The Obama administration's Unlocking Credit for Small
Businesses Plan may be in danger of failure due to lack of
participation from lenders. The plan, announced on March 16, is
funded with $15 billion of Troubled Asset Relief Program (TARP)
funds. Participating lenders would be subject to the Treasury's
executive compensation limits, as well as the provisions of the
Emergency Economic Stabilization Act of 2008 (EESA) mandating the
issuance of warrants to the government. Lenders who traditionally
participated in the Small Business Administration's (SBA) loan
programs have cited these restrictions as the basis for their
Financial institutions receiving assistance from the TARP
program are required under the EESA to issue warrants to the
Secretary of the Treasury to provide further security to the
taxpayer. The warrants are convertible to common stock, preferred
stock or senior debt at an exercise price set by the Treasury.
The Treasury did not release details about the warrant
requirement in its March 16 announcement, stating that the pricing
and exact nature of the warrants would be revealed at a later time.
In addition, the Treasury must still determine how the warrant
requirements will apply to the subsidiaries of parent companies
that have already received TARP funds. The Treasury Department has
delayed the launch of the program to resolve these issues, but is
expected to release details shortly. Lenders were initially
scheduled to issue loans under the program as of the end of
Details Of The Program
Under the Unlocking Credit for Small Business plan, the Treasury
Department, in conjunction with the SBA, will take three principal
Purchase up to $15 billion of securities backed by SBA loans on
the secondary market;
Temporarily increase the maximum loan guarantee to 90% for
certain types of SBA loans; and
Temporarily suspend certain fees imposed on the issuance of SBA
In addition, the Treasury Department will impose new
requirements on banks to provide periodic reports detailing the
amount of small business lending activity.
Direct Purchases of Securities Backed by Loans from
SBA's 7(a) and 504 Programs: Under the plan, the Treasury
would directly purchase securities backed by the guaranteed portion
of loans issued under the SBA's 7(a) Loan Program ("7(a)
securities") and first-lien mortgage securities issued under
504 Community Redevelopment Program ("504 securities").
The Treasury Department would begin purchasing 7(a) securities
packaged between July 1, 2008 and December 31, 2009.
The Treasury would also purchase 504 securities packaged on or
after July 1, 2008 that meet (unspecified) eligibility criteria
designed to protect taxpayers. In addition, the SBA is currently
working to develop a secondary market guarantee program for 504
securities, and the Treasury will begin purchasing the guaranteed
securities once the program is fully implemented.
The SBA currently does not provide a guarantee to lenders for
loans issued under the SBA's 504 Community Development Loan
Program. Private lenders provide up to 50% of the financing for
projects under this program in the form of first-lien mortgage
loans. (The next 40% is financed by local certified development
companies and is guaranteed by an SBA debenture. The owner is
expected to finance the remaining 10%.)
Increased Maximum Loan Guaranty for SBA Loans: The SBA
increased its guaranty of SBA 7(a) loans to 90% of the loan amount
from the prior limit of at least 75%. Previously, loans under the
7(a) program were guaranteed up to 85% for loans at or below
$150,000 and up to 75% for larger loans.
Elimination of Certain Loan Fees: The plan temporarily
eliminates the Certified Development Company (CDC) processing fees
charged to borrowers and the third-party participation fees charged
to lenders on loans under the 504 program. The plan will also
temporarily eliminate upfront fees on loans under the 7(a)
Increased Reporting: The Treasury Department will also
require the 21 largest banks receiving capital assistance from the
government to submit monthly reports detailing its small business
lending activity. In addition, the Treasury will encourage all
banks to report their small business lending activity in their
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While the "buy here, pay here" nature of the defendants' operation allowed them to engage in the alleged discrimination, lenders need to remain vigilant of the risks posed by intent-based discrimination claims.