The Small Business Jobs Act of 2010 defines qualified small business lending—as defined by and reported in an institution’s quarterly regulatory filings, also known as Call Reports—as one of the following: owner-occupied nonfarm, nonresidential real-estate loans; commercial and industrial loans; loans to finance agricultural production and other loans to farmers; and loans secured by farmland. In addition, qualifying small business loans cannot be for an original amount of more than $10 million, and the business may not have more than $50 million in revenue. The act specifically prohibits Treasury from accepting applications from institutions that are on FDIC’s problem bank list or have been removed from that list during the previous 90 days. The initial baseline small business lending amount for the SBLF program was the average amount of qualified small business lending that was outstanding for the four full quarters ending on June 30, 2010, and the dividend or interest rates paid by an institution are adjusted by comparing future lending against this baseline. Also, the institution is required to report any loans resulting from purchases, mergers, and acquisitions so that its qualified small business lending baseline is adjusted accordingly. Fewer institutions applied to SBLF than were initially anticipated, in part because many banks did not anticipate that demand for small business loans would increase. The institutions that applied to and were funded by SBLF were primarily institutions with total assets of less than $500 million. In addition, in our 2011 report, we found that the lack of clarity by Treasury in explaining the program’s requirements created confusion among applicants and that Treasury faced multiple delays in implementing the SBLF program and disbursing SBLF funds by the statutory deadline of September 27, 2011. We recommended Treasury apply lessons learned from the application review phase of SBLF to help improve its communications with SBLF participants and other interested stakeholders, such as Congress and bank regulators. In 2012, in response to our recommendation, Treasury officials said that they had enhanced their communication strategy with SBLF participants and stakeholders and developed written communication guidelines to provide for consistency, continuity, and validity. The amount of funding an institution received under the SBLF program depended on its asset size as of the end of the fourth quarter of calendar year 2009. Specifically, if the qualifying financial institution had total assets of $1 billion or less, it was eligible for SBLF funding that equaled up to 5 percent of its risk-weighted assets. If the qualifying institution had assets of more than $1 billion but less than $10 billion, it was eligible for funding that equaled up to 3 percent of its risk-weighted assets. In the case of bank or thrift holding companies, assets were to be measured based on the total combined assets of the insured depository institution subsidiaries and risk-weighted assets were to be measured based on the combined risk-weighted assets of the insured depository institution subsidiaries. The SBLF program provided an option for eligible institutions to refinance preferred stock or subordinated debt issued to Treasury through CPP. At the time of application, the institution was required to submit a small business lending plan to its regulator describing how the applicant’s business strategy and operating goals will allow it to address the needs of small businesses in the area it serves. Participating SBLF C-corporation banks and bank holding companies pay dividends of up to 5 percent per year initially to Treasury, with reduced rates available if they increase their small business lending. The initial dividend rate is based on the difference between the baseline level and the lending reported in the second calendar quarter preceding the SBLF closing date. Additionally, the dividend rate payable decreases quarterly as banks increase small business lending over their baselines. While the dividend rate was no more than 5 percent for the first 9 quarters (a little over 2 years), a bank could reduce the rate to 1 percent by generating a 10 percent increase in its lending to small businesses compared with its baseline. After 9 quarters, the dividend rate on the capital became fixed at the rate the participating banks were paying at that time if they had increased their small business lending; otherwise, the dividend rate increased to 7 percent if participating banks had not increased their small business lending. After 4.5 years, the dividend rate on the capital increases to 9 percent for all banks regardless of a bank’s small business lending. For S-corporations and mutual institutions, the initial interest rate was at most 7.7 percent. The rate fell as low as 1.5 percent for the institutions that increased their small business lending by 10 percent or more from the previous quarter. For CDLFs, the initial dividend rate is 2 percent for the first 8 years. After 8 years, the rate increases to 9 percent if the CDLF has not repaid the SBLF funding. This structure is designed to encourage CDLFs to repay the capital investment by the end of the 8- year period. Treasury allows an SBLF participant to exit the program at any time, with the approval of its regulator, by repaying the funding provided along with dividends owed for that period. Under the act, Treasury has a number of reporting requirements to Congress related to SBLF: (1) monthly reports describing all of the transactions made under the program during the reporting period; (2) a semiannual report (for the periods ending each March and September) providing all projected costs and liabilities and all operating expenses; and (3) a quarterly report, known as the Lending Growth Report, detailing how participants have used the funds they have received under the program. SBLF participants had increased lending over baseline levels as of June 30, 2013, according to Treasury’s Lending Growth Report. Total qualified small business lending for SBLF participants—banks and CDLFs—increased by almost $10.4 billion over their aggregate baseline of about $36.5 billion. Bank participants increased their qualified small business lending by about $10.1 billion over a baseline of about $35.7 billion. CDLFs increased their qualified small business lending by about $256.3 million over a baseline of about $796.8 million. Of the 265 participating banks, 246 (93 percent) increased their qualified small business lending, and 45 of the 50 CDLFs (90 percent) increased their qualified small business lending. SBLF participants had made about $188 million in dividend or interest payments to Treasury as of June 30, 2013—$185 million from banks and $3 million from CDLFs. As of June 30, 2013, SBLF participants had not missed any payments. Figure 1 shows the numbers of program participants in different dividend or interest rate categories. As of July 1, 2013, 16 participants with aggregate investments of $147.3 million had fully redeemed Treasury’s investment. The structure of the SBLF program is designed to encourage banks to repay the capital investment by the end of 4.5 years and CDLFs to repay at the end of 8 years. However, Treasury allows an SBLF participant to exit the program at any time. SBLF securities may be redeemed at any time subject to the submission of a formal request to Treasury. Treasury reviews the notice to determine whether it meets a number of conditions. The redemption amount must equal at least 25 percent of the original funding balance. The redemption date must be no more than 60 days and no fewer than 30 days from the date the notice is sent to Treasury. Payment of accrued dividends or interest for the current dividend period must be made in addition to the principal balance. Because exiting the SBLF program would affect a participant’s capital, banks that want to leave the program also need approval from their appropriate federal banking regulator. If the SBLF participant is a bank or thrift, upon receipt of a redemption notice, Treasury notifies the appropriate federal banking regulator to determine if it has any objection. The federal banking regulator then reviews the redemption request to analyze the impact of the redemption of SBLF securities on capital levels. The analysis bank regulators perform for SBLF redemptions is similar to the analysis they would undertake for other banks and thrifts engaging in activities that would reduce their capital. In general, federal banking regulators assess whether banks will have sufficient capital after redeeming their SBLF securities and whether the banks have the financial ability or capital strength to exit the SBLF program. The decision is based in part on the bank’s condition and the bank’s capital planning process, including performance and leverage ratios, classified assets, nonperforming loans, allowance for loan and lease losses, outstanding enforcement actions, and other factors. If the federal banking regulator does not object to the redemption, Treasury proceeds with the redemption after verifying that they meet requirements for redemption. SBLF participants exited the program for a variety of reasons. Some participants shared with Treasury the reasons for leaving the program, though they are not required to do so. Four participants told Treasury that they wanted to redeem their SBLF securities prior to an acquisition by another bank. Another participant told Treasury it was redeeming SBLF securities due to a difficult economic environment and the potential impact of revised regulatory capital guidelines. Another participant said it wanted to eliminate ongoing dividend expenses and compliance costs associated with the SBLF program requirements. For those participants that did not provide a reason to Treasury, we contacted 10 former participants that fully repaid their SBLF funds to ask them their reasons for leaving the program. We received responses from nine participants and some gave multiple reasons for leaving. For example, eight participants told us that they exited the program to avoid dividend expenses and said that they could obtain less expensive funding elsewhere. Two participants told us that reporting and compliance were burdensome, and officials from two banks said that demand for small business loans was not as strong as they had expected.