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BROKEN PROMISES: THE SMALL BUSINESS 

LENDING FUND’S BACKDOOR BANK BAILOUT 

HEARING 

BEFORE THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

APRIL 24, 2013 

Serial No. 113–19 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 

(II) 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

DARRELL E. ISSA, California, Chairman 

JOHN L. MICA, Florida 

MICHAEL R. TURNER, Ohio 

JOHN J. DUNCAN, JR., Tennessee 

PATRICK T. MCHENRY, North Carolina 

JIM JORDAN, Ohio 

JASON CHAFFETZ, Utah 

TIM WALBERG, Michigan 

JAMES LANKFORD, Oklahoma 

JUSTIN AMASH, Michigan 

PAUL A. GOSAR, Arizona 

PATRICK MEEHAN, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

TREY GOWDY, South Carolina 

BLAKE FARENTHOLD, Texas 

DOC HASTINGS, Washington 

CYNTHIA M. LUMMIS, Wyoming 

ROB WOODALL, Georgia 

THOMAS MASSIE, Kentucky 

DOUG COLLINS, Georgia 

MARK MEADOWS, North Carolina 

KERRY L. BENTIVOLIO, Michigan 

RON DESANTIS, Florida 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

JOHN F. TIERNEY, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

JACKIE SPEIER, California 

MATTHEW A. CARTWRIGHT, Pennsylvania 

MARK POCAN, Wisconsin 

TAMMY DUCKWORTH, Illinois 

ROBIN KELLY, Illinois 

DANNY K. DAVIS, Illinois 

PETER WELCH, Vermont 

TONY CA ́ RDENAS, California 

STEVEN A. HORSFORD, Nevada 

MICHELLE LUJAN GRISHAM, New Mexico 

VACANCY 

LAWRENCE J. BRADY, Staff Director 

JOHN D. CUADERES, Deputy Staff Director 

ROBERT BORDEN, General Counsel 

LINDA A. GOOD, Chief Clerk 

DAVID RAPALLO, Minority Staff Director 

(III) 

C O N T E N T S 

Page 

Hearing held on April 24, 2013 .............................................................................. 1 

WITNESSES 

The Honorable Christy L. Romero, Special Inspector General, Office of the 

Special Inspector General for the Troubled Asset Relief Program 

Oral Statement ................................................................................................. 5 

Written Statement ............................................................................................ 8 

APPENDIX 

A Response to SIGTARP’s Draft Audit Report: ‘‘Banks that Used the Small 

Business Lending Fund to Exit TARP’’ .............................................................. 42 

Department of Treasury, Office of the Inspector General, Audit Report, Small 

Business Lending Fund: Soundness of Investment Decisions Regarding 

Later-Entry, Withdrawn and Reconsidered Institutions in the SBLF Program ...................................................................................................................... 47 

GAO, Small Business Lending Fund, Additional Actions Needed to Improve 

Transparency and Accountability ....................................................................... 64 

GAO, Small Business Lending, Opportunities Exist to Improve Performance 

Reporting of Treasury’s Programs ...................................................................... 118 

The Honorable Elijah E. Cummings, a Member of Congress from the State 

of Maryland, Opening Statement ....................................................................... 174 

The Honorable Michael R. Turner, a Member of Congress from the State 

of Ohio, Opening Statement ................................................................................ 176 

The Honorable Tony Ca ́ rdenas, a Member of Congress from the State of 

California, Opening Statement ........................................................................... 177 

Letters to the Honorable Darrell Issa and the Honorable Elijah Cummings 

from the Credit Union National Association (CUNA) ....................................... 179 

(1) 

BROKEN PROMISES: THE SMALL BUSINESS 

LENDING FUND’S BACKDOOR BANK BAILOUT 

Wednesday, April 24, 2013, 

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, D.C. 

The committee met, pursuant to notice, at 9:30 a.m. in room 

2154, Rayburn House Office Building, the Honorable Darrell Issa 

[chairman of the committee], presiding. 

Present: Representatives Issa, Turner, McHenry, Jordan, 

Walberg, Lankford, Gosar, Farenthold, Meadows, Cummings, Clay, 

Connolly, Duckworth, Kelly, Davis, Horsford, . 

Staff Present: Alexia Ardolina, Majority Assistant Clerk; Kurt 

Bardella, Majority Senior Policy Advisor; Molly Boyl, Majority Parliamentarian; Lawrence Brady, Majority Staff Director; John 

Cuaderes, Majority Deputy Staff Director; Brian Daner, Majority 

Counsel; Adam P. Fromm, Majority Director of Member Services 

and Committee Operations; Linda Good, Majority Chief Clerk; 

Christopher Hixon, Majority Deputy Chief Counsel, Oversight; Michael R. Kiko, Majority Staff Assistant; Mark D. Marin, Majority 

Director of Oversight; James Robertson, Majority Senior Professional Staff Member; Laura L. Rush, Majority Deputy Chief Clerk; 

Scott Schmidt, Majority Deputy Director of Digital Strategy; Rebecca Watkins, Majority Deputy Director of Communications; Beverly Britton Fraser, Minority Counsel; Kevin Corbin, Minority Professional Staff Member; Jennifer Hoffman, Minority Press Secretary; Elisa LeNier, Minority Deputy Clerk; Lucinda Lessley, Minority Policy Director; Jason Powell, Minority Senior Counsel; Dave 

Rapallo, Minority Staff Director; Rory Sheehan, Minority New 

Media Press Secretary. 

Chairman ISSA. The committee will come to order. 

Today’s hearing, Broken Promises: Small Business Lending 

Funds Backdoor Bailout, will come to order. But before we begin, 

I would like to yield to the ranking member to introduce our newest member to the committee. 

Mr. CUMMINGS. Mr. Chairman, thank you very much. It is with 

tremendous pleasure that I introduce the committee to our newest 

member, Ms. Robin Kelly, from Illinois, Chicago specifically. She 

has a record of standing up for the rights of citizens and working 

very hard to make sure that folks live the very best lives that they 

can. 

She is a very brilliant young lady. Her reputation precedes her. 

We just want you to know, Congresswoman Kelly, that we welcome 

you, we look forward to working with you. As you know, we have 

2 

quite a bit of jurisdiction in this committee. So you fit right in, with 

the types of things that you have been concerned about are the 

very things that we address on a daily basis. 

So welcome, and I am sure you will find that on both sides of 

the aisle you will have a welcome reception. We try to work together to get as much done as we possibly can. Welcome. 

Thank you, Mr. Chairman. 

Chairman ISSA. Thank you, Mr. Cummings. I might note, one of 

the rules of the committee that I think you will be pleased about 

is that you are here at the gavel, if you look from Mr. Cummings 

down, you are fourth to ask questions when we come up. All these 

empty chairs, they will come after you. So welcome to the timeliness of the committee also. 

And you, you are fifth. 

[Laughter.] 

Chairman ISSA. Good morning. The Oversight Committee’s mission statement is that we exist to secure two fundamental principles. First, Americans have a right to know that the money 

Washington takes from them is well spent. And second, Americans 

deserve an efficient, effective government that works for them. 

Our duty on the Oversight and Government Reform Committee 

is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers. Because taxpayers have a right 

to know what they get from their government. 

We will work tirelessly in partnership with citizen watchdogs to 

deliver the facts to the American people and bring genuine reform 

to the Federal bureaucracy. 

Today I might note that at the White House signing ceremony 

in 2010, President Obama promised that Small Business Lending 

Fund would help main street banks lend to main street small businesses. That is a portion of the signing ceremony that I remember, 

because in fact, it was one of the important promises, and one that 

I believed we would keep. Because small business and their access 

to capital is the difference between growth and no growth. 

The truth is, large corporations had a short-term problem of capital, and it disappeared almost overnight. Since that time, whether 

it is the high yield or other forms of access, large companies, particularly public companies, have had access to some of the least expensive money in my lifetime. But today, we will see the Special 

Inspector General’s audit reveals the primary reason why the Fund 

exists was to give banks a backdoor exit out of TARP. That bothers 

me. I wish it wasn’t so. I wish it wasn’t in the report. But, in fact, 

while banks were helping themselves, small businesses, the engine 

of our economy, were not getting the assistance they need. 

Two point seven billion dollars, or more than two-thirds of all 

SBLF funds, went to banks that were already in TARP. With the 

Treasury Department’s blessing, these banks used 80 percent of 

those funds to exit TARP at a lower interest rate, rather than lend 

it out to small businesses. That means millions of taxpayer dollars 

were taken away from the American people and allowed to sit in 

the accounts of banks that received TARP funds. 

With the Administration’s blessing, and I might note, the Administration is a very broad word, and during this hearing, we will get 

more refined as to who in the Administration, TARP banks were 

3 

able to escape restrictions on governance, executive pay, and luxury 

expenditures. 

What I can’t get past is the fact that former Treasury Secretary 

Geithner made the absurd prediction that these banks would lend 

out $10 for every $1 in funding. The audit sampling found that 

TARP banks lent out only $1.13 for every $1 in SBLF funds. Once 

again, the American people were told one thing and in fact, for selfinterest of the banks that received this, just the opposite occurred. 

There are real inconsistencies to what was said and what was 

done that create real questions of what the Treasury Department 

should have done and how they are going to explain to us their failure. I asked the Treasury Department to appear before today’s 

hearing. They refused, even though the committee offered them 

that we would make extraordinary exceptions and accommodations 

for their participation. 

Let me be clear. Their absence does not absolve them of the responsibility to answer questions to the American people they have 

a right to know. 

I will today submit questions to the Treasury Department in the 

record. And I imagine the gentleman from Maryland, Mr. 

Cummings, will also have many questions. I insist that we be answered those questions, or we will have another hearing. This committee looks for waste, fraud and abuse. To put this money into 

people who didn’t need it is not only wasteful of funds, but it ultimately denied the American people that GDP growth they so much 

wanted and needed. 

I represent small business. Not just in that I have many in my 

district, but I came from small business. I know that in fact capital 

accumulation for growth is the hardest thing for a small business 

to do. They lean heavily on their community banks. They lean 

heavily at times on SBA. There is no basis under which that should 

have happened. 

I might note in closing, TARP has been a success when it comes 

to big banks paying back their loans. They paid them back early, 

they paid them back with interest. The truth was, most of the 

banks that received TARP money never really needed it except as 

a confidence statement. That reality says that this was less excusable, much less excusable because ultimately they were going to 

pay it back. This simply gave them an ability to do it sooner and 

for less. 

With that, I recognize my partner and colleague in this, Mr. 

Cummings, for his opening statement. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

And thank you, Ms. Romero, for testifying before us today. We 

appreciate your service, and we thank you and everyone in your office for the work that you do. It is outstanding work. 

Small businesses are the lifeblood of our Country’s economy. 

When small businesses thrive, America thrives. When small businesses have access to credit, they hire more workers and they replenish their inventories. 

This was the rationale behind the passage of the Small Business 

Jobs Act of 2010. In order to help small banks increase their lending to small businesses, Congress created the Small Business Lending Fund as an investment in America’s future. Since the inception 

4 

of the program in 2011, it has been a marked success. Lending to 

small businesses has increased by $8.9 billion, which translates to 

more than 38,000 new loans to small businesses. 

More than 80 percent of these loans are for less than $250,000 

and they are making a critical difference to a host of very small 

but very important businesses. My home State of Maryland has 

benefitted greatly from this program. Participating banks have increased their loans to small businesses by more than $280 million. 

I am proud to think of the number of family-owned restaurants, florists and day care centers that are thriving with these loans. 

The chairman’s home State of California is also benefitting from 

this program. California’s small community banks participating in 

the program have increased their lending to small businesses by 

more than $590 million. The fact is that the entire Country is benefitting from this program, particularly in the southwest, where 

more than 11,000 small businesses have received loans, and in the 

chairman’s region in the southwest, where 9,500 small businesses 

have received new loans. 

Today we hear about a report issued by the Special Inspector 

General for TARP that is critical of this program because it allows 

financial institutions to essentially refinance some of their TARP 

funds with funds from the Small Business Loan program. We have 

to keep in mind, however, that this is exactly what Congress authorized. We did this in 2010 when we created the program. We 

wanted to incentivize banks to make loans to small businesses as 

across the Country in order to spur growth to help lift our economy 

out of the recession. 

And the bottom line is that the program is working. All of the 

banks are making their interest payments to the Treasury Department, and not one has missed a payment. In fact, Treasury now 

estimates that these investments will be repaid fully, along with 

$50 million profit to the American taxpayer. 

Although I appreciate SIGTARP’s work, today’s hearing would 

have been more helpful to the committee members if we could have 

heard from additional witnesses. I agree with the chairman that 

that is essential. For example, Treasury officials should be here to 

offer their response, but they were given only eight days notice and 

they could not complete their testimony in a short time frame. This 

is according to them. 

For this reason, Mr. Chairman, I ask that a letter sent on March 

28th, 2013, from Deputy Assistant Treasury Secretary Don Graves, 

responding to SIGTARP’s report, be entered into the record. 

Chairman ISSA. Without objection. 

Mr. CUMMINGS. I also think committee members would have benefitted greatly from hearing from the Special Deputy Inspector at 

Treasury who has direct oversight jurisdiction over this program, 

who has issued reports that appear to conflict with some of 

SIGTARP’s findings. 

Now, my staff contacted the Deputy IG, but she also was unavailable to attend this hearing on such short notice. For this reason, Mr. Chairman, I ask that the IG’s report on this program, 

which was issued in July 2012, also be entered into the record. 

Chairman ISSA. Without objection. 

5 

Mr. CUMMINGS. I want to make it clear, Mr. Chairman, while we 

are entering these into the record, I agree with you, we need the 

testimony. But I want to make sure they are part of the record. 

Finally, GAO also has a statutory mandate to review this program’s initial reports. Those reports have commended the implementation of this program. Unfortunately, we do not have anyone 

here from GAO either. 

I ask unanimous consent that GAO’s reports on this program, 

which was issued in 2011 and 2012, also be entered into the record. 

Chairman ISSA. Without objection. 

Mr. CUMMINGS. I look forward to the testimony of Ms. Romero. 

But what we will hear today is a partial and incomplete assessment of what we have to deal with today. And I look forward, Mr. 

Chairman, to working with you to getting all of the witnesses that 

we need so we might thoroughly address this issue. 

With that, I yield back. 

Chairman ISSA. I thank the gentleman. And we will extend a future invitation. So hopefully those who could not do it in eight days 

will be aware that they will be invited in the future and perhaps 

they can start working now. 

I also want to associate myself with your comments, this is a 

technical hearing. This is one in which no laws were broken, but 

in fact there was a more effective use of funds. And you talked 

about that very favorably, as I would agree. Then there was a less 

effective use of funds. It is the impact of that that I believe the IG 

will testify to. 

Members may have seven days in which to submit opening statements, or other extraneous material for the record. I would now 

like to welcome our witness, the Honorable Christy L. Romero. She 

is Special Inspector General for the Troubled Asset Relief Program 

and a returning guest, both in her current position and her previous position. 

Pursuant to the rules, if you would please rise and raise your 

right hand to be sworn. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth and nothing but 

the truth? 

[Witness responds in the affirmative.] 

Chairman ISSA. Please be seated. 

Let the record indicate that the witness answered in the affirmative. 

Because this is the sole panel, we won’t hit you with the light 

and say next witness. But I would appreciate it if you would summarize so we can get to questions. The gentlelady is recognized. 

STATEMENT OF THE HONORABLE CHRISTY L. ROMERO, SPECIAL INSPECTOR GENERAL, OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF 

PROGRAM 

Ms. ROMERO. Chairman Issa, Ranking Member Cummings and 

members of the committee, it is my honor today to appear and 

present SIGTARP’s report. I thank the committee for its commitment to oversight and transparency. 

6 

TARP was intended to increase lending. But that did not happen 

and small businesses were left struggling. So Congress viewed 

SBLF as a fix to TARP, because it gave incentives to lend. 

Treasury officials said that banks could leverage each SBLF dol- lar to make loans in many multiples. As much as $8 to $10 in loans 

could be made for every SBLF dollar. 

TARP banks were allowed in SBLF but it was Treasury who had 

the authority to choose the banks that would be a good fit for SBLF 

and the amount they would get. Congress had one clear expectation: all banks were expected to increase lending. 

SIGTARP’s audit is not about whether it was appropriate for 

Congress to allow TARP banks in SBLF. Our report is about 

whether Treasury chose the right banks, the right TARP banks to 

exit TARP and go into SBLF. Nearly 60 percent of TARP small 

banks applied for SBLF, while only 9 percent of small banks outside of TARP applied for SBLF. This should have been a warning 

sign that TARP banks were looking at SBLF as a TARP exit strategy. 

When Treasury was choosing banks, we recommended that 

Treasury not count the TARP capital in assessing the health of the 

bank. What we said was, it made little sense to take a bank out 

of TARP if it did not have the capital to lend. Treasury rejected our 

recommendation, and they gave two-thirds of the $4 billion in 

SBLF dollars to TARP banks. 

Twenty-four TARP banks actually decreased their small business lending while in SBLF. These banks got $500 million in SBLF, but 

they decreased their small business lending by $741 million. Where 

did the SBLF money go? It did not go to small businesses. Fourteen 

of these banks paid their shareholders dividends. At least two gave 

their CEOs a substantial raise, a raise of at least 40 percent. These 

banks got some of the biggest SBLF investments. At least 24 banks 

that decreased lending actually got some of the biggest dollars from 

SBLF. Nineteen got more than $10 million; ten got over $20 million 

from SBLF and two got well over $50 million from SBLF. But only 

12 banks in SBLF got over $50 million. 

This cannot be acceptable. The number of banks that Treasury 

should have allowed to actually decrease their small business lending in SBLF should have been zero. 

TARP banks had much to gain and little to lose from SBLF. 

There is no penalty for decreasing lending. The banks pay what 

they would have in TARP. 

We looked to see if the TARP banks that were chosen by Treasury increased their lending in many multiples of every SBLF dollar, just as Treasury had promised. We found that was not the 

case. Forty-two banks that Treasury gave only enough SBLF dollars to repay TARP increased their lending by only 25 cents for 

every SBLF dollar. These 42 banks got one-quarter of the money 

in SBLF, they got $1 billion of the $4 billion in SBLF. TARP banks 

as a group collectively increased lending by $1.13 for every dollar 

in SBLF funds. 

The non-TARP banks that are in SBLF boosted their lending by 

three times that amount. 

The application process was essentially the same as it was for 

TARP, left over from TARP, which is how one banking regulator 

7 

described it to us. It did not make sense to us that repeating the 

same TARP process would bring a different result. 

There is supposed to be one key difference in the application 

process. Congress put in a lending safeguard; the banks had to submit a plan on how they would increase lending to their banking 

regulator along with their application to SBLF. 

That lending plan should have separated the wheat from the 

chaff. It should have shown which banks best fit the program’s 

goals, and which would fall short. The first problem, the plans, the 

template of which were designed by Treasury, were two pages long, 

not a lot of detail. Second problem, Treasury thought the banking 

regulators were assessing the plan to see if the lending was achievable, and the banking regulators thought that Treasury was doing 

it. This lack of accountability resulted in no adequate assessment 

of the lending plans. There is no consistent, meaningful review of 

the plans. 

Treasury did no independent analysis to determine if the lending 

could be achieved. They only did a check-the-box, superficial review 

to see if certain elements were included. This was a lost opportunity to ensure that the right TARP banks that could lend refinance into SBLF. There is another lost opportunity when for two 

years Treasury did not ask why 24 banks decreased lending. 

What can be done? Well, we can’t get back the lending that 

didn’t happen to small businesses. But we can focus on the lending 

that can happen going forward with these banks. We recommended 

that Treasury help those banks come up with new plans to increase 

their lending in multiples, as was intended but Treasury rejected 

that. Unfortunately, it is the small businesses in our communities 

that have suffered and will continue to suffer unless there is meaningful lending to them. 

Thank you again for this opportunity, I am happy to respond to 

any questions. 

[Prepared statement of Ms. Romero follows:] 

8 


Insert offset folio 1 here 80921.001

FOR OFFICIAL USE ONLY UNTIL RELEASED BY THE 

U.S. HOUSE COMMITTEE ON 

OVERSIGHT AND GOVERNMENT REFORM 

STATEMENT OF THE HONORABLE CHRISTY ROMERO 

SPECIAL INSPECTOR GENERAL 

FOR THE TROUBLED ASSET RELIEF PROGRAM 

(SIGTARP) 

BEFORE THE 

U.S. HOUSE COMMITTEE ON 

OVERSIGHT AND GOVERNMENT REFORM 

Apri124,2013 
9 


Insert offset folio 2 here 80921.002

Chainnan Issa, Ranking Member Cummings and members of the Committee, I am 

honored to appear before you today to present the Office of the Special Inspector General for 

the Troubled Asset Relief Program's ("SIGTARP") April 9, 20 J3 audit report "Banks that 

Used the Small Business Lending Fund to Exit TARP." 

SIGT ARP serves as the watchdog over the Troubled Asset Relief Program 

("TARP"), the Federal bailout resulting from the financial crisis. SIGT ARP protects the 

interests of those who funded T ARP programs - American taxpayers - by conducting 

criminal investigations and audits. Our mission is to promote economic stability through 

transparency, robust enforcement, and coordinated oversight. 

This Committee is committed to examining the management and effectiveness of 

Treasury's Small Business Lending Fund ("SBLF"). Lending was a key goal ofTARP and 

SBLF. TARP was intended to increase lending. However, that did not happen and small 

businesses were left struggling. On February 26, 2010, then-Treasury Assistant Secretary for 

Financial Stability Herbert Allison testified before Congress in support of the proposed SBLF 

program, stating that SBLF funds could increase banks' capital by 30-50%, capital that "can 

be leveraged to support a great deal more in lending." The idea behind SBLF was not simply 

that the banks would lend out the SBLF funds it received, but instead that they would leverage 

those funds to make loans in many multiples of the SBLF dollars. In September 2010, 

Congress authorized Treasury to invest $30 billion in small banks through SBLF. Viewed by 

members of Congress as a fix for TARP's failure to require or incentivize banks to lend the 

money, SBLF provided participating banks with incentives to increase small-business lending. 

The scope and scale ofSBLF were not as expected. Fifty-eight percent of the 

community banks in TARP applied for SBLF, while only 9% of the roughly 6,700 community 

1 
10 


Insert offset folio 3 here 80921.003

banks not in T ARP applied. Given that T ARP status should not have been indicative of loan 

demand, the wide differential in applications should have been a warning sign to Treasury that 

TARP banks were looking to SBLF as an opportunity to exit TARP.' Treasury only invested 

$4 billion of the available $30 billion, two-thirds of which ($2.7 billion) went to 137 T ARP 

banks. These T ARP banks used approximately $2.1 billion of the SBLF funds as a vehicle to 

exit TARP, escape TARP's restrictions on executive compensation and luxury expenditures, 

and pay less for taxpayer money (in the form of reduced dividends)2 As part of its mission of 

transparency and oversight, SIGTARP conducted an audit to determine whether Treasury and 

Federal banking regulators consistently evaluated applications submitted by TARP banks to 

refinance into SBLF. 

Although Congress allowed TARP banks to participate in SBLF, it intended that all 

banks in the program increase their loans to small businesses, and gave Treasury authority to 

choose which TARP banks best fit the program's goal. Some members of Congress noted that 

SBLF substantially resembled TARP and expressed doubt that lending would increase. 

Concerned that some banks may view SBLF as a TARP exit strategy with little benefit to 

small businesses, in September 2010, SIGTARP recommended that when choosing banks, 

Treasury not count T ARP capital in assessing the health of the bank, stating "it makes little 

sense to convert a bank into SBLF - a program intended to incentivize increased lending - if 

the institution does not have the necessary capital to support such increased lending." 

1 In a 2011 GAO survey, some TARP banks cited the opportunity to exit TARP as the primary reason for 

applying for SBLF funds. 

2 In addition, when discussing in press releases and blog posts how much Treasury has received in TARP 

repayments, Treasury includes the more than $2 billion of SBLF funds that banks used to repay T ARP. In a 

letter to Secretary Geithner, Senator Chuck Grassley asked Treasury to ensure that TARP funds repaid by SBU 

not be counted as funds repaid to the Government. 

2 
11 


Insert offset folio 4 here 80921.004

SIGTARP continued, "An institution that would not have an adequate capital base but for the 

Government's investment likely will not have the necessary capital to support increased 

lending." SIGTARP designed the recommendation not to penalize TARP banks, but to ensure 

that banks did not use SBLF to escape TARP, and its restrictions, without effectively 

increasing small-business lending, a concern that unfortunately has come to fruition. 

increased Former TARP Banks that Used 

SBlF To Exit TARP 

Former TARP banks in SBLF have not effectively increased small-business lending 

because they used approximately 80% of SBLF funds ($2.1 billion of the $2.7 billion) to pay 

offTARP, rather than to increase lending. Twenty-four TARP banks actually decreased their 

small business lending by $741 million while in SBLF, which was more than the $501 million 

they received in SBLF.3 Furthermore, 14 of these 24 former TARP banks paid dividends to 

shareholders while in SBLF, despite decreasing their small business lending. Given that 

SBLF's sole goal was to increase small business lending, the number of banks that Treasury 

should have allowed to decrease their lending in SBLF after two years should be zero. 

TARP banks had much to gain and little to lose from refmancing into SBLF 

irrespective of their small-business lending capability or willingness to lend. If the former 

TARP banks fail to increase lending, there is no meaningful penalty. The "fees" and 

"penalties" resulting from a TARP bank's failure to increase Icnding in SBLF bring the cost 

of capital in line with the cost under T ARP. 4 

3 The source for all SBLF lending data used in this report is Treasury's Use a/Funds Report, published on 

January 7,2013, that reflects SBLF lending as of September 30, 2012, the latest data available at the 

time SIGTARP drafted its report. At that time, 132 of the 137 TARP banks remained in SBLF, five had 

paid off SBLF and exited the program. 

4 If the bank had remained in TARP, it would pay a 5% dividend for each of five years, after which (in 

2013 or 2014) the rate would increase to 9%. If a T ARP bank that refinanced into SBLF fails to increase 

3 
12 


Insert offset folio 5 here 80921.005

Treasury detennined that as a matter of policy, both TARP and non-T ARP banks 

applying to SBLF would havc to projcct lending growth at least equal to the amount of SBLF 

funds they received; however, that was the minimum, and Treasury expected banks that 

received SBLF funds to increase lending in multiples of every SBLF dollar. Tn a March 16, 

2010 hearing before the House Committee on Appropriations, fonner Treasury Secretary 

Geithner testified about the proposed SBLF program stating that, "the capital could be 

leveraged several times into new loans." He further testified. "one of the best use ofa dollar 

of scarce resources is capital to a small bank because that will tum into $8 to $10 in additional 

lending capacity." In a press release, Treasury announced that it was investing more than $4 

billion to "help propel lending by Main Street banks in many multiples of that amount." On 

October 18, 2011, fonner Treasury Secretary Timothy Geithner testified at a hearing on a 

review of the Small Business Jobs Act by the Senate Committee on Small Business and 

Entrepreneurship on, that SBLF (and TARP) investments in banks "are by any measure one of 

the most efficient uses of taxpayers' money we have because every dollar of capital you make 

available to a bank who can't get capital from other sources is worth somewhere between $8 

and $10 of lending capacity."s 

SIGTARP conducted an analysis to detennine whether TARP banks increased 

small business lending in multiples of every SBLF dollar, in line with Treasury's statements 

its small-business lending after two years, its dividend rate will increase by 2 percentage points from, 5% 

to 7% (in 2014). In addition, if a SBLF bank fails to increase lending after the bank's 9th quarter in 

SBLF, there would be a 2% "lending incentive fee" to 9% on the fifth anniversary of the TARP 

investment. 

5 Some members of Congress believed that lending had the potential to increase by multiples often, stating 

that SBLF would lead to $300 billion in new small-business loans because the banks would be able to 

lend as much as $10 for every $1 in SBLF funds. Senator Maria Cantwell, a member of the Senate 

Committee on Small Business and Entrepreneurship, quoted an estimate by the Independent Community 

Bankers of America that the $30 billion SBLF fund will generate up to $300 billion in small-business 

lending. In June 2010, Congresswoman Melissa Bean cited a Congressional Budget Office estimate that 

SBLF "can be leveraged by banks into over $300 billion in new small-business loans," based on SBLF's 

potential as a $30 billion small-business investment fund. 

4 
13 


Insert offset folio 6 here 80921.006

and policy. This simple method shows the value the SBLF banks are providing to taxpayers 

and takes into account the taxpayer dollars invested in the banks; something not provided just 

looking at loan growth. While any increase in lending is helpful, not all lending increases 

deliver the same degree of value to taxpayers, particularly in light of the fact that small 

business lending at TARP banks had declined so much during the crisis. 

Beyond the 24 banks that decreased lending while in SBLF, the remaining TARP 

banks in SBLF increased lending, but they significantly underperformed compared with nonTARP banks. Former T ARP banks in SBLF increased lending by just $1.13 for each $1 in 

SBLF funds they received (a multiple of one for every SBLF dollar). By comparison, banks 

that did not participate in TARP but received SBLF funding have increased small-business 

lending by more than three times that amount - $3.45 for each $1 in SBLF funds ( a multiple 

of three for every SBLF dollar). 

Figure 1 shows a comparison of SBLF funding levels and lending increases ofTARP 

banks and non-T ARP banks. 

5 
14 


Insert offset folio 7 here 80921.007

FIGURE 1 

Note: Increases are calculated as the difference between Qua!ified Small Business lending as of 

September 30,2012, and the quarterly average of these loan balances for the four quarters precedIng the Jegislation's 

passage (the same bbase!ine" period used by the program to calculate lending growth). 

Source: SIGT ARP analysis based on Treasury's SBlF Transactions Reporl as of December 31, 2012, and Treasury's 

Use of Funds Report, data as of September 30, 2012. 

SElLF 

Although as a group, the fonner T ARP banks remaining in SBLF increased lending 

by $1.13 for each $1 in SBLF funds received, there was a significant difference in lending 

depending on whether the bank received only enough SBLF funds to repay T ARP or received 

additional funds. 

SIGTARP found that 42 TARP banks that received only enough SBLF funds to pay 

offTARP have lent out significantly less than they received in SBLF funds - increasing 

lending by only 2S¢ for each $1 in SBLF funds. If Treasury had implemented SIGTARP's 

20 I 0 recommendation, it could have addressed the obvious question about these banks' ability 

6 
15 


Insert offset folio 8 here 80921.008

to meet the SBLF's program's lending goal if all the SBLF funds they received would be used 

to repay TARP. T ARP banks that received additional money beyond the outstanding TARP 

balance have increased lending by $1.67 for every $1 in SBLF funds. Therefore, TARP banks 

in SBLF have not propelled lending in many multiples of the amount of SBLF funds they 

received, as Treasury promised. Figure 2 shows differences in lending increases in fonner 

T ARP banks in SBLF that only received enough SBLF funds to repay T ARP compared to 

those that received additional SBLF funds. 

FIGURE 2 

DIFFERENCES IN INCREASES IN LENDING BY TARP BANKS SBLF, 

BASED ON AMOUNT OF SEllF FUNDING 

Note: Increases are calculated as the difference between Qualified Small Business Lending as of 

September 30, 2012, and the quarteny average of these loan balances for the four quarters preceding the legislation's 

passage (the same ubaseline" period used by the program to calculate !ending growth). 

Source: SIGTARP analysis based on Treasury's SBlF Transactions Report as of December 31, 2012, and Treasury's 

Use of Funds Report, data as of September 30, 2012. 

7 
16 


Insert offset folio 9 here 80921.009

Federal Regulators Old Assess V\H,,,!hpr 

Banks' To Increase Small·Business L&ndlng Achievable 

Treasury had the ability to exclude T ARP banks that were not a good fit for the 

SBLF program. Congress' safeguard of requiring that banks submit a small-business lending 

plan, a requirement not present in TARP, did not have the intended effect because Treasury 

and the Federal banking regulators did not adequately assess whether the banks' plans to 

increase small-business lending were achievable.6 Overall, Treasury and regulators did not 

conduct consistent, meaningful reviews of the plans focusing on whether the TARP banks 

were prepared to lend SBLF capital. SIGT ARP found that, during the application review 

process, regulators did not consistently provide adequate input to Treasury on the SBLF 

lending plans and generally did not scrutinize the credibility of the information presented in 

the lending plans, focusing instead on the applicant's viability. 

Treasury's application review process was almost entirely focused on the banks' 

ability to repay the funds to Treasury, overshadowing any consideration of the applicants' 

preparedness to lend SBLF money. Treasury determined that as a matter of policy, both 

T ARP and non-T ARP applicants would have to project lending growth at least equal to the 

amount of SBLF funding they received. However, Treasury did not adequately evaluate the 

credibility of those projections, limiting the effectiveness of that policy. Absent consistent 

and meaningful scrutiny by Treasury or regulators of banks' lending plans, some institutions 

refinanced from TARP into SBLF seemingly unable to fulfill the sole purpose of the program 

- to increase lending to small businesses. 

6 The Federal banking regulators are the Federal Reserve Board ("Federal Reserve"), the Federal Deposit 

Insurance Corporation ("FDIC"), and the Office of the Comptroller of the Currency ("oec"). 

8 
17 


Insert offset folio 10 here 80921.010

Treasury & 

Each 

Lending 

Banking Regulators Did "'''U>f-' """"'" Communicate 

Each ReHed the Other To Assess the Banks' Plans To Increase 

Lending plans submitted by SBLF applicants did not receive appropriate and 

consistent Government scrutiny during the application review process in part because 

Treasury and Federal banking regulators did not collaborate eftectively with each other, each 

claiming that the other had responsibility to assess the lending plans. Treasury's SBLF 

program director told SIGT ARP that Treasury did not perform an independent analysis of the 

projections in the lending plans, a statement borne out by SIGTARP's document review. He 

told SIGTARP that the analysis of the lending plans was the regulators' responsibility, rather 

than Treasury's, because the Jobs Act required that the lending plans be submitted to 

regulators. 

Regulators, however, did not agree with Treasury's view, and OCC and FDIC 

officials told SIGT ARP that they perceived their role to be that of a conduit, passing along the 

lending plans to Treasury. SIGTARP asked Federal Reserve's Manager of Community 

Banking Organizations whether the Federal Reserve had considered whether the lending goals 

reported in TARP applicants' lending plans were attainable when some institutions used all 

the SBLF capital they received to repay TARP. He responded that such consideration was the 

responsibility of Treasury, not the regulators. The result of this lack of effective 

communication was an overall lack of scrutiny by Treasury and regulators to determine 

whether the banks' plans were credible. Notably, Treasury and regulators did not deny SBLF 

funding to any T ARP bank based on its lending plan. 

9 
18 


Insert offset folio 11 here 80921.011

Regu!ators Not Consistently Action To Preserve intent of 

Meaningfully "",P\!I.'"",n Banks' Proposals To 

Increase 

During the SBLF application review process, regulators missed opportunities to 

protect the interests of taxpayers because they did not ensure that the banks were prepared to 

lend SBLF funds to small businesses consistent with the intent of Congress. Given their 

institutional expertise as bank supervisors, regulators were well suited to weigh in on the 

credibility of the applicant banks' plans to increase small-business lending. Instead regulators 

generally focused on the banks' viability, in a process described by one regulator as "left 

over" from T ARP. Despite the fact that the law that created SBLF required that applicants 

submit a small-business lending plan to their Federal banking regulator, regulators did not 

consistently take action to preserve the intent of Congress by meaningfully reviewing the 

banks' proposals to increase lending. Even where the regulator provided input to Treasury on 

the lending plans, the regulator did not recommend that Treasury deny funding to the TARP 

bank based on the lending plan, and former TARP banks have not effectively increased smallbusiness lending.? 

SIGTARP found that, during the application review process, regulators did not review banks' plans to 

increase lending in the same manner. According to an FDIC official interviewed by SIGTARP, the 

FDIC (who regulated 69% oftbe TARP applicants) did not analyze the lending plans and served only as 

a conduit to Treasury. FDIC guidelines instructed its staff that no input was necessary unless the plan 

presented safety and soundness concerns. An OCC official told SIGT ARP that OCC viewed itself as a 

condillt for the lcnding plan, with Treasury having primary responsibility for lending plan review, and 

OCC weighing in on reasonableness. The Federal Reserve's review of lending plans appears to have 

differed depending on whether it was the primary regulator of the bank or the regulator of the bank 

holding company (who received the funds). A Federal Reserve official told SIGTARP that the Federal 

Reserve focused on the impact of the plan on the safety and soundness of the bank, not on the adequacy 

and achievability of the proposed lending, and deferred responsibility to FDIC or OCC, which regulated 

the subsidiary bank. In these statements, the official is referring to applicants where the Federal Reserve 

regulated the bank holding company, but not the subsidiary bank. In addition, in SIGT ARP's review of 

32 applications by TARP banks for SBLF, the FDIC only provided input to Treasury on the applicant 

lending plans for 4 of23 FDIC-regulated banks, the OCC provided input on 5 of 5 OCC-regulated banks, 

and the Federal Reserve provided input to Treasury on the lending plans of only 7 of the 27 banks where 

10 
19 


Insert offset folio 12 here 80921.012

Review of Banks' Pians To increase Lending Was and 

a "Check-tlle-8ox" 

Even with limited input from the regulators on banks' proposed lending plans, the 

plans could have been adequately assessed had Treasury's own review been substantive. 

Instead, Treasury's application review process was almost entirely focused on the banks' 

ability to repay the funds to Treasury, overshadowing any consideration of the applicant's 

preparedness to lend SBLF money. Treasury's review of the lending plans submitted by SBLF 

applicant banks was superficial, with Treasury merely filling in a "check-the-box" review 

form that did not provide specific details to support the applicant's ability to increase lending 

as proposed. Treasury's evaluation of the lending plans as seen in its Small Business Lending 

Fund Lending Plan Evaluation reproduced in Figure 3 focused on form over substance, 

scoring the banks on how many of the 12 elements the bank included, assigning equal weight 

for the bank's description of its use of media outlets for outreach as it did for describing its 

emphasis on small-business lending. 8 Treasury gave little to no consideration to key risk 

factors, such as the source of funds to support new lending, despite obvious questions about 

TARP banks' ability to meet the SBLF program's lending goals for those banks that would 

use SBLF funds to repay T ARP. 

the Federal Reserve regulated the bank holding company and all 4 applicant banks primarily regulated by 

the Federal Reserve. 

8 Treasury did not require the banks to provide other information that would be helpful to assess the 

credibility of whether the banks could achieve their proposed increases in lending. For example, plans 

could pass review without T ARP banks describing where they would get the funds to lend, how smallbusiness lending fit within banks' lending, or without specifYing the amount of resources banks planned 

to devote to small-business lending. In addition, SIOTARP's review of meeting minutes and 

documentation for its review of32 TARP banks that applied for SBLF evidences that, for those banks, 

Treasury officials generally did not assess whether the banks' plans to increase small-business lending 

were achievable. Treasury invested SBLF funds in some banks, even though the banks submitted 

lending plans that were deficient on their face. In its review of 32 applications, STOT ARP found obvious 

deficiencies in lending plans that Treasury and Federal banking regulators should have caught, even in a 

superficial review. 

11 
20 


Insert offset folio 13 here 80921.013

FIGURE 3 

SMALL 

FORM 

lcnd;l'Ig Plen Evaluation 

MAMo~rORY l1ND1NG PlAN CUMEN1S 

Current 8uslneou ~llndj ... g,,~ "<'" To-ta! toa;(U,_'II; 

Amount~qu~stflcl· ___ _ 

1. Mandatory Lemjl1\& ?Ian Ekrni"ltf$ 

[Joe: ,orpo, .. k ,;:rdH'IW iI'lil bu~!tI~~~ abJI:!"Ctl"'{'~, 

~. AMly5-is 01 how rtw book YJOuid c-onduct trotnMlt:h ~ ill Im:rel1'>1! smaN bU!inUSlending 

DatI) 

l.1j5/31,'2lHll SENStTlV€ BUT t«JT CLASSIfiED - DQ NO~ DISHmJllH 

Source: Treasury. 

12 
21 


Insert offset folio 14 here 80921.014

Congress intended that SBLF fix the significant lost opportunity in TARP that banks 

were not required or given incentives to lend. The lending plans were the safeguard to 

provide that fix, but without consistent, meaningful review of those plans by Treasury and the 

Federal banking regulators, there was no substantive difference between TARP's application 

review process and SBLF's application review process for TARP banks, as it related to 

lending. Many of the TARP banks that refinanccd into SBLF are demonstrating an inability 

or unwillingness to fulfill the sole purpose of the program increase lcnding to small 

businesses. Many T ARP banks may not have had the wherewithal to increase lending 

because they used their SBLF funds to repay TARP. Other TARP banks may not have 

received enough additional funds to achieve the increases in lending they proposed. Treasury 

and regulators would have detected this with proper and consistent scrutiny of applicants' 

lending plans and required the banks to demonstrate a source of funds to lend. If the banks 

could not credibly demonstrate a source of funds to lend beyond the SBLF funds they used to 

repay TARP, Treasury should have found the banks unsuited to participate in the program and 

kept them in T ARP. 

Unlike T ARP' s first bank program, which was created during an emergency, SBLF 

was not designed in the same crisis mode that existed in 2008. Treasury and regulators had a 

year to develop and implement meaningful SBLF application review procedures that would 

achieve the intended purpose of promoting lending. By not doing so, Treasury and the 

regulators lost sight of Congress' primary goal of the program to increase lending to small 

businesses. Treasury and the regulators should have assessed the credibility of the 

information provided by each applicant TARP bank in its lending plan to ensure that those 

banks exiting TARP through SBLF were well positioned and well prepared to meet SBLF's 

sole purpose to increase lending to small businesses. At a minimum, Treasury and the 

13 
22 


Insert offset folio 15 here 80921.015

regulators should have required T ARP bank applicants to identify another source of capital to 

increase lending when the institutions sought to use all of the SBLF capital they received to 

repay TARP. If these TARP banks had been unable to demonstrate a credible source of 

capital to lend, regulators and Treasury may have identified some of the applicants as unsuited 

to exit TARP using SBLF funds. Had these banks remained in TARP, they would have been 

subject to TARP's limitations on executive compensation, luxury expenditures, and 

cumulative dividends at a higher payment to taxpayers. Instead, SBLF served as a vehicle for 

a significant number of T ARP banks to exit T ARP using Government funds with more 

favorable tenns than TARP with little resulting benefit for small businesses. 

Lessons Learned & SIGTARP Recommendations 

In conducting this audit, SIGT ARP identified a lack of effective coordination and 

communication between Treasury and the Federal banking regulators. Early communication 

and coordination of which entity was responsible for assessing the credibility of banks , 

lending plans would likely have ensured the effectiveness of the lending plans - Congress' 

critical safeguard to ensure that banks lent the money. Implementing appropriate corrective 

action could prevent Treasury and regulators from repeating past mistakes in future 

collaborative endeavors. SIGTARP recommended: (1) that Treasury and the Federal banking 

regulators coordination when collaborating on current and future initiatives by defining roles 

and documenting processes; (2) that Treasury work with the banks to establish new, 

achievable plans to increase lending going forward; and (3) to preserve the capital fonner 

TARP banks participating in SBLF have to lend, the primary Federal banking regulators 

should not approve dividend distributions to shareholders of fonner TARP banks that have not 

effectively increased small-business lending while in SBLF. 

14 
23 


Insert offset folio 16 here 80921.016

Treasury disagreed with SIOTARP's audit findings, relying on the lending that has 

happened, without addressing the lending that has not happened. This is the equivalent of 

Treasury focusing on the 862,000 homeowners active in a HAMP permanent mortgage 

modification, rather than focus on the 3 to 4 million homeowners who were supposed to be 

helped by HAMP, many of whom could still be helped by HAMP. It is unfortunate for small 

businesses that Treasury's response to SIOTARP's report is to take a defensive posture and 

reject SIOTARP's recommendations. Treasury shows no realization that more can be done, 

or that change is needed to the status quo. The actions SlOT ARP recommends are prudent 

and not difficult to accomplish. T ARP banks in SBLF need help from Treasury to work on 

new small-business plans to achieve their promise to increase small business lending. 

Chairman Issa, Ranking Member Cummings, and members of the Committee, thank 

you again for this opportunity to appear before you, and I would be pleased to respond to any 

questions that you may have. 

15 
24 

Chairman ISSA. Thank you. 

I will recognize myself first. Could you put the form up on the 

screen, please? That is the form you are talking about? 

Ms. ROMERO. That is correct. 

Chairman ISSA. So it looks like SAT, but with only two boxes, not 

four or five boxes to check. It is a zero or 1 relationship. So all 

somebody had to do is give themselves the appropriate answer, a 

zero or 1, and they were done, is that right? 

Ms. ROMERO. It was very superficial, just check the box if the information was there. 

Chairman ISSA. That is a million dollar plus decision on a onepage. 

I would like to show the video in context, not to mock or be unfair to the President, or the Secretary. But I think it puts in context the promise made versus what was kept. 

[Video shown.] 

Chairman ISSA. Now, in fairness, I want to ask the question divided. Could the banks that were not coming out of TARP, in which 

this was net new dollars, at about 1 percent interest rate, very favorable interest rate, were the President’s goals and the Secretary’s 

statements confirmed? 

Ms. ROMERO. I think they are well on their way. This program 

takes a little bit of time. They are already at $3.45 increased lending for every dollar. 

Chairman ISSA. The goal of getting to $8 or $9 is still there, but 

essentially though, for every dollar we put in, we got $3 in lending 

and we got a net increase. 

So substantially, it did get out quickly and it did get out and do 

good where it went to banks that had net new dollars to lend, is 

that right? 

Ms. ROMERO. That is right. 

Chairman ISSA. In your testimony, isn’t the real problem here 

net new dollars versus taking a 5 percent interest rate and dropping it to 1 percent and saving the difference? That seems to be 

the difference between whether I take TARP, pay it back and then 

take money that costs me less, but have no net new dollars. That 

seems to be really what we are talking about here, is the use of 

funds was TARP and savings, rather than any kind of net increase. 

Ms. ROMERO. That is why we had recommended, when Treasury 

was choosing the banks that they not count that TARP capital. 

They needed the banks to stand on their own capital, just like 

every other bank applying would. 

Chairman ISSA. So by paying back the TARP capital, they really 

not only were standing on their TARP capital, but they were replacing it with this money. So these were banks that because they 

still had TARP, in a sense they were underfunded. 

Ms. ROMERO. Well, for the banks that decreased lending, either 

maybe they weren’t the right banks to get into the program, or 

Treasury could have given them a little more money to try to give 

them additional capital to leverage funding out. It was Treasury 

that made the decision to choose the bank and how much funding 

they would get. 

25 

Chairman ISSA. Were any of these banks banks that did not pass 

the stress test that essentially were either close to or below the initial mark? 

Ms. ROMERO. Well, no, because the stress test is for the largest 

banks and these are the smaller banks. 

Chairman ISSA. So these banks could have been over leveraged, 

not over leveraged, that wasn’t part of the test? 

Ms. ROMERO. No. Those were things that should have been 

looked at. 

Chairman ISSA. So we could have had banks that got TARP 

money, needed TARP money and were on the edge, and as a result 

they just simply needed that, essentially leverage improvement, because what they got was, they got a lower interest rate which went 

right to the bottom line, 4 percent of a million dollars is $40,000 

real benefit, is that right? 

Ms. ROMERO. If they don’t increase their lending at all, then they 

just pay the same as they would in TARP, which is 5 percent. But 

in TARP, after five years that jumps to 9. Even if you increase, if 

you are in SBLF, even if you increase by a dollar, you are not going 

to get that 9 percent jump. 

Chairman ISSA. But if you decrease by $1.13, essentially 13 cents 

of increase, you were paying 1 percent on that money, weren’t you? 

Ms. ROMERO. Yes. It dropped down for each bank. Each bank is 

a little bit different. But basically there are these tiered stages. All 

you have to do is lend like a minimum of 2.5 percent increase to 

get a drop. Some of these had very, very low thresholds. So to do 

increases of 2.5 percent, 5 percent, 10 percent, for somebody that 

is a low bar. Everything is helpful, not everything is meaningful. 

Chairman ISSA. But if I got several million dollars and I got out 

of TARP, I got an interest rate drop of some amount and I got to 

increase my pay as the CEO of a bank above what would otherwise 

have been limited by act of Congress? 

Ms. ROMERO. That is right, you escaped all of TARP’s restrictions 

and luxury expenditures. 

Chairman ISSA. I can see why a bank would do that. 

Let me just ask one last question. This audit question. I want to 

understand. You had a choice between Treasury doing it, essentially you had two places to audit, and each party thought the 

other was doing it. So in a sense there was no audit, is that correct, 

that you had one group that should have done it, or the other 

group that should have done it, each said, I thought the other was 

doing it? So what we had was a failure to audit that somewhere 

somebody didn’t notice until you brought it up? 

Ms. ROMERO. Yes, it was very compelling to hear, as we interviewed each regulator individually, to hear that they thought the 

others had done it. 

Chairman ISSA. Let me just ask a follow-up to that very, very 

quickly. Bank regulators do not ordinarily do this kind of audit except on the behest of Treasury. So in a sense, wasn’t it Treasury’s 

primary responsibility to see that the audit got done or to do it? 

It was not inherent of bank regulators audit, but it certainly is 

something Treasury could have tasked them with, or did it themselves? 

26 

Ms. ROMERO. This is certainly Treasury’s program and they take 

responsibility. But I do have to lay a little bit of responsibility on 

the banking regulators because the lending plans under the statute 

were actually given to them, submitted to them. They were probably in the best position. But ultimately it was Treasury’s job and 

responsibility to make sure that it happened, because they were 

running the program. 

Chairman ISSA. Thank you. 

The ranking member is recognized. 

Mr. CUMMINGS. Thank you very much. I want to make sure, first 

of all, I want to thank you for your report. But I want to make sure 

that we have, I guess in Steve Harvey’s language, the rest of the 

story. Because there are different ways to look at the same information. 

But I want to go back for a moment. How many banks are we 

talking about and how many decreased their lending? 

Ms. ROMERO. There were 137 TARP banks that were in SBLF. 

Twenty-four decreased the lending. Now, 24 may sound small. But 

when you look at the dollar amount, it is a large amount. These 

were some of the largest. You had a couple banks, two banks in 

that group, for example, that got more than $50 million and only 

12 banks in SBLF got more than $50 million. So you have 10 that 

got over $10 million, 19 that got over $10 million. So while 24 may 

look like a small number, the significance is how many that they 

got $500 million under the program. 

Mr. CUMMINGS. I believe very strongly, there are two words that 

I use in my office most often, effectiveness and efficiency. It sounds 

like that that is what we are going to. But around here, we have 

a tendency, Ms. Romero, sometimes to, we get reports or whatever 

and then certain things are pulled out and they become the headlines. And a lot of times, we have what I call collateral damage, 

of people who did not do anything wrong. As a matter of fact, did 

everything right, and don’t always get the credit. Usually if there 

is any kind of correction, it is on page 33 at the bottom paragraph. 

So I try to make sure that we have the entire story here. 

Now, the title of today’s hearing is Backdoor Bailout. And the implication is that there is something wrong with small community 

financial institutions obtaining funds under this program and then 

refinancing some of their TARP obligations back for bailout. That 

is the title of the hearing. See, you have to understand the climate 

we are operating in here. It is a little different than your office. 

So let’s set the record straight. When Congress passed the Small 

Business Jobs Act of 2010, we explicitly authorized this. Let me 

read exactly what the law says, we did this, the Congress did this. 

The law says, ‘‘The Secretary shall issue regulations and other 

guidance to permit eligible institutions to refinance securities 

issued to Treasury under the CBCI and the CBP for securities to 

be issued under the program.’’ 

Ms. Romero, the CBCI and the CBP are programs under TARP, 

is that right? 

Ms. ROMERO. That is correct. 

Mr. CUMMINGS. So Congress expressly authorized these small 

community banks to refinance their TARP funds, is that right? 

27 

Ms. ROMERO. That is correct. That is not what our report is 

about. 

Mr. CUMMINGS. Well, I am asking the questions. So far, these 

banks have been doing a terrific job in paying back these funds. As 

I understand it, all of the banks that receive funds under this program are repaying them appropriately and not one of them has 

missed a quarterly dividend payment. According to Treasury’s most 

recent estimate, the American taxpayers are set to make a profit 

of $50 million on this program. 

Now, I would imagine you would say that we could have done 

even better, is that right? 

Ms. ROMERO. No, I don’t think that is the point. 

Mr. CUMMINGS. Okay, but do you agree with what I have said 

so far? 

Ms. ROMERO. I have not looked over the whole program. 

Mr. CUMMINGS. You haven’t looked at how much money we are 

making, the profit? 

Ms. ROMERO. No. What I looked at is, just like I looked for the 

largest banks, how TARP banks exited TARP, I looked to see how 

TARP banks exited TARP through this program. So that is what 

I was looking at. That is what we were focused on. 

Mr. CUMMINGS. I got you. So let me ask you about a report that 

GAO issued after evaluating this program. GAO’s report said this: 

‘‘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.’’ 

Do you disagree with GAO’s report, that finding? 

Ms. ROMERO. Well, I do not know if GAO looked at the analysis, 

and if there was any independent analysis on the lending plans. 

But I can tell you that what we found is in the application process 

there was no independent analysis of the lending plans by Treasury to see if the lending was achievable. That would have applied 

for all banks. 

I also don’t know, I don’t believe GAO looked at the difference 

between lending at TARP banks and lending at non-TARP banks 

Mr. CUMMINGS. Mr. Chairman, before you do that, please, may 

I request unanimous consent to have the same amount of time that 

the Chairman had, which is about an extra 1.5 minute? Okay. I 

saw you putting your light on. 

Mr. MCHENRY. [Presiding] Sure, I ask unanimous consent the 

gentleman has an additional minute and 15 seconds. Without objection, so ordered. 

Mr. CUMMINGS. Thank you very much. 

Ms. Romero, the program also has been audited by the Special 

Deputy Inspector General within the Treasury Inspector General’s 

office. All of these offices are very reputable offices. The Deputy IG 

issued a reporting finding that the Department ‘‘consistently approved institutions that would likely meet their financial obligations to the SBLF program.’’ Do you agree with the Deputy IG? 

Ms. ROMERO. Again, we were able to do something that maybe, 

then maybe some others. If you just look at Treasury and their application process, you might get one view of it. It was when we 

28 

looked at Treasury and every single one of the banking regulators 

together, because they were all part of the process, that we saw 

where each thought the other had responsibility for analysis of the 

lending plan. So I am not exactly sure that the Treasury IG could 

see that. That is why it was so important, as we were looking at 

how TARP was being exited, that we were able to go in and interview those people, look at their documents in terms of the regulators. That is where things fell through the cracks, is in the lending plan. 

Mr. CUMMINGS. Thank you very much. 

Mr. Chairman, that is why it is important that we get the Treasury folks in here. Because you get one piece, but you have to have 

the whole picture. It is like trying a case with just one side. 

Mr. MCHENRY. The gentleman’s time has expired. The chair has 

been generous with him. And just to note for the record again, 

Treasury was invited and given ample opportunity to participate. 

They refused, even to the point where their existing report would 

be allowed to be a testimony in response to Ms. Romero’s report 

and the SIGTARP’s report. 

With that, I will now recognize myself for five minutes. Ms. Romero, under the scenario that the ranking member painted, would 

these banks have paid more back under TARP than under the 

SBLF back to the Treasury, back to the taxpayer? 

Ms. ROMERO. Yes. For the banks who did not, who decreased 

their lending, or did not significantly increase their lending, yes. 

Mr. MCHENRY. Therefore, this profit would have been a greater 

profit had they not been moved into the SBLF? 

Ms. ROMERO. They would have paid more in dividends. 

Mr. MCHENRY. Thank you. So with this line of this question 

here, the pledge was that these SBLF banks would lend more to 

small businesses than TARP banks. Did that prove true? 

Ms. ROMERO. I am sorry, would the banks increase their lending 

to small businesses? 

Mr. MCHENRY. Right. 

Ms. ROMERO. Are you asking if they would have increased their 

lending to small businesses in TARP? 

Mr. MCHENRY. Well, no, compare a TARP bank to a Small Business Lending Fund bank. 

Ms. ROMERO. I apologize. Yes. In the Small Business Lending 

Fund, there is no question you were supposed to increase your 

lending. You certainly weren’t supposed to take the money and decrease your lending. 

Mr. MCHENRY. Okay. So then the question is, the performance 

of these SBLF banks, these Small Business Lending Fund banks, 

right? 

Ms. ROMERO. Right. 

Mr. MCHENRY. The statute requires the banks to submit a small 

business lending plan, correct? 

Ms. ROMERO. Yes. 

Mr. MCHENRY. So there was a requirement in statute that the 

Treasury demand this plan. Did Treasury deny a single bank or 

any bank, or what is the number of banks that Treasury denied for 

not having an adequate small business lending plan? 

29 

Ms. ROMERO. None. There were some who did not include information so didn’t pass the check-the-box. They would then resubmit 

that information. So no bank was denied funding based on their 

lending plan. 

Mr. MCHENRY. Based on an insufficient or inadequate small 

business lending plan? 

Ms. ROMERO. I will say it this way, based on a lending plan 

where the bank could not achieve the lending increases that they 

proposed. 

Mr. MCHENRY. So what was the level of scrutiny by Treasury of 

having a small business lending plan in order to be in the Small 

Business Lending Fund? 

Ms. ROMERO. It was not adequate at all. They did no independent analysis to see if the lending was achievable. 

Mr. MCHENRY. So you are saying that the performance did not 

meet the statute required by Congress and signed by the President? 

Ms. ROMERO. Yes. You can’t have banks in the program who decrease their lending. 

Mr. MCHENRY. Interesting. So the idea that we could actually 

take banks out of TARP and TARP oversight with a greater return 

to the Treasury and by the way, the taxpayer, to take them into 

a different plan that has the very politically popular term, Small 

Business Lending, included in it, that is interesting. So if you think 

about the returns based on this, TARP banks lent out how much 

per dollar in the Small Business Lending Fund? 

Ms. ROMERO. Total TARP banks increased their lending by $1.13 

for every SBLF dollar. 

Mr. MCHENRY. So what is the comparison here? How can I compare it? Is that good? 

Ms. ROMERO. Non-TARP banks increased their lending by $3.45 

for every SBLF dollar. So it is three times the amount. 

Mr. MCHENRY. Okay. Because clearly, Congress put this in statute, the President touted. Chairman Issa showed this video. Clearly, this can’t be the case. 

Ms. ROMERO. This is absolutely the case. 

Mr. MCHENRY. So you are telling me a non-participating bank 

actually increased their small business lending more than a participating bank in the Small Business Lending Fund? 

Ms. ROMERO. Yes, and not only should it have been obvious that 

the money would be used to repay TARP, we warned Treasury that 

this would happen, that this could happen. We made a recommendation in September 2010 that said, when you choose the 

banks, don’t count the government capital in determining the 

health of that bank. Because they have to have capital that they 

can leverage into loans. 

Mr. MCHENRY. Certainly. So can the Treasury require under-performing banks to actually develop plans? 

Ms. ROMERO. Absolutely. 

Mr. MCHENRY. Have they? 

Ms. ROMERO. No. We made the recommendation in the audit and 

they rejected it. 

30 

Mr. MCHENRY. And in response to your audit, do they say, 

thanks so much, thanks for letting us know, we are going to shape 

up, we are going to do this? 

Ms. ROMERO. No, unfortunately they took a very defensive posture. They focused on the lending that has happened in the program, when that is sort of like in HAMP, focusing on the homeowners who have gotten help but not focusing on the homeowners 

that should have gotten help, that were intended to get help. That 

is what we are trying to do. We are trying to say, don’t give up on 

these banks now. There is still an opportunity to help small businesses with these non-TARP banks. So work with them to do that. 

But that was rejected. 

Mr. MCHENRY. My time is expired, but you said the word HAMP. 

So that of course raises my ire based on that poor performance and 

what it has done to folks it was intended to help. 

Now we will recognize Mr. Clay of Missouri. 

Mr. CLAY. Thank you, Mr. Chairman. 

Let me thank the witness for being here today. When Congress authorized $30 billion to establish the Small Business Lending 

Fund, we intended to provide an incentive to community banks nationwide to increase their small business lending. Banks were eligible to apply for SBLF as long as they met the legal requirements. 

Banks that were not paying their TARP dividends were not eligible 

to apply. 

Ms. Romero, your report raises a concern about the fact that only 

935 community banks applied to SBLF when there are approximately 7,000 community banks that could have been potential applicants. Can you please elaborate on that number and why there 

were so few? 

Ms. ROMERO. Sure. The number is about 9 percent of community 

banks that were not in TARP applied, while about 60 percent of 

community banks in TARP applied. Why that is the case, I can’t 

elaborate on, sir. I wish I could. But all I have looked at in this 

program is how TARP banks exited TARP. So I haven’t looked at, 

I don’t have jurisdiction over the whole program to say, how was 

it marketed in the beginning or what was set up in the beginning. 

I am only looking at the decisions that were made to take banks 

out of TARP, because I am the Special Inspector General for TARP. 

Mr. CLAY. I heard you mention that some of these banks repaid 

TARP with SBLF funds. 

Ms. ROMERO. Yes. 

Mr. CLAY. How did they? They got TARP money then they took 

SBLF, and decided that they were going to repay the money they 

owed taxpayers, basically, with this money. Is that a shell game? 

Ms. ROMERO. Well, that was okay. Congress allowed that. And 

we are not taking issue with that, that TARP banks could use the 

SBLF money to pay off TARP. That is Congress’ call. What we are 

saying is, it was Treasury’s call as to choose the right TARP banks 

to do that, and to also determine how much money they would give 

them. For example, they could choose the banks that would best 

lend, and it would have been obvious to them that if the banks did 

not have any additional capital to lend, that just giving them 

enough to pay TARP would not leverage into the multiples of loans, 

which is a basic premise. 

31 

Mr. CLAY. Well, your report says SIGTARP found that 42 TARP 

banks that received only enough SBLF funds to pay off TARP and 

lend out significantly less than they received in SBLF funds, increasing lending only by 25 cents for each dollar of these funds. 

Speaking of Missouri, give me some examples of banks. Can you 

name any Missouri banks? 

Ms. ROMERO. Yes. In the 24 who decreased lending, there are 

two Missouri banks who decreased lending while in SBLF. Do you 

want me to name them? 

Mr. CLAY. Yes, please. 

Ms. ROMERO. Liberty Bancshares decreased lending by 20 percent. This is Small Business Lending. Fortune Financial Corporation, which decreased lending to small businesses by 13 percent 

while in SBLF. 

Mr. CLAY. Wow. Okay. GAO surveyed banking institutions to 

learn why they had not applied for SBLF funding, and reported 

that a primary reason was a lack of interest in the program. A respondent’s most common reason for not applying to the program 

was a lack of demand for small business loans. Do you disagree 

with GAO’s findings? 

Ms. ROMERO. I very much respect GAO and the other IGs. I don’t 

disagree with the findings, but I think it is interesting because 

there should not have been any difference in loan demand based 

on whether you were a TARP bank or not. So to see 60 percent of 

TARP banks apply to SBLF and only 9 percent of the non-TARP 

banks, if there is not enough loan demand then there is not enough 

likely loan demand on the TARP banks, too. And that sends up a 

warning flag to me that some banks may have been looking at it 

as a TARP exit strategy. 

Mr. CLAY. Thank you so much. 

Ms. ROMERO. Thank you. 

Mr. MCHENRY. I thank my colleague. And I recognize my colleague and neighbor from North Carolina, Mr. Meadows. 

Mr. MEADOWS. Thank you, Mr. Chairman. 

Ms. Romero, thank you so much for your illuminating and very 

detailed report. Thank you to your staff as well for being so well 

prepared. 

As we start to see some of this come out, I appreciate your willingness and your thoroughness in trying to get the full picture. So 

many times what we do is we look at one segment of government 

and we say, okay, they are performing up to their standards, we 

look at another, they are performing up to their standards. But 

when we put them together, we find that the result, as in this case, 

is not something that helps small businesses at all. 

I can tell you that my colleague opposite, talking about the GAO 

standards, saying there was not a demand for small business loans, 

as a small business owner for over 28 years, I can tell you there 

was never ever more of a demand or a need for that within the 

community banking system as was evident in this particular time. 

So I would certainly disagree with their assessment of this particular time. 

You mentioned that roughly only 9 percent I think of community 

banks not in TARP applied for the SBLF funds. Isn’t this in itself 

evidence that this was not an effective way to stimulate lending? 

32 

When we see it, it becomes more of a backdoor for TARP than it 

is for lending to small businesses. 

Ms. ROMERO. Certainly for several TARP banks it was a way to 

get out of TARP, absolutely. Whether it is indicative of how they 

marketed the program, I don’t really know how they marketed the 

program. This isn’t something we looked into, because we were 

looking at the TARP banks. But it does raise a flag as to whether 

there was the right reach-out to get the right banks in the program. 

Mr. MEADOWS. I think in your testimony you talk about the fact 

that you did exhaustive research, I believe, on 32 applications, 

SBLF applications. And from that, for almost all of them, I think 

29 out of 32 applications, there was no evidence of any oversight 

or investigative nature on the part of Treasury to look at a detailed 

plan on how it would increase lending? Is that correct? 

Ms. ROMERO. That is correct, and it actually goes broader than 

that. When we asked the questions and did interviews, and we 

looked at all the documents, we were told by the program director 

for SBLF that Treasury did no independent analysis to determine 

whether the lending in the lending plans was achievable, because 

they thought that was the bank regulators’ jobs. 

We found no independent analysis, so his statement was borne 

out by the documents. Then on top of that, we looked in detail at 

32 and found that there was almost zero mention of the lending 

plans. 

Mr. MEADOWS. Okay, so from a legislative standpoint, they were 

required to come up with a lending plan, but yet they didn’t do it 

and we still gave them the money? 

Ms. ROMERO. That is correct. 

Mr. MEADOWS. In the private sector, would we call that fraud? 

Ms. ROMERO. I don’t know whether it is fraud here. I am also in 

charge of a criminal law enforcement agency, so that is not something we have looked at. But I would say it was very disturbing 

that there was this massive lost opportunity in determining which 

banks were the right banks to exit TARP and go into SBLF. 

Mr. MEADOWS. So best case scenario, it was a gross mismanagement of oversight in terms of the implementation of this process? 

Ms. ROMERO. It absolutely should have happened. There could 

have been three levels of review to make sure that these banks 

could have achieved the lending plan. It could have been at the 

subsidiary bank regulator, it could have been at the bank holding 

company regulator, which is the Federal Reserve, which actually, 

the bank holding company got the money, and it should have been 

at Treasury. 

Mr. MEADOWS. I have just a little bit of time remaining, so you 

talk about 24 institutions that actually decreased lending. 

Ms. ROMERO. That is correct. 

Mr. MEADOWS. But at the same time, some of those institutions 

were paying better or higher bonuses and salaries and pay-outs to 

executives. Would you say that was systemic throughout or just 

isolated? 

Ms. ROMERO. So, 14 paid dividends to their shareholders. That 

is a problem. That should never have happened. 

33 

Mr. MEADOWS. So instead of making loans to small businesses, 

they paid dividends to shareholders, instead of the money that they 

borrowed for that particular cost? 

Ms. ROMERO. Absolutely. And not all those banks are public, but 

we looked and we saw at least two instances where they gave their 

CEO a raise. 

Mr. MEADOWS. Lastly, is there any way that we can say, where 

we are today, Treasury, you can fix it? Do you see a willingness on 

their part to fix it going forward? 

Ms. ROMERO. I am a glass half full kind of gal. I would like to 

see small businesses get the benefit, if we are going to have the 

tradeoff of getting these banks out of TARP, I would like to see 

small business increase. So we put our heads together to try to figure out how to do that, and said, why don’t you work with the 

banks. It is not too late to try to get new small business lending 

in the future. 

That is the prudent thing to do, it is not difficult to do. But 

Treasury rejected that. 

Mr. MEADOWS. I thank the chairman for his patience, and I yield 

back. 

Mr. MCHENRY. Ms. Duckworth of Illinois. 

Ms. DUCKWORTH. Thank you, Mr. Chairman. 

Ms. Romero, what I see here for me is a basic missed opportunity 

to get lending out to small businesses. Time and again, my small 

business owners in my district have said that lack of access to capital is one of the greatest challenges they face. And here we have 

a program that could get out as much as $30 billion and we only 

use $4 billion of it. 

And the most fundamental point for me is a real lack of opportunity. It is opportunity wasted. I am really disappointed that 

Treasury did not accept the invitation to be here, and they could 

not be here today. I would have liked to hear both sides of the 

story. 

From their letter to you to Don Graves, his response to some of 

your criticism was that the former TARP banks did report a medium small business lending increase of 18.4 percent, and that 84 

percent of those banks that participated, former TARP banks that 

participated actually increased their small business lending, and 73 

percent of those increased their small business lending by 10 percent or more. 

You had said that one of the problems with this program is how 

Treasury chose how much money they would give banks, and that 

if they only gave banks just enough to cover their TARP repayment, that is what they went with. Do you think that perhaps part 

of the issue here is that the lending criteria was simply too rigorous, other than the other way around, which is what you suggest? 

Ms. ROMERO. It is a really good question. It could go either way. 

If the banks really had no intention to lend and really had no additional source of capital to lend, then they shouldn’t have been in 

the program at all. But for the ones who submitted the lending 

plan, there should have been more rigorous criteria, which is to 

really look at that. 

34 

And I appreciate the increases in lending that happen, because 

any increase in small business lending is helpful. But not all increases in small business lending have a meaningful impact. So remember, we are talking about banks that have very, very low lending levels. So even increasing it 10 percent, while it is helpful, it 

is not really a high bar. And that is why the goal of SBLF was not 

a 10 percent increase. That is just how you determine your cost of 

capital. The goal is a really basic principle of lending, that you take 

that money as capital and then you leverage off that loan in multiples. That is what we were looking for, and that is what we 

haven’t seen happen. 

Ms. DUCKWORTH. Thank you. 

I would like to yield the remainder of my time to the ranking 

member. 

Mr. CUMMINGS. Thank you very much. I thank the gentlelady for 

yielding. 

I agree with Ms. Duckworth. I want to see every single small 

business get the money that they need. And there is a tremendous 

demand in my district. It is, we are handicapped in this hearing, 

because we have reputable people who seem to disagree with you. 

I wish we had them here, I really do. Because some of the accusations are quite strong. And everybody on both sides of the aisle 

knows that I am a great defender of people’s reputations. 

Did you ever have a chance to talk to Don Graves? Did you talk 

to him? He is in charge of the program. 

Ms. ROMERO. Yes. 

Mr. CUMMINGS. You did talk to him? 

Ms. ROMERO. We coordinate with him, his office. We also coordinate with GAO and the Treasury Inspector General. I don’t think 

anyone is in disagreement with what we are saying. 

Mr. CUMMINGS. Well, let me just tell you, I am just looking at 

a letter, and this is why I am going to be pushing hard to get 

Treasury in here. Because again, we want to make sure our constituents benefit. When we have, well, let me read this. Mr. Graves 

said in his letter of March 28th, he says here ‘‘The report ignores,’’ 

he is talking about your report, ‘‘ample evidence that Treasury conducted a serious review of applicants’ lending plans. For example, 

of the banks and SIGTARP’s sample that received SBLF funding, 

Treasury rejected as inadequate over 30 percent of the initial plans 

submitted by these institutions.’’ 

Now, as I sit here and I am listening, I didn’t hear anything 

about that. What is going on there? 

Ms. ROMERO. Sure. I am actually really glad you gave me an opportunity to talk about that. The serious review they did was to 

take the form that I included in my testimony and determine 

whether 12 elements were included in the plan. If something was 

missing, or if there was something that was deficient on their face, 

like they had to at least say they were going to lend out in the 

same amount of money they got in SBLF, if the amount was too 

low, Treasury would send it back. 

That was their review. The banks would then just resubmit it 

with the information or change the number without any justification. 

35 

So there was a review, and I am not saying there wasn’t a review. But what we are saying is it was superficial. What we were 

looking to see is, did you do an analysis or anything to determine 

whether the lending increases that they proposed in the plan was 

achievable. And we were told no by Treasury, we did not do any 

independent analysis because that was the regulators’ jobs. And we 

were told by the regulators, no, we did not consistently do an analysis because that was Treasury’s job. Our job was to look at safety 

and soundness. 

There were a few instances where some of the bank regulators, 

particularly OCC, actually took a look at that. But like the FDIC, 

who regulated 69 percent of the TARP banks who applied, that 

wasn’t their protocol. It wasn’t their process. And they said Treasury knew we should be doing that. 

So while Treasury did a review and rejected some things on a 

check-the-box basis because the box wasn’t checked, they never did 

an independent analysis to determine whether the lending increases could actually be achieved. That is what these lending 

plans are for. When Congress put this safeguard in, they wanted 

to make sure that we wouldn’t have a repeat of TARP, that the 

banks would actually lend the money out. 

So Treasury’s SBLF program director told us twice, we did no 

independent analysis, that was the regulators’ job because the statute required the lending plan to go to the regulator, that was borne 

out by the documents, that was borne out by everything we saw. 

Then when we went and talked to the regulators and the regulators said that was Treasury’s responsibility, that was borne out 

by the documents that the regulators gave us. 

So what we are saying is, we are not saying there was no review. 

We are saying the review that happened wasn’t a sufficient, adequate assessment to determine whether the banks had the wherewithal or could actually achieve the lending increases that they 

had proposed. 

Mr. CUMMINGS. Thank you very much. 

Mr. GOSAR. [Presiding] Thank you. 

I am going to recognize myself for five minutes. 

Ms. Romero, with this checklist for the banks be similar to what 

scrutiny businesses would go through for a lending program? 

Ms. ROMERO. No, and it should be. 

Mr. GOSAR. Not even close, is it? 

Ms. ROMERO. It shouldn’t be how the government makes its investments. 

Mr. GOSAR. Wow. Would you consider $1.13 cents return versus 

$1 investment a good portfolio? 

Ms. ROMERO. No, and I wouldn’t consider taking $500 million 

and then not lending off of it a good portfolio, either. 

Mr. GOSAR. It is pathetic. I am a businessman, and I happened 

to be a dentist for 25 years, so the return on investment is pathetic. 

Mr. Geithner, when the Secretary talked to Congress in regard 

to this program, did he misrepresent this program to Congress? 

Specifically in that clip, he talks about a return on investment of 

lending of $8 to $10 for every dollar invested. That is clearly not 

what transpired here. 

36 

Ms. ROMERO. I think the intention was there. I think the problem was in the execution. 

Mr. GOSAR. So let me get this straight. Thank you. So execution 

really poor again. It seems we have a recurrent theme here with 

the Secretary of Treasury that we have very poor oversight. Maybe 

we mean well, but we have very poor exercise of the facts. Is it not 

financial aspects are about facts and about details, is it not, Ms. 

Romero? 

Ms. ROMERO. The facts and the details are incredibly important 

here. 

Mr. GOSAR. Secretary of Treasury and we can’t get those right. 

Let me ask you what is fair. If a bank made a dividend purchase, 

do you think it is fair that the taxpayer should get it back? And 

how about the CEOs, getting those paid? Shouldn’t we get that 

back? That should be fair, right? 

Ms. ROMERO. I absolutely agree with that. That never should 

have been allowed. It should not be allowed in the future. We have 

made a recommendation to the banking regulators to never allow 

it again and they have rejected that recommendation. 

Mr. GOSAR. Wow. So the ranking member just talked to you 

about a letter from Mr. Graves about a rigorous, serious review of 

these protocols. That checklist to me is hardly a serious review. It 

seems like we go over and over again pointing the finger, the blame 

game, so that we don’t know who is responsible for this. But it 

really lies with Treasury, does it not? 

Ms. ROMERO. It is their program. 

Mr. GOSAR. I know you went in depth a little bit with Mr. 

Graves’ letter with the ranking member. But for moms and pops 

out there, that is real ill-intentioned, right? 

Ms. ROMERO. Treasury is absolutely responsible in picking the 

right banks to go in. And when Congress says, well, we don’t want 

a repeat of what happened with TARP, we are lending an increase, 

we are going to fix is, and our safeguard to make sure that they 

lend is to require a lending plan, when there is no meaningful, consistent review of that lending plan by the government, then the intent of Congress is thwarted in putting that safeguard in. 

Mr. GOSAR. I am glad you brought that up, the intent of Congress. Do you believe that this bill was well-vetted? 

Ms. ROMERO. I don’t have any idea on how Congress did that. 

Mr. GOSAR. It seems to me that this was very ill-vetted, because 

the application you always look at outcomes. What was the intended course and the outcomes. This is a failure by any stamp of 

the imagination. And we didn’t vett this bill very appropriately. 

This was rushed through in Congress. We actually had a Secretary 

of Treasury misrepresenting the plan, at least giving it expectations that there was no intentions of follow-through. Because what 

I see the Secretary of Treasury doing is explaining one thing to 

Congress and then following through with nothing, absolutely nothing. 

Wait a minute. You made a comment that said that the numbers 

match the TARP numbers, did you not? So there must have been 

very interesting dialogue behind the scenes, right? 

Ms. ROMERO. The 42 banks only got enough SBLF dollars to pay 

off TARP. It should have been obvious that the banks then did not 

37 

have capital to lend off of. And beyond being obvious, we sent a letter to Secretary Geithner September 2010, when they were picking 

the banks, warning of this, and saying, you can’t switch a bank out 

of TARP into SBLF, it doesn’t make sense, if they don’t have the 

capital to lend but for the TARP capital. And that was rejected. 

Mr. GOSAR. The fox in the henhouse, just really interesting. 

Just one last question, I know I am running out of time. Do you 

feel there is adequate capital for small business out in America 

right now? 

Ms. ROMERO. No. 

Mr. GOSAR. What is our number one biggest area of growth? Is 

it large business or small business? 

Ms. ROMERO. Certainly I agree with Congressman Duckworth, 

small businesses really need help here. That is why we made the 

recommendation to try to help, that Treasury should even now try 

to help these banks come up with a new plan to increase lending 

to small businesses. That is what we are looking at, we are looking 

at it from the small business perspective. 

Mr. GOSAR. Thank you very much, Ms. Romero. I would like to 

acknowledge the gentleman from Nevada, Mr. Horsford, for five 

minutes. 

Mr. HORSFORD. Thank you very much, Mr. Chairman. And thank 

you, Ms. Romero, for being here today. 

I have said before that I am not a defender of every Federal program. I am a defender of my constituents who rely on Federal programs to meet the needs in our respective communities. And when 

I talk to my small businesses, their number one issue is access to 

capital. So it is incredibly frustrating when we hear about these 

programs and the very entities that are responsible for them aren’t 

present to talk about them. I want to say for the record I find that 

inappropriate. 

I also feel that we need more input from the very people that 

these programs are supposed to benefit. I would love to hear from 

small businesses who both got loans or didn’t get loans. I would 

love to hear from some of the community banks. Many in my district, it was the community banks that were trying and are trying 

to work with small business in my area, more so than some of the 

larger banks that don’t even return people’s calls. 

So Ms. Romero, my question is, the fact that the Small Business 

Lending Fund program is different than TARP, that it is an incentive-based investment program, correct? 

Ms. ROMERO. Yes. 

Mr. HORSFORD. So under statute, Congress directed that funds 

be made available to community banks and other small financial 

institutions, including former TARP recipients, with an incentive 

for participants to increase small business lending, right? 

Ms. ROMERO. Yes. 

Mr. HORSFORD. So the bottom line is that more banks, that the 

more banks increase their loans to small businesses, the less they 

pay in dividends. And if recipients fail to increase their small business lending over time, that the price of those dividends goes up 

as well? 

Ms. ROMERO. The best way to do it for the TARP banks is to do 

a comparison to what they would pay in TARP to what they pay 

38 

in SBLF. If they don’t increase at all, there is no penalty to the 

SBLF banks. They pay the exact same that they would in TARP. 

So they get to escape all of the TARP restrictions on executive compensation, luxury expenditures, that sort of thing, and they just 

pay the same amount. 

If they increase their lending by a dollar, they are going to pay 

less in a dividend than they would in TARP. 

Mr. HORSFORD. So that is the basic way in which the program 

is structured? 

Ms. ROMERO. Yes. 

Mr. HORSFORD. So there is an indication, though, in your report 

on April 9th that you raised a concern about this process, stating 

‘‘If the former TARP banks fail to increase lending, there is no 

meaningful penalty.’’ Was that your statement? 

Ms. ROMERO. Absolutely. That is what I just explained. Because 

they get all the benefits of leaving TARP but there is no penalty 

on them. So for the 24 banks that decreased their lending, nothing 

is happening with them. No one is standing up other than 

SIGTARP and saying, this should not be allowed in the program. 

And they are paying the same amount that they would under 

TARP. So there is no penalty for them to decrease their lending. 

Mr. HORSFORD. And if banks don’t pay back the taxpayer in a 

timely manner, the taxpayer return could be even more substantial, is that correct? 

Ms. ROMERO. Yes, and you have to look at if those banks had 

stayed in TARP, then if some of these banks, not just these 24, but 

if we look at some of them that only lent an incremental amount 

and got a dividend break, if they had stayed in TARP they would 

have paid more to taxpayers in their dividends. So what we are 

saying is, we will take any increase in lending to small businesses, 

not every increase has a real meaningful impact on the small businesses that you talked about. 

Mr. HORSFORD. I agree, and I think that ultimately, that is what 

I want to get to, when I look at this chart that was provided to us. 

The West, the State that I represent, Nevada, was second to last 

in small business lending in the region of the Country. So I want 

to know why businesses in my area didn’t get the same opportunities to loans, and if that was due to failure on the part of Treasury, 

on the implementation of this program. I expect them to be able 

to answer my questions as a member of Congress, so that I can go 

back and tell my businesses this is how this program works. And 

if you qualify, pursue it. Because people need what they are offering, which is access to capital. 

Thank you very much, Mr. Chairman. 

Ms. ROMERO. I agree. 

Chairman ISSA. [Presiding] Thank you, and thank you for your 

insightful questions. 

Very briefly, I want to make the record straight from the standpoint of a couple of things. First of all, this program has now 

ended. So we are in the payback phase of no net new money. So 

if I understand from a corrective action, we really can’t pull back 

the money and redistribute it at this point or force higher lending, 

is that correct? 

39 

Ms. ROMERO. That is correct. But I think Treasury should still 

try to work as hard as they can to try to increase lending. Not 

through money. 

Chairman ISSA. I appreciate that. One of the impressions I got 

through this hearing was that the President was not well served 

in the implementation. I think on both sides of the dais you saw 

that. Certainly 42 banks simply rotated from being covered under 

stringent rules, bipartisan rules of accountability and pay and luxury benefits. And they got out of it. They borrowed enough to pay 

off their loan, so they didn’t care. They just wanted one source of 

money replacing another. And it was pretty transparent, when you 

borrow exactly what you need to get out of TARP, right? 

Ms. ROMERO. Right. And some of them paid less of a dividend 

than they would in TARP. 

Chairman ISSA. So we lost money through this maneuver. 

Ms. ROMERO. On those banks, yes. 

Chairman ISSA. Now, if I have my figures correct, this program was a $30 billion program, sizeable program. 

Ms. ROMERO. Yes. 

Chairman ISSA. And $4 billion actually went out, is that correct? 

Ms. ROMERO. Yes. 

Chairman ISSA. And $2.1 billion went to these basically TARP 

banks that had little or no return. 

Ms. ROMERO. Yes, $2.1 billion went to pay off TARP. 

Chairman ISSA. Went to pay off TARP. So the real tragedy here 

is one, the money wasn’t used nearly to the level authorized; two, 

it went roughly half to paying off TARP. I might remind all of us 

that $2.1 billion is not a lot of money into TARP, so it is a relatively small group of banks that got the benefit compared to the 

total dollars of TARP. 

The lesson learned that I want to ask, and I will send this over 

to Financial Services hopefully in a joint report, is, if I hear you 

correctly from your report, one, we need to insist that the term 

plan be more than a one page check off the box. We need to find 

a way to do that in the legislative language and guidance. 

Two, when we authorize $30 billion, there has to be some expectations of reasonable goals, achievement, because this $30 billion, 

and the gentleman from Nevada made a good point, that $30 billion, if another $26 billion of it had gotten out there, it would have 

made a huge difference at even a three times multiple as to the 

availability of funds to small business. 

Lastly, as far as I can tell, we should have had strings on TARP 

banks, now, that may never happen again. But we could say any 

bank which had an alternate government loan, from simply paying 

off one loan with another loan. That should have been explicitly net 

new capital, otherwise there could be no expectation that actual net 

loans would change. 

Ms. ROMERO. Absolutely. I would agree with all of that. 

Chairman ISSA. And I guess the one more thing I got out of the 

hearing today is defined point of accountability. The language of 

the legislation was pretty clear. But it was certainly possible for 

Treasury to say as they said to you, we thought the regulators 

would do it, while regulators said, we had no specific guidance, and 

they shirked, if you will, proactive responsibility. 

40 

Did I cover the points here today? 

Ms. ROMERO. Absolutely. 

Chairman ISSA. I am going to yield to the ranking member for 

his closing. But I think what you have been helpful for here, which 

is unusual, is this is not a big scandal. There is no criminal activity. But there is a series of lessons learned for legislative language 

that you cannot oversight and you cannot delegate and hope for the 

best in the areas I just outlined. Would that pretty much summarize what you would like us to take away from today’s hearing? 

Ms. ROMERO. Absolutely. Although I also think that the fault 

doesn’t all lie with the language in the statute. I think when there 

is an intention in the statute and when there are statements being 

made to Congress about the intent, that needs to be followed 

through, and the agencies who are responsible need to take responsibility for that. There needs to be accountability. What we said is 

there needs to be better coordination and communication. 

We have with TARP, we have with SBLF, and we have with a 

number of things going forward after the crisis a government that 

doesn’t want to be stovepiped or siloed, they want to work together. 

What we are saying is, when you work together, improve your coordination and your accountability and improve your communication. That recommendation was denied. And we don’t see how that 

can be denied, and it shouldn’t be denied. 

Chairman ISSA. I guess I will put in a small pitch in closing for 

the Data Act, something that has been passed out of this committee previously and something that would provide real-time 

transparency to oversight, both in the Administration and obviously it would have allowed Congress to be aware of these figures 

sooner, and the Inspector General’s office, I might add. 

So that will all end up in our report. Mr. Cummings, do you have 

a closing statement? 

Mr. CUMMINGS. Thank you very much. 

First of all, Mr. Chairman, I want to associate myself with what 

you just said. It is very frustrating for my constituents, about a 

year or so ago we had a forum in my district with the Federal Reserve for small business people, probably about a year and a half 

ago. All these small businesses came out. Their number one concern was access to capital. They had been doing well. 

The interesting thing is that a number of them said, look, we 

have opportunities, but we can’t get the funds to do the job. We 

can’t even get line of credit. And then to hear a program that has 

certain intended results not get those results is sad. 

Treasury says that the reason why they could not be here is they 

only had eight days notice. I really would have liked to have heard 

from them. But one thing that needs to go forth from this hearing 

is that we can do better. And that is what you are saying. 

Ms. ROMERO. Yes. 

Mr. CUMMINGS. Sometimes I think, Ms. Romero, we get caught 

up, and I have seen this in government in various ways, in a culture of mediocrity. Certain agencies get to a point where they could 

do better, but for some reason they don’t. So I guess when you 

have, and this is what I want your answer on, so you think the 

law, the way it was drawn up, the law itself, could have been clearer, or you just think that it was clear enough and there was just 

41 

some disregard or both, disregard of doing what was necessary to 

get the full intended results? Do you follow my question? 

Ms. ROMERO. Yes, absolutely. Congress’ intent is clear in this 

statute. 

Mr. CUMMINGS. So it is not the statute? 

Ms. ROMERO. I think this is the point I was trying to make, there 

is a lending plan that is a safeguard. But you have to take responsibility when you are Treasury or the banking regulators who are 

looking at that lending plan to make sure that Congress’ intent is 

met. 

I think what the chairman was saying was, if they can’t take accountability to do that, then maybe Congress has to lay it out more 

clearly. But they shouldn’t have to. Congress shouldn’t have to. 

Treasury and the regulators have to take accountability. When we 

look at our work, I know some people think that an IG’s job is to 

criticize, but that is not what we do. We are trying to make these 

programs better. We are trying to get help to people who need help 

from TARP, small businesses that needed help from these programs. We are trying to say, if you took a bank out of TARP that 

would pay less in dividends to taxpayers, that tradeoff is fine and 

good if there is a meaningful impact on small businesses and they 

get the benefit of that. 

So all we are trying to do is say, how do we get there? Let’s remove the obstacles that didn’t allow us to get there in the first 

place, and let’s move forward. When Treasury takes a defensive 

posture and just defends what they did and doesn’t talk about what 

they should have done or still can do, it is not really an effective 

response to an Inspector General’s report. Unfortunately, that is 

typically what has been happening with our reports. 

We are trying to work together with them, to make sure that the 

intent of Congress is met. We are not trying to criticize for criticism’s sake. We are trying to make this better. That is what is 

frustrating. 

Mr. CUMMINGS. I have to tell you, since I have been in Congress, 

over 16 years, that is one of the best statements I have ever heard, 

what you just said. I really mean that. Because you are right, that 

is what it is all about, how do you make sure that things are done 

in an effective and efficient manner. It is simple. 

I tell folks all the time, it is so important tome that government 

functions properly. My constituents need government to function 

like government is supposed to function. The statement you just 

made about the role of the IG, I totally agree with you. Hopefully, 

Treasury is listening to this and for future times maybe we will 

have a better situation. 

Thank you very much, and we thank your entire staff. 

Ms. ROMERO. Thank you so much. 

Chairman ISSA. I want to thank again all of you for your service 

and for being witnesses here today. We stand adjourned. 

[Whereupon, at 11:00 a.m, the committee was adjourned.] 

42 


Insert offset folio 17 here 80921.017

Christy L. Romero 

Special Inspector General 

DEPARTMENT OF THE TREASURY WASHINGTON. D.C. 20220 

March 28,2013 

for the Troubled Asset Relief Program 

United States Department of the Treasury 

1500 Pennsylvania Avenue, NW 

Washington, DC 20220 

RE: Response to SIGTARP's Draft Audit Report: "Banks that Used the Small Business 

Lending Fund to Exit T ARP" 

Dear Ms. Romero: 

Thank you for the opportunity to review the Special Inspector General for the Troubled Asset 

Relief Program (SIGTARP) draft report on banks that refinanced Troubled Asset ReJiefProgram 

(TARP) investments in the Small Business Lending Fund (SBLF). As you know, SBLF is not a 

TARP program. Nonctheless, the DepaJiment of the Treasury (Treasury) appreciates your 

interest in the program as it relates to fOlmer T ARP institntions. This letter provides Treasury's 

official rcsponse. 

I. Former T ARP Banks have Significantly Increased Small Business Lending in SBLF 

The SBLF program has been a success. In the five quarters following funding, SBLF institntions 

have made significant progress in increasing small business lending. As of December 2012, 

SBLF participants have increased their small business lending by $8.9 billion, with a median 

increase of29 percent. These increases are widespread. Ninety percent of all participants have 

increased their small business lending. Further, a substantial majoIity of participants-more than 

83 percent-have increased their small business lending by 10 percent or more. This lending has 

been widely distributed across the country and among loan sizes and types. I 

Former TARP banks are no exception. When ccmpared with banks that did not participate in 

SBLF, former TARP banks report an increase in total business lending over three times greater 

than that of their direct peers, and over six times greater than the increase reported by community 

banks. We disagree with the Report's finding that these banks have not effectively increased 

small business lending; the program's results to date directly contradict that ccnclusion. For 

example: 

1 SBLF April 2013 Use of Funds Report: Rep0l1 Submitled pursuant /0 Section 4106(3) of the Small Business Jobs 

Act of2010. to be submitted to Congress in April 2013. 
43 


Insert offset folio 18 here 80921.018

Former T ARP banks have increased their small business lending by $3.6 billion over 

baseline levels. This increase is marc than 40 percent of the total increase reported by all 

SBLF participants. 

• Fonner TARP banks report a median small business lending increase of 18.4 pereentwell above the 10 percent increase that Congress established as the threshold level for 

earning the maximum incentive under the program. 

• 84 percent of former T ARP banks have increased their small business lending, and 73 

percont have increased small business lending by 10 percent or more. 

Indeed, former T ARP banks considered as a group have far exceeded the benchmarks Congress 

set for SBLF. To achieve the maximum dividend rate reduction offered by Congress, these 

banks would have needed to increase small business lending by a total of $2.9 billion over two 

years. After only one year, fonncr TARP banks have already increased their lending by more 

than this amount. In addition, these banks are ahead of schedule in achieving the increases 

specified in their lending plans. Just over halfw'ay through the two-year window that Congress 

established for banks to increase lending, former T ARP banks have already achieved a median 

95 percent of the lending increases projected in their plans. FOliy-seven percent ofthese banks 

have exceeded their plans' full two-year targets. 

SIGTARP's conclusion that these institutions have not effectively increased lending is based 

solely on a comparison between fonner T ARP institutions and other non-TARP participants in 

the program. This comparison is flawed for a number of reasons. First, non-TARP banks 

received significant additional capital under SBLF, while fonner TARP participants were 

required to refinance their outstanding T ARP capital and therefore received minimal or 110 net 

new investment through SBLF. As expected, banks that received more additional capital under 

SBLF report greater lending increases than banks that received less. TARP banks also used their 

initial T ARP investments to increase their business lending before entering SBLF, with a median 

increase of six percent prior to the baseline period. These pre-SBLF lending increases raised the 

baseline against which lending growth is measured in SBLF. Consequently, these banks entered 

SBLF with a higher bar against which they are measured than their non-T ARP counterparts. 

And again, the fact remains that fanner T ARP banks as a group have significantly increased 

small business lending and have exceeded all Congressional benchmarks for the program. 

II. Oversight of the SBLF Program bas been Extensive 

The SBLF program is subject to a tremendous amount of oversight. The law that created SBLF 

provided for oversight by two entities, the Treasury's Office ofthe Inspector General (OIG) and 

the Govel111l1ent Accountability Office (GAO). The orG has a statutorily prescribed Special 

Deputy Inspector General for SBLF oversight who has issued half a dozen reports on the 

program since early 2011. TIle GAO has also reviewed SBLF, publishing detailed evaluations of 

the program in2011 and 2012. Treasury has accepted all ofOIG's 19 recommendations, and has 

accepted all three recommendations from GAO. Both OIG and GAO will continue their strong 

oversight ofSBLF as the program moves forward. 

2 
44 


Insert offset folio 19 here 80921.019

These oversight bodies have offered thoughtful critiques of SBLF that have servcd to strengthen 

the program. They have also issued positive findings that stand in contrast to SIGTARP's 

portrayal of the SBLF application review process and tl]C program's overall success. OIG, for 

example, concluded that Treasury's later-entry application review process was sound, finding 

that Treasury "consistently approved institutions that would likely meet their financial 

obligations to the SBLF program.,,2 orG also found that "institutions not admitted into the 

program received adequate consideration," and "applicants ... received reconsideration based on 

consistent criteria."] Similarly, GAO found that "Treasury adopted procedures to help ensure 

tl)at applicants were evaluated consistently and were likely to repay funds .. ,.,,4 GAO also 

found that banks participating in SBLF have increased lending, concluding that these banks have 

"noticeably higher changes in lending rates" when compared to similar non-SBLF institutions. 5 

The Report does not acknowledge these aspects of SBLF, resulting in an unbalanced view of the 

program. 

III. Congress Required Treasury to Allow T ARP Bank Participation in SBLF 

The Report criticizes Treasury because "[m]any TARP banks primarily looked at SBLF as an 

opportunity to exit TARP, escape TARP's restrictions, and pay less for taxpayer money." 

However, Congress explicitly instructed Treasury to permit the refinancing ofTARP funding 

through SBLF. The Small Business Jobs Act of201 0 - which created SBLF - provides: 

The Secretary shall ... issue regulations and other guidance to pennit eligible institutions 

to refmance secllJ'ities issued to Treasury under [TAR? prol,'Ta!lls] for securities to be 

issued under the Program. 

Treasury had no discretion in this matter. While SJGTARP may believe that SBLF should not 

have been available to T ARP banks, the fact is the law required it. 

In executing Congress's directive, Treasury took great care to preserve program incentives to 

promote small business lending among formcr TARP banks. For example, Treasnry instituted a 

two percent lending incentive fee to prevent T ARP banks from receiving a dividend rate benefit 

solely by virtue of their pWiicipation in SBLF. Thus, for the small number of former TARP . 

banks that have not increased small business lending, those banks have not paid a dollw' less to 

fue taxpayer than they othelwise would have under TARP. Only fuose former T ARP banks that 

increase their small bnsiness lending are charged a lower dividend rate under SBLF. And the 

program results speak for themselves. Rather than languishing in SBLF after an "escape" from 

the burdens ofTARP, as the Report suggests, the vast majority of fonner T ARP banks have 

benefited small businesses through substantial increases in their small bnsiness lending. 

2 OIG, Soundness of Investment Decisions Regarding Later-Entry, Withdrawn and ReCONsidered Institutions in the 

SBLF Program, OlG-SBLF-12-004 (July 3, 2012). 

'Id. 

4 GAO, Small Business Lending Fund: Additional Actions Needed 10 Improve Transparency and Accoufttabllity, 

GAO-12-183 (Dec. 20ll). 

S GAO, Small Business Lending: Opportunilie •• Exist 1o Improve Pe,fonnance Reporting ofT/'easury Programs, 

GAO-13-76 (Dec. 2012). 

3 
45 


Insert offset folio 20 here 80921.020

in addition, Treasury declined to approve over half of aU TAR? applications to SELF, which is 

comparable to the percentage of non-T ARP banks denied funding. Contrary to the Rcport's 

implication, TARP banks received robust scrutiny throughout the SBLF application review 

process. 

IV. SBLF's Dividend Rate Structnre Inccntivizes Small Business Lending 

The Report gives short shrift to the dividend rate incentive structure at the core ofthe SBLF 

program. It is simply untrue that without the "safeguard" of "meaningful" lending plan review 

SBLF banks will be unmotivated to increase their small business lending. Congress established 

specific incentives for banks to increase lending and disincentives for banks that fail to increase 

lending. Banks receive a dividend rate benefit only if they show actual increases in their small 

business lending. Banks that fail to increase lending pay a higher rate, at a level that is expected 

to earn a profit for the taxpayer. These incentives are nollinked to the banks' lending plans. In 

fact, COnb'feSS did not even require banks to project increases in small business lending in their 

lending plans. Treasury und the banking reb'1llators added this component. 

In addition, the Report ignores ample evidence that Treasury conducted a serious review of 

appliclUlts' lending plans. For example, of the banks in SIGTAR?' s slUnple that received SBLF 

fundi.ng, Treasury rejected as inadequate over 30 percent of the initial pllU1S submitted by these 

institutions, Banks then had to resubmit satisfactory plans to receive approval for funding. 

V. The Report Contains Numerous Errors and Omissions 

111ere are numerous other errors and omissions in the Report. For example, we disagree that 

Treasury lUld the Federal banking regulators did not effectively colTununicate with each other 

throughout the SBLF application review process. Treasury and the banking agencies engaged in 

extensive collaboration before and during the investment process, documented their mutual 

agreement regarding the supervisory consultation process, and were well apprised of the scope of 

each party's review. Treasury's own review process was designed in a manner consistent with 

this shared understanding lUld was not based upon a "lack of coordination" as the Report 

contends. SIGT ARP apparently relies 011 misquotes or out-of-context statements from SBLF's 

pro.6>Tam director to lU'gue that there was a miscommunication. Treasury provided comments to 

SlOT ARP clarifying that the Report's citations were inaccurate and did not reflect our 

understanding of the process, but SIGTARP appears to have ignored these comments. The 

Report also fails to acknowledge the substantial written record of coordination between Treasury 

and the regulators regarding the lending plan review process. 

Another significant error is that SIGTARP states that there were "obvions deficiencies" in some 

lending plans that Treasury "should have caught." The Report implies that Treasury approved 

some of these plans despite the deficiencies, when in fact the applicants were denied funding 

based on their financial condition. These instituti011S were not asked to resubmit lendi.ng plans 

because their applications would not have been funded in any event. In other instances, the 

banks had revised their plans to remedy the issues the Report cites prior to receiving approval. 

In addition, SfGTARP states that 29 of the 32 TARP bank. applications sampled "showed no 

4 
46 


Insert offset folio 21 here 80921.021

documented Treasury review of the banks' lending plans." However, each application file for 

those banks included a lending plan evaluation completed by Treasury staff. 

VI. Recommendations 

Regarding the Report's first recommendation, we believe that Treasury's coordination with 

regulators throughout the SBLF application review process was extensive and complete. 

Treasury entered into fonnal agreements with the regulators defining each entity's ro Ie in the 

process, and also documented procedures through flowcharts, risk management tools, and 

reporting systems. Together with weekly meetings, these tools resulted in effective 

communication among all entities throughout the investment process. As for SlOT ARP' s 

second recommendation, as noted above, Congress designed SBLF to incentivize small husiness 

lending lhrough the program's dividend rate structure. Treasury will continue to rely on that 

structure to incentivize lending increases going forward. Finally, Treasury has no response to 

SIGTARP's third recommendation, which appcars to be directed to federal banking regulators, 

not Treasury. 

Thank you once again for the opportunity to review and comment on the Report. We appreciate 

SIOTARP's work over the course of this audit. 

~, D"n~~",,,$-~ 

cc: Debra Rirt 

Special Deputy Inspector General for 

Office of SBLF Program Oversight 

Deputy Assistant Secretary 

5 
47 


Insert offset folio 22 here 80921.022

Audit Report 

Report Number: OIG-SBLF-12-004 

SMALL BUSINESS LENDING FUND: Soundness of Investment 

Decisions Regarding Later-Entry, Withdrawn and Reconsidered 

Institutions in the SBLF Program 

July 3,2012 

Office of 

Inspector General 

Department of the Treasury 
48 


Insert offset folio 23 here 80921.023

Contents 

Audit Report ....................................................................................................... 1 

Results in Brief .................................................................................................. 2 

Background ........................................................................................................ 3 

Treasury Generally Approved Institutions that Could Likely Meet their Financial 

Obligations to the Program .............................................................................. 4 

Treasury Gave Applicants Equal Opportunity for Reconsideration ............................. 7 

Treasury Had Adequate Bases for Denying Funding to Institutions .......................... 8 

Recommendation ............................................................................................... 9 

Management Comments and OIG Response ........................................................... 9 

Appendices 

Appendix 1; 

Appendix 2; 

Appendix 3: 

Appendix 4: 

Abbreviations 

ARC 

FBA 

FDIC 

FRB 

IC 

OIG 

OCC 

SBLF 

Objectives, Scope, and Methodology ......................................... 10 

Management's Response .......................................................... 12 

Major Contributors ................................................................... 14 

Report Distribution ................................................................... 1 5 

Application Review Committee 

Federal Banking Agency 

Federal Deposit Insurance Corporation 

Federal Reserve Board 

Investment Committee 

Office of Inspector General 

Office of the Comptroller of the Currency 

Small Business Lending Fund 

Soundness of Investment Decisions Regarding later~Entry ~ Withdrawn and ReconSidered 

Institutions in the SBLF Program Page i 

(0IG·SBLF·12·004) 
49 


Insert offset folio 24 here 80921.024

OIG 

The Department of the Treasury 

Office of Inspector General 

July 3,2012 

Don Graves, Jr. 

Audit 

Report 

Deputy Assistant Secretary for Small Business, Housing, and Community 

Development 

This report presents the results of our audit of investment decisions 

involving the Small Business Lending Fund (SBLF). SBLF is a fund 

created to provide capital to community banks with assets of less than 

$10 billion with incentives to stimulate small business lending. Our audit 

objectives were to determine whether Treasury: (1) consistently 

approved institutions that were financially viable and able to repay the 

SBLF investments; (2) gave adequate consideration to institutions that 

were not approved and asked to withdraw their applications; and (3) had 

adequate bases for denying funding to institutions. 

To accomplish our first objective, we reviewed investment decision 

records for 47 randomly sampled institutions that Treasury approved and 

funded within the last 60 days preceding the program's September 27, 

2011, funding deadline. We compared supervisory consultative 

memoranda from the institutions' regulators-the Federal Deposit 

Insurance Corporation (FDIC) and Office of the Comptroller of the 

Currency (OCC)-to the most relevant bank examination reports prepared 

by FDIC and OCC to determine whether they provided Treasury with 

robust and complete information regarding the financial health of the 

institutions. We also attempted to review a sample of institutions 

regulated by the Federal Reserve Board (FRB), but the FRB declined to 

provide us with reports of examination until after our audit was 

completed, creating a scope limitation for the first objective of this audit. 

To accomplish our second objective, we reviewed documents supporting 

Treasury's investment decisions for a judgmental sample of 34 

institutions that Treasury identified as being "reconsidered" for SBLF 

funding. We also reviewed updated financial and regulatory information 

recorded by Treasury subsequent to its initial review of the reconsidered 

institutions, and verified that Treasury was not informed of changes that 

had occurred in the financial condition of institutions that were not 

reconsidered. We interviewed SBLF staff, and officials from FDIC, and 

OCC. Finally, to accomplish our third objective, we reviewed investment 

Soundness of Investment Decisions Regarding Later-Entry, Withdrawn and Reconsidered 

Institutions in the SBLf Program Page 1 

0IG-SBlF-12-004 
50 


Insert offset folio 25 here 80921.025

decisions for a sample of 51 institutions that Treasury asked to withdraw 

from the program between June and September 2011. 

We conducted our fieldwork from October 2011 to May 2012 in 

accordance with 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. Accordingly, we believe the 

evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. Appendix 1 contains a more 

detailed description of our audit objectives, scope, and methodology. 

Results in Brief 

Based on our review of 47 FDIC- and OCC-regulated banks, we found 

that Treasury consistently approved institutions that would likely meet 

their financial obligations to the SBLF program. However, we identified 

four institutions that had repayment probabilities below the SO-percent 

threshold for program acceptance. For three of the institutions Treasury 

documented compensating factors supporting its funding decisions. 

However, Treasury did not have an adequate basis for elevating the 

repayment probability of the fourth institution. Similar to our previous 

audit, bank examination reports from the Federal Banking Agencies 

(FBAs) for these institutions flagged supervisory concerns beyond those 

disclosed to Treasury in supervisory consultative memoranda. Treasury 

was aware of these concerns for all but one of the admitted institutions, 

primarily because Treasury's documentation of its decisions improved. 

We also found that institutions not admitted into the program received 

adequate consideration before Treasury asked them to withdraw their 

applications. In all 34 cases reviewed, Treasury requested updated 

supervisory information, financial data, and/or the status of regulatorimposed dividend restrictions before deciding to approve or deny the 

applications. The applicants also received reconsideration based on 

consistent criteria. 

Finally, our review of 51 institutions denied funding disclosed that 32 did 

not meet the basic eligibility requirements, and therefore could not be 

admitted. The remaining 19 institutions were reviewed by Treasury's 

Application Review Committee (ARC) or Investment Committee (lC) and 

denied funding based on clear risks the committees identified with the 

financial health of the banks and/or their lending practices. 

Soundness of Investment Decisions Regarding later-Entry, Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 2 

0IG·SBLF·12·004 
51 


Insert offset folio 26 here 80921.026

Background 

On September 27, 2010, President Obama signed into law the Small 

Business Jobs Act of 2010, establishing the SBLF. SBLF is a fund 

created to provide capital to community banks with incentives to 

stimulate small business lending and, as a result, promote job creation 

and economic growth within communities. In addition to statutory 

eligibility requirements, participation in the SBLF program was restricted 

to financially viable institutions that were (1) adequately capitalized, (2) 

not expected to become undercapitalized, and (3) not expected to be 

placed into conservatorship or receivership. 

Treasury launched the SBLF program in December 20,2010, and by the 

June 22, 2011 application deadline, had received requests from 935 

financial institutions for $11.8 billion of the $30 billion authorized for the 

program. Treasury disbursed approximately $2.3 billion of the funds in 

the last 60 days leading up to the September 2011 deadline. By the 

program's September 27, 2011 funding deadline, Treasury issued 

preliminary approvals to 400 institutions, with 332 institutions accepting 

a total of $4.03 billion. Of the remaining 535 applicants, 461 were not 

admitted, and 74 withdrew prior to Treasury's consideration. 

In May 2011, we reported that Treasury established an 8-step 

investment decision process that examined applicant eligibility, financial 

viability, and ability to repay Treasury's SBLF investment.' While we 

determined that the process was consistent with legislative eligibility 

requirements, we also identified areas for improvement. Specifically, we 

reported that Treasury did not require thorough disclosure from the FBAs 

of supervisory issues influenCing the health of the banks and had granted 

FBAs significant discretion over the types of information they could 

report to Treasury. However, Treasury personnel did not agree to specify 

the types of supervisory issues that FBAs should report, because doing 

so would have reopened what had already been lengthy negotiations 

with the regulators. 

In February 2012, we reviewed 23 of the first 55 applicants accepted 

into the SBLF program. 2 We reported that Treasury approved institutions 

that may have difficulty meeting repayment and dividend obligations 

partly because it did not obtain sufficiently robust information from 

federal regulators about the condition of the institutions applying for 

1 OIG-SBLF-11-001, Small Business Lending Fund: Investment Decision Process for the Small Business 

Lending Fund, May 13, 2011. 

2 OIG-SBLF-12-002, Small Business Lending Fund: Soundness of Investment Decisions Regarding Ear/yEntry Applicants into the SBLF Program, February 17, 2012. 

Soundness of Investment Decisions Regarding Later~Entry, Withdrawn and Reconsidered 

Institutions in the SBLF Program Page 3 

0IG-SBLF-12-004 
52 


Insert offset folio 27 here 80921.027

funding. However, Treasury also admitted institutions despite 

supervisory issues and investment staff concerns about applicant 

repayment ability. This occurred because Treasury gave federal 

regulators discretion over what information they reported, did not 

document their consideration of the supervisory concerns provided, and 

overrode requirements during the application review process. 

Treasury Generally Approved Institutions that Could Likely Meet Their 

Financial Obligations to the SBLF Program 

Our review of supervisory and financial information for 47 FDIC- and 

OCC-regulated institutions admitted to the SBlF program disclosed that 

they were generally viable and likely to meet dividend and repayment 

obligations. However, we identified four institutions that were admitted 

to the program with repayment probabilities of less than 80 percent-the 

program threshold for acceptance. Treasury adequately supported its 

approval of three of these institutions by compensating factors justifying 

the investment decisions, but did not adequately support its approval of 

the fourth institution. We also found that Treasury had sufficiently robust 

information from the FBAs about the financial health of the institutions 

and that it performed a thorough analysis of those admitted. 

Treasury Admitted Some Institutions with Potential Repayment Issues 

We identified four institutions, including one T ARP recipient, that were 

accepted into SBlF with repayment probabilities below the threshold set 

for the program. Treasury established an 80-percent repayment 

probability threshold for participation. Despite this threshold, it approved 

one institution whose repayment probabilities were 70 percent and three 

that were 76 percent. For three of the institutions, including the one 

TARP recipient, Treasury documented in ARC or IC minutes the reasons 

for revising the credit analyst's assessment including: 

The first institution's classified assets were $6 million or 40 

percent lower than the additional loan losses projected by the 

credit analyst, resulting in an improved forward Tier 1 ratio and a 

revised repayment probability above 80 percent; 

• The second institution's earnings were projected to be $2 million 

more than the credit analyst's projection, based on current 

earnings. The higher projected earnings would improve the 

institution's Tier 1 capital ratio, resulting in a revised repayment 

probability of 80 percent; 

Soundness of Investment Decisions Regarding later-Entry, Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 4 

0IG-SBLF-12-004 
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The credit analyst's projected loan losses of $37 million were 

approximately 30 percent higher than the third institution's 

classified assets of $24 million. In addition, the ARC noted that 

the institution had no other debt, its allowance for loan and lease 

losses was adequately funded, and the quality of the institution's 

assets had improved. 

In each case, Treasury documented its deliberations and the factors that 

led to its repayment recalculations in the minutes associated with the 

institutions. Although we do not know whether these institutions will be 

able to pay dividends and repay the SBLF investments, Treasury's 

analyses are transparent in the minutes. 

However, Treasury did not appear to have an adequate basis for raising 

one de novo institution's repayment probability level. Because this 

institution had no classified assets, Treasury reduced the classified 

assets and provisioning below those used in the credit analysis. Treasury 

also determined that, based on supervisory information, the credit 

analyst's evaluation of the institution's qualitative factors was overly 

negative. If adjusted for these factors, Treasury determined the loan 

losses would result in a Tier 1 common ratio of 8 percent and a 

repayment probability above 80 percent. Because this institution was a 

de novo bank, for which asset quality typically starts high until the 

portfolio matures and experiences more defaults, we believe Treasury 

should not have adjusted the institution's projected potential loan losses 

and forward Tier 1 common ratio based on the absence of classified 

assets. 

Treasury Admitted Banks with Identified Issues with Asset Quality, 

Earnings, Capital, and Management 

We found that 35 of the 47 approved institutions sampled had noted 

supervisory concerns. FDIC and acc bank examination reports and 

supervisory consultative memoranda, CAMELS3 ratings, and/or 

communications with Treasury mentioned concerns about these 

institutions' earnings, asset quality, capital, and/or bank management. 

3 "CAMELS" refers to ratings of six essential components of an institution's financial condition and 

operations that FBAs assign to financial institutions. These component factors address: adequacy of 

capital; quality of assets; capability of management; quality and level of earnings; adequacy of 

liquidity; and sensitivity of the institution's earnings or capital to market risk. FBAs assign composite 

and component ratings of 1 to 5, with 1 indicating the strongest performance and least degree of 

supervisory concern; and a 5 indicating the weakest performance, and highest degree of supervisory 

concern. 

Soundness of Investment Decisions Regarding Later~Entry. Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 5 

OIG·SBLF·12·004 
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TARP banks had roughly as many supervisory concerns as did the other 

banks admitted to the program. Of the 47 banks sampled, 28 were 

former 

TARP recipients that refinanced their TARP investments through SBLF. 

As shown in Table 1 below, 21 of 28, or 75 percent, of the TARP banks 

in our sample had supervisory issues compared to 14 of 19, or 74 

percent, for non-TARP banks. However, TARP banks had a higher 

percentage of supervisory issues in more than one category. For 

example, 11 of 21 (52 percent) of the TARP banks sampled with 

supervisory issues had two or more categories of concerns compared to 

5 of 14 (36 percent) of the non-TARP banks. 

Table 1: Numbers of TARP and Non-TARP Institutions 

with Supervisory Issues 

Asset Earnings Issues In Two 

Quality Issues or More Total Issues Only CAMELS 

Only Components 

Institutions 

Refinancing 6 4 11 21 

TARP Funds 

All Other 

Accepted 5 4 5 14 

Institutions 

Total 11 8 16 35 

Reports by FBAs and the Treasury Office of Inspector General (OIG) have 

shown that these characteristics can contribute substantially to the 

financial decline of banks. Even if such issues do not affect a bank's 

viability, they may impair a bank's ability to consistently pay dividends or 

repay Treasury's investment. 

Based on our review of the consultation memoranda and the ARC and IC 

minutes, we believe that Treasury was aware of the supervisory 

concerns we identified for all but one of the institutions admitted, and 

had documented mitigating factors for its decisions. Treasury also 

informed US that it never intended to restrict the program to institutions 

without supervisory issues. For example, Treasury approved one 

institution for the program after asset quality and earnings improved in 

the second quarter. Treasury admitted a second institution that it initially 

recommended for withdrawal based on weak earnings, asset quality, and 

a less-than-satisfactory management rating after second quarter 

financials showed that asset quality and income had improved over the 

Soundness of Investment Decisions Regarding Later-Entry, Withdrawn and Reconsidered 

Institutions in the SBLF Program Page 6 

OIG-SBLF-12·004 
55 


Insert offset folio 30 here 80921.030

past year. A third institution had issues with commercial real estate loans 

and risk management, which Treasury decided had been mitigated in the 

first half of 2011. 

However, while Treasury stated that it was aware of a fourth 

institution's poor earnings history, it was unaware that the institution's 

report of examination mentioned 7 years of less-than-satisfactory 

earnings. We spoke to the responsible FBA officials who stated that by 

the time the institution was under consideration, it had showed several 

years of improving earnings in line with projections. The FBA informed us 

that it, therefore, viewed the information in the report of examination as 

somewhat stale. The FBA had also generally informed Treasury of the 

institution's poor earnings history in its supervisory consultation 

memorandum. The dividend restriction was also at the subsidiary bank 

level and would not have disqualified the institution from participation in 

SBLF. 

Treasury Gave Applicants Equal Opportunities for Reconsideration 

To determine whether applicants had an equal chance for 

reconsideration, we evaluated a judgmental sample of 34 applicants that 

Treasury reconsidered after the ARC or the IC initially tabled them or 

recommended them for withdrawal. According to Treasury, the only 

intervening events that could result in reconsideration were receipt of 

either new information from the FBAs or second quarter financial results. 

Treasury informed us that if the IC could not recommend approval based 

on first quarter results, it would wait for second quarter results to 

become available before making a decision. 

We determined that Treasury either received updated supervisory 

information from FBAs or updated financial data for all of the 34 

applicants reconsidered, which was documented in the files for the 

applicants, IC minutes, or ARC minutes. Eighteen applicants were 

reconsidered based upon new supervisory information, while 16 were 

reconsidered based upon new financial data. Ultimately, 23 of these 

applicants were approved, and 11 were asked to withdraw. 

Finally, the applicants' files contained no evidence of communication 

from parties other than the FBAs or financial analysts that Treasury 

engaged to help evaluate the applicants. If applicants or third parties 

asked for reconsideration, Treasury informed them that there was no 

appeals process. Therefore, it appeared that there was no undue 

influence when reconsidering institutions for approval. 

Soundness of Investment Decisions Regarding later-Entry, Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 7 

OIG-SBlF-12-004 
56 


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Treasury Had Adequate Bases for Denying Funding to Institutions 

The majority of the institutions denied funding in our sample was asked 

to withdraw their applications because they did not meet the basic 

eligibility requirements for the program. The Act prohibits Treasury from 

investing in institutions that are on the FDIC problem bank list or have 

been removed from the list within 90 days prior to application. It also 

prohibits the financing of T ARP institutions that have missed more than 

one TARP dividend payment. Further, Treasury guidelines prohibit 

investments in institutions that are under dividend restrictions from their 

FBAs or state banking regulators. 

Overall, 461 institutions were not admitted to the program of which 262 

did not meet the basic eligibility requirements. We reviewed 51 

applicants who met basic eligibility requirements, but were not admitted 

to the program. Of those reviewed, 32 were ineligible because they had 

dividend restrictions that could not be waived. As a result, they did not 

receive either ARC or IC review. 

The remaining 19 applicants in the sample were eligible for the program 

and reviewed by the ARC or the IC. However, Treasury identified 

multiple risks associated with the ability of these applicants to meet their 

financial commitments under the program. For example, Treasury 

justified its decision not to invest in three institutions by noting that: 

• The first institution had asset quality, management, earnings, and 

capital issues. One-third of the classified loans were outside the 

institution's natural market area and in distressed markets. Capital 

was below a requirement established in a memorandum of 

understanding with its regulator and earnings were weak. In 

addition, lender compensation was linked to portfolio size, creating 

incentives for risky loans. 

• A second institution, a bank holding company, was under an 

enforcement action by its regulator. First-quarter financials 

showed further deterioration in the applicant's financial condition 

and its repayment probability was 28 percent. Further, the 

subsidiary bank had no earnings and could not pay dividends to 

the applicant holding company, which was currently paying its 

obligations from cash on hand. 

• A third bank was deemed not viable by its FBA and was operating 

under an enforcement action. In its most recent examination, its 

Soundness of Investment Decisions Regarding Later-Entry, Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 8 

OIG-SBLF-12-004 
57 


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FBA had deemed capital unsatisfactory. Also, almost 100 percent 

of its assets were classified. 

Therefore, Treasury documented its concerns with these institutions and 

identified issues that might reasonably have justified its decision not to 

invest. 

Recommendation 

Because the period of investment for the SBLF program has passed, we 

have made no recommendations for improving Treasury's investment 

decision process. However, previously we recommended, and Treasury 

agreed, to create an internal watch list for banks with more severe 

financial issues. This will ensure that Treasury has an opportunity to 

discuss with the banks' management their financial condition if it 

appears appropriate. 

Management Comments and DIG Response 

Treasury officials agreed with the report's findings that institutions 

approved for SBLF participation are likely to be able to repay Treasury's 

investment, it gave applicants equal opportunity for reconsideration 

based on consistent criteria, and there was no undue influence in the 

reconsideration process. In addition, Treasury agreed that it had 

adequate bases for denying funding to institutions not approved for 

program participation. 

Treasury officials also stated that, as noted in the Recommendation 

section of the report, it has created and continues to maintain an internal 

review list of bank participants with certain financial issues. We 

consider management's comments to be responsive to the audit findings. 

* 

We appreciate the courtesies and cooperation provided to our staff 

during the audit. If you wish to discuss the report, you may contact me 

at (202) 622-1090, or Lisa DeAngelis, Audit Director, at (202) 927-

5621. 

lsI 

Debra Ritt 

Special Deputy Inspector General for 

Office of Small Business Lending Fund Program Oversight 

Soundness of Investment Decisions Regarding Later~Entry, Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 9 

OIG·SBlF-12-004 
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Appendix 1 

Objectives, Scope, and Methodology 

We conducted the audit of investment decisions regarding later-entry, 

withdrawn and reconsidered institutions in the Small Business Lending 

Fund (SBLF) program in response to our mandate under section 4107 of 

the Small Business Jobs Act of 2010. 4 This section provides that the 

Office of SBLF Program Oversight is responsible for audit and 

investigations related to the SBLF program and must report at least twice 

a year to the Secretary of the Treasury and Congress on the results of 

oversight activities, including recommended program improvements. 

Our audit objectives were to determine whether Treasury: (1) consistently 

approved institutions that were financially viable and able to repay the 

SBLF investments; (2) were consistent in how they considered 

institutions that were not approved and asked to withdraw their 

applications; and (3) had adequate bases for denying funding to 

institutions. We reviewed three populations: applicants approved and 

funded between July 27 and September 27, 2011 (during the last 60 

days of the program); applicants that were asked by Treasury to 

withdraw from the SBLF program; and applicants that were reconsidered 

for SBLF funding. 

To accomplish our first objective, we reviewed investment decision 

records for 47 randomly sampled institutions that Treasury approved and 

funded within the last 60 days preceding the program's September 27, 

2011 funding deadline. These records included Investment Committee 

(IC) memoranda, Application Review Committee and IC minutes, and 

applicable correspondence. We also compared supervisory consultative 

memoranda from the institutions' regulators-the Federal Deposit 

Insurance Corporation (FDIC) and Office of the Comptroller of the 

Currency {OCC)-to the most relevant bank examination reports prepared 

by FDIC and OCC to determine whether they provided Treasury with 

robust and complete information regarding the financial health of the 

institutions. Where we identified issues from examination reports that had 

not been disclosed in supervisory memoranda we met with SBLF program 

staff to determine their awareness of the issues. We also attempted to 

review a sample of institutions regulated by the Federal Reserve Board 

(FRB), but the FRB declined to provide us with reports of examination 

until after the audit work was completed, creating a scope limitation for 

the first objective of this audit. 

4 The Small Business Jobs Act of 2010, Public Law 111-240, was signed into law on September 27, 

2010. 

Soundness of Investment Decisions Regarding Later-Entry. Withdrawn and Reconsidered 

Institutions in the SBLF Program Page 10 

OIG-SBlF-12-004 
59 


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Appendix 1 

Objectives, Scope, and Methodology 

To accomplish our second objective, we reviewed documents supporting 

Treasury's investment decisions for a judgmental sample of 34 

institutions that Treasury identified as being "reconsidered" for SBLF 

funding. We also reviewed updated financial and regulatory information 

recorded by Treasury subsequent to its initial review of the reconsidered 

institutions, and verified that Treasury was not informed of changes that 

had occurred in the financial condition of institutions that were not 

reconsidered. We interviewed SBLF staff, and officials from FDIC and 

OCC. We reviewed applicant files to identify evidence of communication 

from parties other than the FBAs or the financial analysts that Treasury 

used to evaluate the applications. 

Finally, to accomplish our third objective, we reviewed investment 

decisions for a sample of 51 institutions that Treasury asked to withdraw 

from the program between June and September 2011. We obtained 

information from Treasury regarding the total number of statutorily 

ineligible applicants, 

We conducted our fieldwork from October 2011 to May 2012 in 

accordance with 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, 

Soundness of Investment Decisions Regarding Later-Entry. Withdrawn and Reconsidered 

Institutions in the SBLF Program Page 11 

OIG-SBlF-12-004 
60 


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DcbraRitt 

Appendix 2 

Management Response 

DEPARTMENT OF THE TREASURY WASHINGTON. D.C. 2:0220 

June '27, 2012 

SpecIal Deputy Inspector General for 

Office of Small Business Lending Fund Program Oversight 

U.S. Department of the Treasury 

1500 Penns) Ivania Avenue.:\W 

Washington. DC ::'02::0 

Dear },·ls. Rift: 

Thank you for the opportunity to review your draft report (the Report) on the soundness of Small 

Business Lending Fund (SBLF) investment decisions for iatcN,:mry, withdra\\TI, and 

reconsidered institutions, This letter provides the Department of the Treasury's {Treasury) 

official response. 

We reviewed the Report" s findings. which renect the SBLF program's comprehensive and. 

transparent investment process. Your audit examined a significant number of SELF applicants 

and considered infonnation such a1.- supervisory consultative memoFc.nda from federal banking 

agencies. relevant bank examination reports. updated financial and regulatory information for 

some institutions, and documentation supporting Treasury's investment decisions. Treasury 

agrees with the Report's finding that institutions approved for SBLF partici.pation arc likely to he 

able to repay Treasury's inwstment. 

Treasury also agrees that it gave applicants equal opportunity for reconsideration ba~ on 

consistent criteria. Treasury only reconsidered an applicant upon receipt of new supervisory 

infonnation or new financial information. mId did not entertain indiyjdual requests for 

reconsideration. Therefore, a:.- the Report finds, there was no undue influence in the 

reconsideration process. 

Finally, Treasury agrees that il had adequate bases for denying funding to institutions not 

approved for program participation. TreasurJ denied funding with consistency to applicants that 

did not mcet cligihility requirements, were unable to pay dividends, or exhibited clear risks that 

could compromise the applicant's ability to meet financial commitments under SBLF. 

In closing - as noted in the recommendation section uftbe Report -- Treasury has created and 

continues to maintain an intema! review list of bank participants with certain financial issues-. 

Thank you once again for the opportunity to review the Report. We look forward to working 

with you and your team in the future. 

Soundness of Investment Decisions Regarding laterwEntry, Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 12 

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Appendix 2 

Management Response 

Soundness of Investment Decisions Regarding Later~Entry, Withdrawn and Reconsidered 

Institutions in the SBLF Program Page 13 

OIG-SBLF-12-004 
62 


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Appendix 3 

Major Contributors 

Debra Ritt, Special Deputy Inspector General 

lisa DeAngelis, Audit Director 

John Rizek, Supervisory Auditor 

Elizabeth MacDonald, Attorney 

Bobbi A. Paulson, Referencer 

Soundness of Investment Decisions Regarding Later~Entry. Withdrawn and Reconsidered 

Institutions in the SBLF Program Page 14 

OIG-SBLF-12-004 
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Appendix 4 

Report Distribution 

Department of the Treasury 

Deputy Secretary 

Office of Strategic Planning and Performance Management 

Office of Financial Management 

Office of Accounting and Internal Control 

Office of Management and Budget 

OIG Budget Examiner 

United States Senate 

Chairman and Ranking Member 

Committee on Small Business and Entrepreneurship 

Chairman and Ranking Member 

Committee on Finance 

Chairman and Ranking Member 

Committee on Banking, Housing and Urban Affairs 

United States House of Representatives 

Chairman and Ranking Member 

Committee on Small Business 

Chairman and Ranking Member 

Committee on Financial Services 

Government Accountability Office 

Comptroller General of the United States 

Soundness of Investment Decisions Regarding later~Entry. Withdrawn and Reconsidered 

Institutions in the SBlF Program Page 15 

OIG-SBLF-12-004 
64 


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GAO 

December 2011 

GAO-12-183 

United States Government Acconntability Office 

Report to Congressional Committees 

SMALL BUSINESS 

LENDING FUND 

Additional Actions 

Needed to Improve 

Transparency and 

Accountability 

["" ""'f .« ..... .,,,,, ."',. : G~ ~~,,~.~~,,« .. '" :~:~~ ! 
65 


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Highlights ofGAO-12~183, a report to 

congressional committees 

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 Recouuuends 

To improve transparency and accountability, Treasury should (1) 

en~ance 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 e'!fectivene~s. Treasury 

agreed with GAO's recommendations, 

View GAo-12~ 183J7or Qlore information, 

contact A Nicole Clowers ,at ~202) 512-8678 

or clowersa@gao.gov, 

SMALL BUSINESS LENDING FUND 

Additional Actions Needed to Improve Transparency 

and Accountability 

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 

addrtion, 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 

!ending 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 

perfonmance, 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. Wrthout 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. 

_____________ United States Government Accountability Office 
66 


Insert offset folio 41 here 80921.041

Contents 

Let1er 

Appendix I 

Appendix II 

Appendix III 

Appendix IV 

Tables 

Background 

Treasury's Application Requirements and Decisions Were Not 

Always Transparent 

Characteristics of Applicants and Participants and Factors 

Affecting SBLF Participation 23 

Treasury Has Not Finalized Plans to Monitor SBLF Patticipants or 

Track SBLF's Impact 28 

Conclusion .., 32 

Reconunendations for Executive Action 33 

Agency Comments and Our Evaluation 34 

Objectives, Scope, and Methodology 37 

Responses to Questions from GAO's Survey on the SBLF Program 43 

Comments from the Department of the Treasury 47 

GAO Contact and Staff Acknowledgments 48 

Table I: Main Paranleters Treasury Used for Evaluating SBLF 

Applicants 38 

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

GAO Survey 41 

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

SELF program? 43 

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

fonding 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: ,Vhat are the reasons your bank had for KOT applying for 

fWlding through the SBLF program? 45 

pagel GAO~12·183 Small Business Lending Fund 
67 


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Figures 

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

funding through the SBLF program, \vhich one \vas the 

most important reason for NOT applying? 4G 

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

Figure 2: Timeline for the Implementation of SBLF, September 

2010 Uu'ough October 2011 18 

Figure 3: SBLF Applicant and Participant Data 24 

Figure 4: SBLF' Investments by State 25 

Figure 5: F'actors Affecting Banks' Participation in SBLF' 27 

Figure 6: Indicators of Small Business Credit Conditions, Third 

Quart.er 20m-Third Quarter 2011 28 

Page ii GAO·12·183 Small Business Lending Fund 
68 


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Abbreviations 

ABA 

call reports 

CAMELS 

CDCI 

CDFI 

CDLF 

CPP 

FDIC 

Federal Reserve 

GPRA 

ICBA 

NFIB 

OCC 

OTS 

SBLF 

SBU 

SNL 

TARP 

Treasury 

IG 

American Bankers Association 

consolidated reports of condition and income 

C-Capital adequacy, A-Asset quality, 

M-Management quality, E-Earnings, 

L-Liquidity, and S-Sensitivity to market risk 

community development capital initiative 

community development financial institution 

Community Development Loan Funds 

Capital Purchase Program 

Federal Deposit Insurance Corporation 

Board of Governors of the Federal Reserve System 

Government Performance and Results Act of 1993 

Independent Community Bankers Association 

National Federation of Independent Business 

Office of the Comptroller of the Currency 

Office of Thrift Supervision 

Small Business Lending Fund 

Small Business Lending Index 

SNL Financial-collects and publishes financial 

data and analyses 

Troubled Asset Relief Program 

Department of the Treasury 

Inspector General 

This is a work of the U,S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other materia!, permission from the copyright holder may be J necessary if you wish to reproduce this material separately 

Page ill GAO-12-1S3 Small Business Lending Fund 
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Insert offset folio 44 here 80921.044

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 

caprtal 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.' 

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

signed into law the Small Business Jobs Act of 201 0.' 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 The act 

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

available and offers incentives to increase small business lending. 

'House Committee on Small Business, The State of Smafl Business Access to Cap;tal 

and Credit: The View from Secretary Geithner, 11ih Cong .. 1st sess., 2011. 

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

31n this report, "banksH refers to banks, thrifts, and bank and thrift holding companies. For 

the purposes of the SBLF program, a GOLF is an entity that is certified by Treasury as a community development financial institution (GOFf) loan fund. GOFI is a speciallzed 

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

institutions. 

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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 (T ARP) 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' 

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 non public 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 

4S. 681, 112111 Congo (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, 11ih 

Cong.(2011 ). 

Page 2 GAO~12-183 Small Business Lending Fund 
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Insert offset folio 46 here 80921.046

infusion program underTARP that is similar to SBLF-' 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 

5The 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 oce for savings 

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

Supervisory authority was transferred to the oce 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. 

6The CAMELS rating system is a U.S. supervisory too! that describes a bank's overall 

condition and that is used to c!assify the nation's banks. The composite rating is based on 

financia! statements and regulators' on-site examinations and has six componentscapital 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 Contra! in the Federal Government, GAO/AIMD-OO~21.3.1 

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

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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 

CDC I 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 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. 

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. 

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. 

8Communlty Development Capital Initiative (CDCI) is part of the TARP program that 

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

small businesses and other community development projects. 

9The weighted response rate accounts for the differential sampling fractions within strata. 

More information can be found in appendix II. 

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Background 

Considerations, and 

Eligibility Requirements 

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 

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SELF Application Process 

and Requirements 

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.'2 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 COLFs. To qualify for 

SBLF, COLFs 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 

iDA cal! 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. /n 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 "sn 

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Insert offset folio 50 here 80921.050

SBLF Funding and 

Incentives for Small 

Business Lending 

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 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 biJlion 

1350me banking institutions areformed as either S-corporations (S-corps) or mutua! 

organizations (mutua!s) 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 capita! 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. 

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

Treasury. Tier 1 capita! is considered the most stable and readity available capita! for 

supporting a bank's operations. It covers core capita! elements, such as common 

stockholder's equity and noncumulative perpetual preferred stock. The SBlF funds are 

Tier 2 capita! 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. 

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

or represent equity ownership in the issuer. 

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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 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 CDC!. If the qualifying 

institution is a CPP or CDC I recipient, any capital that remains 

outstanding from these investments is deducted from the SBLF program 

limits. All CPP and CDC I outstanding amounts must be repaid when 

SBLF funding is received. 

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 

COLFs. 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 

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. SpecificaUy, 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 !oan commitments, are converted into credit equivalent 

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

to assign hjgher~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 8 GAO~12·183 Small Business Lending Fund 
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Treasury's Application 

Requirements and 

Decisions Were Not 

Always Transparent 

Review Process 

He'lmred Additional Steps 

"""ill'Ll""" Some 

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. 

Page 9 GAO~12~183 Small Business Lending Fund 
78 


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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 The inputs that the Application Review Team considered 

included the following: 

number of applications increased over time, Treasury requested additional 

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

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

applicants. 

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79 


Insert offset folio 54 here 80921.054

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 

17Specificalfy, ace used three conclusions: (1) nonobjection, (2) nonobjection conditioned 

on private capita! raised of a specified amount. or (3) unable to support the request for 

SBLF funding to provide Information for Treasury's evaluation, ors also provided a 

upositiveH 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 11 GAO~12·183 Small Business Lending Fund 
80 


Insert offset folio 55 here 80921.055

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 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 

191n 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 

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

historical smalt bUSiness lending growth and experience; (4) participation in Small 

Business Administration, U.S. Department of Agriculture, or state sma!! 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, 

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. 

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81 


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across bank applicants. Treasury said that it added this additional 

review by the Application Review Committee in response to a 

previous GAO recommendation. 22 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. 

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. 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 

221n our 2010 report on CPP, we found that because Treasury reHed 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 13 GAO~12~183 Small BUSiness lending Fund 
82 


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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 Treasury also 

considered the applicants' CAMELS composite ratings. For the evaluation 

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

nonapproved applicants: 

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 

':lAWe selected key inputs used by Treasury to guide its deciSIons and performed an 

analysis for aU 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 aU 935 applicants. 

For a more information on our methodology, see appendix L 

Page 14 GAO·12~183 Small Business lending Fund 
83 


Insert offset folio 58 here 80921.058

lending plans."" 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-cou!d explain 

accepted applicants with elevated ratiOS of nonperforming loans. 

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

the app!ication process prior to Treasury's evaluation. 

2sTreasury 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 15 GAO·12·183 Small Business Lending Fund 
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Insert offset folio 59 here 80921.059

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 16 GAO·12·183 Small Business Lending Fund 
85 


Insert offset folio 60 here 80921.060

to 

Applications Was Affected 

by Implementation 

Challenges and Funding 

Deadline 

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. 3o 

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!G 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 probabmty estimates in Treasury's funding decisions. 

Page 17 GAO·12·183 Small Business lending Fund 
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Figure 2: Timeline for the Implementation of SBLF, September 2010 through October 2011 

Septembflr 27: 

SmaH Business 

JobsAct of 2010 

March 15: Treasury finalized the 

terms of supervisory consultatIOn 

WIth FD!C, Federal Reserve 

OCC,MdOTS 

July7:Tleasury 

<:Innounced theurs! 

walle of funding for 

slxcommunrty 

tanks that 

ret;e1veci a IO\a1 of 

$123milhonon 

Jun-e21 

OtH:ernber2/): 

Treasury launched 

SBlF and issued terms 

and condlllons oJ SSLF 

community banks 

Martoh 31: May 16: 

Initial deadline Extended 

forcommumty deadhnefor 

banks community banks 

Oet3: 

FirS!. round 

ofdlVld-end 

payments 

were made 

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 OT8-

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 18 GAO·12~183 Small Business Lending Fund 
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Lack of Clarity about 

Program Requirements 

and Transparency of Some 

Decisions Created 

Confusion 

Program Requirements and 

Dividend Restrictions 

Memo to inform Treasury's evaluation." 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 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 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 

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

on private capita! 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 

~positiven or "negative" assessment on each applicant. 

Page 19 GAO·12~183 Small Business Lending Fund 
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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 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 

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 2010,33 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 oce 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, 

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 

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 20 GAO-12-183 Small Business Lending Fund 
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Status of Applications 

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 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. 

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. 

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 

Page 21 GAO-12w183 Small Business Lending Fund 
90 


Insert offset folio 65 here 80921.065

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. 

Page 22 GAO~12·183 Small Business Lending Fund 
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Characteristics of 

Applicants and 

Participants and 

Factors Affecting 

SBLF Participation 

Fewer institutions applied to SBLF and received funding than initially 

anticipated. Although SBLFs 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 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. 

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.37 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 CDC I funds, investing a total of $2.7 billion in these 

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

$17.4 bilUon figure was reported In Treasury's submission to the President's 2012 

budget 

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

exclude COLFs, which do not submit cal! reports and did not report total assets. 

Page 23 GAO~12·183 Small Business Lending Fund 
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Figure 3: SBlF Applicant and Participant Data 

Dollars in billions 

Institutions 

$1178- 935 

10 '''' .00 '" i.OOO 

Number of Institutions 

Iota! 

CPPICDC! 

Note: Of the $6,7 blUion in requested to refinance CPP and CDC! funds, $5.69 bil!ionwas to repay 

CPP/CDC! principal. $2.2 billion of the ultimate $2.7 billion CPP/CDCllnvestments 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 

38StatisticaUy, 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 GOP, but there is no relationship between unemployment and the 

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

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

this. 

Page 24 GAO·12~183 Small Business Lending Fund 
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Figure 4: SBLF Investments by State 

Number of funded institutions 

30 

Comparison of SBLF 

Applicants and Banks to 

Non-SBLF Peer Banks 

Number of funded !nst1tutlOn;:; 

Dollars 10 millions 

400 

35' 

3.0 

250 

200 

150 

100 

5. 

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 For example, 

SBLF participants had lower capital ratios and a smaller proportion of 

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

3SWe 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. 

Page 25 GAO~12~183 Small Business lending Fund 
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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 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 

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. 

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 sma!! 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. 

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Banks Frequently Cited 

Lack of Demand as the 

Most Important Reason for 

Not Applying to the 

Program 

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 

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. 

Figure 5: Factors Affecting Banks' Participation in SBlF 

Note: The 95 percent confidence inteIVa!s around the estimates for not applying to the SBlF do not 

exceed plus Of 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. 

Page 27 GAO·12~183 Small Business Lending Fund 
96 


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Treasury Has Not 

Finalized Plans to 

Monitor SELF 

Participants or Track 

SELF's Impact 

Credit Conditions Remain 

Challenging for Small 

Businesses 

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 

Percentage responding 

40 

35 

30 __ - __ _ 

25 

20 

o 

,,' ........ 

~ ....... -""-----';# " 

/r- J 

, 

, 

, 

, 

, 

/ 

, 

Spread over federal funds 

Spreads on small loans Weder.;! Reserve) 

r-

, 

~:03Q4 ~_Q_2_Q_'_Q4_ ~_.Q_2_Q_'_Q4_ ~:06Q2 Q3 Q4 ==-=--=-: :OSQ2 Q3 Q4 :UsQ2 Q3 Q4 =-:=--=...:::.:c :11Q2 03 

Page 28 GAOa12~183 Small Business Lending Fund 
97 


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Treasury Has Not Finalized 

Plans for Monitoring SBLF 

Participants and the 

Program's Impact Because 

Focus Has Been on 

Implementation 

Note: The mdicators 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 

Federa! 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" 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 Bus!ness Lending !ndex (SBLt) is a measure of new loans to small 

businesses developed by Thomson Reuters and PayNet Inc. 

Page 29 GAO-12-183 Small Business Lending Fund 
98 


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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, oce, 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 30 GAO·12·183 Small Business Lending Fund 
99 


Insert offset folio 74 here 80921.074

to assess petiormance 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 offarm-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," 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 petiormance measures, are an integral 

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

for stewardship of government resources and achieving effective results, 

Establishing petiormance 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" 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 

"GAOIAIMD-OO-21 ,3, 1, 

460nce 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 

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

risks prompted by such changes, 

Page 31 GAO~12·183 Small Business Lending Fund 
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Conclusions 

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'7 

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, 

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. 

Page 32 GAO~12-183 Small Business Lending Fund 
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Recommendations for 

Executive Action 

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. 

Page 33 GAO~12·183 Small Business lending Fund 
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Agency Comments 

and Our Evaluation 

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 

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Insert offset folio 78 here 80921.078

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 35 GAO~12~183 Small Business Lending Fund 
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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 

Page 36 GAO·12~183 Small Business Lending Fund 
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Appendix I: Objectives, Scope, and 

Methodology 

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 

Page 37 GAO~12·183 Small Business Lending Fund 
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Appendix I: Objectives, Scope, and 

Methodology 

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 

Eligibility 

Positive financial viability 

CAMELS composite ratingsa 

Repayment probability estimate 

Key performance ratios 

Parameters 

Treasury determined only aU approved applicants must first pass the imtial eligibllity check 

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

assessment from their respective regulators. 

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

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

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 

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 percentb 

Nonperforming loans ratfo: Nonperforming loans (NPLS) + other real estate owned (CREO) 

INet Tier 1 capita! + ALlL: greater than 40 percent 

Construction and development loans: Construction and development loansffotal risk-based 

capital: greater than 300 percene 

Page 38 GAO~12~183 Small Business Lending Fund 
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Key Data 

Lending plan scores 

Appendix I: Objectives, Scope, and 

Methodology 

Parameters 

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. 

-cD"';v-c;dC"e-n-cd-re-s-trC";cC-tio-n-s------cT=-r-ea-s-u-ry--Cdetermined oni;;· a-p-pcclic-a-nC"ts""Cth'""aC"t are able to pay dividends to SBLF funds could be 

approved. 

Source GAO summary of Treasury documentation 

"This exclude COLFs, because CDLFs do no! face the same regulatory reporting requirements as 

banks and thus do not have supervisory data 

bTier 1 capital is considered the most stable and readily available capital for supporting a bank's 

operations. It covers core capital eiements, such as common stockholder's equity and noncumulative 

perpetual preferred stock. 

"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 tosses" 

(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. 

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: 

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 

Page 39 GAO~12~183 Small Business lending Fund 
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Appendix I: Objectives, Scope, and 

Methodology 

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/AIMO-OO-21.3.1. 

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Appendix I: Objectives, Scope, and 

Methodology 

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

assets. 2 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. 

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 (+1- 58) institutions estimated to be in-scope 

institutions in the population, 

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

Stratum 

Holding company $5-

$10 billion 

Banks less than $5 

billion 

Total 

SQurce GAO survey results 

Population 

size 

63 

5.118 

1,547 

6,733 

Sample Respondents 

size Out of scope within scope 

63 30 

378 249 

348 219 

794 502 

2Sanking institutions includes banks, thrifts, and bank and thrift holding companies 

Page 41 GAO·12·183 Small Business Lending Fund 
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AppendiX I: Objectives, Scope, and 

Methodology 

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 PayNe!. 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. 

Page 42 GAO~12~183 Small Business Lending Fund 
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Appendix II: Responses to Questions from 

GAO's Survey on the SBLF Program 

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 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. 

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

95 percent 95 percent 

Estimated confidence interval- confidence intervalResponses percentage lower bound upper bound 

Yes, we applied. 18 14 22 

Yes, we plan to <1 

apply. 

No 80 77 84 

Source GAOsulileyresults 

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

SBlF program? 

Responses 

It is a source of capital to 

meet growing demand for 

small business credit. 

It is financially attractive in 

relation to the expected 

cost of capital relative to 

market alternatives. 

A reason 

Not a 

reason 

A reason 

% 

94 

6 

91 

95 percent 

confidence 

interval-lower 

bound 

86 

81 

95 percent 

confidence 

interval. 

upper bound 

98 

14 

97 

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

Page 43 GAO~12~183 Small Business lending Fund 
112 


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Appendix II: Responses to Questions from 

GAO's Survey on the SBLF Program 

Responses 

Not a 

reason 

It offers the ability to A reason 

refinance Capital Purchase Nota Program (CPP) funds reason through the SBLF program 

Other 

Source GAO survsy results 

% 

31 

69 

95 percent 95 percent 

confidence confidence 

interval-lower intervalbound upper bound 

19 

20 44 

57 80 

18 68 

32 82 

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 

It is a source of capital to meet growing 

demand for small business credit. 

It is financially attractive in relation to the 

expected cost of capital relative to market 

a!ternatives. 

% 

41 

35 

18 

95 percent 95 percent 

confidence confidence 

interval-lower interval-upper 

bound bound 

29 52 

23 48 

29 

Note: Examples of "Other" responses included the program offering a source of capita! to grow and 

Tier 1 capital treatment. 

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Appendix II: Responses to Questions from 

GAO's Survey on the SBlF Program 

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

the SBLF program? 

We plan to avoid taking on new 

obligations during current 

economic conditions. 

We prefer to avoid participation in 

government programs. 

Other 

Source GAO survey results 

reason 

A reason 

Nota 

reason 

A reason 

Nota 

reason 

Nota 

reason 

22 

78 

50 

50 

64 

A Reason 38 

Nota 

reason 

62 

17 

74 

44 

45 

59 

30 

53 

Note: Examples of "Other" responses included not being eligible to apply for the program or not needing additional capital at the time. 

26 

83 

55 

56 

70 

47 

70 

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114 


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Appendix II: Responses to Questions from 

GAO's Survey on the SBlF Program 

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 

We have lIttle or no anticipated 

demand for small business credit. 

We plan to avoid taking on new 

obligations during current economic 

conditions 

We prefer to avoid participation in 

government programs 

The SBLF was less financially 

attractive in relation to the expected 

cost of capital relative to market 

alternatives. 

The terms of participation were 

unfavorable. 

The application process was too 

burdensome. 

Other 

Source GAOsvrYoyresuits 

% 

29 

25 

6 

18 

95 percent 95 percent 

confidence confidence 

interval~lower interval~upper 

bound bound 

24 34 

20 30 

11 

13 

14 22 

Note: Examples of UOther" responses included not being eHgible to apply for the program or not 

needing additional capital at the time. 

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115 


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Appendix III: Comments from the 

Department of the Treasury 

December 1,2011 

A. Nicole CloweMl 

Director, Financial Markets And Community Investment U.S. G()vemment Accountability Office 

441 G Street, N.W. 

Washington,D.C20548 

Dear Ms. Clowers: 

Thank you forlh~ opportunity to review and comment ot\ the GAO's draft report regarding the Small 

Business Lending Fund ("SSW,). We appreciate your ~tlI.ff'$.c<.>lIaborative approach in evaluating this 

initilttive over a l3-mornh period that encOtllpl'lSsed much of the program '$ design and implementation. 

The Dep;lrtlnentoftbe Treasllry ('1'rea$UI)''') welc\'lffit!S the GAO's cODclu~on that "TrellSUf)' adopted 

procedures to help ensUN that applicants were evaluated conr.istently and were Jikeiy to repay fund~," as these objectives w"n,: central elements ofilie program's design. 

Throusboul the il'l'lpJementatioo of the SBLFpmgram, Treasury has worked to achieve a high level of 

trnnsparencyandaccounlBbiUty. Treasuryeng~ine)(ten~':l!ltl'ellChwitbpotentialappl~ts, 

participating in OVeT 50 industry events, reiecoofen:nces, and webinars Il5 well as initiating more than 

4,600 outbound calls dire<:tly to in$litutkoni. To dille, Treasury has also published 15 program and 

tmnsactllmreports,includinganinijialllS'5essmenlofincreasesin!imld!busine3:sl~inglll1lOngSBLF 

palticipams and a detailed stud)' of the program's potentia! impact on lending to women-, vetenUh and minorlty-owned small businm;ses. 

Treasury agrees with the GAO's three recommendations - each of which is aimed at furthering the 

objectives oftransparcneyandaccounUlbility-and is laking steps to 1ncorporateiliese recommendatiOM 

mto our e::ti$ling plaru; and proeooWlB. 

In closing, we appt'e(:iate the eOl'l$tructive relationship we have developed with you and your team. We 

look forward to eontinuing 10 work together on this important program. 

Page 47 

1l~;J DonQraves,Jr, 

Deputy AssiSWtt Secretary for Smal! Business, 

COlJImunity Development, and AffOl'dahle 

Housing Policy 

GAO~12~183 Small Business Lending Fund 
116 


Insert offset folio 91 here 80921.091

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(2S0585) 

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. 

Page 48 GAO-12-183 Small Business Lending Fund 
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118 


Insert offset folio 93 here 80921.093

GAO 

December 2012 

GAO-13-76 

United States Government Accountability Office 

Report to Congressional Committees 

SMALL BUSINESS 

LENDING 

Opportunities Exist to 

Improve Performance 

Reporting of 

Treasury's Programs 

GAO 

Accountability * Integrity * Reliability 
119 


Insert offset folio 94 here 80921.094

Highlights of GAO~13'76, a report to 

congressional committees 

Why GAO Did This Study 

The Small Business Jobs Act of 2010 

aimed to stimulate job growth by, 

among other things. establishing the 

SBlF and SSBCI programs within 

Treasury, SBlF uses capital 

investments to encourage community 

banks with assets of less than $10 

billion to increase their small business 

lending. SSBCI provides funding to strengthen state and municipal 

programs that support lending to small 

businesses. Under the act, GAO is 

required to conduct an audit of both 

programs annually. GAO's first reports 

were on the programs' implementation 

and made recommendations. This 

second report examines (1) the status 

of Treasury's efforts to monitor 

participants' compliance with program 

requirements under SBlF and SSBCI, 

(2) the status of SBlPs and SSBCl's 

small business lending, and (3) 

Treasury's evaluation of SBlF and 

SSBC! and communication of 

outcomes to Congress and interested 

parties. GAO reviewed Treasury 

documents ~n SBlF and SSBCI 

procedures; analyzed the most recent 

available performance information for 

both programs and data on financial 

institutions; and interviewed officials 

from Treasury and nine states 

participating in SSBCL 

What GAO Recommends 

Treasury should develop a polley on 

how it will use its authority to terminate 

SSBCI funds. Treasury should also 

expand its methodology discussion in 

SBlF reports and make the results of 

SSBCI performanGemeasures public. 

In written comments on a draft of this 

report, Treasury agreed to implement 

th~se recomfDend~tions. 

View GAO-13-76. For iflore lnformation, 

-contact Daniel parc!a-DI8z (2Q2) 512-8678 or 

garciadiazd@gao,golJ. 

SMALL BUSINESS LENDING 

Opportunities Exist to Improve Performance 

Reporting of Treasury's Programs 

What GAO Found 

The U.S. Department of the Treasury (Treasury) has made progress in 

developing guidance and procedures to-monitor participants' compliance with 

requirements for the Small Business Lending Fund (SBlF) and the State Small 

Business Credit Initiative (SSBCI) programs. In response to GAO's previous 

recommendation on SBlF monitoring, Treasury has developed procedures for 

monitoring SBlF participant compliance with legal and reporting requirements. 

Treasury also issued standards to provide states with best practices for reviewing 

participants' compliance with SSBCl's legal and policy requirements and 

developed procedures for sampling transaction-level data to evaluate the 

accuracy of the states' SSBCI annual reports. 

As of June 30, 2012, SBlF participants had increased their business lending 

over the 2010 baseline. The median SBLF participant had a 31 percent increase 

in total business lending and a 14 percent increase for small business loans 

under $1 million, according to GAO's analysis. For SSBCI, states had used about 

10 percent of the funds as of June 30, 2012. The act provides Treasury with 

authority to terminate funds that have not been allocated to states within 2 years 

of Treasury's approval of the state's participation in SSBCL However, Treasury 

has not yet developed a formal written policy explaining what actions it will take if 

SSBCI participants have not met the requirements to receive their full allocation 

of funds within the 2-year time frame. Treasury officials said that they currently 

have no plans to use this authority but retain the ability to do so in the future. 

Nevertheless, formal guidelines on how Treasury will use this authority could 

help ensure consistent use of the authority if used in the future and provide clarity 

to states about the consequences of not using the funds in a timely manner. 

Treasury has taken steps to evaluate SBlF's and SSBCl's performance but 

could enhance public reporting of program outcome information. In a quarterly 

report to Congress, Treasury compares business lending in SBLF participants to 

a large comparison group that it adjusted for certain aspects of bank size and 

geography. GAO's analysis using a peer group that was adjusted for financial 

health as well geography and size showed that in nearly every case, the 

difference in total business lending growth was somewhat smaller than in 

Treasury's analysis. Treasury considered using a more refined peer group that 

adjusted for these factors but judged that the differences were not significant 

However, Treasury did not disclose these options in the report or explain why the 

larger comparison group was chosen, which compromised the transparency of 

Treasury's methodology. Furthermore, Treasury's approach did not isolate the 

impact of SBlF from other factors that could affect lending, as GAO 

recommended in its first SBlF report. Treasury officials said they are continuing 

to explore evaluation approaches, including collecting additional data from a 

survey of SBlF institutions. In response to GAO's 2011 recommendation on 

SSBCI performance measures, Treasury has designed perfonmance measures, 

such as the amount of private leverage states have achieved with SSBCI funds. 

However, Treasury has not yet developed a way to make this performance 

information public. Treasury shares information with the states through 

conferences and technical assistance, but performance information could help 

Congress and the states to better understand the effectiveness of SSBCl's 

various programs. 

_____________ United States Government Accountability Office 
120 


Insert offset folio 95 here 80921.095

Contents 

Letter 

Appendix I 

Appendix II 

Appendix III 

Table 

Figures 

Backgrotmd 4 

Treasury Has Made Progress in Developing Compliance Guidance 

and Processes for SBLF and SSBCI 9 

SBLF-Funded Institutions and SSBCI-Fnnded States Haw Begun to 

Support Small Business Lending, but Treasury's Policy for 

Timely Vse of SSBCI Funds Is Unclear 16 

Treasury Could Enhance Its Reporting of Progranl Performance 

Inlormation 26 

Conclusions 38 

Recommendations for Executive Action 40 

Agency Comments and Our Evaluation 41 

Objectives, Scope, and Methodology 44 

Comments from the Department of the Treasury 49 

GAO Contact and Staff Acknowledgments 51 

Table 1: Summary Data on SBLF Participants, GAO's Peer Group, 

and Trea<;ury's Comparison Group 48 

Figure 1: Distribution of Dividend or Interest Rates Paid by 

Institutions on SBLF Funds, as of June 30, 2012 18 

Figure 2: Distribution of SBLF Participants' Changes in Business 

Lending, from Baseline Level to the Quarter Ended June 

30,2012 20 

Figure 3: Median Changes in SBLF Participants' Business Lending 

by CPP Status, from Baseline Level to the Quarter Euded 

June 30,2012 21 

Figure 4: Cmnulative SSBCI Funds Used by Program Type, as of 

June 30, 2012 22 

Pagel GAO-13-76 Small Business Lending Programs 
121 


Insert offset folio 96 here 80921.096

Figure 5: SSBCI Allocation by State, Territory, or Municipality and 

Cmnulative SSBCI Fmlds Transferred and Used, as of 

.Tune 30, 2012 23 

Figure 6: Distribution of Changes jn Total Business Lending, from 

Baseline Level to the Quart.er Ending ,June 30, 2012 29 

Figure 7: Median Changes in Total Business Lending by 

Geographical Region, from Baseline Level to the Quarter 

Ending June 30,2012 30 

Figure 8: Median ChaIlges in Total Business Lending hy Iustitution 

Size in Total Assets, from Baseline Level to the Quarter 

Ended Junc 30, 2012 31 

Abbreviations 

CAMELS 

CAP 

CDFI 

CDLF 

CPP 

FDIC 

GPRAMA 

OCSP 

OIG 

SBLF 

SSBCI 

TARP 

capital adequacy, asset quality, management, earnings, 

liquidity, and sensitivity to market risk 

capital access programs 

community development financial institution 

community development loan funds 

Capital Purchase Program 

Federal Deposit Insurance Corporation 

Government Performance and Results Act 

Modernization Act 

other credit support programs 

Office of Inspector General (Treasury) 

Small Business Lending Fund 

State Small Business Credit Initiative 

Troubled Asset Relief Program 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this materia! separately. 

Page Ii GAO·13·76 Small Business lending Programs 
122 


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United States Government Accountability Office 

Washington, DC 20548 

December 5, 2012 

Congressional Committees 

Small businesses playa vital role in the U,S, economy, accounting for 

about half of private-sector output and employing more than half of 

private-sector workers, 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 2008 and early 2009, major disruptions of business 

credit markets made accessing credit difficult for small businesses, 

Currently, there is still concern that small businesses might not be able to 

access enough capital to create jobs, Recent data show that net 

employment growth at small businesses is not increasing at the same 

rate as in previous economic recoveries. 

To address these concerns, Congress passed the Small Business Jobs 

Act of 2010, which was signed by the President on September 27,2010,1 

Among other things, this legislation aims to stimulate job growth by 

establishing the Small Business Lending Fund (SBLF) and the State 

Small Business Credit Initiative (SSBCI), 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,2 The act authorized 

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

and offered incentives to increase small business lending, However, 

interest in SBLF was lower than anticipated, with 935 financial institutions 

applying to the program for a combined funding request of $11,7 billion, 

By September 2011, the Department of the Treasury (Treasury) had 

ultimately approved $4,0 billion for 332 institutions through Treasury 

purchases of preferred stock or debt instruments-$3,9 billion to 281 

banks and $104 million to 51 CDLFs, No additional SBLF funds will be 

awarded to banks or CDLFs, 

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

21n this report, "banks" refers to banks, thrifts, and bank and thrift holding companies. For 

purposes of the SBLF program, a GOLF is an entity that is certIfied by Treasury as a 

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

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

institutions. 

Page 1 GAOw13w 76 Small Business Lending Programs 
123 


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Funded with $1.5 billion, SSBCI is designed to strengthen state programs 

that support private financing to small businesses and small 

manufacturers that, according to Treasury, are not obtaining the loans or 

investments they need to expand and to create jobs. States are expected 

to use their SSBCI funds to leverage private financing and investment 

that is at least ten times the amount of their SSBCI funds (a leverage ratio 

of 10:1) by December 31,2016. Forty-seven states, American Samoa; 

the District of Columbia; Guam; the Northern Mariana Islands; Puerto 

Rico; the U.S. Virgin Islands; Carrington, North Dakota; Mandan, North 

Dakota; and Anchorage, Alaska currently participate in the program. 3 

The 2010 Small Business Jobs Act requires us to conduct an annual audit 

of the SBLF and SSBCI programs. 4 In our first reports, we reviewed the 

implementation of SBLF and SSBCI and made recommendations to 

improve the management oversight of the programs. 5 This second report 

examines (1) the status of Treasury's efforts to monitor participants' 

compliance with program requirements under SBLF and SSBCI; (2) the 

status of SBLF and SSBCI participants' small business lending; and (3) 

the extent to which Treasury evaluates the SBLF and SSBCI programs 

and communicates their outcomes, such as an increase in small business 

lending, to Congress and interested parties. 

To examine the status of Treasury's efforts to monitor participants' 

compliance with program requirements under SBLF and SSBCI, we 

analyzed Treasury's documentation and interviewed relevant officials. For 

SBLF, we reviewed and analyzed Treasury's compliance procedures. We 

interviewed Treasury officials on the process by which staff review the 

Quarterly Supplemental Reports for accuracy. For SSBCI, we reviewed 

SSBCI National Standards for Compliance and Oversight and SSBCI 

Policy Guidelines. We interviewed Treasury officials on implementing the 

3North Dakota and Wyoming did not submit an SSBCI application. Alaska initially app!ied 

for Its maximum SSBCI allocation before the June 27, 2011, deadline but subsequently 

withdrew its appHcation, SSBC! also accepted applications from municipalities in states 

that did not apply and territories. For purposes of this report, when we refer to "states" we 

are referring generally to aU SSBCl participants, 

412 U.S.C. § 4107(c) and 12 U.S.C. § 5710 (b). 

sGAO, Small Business Lending Fund: Additional Actions Needed to Improve 

Transparency and Accountability, GAO-12-183 (Washington, D.C.: Dec. 14,2011) and 

State Small Business Credit (nitiative: Opportunities Exist to fmprove Program Oversight, 

GAO-12-173, (Washington, D.C .. Dec. 7, 2011). 

Page 2 GAO-13-76 Small Business Lending Programs 
124 


Insert offset folio 99 here 80921.099

SSBCI compliance procedures and officials from the states of Colorado, 

Florida, Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, 

and Texas. Factors we used for selecting these states included the 

amount of funding provided by Treasury, geographic diversity, number 

and types of small business programs, and status of use of funds. Our 

selection process is more fully described in appendix I. We reviewed the 

Allocation Agreements between Treasury and each of the nine 

participating states that we interviewed to analyze the conditions and the 

requirements placed on the states. 

To determine the status of SBlF participants' small business lending, we 

reviewed Treasury's Use of Funds Reports to determine the most current 

level of qualified small business lending and the distribution of dividend or 

interest rates paid by program participants· Because Treasury requires 

only SBlF participants to submit data on qualified small business 

lending-generally, lending below $10 million-we also analyzed total 

business lending as well as small business lending under $1 million, 

which is available through the Call Reports. 7 We accessed Call Report 

data using SNL Financial-a private financial database that contains 

publicly filed regulatory and financial reports-and analyzed lending by 

SBlF participants for the quarter ending June 30, 2012. For the SSBCI 

program, we collected and reviewed data from the quarterly reports as of 

June 30,2012, of all SSBCI participants.' These data were the most 

recent available for our analysis. We determined that the data collected 

by Treasury on SBlF and SSBCI were sufficiently reliable for our 

purposes. 

To examine the extent to which Treasury evaluates and communicates 

SBlF and SSBCI program outcomes, we reviewed Treasury 

documentation for both programs. To determine the extent to which 

Treasury evaluates the performance of SBlF, we reviewed Treasury's 

Use of Funds Report to identify how Treasury analyzed the performance 

6The Use of Funds Report is a quarterly report to Congress describing how participating 

institutions have used the funds they have received under the program. 

7 A 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. 

8The act requires that SSBCI participants provide to Treasury a quarterly report on the 

use of SSBCI funds during the previous quarter. 

Page 3 GAO~13-7G Small Business Lending Programs 
125 


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Background 

Small Business Lending 

Fund 

of SBLF. We assessed the methodology and the comparison group 

Treasury used in evaluating the performance of SBLF participants as well 

as institutions that did not participate in SBLF. We interviewed Treasury 

officials on their comparison group analysis to understand the process by 

which the analysis was developed. To help understand the usefulness of 

the comparison group, we chose a peer group of non-SBLF institutions 

that we adjusted for geographical and size distribution as well as financial 

health. By analyzing a peer group, we could account for differences 

between SBLF participants and other financial institutions. For 

determining the extent to which Treasury evaluates SSBCI performance 

outcomes, we collected and reviewed the performance measures that 

Treasury developed for evaluating SSBCI. In addition, we interviewed 

officials from the nine selected states to collect information on their 

evaluation relating to their state's SSBCI performance and identify what 

type of performance information they think would be helpful in 

administering their state small business programs. 

We conducted this performance audit from March 2012 to December 

2012 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. 

For the purpose of the SBLF program, the Small Business Jobs Act of 

2010 defines qualified small business lending-as defined in an 

institution's quarterly regulatory filings (Call Reports)-as one of the 

following: 

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 small business loans cannot be for more than $10 

million, and the business may not have more than $50 million in revenue. 

The act specifically prohibits Treasury from accepting applications from 

Page 4 GAO-13-76 Small Business Lending Programs 
126 


Insert offset folio 101 here 80921.101

institutions that are on the Federal Deposit Insurance Corporation's 

(FDIC) problem bank list or have been removed from that list during the 

previous 90 days,9 The initial baseline small business lending amount for 

the SBLF program was the average amount of qualified small business 

lending that was outstanding for the four full quarters ending on June 30, 

2010, and the dividend or interest rates paid by an institution are adjusted 

by comparing future lending against this baseline, Also, the institution is 

required to list any loans resulting from mergers and acquisitions so that 

its qualified small business lending baseline is adjusted accordingly, 

Fewer institutions applied to SBLF than initially anticipated, in part 

because many banks did not anticipate that demand for small business 

loans would increase, The institutions that applied to and were funded by 

SBLF were primarily institutions with total assets of less than $500 million, 

In addition, in our 2011 report, we reported that the lack of clarity by 

Treasury in explaining the program's requirements created confusion 

among applications and Treasury faced multiple delays in implementing 

the SBLF program and disbursing SBLF funds by the statutory deadline 

of September 27, 2011.10 

The amount of funding a bank received under the SBLF program 

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 

or less, it was eligible for SBLF funding that equaled up to 5 percent of its 

risk-weighted assets." If the qualifying bank had assets of more than $1 

billion but less than $10 billion, it was eligible for funding that equaled up 

problem bank list is a confidential list created and maintained by the FDIC of banks 

that are in jeopardy of failing. In genera!, "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 u4" or "5.~ 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' onsite 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 

1oGAO-12-183. 

11Risk-weighted assets are weighted according to credit risk and are used in the 

calculation of required capita! leve!s. 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, ~here relevant 

Page 5 GAO-13-76 Small Business Lending Programs 
127 


Insert offset folio 102 here 80921.102

to 3 percent of its risk-weighted assets. The SBLF program provided an 

option for eligible institutions to refinance preferred stock or subordinated 

debt issued to the Treasury through the Troubled Asset Relief Program's 

(TARP) Capital Purchase Program (CPP).12 Participating SBLF banks 

must pay dividends or interest of 5 percent per year initially to Treasury, 

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 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. After 4.5 years, the dividend 

rate on the capital will increase to 9 percent for all banks regardless of a 

bank's small business lending. For S-corporations and mutual institutions, 

the initial interest rate was at most 7.7 percent. The rate would fall as low 

as 1.5 percent if these institutions increase their small business lending 

by 10 percent or more from the previous quarter. 13 For COLFs, the initial 

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

will increase to 9 percent if the COLF has not repaid the SBLF funding. 

This structure is designed to encourage COLFs to repay the capital 

investment by the end of the 8-year period. Treasury will allow an SBLF 

participant to exit the program at any time, with the approval of its 

regulator, by repaying the funding provided along with dividends owed for 

that period. 

Under the act, Treasury has a number of reporting requirements to 

Congress related to SBLF: (1) monthly reports describing all of the 

transactions made under the program during the reporting period; (2) a 

semiannual report (for the periods ending each March and September) 

12As the largest TARP program, the Capital Purchase Program was designed to provide 

capital investments to financially viable financial institutions, Treasury received preferred 

shares and subordinated debentures, along with warrants, 

1380me banking institutions are formed as either S-corporations or mutual organizations, 

which will affect the form of Treasury's investment. An S~corporation 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 mutua! 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 mutua!s 

Page 6 GAO·13"76 Small Business Lending Programs 
128 


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State Small Business 

Credit Initiative 

providing all projected costs and liabilities and all operating expenses; 

and (3) a quarterly report known as the Use of Funds Report. 

SSBCI was established to support existing and new state programs that 

support private financing to small businesses and small manufacturers 

that, according to Treasury, are not obtaining the loans or investments 

they need to expand and to create jobs. The act allowed Treasury to 

provide SSBCI funding for two state program categories: capital access 

programs (CAP) and other credit support programs (OCSP). For both 

CAP and OCSPs, lenders are required to have at least 20 percent of their 

own capital at risk in each loan. Also, origination and annual utilization 

fees are determined by each state to defray the program's cost. Loan 

terms, such as interest and collateral, are typically negotiated between 

the lender and the borrower, although in some cases loan terms are 

subject to state approval and, in many cases, the state and lender will 

discuss and negotiate loan terms and guarantee options prior to reaching 

agreement to approve the loan and issue a guarantee. A CAP is a loan 

portfolio insurance program wherein the borrower and lender, such as a 

small business owner and a bank, contribute to a reserve fund held by the 

lender. Under a CAP, when a participating lender originates a loan, the 

lender and borrower combine to contribute an amount equal to a 

percentage of the loan to a loan reserve fund, which is held by the lender. 

Under SSBCI, the contribution must be from 2 percent to 7 percent of the 

amount borrowed. Typically, the contribution ranges from 3 percent to 4 

percent. The state then matches the combined contribution and sends 

that amount to the lender, which deposits the funds into the lender-held 

reserve fund. Under SSBCI, approved CAPs are eligible to receive 

federal contributions to the reserve funds held by each participating 

financial institution in an amount equal to the total amount of the 

contributions paid by the borrower and the lender on a loan-by-Ioan basis. 

In addition, the following OCSPs are examples of programs eligible to 

receive funding under the act: 

Collateral support programs: A Collateral Support Program is 

designed to enable finanCing that might otherwise be unavailable due 

to a collateral shortfall. It provides pledged cash collateral to lenders 

to enhance the collateral coverage of individual loans. The state and 

lender negotiate the amount of cash collateral to be pledged by the 

state. 

Loan participation programs: States may structure a loan participation 

program in two ways: (1) through purchase transactions, also known 

Page 7 GAO-13-76 Small Business lending Programs 
129 


Insert offset folio 104 here 80921.104

as purchase participation, in which the state purchases a portion of a 

loan originated by a lender, or (2) by participating in a loan as a colender, where a lender originates a senior loan and the state 

originates a second loan to the same borrower that is usually 

subordinate to the lender's senior loan should a default occur. State 

loan participation programs encourage lending to small businesses 

because the lender is able to reduce its potential loss by sharing its 

exposure to loan losses with the state, 

Loan guarantee programs: These programs enable small businesses 

to obtain a term loan or line of credit by providing the lender with the 

necessary security in the form of a partial guarantee, In most cases, a 

state sets aside funds in a dedicated reserve or account to 

collateralize the guarantee of a specified percentage of each 

approved loan. The guarantee percentage is determined by the states 

and lenders but, under SSBCI, may not exceed 80 percent of loan 

losses. 

Venture capital programs: These programs provide investment capital 

to create and grow start-ups and early-stage businesses, often in one 

of two forms: (1) a state-run venture capital fund (which may include 

other private investors) that invests directly in businesses, or (2) a 

fund of funds, which is a fund that invests in other venture capital 

funds that in turn invest in individual businesses, 

Direct loan programs: Although Treasury does not consider these 

programs to be a separate SSBCI program type, it acknowledges that 

some states may identify programs that they plan to support with 

SSBCI funds as direct loan programs, The programs that some states 

label as direct loan programs are viewed by Treasury as cO-lending 

programs categorized as loan participation programs, which have 

lending structures that are allowable under the statute, 

OCSPs approved to receive SSBCI funds are required to target small 

businesses with an average size of 500 or fewer employees and to target 

support towards loans with an average principal amount of $5 million or 

less, In addition, these programs cannot lend to borrowers with more than 

750 employees or make any loans in excess of $20 million, 

After their applications were approved, the states entered into Allocation 

Agreements with Treasury before they received their funds, SSBCI 

Allocation Agreements are the primary tool signed by Treasury and each 

participating state and outline how recipients are to comply with program 

requirements, The act requires that each state receive its SSBCI funds in 

three disbursements or tranches of approximately one-third of its 

approved allocation, Prior to receipt of the second and third 

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130 


Insert offset folio 105 here 80921.105

Treasury Has Made 

Progress in 

Developing 

Compliance Guidance 

and Processes for 

SBLF and SSBCI 

Treasury Has Developed 

Procedures to Monitor 

SBLF Participant 

Compliance and Report of 

Lending Data 

disbursements, a state must certify that it has expended, transferred, or 

obligated 80 percent or more of the previous disbursement. Treasury may 

terminate any portion of a state's allocation that Treasury has not yet 

transferred to the state within 2 years of the date on which its SSBCI 

Allocation Agreement was signed. Treasury may also reduce, suspend or 

terminate a state's allocation at any time during the term of the Allocation 

Agreement upon an event of default under the agreement. Under the act, 

states are required to submit quarterly and annual reports on their use of 

SSBCI funds. All SSBCI Allocation Agreements will expire on March 31, 

2017. 

In response to our previous recommendation on SBLF compliance 

procedures, Treasury has developed procedures for monitoring SBLF 

participant compliance with legal and reporting requirements. Treasury 

has also issued compliance standards for SSBCI and procedures to 

review states' annual reports. The standards provide the participating 

states with best practices for reviewing borrower and lender compliance 

with SSBCl's legal and policy requirements. 

We recommended in December 2011 that Treasury should finalize 

procedures for monitoring SBLF participants, including procedures to 

better ensure that Treasury is receiving accurate information on 

participants' small business lending. 14 In response to the 

recommendation, Treasury officials told us they had written compliance 

procedures in March 2012 and finalized compliance procedures on 

September 28, 2012, for monitoring participant conformance with 

program terms, including documentation requirements, certification 

requirements, and other requirements under the Securities Purchase 

Agreement. 15 In addition, according to Treasury officials, SBLF 

compliance procedures include a review of the Quarterly Supplemental 

14GAO-12-183. 

15The Securities Purchase Agreement is the terms between Treasury and SBLF 

participants on which the SBlF participants issued preferred stock to the Treasury, which 

Treasury purchased using SBlF funds. 

Page 9 GAO~1J..76 Small Business lending Programs 
131 


Insert offset folio 106 here 80921.106

Reports (quarterly reports) for accuracy to monitor that the dividend or 

interest rates paid by the institutions are correct 16 

As mandated by the act, Treasury requires each SBLF participant to 

submit two annual certifications: 

(1) Any businesses receiving a loan from an SBLF participant 

using SBLF funds must certify to the institution that the principals 

of the business have not been convicted of a sex offense against 

a minor. Under the Securities Purchase Agreement, annually until 

redemption, the SBLF participant is required to provide the 

certifications to Treasury that businesses receiving loans from the 

bank have certified that their principals have not been convicted of 

a sex offense against a minor. 

(2) Each SBLF participant must certify that it is in compliance with 

the requirements of the Customer Identification Program, which is 

intended to enable the bank to form a reasonable belief that it 

knows the true identity of each customer. 

In addition to these certifications, Treasury requires, through the 

Securities Purchase Agreement, that SBLF participants meet certain 

additional conditions and certifications, such as the bank's Chief 

Executive Officer and Chief Financial Officer attesting to the accuracy of 

the bank's Call Report and certifying to Treasury that information provided 

on each supplemental quarterly report, is complete and accurate. 

Treasury developed a compliance monitoring tool for verifying the proper 

certification submission by SBLF participants. The tool is a set of 

spreadsheets Treasury uses to track the receipt of documents from SBLF 

participants, as required by the Securities Purchase Agreement, including 

annual financial statements, independent auditor certifications, and 

executive officer certifications. 

An important SBLF compliance focus is the review and monitoring of the 

quarterly reports. Each SBLF participant is required to correctly calculate 

its quarter-end adjusted small business lending baseline and the qualified 

H'Quarterly Supplemental Reports supplement the Cal! Reports filed by the SBLF 

participants and indude the calculations for the qualified small business lending for the 

quarter and the dividend or interest rate to be paid by the SBLF participants. 

Page 10 GAO-13-76 Small Business Lending Programs 
132 


Insert offset folio 107 here 80921.107

small business lending for that quarter. '7 The quarterly reports are the 

primary source on which Treasury bases its Use of Funds Report of 

qualified small business lending and the dividend or interest rate paid by 

the SBLF participants. The quarterly reports are forms in which the SBLF 

participants calculate their qualified small business lending for the quarter 

and the resulting dividend or interest rate. The dividend or interest 

payment depends on the growth or the decline of qualified small business 

lending. Thus, if the baseline or the qualified small business lending is 

incorrectly calculated, Treasury will not receive an accurate dividend or 

interest payment amounts. 

According to Treasury documentation, Treasury will review the following 

elements in the quarterly reports: 

certification of accuracy by the institution's executives (including Chief 

Executive Officer, Chief Financial Officer, and all directors or trustees 

who attested to the Call Report); 

independent auditor certification; 

real-time validation of the calculations for the quarterly reports; 

analysis of the quarterly reports; and 

explanation letters and auditor attestations if the quarterly report is a 

resubmission. 

According to Treasury officials, the review performed by SBLF 

compliance staff is primarily to identify discrepancies between data on the 

quarterly reports and the Call Reports. According to Treasury staff, they 

use a system that allows staff to monitor discrepancies or errors and 

follow up with participants. Treasury staff review participants' quarterly 

reports to identify any potential errors or missing information. Staff 

compare the quarterly report submissions to the Call Reports to check for 

discrepancies for the same period. According to Treasury officials, staff 

also compare quarterly reports to prior Call Reports to check for errors in 

reported changes in loan balances and net charge-offs and apply 

statistical tests, such as a comparison of government guaranteed lending 

amounts in the quarterly reports, to lending figures publicly reported by 

17The SBlF qualified baseHne is adjusted each quarter to take into account any gains 

resulting from mergers, acquisitions, and loan purchases during the period that SBlF 

participants may have acquired during the period. The baseline is adjusted so that the 

smail business lending being measured is new small business lending. not lending from 

mergers, acquisitions, or purchases of sma!! business loans. 

Page 11 GAO-13-76 Small Business Lending Programs 
133 


Insert offset folio 108 here 80921.108

the Small Business Administration. 18 Treasury staff said they use a 

verification check for arithmetic errors for calculating the adjusted 

baseline exclusions and qualified small business lending. Treasury 

follows up with institutions to address identified issues and errors and 

requests resubmission of corrected quarterly reports, as appropriate. 

Treasury has also responded to the findings and recommendations of the 

Treasury's Office of Inspector General (OIG). In August 2012, Treasury's 

OIG reported on a small judgmental sample of 10 initial supplemental 

reports submitted by SBLF participants." To establish initial dividend 

rates, SBLF participants completed the initial supplemental reports using 

small business lending data from their quarterly Call Reports and loans 

records and submitted them to Treasury. The OIG reviewed the 

calculations for the small business lending baseline and the initial 

dividend rate payment and found errors in 8 of the 10 reviewed reports. 

OIG's recommendations included the following: 

follow up with the 8 banks where errors were identified and determine 

whether corrected initial supplemental reports and quarterly reports 

should be submitted and make the necessary adjustments to dividend 

rates for the banks, as appropriate; 

notify all SBLF participants about the types of errors identified by this 

audit to help prevent similar errors from occurring in the future; and 

ensure that the October 2012 Use of Funds Report contains 

corrections for errors identified by this audit. 

Treasury agreed with the OIG's recommendations and commented that it 

would review the identified errors with each institution and direct these 

institutions to resolve any errors in the third quarter of 2012, including 

resubmitting corrected initial and quarterly supplemental reports, as 

appropriate. Further, Treasury conducted training webinars in July and 

August 2012 to address common errors identified in their reviews of 

quarterly report submissions. According to Treasury officials, they 

completed the review of the eight banks where quarterly report errors 

18Net charge-efts are total loans and leases charged off (removed from balance sheet 

because of uncollectibility), less amounts recovered on loans and leases previously 

charged off. 

190epartment of the Treasury, Office of Inspector General, Small Business Lending Fund: 

Initial Dividend Rate Calculations Used Incorrect Lending Information, (Washington, D.C .. 

Aug. 21, 2012) 

Page 12 GAO-13-76 Small Business lending Programs 
134 


Insert offset folio 109 here 80921.109

Treasury Has Developed 

Guidance to Assist SSBCIParticipating States in 

Their Oversight of Lenders 

and Borrowers 

were identified and banks resubmitted quarterly reports as appropriate. 

Two banks submitted revised reports identifying a combined total of 

$258.00 in overpayments to Treasury. 

Treasury has developed SSBCI Policy Guidelines and compliance 

standards for participating states to follow in implementing their state 

small business programs using SSBCI funds. According to Treasury 

officials, primary oversight of the use of SSBCI funds is the responsibility 

of each participating state. The participating states we interviewed viewed 

their responsibility as monitoring SSBCI lender and borrower compliance 

with program requirements. Under the act, specific lender and borrower 

assurances and certifications must be delivered before a transaction is 

enrolled in the participating state's approved program. For example, 

borrowers must provide assurance that proceeds will be used for an 

eligible business purpose and that the borrower is not an executive 

officer, director, or principal shareholder (or a member or the immediate 

family or a related interest of such individual) of the lender. Similarly, 

lenders must submit certifications to the participating state providing 

assurance that, for example, the loan is not a refinancing of a loan 

previously made to that borrower by the lender or an affiliate of the 

lender. In addition to these certifications, the act requires that borrowers 

and the lenders certify that their principals have not been convicted of a 

sex offense against a minor as such terms are defined in section 111 of 

the Sex Offender Registration and Notification Act 20 Eight states we 

interviewed told us that they reviewed borrower and lender certifications 

for meeting the legal requirements and assurances before enrolling the 

loans. 

In May 2012 Treasury issued the SSBCI National Standards for 

Compliance and Oversight, which was intended to provide the states with 

guidance for reviewing, monitoring, and managing compliance. 21 Treasury 

considers the standards as best practices that the states should adopt or 

incorporate, as appropriate, into existing procedures. For example, 

according to the standards, if a partiCipating state delegates to an 

administrative entity the responsibility to obtain the certifications to 

u.s.c. § 16911. 

21U.S. Department of the Treasury, SSBCf National Standards for Compliance and 

Oversight, (Washin9ton, D.C .. May 15, 2012). 

Page 13 GAO~13~76 Small Business lending Programs 
135 


Insert offset folio 110 here 80921.110

individual lenders, the participating state must exercise oversight to 

ensure compliance, One means of ensuring oversight would be for the 

participating state to conduct an annual audit of each lender's transaction 

files to verify that the use of proceeds certifications are on file and signed 

by an authorized representative of the lender. As another example of a 

best practice, the standards recommend that, when overseeing entities 

that administer the state smail business programs, states should perform 

site visits, require periodic status update reports, or conduct regular 

conference calls with the administering entity, 

The participating states we interviewed found the SSBCI National 

Standards for Compliance and Oversight to be helpful as they were 

developing their compliance procedures, Three of the nine states already 

had similar compliance procedures in place for their small business 

lending and amended their procedures to include SSBCI compliance 

standards, Six states told us that they established or are establishing 

compliance standards using the SSBCI National Standards for 

Compliance and Oversight as guidance, According to state officials of the 

nine states we interviewed, as part of their procedures, staff reviewed the 

borrower and lender documentation for compliance, 

Under the act, SSBCI participants are subject to two reporting 

requirements: annual reports and quarterly reports, As part of its 

responsibilities for overseeing the use of SSBCI funds, Treasury is 

planning to conduct a review of the Annual Report data submitted to them 

by the states, Under the act, SSBCI participants are to submit to Treasury 

an Annual Report no later than March 31 of each year. The data included 

transaction-level data for each loan or investment made using SSBCI 

funds for that year; 

the number of borrowers that received new loans originated under the 

approved state program; 

the total amount of such new loans; 

breakdowns by industry type, loan size, annual sales, and number of 

employees of the borrowers that received such new loans; 

the zip code of each borrower that received such a new loan; and 

other data that the Secretary may require to carry out the purposes of 

the program, 

As part of its review of the 2012 Annual Report data, Treasury plans to 

review a sample of loans and investments for the appropriate 

documentation of borrower and lender assurances and certifications for 

data accuracy, To conduct this review, SSBCI staff designed an 

Page 14 GAO-13-76 Small Business Lending Programs 
136 


Insert offset folio 111 here 80921.111

evaluation form to review the certifications and the Annual Report data. 

SSBCI participants are required to submit their 2012 annual data to 

Treasury by March 31, 2013. The loans or investment will be reviewed 

for the following assurances and certifications: 

Each lender or investor that has received credit support for a 

particular transaction has at least 20 percent of their own capital at 

risk unless Treasury has waived this requirement. 

Signed borrower and lender use-of-proceeds certifications have been 

provided, and the borrowerllender signature block matches the 

borrower on the loan documents. 

Signed borrower and lender sex offender certifications have been 

provided. 

In the data accuracy review, Treasury plans to verify a sample of SSBCI 

Annual Report data submitted by the states with the actual loan or 

investment documentation. The types of data that Treasury intends to 

verify include the following: 

date of disbursement for the loan or investment; 

borrower's annual revenue and the year of business incorporation; 

enrolled loan amount and any public subsidy associated with the 

enrolled loan or venture capital investment; 

SSBCI federal contribution to CAP loan; and 

amount the state had contributed to a loan participation, loan 

guarantee, or loan collateral program. 

Treasury also intends to verify that the amount of subsequent private 

financing matches the documentation provided and that the 

documentation supports the relationship between the SSBCI loan 

program and the private financing. 

The states are required to submit to Treasury a quarterly report on the 

use of SSBCI funds during the previous quarter. Under the act, states are 

required to report the total amount of federal funding used and to certify 

that the information provided is accurate and that the state is 

implementing its approved programs in accordance with the act and the 

regulations or other guidance issued by Treasury. As part of the 

Allocation Agreements, Treasury also requires states to submit reports on 

the total amount of allocated funds used for administrative costs, the 

amount of program income generated, and the amount of charge-offs 

against the federal contributions to the reserve funds. Treasury conducts 

a more limited review of the SSBCI quarterly reports compared to the 

Page 15 GAO~13~76 Small Business Lending Programs 
137 


Insert offset folio 112 here 80921.112

SBLF-Funded 

Institutions and 

SSBCI-Funded States 

Have Begun to 

Support Small 

Business Lending, but 

Treasury's Policy for 

Timely Use of SSBCI 

Funds Is Unclear 

Annual Report. Specifically, Treasury staff conduct checks on the 

administrative costs to ensure that the costs do not exceed the statutory 

caps. In addition, staff verify that the amount of funds used does not 

exceed the amount allocated to the state and that the state official signing 

the SSBCI quarterly reports is authorized to do so. 

According to Treasury officials, they would not approve a new 

disbursement of funds if they had substantial evidence that a state's 

compliance with SSBCI program requirements was inadequate. When a 

participating state requests a disbursement of funds, according to 

Treasury staff, they will conduct a pre-disbursement review. In addition to 

confirming that the participating state has expended, obligated, or 

transferred 80 percent of its previous disbursement, Treasury staff review 

the results of Treasury's SSBCI compliance monitoring, According to 

Treasury documentation, this review will include a review of a sample of 

transactions in which SSBCI funds were used; a review of financial 

audits, if submitted; the review of the quarterly reports and if available, the 

annual reports for accuracy and completeness; and the review of any of 

the states' compliance activities or records that would indicate whether a 

participating state had failed to comply with any program requirements. 

As of June 30, 2012, SBLF participants had increased their business 

lending over the baseline from 2010." For SSBCI, Treasury had 

transferred to the states nearly one-third of the program's $1.5 billion in 

total funding as of June 30, 2012. States had used about $154 million 

(about 10 percent) of these funds through a variety of programs. States 

had received and used funds at differing levels, but some states were 

concerned that Treasury may take actions to suspend disbursements 

after participants have been in the program for more than 2 years. 

Treasury has the authority to terminate disbursements to SSBCI 

participants who have not met the requirements to receive their full 

allocation within 2 years of having been accepted into the program. 

Treasury has not yet developed a policy that reflects how it will use this 

authority even though this 2-year period will end for most states sometime 

in 2013. Treasury officials stated that they do not plan to use this authority 

22These financial data are reported on a quarterly basis, and June 30, 2012, represents 

the most recent data available. 

Page 16 GAO-13-76 Small8usiness Lending Programs 
138 


Insert offset folio 113 here 80921.113

SBLF Participants Have 

Generally Increased Their 

Levels of Both Small 

Business and Total 

Business Lending 

at this time and that Treasury will provide all participants with sufficient 

lead time so that they can modify or adjust their programs, as necessary. 

According to Treasury, SBLF participants have increased their qualified 

small business lending by $6.7 billion over their $36.0 billion baseline, as 

of June 30, 2012. This number includes a $1.5 billion increase over the 

prior quarter. Further, Treasury reported that 89 percent of participants 

had increased their qualified small business lending over baseline levels 

and about 76 percent of participants had increased their qualified small 

business lending by 10 percent or more. As previously discussed, SBLF 

uses a dividend or interest rate incentive structure to encourage 

participating institutions to increase qualified small business lending. 

SBLF participants paid an average dividend or interest rate of 2.1 percent 

on their SBLF funds as of June 30, 2012. Over half of SBLF participants 

paid a dividend or interest rate of 1 percent on their SBLF fundsbecause their qualified small business lending growth was 10 percent or 

higher-and 15 percent of institutions paid 5 percent or more (see 

fig. 1).23 

23As mentioned earlier, dividends or interest rates for S~corporations.range from 15 

percent to 7.7 percent depending on their increases in qualified small business lending 

Treasury used these differing rates to ensure that S-corporations' after-tax rate was equal 

to that of other participating institutions (1.0 percent to 5.0 percent). Figure 1 displays the 

pre-tax dividend or interest rates, but groups the rates in a way that more closely mirrors 

the corresponding loan growth changes. 

Page 17 GAO-13-76 Small Business Lending Programs 
139 


Insert offset folio 114 here 80921.114

Figure 1: Distribution of Dividend or Interest Rates Paid by Institutions on SBlF 

Funds, as of June 30, 2012 

Number of SBlF institutions 

r----------- 1.00-1.50% rate 

,------- 1.51-4.99% rate 

(%) '" proportion of SBLF 

institutions paying that rate 

Source GA09flal\fS~ofTfeaslJl)lda!a 

5.00~7.70% rate 

SBLF participants also showed increases in small business loans under 

$1 million, as well as total business lending. While the Small Business 

Jobs Act set the threshold for qualified small business lending at $10 

million, depository institutions are required to submit Call Reports with 

detailed financial information including small business lending, which the 

reports define as loans under $1 million.24 Such data are useful for 

comparing certain small business lending of SBLF participants with that of 

institutions that did not participate in SBLF." Total business lendingwhich includes all business loans, including loans over $10 million and 

24Call Reports require reporting only on loans up to $500,000 for two of the loan 

categories-loans to finance agricultural production and loans secured by farmland. The 

$1 million threshold applies to the other two categories-commercial and industrial loans 

and nonfarm, nonresidential real estate loans. 

25Secause qualified small business lending-lending below the $10 mimon threshold-is 

defined by the Small Business Jobs Act, only SBlF participants are required to submit 

these data, leaving the data unavailable for institutions that did not participate in SBlF. 

Page 18 GAO-13-76 Small Business Lending Programs 
140 


Insert offset folio 115 here 80921.115

those to businesses with over $50 million in revenue-can also help 

illustrate differences in lending activity between these two groups.26 

Treasury uses total business lending in its reporting to compare SBLF 

participants to non-SBLF institutions and noted that qualified small 

business lending makes up a large part of total business lending for SBLF 

participants. For example, qualified small business lending totaled 95 

percent of total business lending for the median SBLF participant as of 

December 31,2011. 

SBLF participants increased both small business loans under $1 million 

as well as total business lending. In particular, the median SBLF 

participant had a 31 percent increase in total business lending for the 

quarter ending June 30, 2012, over the baseline level. 27 The median 

SBLF participant had a 14 percent increase for small business loans 

under $1 million over the same period. When categorizing SBLF 

participants by the changes in their lending, the SBLF participants fell into 

the higher growth categories for total business lending, but were more 

evenly distributed for small business loans under $1 million except for 

participants whose lending increased over 40 percent (see fig. 2). 

26Tota! business lending only includes lending to the same four loan categories as 

qualified sma!! business lending. 

27The act establishes the baseline for measuring the change in small business lending as 

the average of the amounts that were reported for each of the four calendar quarters 

ended June 30, 2010. Call Reports did not begin requiring quarterly reporting of small 

business lending under $1 mUllan until the second quarter of this four quarter baseline 

period. Accordingly, we calculated the baseline for small business lending under $1 mimon 

using the average of each of the three calendar quarters ended June 3D, 2010. The act 

also defines one of the categories of qualified small bUSiness lending as owner-occupied 

nonfarm, nonresidential rea! estate loans. For quarterly reports of small business lending, 

Cal! Reports use a broader category of all nonfarm, nonresidential rea! estate without a 

distinction for owner occupancy. As a result, the small business lending under $1 million 

includes the broader category. The total business lending numbers use the full baseline 

and the narrower categorization of owner-occupied nonfarm, nonresidential real estate 

and should therefore not be compared to the numbers for small business lending under $1 

mHllon 

Page 19 GAO·13·76 Small Business Lending Programs 
141 


Insert offset folio 116 here 80921.116

Figure 2: Distribution of SBLF Participants' Changes in Business Lending, from Baseline Level to the Quarter Ended June 30, 

2012 

Small business lending under $1 million 

Percent of institutions 

40 

35 

30 

25 

20 

15 

10 

Total business lending 

Percent of institutions 

40 

35 

30 

25 

10 

«10%) 110%)- 0%· 10%· 20%. >40% «10%) (10%)- 0%· 10%· 20%· >40% 

0% 10% 20% 40% 

Percentage Percentage 

Source: GAO ilnalYSls of SNI. FInanCIal data 

0% 10% 20% 40% 

About half of SBLF participants used their program funds to repay and 

exit T ARP's CPP. These CPP refinance participants had noticeably lower 

lending growth than SBLF participants that did not participate in CPP (see 

fig. 3). In particular, CPP refinance participants increased small business 

loans under $1 million by 5 percent compared with 33 percent for nonCPP participants. For total business lending, CPP refinance participants 

saw increases of 17 percent compared with 45 percent for non-CPP 

participants. Treasury officials said that one possible reason for this 

difference is that CPP refinance participants were only eligible for a 

limited amount of incremental SBLF funds, beyond the amount of CPP 

funds refinanced. As a result, unlike other SBLF participants, these 

institutions did not receive as much "new" capital to increase small 

business lending. Nevertheless, all SBLF participants are subject to the 

same incentive structure based on the dividend or interest rale. 

Furthermore, Treasury officials also noted that in many instances the 

CPP refinance participants may have already experienced an increase in 

lending from the CPP capital they originally received. 

Page 20 GAO·13·76 Small Business Lending Programs 
142 


Insert offset folio 117 here 80921.117

States Disbursed SSBCI 

Funds through Different 

Types of Programs and at 

Varying Rates 

Figure 3: Median Changes in SBLF Participants' Business Lending by CPP Status, 

from Baseline Level to the Quarter Ended June 30, 2012 

Small business lending under $1 million 

Percent change 

45 

40 

35 

So~rce GAO anatys,s of SNl F,mUlclaf data 

Total business lending 

Percent change 

45 

As of June 30,2012, Treasury had transferred $468 million in SSBCI 

funding to the states, representing about one-third of the $1.5 billion that 

was set aside for the program. States had used $150 million of these 

funds-about 10 percent of the program total-disbursing them to lending 

institutions through a variety of programs. Loan participation programs 

accounted for 47 percent 01 the funds used, as of June 30,2012, followed 

by venture capital programs (28 percent), collateral support programs (17 

percent), and loan guarantee programs (6 percent), as shown in figure 4. 

The remaining program categories-capital access programs, direct 

lending, and other-combined for the remaining 2 percent of funds used. 

Page 21 GAO-13-76 Small Business Lending Programs 
143 


Insert offset folio 118 here 80921.118

Figure 4: Cumulative SSBCI Funds Used by Program Type, as of June 30, 2012 

Participating states have received and used SSBCI funds at differing 

levels, partially because of when applications were approved and funds 

were allocated (see fi9, 5), Of the 53 states, territories, or municipalities 

that received SSBCI funding, 47 had used a proportion of their funds as 

of June 30,2012, Montana had the highest proportion used of the amount 

that Treasury had allocated, as of June 30, 2012, States we interviewed 

said that disbursing funds was much faster for state programs that were 

in existence before SSBCI because the infrastructure was already in 

place and lenders were already familiar with the programs, Moreover, 

some states implementing new programs told us that it could take time to 

use the funds because they had to conduct extensive outreach to lenders 

to make them aware of the programs and encourage them to commit to 

small business lending, 

Page 22 GAO·13·76 Small Business lending Programs 
144 


Insert offset folio 119 here 80921.119

Figure 5: SSBCI Allocation by State, Territory, or Municipality and Cumulative SSBCI Funds Transferred and Used, as of June 

30,2012 

Dollars in millions 

'80 

State 

Percentages 

'00 

so 

20 

o 

J~~~~cr~~~~~~~~~~~~$~#~8~~~~~ts~~~$~&~SS~~~~~~&~~~F~~~~F~ 

s,.'" 

:_-_-_-_-J Amount allocated 10 state 

~ Percentage of allocatIon transferred to state 

_ Percentage of allocation used by state 

Souroo. GAO analysIS ofTr~asury data 

Note: States are in order of the largest to smallest allocation amount California had been aHocated 

$168.6 million, but its transferred and used amounts were not available for the June 30, 2012, 

quarterly report due to an extension granted. Washington's amount used is greater than its 

transferred amount because it includes loan commitments that are contingent upon receipt of its next 

disbursement. Alaska did not participate in SSBC!, and "AK" reflects the city of Anchorage, which 

applied for funding at the municipal leveL "N" refers fa the Northern Mariana Islands. North Dakota did 

not apply for SSBCI funds, but two consortia of municipalities in North Dakota-the Mandan 

Consortium and the Carrington Consortium-appUed, approved, and received funding on August 31, 

2012, and September 28. 2012, respectively. Wyoming did not apply for SSBCI funds, bul one 

consortium of municipalities-the Laramie Consortium-applied for funds and was approved. 

Page 23 GAO~13-76 Small Business lending Programs 
145 


Insert offset folio 120 here 80921.120

Treasury IIa'> Not Yet 

Developed a Policy on 

How to Treat States That 

Do Not Meet SSBCI's 2-

Year Time Frame 

Under the act, the Secretary may revoke any portion of a participating 

state's allocated amount that has not been transferred to the state by the 

end of the 2-year period beginning on the date the state received 

approval, but Treasury has not developed a written policy on how it will 

use this authority. For most of the participating states, this 2-year period 

will end sometime during 2013, but it is still unknown if they all will be able 

to use their funds in time to obtain the third and final disbursement within 

this time frame. This time frame is quickly approaching for five states 

(California, Hawaii, Missouri, North Carolina, and Vermont) that signed 

their Allocation Agreements with Treasury before May 2011. For 39 states 

the 2-year time frame will end by September 30, 2013, in terms of their 

allocation agreement. As of November 16, 2012, according to Treasury, 

ten states (Idaho, Indiana, Kansas, Michigan, Missouri, Montana, North 

Carolina, South Carolina, South Dakota, and Washington) had requested 

and received their second disbursement; eight states (Arkansas, 

Delaware, Florida, LouiSiana, Massachusetts, New Hampshire, New 

Jersey, and West Virginia) had requested their second disbursement but 

had not yet received it; and one state, Montana, had requested and 

received a partial third disbursement. The remaining 38 SSBCI 

participants were still working to use their first disbursement, as of 

November 16, 2012. 

Some states told us that the 2-year time frame is short for disbursing 

SSBCI funds especially for states with new state small business 

programs. One state official told us that because their programs are 

relatively new and lending institutions are unfamiliar with them, the 2-year 

time frame is too tight for lenders to make informed decisions about 

participating in the program. Similarly, officials from two states told us that 

the 2-year time frame for disbursing the SSBCI funds is short because 

their state small business programs were newly created. 

According to Treasury officials, Treasury is aware of the 2-year time 

frame and the potential concerns of the states. After reviewing the law, 

Treasury officials told us that the Secretary has discretion on whether or 

not to revoke the undisbursed allocation if it has not been transferred to a 

participating state as of the 2-year anniversary. According to Treasury 

offiCials, they have not drafted a policy or procedures on what actions 

they may implement if the states miss the 2-year time frame for their final 

disbursement of funds. However, they told us that the states were 

encouraged to describe in their applications how they would disburse the 

funds within the 2-year time frame and that they advised the states of the 

importance of meeting the 2-year time frame. Moreover, they said that 

they do not consider the 2-year time frame to be a requirement that funds 

Page 24 GAO~13~7S Small Business Lending Programs 
146 


Insert offset folio 121 here 80921.121

not yet transferred must be deemed unavailable at that time. At an 

October 2012 conference attended by many SSBCI participants, 

according to Treasury staff, the Deputy Assistant Secretary for Small 

Business, Community Development, and Affordable Housing Policy told 

the participants that Treasury did not currently plan to exercise this 

authority in the near future. However, these statements are not currently 

documented in a written or formal policy statement explaining its position. 

Treasury staff told us when Treasury develops a policy on its 

discretionary authority, it will provide all participants with sufficient lead 

time so that they can modify or adjust their programs, as necessary. 

Treasury officials told us that the purpose of the Deputy Assistant 

Secretary's conference announcement was to address the concern and 

clarify that Treasury would not be taking action at this time if an SSBCI 

participant had not met the 2-year requirement and to affirm that Treasury 

retains its discretionary authority going forward. 

In prior work, we have recommended that when states are required to 

spend federal funds to meet a statutory deadline or specific program 

requirements, agencies should provide guidance to the states on what 

they should expect if they are unable to meet the deadline. 28 The act 

provides Treasury's discretionary authority to encourage the states to use 

the funds in a timely manner, but without a formal written policy, how 

Treasury would use this authority in a consistent manner is unclear. 

Having clear guidelines on how Treasury plans to use its discretionary 

authority to terminate funds could help ensure consistent application of 

the authority. In addition, such guidelines could help states understand 

the need to use the funds in a timely manner while meeting program 

requirements and could provide clarity to states about the associated 

consequences of not meeting the 2-year time frame. 

Recovery Act: Progress and Challenges in Spending Weatherization Funds, 

GAO-112-1195 (Washington, D.C.: Dec. 16, 2011) and Recovery Act: States' and Localities' 

Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster 

Accountability, GAO-10-604 (Washington, D.C.: May 26, 2010). 

Page 25 GAO~13~76 Small Business Lending Programs 
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Treasury Could 

Enhance Its Reporting 

of Program 

Performance 

Information 

Additional Information on 

Treasury's Methods for 

Analyzing SBLF Outcomes 

Would Enhance 

Transparency 

Treasury has established performance measures to manage its programs 

but could enhance its public reporting of program performance 

information. In its Use of Funds Report, Treasury compared business 

lending by SBLF participants to that of non-SBLF institutions, but the 

report does not disclose Treasury's rationale for choosing its comparison 

group over other possibly more representative alternatives. Treasury 

officials told us that they are continuing to consider different approaches 

for evaluating SBLF. In addition, Treasury has designed SSBCI timeliness 

and outcome performance measures but has not made this information 

publicly available. Treasury officials are conSidering different options for 

presenting this information and said they plan to eventually to make some 

of it public. However, Treasury has not made any decisions on the 

specific SSBCI performance information that it might publicly release. 

Treasury has also taken actions to enhance its communications with 

SBLF and SSBCI program participants, such as dedicating staff to assist 

with participants' inquiries. 

Our review found that SBLF participants had noticeably higher changes in 

lending rates when compared to similar non-SBLF institutions, but that 

Treasury's methods for analyzing SBLF participants' lending may 

somewhat overstate differences between SBLF participants' lending and 

that of other eligible banks. In our December 2011 report on SBLF, we 

recommended that Treasury finalize 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. 29 Treasury 

officials explained to us that they explored different comparison methods 

that more closely mirror SBLF participants, but this information is not 

disclosed in its Use of Funds Report to Congress. 

In its Use of Funds Report, Treasury compared total business lending by 

SBLF participants to that of a comparison group of non-SBLF institutions 

and found that SBLF participants had noticeably higher increases in total 

business lending. In its analysis, Treasury adjusted the comparison group 

for a number of factors, including an institution's asset size and 

geography, thereby excluding institutions that fell outside the asset size 

range of SBLF participants and that were headquartered in states that did 

29GAO-12-183. 

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148 


Insert offset folio 123 here 80921.123

not have an institution participating in SBLF.30 Such a comparison is a 

helpful step in understanding the possible effects of SBLF funding. 

However, Treasury did not adjust its comparison group to better ensure 

that its distribution among various asset sizes and states mirrored that of 

SBLF participants. Moreover, Treasury did not adjust its comparison 

group to account for differences in financial health despite requiring SBLF 

applicants to demonstrate a certain degree of financial health before 

approving them for funding. For example, the act specifically restricted 

Treasury from accepting applications from institutions that were on or 

recently removed from the FDIC problem bank list. Because the 

comparison group did not exclude such institutions that were unable to 

qualify for SBLF funding, these institutions may have downwardly skewed 

the group's small business lending growth rate, thus causing Treasury's 

results to overstate the implied effect of the program. As a result, 

Treasury's analysis seemingly links SBLF funding to the increase in small 

business lending when that increase, to some extent, may have been 

associated with the factors mentioned above or other factors such as 

improved local economic growth. 

To analyze the differences in lending between SBLF participants and 

non-SBLF institutions, we chose a peer group that we adjusted for 

geographical and size distribution as well as financial health.31 In nearly 

every case, the loan growth of our peer group was slightly closer than 

Treasury's comparison group to the loan growth of SBLF participants, 

implying that Treasury's choice not to adjust for these differences may 

have resulted in it slightly overstating the differences between these 

groups, and by implication, the program's effect on small business loan 

30Treasury's comparison group was comprised of the 6,463 non~SBLF insured depository 

institutions that were established prior to September 30, 2009, had total assets between 

$7.0 million and $6.4 billion (the range of total assets for SBLF participants) as of March 

31,2011 (the end of the first quarter prior to SBLF participants receiving funding), and are 

located in one of the jurisdictions (44 states and the District of Columbia) in which SBLF 

participants are headquartered, 

31We used the Texas Ratio as a proxy for financial health. it is defined as nonperforming 

assets plus loans 90 or more days past due divided by tangible equity and reserves. The 

Texas Ratio helps determine a bank's likelihood of failure by comparing its troubled loans 

to its capital. Because SBLF funding increases the equity portion of the ratio, we used 

Texas Ratios as of March 31, 2011, which was the last quarter preceding the initial 

disbursements of SBLF funding. 

Page 27 GAO~13·76 Small Business Lending Programs 
149 


Insert offset folio 124 here 80921.124

growth. 32 That is, growth rates of SBLF participants remained noticeably 

higher than those of our peer group. This growth could indicate a 

beneficial effect of SBLF funding on lending, or it could be due to other 

factors, including differences between SBLF participants and our peer 

group for which we were not able to adjust. When categorizing institutions 

by the level of change in their business lending, SBLF participants were 

more heavily concentrated in the higher growth categories compared with 

the peer and comparison groups (see fig. 6).33 Moreover, the median 

SBLF participant had a 31 percent increase in total business lending, 

compared with a 2 percent increase for the comparison group and a 6 

percent increase for the peer group. 

32We replicated Treasury's comparison group using the methodology it outlined in its Use 

of Funds Report This replication may not be identical to Treasury's actual comparison 

group, but we determined that it was sufficiently similar for the purposes of our analysis. In 

aU comparisons of total business lending growth between SBlF, peer, and comparison 

groups, we calculated the baseline using the average of the four quarters ending June 30, 

2010. The data limitation mentioned earlier that required us to use only three quarters in 

the calculation of the baseline only applied to the availability of data on small business 

loans under $1 million, and the three-quarter baseline was used only in those earlier 

sections. 

33As mentioned earlier, Treasury used total business lending to compare lending between 

SBLF participants and the comparison group because qualified small business lending 

data were not avai!able for non-SBlF institutions and because qualified small business 

lending totaled 95 percent of total business lending for the median SBlF participant as of 

December 31, 2011. 

Page 28 GAO-13-76 Small Business Lending Programs 
150 


Insert offset folio 125 here 80921.125

Figure 6: Distribution of Changes in Total Business Lending, from Baseline level to 

the Quarter Ending June 30, 2012 

Percent of institutions 

40 

35 

'0 

25 

20 

15 

10 

Source. GAO analysm of SNL Fmanclal d3rn. 

Further, SBLF participants had a higher median growth rate of total 

business lending than both our peer group and Treasury's comparison 

group in all six geographical regions (see fig. 7). Moreover, the peer 

group had higher rates of growth than the comparison group in five of the 

six regions. 

Page 29 GAO-13-76 Small Business Lending Programs 
151 


Insert offset folio 126 here 80921.126

Figure 7: Median Changes in Total Business Lending by Geographical Region, from 

Baseline Level to the Quarter Ending June 30, 2012 

Percen! change 

" 

40 

30 

20 

10 

·10 

Southeast We., Geographical region 

CJ SBLF participants 

.. GAO peer group 

Southwest Northeast Mid-At/antic Midwest 

_ Treasury comparison group 

SOuroo.GAO;:U13f\'S\SofSNli"manclaldata 

SBLF participants also had a higher median growth rate of total business 

lending across all five asset size categories (see fig. 8). Again, the peer 

group's growth rate was slightly closer to that of SBLF participants than 

the comparison group was for all five asset groups, yet it remained well 

below it. Moreover, SBLF participants in the larger asset categories had 

lower growth rates in total business lending. However, the peer and 

comparison groups had no noticeable trend across different asset size 

groups. In addition, the peer and comparison groups were closest to 

SBLF participants among institutions with assets over $1 billion. 

Page 30 GAOw13w76 Small Business Lending Programs 
152 


Insert offset folio 127 here 80921.127

Figure 8: Median Changes in Total Business Lending by Institution Size in Total 

Assets, from Baseline Level to the QUarter Ended June 30,2012 

Percent ch<lnge 

60 

50 

40 

30 

20 

10 

<$150M 

Dollars in millions 

$150M-$250M 

~ SBlF participants 

_ GAO peer group 

_ Treasury comparison group 

Source' GAO analysIS of SNL Fmanc,al data 

$250M-$500M $500M..$18 >$18 

Treasury officials said that in determining the comparison group to use in 

their analysis, they analyzed distributional differences in asset size and 

geography between the groups, as well as some indicators of financial 

health. They judged that the differences in the variables they analyzed 

were modest and believed that adjusting for these differences-that is, 

making the comparison group more representative of SBLF participantswould only provide a limited benefit while making the analysis less 

transparent and more difficult for others to replicate. They were also 

concerned that using what they considered to be a more judgmental 

approach, such as selecting a peer group, would require certain arbitrary 

decisions which might raise concerns about the validity of their selection 

criteria. As a result, Treasury determined that the differences found in 

their analyses did not warrant an approach that would adjust for these 

factors. 

In addition, although Treasury officials told us they considered but 

decided against using a comparison group that would have been adjusted 

Page 31 GAO-13-76 Small Business Lending Programs 
153 


Insert offset folio 128 here 80921.128

to more closely mirror SBLF participants; they did not explain this 

decision in the methodology section of the Use of Funds Report. In prior 

work on another Treasury program, we said that Treasury should 

enhance its communications relating to financial assistance so that they 

are transparent to the Congress and the public. 34 Without disclosing its 

rationale for choosing its comparison group over other possibly more 

representative alternatives, Treasury may not be providing policymakers 

with a full understanding of its approach and may not be transparent 

regarding the potential for its analysis to overstate the effects of SBLF. 

Treasury's comparison group analysis in its Use of Funds Report also 

does not isolate the impact of SBLF relative to other factors affecting 

small business lending to the extent that other approaches WOUld. While a 

comparison group is an important step and provides useful context, a 

more rigorous analysis of peer banks to help assess what might have 

happened without SBLF, as our 2011 report on SBLF recommends, may 

help Treasury better understand the effects of the program. Our prior 

work on program evaluation suggests that a carefully constructed control 

group should be as similar to program participants as possible to help 

identify the impact of a program, and a number of statistical methods can 

help account for differences. 35 Furthermore, Treasury's concerns about 

making arbitrary judgments in the selection of peers could be addressed 

by conducting a sensitivity analysis-a best practice also identified by the 

Office of Management and Budget-which involves varying assumptions 

to determine how sensitive results are to changes in those assumptions. 36 

Treasury officials said they are looking for a way to improve their analysis 

of SBLF and they have designed a lending survey to collect information 

from SBLF participants on their small business lending and outreach 

activities. They said that the survey will help them assess SBLF. The 

survey covers the following issues: the participant's standards for 

34See GAO, Troubled Asset Relief Program: As Treasury Continues to Exit Programs 

Opportunities to Enhance Communication on Cost Exist, GAO~12~229 (Washington, D.C,· 

Jan. 9, 2012). 

35See GAO, Program Evaluation: A Variety of Rigorous Methods Can Help Identify 

Effective lnteNentfons, GAO~10~30 (Washington, D.C.: Nov, 23, 2009) and Designing 

Evaluations' 2012 Revision, GAO-12-208G (Washington, D.C.: Jan. 2012) 

360ffice of Management and Budget, Circular A-4: Regulatory Analysis, September 17, 

2003. 

Page 32 GAO~13~76 Sma!! Business Lending Programs 
154 


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Treasury Has Developed 

Performance Indicators for 

SSBCI 

approving applications for small business loans or credit lines; the 

demand for small business loans; the participant's practices regarding 

approvals of loans and lines of credit for small business; use of SBLF 

funding or the type of actions the institution has taken because of SBLF 

funding; and outreach activities to minority, women, and veteran 

communities. Treasury also leveraged the Federal Reserve's Senior Loan 

Officer Opinion Survey on Bank Lending Practices as it developed 

questions for the survey and is exploring how it may analyze results from 

both surveys to assess SBLF. Responses were due from the SBLF 

participants by October 4,2012. Treasury plans to issue the results in a 

report at a later date. 

In our December 2011 SSBCI report, we recommended that Treasury 

develop and finalize SSBCI-specific performance measures for evaluating 

the effectiveness of the program and when developing these measures 

consider key attributes of successful performance measures. 37 In 

response to the recommendation, Treasury developed measures for both 

the timeliness of program administration and program performance. In 

establishing measures on timeliness, Treasury considered its own role in 

administering the program, which includes evaluating the eligibility of the 

participating states and approving state programs; overseeing compliance 

with the provisions of the act, the SSBCI policy guidelines, and the terms 

and conditions of the Allocation Agreement; and providing ongoing 

technical assistance for each state's and municipality's program 

implementation. According to Treasury, the timeliness measures will 

assess the quality of the direction provided by Treasury to the states, 

including the efficiency of Treasury's administration of program resources 

and program oversight. These goals for these measures are 

90 percent of requests for modifications to Allocation Agreements are 

approved or rejected within 90 days of receiving a final submission, 

90 percent of requests for subsequent disbursements under existing 

Allocation Agreements are approved or rejected within 90 days of 

receipt of a formal submission, and 

90 percent of quarterly reports received within 5 days of the deadline. 

37GAO-12-173. 

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155 


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According to Treasury staff, for the first two goals, the measurement 

period starts once Treasury has received all documentation required by 

the established procedures for each underlying activity from the state 

requesting a modification or disbursement. Treasury staff advised us that 

these measures are tracked continuously and that Treasury reports the 

12-month data to the Office of Management and Budget annually as part 

of SSBCl's annual budget submission, which should be publicly available. 

In addition, Treasury has developed measures for evaluating 

performance for SSBCI: 

amount of SSBCI funds used over time, as reported on SSBCI 

quarterly reports; 

volume and dollar amount of loans or investments supported by 

SSBCI funds, as reported on SSBCI annual report; 

amount, in dollars, of private-sector leverage in SSBCI annual reports; 

and 

estimated number of jobs created or retained in SSBCI annual 

reports, 

Although Treasury has established measures for SSBCI performance, 

Treasury is considering how it will use these program performance 

indicators for evaluating the overall progress of SSBCI, Treasury staff 

recognized that performance indicators can help policymakers 

understand the results of the policy, but they emphasized that they do not 

have a full year of SSBCI data to use in evaluating the program. Many 

states did not receive their first SSBCI allocation until late 2011 and thus, 

Treasury had limited data to evaluate SSBCI. For example, Treasury told 

us that only 23 states reported using SSBCI funds to support small 

business loans or investments as of December 31, 2011, Treasury 

officials told us that after they have received the 2012 annual report data 

in early 2013, which would constitute a full year of SSBCI funds for almost 

all participants, they will be able to decide how they will review and 

analyze the performance measures going forward. 

In addition, Treasury explained that SSBCI's performance cannot be 

evaluated using a single number or performance indicator because 

SSBCI consists of 140 different programs, and most states have multiple 

small business programs. For instance, Treasury has not created a 

specific number of estimated jobs as a target because so many factors 

can determine the use of funds-for example, the degree of interest by 

financial institutions and private investors, the performance of the state 

agency and any contractors that operate the approved program, and the 

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156 


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Information on SSBCI 

Performance Measures 

May Be Useful for 

Stakeholders 

effectiveness of the program features designed by the state. How this 

program activity affects the level of employment in a state introduces 

many variables that can be difficult to predict According to Treasury 

officials, specific numeric indicators, such as the number of loans 

resulting from state business programs, mayor may not be indicative of 

the performance of SSBCL In analyzing performance outcomes for 

SSBCI, Treasury staff advised us that outcomes are highly dependent on 

factors outside of the program's control, such as the demand for credit in 

a given locality and the quality of the small business borrowers' requests 

for such funds. Also, the states have different economies that may affect 

the results of the SSBCI funds. For example, Michigan's SSBCI funds are 

more concentrated in manufacturing, while other states may be more 

focused on providing assistance to small technological firms. 

In contrast to SBLF, the act does not require Treasury or the states and 

municipalities to report to Congress or the public on the status of SSBCL 

Rather, the act requires that SSBCI participants include certain data, such 

as the number and the dollar amounts of the loans resulting from SSBCI 

funds, in annual reports to Treasury. Treasury's performance measures 

will rely on the data from these annual reports. Treasury officials told us 

that they are considering making public some of the SSBCI performance 

data, but have not decided what specific SSBCI information will be 

released publicly or how it will be presented because they want to make 

sure the information reflects the outcomes in an appropriate context As 

noted earlier, SSBCI covers a large number of programs across the 

country and other factors, such as local demand for credit, could lead to 

different performance outcomes across the participating states. Officials 

told us they plan to decide after they receive and review the 2012 annual 

reports. The GPRA Modernization Act (GPRAMA) requires agency 

performance information to be publicly available. 38 In reporting on the 

governmentwide implementation of GPRAMA in 2011, we noted that 

agencies need to consider the differing needs of various stakeholders, 

including Congress, to ensure that performance information will be both 

useful and used. 39 We reported that federal officials must understand how 

L No. 111-352, 124 Stat 3866 (2011). 

39See, GAO, Managing for Results: GPRA Modernization Act Impfementation Provides 

Important Opportunities to Address Govemment Challenges, GA0-11-617T (Washington, 

D.C.: May 10, 2011). 

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Treasury Has Taken 

Actions to Enhance 

Communications with 

SBLF and SSBCI Program 

Participants 

SBLF 

the performance information they gather can be used to provide insight 

into the factors that impede or contribute to program successes; to 

assess the effect of the program; or to help explain the relationships 

between program inputs, activities, outputs, and outcomes. 

Information on SSBCl's performance measures regarding the amount of 

small business loans or investments and the amount of private leveraging 

resulting from SSBCI funds would provide Congress and SSBCI 

participants with useful information on the progress of SSBCI and its 

effectiveness in increasing small business lending. For example, two 

states told us that they would like more information on the performance 

measures of the other states' programs in order to better implement their 

own programs. Making the 2012 performance outcome data publicly 

available may assist the participating states in identifying successful small 

business state programs and the level of private leveraging that the states 

have achieved at this point in the SSBCI program. SSBCI applications 

were required to demonstrate a reasonable expectation that the programs 

would achieve a 10:1 ratio of new small business lending to SSBCI funds 

within specified timeframes. Information on the progress of SSBCI 

programs may help participating states to make necessary adjustments to 

their programs to more efficiently and effectively use their entire allocation 

of SSBCI funds. 

Treasury has taken steps to address our December 2011 

recommendation that it apply lessons learned from the SBLF application 

review process in order to improve how it communicates with program 

participants and other stakeholders, such as the bank regulators and 

Congress. 40 In response to the recommendation, Treasury officials told us 

that they have enhanced their communication strategy with SBLF 

participants and stakeholders and that they are better positioned to 

40GAO-12-183. 

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158 


Insert offset folio 133 here 80921.133

SSBCI 

respond to questions about SBLF. Shortly after the application review and 

approval period ended, Treasury assigned points of contact for each of 

the SBLF participants. Each point of contact was responsible for 

responding to inquiries from a designated group of participants and 

generally helping to ensure that the participants understood the 

compliance and reporting requirements. As the volume of inquiries has 

declined, Treasury shifted to a more centralized approach for handling 

inquiries. For example, all inquiries from SBLF participants are submitted 

to a centralized e-mail system, and they are then assigned to the staff 

responsible for (1) compliance, (2) investment management, and (3) 

operations. Compliance staff address questions about the Securities 

Purchase Agreements and the quarterly reports, and the reporting of 

qualified small business lending and the investment rates paid by SBLF 

participants. Investment management responds to inquiries relating to 

acquisitions and mergers and operations handle questions about 

redemption of SBLF shares and dividend payments. In addition, Treasury 

has assigned a staff member to handle external communications with 

Congress, the media, and the general public, including the reporting of 

qualified small business and the investment rates paid by SBLF 

participants, According to Treasury officials, they also communicate with 

industry and trade associations, Other communication methods 

established by Treasury included a webinar for instructing SBLF 

participants on completing the quarterly reports, Treasury staff told us that 

the purpose of the webinars was to reduce the number of errors in the 

quarterly reports, 

In addition, on September 28,2012, Treasury finalized written procedures 

to provide guidelines for answering inquiries to provide for consistency, 

continuity, and validity in communications with SBlF participants and 

their representatives, The guidelines describe the process by which a 

contact manager or staff member will communicate with SBLF 

participants. The process steps include the tracking and handling of 

incoming inquiries, outgoing mass communications, periodic reviews by 

business lines for potential Frequently Asked Questions, and the control 

manager's reviews of control effectiveness, The procedures outline the 

communication roles and responsibilities of SBLF employees, the contact 

manager, and management. 

SSBCI has also developed communication mechanisms to assist states 

in developing and implementing their state small business programs, 

Treasury has assigned three relationship managers whose role is to work 

with an assigned group of states in successfully allocating the funds to 

lenders and subsequently to borrowers, Moreover, Treasury has assigned 

Page 37 GAOw13~7S Small Business Lending Programs 
159 


Insert offset folio 134 here 80921.134

Conclusions 

a consultant for three states that requested additional technical expertise 

in implementing their small business programs. Additionally, according to 

Treasury officials, Treasury has engaged a consultant to assist in 

educating lenders nationwide about the approved state programs and two 

consultants to assist with expertise in state-run venture capital to support 

SSBCI staff in providing technical assistance to state program managers 

In addition to the relationship managers and consultants, Treasury has 

held two conferences for communicating with SSBCI participants. Under 

the act, Treasury is generally required to disseminate best practices to 

the states, and Treasury staff view the conferences as one method of 

doing so. The SSBCI National Standards for Compliance and Oversight 

are another example of disseminating best practices. According to 

Treasury staff, conferences provide state officials with the opportunity to 

discuss their programs with peers that are running similar programs and 

can potentially make modifications to their applications. During the March 

2012 conference, states received information on the different types of 

small business programs, lenders, and Treasury assistance. The 

conference agenda showed that several panels were held. Generally, the 

panels consisted of state officials, who discussed their small business 

programs, such as the loan Participation Program and the Venture 

Capital Program. In addition, four banks participated in the panels. 

Training sessions were held during the conference on the National 

Compliance Standards, on requests for modifications to the Allocation 

Agreements, and on subsequent disbursement requests of SSBCI funds. 

Officials from two states we interviewed told us that they found the March 

2012 conference helpful. For example, one official stated that she found 

the conference assisted her in answering questions on compliance and 

on SSBCI small business programs. Treasury held a similar conference in 

early October 2012. 

SBlF and SSBCI officials have made progress in developing procedures 

to monitor participants' compliance. In response to our previous 

recommendation on SBlF monitoring, Treasury has developed 

procedures for monitoring SBlF participant compliance with legal and 

reporting requirements. Treasury also issued the standards for 

compliance to provide states with best practices for reviewing 

participants' compliance with SSBCl's legal and policy requirements and 

developed procedures for sampling transaction-level data to evaluate the 

accuracy of the states' annual reports. 

Page 38 GAO-13-16 Small Business Lending Programs 
160 


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Most SSBCI participants have only received the first of three 

disbursements of their full allocation approved by Treasury, and some 

participants were concerned that they may have difficulty using the funds 

in time to meet the requirements to get their third and final allocation 

within 2 years. SSBCI participants lack a clear understanding of what 

actions Treasury plans to take if they do not meet the 2-year time frame. 

Although a Treasury official has publicly indicated that Treasury does not 

currently plan to exercise the authority to terminate funds that have not 

been allocated within 2 years from the states' approval date, it retains the 

authority to do so in the future. Treasury has yet to develop a formal 

written policy or guidance explaining its position. Clear and specific 

guidelines on how Treasury plans to use this authority to terminate funds 

will help ensure Treasury is consistent in how it applies this authority and 

may further encourage participants to develop programs and approaches 

to use the funds in a timely manner. Moreover, such a policy could also 

facilitate the ongoing communication between Treasury and the 

participants on how best to allocate and use the funds. 

Treasury has taken some steps to evaluate the performance of SBLF and 

the extent to which SBLF participants are increasing their small business 

lending, but further refinements could provide a better assessment of the 

effectiveness of SBLF. As we found in our December 2011 SBLF report, 

Treasury has yet to finalize plans for assessing the performance of the 

program, including measures that can isolate the impact of SBLF from 

other factors that affect small business lending. As we found in Treasury's 

analysis as well as our own, SBLF participants appear to be increasing 

their small business lending since entering the program. However, as we 

recommended in our 2011 report, many factors can contribute to such 

increases, and Treasury should assess these trends taking other factors 

into account While Treasury compared SBLF participants to non-SBLF 

institutions and reported this analysis in its Use of Funds Report, it did not 

provide important information on why it selected the comparison group 

that it used rather than using a peer group more closely matched to the 

SBLF participants. Our own analysis using a peer group showed that 

SBLF participants had increased their lending compared to peers, but 

also showed that the difference in small business lending growth was 

somewhat smaller than what Treasury's analysis suggests. The lack of 

explanation for Treasury's approach in the Use of Funds Report could 

create confusion about the rigorousness of the comparison. Furthermore, 

a more transparent description of the methodological decisions would 

help to enhance the transparency of the information reported. In addition, 

as we recommended in the 2011 report, Treasury should include in its 

plans for assessing the program a more robust evaluation that controls for 

Page 39 GAO~13~76 Small Business Lending Programs 
161 


Insert offset folio 136 here 80921.136

Recommendations for 

Executive Action 

factors that affect small business lending, such as improved local 

economic growth. Without such an evaluation, policymakers, including 

Congress, may not have the information they need to assess whether the 

SBLF approach of using capital injections is a desirable policy option for 

increasing small business lending. Furthermore, a more transparent 

description of the methodological decisions would help to enhance the 

transparency of the information reported. 

In addition, as we recommended last year, Treasury has created 

performance indicators to help monitor and measure the effectiveness of 

SSBCI. However, Treasury has not yet determined how and when it will 

make this information public. Treasury officials acknowledged the 

importance of this information for policymakers and have said they hope 

to develop a method for sharing this information publicly after they have 

had time to review the second annual reports that will be completed by 

the states next year. While we recognize that it is still early in the program 

and results vary greatly across the program participants for a variety of 

reasons, performance information is an important tool for policymakers, 

particularly as Congress reviews and considers programs to assist small 

businesses going forward. In addition, making this information public in a 

timely manner may help program participants, who could observe how 

their peers are performing and use this information to help them improve 

their own programs. 

We recommend that the Secretary of the Treasury take the following 

three actions: 

To help ensure that Treasury is transparent and accountable in its 

decision making, Treasury should develop a written policy explaining 

how it will use the Secretary's discretionary authority to terminate the 

availability of allocated funds to SSBCI participating states if funds 

have not been transferred to the participant by the end of the 2-year 

period beginning on the date that the Secretary approved the state for 

participation. 

To enhance the transparency of its reporting on SBLF, Treasury 

should expand its methodology discussion in its Use of Funds Report 

to include the rationale for its methodology and alternative 

methodologies it considered. 

To provide Congress and the participating states with information on 

the progress of SSBCI, Treasury should make information publicly 

Page 40 GAO~13·76 Small Business Lending Programs 
162 


Insert offset folio 137 here 80921.137

Agency Comments 

and Our Evaluation 

available on its performance indicators measuring SSBCI's 

performance. 

We provided a draft of this report to Treasury for review and comment 

The Deputy Assistant Secretary for Small Business, Community 

Development, and Affordable Housing Policy provided written comments, 

which are reprinted in appendix II. Treasury also provided technical 

comments on the draft report, which we incorporated as appropriate. In 

the written comments, Treasury agreed with the three recommendations 

and stated that it has begun to take steps to implement each of them. 

Specifically, Treasury said it has begun to develop a written policy for 

exercising its discretion to terminate any portion of a state's allocation not 

yet transferred to the state after two years. Treasury said it also will 

include the rationale for Treasury's methodology along with alternative 

methodologies that were considered in the methodology section of the 

next Use of Funds Report and that work is underway on publishing 

performance indicators that measure SSBCI outcomes. Treasury noted 

that the report reflected the progress SBLF and SSBCI had made in 

setting up compliance procedures and taking steps to improve 

communication with program participants. Treasury also stated that both 

programs are working as intended and that it expects both programs to 

continue to promote lending to small businesses. 

We are sending copies of this report to the appropriate congressional 

committees and Treasury. 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 Daniel Garcia-Diaz at 

(202) 512-8678 or garciadiazd@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 III. 

Daniel Garcia-Diaz 

Acting Director 

Financial Markets and Community Investment 

Page 41 GAO~13~76 Small Business Lending Programs 
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Insert offset folio 138 here 80921.138

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 42 GAO·13~76 Small Business Lending Programs 
164 


Insert offset folio 139 here 80921.139

The Honorable Frank Lucas 

Chairman 

The Honorable Collin Peterson 

Ranking Member 

Committee on Agriculture 

House of Representatives 

The Honorable Harold Rogers 

Chairman 

The Honorable Norman D, 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 Representatives 

Page 43 GAO~13~76 Small Business Lending Programs 
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Insert offset folio 140 here 80921.140

Appendix I: Objectives, Scope, and 

Methodology 

Our objectives were to examine: (1) the status of the U.S. Department of 

the Treasury's (Treasury) efforts to monitor participants' compliance with 

program requirements under the Small Business Lending Fund (SBLF) 

and the State Small Business Credit Initiative (SSBCI); (2) the status of 

SBLF and SSBCI participants' small business lending; and (3) the extent 

to which Treasury evaluates and communicates SBLF and SSBCI 

program outcomes. 

To examine the status of Treasury's efforts to monitor participants' 

compliance with program requirements under SBLF and SSBCI, we 

analyzed Treasury's documentation. For SBLF, we reviewed and 

analyzed SBLF's Participant Compliance Monitoring Procedures, which 

were issued on September 28,2012. We interviewed Treasury officials on 

their compliance program and the process by which staff review the 

Quarterly Supplemental Reports for their accuracy. 

For SSBCI, we reviewed SSBCI National Standards for Compliance and 

Oversight and SSBCI Policy Guidelines. We reviewed the Allocation 

Agreements between Treasury and nine participating states that we 

interviewed to analyze the conditions and the requirements placed on the 

states. We interviewed Treasury officials on implementing the SSBCI 

compliance standards and officials from the states of Colorado, Florida, 

Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, and 

Texas. We judgmentally selected these nine states based on the 

following criteria: (1) the top 25 states awarded the most SSBCI funds; (2) 

geographical diversity; (3) states with at least two small business 

programs; (4) states that began using funds as of March 31,2012, and 

states that had not yet used funds for any loans or investments as of 

March 31, 2012; and (5) aVOiding states which have been reviewed 

previously by GAO or the Treasury's Office of the Inspector General. 

Because a large number of states had not spent their first allocation as of 

December 31,2011, we used both the 2011 Annual Report and the 

Quarterly Report for March 31,2012, to identify states' progress in 

allocating their funds. In terms of geographical diversity, we selected at 

Page 44 GAO-13-76 Small Business Lending Programs 
166 


Insert offset folio 141 here 80921.141

Appendix I: Objectives, Scope, and 

Methodology 

least two states from each of four regions: Midwest, Northeast, South, 

and West.' 

To determine the status of SBLF, we reviewed the SBLF Use of Funds 

Reports to determine the most current level of qualified small business 

lending and the distribution of dividend or interest rates paid by program 

participants. Because Treasury requires only SBLF participants to submit 

data on qualified small business lending-generally, lending below $10 

million- we also analyzed total business lending as well as small 

business loans under $1 million, which is available through the Call 

Reports. 2 We accessed the Call Report data using SNL Financial-a 

private financial database that contains publicly filed regulatory and 

financial reports-and analyzed lending by SBLF participants for the 

quarter ending June 30, 2012. The Small Business Jobs Act of 2010 (the 

act) establishes the baseline for measuring the change in small business 

lending as the average of the amounts that were reported for each of the 

four calendar quarters ended June 30, 2010. Call Reports did not begin 

requiring quarterly reporting of small business loans under $1 million until 

the second quarter of this four quarter baseline period. Accordingly, we 

calculated the baseline for small business loans under $1 million using 

the average of each of the three calendar quarters ended June 30,2010. 

The act also defines one of the categories of qualified small business 

lending as owner-occupied nonfarm, nonresidential real estate loans. For 

quarterly reports of small business lending, Call Reports use a broader 

category of all nonfarm, nonresidential real estate without a distinction for 

owner occupancy. As a result, the small business loans under $1 million 

include the broader category. The total business lending numbers use the 

full baseline and the narrower categorization of owner-occupied nonfarm, 

nonresidential real estate and should therefore not be compared to the 

1The Midwest region includes: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, 

Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. The Northeast 

region includes: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New 

York, and Pennsylvania. The South region includes: Alabama, Arkansas, Delaware, 

District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North 

Caronna, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. The 

West region includes: Arizona, California, Colorado, Idaho, Montana, Nevada, Utah, 

Oregon, Washington, and Wyoming 

2Ca!! Reports require reporting only on loans up to $500,000 for two of the loan 

categories-loans to finance agricultural production and loans secured by farmland. The 

$1 million threshold stil! applies to the other two categories-commercial and industrial 

loans and nonfarm, nonresidential real estate loans. 

Page 45 GAO·13·76 Small Business Lending Programs 
167 


Insert offset folio 142 here 80921.142

Appendix I: Objectives, Scope, and 

Methodology 

numbers for small business loans under $1 million. We assessed the 

reliability of these data, for example, by analyzing missing data and 

performing various logic tests and determined that the data were 

sufficiently reliable for the purpose of reporting on SBLF lending. 

To review SSBCI participants' small business lending, we collected and 

reviewed data from the Quarterly Report as of June 30, 2012-the most 

recent quarter available. We conducted data reliability checks on the 

SSBCI quarterly data for the dollar amounts transferred to the states and 

the dollar amounts used by each participating state to identify any 

potential discrepancies in the data. We interviewed Treasury officials on 

how they assessed these data. In addition, we verified with three states 

the data that they had sent to Treasury on the SSBCI Quarterly Report as 

of June 30,2012. We also interviewed state and Treasury officials about 

the status of the use of SSBCI funds and Treasury's authority to suspend 

disbursements to SSBCI participants. Based on these steps, we 

determined that the data collected by Treasury for SSBCI were 

sufficiently reliable for the purpose of reporting total amounts of funds 

allocated and used by the states. 

To examine the extent to which Treasury evaluates and communicates 

SBLF and SSBCI program outcomes, we reviewed Treasury 

documentation for both programs. For determining the extent to which 

Treasury evaluates the performance of SBLF, we reviewed the Use of 

Funds Report to evaluate the methodology Treasury used to assess the 

performance of SBLF participants against a comparison group of 

institutions that did not participate in SBLF. We interviewed Treasury 

officials to understand the process for developing the comparison group 

as well as the alternatives they considered. We used the methodology in 

the report to replicate Treasury's group for our analysis. To help 

understand the usefulness of the comparison group, we also chose a 

peer group of non-SBLF institutions that we adjusted for geographical and 

size distribution as well as financial health, using the Texas Ratio as a 

proxy. 3 To select the peer group, we started with our replication of 

Treasury's comparison group of 6, 175 institutions and categorized them 

3The Texas Ratio is defined as nonperforming assets plus loans 90 or more days past due 

divided by tangible equity and reserves. !t helps determine a bank's likelihood of failure by 

comparing its troubled loans to its capital. Because SBlF funding increases the equity 

portion of the ratio, we used Texas Ratios as of March 31, 2011, which was the last 

quarter preceding the initial disbursements of SBlF funding. 

Page 46 GAO·13·76 Small Business lending Programs 
168 


Insert offset folio 143 here 80921.143

into six asset-size groups. We then sorted the institutions by state, asset 

group, and Texas Ratio and generally assigned two peer institutions to 

each SBLF participant with the closest Texas Ratios, within the same 

state and asset group. In some cases, we had to make judgments in 

choosing the peers-for example, when two SBLF participants were 

similar to one another and when too few potential peers existed. We 

determined that any potential judgment factors were mitigated by the fact 

that the peer group mirrored the SBLF more closely than the comparison 

group across geographical and size distribution as well as financial health 

(see table 1). Consistent with the Use of Funds Report, we analyzed the 

growth in total business lending because qualified small business lending 

data were not available for non-SBLF institutions and because qualified 

small business lending totaled 95 percent of total business lending for the 

median SBLF participant as of December 31, 2011. Here we calculated 

the baseline using the average of the four quarters ending June 30, 2010. 

The data limitation mentioned earlier that required us to use only three 

quarters in the calculation of the baseline only applied to the availability of 

small business lending data, and the three-quarter baseline was used 

only in those earlier sections. We compared our peer group with 

Treasury's comparison group and compared both to SBLF participants. 

We also compared Treasury's analysis against our previous work on 

program evaluation as well as best practices identified by the Office of 

Management and Budget. In assessing the SBLF communication 

process, we reviewed and analyzed SBLF's Contact Management 

Procedures and interviewed Treasury officials on how they communicated 

with SBLF participants. 

Page 47 GAO-13~76 Small Business Lending Programs 
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Insert offset folio 144 here 80921.144

Appendix I: Objectives, Scope, and 

Methodology 

Table 1: Summary Data on SBLF Participants, GAO's Peer Group. and Treasury's Comparison Group 

SBLF GAO Treasury 

participants peer group comparison group 

-:N,--u"mc:b"er,-o:-,f"";nc:-s=ta"' utC":;o"n.,-s----------------'---'-2"'6"'70----''--' 503 6,175 

Southwest 

Northeast 

Mid-Atlantic 

Midwest 

15% 15% 16% 

6% 6% 3'% 

15% 15% 7% 

29% 31% 48% 

Source GAO analySIs of Treasury and SNL data 

For determining the extent to which Treasury evaluates SSBCI 

performance outcomes, we collected and reviewed the performance 

measures that Treasury developed for evaluating SSBCI. We interviewed 

Treasury officials on how they were planning to use the performance 

outcome measures in evaluating SSBCL We also interviewed officials 

from the same nine states we described earlier-Colorado, Florida, 

Georgia, Illinois, Massachusetts, Michigan, New Jersey, Oregon, and 

Texas-to collect information on their evaluation and the performance 

information they reviewed relating to SSBCL To analyze the 

communication of SSBCI performance outcomes, we reviewed the 

relevant provisions 01 the Small Business Jobs Act of2010 and 

Treasury's outreach information that they had drafted for the states, such 

as conference materials. 

We conducted this performance audit from March 2012 to December 

2012 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. 

Page 48 GAO~13~76 Small Business Lending Programs 
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Insert offset folio 145 here 80921.145

Appendix II: Comments from the Department 

of the Treasury 

,l~l GStrc:::t !\\\-' 

\Vl!shi!1f.>1C>IL DC 20548 

DEPARTMEHT OF THE TREASURY WAj;-I'N;'.;TO', bC 2C:;::70 

Thank you for the opporll.D1ity to review the draft report entitled SmeJ[ Btlsiness Ltmuing: 

Oppm111Hities Exist /0 ImproW' Peljorm(JJIcf' RppOI1ing o/T1"l'.a.:rury IS Programs (the Report) 

11us letter prowles the C'fIi(..'1al f;::';p0n&:! of tile Deparlttttml oCtile Trea:'.my (frew,u,f'Y) 

The Repon examines n\'o Tf¢'L:mry programs established by 1he SmaU BusineS$ Jobs Act {)f 

~OJO; the Small Buslne::;s Lending Fund (SBLF) and the State Small Bu.,<>lncss ('rerullnitiativc 

(SSBCI) We fife pleast,'\i lhat t.he Report ackrK'wlcdges that SBLF and SSBCI tmw made 

important pmgress in developing c-Olnpliance processes. including SBLF's procedure.'> fN 

quarterly rcp('rt mmitoring and SSBCl's bcsl practice grndance for comphance and {1\'t'l":>lght of 

funds. In addlbon we appreClate the Rep...")rt' ~ 111ldinfl tlUlt both programs have taken :i!eJh to 

enhance eonmlunicati011 with program participants 

There is- stwng eddt'nce that botl! SBLF and SSBCl are working liS intl."1tded As the Report 

notes, SBLF participants have adueved noticeably higher smail business lending grO\~1h rates 

when compared f(\ similar nNj·SBl,F institutiM:>, In addition,. as of Jllne 30, ~(l12. SELF 

participants had increased their qualified sma.!! business lending by $6.7 billion ov<:r l¥lsdiru: 

Jevds and 76 percent nfparticijXInts had increased small busineilS lending by 10 percent or more SSBC! is :\teadily £:taimng: traction, wim over 90 percent of participating stales CDl11mittmg or 

dlsbursing fiUlds hy Septentocr 30, 2011. Trcasw'Y is confident that a~ ooU, programs mo'w 

forward they "'ill eontlrnl~ to promote lending tt\ small businesses so tllllt the$(' bu!>illCS$!.'S can 

expmd and cre<!te new j0bs_ 

Trcaswy agrees 't\1th each of GAO's three recotml1end'ltions. with respect to SBLF, the 

methodology secti()fl ofTreilsury's next Use qf FlUId, Rt'ptJrl v>'ill include the wtionale for 

Tremmry's lTh!1hodok-gy Jkmg with rul,,:matlve tnetlK~ologj(.".i that were considered. Rt::g:arding 

SSBCI, Treasury has already beglUl ttl develop a written policy for exercising its discrctl(:m to 

tenninate nny portion of a state-s allocation not yet transferred to the state after two years. Work 

is also underway on pUblishing performance mdlclltors thai measure SSBCl ouv.'Otnes 

Page 49 GAO-13·7S Small Business Lending Programs 
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Insert offset folio 146 here 80921.146

Appendix II: Comments from the Department 

of the Treasury 

Sincerely. 

Policy 

Page 50 GAO-13-76 Small Business Lending Programs 
172 


Insert offset folio 147 here 80921.147

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Staff 

Acknowledgments 

(250665) 

Daniel Garcia-Diaz, (202)-512-8678, garciadiazd@gao.gov 

In addition to the individual named above, Kay Kuhlman (Assistant 

Director), Pamela Davidson, Nancy Eibeck, Chris Forys, Michael 

Hoffman, Jonathan Kucskar, Marc Molino, Jennifer Schwartz, and Jena 

Sinkfield made key contributions to this report. 

Page 51 GAO~13·76 Small Business Lending Programs 
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Insert offset folio 149 here 80921.149

JDHNL.M'CA,FtoftlllA 

\'IICHAELR.'tUANEfl,OHIO 

JOHN J. DUNCAN, JR < UNNESSee 

PATRICK T. M"HnJR~, NOIln·1 CAI'lO\.INA 

JIM JORDAN,OHIO 

JASQNClfAfftTZ, UTAH 

:~~~:t!~~o~ri~~~t;:IQMA JUSTINAMASH,MICHIGAN 

PAtJL A.GOSAR. ARIZONA 

PATRICK MEeHAN. P~N"'SY~VAN1A 

SCOn!l!;sJAAcAIS,TfNNESSEE 

TRSY {lOWOY, SOlfTH CAROll~A 

D~AKE FARH:T!-lOLD, TEXAS 

noc HASTINGS, WASI-t\NGTON 

CYNT>lIA 1.11, LJMM S. WYOMING 

ROS WDOOAlL. GEOAGIA 

THOMASMAS~IE.l<ENTUCl<Y 

noue ~OLUNS, GEORGIA 

!dAtil< MeAOOWS, NOIHli CARQU'fA 

KEIlIWLSENTIVOLIO,MfCHIGAN 

RON O,,,~ANTIS. H_oomA 

lAWfiENCEJ.BRADY 

STAHOIRECTO!\ 

ONE HUNDRED THIRTEENTH CONGRESS 

~ongrel3'l3' of tue 'mniteb ~tatel3' 

)QoUlie of ~eprelientatibeli 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

2157 RAYBURN HOUSE OFFICE BUILDING 

WASHINGTON, DC 20515-6143 

Opening Statement 

Rep. Elijah E. Cummings, Ranking Member 

Hearing on "Brol{en Promises: 

The Small Bnsiness Lending Fund's Backdoor Bank Bailout" 

April 24, 2013 

ElIJAl" E. CUMMINGS, MAFtYlAND 

RA."t::!NG MINORIl'" MEMBER 

Thank you, Mr. Chairman. And thank you, Ms. Romero, for testifying here before us 

today. We appreciate your service, and we thank you and everyone in your office for the work 

that you do. 

Small businesses are the lifeblood of our country's economy. When small businesses 

thrive, America thrives. When small businesses have acceRS to credit, they hire more workers, 

and they replenish their inventories. 

This was the rationale behind the passage of the Small Business Jobs Act of2010. In 

order to help small banks increase their lending to small businesses, Congress created the Small 

Business Lending Fund as an investment in America's future. 

Since the inception of this program in2011, it has been a marked success. Lending to 

small businesses has increased by $8.9 billion, which translates to more than 38,000 new loans to 

small businesses. More tban 80% of these loans are for less than $250,000, and they are making 

a critical difference to a host of very small, but very important businesses. 

My home state of Maryland has benefitted greatly from this program. Participating banks 

have increased their loans to small businesses by more than $280 million. 1 am proud to think of 

the number of family-owned restaurants, florists, and daycarc centers that are thriving with these 

loans. 

The Chairman's home state of Califomia is also benefiting from this program. 

California's small community banks participating in the program have increased their lending to 

small businesses by more than $590 million. 

The fact is that the entire country is benefiting from this program, particularly in the 

Southeast, where more than 11,000 small businesses have received loans, and in the Chairman's 

region in ~le Southwest, where 9,500 small businesses have received ncw loans. 
175 


Insert offset folio 150 here 80921.150

Today, we will hear about a report issued by the Special Inspector General for TARP that 

is critical of this program because it allows financial institutions to essentially refinance some of 

their T ARP funds with funds from this small business loan program. 

We have to keep in mind, however, that this is exactly what Congress authorized in 2010 

when we created this program. We wanted to incentivize banks to make loans to small 

businesses across the country in order to spur growth and help lift our economy out of the 

recession. 

And the bottom-line is that the progran1 is working. All of the banks are making their 

interest payments to the Treasury Department, and not one has missed a payment. In fact, 

Treasury now estimates that these investments will be repaid fully-along with a $50 million 

profit to the American taxpayers. 

Although I appreciate SIGTARP's work, today's hearing would have been more helpful 

to Committee Members if we could have heard from additional witnesses. For example, 

Treasury officials should be here to offer their response, but they were given only eight days 

notice, and they could not complete their testimony in that short timeframe. For this reason, Mr. 

Chairman, I ask that a letter sent on March 28,2013, from Deputy Assistant Treasury Secretary 

Don Graves, responding to SIGTARP's report, be entered into the record. 

I also think Committee Members would have benefited from hearing from the Special 

Deputy Inspector General at Treasury who has direct oversight jurisdiction over this program 

and has issued reports that appear to conflict with some ofSIGTARP's findings. My staff 

contacted the Deputy IG, but she also was unavailable to attend this hearing on such short notice. 

For this reason, Mr. Chairman, I ask that the IG's fepmt on this program, which was issued in 

July 2012, also be entered into the record. 

Finally, GAO also has a statutory mandate to review this program and issue reports, and 

those reports have commended the implementation of this program. Unfortunately, we do not 

have anyone here from GAO either. I ask unanimous consent that GAO's reports on this 

progran1, which were issued in 2011 and 2012, also be entered into the record. 

So, I look forward to the testimony of Ms. Romero, but what we will hear today is a 

partial and incomplete assessment of this program. r hope the Chairman will entertain requests 

for additional witnesses should the topic arise in the future. 

Contact: Jennifer Hoffman, Press Secretary, (202) 226-5181. 

2 
176 


Insert offset folio 151 here 80921.151

Statement for the Record 

House Committee on Oversight & Government Reform 

Full Committee Hearing 

"Broken Promises: the Small Business Lending Fund's Backdoor Bank Bailout" 

April 24, 2013 

Congressman Michael R. Turner (OH-tO) 

Mr. Chainnan. today's hearing continues our Committee's important work to investigate waste, fraud, 

and abuse in the federal government. The topic of discussion today, the Small Business Lending Fund 

(SBLF). was created by the Democrat-controlled House as part of the so-called "Small Business Jobs 

Act of 2010" with the stated goal of increasing "the availability of credit to small businesses." 

However. the resulting program was simply a slush fund for bailed-out banks to use in avoiding 

repayment of their debts to the taxpayer. 

As some of our colleagues stated during debate on the bill that created this $30 billion account. the 

SBLF was no more than another unwise. taxpayer-funded bailout - "this is TARP, plain and simple" as 

now-Chainnan of the Financial Services Committee, Mr. Hensarling, described it at the time. 

Moreover, we saw strong opposition by Democrats and the Administration as to placing responsibility 

for oversight of the SBLF with the Special Inspector General for the Troubled Asset Relief Program 

(SIGTARP). However, we are here today because, at least in part, of the failures of the Treasury 

Department to properly administer the SBLF and using it to let TARP recipients off the hook. 

As noted in the SIGTARP audit entitled Banks that Used the Small Business Lending Fund to Exit 

TARP, two-thirds of the $4 billion disbursed by Treasury from the SBLF went to T ARP banks. Rather 

than using those funds to create jobs or institute a meaningful expansion of small business lending, 

Treasury allowed these TARP banks to use eighty percent of their SBLF funds to pay-off- or more 

accurately, refinance - the debts they owed to taxpaycrs under T ARP. The lower interest rates for the 

SBLF when compared to the interest rates ofTARP, as well as the absence of restrictions on lUxury 

expenditures, executive compensation, and governance in the SBLF allowed bailed-out banks to skirt 

oversight safcguards in T ARP and short change the taxpayer on their debt. 

Mr. Chainnan, thank you for holding this important hearing today to examine this clear mismanagement 

of taxpayer dollars and to hear from SIGTARP experts on the failures of the Treasury Department in 

administering this multi-billion dollar bailout. I would also like to thank Christy Romero, the Special 

Inspector General for T ARP and our witness here today, for her continued work on behalf of the 

American people to bring accountability and transparency to these programs. 
177 


Insert offset folio 152 here 80921.152

Broken Promises: The Small Business Lending Fund's Backdoor Bank Bailout 

Committee on Oversight and Government Reform 

Congressman Cardenas 

Wednesday, April 24, 2013 

Thank you Chairman Issa and Ranking Member Cummings for calling this important hearing 

today to discuss the benefits and shortfalls of the Department of Treasury's Small Business 

Lending Fund (SBLF) and the steps we can take to ensure that small businesses have access to 

the capital they need to stay competitive, expand, and create jobs. 

Everyone understands that growing our small business sector is critical to our economic 

recovery and fostering a vibrant and strong economy in the long-term. Small businesses are 

some of our best innovators and biggest job creators in our country and provide millions of 

workers with their livelihoods. 

In 2010, Congress passed the Small Business Jobs Act. This bill sought to stimulate job growth 

through the creation of the Small Business Lending Fund. This program directed the Treasury to 

invest up to $30 billion in small banks so they could in turn provide financing to small 

businesses at lower rates. This bill was intended to boost lending so that small businesses could 

access the capital they needed to expand their operations, hire new workers, and remain afloat 

during one of the worst economic times in recent history. 

A study conducted by the Special Inspector General for the Trouble Asset Relief Program 

(SIGTARP) earlier this month showed that merely $4 billion out of the $30 billion available for 

SBLF was invested by the Treasury. I am intrigued by the fact that two-thirds of this money 

($2.7 billion) went to 132 Trouble Asset Relief Program (TARP) banks, which used $2.1 billion 

(80% of SBLF money) to exit TARP. 

A major problem highlighted by the SIGTARP study is that the lending plans submitted by 

applicant banks were not fully assessed and evaluated by Treasury; it would seem to me that 

these plans played little part in the decision of whether a bank should or should not receive 

SBLF funds. According to the study, these plans were used to check-the-box and both the 

Treasury and banking regulators assumed the other was responsible of evaluating them. 

However last December, the Government Accountability Office (GAO) released a 

comprehensive report of SBLF and its conclusions are far more positive than SIGTARP's findings. 

The GAO concluded that in fact SBLF participants had increased their business lending over the 

2010 baseline and that the median participants had a 14 percent increase for small business 

loans under $1 million. 
178 


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Additionally, the Treasury responded to the SIGTARP study and strongly challenged its findings 

stressing that the reason why banks that had received TARP funds were able to refinance out of 

those programs and into SBlF was because Congress mandated it. 

We clearly do not have the entire picture before us. I am disappointed that the Treasury 

Department and its office of oversight for SBlF are not here today to testify and shed light on 

the matter. I understand that they were not given enough advance notice to send a witness. 

However, it would have been helpful for understanding the full scope of accomplishments or 

shortfalls of this program. 

As a former small business owner myself, I understand the difficulties and challenges that small 

business owners face when managing their businesses, especially in financially during trying 

times when capital is unavailable or extremely expensive. 

I represent many of these small business owners - restaurants, construction companies, corner 

stores, manufacturers of parts and components - who are struggling to make ends meet and 

stretch every dollar to keep their businesses afloat. 

Staying afloat is especially important to many minority and women business owners who 

depend on their businesses to make a living and whose entire life savings are tied to their 

business' success. This is why we should ensure that the taxpayer dollars that we have 

committed to SBlF are actually increasing access to capital for small businesses. 

Although SBlF is not a TARP program and all points of view are not represented today, I look 

forward to hearing Honorable Romero's testimony. I hope that Treasury will be given an 

opportunity to respond and address the concerns raised during this hearing at a later time. 

lastly, I want to reiterate the significant role small businesses play in our economy and I want 

to make sure we are doing everything possible to help them thrive and push our economy into 

full recovery. 
179 


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f~. CUNA 

(",dlllJni"nlhtlonal"'~o)tlsti~n 601 Pennsylvania Ave., NW ! South Building, Suite 600 ! Washington. DC 20004·2601 1 PHONE~ 202·508·6745 ! fAX; 202·638·3389 

cuna.org 

BILL(HEHEY 

President & CEO 

I) 

... ,.' .... I 

CRfDlTUNIONS' ; 

April 23, 2013 

The Honorable Dan)'1 Issa 

ChaiIman 

Committee on Oversight and Government 

Refonu 

United States House of Representatives 

Washington, DC 20515 

The Honorable Elijah Cummings 

Ranking Member 

Committee on Oversight and Government 

Refonu 

United States House of Representatives 

Washington, DC 20515 

Dear Chainnan Issa and Ranking Member Cummings, 

On behalf of the Credit Union National Association (CUNA), I am writing regarding the 

hearing the Committee will hold later this week entitled, "Broken Promises: The Small 

Business Lending Fund's Backdoor Bank Bailout." CUNA is the largest credit union 

advocacy association in the United States, representing nearly than 90 percent of 

America's 7,000 state and federally chartered credit unions and their 96 million members. 

We appreciate your holding this timely and important hearing. 

In 201 0, banks and their national trade associations vigorously pushed for enactment of 

H.R. 5297, the Small Business Lending Fund (SBLF) Act. To this day, despite numerous 

negative government reports and news coverage, these same supporters in the banking 

community have yet to admit the obvious fact that the fund created by this Act has done 

little to stiInulate bank lending to small business but has allowed more than 100 banks to 

use SBLF funds to repay, on better tenus, the funds they received from the American 

taxpayer through the Troubled Asset Relief Program (TARP). In other words, the SBLF 

(Bank Bailout 2.0) was a sweetheart deal to further assist banks that were aided in TARP 

(Bank Bailout 1.0). 

Earlier this month, the Treasury Department released a report regarding the 

implementation of the Small Business Jobs Act and the Small Business Lending Fund. 

The report states: 

"In total, 137 institutions [banks] repaid a CPP [Capital Purchase Program, TARP) 

investment in connection with an SBLF closing. These banks received $2.7 billion 

in SBLF funding and used $2.2 billion of this capital to repay outstanding CPP 

balances." 1 

On April 9, 2013, the Office of the Special Inspector General for the Troubled Asset 

Relief Program (SIGTARP) released a report that echoes the Treasury report. SIGT ARP 

noted that: 

1 Department of Treasury. "Use of Funds Report ~- Report to Congress submitted pursuant to Section 

4106(3) of the Small Business Jobs Act." April 2013. 9 . 
180 


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The Honorable Darryl Issa 

The Honorable Elijah Cummings 

April 23, 2013 

Page Two 

'Treasury invested only $4 billion of the $30 billion available two-thirds of 

which ($2.7 billion) went to 137 TARP banks that used $2.1 billion in SBLF funds 

to exit TARP in 2011 ... The 132 of 137 former T ARP banks remaining in SBLF 

have not effectively increased small-business lending because they used 

approximately SO% of SBLF funds ($2.1 billion of the $2.7 billion) to repay 

TARP.,,2 

SIGTARP went on the recommend: 

"To preserve the amount of capital former TARP banks participating in SBLF 

have to lend, the primary Federal banking regulators (the Federal Reserve, FDIC, 

or OCC) should not approve dividend distributions to common shareholders of 

former TARP banks that have not effectively increased small-business lending 

while in SBLF.,,3 

It is important not to forget that the SBLF was strongly promoted by both the American 

Bankers Association (ABA) and the Independent Community Bankers of America (ICBA) 

as a way for their member banks to promote bank lending to small business and jumpstart 

economic recovery. 

On May IS, 20 I 0, leBA testified before the House Financial Services Committee that the 

association "strongly supports the new SBLF proposal and we'll do our part to make it a 

success.,,4 The American Bankers Association also gave their endorsement of the 

legislation in a statement for the record of the hearing, emphatically stating: 

"ABA supports H.R. 5297, the Small Business Lending Fund Act of2010, which 

was recently proposed to stimulate small business lending. This bill can help 

community banks meet the needs of small businesses across America.,,5 

Have community banks met these needs? The answer is obviously "no." 

2 Special Inspector General for the Troubled Asset Relief Program. "Banks that Used the Small Business 

Lending Fund to Exit TARP." April 9, 2013. 2,6. 

3 Ibid. 20. 

4 Testimony of James D. MacPhee, Chief Executive Officer of Kalamazoo County State Bank in Schoolcraft, 

Michigan, on behalf of the ICBA, before the House Committee on Financial Services hearing entitled, 

"Initiatives to Promote Small Business Lending, Jobs and Economic Growth." May 18, 2010. 6. 

5 Statement of the American Bankers Association for the record of the House Committee on Financial 

Services hearing entitled, "Initiatives to Promote Small Business Lending, Jobs and Economic Growth." 

Mary 18, 2010. 2. 
181 


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The Honorable Darryl Issa 

The Honorable Elijah Cummings 

April 23, 2013 

Page Threc 

To put these past statements and their current silence on the dismal failure of the SBLF in 

context, it is important to take a look at the banking industry's performance. In the fourth 

quarter of2012, America's banks reported net income of$34.7 billion, an increase of $9.3 

billion (37%) from a year earlier. Eighty-six percent of banks made a profit in the fourth 

quarter. According to the American Bankcrs Association, bank revenue increased from 

the previous year, in part due to a $10 billion (18%) increase in noninterest income on 

gains ofloan sales and increased trading revenue. 6 Banks are clearly in excellent financial 

condition but have ignored small business lending and have chosen instead to use Bank 

Bailout 2.0 to cheaply pay off their obligations from Bank Bailout 1.0. 

Credit unions werc not eligible to participate in the SBLF and, frankly, did not need a 

taxpayer fund to encourage them to lend to their small busincss members. As we noted 

during the consideration of the SBLF, there was and still is - a better way to stimulate 

lending to America's small businesses and it doesn't cost the taxpayers a dime. The 

Credit Union Small Business Jobs Creation Act (H.R. 688) would pennit credit unions to 

more fully meet the credit needs of America's small businesses by increasing the statutory 

credit union member business lending cap. If enacted, we estimate that credit unions 

could lend an additional $13 billion to small businesses in the first year, helping them to 

create more than 140,000 new jobs. 

We know the banks oppose H.R. 688; but considering how they have used the taxpayersubsidized SBLF, thcir opposition to this legislation is a prctty good reason to support it. 

Moreover, credit unions' performance in small business lending during the crisis - when 

they expanded their offerings 45% while bank small business offering contracted 15% --

should speak volumes of what small business should expect if Congress allows credit 

unions to continue to lend to them. Credit unions were there for small businesses when 

the banks, with taxpayer backing, abandoned them; and if Congress pennits it, crcdit 

unions will continue to be there for small businesses during the recovery. 

America's credit unions and their 96 million members stand ready to continue to be part of 

the solution to the economic problems our nation faces. We encourage all Representatives 

to cosponsor H.R. 688, and hope the House will act quickly to pass this bill. 

Best regards, 

6 http://www.aba.com/Members/Research/Documents/Conditionsofthelndustrv,pdf 
182 


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A 

NAFCU 

3138 10th Str •• t North 

Arlington, VA 22201·2149 

703.522.4770 \800.336.4644 

F: 703.524.1082 

nafcu@nafcu.org 

National Association 01 Federal Credit Unions I www.nalcu.org 

April 23, 2013 

The Honorable Darrell Issa 

Chairman 

House Committee on Oversight & 

Government Reform 

U.S. House of Representatives 

Washington, D.C. 20515 

The Honorable Elijah Cummings 

Ranking Member 

House Committee on Oversight & 

Government Reform 

U.S. House of Representatives 

Washington, D.C. 20515 

Re: Credit unions want to help small bnsiness, even when banks don't 

Dear Chairman Issa and Ranking Member Cummings: 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade 

association exclusively representing the interests of our nation's federally chartered credit 

unions, I write today in advance of tomon'ow's hearing, "Broken Pl'Omises: The Small Business 

Lending Fund's Backdoor Bank Bailout." As recently detailed by the Special Inspector General 

for T ARP, the Small Business Lending Fund for community banks intended to spm' lending and 

create jobs fell painfully ShOll. While the banking industry continues to rely on taxpayer funds 

while not helping small business, credit unions and their 95 million members stand ready to help 

ensure small businesses can access the capital they need - while not taking taxpayer money to do 

so. 

As recently released by the Special Inspector General fur TARP and subsequently repOlted in 

The Wall Street Journal, ont of the 332 banks participating in the small business lending fund 

program run by the Treasury Depm'tment, 137 used more than half of about $4 billion disbursed 

by the program to help fund their exits from the Troubled Asset Relief Program. It was also 

fotmd that a sizeable number of these banks didn't increase lending at alL Christy Romero, 

special inspector general for TARP, said it best, stating, "Small-business loan levels by TARP 

banks in [the] Small Business Lending Fund came up short." While the banks are waiting for 

the next taxpayer giveaway, credit unions continue to do what they have always done Serve 

those within their field of membership who may otherwise be unbanked. 

As you know, bipartisan legislation (H.R. 688) put forward by Rcps. Ed Royce (R-CA) and 

Carolyn McCarthy (D-NY) would raise the arbitrary member business lending cap for those 

credit unions meeting strict eligibility requirements. Restricting credit unions on the amount of 

business lending they can facilitate is counterproductive to job creation and should be addressed 

NAFCU I Your Direct Connection to Education, Advocacy & Advancement 
183 

Æ 


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immediately. For over 80 years credit unions conducted safe and sound business lending activity 

without the existence of any cap at all. In addition to this proven track record, the Treasury 

Department and the National Credit Union Administration (NCUA) have signcd,off on this 

common sellse proposal that would create jobs. Contrary to Small Business Lending Fund for 

comnn11lity banks, raising the crelit union member business lending cap wouldn't spend a single 

dime of taxpayer f,lOds. 

We thank you for your consideration and welcome lhe 0PP0l1unity to discuss this matter fi.u1hcr. 

If my colleagues and I can be of assistance to you, or if you have any questions regarding this 

issue, please feel ll'ee (0 contact myself or NAFCU's Senior Associate Dh'ector of Legislative 

Affairs, Jillian Pevo, at (703) 842,2286 or JPevo@nafcu.org. 

Brad Th~ler Vice President of LegisJative Affairs 

cc: Members of the fIouse Committee on Oversight and Government Reform