SIGTARP 13-002 April 9, 2013

Banks that Used the Small Business 

Lending Fund To Exit TARP
Office of the special inspector general

 For the Troubled Asset Relief Program 

1801 L Street, NW, 4th Floor

Washington, D.C. 20220

 

SIGTARP 13-002 April 9, 2013

April 9, 2013

MEMORANDUM FOR: The Honorable Jacob J. Lew – Secretary of the Treasury

The Honorable Thomas J. Curry – Comptroller of the Currency

The Honorable Martin J. Gruenberg – Chairman, Board of 

Directors of the Federal Deposit Insurance Corporation

The Honorable Ben S. Bernanke – Chairman, Board of Governors of 

the Federal Reserve System

FROM: The Honorable Christy L. Romero – Special Inspector General for the

Troubled Asset Relief Program

SUBJECT: Banks that Used the Small Business Lending Fund To Exit TARP 

(SIGTARP 13-002)

We are providing this report for your information and use. It discusses the small banks that 

exited the Troubled Asset Relief Program through the Small Business Lending Fund 

program. 

The Office of the Special Inspector General for the Troubled Asset Relief Program conducted 

this audit (engagement code 026) under the authority of Public Law 110-343, as 

amended, which also incorporates the duties and responsibilities of inspectors general under the

Inspector General Act of 1978, as amended.

We considered comments from the Department of the Treasury, the Federal Reserve Board, the

Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency

when preparing the report. Treasury’s comments, along with those of the Federal banking

regulators, are addressed in the report, where applicable, and a copy of the Treasury, Federal 

Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the 

Currency responses are included in the Management Comments section in Appendix D.

We appreciate the courtesies extended to our staff. For additional information on this report, 

please contact Mr. Bruce S. Gimbel, Acting Assistant Deputy Special Inspector General for 

Audit and Evaluation (Bruce.Gimbel@treasury.gov / 202-927-8978).
Banks that Used the Small Business Lending Fund To Exit TARP

SIGTARP 13-002 April 9, 2013

Summary

On September 27, 2010, Congress created the Small 

Business Lending Fund (“SBLF”) as part of the Small 

Business Jobs Act of 2010, which permitted Treasury 

to invest up to $30 billion in eligible small banks to 

increase “the availability of credit for small 

businesses.” Unlike the Troubled Asset Relief 

Program (“TARP”), SBLF incentivized lending by 

rewarding increases in lending with lower rates that a 

bank would pay the Government for the use of the 

money (known as the dividend rate). 

The scope and scale of SBLF were not as expected, 

with most of the money going to banks already in 

TARP. 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.

As part of the Office of the Special Inspector General 

for the Troubled Asset Relief Program’s (“SIGTARP”) 

continuing oversight of TARP, SIGTARP conducted 

this review to determine whether Treasury and 

regulators consistently evaluated applications 

submitted by TARP banks to refinance into SBLF. 

What SIGTARP Found

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. 

Although Congress allowed TARP banks to 

participate, Congress intended that the banks would 

increase their loans to small businesses, and as a 

safeguard, required that applicant banks submit to 

their Federal banking regulator a “small business 

lending plan” detailing how the bank would increase 

lending.

However, former TARP banks in SBLF have not 

effectively increased small-business lending and are 

significantly underperforming compared to non-TARP 

banks. Twenty-four former TARP banks have not 

increased their lending. The remaining former TARP 

banks have increased lending by $1.13 for each 

SBLF dollar they received. 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. 

The 132 of 137 former TARP banks remaining 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 repay 

TARP. Although as a group, the former TARP 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 TARP or received additional funds. TARP 

banks that received only enough SBLF funds to 

repay TARP have lent out significantly less than they 

received in SBLF funds – increasing lending by only 

25ȼ for each $1 in SBLF funds. TARP banks that 

received additional SBLF money beyond the 

outstanding TARP balance have increased lending 

by $1.67 for every $1 in SBLF funds. TARP banks 

had much to gain and little to lose from refinancing 

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.

Congress’ safeguard of requiring that banks submit a 

small-business lending plan did not have the 

intended effect because Treasury and the Federal 

banking regulators – Federal Reserve Board 

(“Federal Reserve”), Federal Deposit Insurance 

Corporation (“FDIC”), and Office of the Comptroller of 

the Currency (“OCC”) – did not adequately assess 

whether the banks’ plans to increase small-business 

lending were achievable – they did not focus on 

whether the TARP banks were prepared to lend 

SBLF capital. SIGTARP found that Treasury and the 

Federal banking regulators did not effectively 

communicate with each other, each claiming that the 

other had responsibility to assess the banks’ lending 

plans. Treasury’s SBLF program director told 

SIGTARP that Treasury did not perform an 

independent analysis of the projections in the lending 

plans, and that analysis of the lending plans was the 

regulators’ responsibility because the law required 

that the lending plans be submitted to regulators. 

Regulators did not agree with Treasury’s view. 

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. 

Regulators did not consistently take action to 

preserve the intent of Congress by meaningfully 
Banks that Used the Small Business Lending Fund To Exit TARP

SIGTARP 13-002 April 9, 2013

reviewing the banks’ proposals to increase lending. 

Instead, regulators generally focused on the banks’ 

viability, in a process described by one regulator as 

“left over” from TARP. Treasury’s review of the 

lending plans was superficial, merely filling in a 

“check-the-box” review form, 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 TARP. Treasury and 

regulators did not deny SBLF funding to any TARP 

bank based on its lending plan.

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 refinanced into SBLF are 

demonstrating an inability or unwillingness to fulfill 

the sole purpose of the program – increase lending to 

small businesses. Many TARP banks may not have 

had the wherewithal to increase lending because 

they used their SBLF funds to repay TARP. 

By not developing and implementing meaningful 

SBLF application review procedures that would 

achieve the intended purpose of promoting lending, 

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 regulators should have required TARP 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 TARP banks to exit TARP using 

Government funds with more favorable terms than 

TARP with little resulting benefit for small businesses.

What SIGTARP Recommended

SIGTARP recommended: (1) that Treasury and the 

Federal banking regulators improve coordination 

when collaborating on current and future initiatives; 

(2) to increase small-business lending by former 

TARP banks participating in SBLF, Treasury should 

work with the banks to establish new, achievable 

plans to increase lending going forward; and (3) 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.

Treasury, FDIC, the Federal Reserve, and OCC 

provided official written responses, which are 

reproduced in full in Appendix D. A discussion of 

these responses and SIGTARP’s response can be 

found in the Management Comments and 

SIGTARP’s Responses section of this report.
Banks that Used the Small Business Lending Fund To Exit TARP

SIGTARP 13-002 April 9, 2013

Table of Contents

Background..................................................................................................................................... 1

The Government’s Process To Review Banks’ Applications for SBLF Funds......................... 3

SBLF Application Phase One – Federal Banking Regulator Review ........................................ 4

SBLF Application Phase Two – Treasury Review..................................................................... 5

Objective ......................................................................................................................................... 5

SBLF Has Not Effectively Increased Lending by Former TARP Banks that Used SBLF 

To Exit TARP ................................................................................................................................. 6

Many TARP Banks Used SBLF Primarily as a Means To Exit TARP and Its Restrictions...... 8

Treasury and Federal Banking Regulators Did Not Adequately Assess Whether Banks’ Plans

To Increase Small-Business Lending Were Actually Achievable................................................ 10

Treasury and Federal Banking Regulators Did Not Effectively Communicate with Each

Other; Each Relied on the Other To Assess the Banks’ Plans To Increase Lending ............... 11

Regulators Did Not Consistently Take Action To Preserve the Intent of Congress and

SBLF by Meaningfully Reviewing the Banks’ Proposals To Increase Lending...................... 12

Treasury’s Review of Banks’ Plans To Increase Lending Was Superficial and Employed

a “Check-the-Box” Review ...................................................................................................... 13

Conclusion and Recommendations............................................................................................... 16

Lessons Learned and Recommendations.................................................................................. 19

Management Comments and SIGTARP’s Responses.................................................................. 21

Appendix A – Scope and Methodology........................................................................................ 24

Appendix B – Acronyms and Abbreviations................................................................................ 26

Appendix C – Audit Team Members............................................................................................ 27

Appendix D – Management Comments from Treasury, FDIC, OCC, and Federal Reserve........ 28
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 1

SIGTARP 13-002 April 9, 2013

Background

This report discusses how, in 2011, 137 of the small banks bailed out by TARP 

used more than $2 billion from another Government program, the Small Business 

Lending Fund, to repay and exit TARP.1 

In the wake of the financial crisis, the amount of credit available to small 

businesses declined substantially. According to Federal Deposit Insurance 

Corporation (“FDIC”) data, the total dollar amount of outstanding small-business 

loans dropped by nearly 15% between mid-2008 and mid-2011. The Troubled 

Asset Relief Program’s (“TARP”) bank program, called the Capital Purchase 

Program (“CPP”) was designed in part to address the decline in lending. From 

October 2008 through December 2009, the U.S. Department of the Treasury 

(“Treasury”) invested $204.9 billion into 707 banks to “stabilize and strengthen 

the U.S. financial system by increasing the capital base of healthy, viable 

institutions, enabling them [to] lend to consumers and business[es].” Although a 

goal of the TARP bank program was to provide money to enable the banks to 

lend, Treasury did not require, or even incentivize, the banks to lend the TARP 

funds. A study published by the Small Business Administration found that from 

2008 to 2011, TARP banks decreased their small-business lending even more than 

non-TARP banks.2

On September 27, 2010, Congress created the Small Business Lending Fund

(“SBLF”) as part of the Small Business Jobs Act of 2010 (“Jobs Act”), which 

permitted Treasury to invest up to $30 billion through this new program in 

eligible small banks to increase “the availability of credit for small businesses.”3 

To ensure that this lending objective was achieved, Congress required that all 

applicants submit a small-business lending plan addressing how they would 

increase small businesses lending. Unlike TARP, SBLF incentivized lending by 

 

1 Many of the larger banks exited the Troubled Asset Relief Program (“TARP”) as soon as they were able to obtain 

regulatory approval to repay. For a detailed report of the circumstance surrounding the largest banks’ exits from 

TARP, see SIGTARP’s report, “Exiting TARP: Repayments by the Largest Financial Institutions,” published on 

September 29, 2011, at 

www.sigtarp.gov/Audit%20Reports/Exiting_TARP_Repayments_by_the_Largest_Financial_Institutions.pdf. Of the 

137 institutions that exited TARP through the Small Business Lending Fund (“SBLF”), 132 remained in SBLF through 

the program’s most recent reporting cycle ending September 30, 2012, the latest data available. Five of the original 

137 institutions paid back Treasury subsequent to entering SBLF. 

2 A November 2012 report developed under a contract with the Small Business Administration titled “How Did the 

Financial Crisis Affect Small Business Lending in the United States?” states, “During the financial crisis, small 

business lending declined by $117 billion, or almost 18%, to only $543 billion in 2011.” The report continues, “At 

TARP banks, small-business lending declined by $74 billion, or 21% from 2008 – 2011 whereas at non-TARP banks, 

the decline was only $42 billion, or 14%.” 

3 The Jobs Act limited participation in SBLF to banks with $10 billion or less in assets at the end of 2009. Banks with 

$1 billion or less in assets could apply to receive up to 5% of their risk-weighted assets, while those with more than 

$1 billion and less than or equal to $10 billion in assets could receive up to 3%. As with TARP’s bank programs, 

Treasury invested by purchasing preferred stock or other instruments in the bank.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 2

SIGTARP 13-002 April 9, 2013

rewarding increases in lending with lower rates that a bank would pay the 

Government for the use of the money (known as the dividend rate).4 Senators 

discussed on the Senate floor how SBLF was “filling a gap” or was a “fix” to 

TARP because TARP did not contain requirements or incentives to lend.

The scope and scale of SBLF were not as expected, with most of the money going 

to banks already in TARP. In 2011, Treasury invested only $4 billion of the 

$30 billion available – two-thirds of which ($2.7 billion) went to 137 TARP banks 

that used approximately $2.1 billion in SBLF funds to exit TARP.5 On 

October 18, 2011, then-Treasury Secretary Timothy F. Geithner testified before 

the Senate Committee on Small Business and Entrepreneurship that there was “a 

good case” for Congress allowing banks to refinance their TARP money with 

SBLF funds “because the capital they got [in] this program comes with a better 

incentive to use it to lend.” 

Several members of Congress voiced concerns that the program could serve as a 

vehicle for TARP recipients to refinance into SBLF under more favorable terms 

with little resulting benefit for small businesses. TARP banks paying a dividend 

rate of 5% that transferred into the SBLF program had the potential to lower their 

dividend rate to 1% if they increased lending.6 In addition, the SBLF dividend is 

non-cumulative, meaning that participants have no obligation to make quarterly 

payments as scheduled or catch up on missed payments, compared to TARP 

dividends, which generally are cumulative. TARP banks that used SBLF to exit 

TARP also benefited from a removal of restrictions that existed in TARP but not 

in SBLF, such as restrictions on executive compensation and on luxury 

expenditures.7 

Some members of Congress noted that SBLF substantially resembled TARP and 

expressed doubt that lending would increase. SIGTARP also raised this concern 

for TARP banks applying to SBLF. In September 2010, SIGTARP sent a letter to 

Treasury Secretary Geithner recommending that Treasury not count TARP capital 

when evaluating the health and viability of a bank applying for SBLF, stating “it 

 

4 The Jobs Act defined qualified small-business lending as loans of $10 million or less or to businesses with $50 million 

or less in revenues. Qualified loans were limited to 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. 

5

For further discussion on these SBLF investments into TARP banks, see SIGTARP’s report, “TARP & SBLF: Impact 

on Community Banks,” published April 25, 2012, 

www.sigtarp.gov/Audit%20Reports/TARP_SBLF_Special_Section.pdf.

6 According to Treasury’s “SBLF: Getting Started Guide For Community Banks,” the cost of capital (the dividend rate) 

for SBLF started at no higher than 5%. If the bank increased its small-business lending by 10% or more, the rate 

would fall to as low as 1%. For increases in small-business lending of less than 10%, the rate could fall to between 2% 

and 4%.

7

Treasury’s “SBLF: Getting Started Guide For Community Banks” stated, “Participation in the Small Business Lending 

Fund carries no executive compensation restrictions” and that any institution participating in SBLF would not be 

considered a TARP recipient.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 3

SIGTARP 13-002 April 9, 2013

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.” 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.”

In response to concerns that there were insufficient safeguards to ensure that 

banks would lend SBLF funds to small businesses, then-Chairwoman of the 

House Committee on Small Business, Nydia Velázquez, introduced language in a 

bill requiring banks to include a small-business lending plan with their SBLF 

application. In discussions on the House floor, Velázquez stated that she insisted 

on specific language in the Jobs Act to require “a detailed plan on how to increase 

small business lending at their institution.” According to Treasury, the smallbusiness lending plan had to address: 

 how the bank will use the funds to increase small-business lending in its 

community;

 the anticipated increases in small-business lending as a result of the receipt of 

funds; and

 proposed outreach and advertising efforts to inform members of the 

community about the availability of the loans and how to apply. 

More than a majority of TARP community banks (320 out of 552) applied for 

SBLF funds.8 Treasury conducted the same application review process for TARP 

banks as non-TARP banks, but added other conditions for TARP banks. Treasury 

required that banks that participated in SBLF could not continue to participate in 

TARP. TARP banks accepted into SBLF had to repay TARP in full, but could 

use SBLF funds to do so. Treasury required that banks be in material compliance 

with their TARP agreement, be current on TARP dividend payments, and not 

have missed more than one dividend payment.9 Treasury would not consider the 

TARP banks’ ability to raise matching funds from private sources, which it 

allowed for non-TARP banks. 

The Government’s Process To Review Banks’ Applications for 

SBLF Funds

Congress required Treasury to consult with Federal banking regulators when 

making investment decisions. At the program’s launch, four Federal regulators –

the Federal Reserve Board (“Federal Reserve”), FDIC, the Office of the 

 

8 A total of 320 TARP banks applied to SBLF – 315 in CPP, and 5 of which were in the TARP Community Development 

Capital Initiative.

9 Any dividend payment not submitted within 60 days of its due date was considered a missed dividend payment. 

Seventy-nine of the 320 TARP banks that applied for SBLF were not eligible to participate because they were not 

current on their TARP dividend payments. 
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 4

SIGTARP 13-002 April 9, 2013

Comptroller of the Currency (“OCC”), and the Office of Thrift Supervision –

supervised the banks (and/or their bank holding companies) that applied to 

SBLF.10 The Federal Reserve is the primary regulator for state member banks. In 

addition, the Federal Reserve regulates bank holding companies whose subsidiary 

banks are primarily regulated by the FDIC or OCC.

SBLF Application Phase One – Federal Banking Regulator Review

The SBLF application review process included review by both Treasury and 

Federal banking regulators to determine each applicant’s suitability to receive 

SBLF funds.11 Similar to applications for TARP, SBLF applications were routed 

to the banks’ regulators for review. Banks applying for SBLF were required to 

submit the small-business lending plan to their primary Federal regulator. 

However, according to the regulators interviewed by SIGTARP, the regulators 

primarily focused their review on the banks’ viability, as they did with TARP. 

For the purposes of SBLF, Treasury defined “viability” as the bank being 

(1) adequately capitalized, (2) not expected to become undercapitalized, and 

(3) not expected to be placed into conservatorship or receivership. Also similar to 

TARP, regulators were responsible for interpreting viability (under this definition) 

and providing a “yes” or “no” assessment, indicating that a bank was viable or not 

viable. In an interview, OCC’s Deputy Comptroller for Thrift Supervision told 

SIGTARP that the regulator’s review process to determine viability was “left 

over” from TARP. 

Similar to TARP, if the banking regulator determined that the bank was “viable,” 

the regulator forwarded the application, including a viability assessment of the 

applicant bank, to Treasury. In addition to providing a viability assessment for 

each OCC-regulated SBLF applicant, OCC also made a recommendation to 

Treasury on whether to fund each applicant. According to Treasury, it treated a 

negative OCC funding recommendation equally to a negative viability 

assessment, rejecting the application if no additional considerations were 

identified. The Federal Reserve and FDIC did not make recommendations to 

Treasury beyond the viability determination.

 

10 During the application period, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 eliminated 

the Office of Thrift Supervision and transferred its rulemaking authority to the OCC and the Federal Reserve 

Supervisory authority was transferred to OCC, the FDIC, and the Federal Reserve. The transfer of these powers was 

completed on July 21, 2011, and the Office of Thrift Supervision was officially abolished 90 days later, on 

October 19, 2011.

11 State regulators were also given an opportunity to weigh in.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 5

SIGTARP 13-002 April 9, 2013

SBLF Application Phase Two – Treasury Review

Treasury made investment decisions based in part on the regulators’ 

determinations of viability. As with TARP, there was an interagency advisory 

committee that was comprised of at least one representative from each regulatory 

agency (FDIC, Federal Reserve, and OCC) to review certain applications.12 If the 

banking regulator decided that a bank was viable, but the bank met certain criteria 

indicating risk, the interagency advisory committee reviewed the application. The 

criteria that would trigger this interagency review included weak or dated bank 

ratings (known as CAMELS ratings13), current financial performance ratios 

indicating soundness concerns, or examinations by the regulators indicating recent 

deterioration in the condition of the bank, or poor Community Reinvestment Act 

performance (which is aimed at racially defined neighborhoods, and residents of 

low and moderate income neighborhoods).14 This committee reviewed 

applications of banks that regulators deemed not viable and would either 

withdraw the bank from consideration or invite regulators to reevaluate the bank. 

Treasury’s decision to fund was made by a majority vote of Treasury’s 

Investment Committee, comprised of five senior-level Treasury officials, with the 

final decision by Treasury’s Deputy Assistant Secretary for Small Business, 

Community Development, and Affordable Housing Policy.15 Along with the 

regulator viability determination, Treasury’s Investment Committee reviewed a 

Treasury-prepared analysis of the bank’s financial condition that focused on the 

likelihood that the bank would repay SBLF funds. 

Objective

SIGTARP conducted this review to determine whether Treasury and regulators 

consistently evaluated applications submitted by TARP banks to refinance into 

SBLF. 

SIGTARP conducted the audit from January 2012 through February 2013, in 

accordance with generally accepted government auditing standards as prescribed 

by the Comptroller General of the United States. For a discussion of the audit’s 

scope and methodology, see Appendix A.

 

12 The interagency advisory committee was known as the Application Review Committee. For purposes of this report, 

SIGTARP will refer to the Application Review Committee as the interagency advisory committee. 

13 CAMELS is a rating system whereby regulators assign banks a score of 1-5, with 1 being strongest, based on their 

Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk.

14 The interagency advisory committee also reviewed applications for banks in which Treasury received inconsistent 

input from state and Federal banking regulators or where Treasury staff recommended interagency review.

15 The Investment Committee was comprised of: the SBLF Director, the Assistant Secretary for Financial Institutions, 

the Assistant Secretary for Financial Markets, the Assistant Secretary for Economic Policy, and the Assistant Secretary 

for Management. Three Investment Committee members or their delegates were required for a quorum. 
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 6

SIGTARP 13-002 April 9, 2013

SBLF Has Not Effectively Increased Lending

by Former TARP Banks that Used SBLF 

To Exit TARP

The 132 of 137 former TARP banks remaining 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 off TARP, rather than to increase 

lending. Treasury determined that as a matter of policy, both TARP and nonTARP applicants to SBLF would have to project lending growth at least equal to 

the amount of SBLF funding they received. However, that was the minimum, and 

Treasury expected banks that received SBLF funds to increase lending in 

multiples of every SBLF dollar. 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.” Some members of Congress believed that 

lending had the potential to increase by multiples of ten, 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.16

Twenty-four TARP banks that received $501 million in SBLF funds have not 

increased their lending while in SBLF.17 The remaining former TARP banks 

have increased lending by just $1.13 for each $1 in SBLF funds they received.18 

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. 

 

16 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.

17 The source for all SBLF lending data used in this report is Treasury’s Use of Funds Report, published on 

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

18 Qualified small-business lending per dollar of SBLF funding received is calculated by dividing the increase in 

qualified small-business lending by the amount of SBLF funding received.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 7

SIGTARP 13-002 April 9, 2013

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

TARP banks and non-TARP banks. 

FIGURE 1

DIFFERENCES IN INCREASES IN LENDING BY TARP AND NON-TARP

BANKS IN SBLF

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

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

passage (the same “baseline” period used by the program to calculate lending 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.

Although as a group, the former TARP 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 TARP or received additional funds. TARP banks that received 

only enough SBLF funds to pay off TARP have lent out significantly less than 

they received in SBLF funds – increasing lending by only 25ȼ for each $1 in 

SBLF funds. TARP banks that received additional money beyond the outstanding 

TARP balance have increased lending by $1.67 for every $1 in SBLF funds.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 8

SIGTARP 13-002 April 9, 2013

Figure 2 shows differences in lending increases in former TARP banks in SBLF 

that only received enough SBLF funds to repay TARP compared to those that 

received additional SBLF funds.

FIGURE 2

DIFFERENCES IN INCREASES IN LENDING BY TARP BANKS IN SBLF, 

BASED ON AMOUNT OF SBLF FUNDING

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

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

passage (the same “baseline” period used by the program to calculate lending 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.

Many TARP Banks Used SBLF Primarily as a Means To Exit TARP 

and Its Restrictions

Many TARP banks primarily looked at SBLF as an opportunity to exit TARP, 

escape TARP’s restrictions, and pay less for taxpayer money. In a 2011 

Government Accountability Office (“GAO”) survey, some TARP banks cited the 

opportunity to exit TARP as the primary reason for applying for SBLF funds.19 

Banks that used SBLF funding to exit TARP were able to escape many of its 

 

19 GAO, “Small Business Lending Fund: Additional Actions Needed to Improve Transparency and Accountability,” 

GAO-12-183, December 2011. GAO received valid survey responses from 510 banks (non-TARP and TARP banks), 

of which 18% (approximately 92 banks) stated that they had applied to SBLF. Approximately 17 banks, 18% of the 

approximately 92 respondents that applied to SBLF, cited the opportunity to refinance out of TARP as a primary 

reason for seeking SBLF capital. 
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 9

SIGTARP 13-002 April 9, 2013

restrictions, such as TARP’s governance restrictions, executive compensation 

restrictions, and limitations on luxury expenditures as well as the negative stigma 

that existed under TARP. In an October 18, 2011, hearing before the Senate 

Committee on Small Business and Entrepreneurship, senators cited an 

October 6, 2011, Wall Street Journal article that quoted a senior bank officer as 

saying that SBLF “gets you out of tough restrictions under TARP. But for us, the 

real incentive was to get that small-business loan growth and bring our interest 

rate down to 1%.” The newspaper also cited a senior official from a community 

bank trade organization as saying that SBLF helps get smaller banks out of 

TARP.20

TARP banks had much to gain and little to lose from refinancing 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 

lending in SBLF bring the cost of capital in line with the cost under TARP. If the 

bank had remained in TARP, it would pay a 5% dividend for each of five years, 

after which the rate would increase to 9%. If a TARP bank that refinanced into 

SBLF fails to increase its small-business lending, its dividend rate will increase 

by 2 percentage points from, 5% to 7%, after the bank’s 9th quarter in SBLF and 

there would be a 2% “lending incentive fee” to 9% on the fifth anniversary of the 

TARP investment.21 This may explain why 320 of the 552 community banks 

(58%) in TARP applied to SBLF, while only 9% (615) of the roughly 6,700 

community banks that were not in TARP applied. 

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 TARP. In a letter to Secretary Geithner, 

Senator Chuck Grassley asked Treasury to ensure that TARP funds repaid by 

SBLF not be counted as funds repaid to the Government. 

 

20 Maltby, Emily, and Loten, Angus, “Tale of Two Loan Programs,” The Wall Street Journal, 10/6/2011. 

21 This additional fee expires 41⁄2 years after Treasury’s SBLF investment, when the dividend rate resets to 9% for all 

SBLF participants, including those that did not participate in TARP.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 10

SIGTARP 13-002 April 9, 2013

Treasury and Federal Banking Regulators 

Did Not Adequately Assess Whether Banks’ 

Plans To Increase Small-Business Lending

Were Actually Achievable

Overall, Treasury and regulators did not conduct consistent, meaningful reviews 

of the plans submitted by applicants that were supposed to explain how the banks 

would increase small-business lending under SBLF. SIGTARP 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. Similarly, 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 TARP and nonTARP 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. As a result, Treasury and the Federal regulators did not reject any TARP 

bank for SBLF because of the bank’s lending plan.22 

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. Many TARP banks may not have had the wherewithal to increase 

qualified small-business lending because they used SBLF funds entirely to repay 

TARP obligations. Other TARP banks may not have received enough additional 

funds to achieve the increases in lending proposed in their lending plans. 

Treasury and regulators would have detected such concerns with proper scrutiny 

of applicants’ lending plans and required the banks to demonstrate the 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 to be unsuited to participate in the program.

Furthermore, 14 former TARP banks have paid dividends to common 

shareholders while in SBLF, despite failing to increase their small-business 

lending. When Treasury provided banks with SBLF funds, it included restrictions 

on the distribution of dividends, should the banks’ capital base fall below a certain 

level or should they miss payments to Treasury. However, no dividend 

 

22 Fifty-nine of the 320 TARP applicants revised their plans for various reasons, of which 38 eventually received SBLF 

funding.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 11

SIGTARP 13-002 April 9, 2013

restrictions were placed on banks that failed to meet the projections established in 

their SBLF lending plans.

Treasury and Federal Banking Regulators Did Not Effectively 

Communicate with Each Other; Each Relied on the Other To Assess 

the Banks’ Plans To Increase Lending

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 effectively 

with each other, each claiming that the other had responsibility to assess the 

lending plans. Treasury’s document “Overview of the Application Review 

Process for the Small Business Lending Fund” states that Treasury would consult 

with banking regulators and perform “a detailed financial assessment, including 

an evaluation of the institution’s likelihood of repayment, as well as a review of 

the applicant’s small-business lending plan.” This same Treasury document also 

states that the Federal banking agencies “received and reviewed the smallbusiness lending plan submitted by each applicant.” Treasury’s SBLF program 

director told SIGTARP that Treasury did not perform an independent analysis of 

the projections in the lending plans. 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 SIGTARP 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 Treasury’s, not the 

regulators’, responsibility. 

Despite holding several meetings to discuss the SBLF application review process, 

Treasury and regulators failed to establish their respective roles and 

responsibilities for review and scrutiny of the banks’ plans to increase smallbusiness lending. FDIC Legal Counsel told SIGTARP that FDIC and Treasury 

met on numerous occasions to sort out their duties, and that Treasury should have 

been well aware of FDIC’s interpretation of its responsibilities. 
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 12

SIGTARP 13-002 April 9, 2013

Regulators Did Not Consistently Take Action To Preserve the Intent 

of Congress and SBLF by Meaningfully Reviewing the Banks’ 

Proposals To Increase Lending

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. The Jobs Act specifically required that applicants, at the time they 

submit an application to the Secretary, shall deliver a small-business lending plan 

to their appropriate Federal banking regulator. The Jobs Act designated the 

lending plans as “confidential supervisory information,” a label that applies to 

information used by banking regulators in their supervision of banks. 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. 

SIGTARP found that, during the application review process, regulators did not 

review banks’ plans to increase lending in the same manner. The FDIC was the 

regulator for 69% of the TARP applicants for SBLF. According to an FDIC 

official interviewed by SIGTARP, the FDIC did not analyze the lending plans and 

served only as a conduit and broker to Treasury. FDIC guidelines instructed its 

staff that no input was necessary unless an institution’s plan to increase smallbusiness lending presented safety and soundness concerns. Rather, FDIC deferred 

the responsibility for analyzing the lending plans to Treasury, which lacked the 

regulators’ familiarity with the applicants. In addition, in SIGTARP’s review of 

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

Treasury on the applicant lending plans for 4 of 23 FDIC-regulated banks.

An OCC official told SIGTARP that OCC viewed itself as a conduit for the 

lending plan, with Treasury having primary responsibility for lending plan review, 

but that OCC weighed in as well on the plans. The OCC official told SIGTARP 

that OCC examiners reviewed the lending plans for reasonableness. In addition, 

in SIGTARP’s review of 32 applications, the OCC provided input to Treasury on 

the lending plans for all 5 applicant TARP banks regulated by the OCC. 

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. The SBLF funding went to the bank holding company, not 

directly to the bank. A Federal Reserve official told SIGTARP that the Federal 

Reserve reviewed the lending plans, focusing on the impact of the plan on the 

safety and soundness of the bank, not on the adequacy and achievability of the 

proposed lending. When asked why the Federal Reserve often provided little or 

no input on lending plans to Treasury, the Manager of Community Banking 

Organizations at the Federal Reserve deferred responsibility to FDIC or OCC, 

which regulated the bank holding companies’ subsidiary bank. In these 
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 13

SIGTARP 13-002 April 9, 2013

statements, the official is referring to applicants where the Federal Reserve 

regulated the bank holding company, but not the subsidiary bank. The Federal 

Reserve’s Manager of Community Banking Organizations added that the Federal 

Reserve’s examiners reported “by exception” on the lending plans, meaning that 

they would provide input to Treasury on the small-business lending plans only 

when they detected an issue. However, without meaningful review, it is unclear 

how the Federal Reserve would detect an issue. In addition, the Federal Reserve 

regulated 31 of the 32 bank applicants reviewed by SIGTARP. In SIGTARP’s 

review, the Federal Reserve provided input to Treasury on the lending plans of 

only 7 of the 27 banks where the Federal Reserve regulated the bank holding 

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

Treasury’s Review of Banks’ Plans To Increase Lending Was 

Superficial and Employed a “Check-the-Box” Review

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 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. Treasury did not consult with regulators or use 

their expertise in developing the form. Treasury assigned 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. 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 TARP banks describing where they 

would get the funds to lend, how small-business lending fit within banks’ lending, 

or without specifying the amount of resources banks planned to devote to smallbusiness lending. 
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 14

SIGTARP 13-002 April 9, 2013

FIGURE 3

TREASURY’S SMALL BUSINESS LENDING FUND LENDING PLAN

EVALUATION FORM

Source: Treasury.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 15

SIGTARP 13-002 April 9, 2013

In addition, SIGTARP’s review of meeting minutes and documentation for its 

review of 32 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. Neither the interagency advisory 

committee nor SBLF program staff nor Treasury’s Investment Committee 

addressed the lending plans for 91% of applications reviewed by SIGTARP. 

Almost all – 29 of the 32 TARP bank applications to SBLF that SIGTARP 

reviewed – showed no documented Treasury review of the banks’ lending plans.23 

Minutes of the interagency advisory committee and Treasury’s Investment 

Committee mentioned the lending plan for only 3 of the 32 TARP bank 

applications SIGTARP reviewed; only 1 of these applications received a response 

with a general statement that the lending plan “appeared to be responsive.” 

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, 

SIGTARP found obvious deficiencies in lending plans that Treasury and Federal 

banking regulators should have caught, even in a superficial review: 

 Two plans had lending projections lower than the SBLF funding requested, 

even though Treasury’s policy required that lending be at least equal to SBLF 

funding. 

 Three plans had lending projections based on a measure other than the 

required two-year timeline.

 Two plans that did not project a sufficient amount of lending were resubmitted 

with unsupported upward revisions to their lending projections. 

 Two plans did not detail how the applicant would gain entry into the smallbusiness lending market, although the applicants were required to do so.

 

23 Four of these applicants did not meet the criteria for review by the interagency advisory committee.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 16

SIGTARP 13-002 April 9, 2013

Conclusion and Recommendations

Viewed by members of Congress as a fix for the Troubled Asset Relief Program’s 

(“TARP”) failure to require or incentivize banks to lend the money, the Small 

Business Lending Fund (“SBLF”) provided participating banks with incentives to 

increase small-business lending. However, the scope and scale of SBLF were not 

as expected, with the U.S. Department of the Treasury (“Treasury”) investing 

only $4 billion of the available $30 billion, two-thirds of which went to TARP 

banks that used SBLF to repay TARP in 2011. Although Congress allowed 

TARP banks to participate, Congress intended that the banks would increase their 

loans to small businesses, and as a safeguard, required that applicant banks submit 

to their Federal banking regulator a “small business lending plan” detailing how 

the bank would increase lending. 

However, former TARP banks in SBLF have not effectively increased smallbusiness lending and are significantly underperforming compared to non-TARP

banks.24 Twenty-four former TARP banks have not increased their lending while 

in SBLF, despite those banks collectively receiving $501 million in SBLF funds. 

The remaining former TARP banks have increased lending by $1.13 for each 

SBLF dollar they received. 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. 

The 132 of 137 former TARP banks remaining 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 repay TARP. Although as a group, the 

former TARP 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 TARP or received 

additional funds. TARP banks that received only enough SBLF funds to repay 

TARP have lent out significantly less than they received in SBLF funds –

increasing lending by only 25ȼ for each $1 in SBLF funds. TARP banks that 

received additional SBLF money beyond the outstanding TARP balance have 

increased lending by $1.67 for every $1 in SBLF funds, a fraction of lending 

increases by non-TARP banks in SBLF. 

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

 

24 The source for all SBLF lending data used in this report is Treasury’s Use of Funds Report, published on 

January 7, 2013, that reflects SBLF lending as of September 30, 2012, the latest data available. Of the 137 

institutions that exited TARP through SBLF, 132 remained in SBLF through the program’s most recent reporting 

cycle ending September 30, 2012, the latest data available. Five of the original 137 institutions paid back Treasury 

subsequent to entering SBLF.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 17

SIGTARP 13-002 April 9, 2013

The “fees” and “penalties” resulting from a TARP bank’s failure to increase 

lending in SBLF bring the cost of capital in line with the cost under TARP.25

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. SIGTARP 

found that Treasury and the Federal banking regulators did not effectively 

communicate with each other, each claiming that the other had responsibility to 

assess the banks’ lending plans. 

Treasury’s SBLF program director told the Office of the Special Inspector 

General for the Troubled Asset Relief Program (“SIGTARP”) that Treasury did 

not perform an independent analysis of the projections in the lending plans, and 

that analysis of the lending plans was the regulators’ responsibility because the 

law required that the lending plans be submitted to regulators. Regulators did not 

agree with Treasury’s view, and Office of the Comptroller of the Currency 

(“OCC”) and Federal Deposit Insurance Corporation (“FDIC”) officials told 

SIGTARP in interviews that they were conduits, passing the lending plans to 

Treasury. When SIGTARP asked the Federal Reserve Board’s (“Federal 

Reserve”) Manager of Community Banking Organizations whether the Federal 

Reserve had considered whether the lending goals in applicants’ plans were 

attainable, when some banks used all the SBLF capital to repay TARP, he 

responded that it was Treasury’s responsibility, not the responsibility of 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 

TARP bank based on its lending plan. 

In reviewing bank applications for SBLF, Treasury and the banking regulators did 

not focus on whether the TARP banks were prepared to lend SBLF capital. 

Instead regulators generally focused on the banks’ viability, in a process described 

by one regulator as “left over” from TARP. 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. 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. Despite regulators 

 

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

increase to 9%. If a TARP bank that refinanced into SBLF fails to increase its small-business lending, its dividend 

rate will increase by 2 percentage points from, 5% to 7%, after the bank’s 9th quarter in SBLF and there would be a 

2% “lending incentive fee” to 9% on the fifth anniversary of the CPP investment.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 18

SIGTARP 13-002 April 9, 2013

giving some input to Treasury on some banks’ lending plans, former TARP banks 

have not effectively increased small-business lending. 

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 require 

applicants to provide specific details to support their ability to increase lending as 

proposed.26 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 TARP. 

Treasury rejected a SIGTARP recommendation that Treasury should not count the 

TARP capital when evaluating the health and viability of TARP banks, despite 

SIGTARP’s warning that it made little sense to convert a TARP bank to SBLF if 

the institution did not have the necessary capital to support increased lending. 

Treasury claimed that the action SIGTARP recommended could unfairly 

disadvantage the applicant bank. SIGTARP designed the recommendation to 

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

effectively increasing small-business lending, which unfortunately has come to 

fruition. 

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 refinanced into SBLF are demonstrating an inability or unwillingness 

to fulfill the sole purpose of the program – increase lending to small businesses. 

Many TARP 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 

 

26 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. Treasury assigned 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.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 19

SIGTARP 13-002 April 9, 2013

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

program and kept them in TARP.27

Unlike TARP’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 

regulators should have required TARP 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 TARP banks to exit TARP using 

Government funds with more favorable terms than TARP with little resulting 

benefit for small businesses.

Lessons Learned and Recommendations

In conducting this audit, SIGTARP 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. Similarly, the Government Accountability Office (“GAO”) recently 

found that Treasury, regulators, and other members of the Financial Stability 

Oversight Council (“FSOC”) 28 “could do more to promote collaboration” in 

carrying out FSOC’s mission, specifically faulted FSOC for insufficiently 

leveraging resources and for not establishing roles, responsibilities, and joint 

 

27 Furthermore, 14 former TARP banks have paid dividends to common shareholders while in SBLF, despite failing to 

increase their small-business lending. When Treasury provided banks with SBLF funds, it included restrictions on the 

distribution of dividends, should the banks’ capital base fall below a certain level or should they miss payments to 

Treasury. However, no dividend restrictions were placed on banks that failed to meet the projections established in 

their SBLF lending plans.

28 Established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Financial Stability 

Oversight Council is chaired by the Secretary of the Treasury and comprised of Federal financial regulators, state 

regulators, and an independent insurance expert.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 20

SIGTARP 13-002 April 9, 2013

strategies. Although the GAO report addresses a different joint initiative, its 

findings indicate that the lack of coordination and communication that SIGTARP 

identified in the SBLF application process is an ongoing issue that persists across 

other joint efforts between Treasury and regulators. Implementing appropriate 

corrective action could prevent Treasury and regulators from repeating past 

mistakes in future collaborative endeavors.

Accordingly, SIGTARP recommends that:

1. Treasury and the Federal banking regulators should improve coordination 

when collaborating on current and future initiatives by (1) defining the roles 

of all participants at the outset of collaborative efforts by creating precise and 

directed governing documents (i.e., charters) that clearly address the 

responsibilities of each entity; and (2) jointly documenting processes and 

procedures, including flowcharts, risk management tools, and reporting 

systems to ensure that objectives are met. Each participant should sign off to 

demonstrate their understanding of, and agreement with, these procedures.

2. To increase small-business lending by former TARP banks participating in 

SBLF, Treasury should work with the banks to establish new, achievable 

plans to increase lending going forward. 

3. 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 smallbusiness lending while in SBLF.
BANKS THAT USED THE SMALL BUSINESS LENDING FUND TO EXIT TARP 21

SIGTARP 13-002 April 9, 2013

Management Comments and SIGTARP’s 

Responses

Treasury’s Comments

Treasury stated statistics that as a group former TARP banks in SBLF have 

increased lending. SIGTARP recognizes an increase in lending by all but 24 of 

those banks, but finds it not effective ($1.13 for each $1 SBLF), particularly in 

comparison to non-TARP banks ($3.45 for each $1 SBLF). Congress did not set a 

benchmark or goal that as a group SBLF banks increase lending by 10%, as 

Treasury contends. Treasury’s 2011 press release states that the SBLF funds 

would increase lending by “many multiples” of the SBLF amount, and there are 

similar statements by members of Congress. It was never the expectation that 

SBLF banks would only lend out the SBLF funds (a multiple of one). Moreover, 

24 former TARP banks in SBLF have not increased lending, a fact that Treasury 

does not address. In addition, TARP banks that received only enough SBLF 

funds to repay TARP have lent out significantly less than they received in SBLF 

funds – increasing lending by only 25ȼ for each $1 in SBLF funds, another fact 

that Treasury does not address. SIGTARP’s concern is not that TARP banks 

could exit TARP through SBLF (as Treasury contends), but instead that the 

TARP banks that did would have a meaningful impact on lending to small 

businesses, which unfortunately has not occurred, but still could occur with new 

lending plans. 

Treasury disagreed that its communication with the regulators was not effective,

claiming that SIGTARP’s report has errors and omissions, without disputing the 

facts or data in the report. This statement appears to be merely a disagreement 

with SIGTARP’s findings. The only factual dispute that Treasury claims is that 

SIGTARP “apparently relies on misquotes or out-of-context statements from 

SBLF’s program director to argue there was a miscommunication.” SIGTARP 

accurately quoted a statement made by Treasury’s SBLF program director in an 

interview with SIGTARP that Treasury did not perform an independent analysis 

of the projections in the lending plans, and that the analysis was the regulators’ 

responsibility, rather than Treasury. SIGTARP presents this statement in the 

exact context in which it was used – in a discussion of who was responsible for 

the lending plans. His statement was borne out by SIGTARP’s document review.

Importantly, Treasury is not saying now that it performed an independent analysis 

of the projections in the lending plans or that the analysis was its responsibility. 

Rather, Treasury says that it did a “serious review” and rejected as inadequate 

30% of plans. Treasury rejected the plans for missing information and banks 

resubmitted the information. Treasury did not conduct a substantive analysis of 

the lending projections. The miscommunication also is based on document 

review and SIGTARP interviews with officials from the FDIC, the OCC, and the 

Federal Reserve, who told SIGTARP that they believed Treasury had 
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SIGTARP 13-002 April 9, 2013

responsibility for analyzing the lending plans. Indeed, FDIC’s official response to 

this report states, “It was agreed that Treasury, as program administrator and 

investor, would review the plans’ sufficiency in relation to program goals and 

requirements.” Clearly there was a miscommunication.

Federal Reserve’s Comments

The Federal Reserve disagreed that the regulators’ review of lending plans was not 

meaningful. The Federal Reserve reviewed lending plans when it was the primary 

regulator but did not consistently review the plans when it regulated only the applicant 

bank’s holding company. The SBLF money went to the holding company, and the 

Federal Reserve had another opportunity to analyze the plans to ensure that the bank 

could increase lending. 

The Federal Reserve rejected SIGTARP’s recommendation to preclude paying 

dividends by institutions that do not increase small-business lending, stating that it 

“does not believe that it is appropriate to use authority specifically designed to 

address the safety and soundness of depository institutions and their holding 

companies to direct firms to engage in particular types of lending.” While 

historically, the banking regulators have focused only on safety and soundness, 

their role related to TARP, and here SBLF, has been unprecedented. For the first 

time, Treasury was investing in financial institutions and Treasury turned to those 

institutions’ regulators for help in determining whether to make that investment. 

Because regulators took on this new role of consulting and providing 

recommendations that Treasury took into account in making its investment 

decision, it has a responsibility to protect taxpayers’ investment. Taxpayers are 

not protected when banks that took SBLF funds to exit TARP did not increase 

lending, but still paid dividends to shareholders. If those banks do not have 

sufficient capital to lend as they promised the Government in taking the SBLF 

funds, they do not have sufficient capital to pay dividends. We acted as one 

Government in making the investment decision and must act as one Government 

in protecting that investment.

FDIC’s Comments

The FDIC confirmed that it was focused on safety and soundness, while it was 

Treasury’s responsibility to review the lending plans. The FDIC agreed with 

SIGTARP’s recommendation to improve coordination with Treasury, but rejected 

SIGTARP’s recommendation to preclude dividend payments, claiming there is no 

authority in the Jobs Act. Banking regulators have significant authority to 

preclude dividends and if they need additional legislative authority, they should 

seek it.
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OCC’s Comments

The OCC agreed that SIGTARP’s data are “true,” but states that there were other 

factors that influenced lending such as economic conditions. That is precisely 

why Treasury and banking regulators who knew these economic conditions 

should have analyzed the lending plans, and can still create new lending plans. 

The OCC agreed with SIGTARP’s recommendation to improve coordination, but 

rejected the recommendation to preclude dividends, stating that national banks do

not apply to pay dividends unless there are extraordinary circumstances, such as a 

provision in an enforcement action, and otherwise there is no basis in existing 

statutes to restrict dividends. The OCC can stop these dividend payments, and if 

the OCC believes it needs additional legislative authority, it should seek it.
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Appendix A – Scope and Methodology

We performed this audit under the authority of Public Law 110-343, as amended, which also 

incorporates the duties and responsibilities of inspectors general under the Inspector General Act of 

1978, as amended. SIGTARP initiated this audit after institutions exited TARP by refinancing into 

SBLF, a program promulgated by the Small Business Jobs Act of 2010. Our objective was to 

determine the extent to which Treasury and regulators consistently evaluated applications submitted 

by TARP banks to exit TARP by refinancing into SBLF. 

In November 2011, SIGTARP announced a review of Treasury’s SBLF application process because 

of the number of TARP institutions that exited TARP through SBLF and the significant amount of 

TARP investment that was refinanced into the new program. SIGTARP coordinated with other 

oversight agencies to ensure maximum coverage and to reduce any overlap, resulting in the report’s 

focus on the above objective. 

To evaluate the SBLF application process established and implemented by Treasury and regulators 

between October 2010 and October 2011, we met with Treasury, OCC, FDIC, and Federal Reserve 

officials involved in the application process to discuss roles and responsibilities in the decisionmaking process. We also reviewed Treasury and regulator policies, procedures, internal controls, 

and documents relevant to the SBLF application and decision-making process for all SBLF 

applicants. We examined the processes by Treasury and regulators to assess the financial condition 

of all applicants and the lending plans they submitted. Additionally, we reviewed legislation 

pertaining to SBLF, including the Small Business Jobs Act of 2010, which provided Treasury with 

the authority to issue regulations and other guidance to permit eligible institutions to refinance from 

TARP to SBLF and the legislative history of the Act. 

In addition to our work described above, SIGTARP selected a judgment sample of 32 applicants (or 

10% of the total population of 320 TARP institutions that applied to the SBLF program). We drew 

only from the 164 institutions that proceeded far enough into the application process for Treasury to 

create an application package, including investment analyses. Among these, SIGTARP selected 32 

of the marginal applications – those submitted by institutions deemed viable but where we identified 

one or more risk factors. These risk factors include, but are not limited to, low initial repayment 

probability, high levels of non-performing loans, low regulatory ratings, “stale” regulatory exams 

and ratings, and dividend restrictions that were either waived or lifted. Although a judgment sample 

does not permit projecting findings to the wider population, employing this methodology allowed 

SIGTARP to focus in more detail on the decision making applied to these applications. 

To ensure our sample largely represented the population of TARP banks that applied to SBLF, 

SIGTARP considered each institution’s regulator, size, location, and whether or not it ultimately 

received SBLF funding. We then obtained additional information for each applicant, including 

regulator input, probability of repayment analyses produced by Treasury financial agents, smallbusiness lending plans, and recommendations from the SBLF Application Review Team. The 

investment analyses SIGTARP reviewed outlined each bank’s financial standing and its ability to 

meet dividend requirements. We also reviewed the official meeting minutes of the SBLF 
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Application Review Committee (an interagency advisory committee) and the SBLF Investment 

Committee, bank examination reports, and Treasury and regulator emails. 

We conducted our audit from January 2012 through February 2013. Our audit was conducted 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 

findings and conclusions based on the audit objective. SIGTARP believes that the evidence 

obtained provides a reasonable basis for the findings and conclusions based on the audit objective.

Limitations on Data

SIGTARP generally relied on Treasury and regulators to provide relevant documentation, including 

email communications, examinations, and other files related to the SBLF application review process. 

To the extent that the documentation provided to SIGTARP by Treasury and regulators did not 

reflect a comprehensive response to SIGTARP’s documentation requests, SIGTARP’s review may 

have been limited. 

Use of Computer-Processed Data

To perform this audit, SIGTARP used data provided by Treasury. To assess the extent to which 

Treasury generated reliable data, we met with SBLF officials to discuss the database and data fields. 

Additionally, we tested the data using the SIGTARP matrix to identify any potentially significant 

reliability issues. We also relied on GAO’s assessment and reliability conclusion on a similar SBLF 

dataset it reviewed and reported on in December 2011. Based on the results of our electronic testing, 

discussions with SBLF officials, and the determination made by GAO regarding a similar database 

provided by Treasury, we concluded that Treasury’s data are sufficiently reliable for the purposes of 

our audit. 

Internal Controls

To assess internal controls pertaining to the SBLF application review process, SIGTARP 

interviewed staff and reviewed policies and procedures from Treasury, the FDIC, the Federal 

Reserve, and the OCC to determine the extent to which internal controls were reasonable and 

effective.

Prior Coverage

SIGTARP has not performed any prior audits related to the SBLF program, although SIGTARP 

previously issued recommendations to Treasury regarding TARP banks refinancing into SBLF, 

which can be found in SIGTARP’s Quarterly Report to Congress dated October 26, 2010. In 

addition, for further discussion on SBLF investments into TARP banks, see “TARP & SBLF: Impact 

on Community Banks,” published April 25, 2012, in SIGTARP’s Quarterly Report to Congress. 

www.sigtarp.gov/Audit%20Reports/TARP_SBLF_Special_Section.pdf
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Appendix B – Acronyms and Abbreviations

CPP – Capital Purchase Program

FDIC – Federal Deposit Insurance Corporation

Federal Reserve – Federal Reserve Board

FSOC – Financial Stability Oversight Council

GAO – Government Accountability Office

Jobs Act – Small Business Jobs Act of 2010

OCC – Office of the Comptroller of the Currency

SBLF – Small Business Lending Fund

SIGTARP – Office of the Special Inspector General for the Troubled Asset Relief Program

TARP – Troubled Asset Relief Program

Treasury – U.S. Department of the Treasury
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Appendix C – Audit Team Members

This audit was conducted and the report was prepared under the direction of Bruce S. Gimbel, 

Acting Assistant Deputy Special Inspector General for Audit and Evaluation, Office of the Special 

Inspector General for the Troubled Asset Relief Program.

Staff members who conducted the audit and contributed to the report include Shawn Graham, 

Roxanne Caruso, Mary Jean, and Sean Morgan.
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Appendix D – Management Comments from Treasury, FDIC, 

OCC, and Federal Reserve
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