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).

Ultimately, institutions should carefully consider how they can disclose their lending efforts, even if the TARP Capital funds have not been segregated (and we expect most institutions have not attempted to segregate their TARP Capital funds).  Comparable to the responses provided to the Treasury Department by the larger banks in the first monthly bank lending survey, institutions may wish to provide the total amount of loan originations, renewals and new commitments without attempting to tie specific loans to TARP Capital.  Narrative disclosure of the manner in which the institution is attempting to generate loans, such as Citizen South Bank’s below-market mortgage rates, may also provided important information to support the institution’s attempts to use TARP Capital funds.

As recognized by the Treasury Department in their first monthly bank lending survey, it is impossible to know what lending levels would have been without the TARP Capital Purchase program, but it is reasonable to presume that “levels would likely have been lower” without TARP Capital funds.  This vagueness, while making it virtually impossible to conclusively demonstrate that TARP Capital funds have increased, it also preserves some flexibility to argue that the TARP Capital funds have increased lending, even if loans are nominally down year-over-year.  Without the TARP Capital funds, loan levels could have been even lower.  Respondents may also want to read our commentary on how a bank could demonstrate that its using the TARP Capital funds to lend.

The SIGTARP request also sets forth a definitive notice to the company to “segregate and preserve” documents related to TARP usage, which would include anything (and everything) that existed both at the time of recipt of the request and going forward.  Implementing a document hold, including electronic document preservation, could provide important protections to a TARP recipient in the event that SIGTARP elects to further pursue a specific company’s response.