Treasury Department Rolls Out Small Business Lending Fund

The U.S. Department of the Treasury ("Treasury") recently created the Small Business Lending Fund (the "SBLF"), implementing part of the Small Business Jobs Act of 2010. The SBLF is a $30 billion fund to encourage lending to small businesses by providing capital to qualified community banks. Through the SBLF, Treasury hopes to create jobs and stimulate local economic growth while also improving the profitability of participating banks.

Under the SBLF, Treasury intends to provide up to $30 billion in Tier 1 capital to eligible community banks with assets of less than $10 billion. The capital will be provided through the purchase of preferred stock or equivalents, which Treasury intends to be Tier-1 qualifying.

The initial dividend rate for SBLF funding will be 5%. However, the dividend rate will be reduced as a participating community bank increases its lending to small business. If a bank's small business lending increases by 10% or more, the dividend rate can fall as low as 1%. Banks that increase their small business lending by less than 10% can benefit from rates between 2% and 4%. If small business lending does not increase in the first two years, the dividend rate will increase to 7%. After four and a half years, the dividend rate will increase to 9% if the SBLF funding has not been repaid.

Significantly, the SBLF has been designed to provide options for community banks to refinance outstanding Capital Purchase Program ("CPP") debt under the Troubled Assets Relief Program ("TARP") and Community Development Capital Initiative securities. The SBLF is not part of TARP and does not contain many of the restrictions associated with CPP funding. For example, SBLF funds do not require restrictions on executive compensation.

Under Treasury's guidelines, small business lending can include:

• commercial and industrial loans;
• owner-occupied nonfarm, nonresidential real estate loans, and
• loans to farm and ranch owners and operators.

In order to be eligible, banks must not be on the FDIC problem bank list and have not received a CAMELs rating of 4 of 5. Mutual Institutions, Subchapter S Corporations and Community Develop Loan Funds may also be eligible for SBLF funds.

In order to apply, eligible community banks must create a Small Business Lending Plan outlining, among other things, the institutions' plans for:

• using the funding,
• providing outreach in the community, and
• advertising the availability of small business loans.

Treasury encourages application by interested community banks, even if they are not certain they will definitely participate in SBLF. Approved banks are not required to participate. All applications are treated as confidential and Treasury will not disclose information regarding applications, approvals or denials. Treasury expects to determine approvals and denials within approximately 45 days of receipt of a completed application.

Treasury will review applications on a rolling basis and encourages early application. Applications must be submitted no later than March 31, 2011. For more information, see Treasury's SBLF Resource Center, available at http://www.treasury.gov/resource-center/sb-programs/Pages/Small-Business-Lending-Fund.aspx.

ABOUT SCHIFF HARDIN LLP