USDA Recovery Act funds are helping to preserve and create jobs, many of which are in small businesses in small towns.

SBA/US BANK The Recovery Act encourages small business lending through SBA's 7(a) and 504 programs.

SBA Dr. Justin Kim, O.D., owner of Trinity Vision Center in Texas, received SBA assistance to get the flexible working capital he needed during the economic downturn.

NADCO Provident Business Financial Services worked with Capital Bank to provide financing to Tech-Wood USA, a start-up trying to generate 35 jobs in rural South Carolina. The banks advanced funds to purchase and improve the building before the SBA 504 loan was completed.

NADCO After the credit crisis hit, the owners of Daystar Desserts needed a loan and the SBA guided them to Village Bank, a 504 lender, that helped them understand changes resulting from the Recovery Act. Their new loan will save them nearly $200,000 in interest costs.

CDFI Fund Project Hope in Massachusetts received a New Markets Tax Credit Award of $4.8 million for its Roxbury Community Center, the community's first certified green building. The money will help Project Hope expand its education, job, and career services.

CDFI Fund Second Line Stages is a "green" film studio that received $6 million in New Markets Tax Credits and was honored by the Council of Development Finance Agencies as the best tax-credit-financed project in the U.S. CDFI Director Donna Gambrell and others toured the studio on June 6, 2009.

CDFI Fund Treasury Secretary Timothy F. Geithner announced $1.5 billion in New Markets Tax Credit awards for 32 organizations on May 27, 2009.

The American Recovery and Reinvestment Act of 2009 (Recovery Act) is promoting economic stability and growth with incentives offered by new and expanded federal programs. The programs are available through the U.S. Small Business Administration (SBA), U.S. Department of the Treasury, U.S. Department of Housing and Urban Development (HUD), and U.S. Department of Agriculture (USDA). The programs give banks opportunities to expand lending, investments, and community development activities. Participating banks may be eligible for consideration under the Community Reinvestment Act (CRA). National banks are encouraged to discuss the possible CRA consideration of specific community and economic development activities with their OCC supervisory office.

This article highlights some of these new and expanded federal programs. Readers interested in gaining a better general understanding of the opportunities made available by the Recovery Act funding, please read A Look Inside.

U.S. Small Business Administration

The Recovery Act enables the SBA to offer new or expanded economic incentives to small businesses and lenders through five programs, including the:

• Basic 7(a) Loan Program
• 504 Certified Development Company Loan Program (CDC)
• Small Business Investment Company Program (SBIC)
• Microloan Program
• America's Recovery Capital Loan Program (ARC)

Basic 7(a) Loan Program

The SBA's 7(a) loan guaranty program is the agency's primary business loan assistance program. Section 7(a) of the Small Business Act authorizes the SBA to provide loan guarantees to lenders making small business loans. Lenders originating and servicing loans to small businesses receive a SBA guaranty on a percentage of the individual loan amount. The guaranty assures lenders that, in the event borrowers default, the SBA will reimburse lenders up to the percentage of the guaranty. Under this program, borrowers remain obligated for the full amount due.

The Recovery Act authorized changes to the 7(a) loan program in three areas.

7(a) Fee Elimination and Guaranty Provisions

For certain 7(a) loans, Section 501 of the Recovery Act, temporarily eliminated the upfront fees for all eligible loans, including those with higher SBA guarantees (up to 90 percent and up to a $1.5 million SBA guaranteed share) as provided in section 502 of the Recovery Act. The original funding in the Recovery Act for fee relief and higher guarantees has been exhausted. However, several temporary extensions have been approved providing additional funding for these purposes. Additional information can be obtained by participating SBA Lenders from their local SBA field office.

Debt Refinancing Permanent Provision

• New refinancing authority has been created by the Recovery Act allowing the restructuring of existing 7(a) debt into new 504 loans for purposes of business expansion and job creation.
• Existing 7(a) loans may be refinanced only if the current lender is unwilling or unable to modify the current loan.
• If a 7(a) lender is refinancing same-institution debt, the refinancing would be eligible for SBA 504 refinancing only if the lender is unable to modify the terms of the existing loan because a secondary market investor will not agree to the modified terms.

Dealer Floor Plan Pilot Initiative

• The Recovery Act authorized the SBA to establish a new program to guaranty new lines of credit extended by lenders to dealerships. The pilot program allows dealers to borrow against existing retail inventory. The dealer repays the debt as the inventory is sold and can borrow against the line of credit to add new inventory. The SBA will guarantee between 60 percent and 75 percent of a floor plan line's wholesale inventory value from $500,000 to $2 million to eligible dealers of titleable assets, including but not limited to automobiles, motorcycles, boats, recreational vehicles and manufactured housing (mobile homes).
• The dealer floor plan pilot program will continue through September 30, 2010. At that time, the SBA will determine if the pilot will be terminated, extended, or if certain features will become a permanent part of SBA's lending programs. Loans approved under the pilot are eligible for the temporary fee waiver as the 7(a) loan guaranty program. However, the SBA will guaranty loans up to 75 percent (not the temporary 90 percent) so that data collected during the pilot phase will provide a meaningful basis to determine if it should be extended.

For more information on this change, see the Small Business Administration and Federal Register posting for 74 FR 32006-32010, July 6, 2009.

504 Certified Development Company Loan Program (CDC)

This loan program provides financing for major fixed assets, such as owner-occupied commercial real estate and long-term assets, such as machinery and equipment. This program involves collaboration between private-sector lenders, such as banks, and certified development companies. Lenders make loans to qualifying small businesses. Typically, the bank portion consists of a loan secured by a first lien, covering 50 percent of the project cost. Subordinate financing of up to 40 percent traditionally comes from the CDC, which obtains these funds through the SBA's sale of debentures.

The SBA promotes the 504 loan program as an economic development tool. It is a self-supporting program funded by loan fees, rather than appropriations from the federal budget. Banks that offer SBA 504 loans may be able to attract small business borrowers that would benefit from long-term financing for plant and major equipment acquisition.

For more information about the SBA 504 program, visit the SBA Website.

Recovery Act Changes to SBA 504

504 Fee Elimination Provisions

For eligible loans approved through the SBA's section 504 Certified Development Company Program on or after February 17, 2009, the SBA temporarily eliminated two program fees:

• Third-party participation fees (Small Business Investment Act section 503(d)(2) fees are codified at 13 CFR 120.972)
• CDC processing fees (13 CFR 120.971(a)(1) fees)

Consistent with the Recovery Act's temporary elimination of CDC processing fees, CDCs will no longer be allowed to collect deposits from small business applicants that otherwise would have gone toward payment of these fees upon loan approval under 13 CFR 120.935. The SBA will reimburse the CDCs for the waived processing fees.

The Funds that were originally earmarked for the temporary elimination 504 loan fees were exhausted.  However, several temporary extensions have been approved providing additional funding for these purposes.  Additional information can be obtained by participating SBA Lenders from their local SBA field office.

On October 28, 2009, SBA announced a new program that allows portions of eligible 504 first mortgages, pooled by originators or broker dealers, to be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15 percent of each individual loan, pool originators will assume 5 percent of the risk, and the SBA will guarantee the remaining 80 percent. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after February 17, 2009. The program will be in place until February 16, 2011, or until $3 billion in new pools are created, whichever occurs first (see SBA Release Number: 09-76).

504 Refinancing Program

A new permanent SBA 504 refinancing program is being launched to help expand existing long-term projects. Under the new changes, a 504 CDC will be able to refinance existing loans that were used for 504-eligible fixed assets. This allows businesses to restructure eligible debt to improve cash flow and enhance capacity for growth and job creation or retention. Eligible debt is any debt incurred by the small business that was used to finance the purchase or expansion of fixed assets such as buildings, land, or equipment. Other eligibility conditions for refinancing include:

• The debt being refinanced has fixed assets as collateral.
• The existing debt was incurred for the benefit of the small business.
• The debt being refinanced must be related to the expansion.
• The new financing provides a substantial benefit to the business when prepayment penalties, financing fees, and other financing costs are taken into account.
• The borrower has been current on all payments of the debt being refinanced for one year prior to the date of refinancing.
• The terms and interest rate must be better than those of the existing indebtedness.
• The business must create or retain a job for every $65,000 guaranteed by the SBA (up from $50,000).

Any small business that is planning an expansion may refinance existing, eligible debt as long as the amount being refinanced is 50 percent or less of the total cost of the expansion.

The SBA 504 refinancing program was authorized on a permanent basis. (See Small

Small Business Investment Company Program (SBIC)

This program is a public–private partnership administered by the SBA to bridge the gap between entrepreneurs' need for capital and traditional financing sources. The structure of the program is unique in that SBICs are privately owned and managed investment funds that use their own venture capital plus funds borrowed with an SBA guarantee to make equity and debt investments in qualifying small businesses. SBICs make investments in a broad range of industries, geographies, and stages of investment. Debenture SBICs focus primarily on providing debt or debt with equity features to small businesses that are mature enough to make current interest payments on the SBIC investment. The SBA licenses and regulates SBIC funds.

For more information on the SBA SBIC program, please visit the Website.

Recovery Act Changes to SBICs

The following changes made to the SBIC program under the Recovery Act are permanent.

• The Recovery Act makes SBICs eligible for greater SBA-guaranteed funding and requires them to invest 25 percent of their investment dollars in "smaller" businesses. The amount of funding an SBIC may invest in a single small business is set at 10 percent of the SBIC's total capital rather than the previous limit of 20 percent of the SBIC's private capital only. This translates to an effective 50 percent increase in funding available to a single business through an SBIC.
• Maximum SBA funding levels to SBICs will increase up to three times the private capital raised by the SBIC—up to $150 million for single SBICs and $225 million for multiple SBICs that are under common control. The cap for all licensees was set at $137.1 million before the Recovery Act.
• The SBA funding limits will be higher for SBICs that are licensed after October 1, 2009, and that certify that at least 50 percent of their investments will be made in small businesses in low-income areas. Under these conditions, the SBA funding level for SBICs will increase to a maximum of $175 million for single licensees and $250 million for jointly controlled multiple licensees.

SBA Microloan Program

The SBA Microloan Program provides very small loans to startup, newly established, or growing small business concerns. Under this program, SBA makes funds available to nonprofit community-based microlenders (intermediaries), which, in turn, make fixed-rate loans to eligible borrowers in amounts up to $35,000. These loans are to be used for working capital and acquisition of materials, supplies, furniture, fixtures, and equipment. SBA's interest rate to microlenders is based on the five-year Treasury rate, with adjustments tied to a microlender's average loan size. The program also offers microlenders financial support for technical assistance-related costs, including staff, classroom training, and occupancy costs. SBA's reimbursement is capped at 25 percent of the microlender's outstanding SBA loan portfolio. The Recovery Act has expanded the program to finance up to $50 million in new lending and $24 million in technical assistance grants to intermediaries (microlenders). Approximately, one third of the funds have been allocated as of March 2010.  The 2010 appropriation for the Microloan Program is $20 million and funds can be rolled-over into 2011. The SBA is expanding this program and is continuing to look for intermediaries.

SBA microlenders must be private, nonprofit community development organizations (501(c) status), quasi-government economic development corporations, or agencies established by Native American tribal governments. They must have at least one year of microlending experience and be able to provide technical assistance to borrowers.

The SBA Website provides a list of intermediaries (microlenders).

SBA America's Recovery Capital Loan Program

The new SBA America's Recovery Capital (ARC) Loan Program offers stabilization financing to existing small businesses. SBA participating lenders make deferred-payment loans of up to $35,000, backed 100 percent by the SBA, to established, viable, for-profit small businesses that need short-term help to make payments on existing qualifying debt. The SBA pays participating lenders a monthly interest rate throughout the term of the loan. The program is intended to give small businesses temporary financial relief to keep their doors open and regain their cash flow so they can maintain existing jobs and ultimately create new jobs.

The ARC program is a no-interest deferred-payment loan to help small businesses that have a history of good performance but, as a result of the slow economy, are struggling to make debt payments. ARC loans are distributed over a period of up to six months to be used for payments of principal and interest for existing, qualifying small business debt, including mortgages, term and revolving lines of credit, capital leases, credit card obligations, and notes payable to vendors, suppliers, and utilities. Repayment begins 12 months after the final loan disbursement. After the 12-month deferral period, borrowers repay the loan principal over a period of five years.  

This program was launched June 15, 2009, and will continue as long as funding is available or until September 30, 2010, whichever comes first. An estimated one third of the funds remain available as of April 1, 2010. Detailed information is available for lenders interested in learning more about the ARC loan program,  a list of lenders, and a map for SBA field office contacts on the SBA Web site.

For more information on any of these SBA programs, visit the SBA Website.

U.S. Department of the Treasury

The Recovery Act enables the Treasury to offer new or expanded economic incentives to private-sector financial intermediaries through three programs.

CDFI Fund – Financial Assistance Awards

The CDFI Fund promotes access to capital and local economic growth by directly investing in, supporting, and training CDFIs that provide loans, investments, financial services, and technical assistance to underserved populations and communities. Financial assistance awards from the CDFI Fund are made in the form of equity investments, loans, deposits, or grants, and must be matched, dollar for dollar, by the applicant with funds of the same type from non-federal sources. Financial assistance awards enable CDFIs to leverage private capital to respond to demand for affordable financial products and services in economically distressed markets and by low-income families. CDFIs respond to this demand through the provision of loans, investments, training, technical assistance and basic financial services such as checking or savings accounts. Based on data supplied by CDFIs required to report to the CDFI Fund, it is estimated that CDFIs leverage their financial assistance awards with other dollars by an average of 20:1. CDFI Financial Assistance awards were $143 million in 2009 and are expected to be $113 million in 2010. These awardees may be looking for banks to help leverage these funds to promote community and economic development in the areas they serve. A listing of recent Financial Assistance award recipients is available on the CDFI Fund's Website.

New Markets Tax Credits Program

The New Markets Tax Credit (NMTC) spurs investment of private sector capital in distressed communities by providing a tax credit for taxpayers who make qualified equity investments in designated Community Development Entities (CDEs). The credit provided to the investor totals 39 percent of the investment in a CDE and is claimed over a seven-year credit allowance period. Banks may invest in CDEs and obtain NMTCs. Some banks have established their own CDEs to take advantage more fully of NMTC allocations. NMTC awards in 2009 were $6.5 billion and are expected to total $5 billion in 2010 (subject to authorization). A listing of recent New Markets Tax Credit awardees is available on the CDFI Fund's Website.

CDFI's Capital Magnet Fund

The Capital Magnet Fund (CMF) was established through the Housing and Economic Recovery Act of 2008 and is administered by the CDFI fund. CMF competitively awards grants to certified CDFIs and non-profit organizations having as one of their principal purposes the management or development of affordable housing. Initial funding of $80 million was included in CDFI Fund's 2010 appropriation. Among an array of options, CMF dollars can be used to provide loan loss reserves, to capitalize an affordable housing fund, for guarantees, and for risk-sharing loans. For more information visit the CDFI web page.

Community Development Capital Initiative

On February 3, 2010, the U.S. Department of the Treasury announced enhancements to the TARP program in new initiative known as the Community Development Capital Initiative (CDCI).  This program offers low-cost capital to regulated Community Development Financial Institutions in order to enhance their ability to provide credit in distressed communities.  Basic terms of the program are:

• Recipients must be regulated financial institutions that are certified CDFIs.
• CDFIs can apply for capital equal to up to 5 percent of their total risk weighted assets.
• The dividend rate on the preferred stock will be 2 percent for eight years; after eight years the interest will increase to nine percent.
• CDFIs with existing TARP Capital Purchase Program investments will be eligible to exchange those investments into this program, thus lowering the cost of capital and providing access to additional capital.
• CDFIs will not be required to issue any warrants or other additional equity kickers to the Treasury Department.

In addition, in cases where an institution might not otherwise be approved by its regulator, it will be eligible to participate so long as it can raise enough private capital that – when matched with Treasury capital up to 5 percent of risk-weighted assets – it can reach viability. The private capital must be junior to Treasury's investment. For more information about the programs see the US Treasury press release.

Applications for the CDCI are due on April 30, 2010 and funding/exchanges must be completed by 5 p.m. (EST) on September 30, 2010.

Financial institutions which are not able to meet these deadlines may still apply to be a certified CDFI. Once CDFI Fund certification has been obtained, those institutions would then be eligible to apply for Financial Assistance awards from the CDFI Fund.

For more information on the CDCI program, please visit the financialstability.gov Web site: http://www.financialstability.gov/roadtostability/comdev.html

U.S. Department of Agriculture

The Recovery Act enables the USDA to offer an expanded guarantee program for rural business and industry financing.

U.S. Department of Agriculture Rural Development Business and Industry Guaranteed Loan Program

USDA's Rural Development Business and Industry Guaranteed Loan Program seeks to improve, develop, or finance business, industry, and employment, and to improve the economic and environmental climate in rural communities. This is done by bolstering the existing private credit structure through the guarantee of quality loans in rural areas. The percentage of guarantee is negotiated between the lender and USDA Rural Development and depends on the size of the loan.

The Recovery Act provided $1.55 billion in loan guarantee authority to make additional funds available to USDA Rural Development–approved lenders providing loans to businesses (including tribal enterprises and tribally owned businesses) in rural communities. The funds are being provided through a central pool, as requests are made, rather than through state allocations. The standard 2 percent B&I guarantee fee is being halved to 1 percent until September 30, 2010 and the standard annual renewal fee is temporarily eliminated until that same date. Finally, the Recovery Act permits a guarantee rate of up to 90 percent for high-priority loans based on an established scoring system and loans that support quality jobs in distressed or underserved areas. Quality jobs mean that the borrower's business pays an average hourly wage rate of at least $9.07 (more than 125 percent of the federal minimum wage). High-priority loans will be targeted to businesses located in a distressed or underserved community.

More information about Recovery Act changes to the USDA Rural Development Business and Industry program is available on the USDA Web site.

Under the program, banks may make loans for:

• Business and industrial acquisitions when the loan will keep the business from closing, prevent the loss of employment opportunities, or provide expanded job opportunities.
• Business conversion, enlargement, repair, modernization, or development.
• Purchase and development of land, easements, rights-of-way, buildings, or facilities.
• Purchase of equipment, leasehold improvements, machinery, supplies, or inventory.

Approved lenders and their USDA Rural Development Office representatives work with businesses (including tribes, tribal enterprises, and tribally owned businesses) to bring this loan program to rural areas (population 50,000 or less). Borrowers must be engaged in or proposing to engage in a business that undertakes at least one of the following activities:

• Provides employment.
• Improves the economic or environmental climate.
• Promotes the conservation, development, and use of water for aquaculture.
• Reduces reliance on nonrenewable energy resources by encouraging the development and construction of solar energy systems and other renewable energy systems.

Loan guarantees will be issued until funds are depleted or until September 30, 2010, whichever comes first.

To apply for funding through the B&I program, lenders should contact their Rural Development State Office. B&I program information is available on the USDA Web site.

General information about the Rural Development B&I Program is available on the USDA Web site and the OCC fact sheet on USDA Rural Development Business and Industry Guaranteed Loans (PDF 76KB).

CRA Consideration

SBA Basic 7(a), SBA 504, and ARC Loan Programs

Under certain circumstances, banks may receive CRA consideration for providing credit under the SBA Basic 7(a), 504, and ARC loan programs. For example, large banks that originate or purchase SBA loans of $1 million or less receive lending test consideration. In addition, SBA loans over $1 million that meet the definition of a community development loan in the CRA regulation (see 12 CFR 12(h)) are considered as community development loans in large bank lending tests. Refer to the regulation and Interagency questions and Answers Regarding Community Reinvestment (Q&A) dated March 11, 2010 for guidance. (See 12 CFR 25.12(h), and 75 FR 11642. §__.12(h)—1.)

Small and intermediate-small banks (ISB) also receive positive CRA consideration for originating or purchasing SBA loans when considering a bank's business lending. Unlike small and large banks, however, SBA loans that also meet the definition of a community development loan by an ISB may be considered under either the ISB community development test or its lending test, but not both. Refer to the Q&A for guidance. (See 12 CFR §__.12(h)—3.)

SBIC Program

Financing projects located in the broader statewide or regional area that includes the bank's assessment area(s), may receive CRA consideration if the projects benefit the bank's assessment area or, if the bank has otherwise adequately addressed the community development needs of its assessment area(s), even if these projects will not directly benefit the institution's assessment area(s). Banks receive CRA consideration for loans to or investments in an SBIC, because the SBICs are presumed to promote economic development. (See 12 CFR25.12(g)(3) and the Q&As §___.12(g)(3)-1).

Microloan Program

Investments in or loans to intermediaries that support the SBA Microloan Program may receive CRA consideration, provided they meet both the geographic requirements of the CRA and they promote economic development. To promote economic development, the loans must support permanent job creation, retention, and/or improvement for low- and moderate-income persons, in low- or moderate-income geographies, or in areas targeted for redevelopment. (12 CFR 25.12(g) and the Q&As §___.12(g)(3)-1 and Q&A §___ .12(t)-4).

A list of SBA Microloan Intermediaries can be found on the SBA Web site.

CDFI Fund and NMTC Programs

Banks may receive CRA consideration for loans and investments to financial intermediaries, such as CDFIs and NMTC-eligible Community Development Entities that primarily lend or facilitate lending in low- and moderate-income areas or to low- and moderate-income individuals to promote community development, provided the geographic requirements of the CRA are met. (See 12 CFR 25.12(h) & (t), and Q&A §___ .12(h)-1 and Q&A §___.12(t)-4.)

Other CRA Information

Providing technical assistance on financial matters to small businesses (generally those with gross annual revenues of $1 million or less) may be considered a community development service under the CRA. (See CFR 25.12(i) and §__.12(i)-3. )

For additional information and guidance on CRA, refer to 12 CFR 25 and the March 11, 2010, Interagency Questions and Answers on CRA, both available on the Federal Financial Institutions Examination Council Web site. National banks are encouraged to discuss with their OCC supervisory office the possible CRA considerations of specific Recovery Act programs.