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WASHINGTON — A top Treasury Department official said Thursday it is planning to distribute the first round of Small Business Lending Fund money to banks by next month — but that's not soon enough for some lawmakers.
May 19 -
Sen. Chuck Grassley again denounced the Small Business Lending Fund after the Treasury Department notified him that recipients of Troubled Asset Relief Program funds are eligible to participate.
April 21 -
There are 7,604 banks and thrifts in this country, and the core mission of nearly all of them is to lend locally. As currently structured, however, nearly 40% of these institutions are barred from taking part in the Small Business Lending Fund, the government's latest attempt to stimulate the national economy from the community level on up.
April 12 -
A bill that would impose restrictions on the Small Business Lending Fund may lead bankers to rethink participation in the program.
April 8 -
Many community bankers are still tepid about the Treasury Department's latest program to promote small-business lending. But they're making reservations while they can.
March 24 -
Recently released terms of the Small Business Lending Fund are fueling fears that may discourage participation in the program.
January 6 -
The Treasury Department has released an application form and a slew of other information about how banks can participate in the Small Business Lending Fund.
December 22
WASHINGTON — The Treasury Department is notifying Small Business Lending Fund applicants that they will not qualify for the program if regulators have restricted them from paying dividends.
Lawyers representing SBLF applicants said the notice formalizes what had been an implicit requirement amid pressure from lawmakers for greater oversight. But it also raises another obstacle for some banks seeking capital.
"This is a formal message that Treasury is going to be tough," said Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick. "It's definitely a message to the Senate and to [Sen. Olympia] Snowe that they're not throwing away government money."
Snowe, the ranking member on the Senate Small Business Committee and an opponent of the SBLF, has complained about a lack of oversight in the program. At a committee hearing last month, other lawmakers questioned why it has taken so long for the money to be distributed.
Last week, the Treasury sent questionnaires to all C corporation banks asking them to disclose whether they are able to pay dividends on SBLF securities and, if not, whether they are working with their regulators to have those restrictions removed or waived. The form must be returned within five business days of receipt, and all dividend restrictions must be removed or waived by Aug. 1 in order for them to qualify for the program.
The requirement doesn't come as a huge surprise, Weissman and others said.
The program is only supposed to be available to healthy banks, and the Treasury must consult with each applicant's primary regulator before approving their application. Most banks with dividend restrictions are under some kind of regulatory order.
"In some ways, it's consistent with the basic framework of the program, that you're able to repay," said Lawrence Kaplan, a partner at Paul, Hastings, Janofsky & Walker LLP. "Because if you're already in troubled condition, you're not going to be able to repay."
The program requires a bank to pay dividends on the preferred stock it issues to the Treasury in exchange for capital. If a bank doesn't boost its small-business lending over time, the dividend will increase.
If a bank isn't in a position to pay those dividends, the government would be giving away free money, said Chip MacDonald, a partner at the Jones Day law firm in Atlanta.
"You wouldn't be able to issue preferred stock in the public market if you were under a dividend restriction, generally, so it's not abnormal," MacDonald said.
Treasury spokeswoman Colleen Murray said the whole program is structured to promote small-business lending through the dividend incentive.
"So though it is clear that banks receiving SBLF funding must be able to pay dividends," Murray said, "we provided additional information so that any institution subject to dividend restrictions has more time to take actions necessary to meet this program requirement."
But some banks, such as those with a memorandum of understanding, may fall into a gray area, Weissman said. Even informal enforcement actions often carry dividend restrictions, but don't necessarily mean that a bank is "troubled," he said.
In the past, the assumption was that if a bank's regulator was on board with their participation in the SBLF, they would work with the bank to make sure they could meet their obligations, including dividend payments, Weissman said.
Requiring regulators to formally remove or waive those restrictions will take time, he said. Generally, regulators aren't willing to remove those restrictions until after an exam.
"It's unfortunate because it impacts the banks that are most likely to need the capital," Weissman said.
Kaplan said it was too early to tell if the new requirement will prevent more banks from participating, as some of them may not have qualified in the first place.
"Given that problem banks are the ones with [dividend] restrictions, the question is if you're on the rising side of the curve or the falling side of the curve," he said. "If you're falling and you know you're going to be under an [enforcement action] soon, you're not going to be able to participate. If you're rising out of a problem, it might give incentives to lift those restrictions."
Though the requirement will help the Treasury avoid losses, MacDonald questioned whether it will help the program reach its ultimate goal of boosting small-business lending. Small banks have requested only about one-third of the $30 billion available under the program.
The Treasury said the questionnaire was not a direct response to pressure from Congress, but the timing is unusual, observers said.
"The fact that the way this had to be done in this Chinese fire drill fashion leads me to think that there's a political aspect to it," Weissman said, "because it's not like this was an unanticipated issue."
