On March 16, 2009, the Treasury announced the terms of new program, Unlocking Credit for Small Businesses, aimed at helping jump start credit markets for small business loans. The program includes the following significant provisions:
- The Treasury will purchase up to $15 billion in securities backed by Small Business Administration (SBA) loans;
- The SBA may guarantee up to 90% of Section 7(a) loans, which are loans to support the business operations of small businesses;
- The SBA will temporarily eliminate loan fees for certain Section 7(a) loans and 504 Program loans, which provide long-term financing to directly support economic development within a community;
- The largest Financial Stability Plan Assistance recipients must weekly report their SBA lending activities, and all financial institutions may have to monthly report their SBA lending activities; and
- The Treasury will issue guidance for the tax-related provisions, aimed at providing liquidity to small businesses and encouraging investments in small businesses.
Together, these provisions are aimed at increasing small business lending, which is extremely important in these flagging economic times because small businesses have generated approximately 70% of net new jobs annually over the past decade. These provisions should also provide a liquidity boost for community banks, credit unions, and small lenders, who together account for approximately 40% of all SBA-backed loans, by allowing these institutions to sell existing SBA loans and then to extend more credit to other borrowers.
While the Treasury and federal banking regulators have uniformly and consistently stated that the TARP Capital Purchase Program was only intended for “viable” banks, what constitutes viability has steadily become a higher standard. (As we’ve previously noted, many of the original TARP Capital Purchase Program recipients would not qualify as the Treasury tightened its standards on viability.)
We are now hearing from multiple sources that for a bank to be deemed viable and eligible to receive TARP Capital Purchase Program funds the maximum acceptable level of non-performing assets is 40% of Tier 1 Capital plus Allowance for Loan and Lease Losses (down from 75% or more previously). While the Treasury still appears to be concerned with commercial real estate concentrations, this non-performing asset test appears to have taken center stage.
Since the collapse of Wall Street in October, 2008, and the immediate and severe deleveraging of available capital, the life-blood of the US economy has contracted from a torrent to a trickle. The so-called “shadow market” that funded the crippled investment banks are no longer able to leverage their assets at a 40:1 ratio. Many of the very large national banks are reeling, seeing their share prices drop from 50% to 90% in the last six months. We have often heard questions from those outside of the banking industry asking us “what do the bankers want?” The answer is simple. Banks want borrowers that can repay loans. It’s that simple and that difficult. If only there was an influx of credit-worthy borrowers. If only there were purchasers of the consumer loans. These exact issues were raised during Chairman Bernake’s 60 Minutes appearance on Sunday, March 15, 2009.
In stepped the Federal Reserve. As opportunity funds and hedge funds across the country and across the world begin to digest the parameters, requirements, and restrictions relating to the Fed’s $1 Trillion lending initiative known as TALF (Term Asset-Backed Securities Loan Facility) attempting to revitalize the stagnant credit markets, several issues have begun to emerge.
The most important criterion for many of our clients is eligibility. TALF was announced in November as an attempt to create a market for small business loans. It has been enlarged to include equipment financing, auto paper, and other consumer credit.
On March 10, 2009, the Treasury announced the completion of the seventeenth round of TARP Capital infusions. The Treasury purchased a total of approximately $285 million in securities from 22 financial institutions on Friday, February March 6, 2009, and has now invested in 491 institutions, totaling approximately $197 billion.
First Busey Corporation, Urbana, Illinois, received the largest infusion: $100 million. Community Bancshares of Kansas, Inc., Goff, Kansas, received the smallest infusion: $500,000.
Of note in this seventeenth round, Florida had 4 institutions receive TARP Capital infusions, raising its total from 11 to 15. Also of note, a fourth CDFI, Citizens Bancshares Corporation of Atlanta, Georgia, received TARP Capital funds.
This round marked the fifth consecutive round where less than 30 institutions received TARP Capital infusions. In fact, other than the eighth round (12/31/2008), where 7 institutions received TARP funds, this round saw the fewest number of TARP closings. As we noted in a previous post, it is unclear what is contributing to or causing this diminishing number of TARP closings.
Click here to view our updated TARP Map.
Click here to view our updated list of TARP Capital recipients and a description of our methodology in compiling the list.
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On March 3, 2009, the Treasury announced the completion of the sixteenth round of TARP Capital infusions. The Treasury purchased a total of approximately $395 million in securities from 28 financial institutions on Friday, February 27, 2009, and has now invested in 469 institutions, totaling approximately $196.8 billion.
Of note in this sixteenth round, three institutions received less than $1 million each: First State Bank of Mobeetie, Mobeetie, Texas, received $731,000; Green City Bancshares, Green City, Missouri, received $651,000; and The Victory Bank, Limerick, Pennsylvania, received $541,000. Integra Bank Corporation, Evansville, Indiana, received the largest infusion: $84 million.
This round marked the fourth consecutive round where less than 30 institutions received TARP Capital infusions. In contrast, in the eight rounds from the fifth (12/5/2008) to the twelfth (1/30/2009), only twice did less than 30 institutions receive TARP - 28 institutions in the sixth round (12/12/2008) and 7 institutions in the eighth round (12/31/2008). It is unclear what is causing this apparent slowdown in TARP Capital closings. It could be a change in policy or simply the result of the change in administration causing certain delays. We do, however, think that it is clear that this apparent slowdown has nothing to do with the amount of funds remaining within the TARP Capital program. There is no indication that the Capital program is near exhausting its allocated funds – approximately $50 billion still remains to be allocated under the TARP Capital Purchase Program.
Click here to view our updated TARP Map.
Click here to view our updated list of TARP Capital recipients and a description of our methodology in compiling the list.
On March 4, 2009, the Treasury announced the release of details for Making Home Affordable, which is comprised of two programs: The Home Affordable Refinance Program and the Home Affordable Modification Program. In total, these programs aim to help 7 to 9 million homeowners by making mortgages more affordable and by helping to prevent foreclosures.
The Home Affordable Refinance Program seeks to provide 4 to 5 million homeowners with the opportunity to refinance first mortgages to take advantage of the historically low mortgage interest rates.
The following criteria must be met to be eligible for this Program:
- the home is one to four unit and owner occupied;
- the loan is owned or controlled by Fannie Mae or Freddie Mac;
- the mortgage payments are current;
- the amount owed on the first mortgage is not more than 105% of the current market value of the home; and
- the borrower has a stable income to support the new mortgage payments.
Homeowners looking to take advantage of this Program, should note two things: First, a borrower who is delinquent on first mortgage payments is ineligible. Second, only first mortgages are altered – second (or third) mortgages cannot be altered under this Program, which means a borrower’s eligibility will depend, in part, on any second (or third) mortgage holder agreeing to maintain a junior position even after the first mortgage has been altered.
On February 5, 2009, the Office of the Special Inspector General Troubled Asset Relief Program (SIGTARP) began issuing letters to TARP Capital recipients requesting information on how the institutions have used the TARP funds and how the institution was addressing the executive compensation limits. The requested information is due 30 days following the request; as a result, the first responses are due the week of March 2, 2009. On February 25, 2009, SIGTARP provided a Frequently Asked Questions supplement to their initial request.
As noted in the FAQ, SIGTARP is not tasked with monitoring whether any individual bank is in compliance with TARP requirements. However, the responses provided to SIGTARP may ultimately result in political and regulatory pressure against institutions that expressly rebut the presumption that TARP funds should be used to spur lending (despite the recession). Institutions should absolutely provide a good faith effort to tell their story regarding the anticipated and actual uses of funds; especially as a senior executive officer is asked to certify to the accuracy of the responses under Title 18, United States Code, Section 101. This code section makes it a felony to provide false statements to federal officials, and was the statute ultimately used to send Martha Stewart to jail. However, institutions should also be aware of the political environment in which these responses will be read (and potentially more widely circulated).
On February 17, 2009, the Treasury Department released its first monthly bank lending survey, comprised of the largest 20 recipients of TARP Capital funds. The survey found that despite the economic deterioration in the fourth quarter of 2008 and news of doom and gloom nightly, banks “continued to originate, refinance and renew loans.”
These originations, refinances and loan renewals were not, however, always sufficient to offset loan payoffs, resulting in lower overall balances of residential mortgage and commercial loans. “Over the period, the median change in residential mortgage loan balances was a decrease of 1 percent, while the median change in corporate loan balances was a decrease of 1 percent. Meanwhile, the median percent change in loan balances for U.S. credit cards was an increase of 2 percent, reflecting greater reliance on existing credit lines by consumers.”
While only the top 20 banks are currently included, the Treasury indicates that it “is in the process of developing a more streamlines snapshot for smaller institutions.”
The Treasury’s analysis, as well as several of the individual responses, can provide useful guidance on how to explain the difficulties of lending in this economy, both generally and in response to the SIGTARP request. In response to the question, “Are banks doing what they’re supposed to do, providing credit to borrowers in a safe and sound manner?”, the Treasury explicitly notes that answering the question “is difficult because we are in an economic downturn, during which it is common for lending levels to contract.” The Treasury goes on to note that “the demand for credit by consumers and businesses typically falls during an economic downturn, reflecting caution by both lenders and borrowers to take on new risk during uncertain economic times.”