The President on September 27 signed into law the Small Business Jobs and Credit Act of 2010 (Act), which establishes the Small Business Lending Fund (Fund), a $30 billion fund intended to promote small business lending. Under the Program, Treasury is authorized to purchase preferred stock, debt instruments and certain other obligations issued by eligible depository institutions and depository institution holding companies with less than $10 billion in assets. Capital invested by Treasury is intended to result in an increase in small business lending. The initial dividend or interest rate will be 5%. The coupon rate may decline within the first 2 years to as low as 1% as the invested capital is deployed in small business loans and as the institution’s small business lending increases relative to pre-investment levels. The coupon rate will increase to 7% after 2 years if the institution has not increased its small business lending, and to 9% after 4½ years in any case. The invested capital must generally be repaid within 10 years. The Act also extends a Small Business Administration (SBA) recovery loan program for small businesses, increases the maximum loan size for SBA 7(a) and 504 loans from $2 million to $5 million and the maximum loan size for SBA 504 manufacturing related loans from $4 million to $5.5 million, and temporarily increases the maximum loan size for the SBA Express loan program. The Act also supports at least $15 billion in small business lending through a new State Small Business Credit Initiative and provides or extends eight small business tax cuts.
Nutter Notes: Tier 1 capital treatment for investments under the Fund is likely but not certain. Although Treasury is authorized under the Act to make “capital investments” in eligible institutions by purchasing preferred stock and “other financial instruments” under the Program, the Act does not expressly provide that the preferred stock and “other financial instruments” will be treated as Tier 1 capital. However, there were colloquies on the House and Senate floors during debate of the Act in which the authors of the Act exchanged comments in an attempt to make clear that they intend that Treasury’s investments in participating institutions under the program be treated as Tier 1 capital. An eligible institution with total assets equal to or less than $1 billion may apply for a capital investment in an amount not exceeding 5% of risk-weighted assets, less the amount of any Capital Purchase Program and Community Development Capital Initiative investments. An eligible institution with total assets of more than $1 billion but equal to or less than $10 billion may apply for a capital investment in an amount not exceeding 3% of risk-weighted assets, less the amount of any Capital Purchase Program and Community Development Capital Initiative investments. The Act provides that only the “top-tier” holding company is eligible to participate if there is a mid-tier holding company or multiple levels of holding companies. Credit unions are not eligible to participate in the Program. Please see the Special Edition of the Nutter Bank Report for a more detailed summary of the Act.