic documents, such as the Treasury’s internal control 

procedures and Application Review Committee and Investment 

Committee minutes, and publicly available material from the SBLF 

website. We reviewed Treasury’s and the four federal regulators’ 

respective roles and responsibilities with respect to evaluating applicants 

and compared them with the same roles for the Capital Purchase 

Program (CPP), a capital infusion program under the Troubled Asset 

Relief Program (TARP) that is similar to SBLF. We interviewed officials 

from Treasury, Federal Deposit Insurance Corporation (FDIC), Board of 

Governors of the Federal Reserve System (Federal Reserve), the Office 

of the Comptroller of the Currency (OCC), and the Office of Thrift 

Supervision (OTS) to obtain information on their SBLF applicant 

evaluation processes and to discuss the similarities and differences 

between SBLF and CPP in terms of their roles and the processes for 

evaluating applicants. We also interviewed representatives of industry 

trade groups, including American Bankers’ Association, International 

Franchise Association National Federation of Independent Business, 

Independent Community Bankers Association, and the National 

Association of Government Guaranteed Lenders to obtain their 

perspectives on SBLF and the application process.

To identify applicants that fell outside of Treasury’s stated evaluation 

parameters, we obtained data from Treasury, FDIC and SNL Financial 

(SNL) for all applicants on key inputs that Treasury used to inform its 

funding decisions, including CAMELS composite ratings, repayment 

probability, performance ratios, lending plan scores, dividend restriction 

information, and results of regulators’ financial viability assessments. To 

assess the reliability of Treasury’s data, we (1) performed electronic 

checking for errors in accuracy and completeness; (2) reviewed related 

documentation, such as minutes from the Application Review Committee 

and Investment Committee; and (3) held numerous meetings and 

remained in ongoing correspondence with Treasury to discuss data fields, 

analysis procedures, and weekly data updates. When we found 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-12-183 Small Business Lending Fund

inconsistencies, for example, between the weekly data updates or 

between the data and published information, we clarified them with 

Treasury. For example, during our interviews with Treasury, we learned 

that 60 applicants were approved by Treasury but did not close and were 

labeled in the same category (“withdrawn”) as applicants that were not 

approved. After clarifying and resolving our questions pertaining to the 

data, we concluded that the updated data set was reliable for the purpose 

of identifying applicants that fell outside of Treasury’s stated evaluation 

parameters.

Using this updated and corrected data set, we performed an analysis for 

all 935 applicants to identify which of the applicants, both approved and 

nonapproved, fell out of Treasury’s stated evaluation parameters (Table 1 

lists the key data that Treasury used to inform its funding decisions and 

their corresponding parameters). We compared all data fields pertaining 

to Treasury’s stated evaluation parameters, such as the regulator’s 

viability assessment, repayment probability estimates, and lending plan 

results to Treasury’s decision data field to identify those applicants 

outside of the parameters. We did not review the evaluation documents, 

such as regulator’s supervisory consultation memos and minutes from the 

Application Review and Investment Committees for all 935 applicants.

Table 1: Main Parameters Treasury Used for Evaluating SBLF Applicants

Key Data Parameters 

Eligibility Treasury determined only all approved applicants must first pass the initial eligibility check .

Positive financial viability Treasury determined only all approved applicants must first receive a positive financial viability 

assessment from their respective regulators. 

CAMELS composite ratings Treasury considered CAMELS composite ratings of 1, 2 or 3 as acceptable. Per the legislation, 

problem banks (i.e., banks with CAMELS composite ratings of 4 and 5) were not eligible. 

a

Repayment probability estimate Treasury determined that repayment probability of 80 percent as the minimum acceptable. An 

initial estimate was developed by financial agents. Treasury reviewed this initial estimate and, if 

needed, updated the estimate to incorporate confidential supervisory information. 

Key performance ratios Treasury considers the following as thresholds that would require further review:

• Classified assets ratio: Classified assets/Net Tier 1 capital + allowance for loan and lease 

losses (ALLL): greater than 100 percent

• Nonperforming loans ratio: Nonperforming loans (NPLS) + other real estate owned (OREO) 

/Net Tier 1 capital + ALLL: greater than 40 percent

b

• Construction and development loans: Construction and development loans/Total risk-based 

capital: greater than 300 percentc
Appendix I: Objectives, Scope, and 

Methodology

Page 39 GAO-12-183 Small Business Lending Fund

Key Data Parameters 

Lending plan scores Treasury evaluated the lending plans as either responsive or nonresponsive. Treasury rated 

applicants’ lending plan based on a 12 point evaluation. Any applicants that received 8 points or 

above, their lending plans were deemed responsive. The ones that received 7 points or below 

were deemed nonresponsive. 

Dividend restrictions Treasury determined only applicants that are able to pay dividends to SBLF funds could be 

approved. 

Source: GAO summary of Treasury documentation. 

a

This exclude CDLFs, because CDLFs do not face the same regulatory reporting requirements as 

banks and thus do not have supervisory data.

b

Tier 1 capital is considered the most stable and readily available capital for supporting a bank’s 

operations. It covers core capital elements, such as common stockholder’s equity and noncumulative 

perpetual preferred stock.

c

Using the results from this analysis, we then selected a small, 

nongeneralizable sample of 15 applicants that appeared to be particularly 

out of line with Treasury’s stated parameters for additional review. In 

selecting the sample, we attempted to identify at least 3 applicants from 

each of the following categories:

Classified assets are known only by the regulators, so the financial agents would not be able to do 

this in the absence of the supervisory consultation memos. The “allowance for loan and lease losses” 

(ALLL) is an account maintained by financial institutions to cover incurred losses in their loan and 

lease portfolios. The “other real estate owned” (OREO) is an account used for examination and 

reporting purposes that primarily includes real estate owned by a financial institution as a result of 

foreclosure.

• 6 approved outliers that had a repayment probability of less than 63 

percent

• 3 nonapproved applicants that had a repayment probability of greater 

than 95 percent

• 3 approved outliers that had nonperforming loan ratios of greater than 

55 percent

• 3 nonapproved applicants that had a no nonperforming loans

Because our findings are based on a nongeneralizable sample, they 

cannot be generalized to all applicants. However, because they represent 

significant deviations from Treasury’s stated evaluation parameters, our 

analysis provides useful examples of how Treasury used these inputs in 

making funding decisions. As part of this analysis, we reviewed minutes 

from the Application Review Committee and Investment Committee, and 

interviewed Treasury officials. Our criteria for assessing Treasury’s 
Appendix I: Objectives, Scope, and 

Methodology

Page 40 GAO-12-183 Small Business Lending Fund

evaluation process drew from GAO’s Standards for Internal Control in the 

Federal Government and past GAO work, particularly on CPP.1

To describe the characteristics of institutions that applied for and received 

SBLF program funds, we collected and analyzed data from Treasury. For 

example, we analyzed the number of institutions that applied; the number 

of institutions that were approved and nonapproved; the number of 

institutions that applied to refinance CPP or CDCI funds; and the 

institutions’ geographic locations. To determine the extent to which the 

distribution of SBLF funds was associated with state unemployment rates, 

we collected state unemployment rates from the Bureau of Labor 

Statistics and compared the data against both the number of funded 

institutions and the dollars of funding by state, using correlations and 

regression analysis.

We developed a comparable peer group of banks that did not receive 

SBLF program funds and compared their financial condition and recent 

small business lending with that of SBLF bank applicants and 

participants. We analyzed the proportion of loans worth less than $1 

million (or less than $500,000 in the case of farm-related loans) as an 

indicator a one kind of small business lending. This definition is different 

from qualified small business lending under SBLF, which includes loans 

for under $10 million to firms with revenue less than $50 million. Peers 

were chosen based on size, geographic location, and type of institution. 

We excluded CDLFs from the analysis comparing applicants and 

participants with peers. These are not regulated depository institutions, 

and the lack of supervisory information did not enable us to describe 

comparable financial characteristics. For certain comparisons of 

applicants with peers, we omitted problem banks that were ineligible for 

SBLF so that the two groups would be more comparable. We obtained 

CAMELS composite ratings from FDIC for both applicants and peers. We 

assessed the reliability of the data used for our analyses by, for example, 

reviewing prior GAO work and inspecting data for missing observations 

and outliers. We found that they were sufficiently reliable to describe the 

characteristics of SBLF banks and their peers.

To determine banks’ reasons for applying or choosing not to apply to the 

SBLF program, we conducted a nationally representative survey of 

 

1 GAO/AIMD-00-21.3.1. 
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-12-183 Small Business Lending Fund

executives of banking institutions with less than $10 billion in total 

assets.2

We received valid responses from 510 (64 percent) out of the 794 

sampled banking institutions. The weighted response rate, which 

accounts for the differential sampling fractions within strata, is 66 percent.

We identified eight banking institutions in our sample that were either 

closed or were improperly included in the sampling frame. We classified 

these as out of scope institutions and adjusted our estimates so they are 

generalized only to the 6,659 (+/- 58) institutions estimated to be in-scope 

institutions in the population.

Based on lists of financial institutions provided by FDIC, OTS, 

and the Federal Reserve, we identified 6,733 institutions with less than 

$10 billion in total assets to be included in our population for this survey.

We selected a stratified random sample of 794 institutions from the 

population of 6,733 (see table 2). We stratified the population into four 

strata based on the amount of assets and whether the entity was part of a 

holding company or a stand alone bank or thrift. The sample size was 

determined to produce a proportion estimate within each stratum that 

would achieve a precision of plus or minus 7 percentage points or less, at 

the 95 percent confidence level. We then inflated the sample size for an 

expected response rate of 50 percent. Because of the smaller number of 

banks and holding companies with assets greater than $5 billion and less 

than $10 billion, we selected all of these with certainty.

Table 2: Population, Sample Size, and Respondent Information for GAO Survey

Stratum 

Population 

size

Sample 

size Out of scope

Respondents 

within scope

Holding company $5- 

$10 billion 63 63 2 30

Holding company Less 

than $5 billion 5,118 378 5 249

Banks $5- $10 billion 5 5 0 4 

Banks less than $5 

billion 1,547 348 1 219

Total 6,733 794 8 502

Source: GAO survey results. 

 

2

Banking institutions includes banks, thrifts, and bank and thrift holding companies.
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-12-183 Small Business Lending Fund

The Web-based survey was administered from June 15, 2011 to August 

15, 2011. Bank executives were sent an e-mail invitation to complete the 

survey on a GAO Web server using a unique username and password. 

Nonrespondents received several reminder e-mails and a letter from GAO 

to complete the survey. The practical difficulties of conducting any survey 

may introduce additional nonsampling errors, such as difficulties 

interpreting a particular question, which can introduce unwanted 

variability into the survey results. We took steps to minimize nonsampling 

errors by pretesting the questionnaire with four banks in April 2011. We 

conducted pretests to make sure that the questions were clear and 

unbiased and that the questionnaire did not place an undue burden on 

respondents. An independent reviewer within GAO also reviewed a draft 

of the questionnaire prior to its administration. We made appropriate 

revisions to the content and format of the questionnaire after the pretests 

and independent review. All data analysis programs were independently 

verified for accuracy.

To assess Treasury’s plans to monitor participants and measure SBLF’s 

effectiveness, we interviewed Treasury officials about their intended work.

To describe trends in small business credit markets, we used a number of 

indicators to describe market conditions before and during the 

implementation of SBLF. These indicators included data from a survey 

conducted by the National Federation of Independent Business on 

whether members’ borrowing needs are being satisfied; a survey by Wells 

Fargo addressing banks’ ease or difficulty in obtaining credit; and the 

Federal Reserve’s bank survey on the cost of credit for loans of various 

sizes. For additional information on current credit market conditions, we 

also used data from a Federal Reserve’s survey of large banks (Senior 

Loan Officer Opinion Survey) and an estimate of small business loan 

originations developed by Thomson Reuters and PayNet. To determine 

the reliability of these data sources, we relied on previous GAO work and 

interviewed company representatives as appropriate to learn about their 

data collection methods and any changes to their controls. Based on our 

analysis we determined that, while the individual sources were not 

independently crucial to our findings, they were sufficiently reliable 

together to document patterns in the small business credit markets.

We conducted this performance audit from December 2010 to December 

2011 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives.
Appendix II: Responses to Questions from 

GAO’s Survey on the SBLF Program

Page 43 GAO-12-183 Small Business Lending Fund

We distributed a Web-based survey to 794 banking institutions from the 

population of 6,733 to determine whether they applied to the SBLF 

program and the reasons for their decision.1

Table 3: Has your bank applied, or does it plan to apply, to the SBLF program?

We received valid responses 

from 510 (64 percent) out of the 794 sampled institutions. Tables 3-7 

below show the responses to questions from the survey. Because we 

followed a probability procedure based on random selections, our sample 

is only one of a large number of samples that we might have drawn. 

Because each sample could have provided different estimates, we also 

provide the lower and upper bound estimates at a 95 percent confidence 

interval. The weighted response rate, which accounts for the differential 

sampling fractions within strata, is 66 percent. For more information about 

our methodology for designing and distributing the survey, see 

appendix I.

Responses

Estimated 

percentage

95 percent 

confidence intervallower bound

95 percent 

confidence intervalupper bound

Yes, we applied. 18 14 22

Yes, we plan to 

apply.

2 <1 3 

No 80 77 84

Source: GAO survey results.

Table 4: What are the reasons your bank had for applying for funding through the 

SBLF program?

Responses % 

95 percent 

confidence 

interval-lower 

bound

95 percent 

confidence 

intervalupper bound

It is a source of capital to 

meet growing demand for 

small business credit.

A reason 94 86 98

Not a 

reason

6 2 14

It is financially attractive in 

relation to the expected 

cost of capital relative to 

market alternatives.

A reason 91 81 97

 

1

Banking institutions includes banks, thrifts, and bank and thrift holding companies. 

Appendix II: Responses to Questions from 

GAO’s Survey on the SBLF Program
Appendix II: Responses to Questions from 

GAO’s Survey on the SBLF Program

Page 44 GAO-12-183 Small Business Lending Fund

Responses % 

95 percent 

confidence 

interval-lower 

bound

95 percent 

confidence 

intervalupper bound

Not a 

reason

9 3 19

It offers the ability to 

refinance Capital Purchase 

Program (CPP) funds 

through the SBLF program.

A reason 31 20 44

Not a 

reason

69 57 80

Other 18 68

32 82

Source: GAO survey results.

Note: Examples of “Other” responses included the program offering a source of capital to grow and 

Tier 1 capital treatment.

Table 5: Of all the reasons your bank had for applying for funding through the SBLF 

program, which one was the most important reason for applying?

Responses % 

95 percent 

confidence 

interval-lower 

bound

95 percent 

confidence 

interval-upper 

bound

It is a source of capital to meet growing 

demand for small business credit.

41 29 52

It is financially attractive in relation to the 

expected cost of capital relative to market 

alternatives.

35 23 46

It offers the ability to refinance Capital 

Purchase Program (CPP) funds through the 

SBLF program.

18 9 29

Other 7 2 16

Source: GAO survey results.

Note: Examples of “Other” responses included the program offering a source of capital to grow and 

Tier 1 capital treatment.
Appendix II: Responses to Questions from 

GAO’s Survey on the SBLF Program

Page 45 GAO-12-183 Small Business Lending Fund

Table 6: What are the reasons your bank had for NOT applying for funding through 

the SBLF program?

Responses % 

95 percent 

confidence 

interval-lower 

bound

95 percent 

confidence 

interval-upper 

bound

We have little or no anticipated 

demand for small business credit.

A reason 42 36 47

Not a 

reason

58 53 64

We plan to avoid taking on new 

obligations during current 

economic conditions.

A reason 22 17 26

Not a 

reason

78 74 83

We prefer to avoid participation in 

government programs.

A reason 50 44 55

Not a 

reason

50 45 56

The SBLF was less financially 

attractive in relation to the 

expected cost of capital relative to 

market alternatives.

A reason 28 23 34

Not a 

reason

72 66 77

The terms of participation were 

unfavorable.

Not a 

reason

36 30 41

Not a 

reason

64 59 70

The application process was too 

burdensome.

A reason 32 27 37

Not a 

reason

68 63 73

Other A Reason 38 30 47

Not a 

reason

62 53 70

Source: GAO survey results.

Note: Examples of “Other” responses included not being eligible to apply for the program or not 

needing additional capital at the time. 
Appendix II: Responses to Questions from 

GAO’s Survey on the SBLF Program

Page 46 GAO-12-183 Small Business Lending Fund

Table 7: Of all the reasons your bank had for NOT applying for funding through the 

SBLF program, which one was the most important reason for NOT applying?

Responses % 

95 percent 

confidence 

interval-lower 

bound

95 percent 

confidence 

interval-upper 

bound

We have little or no anticipated 

demand for small business credit.

29 24 34

We plan to avoid taking on new 

obligations during current economic 

conditions.

5 3 7 

We prefer to avoid participation in 

government programs.

25 20 30

The SBLF was less financially 

attractive in relation to the expected 

cost of capital relative to market 

alternatives.

8 5 11

The terms of participation were 

unfavorable.

9 6 13

The application process was too 

burdensome.

6 4 9 

Other 18 14 22

Source: GAO survey results.

Note: Examples of “Other” responses included not being eligible to apply for the program or not 

needing additional capital at the time.
Appendix III: Comments from the Department 

of the Treasury

Page 47 GAO-12-183 Small Business Lending Fund

Appendix III: Comments from the 

Department of the Treasury
Appendix IV: GAO Contact and Staff 

Acknowledgments

Page 48 GAO-12-183 Small Business Lending Fund

A. Nicole Clowers, (202) 512-8678, or Clowersa@gao.gov

In addition to the contact above, Kay Kuhlman, Assistant Director; Tania 

Calhoun; Emily Chalmers; Pamela Davidson; Colin Gray; Simin Ho; 

Michael Hoffman; Jonathan Kucskar; and Angela Messenger made key 

contributions to this report.

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(250585)
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