The Small Business Lending Fund
Released: 2019-04-12T00:00:00

Small Business Access to Capital

Congressional interest in small business access to capital has increased in recent years because of concerns that small businesses might be prevented from accessing sufficient capital to enable them to start, continue, or expand operations and create jobs. Small businesses have played an important role in net job growth during previous economic recoveries, particularly in the construction, housing, and retail sectors. For example, after the eight-month recession that began in July 1990 and ended in March 1991, small businesses (defined for this purpose as having fewer than 500 employees) increased their net employment in the first year after the recession, whereas larger businesses continued to experience declines in employment. During the most recent recession (December 2007-June 2009), small businesses accounted for almost 60% of net job losses. From the end of the recession through the end of FY2012, small businesses accounted for about 63% of net new jobs, close to their historical average share of net new job creation. Since then, small businesses have added about 65% of net new jobs.

Some have argued that the federal government should provide additional resources to assist small businesses. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses and create jobs.

Several laws were enacted during the 111 th Congress to enhance small business access to capital. For example,

P.L. 111-5 , the American Recovery and Reinvestment Act of 2009 (ARRA), provided the Small Business Administration (SBA) an additional $730 million, including $375 million to temporarily subsidize SBA fees and increase the 7(a) loan guaranty program's maximum loan guaranty percentage from 85% on loans of $150,000 or less and 75% on loans exceeding $150,000 to 90% for all regular 7(a) loans. P.L. 111-240 , the Small Business Jobs Act of 2010, authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) ($4.0 billion was issued) to encourage community banks with less than $10 billion in assets to increase their lending to small businesses. It also authorized a $1.5 billion State Small Business Credit Initiative to provide funding to participating states with small business capital access programs, numerous changes to the SBA's loan guaranty and contracting programs, funding to continue the SBA's fee subsidies and the 7(a) program's 90% maximum loan guaranty percentage through December 31, 2010, and about $12 billion in tax relief for small businesses. P.L. 111-322 , the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue its fee subsidies and the 7(a) program's 90% maximum loan guaranty percentage through March 4, 2011, or until available funding was exhausted, which occurred on January 3, 2011.

According to the SBA, the temporary fee subsidies and 90% maximum loan guaranty for the 7(a) program "engineered a significant turnaround in SBA lending.... The end result is that the agency helped put more than $42 billion in the hands of small businesses through the Recovery Act and Jobs Act combined."

This report focuses on the SBLF. It begins with a discussion of the supply and demand for small business loans. The SBLF's advocates argued that the fund was an important part of a larger effort to enhance the supply of small business loans. After describing the program's structure, the report then examines other arguments that were presented both for and against the program's enactment. Advocates claimed the SBLF would increase lending to small businesses and, in turn, create jobs. Opponents contended that the SBLF could lose money, lacked sufficient oversight provisions, did not require lenders to increase their lending to small businesses, could serve as a vehicle for the Troubled Asset Relief Program (TARP) recipients to effectively refinance their TARP loans on more favorable terms with little or no resulting benefit for small businesses, and could encourage a failing lender to make even riskier loans to avoid higher dividend payments.

The report concludes with an examination of the SBLF's implementation by the Department of the Treasury and a discussion of bills introduced during recent Congresses to amend the SBLF. For example, during the 112 th Congress, S. 681 , the Greater Accountability in the Lending Fund Act of 2011, would have, among other provisions, limited the program's authority to 15 years from enactment and prohibited TARP recipients from participating in the program. H.R. 2807 , the Small Business Leg-Up Act of 2011, would have transferred any unobligated and repaid funds from the SBLF when its investment authority expired on September 27, 2011, to the Community Development Financial Institutions Fund "to continue the program of making capital investments in eligible community development financial institutions in order to increase the availability of credit for small businesses." H.R. 3147 , the Small Business Lending Extension Act, would have, among other provisions, extended the Department of the Treasury's investment authority from one year following the date of enactment to two years. During the 113 th Congress, H.R. 2474 , the Community Lending and Small Business Jobs Act of 2013, would have transferred any unobligated and repaid funds from the SBLF to the Community Development Financial Institutions Fund.

Two Indicators of the Supply and Demand for Small Business Loans

Federal Reserve Board: Survey of Senior Loan Officers

Each quarter, the Federal Reserve Board surveys senior loan officers concerning their bank's lending practices. The survey includes questions about both the supply and demand for small business loans. For example, the survey includes a question concerning their bank's credit standards for small business loans: "Over the past three months, how have your bank's credit standards for approving applications for C&I [commercial and industrial] loans or credit lines—other than those to be used to finance mergers and acquisitions—for small firms (defined as having annual sales of less than $50 million) changed?" The senior loan officers are asked to indicate if their bank's credit standards have "Tightened considerably," "Tightened somewhat," "Remained basically unchanged," "Eased somewhat," or "Eased considerably." Subtracting the percentage of respondents reporting "Eased somewhat" and "Eased considerably" from the percentage of respondents reporting "Tightened considerably" and "Tightened somewhat" provides an indication of the market's supply of small business loans.

As shown in Figure 1 , senior loan officers reported that they generally tightened small business loan credit standards from 2007 through late 2009. Since 2009, small business credit markets have generally improved, with some tightening in 2016 and the end of 2018.

The survey also includes a question concerning the demand for small business loans: "Apart from normal seasonal variation, how has demand for C&I loans changed over the past three months for small firms (annual sales of less than $50 million)?" Senior loan officers are asked to indicate if demand was "Substantially stronger," "Moderately stronger," "About the same," "Moderately weaker," or "Substantially weaker." Subtracting the percentage of respondents reporting "Moderately weaker" and "Substantially weaker" from the percentage of respondents reporting "Substantially stronger" and "Moderately stronger" provides an indication of the market's demand for small business loans.

As shown in Figure 1 , senior loan officers reported that the demand for small business loans declined somewhat in 2007 and 2008, and declined significantly in 2009. Demand then leveled off (at a relatively reduced level) during 2010, increased somewhat during the first half of 2011, declined during the latter half of 2011, generally increased from 2012 through 2015, and has varied somewhat, increasing in some quarters and declining in others, since then.

Federal Deposit Insurance Corporation: Outstanding Loan Balance

The Federal Deposit Insurance Corporation (FDIC) has maintained comparable small business lending data for the second quarter (June 30) of each year since 2002. Figure 2 shows the amount of outstanding small business loans (defined by the FDIC as commercial and industrial loans of $1 million or less) for nonagricultural purposes as of June 30 of each year from 2006 to 2018. As shown in Figure 2 , the amount of outstanding small business loans for nonagricultural purposes increased at a relatively steady pace from June 30, 2006, to June 30, 2008, declined over the next several years, and has increased each year since June 30, 2013.

Although changes in small business outstanding debt are not necessarily a result of changes in the supply of small business loans, many, including the SBA, view a decline in small business outstanding debt as a signal that small businesses might be experiencing difficulty accessing sufficient capital to enable them to lead job growth.

Factors that May Have Contributed to the Decline in the Supply of Small Business Loans in 2007-2010

According to an SBA-sponsored study of small business lending, several factors contributed to the decline in small business lending from 2007 to 2010. The report's authors noted that the 30% decline in home prices from their peak in 2006 to 2010 diminished the value of collateral for many small business borrowers, some of whom had relied on home equity loans to finance their small businesses during the real estate boom. The authors concluded that the absence of this additional source of collateral may have contributed to a decline in lending to small businesses. They also argued that many small businesses found it increasingly difficult to renew existing lines of credit as lenders became more cautious as a result of slow economic growth and an increasing risk of loan defaults, especially among small business start-ups, which are generally considered among the most risky investments. The authors argued that

in this newly regulated market, smaller lenders are likely to be less profitable because they have fewer sales of products and services to spread out over the higher auditing and FDIC costs. Hence, they have less money to lend to small businesses and others; and the relative difficulty in assessing creditworthiness due to the lack of information about potential financial performance is very high in small business lending, especially in financial markets driven by factor—rather than relationship—lending. Therefore, one would expect the small business loan market to recover more slowly than other financial markets.

The authors also noted that FDIC data indicated that small business lending had not only declined in absolute terms (the total amount of dollars borrowed and the total number of small business loans issued), but in relative terms as well (the market share of business loans):

Over the eight years from 2003 through 2010, small business loans as a share of total business loans declined by more than 12 percentage points, from 81.7% in 2003 to 68.9% in 2010. Perhaps of most concern is the further decline in the ratios of small business loans to total assets and small business loans to total business loans. Small business loans constituted about 16.8% of total assets in 2005, but only 15.3% in 2010; hence, small business lending is becoming less significant for these lenders. Small business lending is also losing market share in the business loan market. In the eight-year period from 2003 to 2010, small business loans as a share of total business loans declined more than 10 percentage points from 81.7% in 2003 to 68.9% in 2010.

Factors that May Have Contributed to the Decline in the Demand for Small Business Loans in 2007-2010

According to the previously mentioned SBA-sponsored study of small business lending, the demand for small business loans fell during the recession primarily because many small businesses experienced a decline in sales and many small business owners had a heightened level of uncertainty concerning future sales. The study's authors argued that given small business owners' lack of confidence in the demand for their goods and services, many small business owners decided to save capital instead of hiring additional employees and borrowing capital to invest in business expansions and inventory.

The responses of small business owners to a monthly survey by the National Federation of Independent Business Research Foundation (NFIB) concerning small business owners' views of the economy support the argument that declining sales contributed to the reduced demand for small business loans. From 2008 through 2011, small business owners responding to the NFIB surveys identified poor sales as their number-one problem. Prior to 2008, taxes had been reported as their number-one problem in nearly every survey since the monthly surveys began in 1986. Also, employment data suggest that small businesses were particularly hard hit by the recession. As mentioned previously, small businesses accounted for almost 60% of the net job losses during the December 2007-June 2009 recession.

According to testimony by the Secretary of the Treasury before the House Small Business Committee on June 22, 2011, small businesses were especially hard hit by the recession because

[s]mall businesses are concentrated in sectors that were especially hard hit by the recession and the bursting of the housing bubble: construction and real estate. More than one-third of all construction workers are employed by firms with less than 20 workers, and an additional third are employed by businesses with fewer than 100 employees. Just over half of those employed in the real estate, rental, and leasing sectors work for businesses with less than 100 workers on their payrolls. More broadly, the rate of job losses was almost twice as high in small businesses as it was in larger firms during the depths of the crisis.

The Congressional Response to the Decline in the Supply and Demand for Small Business Loans

During the 111 th Congress, legislation designed to increase both the supply and demand for small business loans was adopted. For example, Congress provided more than $1.1 billion to temporarily subsidize fees for the SBA's 7(a) and 504/Certified Development Company (504/CDC) loan guaranty programs and to increase the 7(a) program's maximum loan guaranty percentage from 85% on loans of $150,000 or less and 75% on loans exceeding $150,000 to 90% for all regular 7(a) loans (funding was exhausted on January 3, 2011). The fee subsidies were designed to increase the demand for small business loans by reducing the cost of borrowing. The 90% loan guarantee was designed to increase the supply of small business loans by reducing the risk of lending.

Congress also provided the SBA additional resources to expand its lending to small businesses. For example, ARRA included a $255 million temporary, two-year small business stabilization program to guarantee loans of $35,000 or less to small businesses for qualified debt consolidation, later named the America's Recovery Capital (ARC) Loan program (the program ceased issuing new loan guarantees on September 30, 2010); an additional $15 million for the SBA's surety bond program and a temporary increase in that program's maximum bond amount from $2 million to $5 million and up to $10 million under certain conditions (the higher maximum bond amounts ended on September 30, 2010); an additional $6 million for the SBA's Microloan program's lending program and an additional $24 million for the Microloan program's technical assistance program; and increased the funds ( leverage ) available to SBA-licensed Small Business Investment Companies (SBICs) to no more than 300% of the company's private capital or $150 million, whichever is less.

Several other programs were also enacted during the 111 th Congress to increase the supply of small business loans. For example, ARRA authorized the SBA to establish a temporary secondary market guarantee authority to provide a federal guarantee for pools of first lien 504/CDC program loans that are to be sold to third-party investors. ARRA also authorized the SBA to make below-market interest rate direct loans to SBA-designated "Systemically Important Secondary Market (SISM) Broker-Dealers" that would use the loan funds to purchase SBA-guaranteed loans from commercial lenders, assemble them into pools, and sell them to investors in the secondary loan market.

P.L. 111-240 extended the SBA's secondary market guarantee authority from two years after the date of ARRA's enactment to two years after the date of the program's first sale of a pool of first lien position 504/CDC loans to a third-party investor (which took place on September 24, 2010). The act also increased the loan guarantee limits for the SBA's 7(a) program from $2 million to $5 million, and for the 504/CDC program from $1.5 million to $5 million for "regular" borrowers, from $2 million to $5 million if the loan proceeds are directed toward one or more specified public policy goals, and from $4 million to $5.5 million for manufacturers. It also increased the SBA's Microloan program's loan limit for borrowers from $35,000 to $50,000 and for microlender intermediaries after their first year in the program from $3.5 million to $5 million. In addition, it temporarily increased for one year (through September 26, 2011) the SBA 7(a) Express Program's loan limit from $350,000 to $1 million. The act also authorized the Secretary of the Treasury to establish the $30 billion SBLF and a $1.5 billion State Small Business Credit Initiative to provide funding to participating states with small business capital access programs.

The SBLF

The SBLF was designed "to address the ongoing effects of the financial crisis on small businesses by providing temporary authority to the Secretary of the Treasury to make capital investments in eligible institutions in order to increase the availability of credit for small businesses." The SBLF's legislative history, including differences in the House- and Senate-passed versions of the program, appears in the Appendix .

P.L. 111-240 authorized the Secretary of the Treasury to make up to $30 billion in capital investments in eligible institutions with total assets equal to or less than $1 billion or $10 billion (as of the end of the fourth quarter of calendar year 2009). The authority to make capital investments in eligible institutions was limited to one year after enactment.

Eligible financial institutions with total assets equal to or less than $1 billion as of the end of the fourth quarter of calendar year 2009 could apply to receive a capital investment from the SBLF in an amount not exceeding 5% of risk-weighted assets, as reported in the FDIC call report immediately preceding the date of application. During the fourth quarter of 2009, 7,340 FDIC-insured lending institutions reported having assets amounting to less than $1 billion.

Eligible financial institutions with total assets of $10 billion or less as of the end of the fourth quarter of calendar year 2009 could apply to receive a capital investment from the fund in an amount not exceeding 3% of risk-weighted assets, as reported in the FDIC call report immediately preceding the date of application. During the fourth quarter of 2009, 565 FDIC-insured lending institutions reported having assets of $1 billion to $10 billion.

Risk-weighted assets are assets such as cash, loans, investments, and other financial institution assets that have different risks associated with them. FDIC regulations (12 C.F.R. §567.6) establish that cash and government bonds have a 0% risk-weighting; residential mortgage loans have a 50% risk-weighting; and other types of assets (such as small business loans) have a higher risk-weighting.

Lending institutions on the FDIC problem bank list or institutions that have been removed from the FDIC problem bank list for less than 90 days are ineligible to participate in the program. A lending institution can refinance securities issued through the Treasury Capital Purchase Program (CPP) and the Community Development Capital Incentive (CDCI) program under TARP, but only if that institution had not missed more than one dividend payment due under those programs.

Dividend Rates

Participating banks (C corporations and savings associations) are charged a dividend rate of no more than 5% per annum initially, with reduced rates available if the bank increases its small business lending by specified amounts. For example, during any calendar quarter in the initial two years of the capital investments under the program, the bank's dividend rate is lowered if it increases its small business lending, as reported in its FDIC call reports, compared with the average small business lending it made in the four previous quarters immediately preceding the law's enactment, minus some allowable adjustments.

Table 1 shows the dividend rates associated with small business lending increases by C corporation banks and savings associations.

Table 2 shows the dividend rates associated with small business lending increases by participating S corporation banks and mutual lending institutions. These rates are slightly higher than those for C corporation banks and savings associations "to reflect after-tax effective rates equivalent to the dividend rate paid by other classes of institutions participating in the Fund through the issuance of preferred stock." As will be discussed later, an S corporation does not pay federal taxes at the corporate level. Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns.

Community Development Financial Institutions (CFDIs) are provided funding for an initial eight years with an automatic rollover for two additional years at the issuer's option. On the 10 th anniversary of the investment date the issuer repays the principal amount, together with all accrued and unpaid interest. Additionally, the dividend rate is 2% per annum for the first eight years from the investment date (payable quarterly in arrears on January 1, April 1, July 1, and October 1 of each year) and 9% thereafter.

Lending Plan Requirement

SBLF applicants are required to submit a small business lending plan to the appropriate federal banking agency and, for applicants that are state-chartered banks, to the appropriate state banking regulator. The plan must describe how the applicant's business strategy and operating goals will allow it to address the needs of small businesses in the areas it serves, as well as a plan to provide linguistically and culturally appropriate outreach, where appropriate. The plan is treated as confidential supervisory information. The Secretary of the Treasury is required to consult with the appropriate federal banking agency or, in the case of an eligible institution that is a nondepository community development financial institution, the Community Development Financial Institution Fund, before determining if the eligible institution may participate in the program.

The act directed that all funds received by the Secretary of the Treasury in connection with purchases made by the SBLF, "including interest payments, dividend payments, and proceeds from the sale of any financial instrument, shall be paid into the general fund of the Treasury for reduction of the public debt."

Arguments For and Against the SBLF

The SBLF's advocates argued that it would create jobs by encouraging lenders, especially those experiencing liquidity problems (access to cash and easily tradable assets), to increase their lending to small businesses. For example, the House report accompanying H.R. 5297 , the Small Business Lending Fund Act of 2010, argued that the SBLF was needed to enhance small business's access to capital, which, in turn, was necessary to enable those businesses to create jobs and assist in the economic recovery:

There has been a dramatic decrease in the amount of bank lending in the past several quarters. On May 20, 2010, the Federal Deposit Insurance Corporation (FDIC) released its Quarterly Banking Profile for the first quarter of 2010. The report shows that commercial and industrial loans declined for the seventh straight quarter, down more than 17% from the year before.

Many companies, particularly small businesses, claim that it is becoming harder to get new loans to keep their business operating and that banks are tightening requirements or cutting off existing lines of credit even when the businesses are up to date on their loan repayments. Treasury Secretary Timothy F. Geithner recently acknowledged the problem encountered by some banks, both healthy and troubled, which have been told to maintain capital levels in excess of those required to be considered well capitalized.

Some banks say they have little choice but to scale back lending, even to creditworthy borrowers, and the most recent Federal Reserve data shows banks are continuing to tighten lending terms for small businesses.

A dissenting view, endorsed by the House Committee on Financial Services' minority members, was included in the report. This view argued that the SBLF does not properly deal with the lack of financing for small businesses:

Instead of addressing the problem by stimulating demand for credit by small businesses, H.R. 5297 injects capital into banks with no guarantees that they will actually lend. The bill allows a qualifying bank to obtain a capital infusion from the government without even requiring the bank to make a loan for two years. In fact, if a bank reduces or fails to increase lending to small business during those first two years, it would not face any penalty. It defies logic that the Majority would support a bill to increase lending that does not actually require increased lending. A more effective response to the challenges facing America's small businesses was offered by Representatives Biggert, Paulsen, Castle, Gerlach, and King, whose amendment would have extended a series of small business tax credits before implementing the Small Business Lending Fund.

Advocates also argued that even if the SBLF were authorized "the program probably would not be fully operational for months; banks could shun the program for fear of being stigmatized by its association with TARP; and many banks would avoid taking on new liabilities when their existing assets are troubled." They contended that the bill did not provide sufficient oversight for effectively monitoring the program because the Inspector General of the Department of the Treasury, who was given that oversight responsibility under the bill, "might not be able to direct sufficient attention to this task given its other responsibilities." They argued that the Special Inspector General of TARP would be in a better position to provide effective oversight of the program.

These, and other, arguments were presented during House floor debate on the bill. For example, Representative Melissa Bean advocated the bill's passage, arguing that the SBLF

builds on the effective financial stabilization measures Congress has previously taken by establishing a new $30 billion small business loan fund to provide additional capital to community banks that increase lending to small businesses. This $30 billion investment on which the government will be collecting dividends and earning a profit per the CBO [Congressional Budget Office] estimates can be leveraged by banks into over $300 billion in new small business loans. This is an important investment by the Federal Government in our small business that brings tremendous returns.

The terms of the capital provided to banks are performance based; the more a bank increases its small business lending, the lower the dividend rate is for the SBLF capital. If a bank decreases its small business lending, it will be penalized with higher dividend rates.

This legislation includes strong safeguards to ensure that banks adequately utilize available funds to increase lending to small businesses, not for other lending or to improve their balance sheet. There will be oversight consistently throughout the program, plus it requires that the capital be invested only in strong financial institutions at little risk of default and the best positioned to increase small business lending.

It's important for Americans to understand that although this fund has a maximum value of $30 billion, it is estimated to make a profit for taxpayers in the long run. And the money will ultimately go not to banks, but to the small businesses and their communities that they lend to. As our financial system stabilizes and our community banks recapitalize, these funds will be repaid to Treasury with full repayment required over the next 10 years.

Representative Nydia Velázquez, then-chair of the House Committee on Small Business, added that the legislation had sufficient safeguards in place to ensure that the funds were targeted at small businesses:

First, banks must apply to the Treasury to receive funds, with a detailed plan on how to increase small business lending at their institution. This language was included at my insistence that we need to make sure that small businesses will get the benefit of this legislation.

Second, this capital, repayment of the government loans will be at a dividend rate starting at 5% per year. This rate will be lowered by 1% for every 2.5% increase in small business lending over 2009 levels. It can go as low as a total dividend rate of just 1% if the bank increases its business lending by 10% or more, incentivizing banks to do the right thing. To ensure that banks actually use the funding they receive, the rate will increase—and there are penalties—to 7% if the bank fails to increase its small business lending at their institution within 2 years. To ensure that all federal funds are paid back within 5 years, the dividend rate will increase to 9% for all banks, irrespective of their small business lending, after 4 1/2 years.

Representative Velázquez added "let me just make it clear … CBO estimates that [the SBLF] will save taxpayers $1 billion over 10 years, as banks are expected to pay back this loan over 10 years, with interest."

Representative Randy Neugebauer opposed the bill's adoption, arguing that

the majority is repeating the same failed initiatives that have helped our national debt grow to $13 trillion in the past 2 years. This bill follows the model of the TARP program, minus [TARP's] stronger oversight, and it puts another $30 billion into banks in the hopes that lending to small businesses will increase. In the words of Neil Barofsky, the Special Inspector General who oversees the TARP, "In terms of its basic design," he says, "its participants, its application process, from an oversight perspective, the Small Business Lending Fund would essentially be an extension of the TARP's Capital Purchase Program." From the Congressional Oversight Panel for TARP, chaired by Elizabeth Warren, she says, "The SBLF's prospects are far from certain. The SBLF also raises questions about whether, in light of the Capital Purchase Program's poor performance in improving credit access, any capital infusion program can successfully jump-start small business lending."

This bill allows for another $33 billion in spending that will be added to the government's credit card. The CBO tells us that the bank lending portion will ultimately cost taxpayers $3.4 billion when market risk is taken into account.

The House passed H.R. 5297 by a vote of 241-182, on June 17, 2010.

The arguments presented during House floor debate on H.R. 5297 were also presented during Senate consideration of the bill. Advocates argued that the SBLF would encourage higher levels of small business lending and jobs. For example, Senator Mary Landrieu argued on July 21, 2010, that the SBLF should be adopted because it "is not a government program for banks. It is a public-private partnership lending strategy for small business." She added that as chair of the Senate Committee on Small Business and Entrepreneurship, she talked with her colleagues, including the SBLF's opponents, and revised the program to address their concerns. She also argued that the SBLF has

hundreds of endorsements from independent banks, the community banks and almost every small business association in America … makes $1 billion [according to the CBO score] … is not direct lending from the federal government. It is not creating a new bureaucracy … [It is] voluntary … there are no onerous restrictions.… The small business gets the loans. We create jobs. People are employed. The recession starts ending…. It has nothing to do with TARP money. It is not a TARP program. It is not a bank program. It doesn't have anything to do with banks except that we are working in partnership with banks to lend money to small businesses which are desperate for money.

Opponents argued that the SBLF could lose money, lacked sufficient oversight provisions, did not require lenders to increase their lending to small businesses, could serve as a vehicle for TARP recipients to effectively refinance their TARP loans on more favorable terms with little or no resulting benefit for small businesses, and could encourage a failing lender to make even riskier loans to avoid higher dividend payments. In addition, there were disagreements over the number of amendments that could be offered by the minority, which led several Senators to oppose further consideration of the bill until that issue was resolved to their satisfaction. For example, on July 22, 2010, Senator Olympia Snowe argued that although "under a cash-based estimate, CBO listed the official score for the lending fund as raising $1.1 billion over 10 years," SBLF proponents "fail to mention" that when CBO scored the SBLF using an alternative methodology that adjusts for market risk, it estimated that the SBLF could cost $6.2 billion. Senator Snowe also argued that the bipartisan Congressional Oversight Panel for TARP stated in its May 2010 oversight report that the proposed SBLF "substantially resembles" the TARP and "is a bank-focused capital infusion program that is being contemplated despite little, if any, evidence that such programs increase lending." Senator Snowe noted that she regretted "that we are in a position where we have not been able to reach agreement allowing the minority to offer amendments, which is confounding and perplexing as well as disappointing." Senator Snowe later added that the SBLF's incentives to encourage lending to small businesses also "could encourage unnecessarily risky behavior by banks … to avoid paying higher interest rates."

Opponents also questioned the SBLF's use of quarterly call report data as submitted by lenders to their appropriate banking regulator to determine what counts as a small business loan. Call report data denotes loans of $1 million or less as small business loans, regardless of the size of the business receiving the loan. As a result, the SBLF's opponents argued that "the data used to measure small business lending in the SBLF covers an entirely different set of small businesses than those that fall within the definition set out in the Small Business Act or used by the SBA."

The Senate's version of H.R. 5297 was agreed to on September 16, 2010, by a vote of 68-38. The House agreed to the Senate-passed version of H.R. 5297 on September 23, 2010, by a vote of 237-187, and the bill, retitled the Small Business Jobs Act of 2010, was signed into law by President Obama on September 27, 2010.

The SBLF's Implementation

On February 14, 2011, the Obama Administration issued its budget recommendation for FY2012. The budget anticipated that the SBLF would provide $17.399 billion in financings, well below its authorized amount of $30 billion. This was the first indication that the SBLF's implementation may not proceed as expected. The second indication that the program's implementation may not proceed as expected was an unanticipated delay in the writing of the program's regulations.

Treasury's Rollout of the Program

The U.S. Treasury was criticized by some for not implementing the program quickly enough. The first financing took place on June 21, 2011, about nine months after the program's enactment. The delay was largely due to the Treasury's need to finalize the SBLF's investment decision process with federal banking agencies and the need to create separate SBLF regulations for financial institutions established as C corporations, Subchapter S corporations, mutual lending institutions, and Community Development Financial Institutions (CDFIs).

A C corporation is a legal entity established under state law and includes shareholders, directors, and officers. The profit of a C corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends. The majority of insured depository institutions, bank holding companies, and savings and loan holding companies are C corporations. A Subchapter S c orporation refers to a section of the Internal Revenue Code (IRC) that allows a corporation to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. Mutual lending institutions , which include many thrifts, are owned by their depositors or policyholders. They have no stockholders. CDFIs are financial entities certified by the CDFI Fund in the U.S. Department of the Treasury and provide capital and financial services to underserved communities.

The establishment of separate regulations for each of these different types of financial institutions was largely related to issues involving whether the SBLF's financings would be counted by banking regulatory agencies as Tier 1 capital (core capital that is relatively liquid, such as common shareholders' equity, disclosed reserves, most retained earnings, and perpetual noncumulative preferred stocks) or as Tier 2 capital (supplementary capital that consists mainly of undisclosed reserves, revaluation reserves, general provisions, hybrid instruments, and subordinated term debt).

The treatment of the SBLF's financings was important given that banks must maintain a minimum total risk-based capital ratio of 8% (the ratio measures bank capital against assets, with asset values risk-weighted, or adjusted on a scale of riskiness) to be considered adequately capitalized by federal banking regulators. In addition, banks must maintain a minimum Tier 1 risk-based ratio to assets, typically 3% for banking institutions with the highest financial ratings and 4% for others.

According to Treasury officials, under Internal Revenue Service (IRS) rules, S corporations can have only a single class of stock (common shares). Consequently, these institutions cannot issue preferred stock to Treasury. As a result, Treasury had to consider purchasing subordinated debt from these institutions, which the banking regulatory agencies would likely designate as Tier 2 capital. Treasury officials believed that providing Tier 2 capital would probably result in fewer S corporation participants. Additionally, because mutual lending institutions do not issue stock, Treasury officials were unable to receive preferred stock as consideration for an investment in this type of institution. Therefore, Treasury had to consider purchasing subordinated debt from these institutions as well.

Treasury completed its regulations for C corporation banks first. For C corporations, SBLF funds are treated as Tier I capital and the Treasury purchases senior perpetual noncumulative preferred stock (or an equivalent). The stock pays a quarterly dividend on the first day of each quarter after closing of the SBLF capital program funding. Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings) but may also include nonredeemable, noncumulative preferred stock. In contrast, S corporations and mutual lending institutions receive unsecured subordinated debentures from the Treasury, which are considered Tier 2 capital for regulatory capital requirements.

The application deadline for C corporation banks was May 16, 2011. The application deadline for Subchapter S corporations and mutual lending institutions was June 6, 2011, and the application deadline for CDFIs was June 22, 2011. A total of 926 institutions applied for $11.8 billion in SBLF funding.

Treasury approved more than $4.0 billion in SBLF financing to 332 lending institutions ($3.9 billion to 281 community banks and $104 million to 51 CDFIs). SBLF recipients have offices located in 47 states and the District of Columbia. The average financing was $12.1 million, ranging from $42,000 to $141.0 million.

Of the 332 lending institutions which received financing, 137 institutions had participated in TARP's Community Development Capital Initiative or its Capital Purchase Program. These institutions received nearly $2.7 billion in SBLF financing (66.8% of the total).

Small Business Lending Progress Reports

Treasury is required to publish monthly reports describing all transactions made under the SBLF program during the reporting period. It is also required to publish a semiannual report (each March and September) providing all projected costs and liabilities, operating expenses, and transactions made by the SBLF, including a list of all participating institutions and the amounts each institution has received under the program. Treasury must also publish a quarterly report describing how participating institutions have used the funds they have received.

SBLF participants must submit an initial supplemental report to Treasury no later than five business days before closing. The report provides information from the institution's FDIC call reports or, for holding companies, from their subsidiaries' FDIC call reports, that Treasury uses to establish an initial baseline for measuring the SBLF participants' progress in making loans to small businesses.

The initial baseline is the average amount of qualified small business lending that was outstanding for the four full quarters ending on June 30, 2010. It is derived by first adding the outstanding amount of lending reported for all commercial and industrial loans, owner-occupied nonfarm, nonresidential real estate loans, loans to finance agricultural production and other loans to farmers, and loans secured by farmland. Then, the outstanding amount of lending for large loans (defined as any loan or group of loans greater than $10 million), loans to large businesses (defined as businesses with annual revenues greater than $50 million), and the portion of any loans guaranteed by the U.S. government or for which the risk is assumed by a third party is subtracted from that amount. The lending institution then adds back any cumulative charge-offs with respect to such loans since July 1, 2010. This last adjustment is done to prevent lending institutions from being penalized for appropriately charging off loans.

Each SBLF participant's small business lending baseline is also adjusted to take into account any gains in qualified small business lending during the four baseline quarters resulting from mergers, acquisitions, and loan purchases. This adjustment is designed to ensure that dividend rate reductions provided to any SBLF participant correspond to additional lending to small businesses and not to the acquisition of existing loans. In addition, the cumulative baseline for all SBLF participants will decrease over time as SBLF participants repay their SBLF loans and exit the program. For example, the initial small business lending baseline for the 332 SBLF participants as of March 31, 2011, was $35.52 billion ($34.75 billion for 281 banks and $770.48 million for 51 CDFIs). The small business lending baseline for the 50 institutions that continued to participate in the SBLF as of December 31, 2018, was $1.5 billion ($808.8 million for 7 banks and $714.5 million for 43 CDFIs).

Table 3 provides the number and type of SBLF participating institutions, the small business lending baseline, the amount of small business lending by participants, the change in small business lending by participants, and the change in small business lending by both current and former participants from 2011 to 2018. The number of SBLF participating institutions is declining as institutions repay their loans and exit the program. As Treasury anticipated, this decline has accelerated following the first quarter of 2016 because the dividend rates for C corporation banks and savings associations and for S corporation banks and mutual lending institutions were increased at that time (to 9% and 13.8%, respectively).

SBLF institutions are also required to submit quarterly supplemental reports, due in the calendar quarter following submission of the initial supplemental report and in each of the next nine quarters, to determine their dividend rate for the next quarter.

Using information contained in the quarterly supplemental reports, Treasury announced in its April 2019 quarterly report on SBLF Participants' Small Business Lending Growth that, as of December 31, 2018

The 50 current SBLF participants (7 banks and 43 CDFIs) increased their small business lending by $1.347 billion over a $1.523 billion baseline. Since inception, the total increase in small business lending reported by both current and former SBLF participants is more than $19.1 billion over the baseline. All seven of the currently participating community banks and 39 of the 43 currently participating CDLFs increased their small business lending over baseline levels. Most current participants report that their small business lending increases have been substantial, with 43 of 50 current SBLF participants (86.0%) increasing small business lending by 10% or more.

Treasury officials have praised the SBLF's performance. For example, on October 9, 2012, then-Deputy Secretary of the Treasury Neal Wolin announced that the SBLF quarterly use of funds report released that day "is further indication that the Administration's Small Business Lending Fund is continuing to help create an environment in which entrepreneurial small businesses can succeed and excel." He added that "banks in the SBLF program continue to show large increases in the lending available for small businesses to grow, create jobs, and support families in communities across the country."

Some financial commentators have expressed a somewhat less sanguine view of the program's performance. For example, one commentator noted, after the release of the quarterly use of funds report in January 2012, that although the report of increased small business lending was positive news "it is difficult to isolate the proportion of new lending that would have occurred anyway" due to improvements in the economy. Another commentator noted that the data may have been skewed by SBLF participants who were entering the small business lending market for the first time, making the increases appear larger and more significant than they actually are; yet another noted that the reported growth in small business lending occurred over six quarters (since June 30, 2010) and that the results, although positive, are "not as impressive as it may seem." A commentator argued in September 2012 that "if the SBLF ends up being a success story, it will have been on a far smaller scale than either Obama or Congress had originally expected. What's more, it's become clear that even boatloads of financing won't change the fact that demand for the loans themselves has also fallen off, as small businesses themselves are reluctant to expand in a stagnant economy."

In addition, on August 29, 2013, Treasury's Office of Inspector General (OIG) released an audit of Treasury's reporting of small business lending gains relative to small business lending levels prior to the lenders' participation in the program. The OIG found that "small business lending gains reported by Treasury are significantly overstated and cannot be linked directly to SBLF funding." Specifically, the OIG noted that "substantial amounts [$3.4 billion of the then reported $8.9 billion] of the reported gains occurred prior to participants receiving SBLF funding." As the OIG explained,

the lending gains reported [by Treasury] were measured against the same baseline period that the Small Business Jobs Act of 2010 (the Act) instructs Treasury to use for setting dividend rates for repayment of the SBLF capital, which is the four calendar quarters [which] ended [on] June 30, 2010. However, measuring program performance against a baseline with a midpoint seven quarters prior to when most participants received funding inflates program accomplishments and is not responsive to provisions in the Act that direct Treasury to report on participant use of the SBLF funds received.

The OIG also argued that the reported lending gains cannot be directly linked to the SBLF capital that Treasury invested in the financial institutions because the lending gains reported "represent all small business lending gains that institutions participating in the SBLF achieved, regardless of how the loans were funded." In addition, the OIG noted, among other findings, that "a relatively small number (35 or 11%) of SBLF participants accounted for half of small business lending increases between the baseline figure and December 31, 2012."

Proposed Legislation

During the 112 th Congress, several bills were introduced to change the SBLF. None of the bills were enacted. For example, then-Senator Snowe introduced S. 681 , the Greater Accountability in the Lending Fund Act of 2011, on March 30, 2011. Senator Snowe argued that

While I would prefer to terminate this fund altogether, it is unlikely based on the current political environment, which is why we must work to protect taxpayers from some of its most egregious provisions. My goal with this legislation is to ensure that only healthy banks have access to taxpayer money, that they are required to repay loans within a reasonable period of time, and that small businesses find the affordable credit they need.

The bill would have, among other things,

required recipients to repay SBLF distributions within 10 years of the receipt of the investment; terminated the program no later than 15 years after the date of the bill's enactment; prohibited the Secretary of the Treasury from making capital investments under the program if the FDIC is appointed receiver of 5% or more of the institutions receiving an investment under the program; prohibited participation by any institution that received an investment under TARP (effective on the date of the bill's enactment); removed provisions allowing the Secretary of Treasury to make a capital investment in institutions that would otherwise not be recommended to receive the investment based on the institution's financial condition, but are able to provide a matching investment from private, nongovernmental investors; required the approval of appropriate financial regulators when determining whether an institution should receive a capital investment; and revised the benchmark against which changes in the amount of small business lending is measured from the four full quarters immediately preceding the date of enactment to calendar year 2007.

In addition, H.R. 1387 , the Small Business Lending Fund Accountability Act of 2011, would have provided the Special Inspector General for TARP responsibility for providing oversight over the SBLF.

S.Amdt. 279 to S. 493 , the Small Business Innovation Research, Small Business Technology Transfer Reauthorization Act of 2011, would have prevented TARP recipients from using funds received in any form under any other federal assistance program, including the SBLF program.

H.R. 2807 , the Small Business Leg-Up Act of 2011, would have transferred any unobligated and repaid funds from the SBLF to the Community Development Financial Institutions Fund beginning on the date when the Secretary of the Treasury's authority to make capital investments in eligible institutions expired (on September 27, 2011). The bill's stated intent was "to increase the availability of credit for small businesses."

H.R. 3147 , the Small Business Lending Extension Act, would have extended the Department of the Treasury's investment authority from one year following enactment to two years and required the Treasury Secretary to provide any institution not selected for participation in the program the reason for the rejection, ensure that the rejection reason remains confidential, and establish an appeal process that provides the institution an opportunity to contest the reason provided for the rejection of its application.

During the 113 th Congress, H.R. 2474 , the Community Lending and Small Business Jobs Act of 2013, would have, among other provisions, transferred any unobligated and repaid funds from the SBLF to the Community Development Financial Institutions Fund.

Concluding Observations

The SBLF was enacted as part of a larger effort to enhance the supply of capital to small businesses. Advocates argued that the SBLF would help to address the decline in small business lending and create jobs. Opponents were not convinced that it would enhance small business lending and worried about the program's potential cost to the federal treasury and its similarities to TARP.

Participating institutions are reporting they have increased their small business lending. However, as has been discussed, questions have been raised concerning the validity of these reported amounts. Specifically, as Treasury's OIG argued in its August 2013 audit, more than one-third of the reported lending gains at that time occurred prior to September 30, 2011, the quarter in which most SBLF participants received their SBLF funds; the reported small business lending gains reflect all of the small business lending gains that the participants achieved, regardless of how the loans were funded; and previous OIG audits "have shown that a large number of participants misreport their small business lending activity." In those previous audits, "50% or more of the institutions reviewed submitted erroneous lending data to Treasury, either overstating or understating their small business lending gains."

In addition to questions related to the validity of the reported small business lending gains, any analysis of the program's influence on small business lending is likely to be more suggestive than definitive because differentiating the SBLF's effect on small business lending from other factors, such as changes in the lender's local economy, is methodologically challenging, especially given the relatively small amount of financing involved relative to the national market for small business loans. The SBLF's $4.0 billion in financing represents less than 0.7% of outstanding small business loans (as defined by the FDIC).

In terms of the concerns expressed about the program's potential cost, Treasury initially estimated in December 2010 that the SBLF could cost taxpayers up to $1.26 billion (excluding administrative costs that were initially estimated at about $26 million annually but actual outlays were $4.54 million in FY2014, $9.05 million in FY2015, $5.01 million in FY2016, and $3.4 million in FY2017). Treasury based that estimate on an expectation that about $17 billion in SBLF financings would be disbursed. In October 2011, Treasury estimated the program's costs based on actual participant data. It estimated that the SBLF would generate a savings of $80 million (excluding administrative costs), with the savings coming primarily from a lower-than-expected financing level and, to a lesser extent, improvements in projected default rates "due to higher participant quality than expected" and lower market interest rates. Treasury issues a semiannual report on SBLF costs. In its latest semiannual cost report, released on August 16, 2018, Treasury estimated that the SBLF will "generate a lifetime positive return of $31 million [excluding administrative costs] for the Treasury General Fund."

One issue that arose relative to the program's projected cost is the noncumulative treatment of dividends. Treasury's OIG reported in May 2011 that

Under the terms set by legislation, dividend payments are non-cumulative, meaning that institutions are under no obligation to make dividend payments as scheduled or to pay off previously missed payments before exiting the program. This dividend treatment differs from the TARP programs, in which many dividend payments were cumulative. This change in dividend treatment was driven by changes in capital requirements mandated by the Collins Amendment to the Dodd-Frank Act.

The amendment equalizes the consolidated capital requirements for Tier 1 capital of bank holding companies by requiring that, at a minimum, regulators apply the same capital and risk standards for FDIC-insured banks to bank holding companies. Under TARP, the FRB [Federal Reserve Board] and FDIC treated capital differently at the holding company and depository institution levels. The FRB treated cumulative securities issued by holding companies as Tier 1 capital, while FDIC treated non-cumulative securities issued by depository institutions as Tier 1 capital. In order to comply with the Dodd-Frank Act requirement that securities purchased from holding companies receive the same capital treatment as those purchased from depository institutions, Treasury made the dividends under SBLF non-cumulative.

Additionally, given that Tier 1 capital must be perpetual and cannot have a mandatory redemption date, the 10-year repayment period in the Small Business Jobs Act cannot be enforced.

Treasury addressed this issue by placing the following additional requirements and restrictions on participants who miss dividend payments:

the participant's CEO [Chief Executive Office] and CFO [Chief Financial Officer] must provide written notice regarding the rationale of the board of directors (BOD) for not declaring a dividend; no repurchases may be affected and no dividends may be declared on any securities for the applicable quarter and the following three quarters; after four missed payments (consecutive or not), the issuer's BOD must certify in writing that the issuer used best efforts to declare and pay dividends appropriately; after five missed payments (consecutive or not), Treasury may appoint a representative to serve as an observer on the issuer's BOD; and after six missed payments (consecutive or not), Treasury may elect two directors to the issuer's BOD if the liquidation preference is $25 million or more.

Treasury's OIG agreed that Treasury's equity investment policy is consistent with the legislation and that "it has reasonably structured the program to incentivize payment of dividends." However, it recommended that "Congress consider whether an amendment to the Small Business Jobs Act and/or waiver from the Collins Amendment to the Dodd-Frank Act is needed to make the repayment of dividends a requirement for exiting the program."

In conclusion, congressional oversight of the SBLF is currently focused on the program's potential long-term costs and effects on small business lending. Underlying those concerns are fundamental disagreements regarding the best way to assist small businesses. Some advocate the provision of additional federal resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses and create jobs.

Appendix. The SBLF's Legislative History

The SBLF's Legislative Origin

On March 16, 2009, President Obama announced the first SBLF-like proposal. Under that proposal, the Department of the Treasury would have used TARP funds to purchase up to $15 billion of SBA-guaranteed loans. The purchases were intended to "immediately unfreeze the secondary market for SBA loans and increase the liquidity of community banks." The plan was dropped after it met resistance from lenders. Some lenders objected to TARP's requirement that participating lenders comply with executive compensation limits and issue warrants to the federal government. Smaller, community banks objected to the program's paperwork requirements, such as the provision of a small-business lending plan and quarterly reports.

In his January 2010 State of the Union address, President Obama proposed the creation of a $30 billion SBLF to enhance access to credit for small businesses:

When you talk to small business owners in places like Allentown, Pennsylvania, or Elyria, Ohio, you find out that even though banks on Wall Street are lending again, they're mostly lending to bigger companies. Financing remains difficult for small business owners across the country, even those that are making a profit.

Tonight, I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat.

In response to the opposition community lenders had expressed concerning TARP's restrictions in 2009, the Obama Administration proposed that Congress approve legislation authorizing the transfer of up to $30 billion in TARP spending authority to the SBLF and statutorily establish the new program as distinct and independent from TARP and its restrictions. The Administration's legislative proposal was finalized and sent to Congress on May 7, 2010. Representative Barney Frank, then-chair of the House Committee on Financial Services, introduced H.R. 5297 , the Small Business Lending Fund Act of 2010, on May 13, 2010.

The House Committee on Financial Services held a hearing on H.R. 5297 on May 18, 2010, and passed the bill, as amended to include a State Small Business Credit Initiative, the following day. The House passed the bill, as amended to include a Small Business Early-Stage Investment Program, a Small Business Borrower Assistance Program, and some small business tax reduction provisions, on June 17, 2010.

The House-Passed Version of the SBLF

Title I of the House-passed version of H.R. 5297 authorized the Secretary of the Treasury to establish a $30 billion SBLF "to address the ongoing effects of the financial crisis on small businesses by providing temporary authority to the Secretary of the Treasury to make capital investments in eligible institutions" with total assets equal to or less than $1 billion or $10 billion (as of the end of the fourth quarter of calendar year 2009) "in order to increase the availability of credit for small businesses." The authority to make capital investments in eligible institutions was limited to one year after enactment.

Eligible financial institutions having total assets equal to or less than $1 billion as of the end of the fourth quarter of calendar year 2009 could apply to receive a capital investment from the SBLF in an amount not exceeding 5% of risk-weighted assets, as reported in the FDIC call report immediately preceding the date of application. During the fourth quarter of 2009, 7,340 FDIC-insured lending institutions reported having assets amounting to less than $1 billion.

Eligible financial institutions having total assets equal to or less than $10 billion as of the end of the fourth quarter of calendar year 2009 could apply to receive a capital investment from the fund in an amount not exceeding 3% of risk-weighted assets, as reported in the FDIC call report immediately preceding the date of application. During the fourth quarter of 2009, 565 FDIC-insured lending institutions reported having assets of $1 billion to $10 billion.

Risk-weighted assets are assets such as cash, loans, investments, and other financial institution assets that have different risks associated with them. FDIC regulations (12 C.F.R. §567.6) establish that cash and government bonds have a 0% risk-weighting; residential mortgage loans have a 50% risk-weighting; and other types of assets (such as small business loans) have a higher risk-weighting.

Lending institutions on the FDIC problem bank list or institutions that have been removed from the FDIC problem bank list for less than 90 days were ineligible to participate in the program. Lending institutions could refinance securities issued through the Treasury Capital Purchase Program (CPP) and the Community Development Capital Incentive (CDCI) program under TARP, but only if the institution had not missed more than one dividend payment due under those programs.

Participating banks would be charged a dividend rate of no more than 5% per annum initially, with reduced rates available if the bank increased its small business lending. For example, during any calendar quarter in the initial two years of the capital investments under the program, the bank's rate would be lowered if it had increased its small business lending compared to the average small business lending it made in the four previous quarters immediately preceding the enactment of the bill, minus some allowable adjustments. A 2.5% to less than 5% increase in small business lending would have lowered the rate to 4%, a 5% to less than 7.5% increase would have lowered the rate to 3%, a 7.5% to less than 10% increase would have lowered the rate to 2%, and an increase of 10% or greater would have lowered the rate to 1%.

Table A-1 shows the dividend rates associated with small business lending increases for C corporation banks and savings institutions under H.R. 5297 . These rates were subsequently included in the final law.

The bill also authorized the Secretary of the Treasury to adjust these dividend rates for S corporations "to take into account any differential tax treatment of securities issued by such eligible institution." Also, Community Development Financial Institutions were to be charged a dividend rate of 2% per annum for eight years, and 9% thereafter.

SBLF applicants were also required to submit a small business lending plan to the appropriate federal banking agency and, for applicants that are state-chartered banks, to the appropriate state banking regulator. The plan was to describe how the applicant's business strategy and operating goals will allow it to address the needs of small businesses in the areas it serves, as well as a plan to provide linguistically and culturally appropriate outreach, where appropriate. The plan was to be treated as confidential supervisory information. The Secretary of the Treasury was required to consult with the appropriate federal banking agency or, in the case of an eligible institution that is a nondepository community development financial institution, the Community Development Financial Institution Fund, before determining if the eligible institution was to participate in the program.

The bill specified that the SBLF would be "established as separate and distinct from the Troubled Asset Relief Program established by the Emergency Economic Stabilization Act of 2008. An institution shall not, by virtue of a capital investment under the Small Business Lending Fund Program, be considered a recipient of the Troubled Asset Relief Program."

The bill also directed that all funds received by the Secretary of the Treasury in connection with purchases made by the SBLF, "including interest payments, dividend payments, and proceeds from the sale of any financial instrument, shall be paid into the general fund of the Treasury for reduction of the public debt."

The Senate-Passed Version of the SBLF

Title IV of the Senate-passed version of H.R. 5297 , which later became law, authorized the Secretary of the Treasury to establish a $30 billion SBLF to make capital investments in eligible community banks with total assets equal to or less than $1 billion or $10 billion. There were several differences between the Senate-passed version of H.R. 5297 's SBLF provisions and the SBLF provisions in the House-passed version of H.R. 5297 . Specifically, the

House-passed version of H.R. 5297 indicated that eligible institutions may be insured depository institutions that are not controlled by a bank holding company or a savings and loan holding company that is also an eligible institution and is not directly or indirectly controlled by any company or other entity that has total consolidated assets of more than $10 billion, bank holding companies, savings and loan holding companies, community development financial institution loan funds, and small business lending companies, all with total assets of $10 billion or less (as of the end of 2009). The Senate-passed version of H.R. 5297 did not provide eligibility to small business lending companies. House-passed version of H.R. 5297 defined small business lending "as small business lending as defined by and reported in an eligible institution's quarterly call report, where each loan comprising such lending is made to a small business and is one the following types: (1) commercial and industrial loans; (2) owner-occupied nonfarm, nonresidential real estate loans; (3) loans to finance agricultural production and other loans to farmers; (4) loans secured by farmland; (5) nonowner-occupied commercial real estate loans; and (6) construction, land development and other land loans." The Senate-passed version of H.R. 5297 's definition of small business lending did not include nonowner-occupied commercial real estate or construction, land development and other land loans. Senate-passed version of H.R. 5297 had an exclusion provision prohibiting recipient lending institutions from using the funds to issue loans that have an original amount greater than $10 million or that would be made to a business with more than $50 million in revenues. The House-passed version of H.R. 5297 did not contain this provision. House-passed version of H.R. 5297 indicated that the incentives received in the form of reduced dividend rates during the first 4.5-year period following the date on which an eligible institution received a capital investment under the program would be contingent on an increase in the number of loans made. If the number of loans made by the institution did not increase by 2.5% for each 2.5% increase of small business lending, then the rate at which dividends and interest would be payable during the following quarter on preferred stock or other financial instruments issued to the Treasury by the eligible institution would be (i) 5%, if this quarter is within the two-year period following the date on which the eligible institution received the capital investment under the program; or (ii) 7%, if the quarter is after the two-year period. The Senate-passed version of H.R. 5297 did not contain this legislative language. House-passed version of H.R. 5297 included an alternative computation provision that would have allowed eligible institutions to compute their small business lending amounts for incentive purposes as if the definition of their small business lending amounts did not require that the loans comprising such lending be made to small business. This alternative computation would have been allowed if the eligible institution certified that all lending included by the institution for purposes of computing the increase in lending was made to small businesses. The Senate-passed version of H.R. 5297 did not contain this provision. House-passed version of H.R. 5297 indicated that an eligible institution that is a community development loan fund may apply to receive a capital investment from the SBLF in an amount not exceeding 10% of total assets, as reported in the audited financial statements for the fiscal year of the eligible institution that ended in calendar year 2009. The Senate-passed version of H.R. 5297 specifies 5%. House-passed version of H.R. 5297 would have required the Secretary of the Treasury, in consultation with the Community Development Financial Institutions Fund, to develop eligibility criteria to determine the financial ability of a Community Development Loan Fund to participate in the program and repay the investment. It provided a list of recommended eligibility criteria that the Secretary of the Treasury could use for this purpose. The Senate-passed version of H.R. 5297 provided a similar, but mandatory, list of eligibility criteria that must be used for this purpose. House-passed version of H.R. 5297 contained a temporary amortization authority provision which would have allowed an eligible institution to amortize any loss or write-down on a quarterly straight-line basis over a period of time, adjusted to reflect the institution's change in the amount of small business lending relative to the baseline. The Senate-passed version of H.R. 5297 did not contain this provision.

The Senate's version of H.R. 5297 was agreed to in the Senate on September 16, 2010, after considerable debate and amendment to remove the Small Business Early-Stage Investment Program and Small Business Borrower Assistance Program, revise the SBLF, and add numerous other provisions to assist small businesses, including additional small business tax reduction provisions. The House agreed to the Senate amendments on September 23, 2010, and President Obama signed the bill, retitled the Small Business Jobs Act of 2010 ( P.L. 111-240 ), into law on September 27, 2010.