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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

December 2011: 

Small Business Lending Fund: 

Additional Actions Needed to Improve Transparency and Accountability: 

Small Business Lending Fund: 

GAO-12-183: 

GAO Highlights: 

Highlights of GAO-12-183, a report to congressional committees. 

Why GAO Did This Study: 

The Small Business Jobs Act of 2010 aimed to stimulate job growth by 
establishing the Small Business Lending Fund program (SBLF) within the 
U.S. Department of the Treasury (Treasury), among other activities. 
The SBLF program was designed to encourage community banks and 
community development loan funds with assets of less than $10 billion 
to increase their lending to small businesses. 

The act also requires GAO to audit SBLF annually. This initial report 
examines (1) Treasury’s procedures for evaluating applications for 
SBLF funds, (2) characteristics of institutions that applied for and 
received funds from SBLF and factors that influenced banks’ decision 
to participate, and (3) Treasury’s plans to monitor participants and 
measure SBLF’s progress in increasing small business lending. GAO 
reviewed documents on Treasury’s procedures and controls; analyzed 
data on applicants; compared SBLF banks with a peer group of 
nonparticipating banks; surveyed a representative sample of banks (for 
a weighted response rate of 66 percent); and interviewed Treasury, 
federal banking regulators, and representatives from industry 
associations. 

What GAO Found: 

Treasury adopted procedures to help ensure that applicants were 
evaluated consistently and were likely to repay funds, but its lack of 
clarity in explaining program requirements and decisions created 
confusion among applicants. The evaluation process included input from 
federal and state regulators, reviews of small business lending plans, 
and estimates of the applicants’ ability to repay funds. GAO’s 
analysis of the inputs Treasury relied on for its decisions showed 
that Treasury generally followed its process, although additional 
steps were taken for some applicants, such as revising repayment 
estimates to include updated information provided by federal 
regulators. Also, Treasury’s initial announcement of program 
requirements did not make clear that applicants could not have 
restrictions on paying dividends, affecting over 200 applicants. 
Treasury also did not explain the rationale for its funding decisions 
to applicants and other stakeholders, and many applicants who were not 
approved were not notified until September 2011—-almost 4 months after 
the application deadline and initial disbursements of funds. Although 
Treasury had several outreach efforts to communicate with the public 
about SBLF, such efforts have not always been timely or clear to 
applicants and other stakeholders and could contribute to SBLF being 
poorly understood by the public and Congress. 

Fewer institutions applied to SBLF and received funding than initially 
anticipated, in part because many banks did not anticipate that demand 
for small business loans would increase. SBLF was authorized to invest 
up to $30 billion, but Treasury funded just 332 of the 935 
applications, investing about $4 billion, or 13 percent, of the 
authorized funds. The institutions that applied to and were funded by 
SBLF were primarily institutions with total assets of less than $500 
million. In addition, GAO’s analysis showed that compared with banks 
that did not apply to SBLF, funded banks had fewer problem loans and 
small loans (under $1 million) and less capital. GAO’s nationally 
representative survey of community banks showed that respondents’ most 
common reason for not applying to the SBLF program was a lack of 
demand for small business loans. 

Treasury has not finalized plans for assessing SBLF’s impact on small 
business lending or procedures for monitoring recipients for 
compliance with program requirements. GAO’s analysis shows that credit 
is still difficult to obtain, although it has eased some compared with 
2009, confirming that the lending environment remains challenging. 
Such an environment makes Treasury’s planned monitoring and 
assessments increasingly important. Treasury officials told GAO that 
they have been developing procedures for monitoring compliance, but 
they are not yet finalized. Similarly, Treasury is considering various 
options for evaluating SBLF’s performance, but complex economic 
relationships will make linking the SBLF program to job growth 
difficult. Treasury officials said that they had been focused on 
approving applicants and disbursing funds by the statutory deadline of 
September 27, 2011, and that finalizing procedures and performance 
indicators had lagged as a result. Now that funding decisions and 
disbursements have been made, finalizing plans for monitoring 
compliance and assessing SBLF’s progress can take precedence. Without 
a full and robust assessment, Treasury will not be able to provide 
useful information to policymakers about the participants’ compliance 
and the effectiveness of a capital infusion program as a means of 
increasing small business lending. 

What GAO Recommends: 

To improve transparency and accountability, Treasury should (1) 
enhance its strategy for communicating with participants and other 
stakeholders, (2) finalize procedures for monitoring participants’ 
compliance with program requirements, and (3) complete plans for 
assessing the program’s effectiveness. Treasury agreed with GAO’s 
recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-12-183]. For more 
information, contact A. Nicole Clowers at (202) 512-8678 or 
clowersa@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Treasury's Application Requirements and Decisions Were Not Always 
Transparent: 

Characteristics of Applicants and Participants and Factors Affecting 
SBLF Participation: 

Treasury Has Not Finalized Plans to Monitor SBLF Participants or Track 
SBLF's Impact: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Responses to Questions from GAO's Survey on the SBLF 
Program: 

Appendix III: Comments from the Department of the Treasury: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Main Parameters Treasury Used for Evaluating SBLF Applicants: 

Table 2: Population, Sample Size, and Respondent Information for GAO 
Survey: 

Table 3: Has your bank applied, or does it plan to apply, to the SBLF 
program? 

Table 4: What are the reasons your bank had for applying for funding 
through the SBLF program? 

Table 5: Of all the reasons your bank had for applying for funding 
through the SBLF program, which one was the most important reason for 
applying? 

Table 6: What are the reasons your bank had for NOT applying for 
funding through the SBLF program? 

Table 7: Of all the reasons your bank had for NOT applying for funding 
through the SBLF program, which one was the most important reason for 
NOT applying? 

Figures: 

Figure 1: Treasury's Process for Evaluating SBLF Applicants: 

Figure 2: Timeline for the Implementation of SBLF, September 2010 
through October 2011: 

Figure 3: SBLF Applicant and Participant Data: 

Figure 4: SBLF Investments by State: 

Figure 5: Factors Affecting Banks' Participation in SBLF: 

Figure 6: Indicators of Small Business Credit Conditions, Third 
Quarter 2003-Third Quarter 2011: 

Abbreviations: 

ABA: American Bankers Association: 

call reports: consolidated reports of condition and income: 

CAMELS: C-Capital adequacy, A-Asset quality, M-Management quality, E-
Earnings, L-Liquidity, and S-Sensitivity to market risk: 

CDCI: community development capital initiative: 

CDFI: community development financial institution: 

CDLF: Community Development Loan Funds: 

CPP: Capital Purchase Program: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

GPRA: Government Performance and Results Act of 1993: 

ICBA: Independent Community Bankers Association: 

NFIB: National Federation of Independent Business: 

OCC: Office of the Comptroller of the Currency: 

OTS: Office of Thrift Supervision: 

SBLF: Small Business Lending Fund: 

SBLI: Small Business Lending Index: 

SNL: SNL Financial-collects and publishes financial data and analyses: 

TARP: Troubled Asset Relief Program: 

Treasury: Department of the Treasury: 

IG: Inspector General: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

December 14, 2011: 

Congressional Committees: 

Congressional interest in assisting small businesses has increased in 
recent years, primarily because of continued concerns about 
unemployment and the sustainability of the current economic recovery. 
In particular, Congress has grown increasingly concerned that in the 
current economic recovery small businesses might not be able to access 
enough capital to create needed jobs. In 2008 and early 2009, major 
disruptions of business credit markets made accessing credit difficult 
for small businesses. For example, a Wells Fargo survey shows that the 
number of small businesses having difficulty accessing credit more 
than tripled from 2007 to 2010, with ultimately almost 40 percent of 
small businesses indicating that credit was difficult to obtain. 
Further, the Secretary of the Treasury testified in June 2011 that 
small businesses were concentrated in sectors that had been especially 
hard hit by the recession, including construction-related industries. 
As a result, during the depths of the 2007-2009 crisis, the rate of 
job losses was almost twice as high for small businesses as it was for 
larger firms.[Footnote 1] 

To address these concerns, on September 27, 2010, President Obama 
signed into law the Small Business Jobs Act of 2010.[Footnote 2] Among 
other things, this legislation aims to stimulate job growth by 
establishing the Small Business Lending Fund program (SBLF). The SBLF 
program is designed to encourage banks and community development loan 
funds (CDLF) with assets of less than $10 billion to increase their 
lending to small businesses with up to $50 million in annual revenues. 
[Footnote 3] The act authorizes the Treasury Secretary to make up to 
$30 billion of capital available and offers incentives to increase 
small business lending. 

Although the SBLF program has received support from some members of 
Congress and banking and business trade groups, other congressional 
members and groups have raised concerns about the program. These 
concerns include protecting taxpayer money (that is, ensuring that the 
funds will be paid back), ensuring that only healthy institutions have 
access to the funds, and ensuring that the institutions receiving the 
funds will actually increase new business lending. Some others have 
also expressed concerns that allowing institutions that received funds 
under the Troubled Asset Relief Program (TARP) to draw on SBLF funds 
would offer a way to refinance out of TARP with lower dividend rates 
and fewer program restrictions but without any guarantee of increasing 
business lending. Legislation has been introduced in Congress intended 
to address program concerns.[Footnote 4] 

The 2010 Small Business Jobs Act requires GAO to conduct an annual 
audit of the SBLF program. Under this statutory mandate, this initial 
report assesses (1) the Department of the Treasury's (Treasury) 
procedures to implement SBLF and evaluate applications for SBLF funds, 
(2) characteristics of institutions applying for and receiving SBLF 
funds and the factors that influenced banks' decision to participate, 
and (3) Treasury's plans to monitor SBLF participants and measure the 
SBLF's progress in increasing small business lending. 

To assess Treasury's evaluation process for SBLF applications, we 
reviewed Treasury's policies, procedures, and internal controls for 
SBLF, including nonpublic documents and publicly available material 
from the SBLF website. We reviewed Treasury's and the four federal 
banking regulators'--Federal Deposit Insurance Corporation (FDIC), 
Board of Governors of the Federal Reserve System (Federal Reserve), 
the Office of the Comptroller of the Currency (OCC), and the Office of 
Thrift Supervision (OTS)--respective roles and responsibilities and 
compared them with their roles for the Capital Purchase Program (CPP), 
a capital infusion program under TARP that is similar to SBLF. 
[Footnote 5] To identify applicants that fell outside of Treasury's 
stated evaluation parameters, we analyzed data that Treasury used to 
inform its funding decisions, including CAMELS composite ratings, 
repayment probabilities, performance ratios, lending plan scores, 
dividend restriction information, and results of regulators' financial 
condition assessments.[Footnote 6] We also analyzed data from 
Treasury, FDIC, and SNL Financial (SNL)--a financial institution 
database--for all applicants. We then compared the applicants that 
Treasury approved and did not approve to its evaluation thresholds and 
identified a number of approved and nonapproved applicants that fell 
outside of these general parameters. Using the results of this 
analysis, we then selected a judgmental sample of 15 applicants that 
appeared to be particularly out of line with the parameters Treasury 
had set for additional review. We obtained the relevant minutes from 
Treasury's Application Review Committee and Investment Committee for 
these 15 applicants to review Treasury's rationale for their decisions 
on these applicants. We interviewed Treasury officials for further 
clarification. We also interviewed representatives of industry trade 
groups to obtain their perspectives on SBLF and the application 
process. Our criteria for assessing Treasury's evaluation process drew 
from GAO's Standards for Internal Control in the Federal Government 
and past IG and GAO work, particularly on CPP.[Footnote 7] 

To describe the characteristics of the institutions that applied to 
and received SBLF program funds, we analyzed data from Treasury on 
applicants and participants, including the number of institutions that 
were approved, not approved, and those that were refinancing their CPP 
or CDCI funds through SBLF.[Footnote 8] We also analyzed the 
geographic distribution of participants and assessed the extent to 
which institutions receiving SBLF funds tended to be located in high 
unemployment areas. We also developed a comparable peer group of banks 
that did not apply for SBLF program funds and compared their financial 
condition and past lending patterns with those of SBLF program 
applicants and participants that are also banks. The data we analyzed 
from Treasury, FDIC, and regulatory filings were sufficiently reliable 
to describe the characteristics of SBLF bank applicants and their 
peers. Finally, we conducted a Web-based survey of a nationally 
representative sample of banks with assets of $10 billion or less to 
obtain their reasons for applying or not applying to the program. The 
weighted response rate was 66 percent.[Footnote 9] On the basis of our 
application of generally accepted survey design practices, we 
determined that the data collected via our survey were of sufficient 
quality for our purposes. 

To assess Treasury's plans to measure SBLF's effectiveness, we 
interviewed Treasury officials about their intended work. To describe 
trends in small business lending, we used a number of indicators that 
provide a variety of perspectives on small business credit market 
conditions leading up to the implementation of SBLF. Appendix I 
contains more information on our objectives, scope, and methodology. 

We conducted this performance audit from December 2010 to December 
2011 in Washington, D.C., in accordance with generally accepted 
government auditing standards. Those standards require that we plan 
and perform the audit to obtain sufficient, appropriate evidence to 
provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Background: 

SBLF Goals, Considerations, and Eligibility Requirements: 

SBLF was one of the key provisions under the 2010 Small Business Jobs 
Act to address the ongoing effects of the financial crisis on small 
businesses. The act provided temporary authority to the Secretary of 
the Treasury to make capital investments in eligible banks and CDLFs 
in order to increase the availability of credit for small businesses. 
The legislation directed Treasury to consider the following in 
exercising its authorities for the SBLF program: 

* increasing the availability of credit for small businesses; 

* providing funding to minority-owned eligible institutions and other 
eligible institutions that served small businesses that were 
minority-, veteran-, and women-owned and that also served low-and 
moderate-income, minority, and other underserved or rural communities; 

* protecting and increasing American jobs; 

* increasing the opportunity for small business development in high-
unemployment areas; 

* ensuring that all eligible institutions can apply, without regard to 
geographic location; 

* providing transparency with respect to the use of SBLF funds; 

* minimizing costs to taxpayers; 

* promoting and engaging in financial education for would-be 
borrowers; and: 

* providing funding to eligible institutions that served small 
businesses directly affected by the Deepwater Horizon spill. 

SBLF is intended to increase small business lending. For the purposes 
of the program, the legislation defined qualified small business 
lending--as defined in an institution's quarterly regulatory filings 
(call reports)--as one of the following:[Footnote 10] 

* commercial and industrial loans; 

* owner-occupied nonfarm, nonresidential real estate loans; 

* loans to finance agricultural production and other loans to farmers; 
and: 

* loans secured by farmland. 

In addition, qualifying loans cannot be for more than $10 million, and 
the business may not have more than $50 million in revenue.[Footnote 
11] 

The act specifically restricts applications from institutions that are 
on the FDIC problem bank list (i.e., defined in the act as banks with 
a composite CAMELS ratings of 4 or 5) or have been removed from that 
list in the previous 90 days.[Footnote 12] Treasury determines whether 
to provide SBLF funding to a bank after consulting with the 
appropriate federal and, if applicable, state banking regulator. The 
Small Business Jobs Act outlined different statutory financial 
eligibility criteria for CDLFs. To qualify for SBLF, CDLFs must meet a 
number of requirements, including having at least 3 years of operating 
experience. 

SBLF Application Process and Requirements: 

Applicants submitted a 1-page application to Treasury and a 3-page 
small business lending plan to their primary federal regulator to (1) 
describe how they would use SBLF funds to address the needs of small 
businesses in the communities they served; (2) specify the projected 
increase in small business lending they expected to achieve 2 years 
after receiving SBLF funds; and (3) describe their approach to 
community outreach and advertising for small business lending, 
especially to minority-, veteran-and women-owned businesses via radio, 
television, or electronic media. 

For banks, Treasury implemented the SBLF program with supervisory 
consultation from the four federal banking regulators: FDIC, Federal 
Reserve, OCC, and OTS. After Treasury conducted an initial eligibility 
review for each applicant, Treasury requested that the regulators 
provide a supervisory consultation for eligible applicants, focusing 
on their financial condition and the results of the most recent 
examination. Regulators recorded their assessment in a Supervisory 
Consultation Memo to Treasury. For CDLFs, Treasury sought input from 
the Community Development Financial Institutions Fund, a bureau in 
Treasury that certifies these institutions. 

SBLF Funding and Incentives for Small Business Lending: 

Under SBLF, Treasury can make capital investments in eligible 
institutions with total assets of less than $10 billion. Treasury 
provides institutions with capital by purchasing preferred stock or 
subordinated debt in each bank.[Footnote 13], [Footnote 14] The amount 
of funding a institution could receive depended on its asset size as 
of the end of the fourth quarter of calendar year 2009. Specifically, 
if the qualifying bank had total assets of $1 billion or less, it 
could apply for SBLF funding that equals up to 5 percent of its risk-
weighted assets (as reported in the call report immediately preceding 
the date of application).[Footnote 15] If the qualifying bank had 
assets of more than $1 billion, but less than $10 billion, it could 
have applied for funding that equals up to 3 percent of its risk-
weighted assets. The SBLF program also provides an option for eligible 
institutions to refinance preferred stock issued to the Treasury 
through TARP's CPP or CDCI. If the qualifying institution is a CPP or 
CDCI recipient, any capital that remains outstanding from these 
investments is deducted from the SBLF program limits. All CPP and CDCI 
outstanding amounts must be repaid when SBLF funding is received. 

Participating banks must pay dividends or interest of 5 percent per 
year initially, with reduced rates available if they increase their 
small business lending. Specifically, the dividend rate payable will 
decrease as banks increase small business lending over their 
baselines. While the dividend rate will be no more than 5 percent for 
the first 2 years, a bank can reduce the rate to just 1 percent by 
generating a 10 percent increase in its lending to small businesses 
compared with its baseline. After 2 years, the dividend rate on the 
capital will increase to 7 percent if participating banks have not 
increased their small business lending and, after 4 1/2 years, the 
dividend rate on the capital will increase to 9 percent for all banks. 
For CDLFs, the initial dividend rate will be 2 percent for the first 8 
years. After the eighth year, the rate will increase to 9 percent if 
the CDLF has not repaid the SBLF funding. This structure is designed 
to encourage CDLFs to repay the capital investment as soon as 
practicable. With the approval of its regulator, Treasury will allow 
SBLF participants to exit the program at any time simply by repaying 
the funding provided along with dividends owed for that period. 
Treasury requires that institutions that are participants in CPP or 
CDCI must increase their small business lending to receive a reduced 
dividend rate benefit from refinancing. Specifically, if a 
institution's business lending has not increased over its baseline 
(i.e., the amount that was outstanding in the four quarters ending 
June 30, 2010) amount by the ninth quarter, it will be required to pay 
a "lending incentive fee" equal to 2 percent per year on the total 
amount of outstanding SBLF funding. 

Institutions chosen to participate in SBLF must submit an Initial 
Supplemental Report to Treasury that calculates the baseline level of 
small business lending and the initial dividend rate. SBLF 
institutions must continue submitting Quarterly Supplemental Reports 
to calculate dividend rates for the next quarter. The goal is to 
measure the institution's changes in qualified small business lending 
to determine changes, if any, to the dividend rate. In addition, SBLF 
institutions must complete a short annual lending survey and annual 
certifications to Treasury that attest the accuracy to the 
institutions' reports, among other things. In accordance with the act, 
Treasury plans to measure institutions' changes in qualified small 
business lending by the amount of loans outstanding each quarter 
against the baseline level. 

Treasury's Application Requirements and Decisions Were Not Always 
Transparent: 

Treasury's Review Process Required Additional Steps to Evaluate Some 
Applicants: 

Treasury's process for evaluating SBLF applicants included several 
levels of review and input from multiple sources to help ensure that 
applicants were treated consistently and that banks approved for 
funding were financially viable and could repay the investments. Such 
procedures are an important control activity that helps ensure agency 
accountability over the use of government resources. Treasury's review 
focused primarily on the financial condition of applicants and drew 
not only on regulators' supervisory consultation, but also on an 
independent credit analysis of applicants' financial health--
specifically, the likelihood that they would be able to repay SBLF 
investments and accompanying dividends--and to a lesser extent on the 
applicants' small business lending plans. Figure 1 provides an 
overview of the process for evaluating SBLF applicants. 

Figure 1: Treasury's Process for Evaluating SBLF Applicants: 

[Refer to PDF for image: illustration] 

SBLF applicants: Applications to: 

SBLF Program Office: 
* Preliminary eligibility checks; 
* Enter applicants' information into database; 
* Review applicants' Small Business Lending Plans. 

Eligible applicants sent to: 

Application Review Team: 
* Review regulators' Supervisory Consultation Memo; 
* Review state regulators' views, if applicable; 
* Review and update credit analysis to determine the applicants' 
repayment probability; 
* Review sector analysis to provide context on factors relevant to the 
Application Review Team's recommendation; 
* Application Review Committee reviews bank applications that may 
warrant additional review. 

Investment Committee: 
* Evaluate and recommend applicants. 

Delegated Treasury Principal: 

Preliminary and final approval. 

Sources: GAO analysis of Treasury information; Art Explosion (images). 

[End of figure] 

First, Treasury checked whether applicants were eligible to 
participate in SBLF. For example, Treasury checked to make sure that 
the applicants had less than $10 billion in assets and were not on 
FDIC's problem bank list. Treasury also checked with the regulators to 
determine whether the applicants could pay dividends to Treasury, a 
process which we describe in more detail later. Furthermore, for 
applicants seeking to refinance their CPP or CDCI funds, Treasury 
checked to ensure that they had not missed more than one dividend 
payments under the program. The program office then entered 
applicants' information into a database. 

Second, the Application Review Team considered various inputs for 
eligible applicants to help develop a preliminary recommendation to 
forward to the Investment Committee. According to Treasury, the 
Application Review Team included five members from Treasury with 
investment analysis experience to manage the application review 
process.[Footnote 16] The inputs that the Application Review Team 
considered included the following: 

* Supervisory consultation memo: As part of the evaluation process, 
Treasury obtained supervisory consultation from the appropriate 
federal banking regulators to determine the financial condition and 
performance of applicant banks. In the memo, the regulators did not 
recommend whether the applicant should be approved; rather the memo 
summarized supervisory information (e.g., CAMELS composite ratings and 
a description of material supervisory issues, if any) about the 
applicant's financial condition and performance and specifically 
indicated whether the applicant was viable.[Footnote 17] "Viable" was 
defined as adequately capitalized, not expected to become 
undercapitalized, and not expected to be placed into conservatorship 
or receivership.[Footnote 18] 

* Repayment probability: The Application Review Team also considered 
an independent credit analysis of applicant's ability to repay SBLF 
investments while making consistent dividend payments to Treasury--
which was referred to as the "repayment probability." Treasury hired 
financial agents to conduct this analysis. Using publicly available 
information, these agents examined applicants' capital structure, 
asset quality, earnings capacity, and access to funding to develop a 
repayment probability estimate. According to Treasury officials, the 
purpose of the repayment probability analysis was to provide a forward-
looking approach to help ensure that participants would generate 
enough future income to repay the SBLF investments and not solely rely 
on a determination of the applicant's financial condition information 
from their respective regulators. According to Treasury officials, the 
Application Review Team reviewed the repayment probability estimate 
and, if needed, updated the estimate to incorporate confidential 
supervisory information. 

* Sector analysis: The Application Review Team reviewed sector 
analyses, on an as needed basis, on current industry trends and 
developments in the small bank credit sector because comparatively 
little market research was available. For example, some of the sector 
analyses included analysis of regional economies or summaries of 
important industry information, such as proposed regulatory and 
legislative changes. Treasury hired financial agents to perform the 
sector analysis. 

* Small business lending plans: The Application Review Team summarized 
input from SBLF Program Office's evaluation of applicants' small 
business lending plans. The evaluation included the projected increase 
in small business lending, experience in small business lending, and 
plans to meet the needs of small businesses or provide appropriate 
outreach.[Footnote 19] 

* Application Review Committee input: The Application Review Team 
considered input from the Application Review Committee, which was made 
up of detailees from the FDIC, Federal Reserve, and OCC who were 
experienced in bank examinations.[Footnote 20] Treasury established 
the Application Review Committee to further help ensure consistent 
treatment of bank applicants. The Application Review Committee was 
responsible for all bank applications that may have warranted 
additional review. For example, the Committee reviewed all applicants 
that receive a CAMELS composite rating of "3," had adverse performance 
ratios, or received inconsistent supervisory consultation from the 
relevant state and federal regulators.[Footnote 21] In addition, the 
Application Review Committee took a "second look" at applicants deemed 
not viable by their respective regulators to ensure that the 
supervisory consultation process had been applied consistently across 
bank applicants. Treasury said that it added this additional review by 
the Application Review Committee in response to a previous GAO 
recommendation.[Footnote 22] The review process ends at this stage for 
applicants that the Application Review Committee did not recommend for 
further consideration and they are no longer considered for SBLF 
funding. According to Treasury, these decisions were further reviewed 
and affirmed by the Deputy Assistant Secretary. 

Third, the Application Review Team then prepared a recommendation for 
the Investment Committee. The Investment Committee was a five-member 
body that included the SBLF Director (Chairman) and the Assistant 
Secretaries for Financial Institutions, Financial Markets, Economic 
Policy, and Management or their delegates. The Investment Committee 
was charged with reviewing and recommending applicants for funding and 
reviewed the information compiled by the Application Review Team to 
inform its recommendations. Applications recommended by the Investment 
Committee were presented for preliminary approval to the Deputy 
Assistant Secretary for Small Business, Community Development, and 
Affordable Housing Policy. After preliminary approval, the approved 
bank had 30 days to close the transaction.[Footnote 23] 

Because CDLFs are unregulated institutions, they do not face the same 
regulatory reporting requirements as banks and, because of differences 
in legislative requirements, Treasury developed a separate set of 
processes to evaluate their ability to meet the eligibility 
requirements and financial conditions. Treasury consulted with the 
CDFI fund to determine whether a CDLF applicant could receive SBLF 
funding on the basis of factors such as prior award history, 
compliance status, and certification requirements. To evaluate the 
CDLF's financial condition, Treasury hired a financial agent to 
perform a desk review and on-site visit to evaluate the CDLF's 
financial statements, risk management and control procedures, adequacy 
of information systems, and management structure. The Application 
Review Team considered these inputs and then made a funding 
recommendation for the Investment Committee. CDLF applicants 
recommended for approval by the Investment Committee were then 
provided to the Deputy Assistant Secretary for preliminary approval. 
Those that were not recommended were also reviewed and affirmed by the 
Deputy Assistant Secretary. 

Our analysis of funding decisions found that Treasury generally 
followed its procedures, but we also identified some decisions that 
appeared to fall outside certain key parameters Treasury had 
established to guide its evaluation process. Treasury established 
specific parameters to evaluate SBLF applicants' financial conditions 
and, to a lesser extent, their small business lending plans. These 
parameters included that applicants should have at least an 80 percent 
probability of repayment and satisfactory performance ratios (e.g., 
nonperforming loan ratios of less than 40 percent, and construction 
and development loan ratios of less than 300 percent, Treasury's 
stated thresholds).[Footnote 24] Treasury also considered the 
applicants' CAMELS composite ratings. For the evaluation criteria that 
we reviewed, we found the following for approved and nonapproved 
applicants: 

* Approved applicants. Our review of Treasury data showed that 400 of 
the 935 applicants were approved. Treasury gave preliminary approval 
to a total of 400 SBLF applicants and funded 332. The remaining 68 of 
the approved applicants either chose not to participate in SBLF or 
were ultimately not approved because Treasury had evaluated updated 
information after they sent out the preliminary approval letter. All 
the approved applicants did not have restrictions on paying dividends. 
We also found that all approved applicants had CAMELS composite 
ratings of 1, 2, or 3 and had construction and development loan ratios 
of less than 300 percent. In addition, all but two approved applicants 
had what Treasury considered "responsive lending plans."[Footnote 25] 
However, we found that 44 of the 400 (11 percent) approved applicants 
had an initial calculation of repayment probability of less than 80 
percent. The lowest repayment probability estimate for an approved 
bank was 48 percent. In addition, we found that 13 of the 400 (3.2 
percent) approved applicants had nonperforming loan ratios (as a 
percentage of capital and loan loss reserves) greater than 40 percent 
(based on first quarter 2011 data).[Footnote 26] 

* Nonapproved applicants. Our analysis showed that, out of 935 
applicants, a total of 535 applicants were not approved.[Footnote 27] 
Fifty-three of the nonapproved applicants were not eligible based on 
Treasury's initial eligibility check. Of the nonapproved applicants, 
175 applicants considered viable by their respective regulator(s) and 
able to pay dividends were ultimately not approved.[Footnote 28] Of 
these nonapproved applicants, 85 (48.6 percent) had a CAMELS composite 
rating of 2, and 49 (28 percent) had both a CAMELS composite rating of 
2 and an initial calculation of repayment probability of higher than 
80 percent.[Footnote 29] 

To examine the decisions that appeared to fall outside of Treasury's 
stated parameters in more depth, we judgmentally selected 15 
applicants that appeared to be particularly out of line with 
Treasury's evaluation parameters. As part of this analysis, we 
reviewed minutes from the Application Review Committee and Investment 
Committee and interviewed Treasury officials. According to Treasury, 
these committees had the flexibility to consider all factors--
supervisory information, financial data, as well as repayment 
probability--relating to the applicants' financial health in making 
their decisions. For 12 of the 15 applicants, the Investment 
Committee's minutes and other documents provided additional 
explanation for their decisions. In particular, Treasury's Investment 
Committee minutes generally indicated that the financial agent's 
probability estimate was deemed too conservative for the approved 
applicants with repayment probabilities of less than 80 percent 
because, for example, the estimates did not include confidential 
supervisory information. For the remaining three applicants, Treasury 
officials were able to explain the rationale for their decisions--for 
example, we learned that the Application Review Committee or 
Investment Committee discussed concerns about the applicants' 
financial condition, but these concerns were not clearly documented in 
the committees' minutes. Treasury officials were able to clarify their 
decisions in subsequent conversations with us. Specifically, 2 
nonapproved applicants from the 15 applicants that we reviewed in more 
depth were deemed viable by their regulators, were able to pay 
dividends, and had a 96 percent repayment probability. However, the 
Application Review Committee did not recommend that these applicants 
go forward and the committee's minutes documented that both applicants 
had asset quality problems. Treasury officials further explained that 
financial agents estimated a high repayment probability for these 
applicants but lacked access to certain confidential supervisory 
information that would have lowered the repayment probability 
estimates. In particular, the financial agent projected a low level of 
losses, but the Application Review Team estimated that the applicants 
could have a higher level of losses based on confidential supervisory 
information about the applicants' classified assets--a measure of 
assets with well-defined weaknesses that jeopardize the liquidation of 
debts. 

Treasury officials acknowledged that the initial repayment probability 
provided by the financial agents did not reflect regulators' views of 
the financial condition of the banks, especially confidential 
information concerning adversely classified assets. According to 
Treasury officials, this was due to the financial agents' reliance on 
only publicly available information to develop the repayment 
probability. Therefore, additional steps were taken to revise the 
estimates in certain cases. Treasury officials explained that the 
Application Review Team updated the probability estimate with 
confidential supervisory information in certain cases to help inform 
Investment Committee's evaluations. While these updated repayment 
probability estimates were considered, they were not recorded in 
Treasury's database. However, Treasury officials explained that this 
updated information was typically included in either the Application 
Review Team's recommendation memorandum to the Investment Committee or 
the Investment Committee minutes.[Footnote 30] 

Time to Review Applications Was Affected by Implementation Challenges 
and Funding Deadline: 

Treasury faced multiple delays in implementing the SBLF program and 
disbursing SBLF funds by the statutory deadline of September 27, 2011. 
Treasury launched the program in December 2010 and had initially 
intended to start approving applications by mid-January 2011 and begin 
closing the application window by early April 2011. However, Treasury 
extended the application deadline for community banks from March 31 to 
May 16, 2001. In addition, Treasury did not begin the application 
process for banks that were S Corps and Mutuals and CDLFs until May 
12, 2011, and set application deadlines for these institutions for 
June 6, 2011, and June 22, 2011, respectively. Because of these 
implementation delays, Treasury did not disburse any funds until the 
end of June 2011, and finished approving the applicants on September 
26, 2011, a day before the funding deadline (see figure 2). 

Figure 2: Timeline for the Implementation of SBLF, September 2010 
through October 2011: 

[Refer to PDF for image: time line] 

2010: 

September 27: 
Small Business Jobs Act of 2010 signed into law. 

December 20: 
Treasury launched SBLF and issued terms and conditions of SBLF 
community banks. 

2011: 

March 15: Treasury finalized the terms of supervisory consultation 
with FDIC, Federal Reserve, OCC, and OTS. 

March 31: 
Initial deadline for community banks. 

May 9: 
Treasury announced the details of S corps and Mutuals, deadline June 
6, 2011. 

May 16: 
Extended deadline for community banks. 

May 23: 
Sent out first round e-mail inquiry regarding the applicant's ability 
to pay dividends, deadline to reply August 1, 2011. 

May 25: 
Treasury issued application form for CDLF, deadline June 22, 2011. 

July 7: 
Treasury announced the first wave of funding for six community banks 
that received a total of $123 million on June 21. 

September 6: 
Treasury began to inform nonapproved applicants of their funding 
decisions. 

September 26: 
Treasury completed applicant reviews and approved the last round of 
funding. 

September 27: 
Deadline for disbursing SBLF funds. 

October 3: 
First round of dividend payments were made. 

Source: GAO. 

[End of figure] 

Treasury officials said that they encountered a number of 
implementation challenges that delayed the disbursement of SBLF funds. 
First, the need to develop SBLF's infrastructure, including hiring 
staff and contractors, contributed to delays in starting the applicant 
review process. Second, Treasury officials noted that while they 
wanted to expeditiously disburse the funds, they were committed to 
developing and implementing a robust set of internal controls, which 
can take time. Third, negotiations over the regulators' role in 
reviewing SBLF applicants for investments took much longer than 
anticipated, and an agreement was not reached until March 2011. 
According to Treasury, this delay resulted from differing views among 
the federal regulators--FDIC, Federal Reserve, OCC, and OTS--about 
whether they should make recommendations to Treasury. Ultimately, the 
regulators and Treasury agreed that the regulators would not be 
required to make recommendations on whether the applicant should be 
approved for SBLF but instead would document their analyses of SBLF 
applicant's financial condition and performance and determination of 
the applicant's viability in the Supervisory Consultation Memo to 
inform Treasury's evaluation.[Footnote 31] Treasury also agreed to 
protect the privacy of the confidential supervisory information the 
regulators provided through a memorandum of understanding or similar 
letter agreements. 

Treasury also reconsidered applicants that had not been approved upon 
their initial review through September, when new supervisory 
information became available. Treasury officials explained that they 
continued to receive updated supervisory information from regulators 
through September, often because some banks had gone through a more 
recent examination. Treasury officials wanted to reevaluate the 
nonapproved bank applicants using this updated information to ensure 
that these applicants were fully considered. Therefore, Treasury 
delayed making final decisions for some applicants so that updated 
supervisory information could be considered. According to Treasury 
officials, waiting for such information proved beneficial for 18 
applicants that were ultimately approved to participate in SBLF. 

Lack of Clarity about Program Requirements and Transparency of Some 
Decisions Created Confusion: 

Treasury did not explicitly explain to applicants all SBLF program 
requirements at the beginning of the application period and did not 
inform nonapproved applicants of their status in a timely manner, 
which created confusion among applicants. Treasury initiated several 
outreach efforts to educate the public and potential applicants about 
SBLF. These efforts included a website with background and guidance on 
the program and frequently asked questions. Treasury also established 
a call center to respond to inquiries from interested institutions and 
held several webinars to explain the program. However, these 
communication efforts were not sufficient to address unexpected 
developments and the delays in the program. Furthermore, Treasury's 
communication strategy did not appear to be effective in communicating 
with external stakeholders such as the banking regulators, industry 
associations, and Congress. Two key developments illustrate these 
weaknesses. 

Program Requirements and Dividend Restrictions: 

Treasury did not clearly explain one of the program requirements to 
SBLF applicants--that they needed to be able to pay dividends on SBLF 
funds they received--during the application process, leading to 
confusion among many applicants about the program. After the 
application deadline for banks, Treasury realized that the information 
from federal regulators would not necessarily indicate whether banks 
had dividend restrictions. For example, dividend restrictions may come 
from state regulators and the applicant's own board of directors and, 
therefore, would not be reflected in the federal regulators' 
supervisory information.[Footnote 32] To obtain this information, in 
May 2011, Treasury sent applicants an e-mail asking them to fill out a 
new form about their ability to pay dividends. In its request, 
Treasury did not explain that this was not a new requirement. 

According to industry representatives, many banks had not realized 
that demonstrating their ability to pay dividends was a requirement 
for eligibility and, therefore, viewed Treasury's request for 
information on dividend restriction as a new requirement that was 
added subsequent to the application process. These representatives 
noted that the requirement that participants be able to pay dividends 
was not explicitly communicated when the information on SBLF was first 
posted on SBLF's website in December 2010.[Footnote 33] For example, 
it was not included in the initial guidance, the application form, or 
the question-and-answer section on the website. This program 
requirement was also not mentioned in Treasury's initial outreach 
efforts (e.g., webinars and conferences). Similarly, officials from 
FDIC, Federal Reserve, and OCC also told us that Treasury's decision 
to not fund banks with dividend restrictions had not been explicitly 
stated when the program was established in December 2010. In addition, 
the regulators noted that Treasury officials did not discuss this 
issue with them until early May 2011. 

Treasury officials noted that the requirement was described in the 
program's published Summary of Preferred Terms posted on December 20, 
2010, and was not a new eligibility criterion or policy change. 
Specifically, Treasury officials pointed out that the summary of terms 
stated that the main policy instrument for SBLF was the dividend rate, 
which would be an incentive for institutions to lend to small 
businesses and repay SBLF funding within a certain time frame. Given 
the program's focus on the dividend rate, Treasury officials assumed 
that applicants would understand that they needed to be free of 
restrictions on paying dividends. 

The confusion about the dividend restriction program requirement 
resulted in a number of banks unable to currently pay dividends 
applying for the program. Specifically, our analysis showed that 231 
of the applicants had some form of dividend restrictions.[Footnote 34] 
According to industry representatives we spoke with, if Treasury had 
communicated this requirement more clearly from the outset, banks 
might not have spent time and effort applying to the program or would 
have had more time to work with their regulators on lifting the 
restrictions to increase their chances of being accepted. 

Status of Applications: 

Although approved institutions began receiving funds in June 2011, 
many applicants that were not selected to participate in SBLF were not 
told of their status until September 2011, almost 4 months after the 
application deadline. Treasury officials explained that by waiting to 
make final decisions for some applicants that would not receive 
approval on the basis of results from the first-quarter call reports, 
Treasury was able to consider results from the second-quarter call 
reports that contained data on the banks' financial conditions through 
June 2011. 

When Treasury informed applicants of their status, it did not 
initially communicate why the banks were not approved. This lack of 
information created confusion and frustration among some applicants. 
For instance, representatives from one banking trade group told us 
that some members were confused about not being approved because they 
had high CAMELS composite ratings and no dividend restrictions and 
their respective regulators had informed them that they had received a 
positive viability determination. As we noted earlier, our analysis of 
Treasury's funding decisions found some applicants that fell within 
the established parameters but were not approved. Specifically, we 
found 85 applicants that were not approved by Treasury despite (1) 
receiving a positive viability determination, (2) having a CAMELS 
composite rating of 2, and (3) being able to pay dividends. Treasury 
officials told us that they did not initially explain to the 
applicants as to why they were not approved because relevant 
supervisory information was confidential, and Treasury was prohibited 
by law from disclosing this information. However, according to OCC, 
they were also not initially consulted about Treasury's decision about 
what to communicate to applicants who were denied, and when such 
discussions did take place, OCC encouraged Treasury to provide 
explanations to applicants. In addition, FDIC and the Federal Reserve 
noted that the regulator's confidential information was only one input 
into Treasury's decision-making process, and the investment decisions 
were Treasury's, not the regulators. Nevertheless, Treasury's emphasis 
on the confidential supervisory information contributed to the delay 
in notifying applicants of the reasons for not being approved and 
reduced the transparency of the decisions. Treasury informed us that 
they have subsequently reached an agreement with the regulators to 
share more information on those decisions with the affected SBLF 
applicants and has finished contacting nonapproved applicants with 
additional information regarding its decision. 

Treasury's ineffective communication about the dividend restriction 
program requirement, delays in communicating the status of 
applications, and lack of explanation for its nonapproval decisions 
resulted in confusion among applicants and may also have negatively 
affected how the potential pool of applicants and the public perceived 
the program. Federal government internal control standards state that 
management should ensure that the agency has adequate means of 
communicating with and obtaining information from external 
stakeholders when such information could have a significant impact on 
the agency's achieving its goals.[Footnote 35] The experience and 
lessons from the first year implementing SBLF could be instructive to 
Treasury's communication strategy about the status of the program 
going forward. Without a more effective communication strategy that 
enhances understanding of the program's goals and requirements and 
recognizes the need for timely communication with external 
stakeholders, SBLF will continue to be poorly understood by the public 
and Congress. 

Characteristics of Applicants and Participants and Factors Affecting 
SBLF Participation: 

Fewer institutions applied to SBLF and received funding than initially 
anticipated. Although SBLF's authorizing legislation provided up to 
$30 billion for investing, Treasury expected program participation to 
be lower and budgeted $17.4 billion in SBLF investments in its fiscal 
year 2011 budget request, based on an internal analysis of projected 
program activity.[Footnote 36] However, interest in SBLF was lower 
than Treasury anticipated, with 935 financial institutions applying to 
the program for a combined funding request of $11.7 billion. 
Ultimately, 332 institutions received $4.03 billion in SBLF 
investments. Of the 332 program participants, 281 (85 percent) were 
banks, while the remaining 51 institutions (15 percent) were CDLFs. 

The program attracted smaller institutions including those seeking to 
refinance CPP and CDCI funds. Sixty-five percent (612) of SBLF 
applicants were small institutions with total assets of $500 million 
or less, and 61 percent (204) of participants fall within this 
category.[Footnote 37] In addition, about one-third (320) of the total 
number of applicants were seeking to refinance CPP and CDCI funds, and 
these applicants requested $6.7 billion in funds--representing about 
57 percent of the total dollar amount requested (see figure 3). 
Treasury approved 137 of the applicants seeking to refinance CPP and 
CDCI funds, investing a total of $2.7 billion in these institutions. 
This represented about 67 percent of all SBLF investments. 

Figure 3: SBLF Applicant and Participant Data: 

[Refer to PDF for image: 2 horizontal bar graphs] 

Funding: 

Applicants: 
CPP/CDCI: $6.7 billion; 
Total: $11.7 billion; 
Participants: 
CPP/CDCI: $2.7 billion; 
Total: $4.03 billion. 

Institutions: 
CPP/CDCI: 320; 
Total: 935; 
Participants: 
CPP/CDCI: 137; 
Total: 332. 

Source: GAO analysis of Treasury data. 

Note: Of the $6.7 billion in requested to refinance CPP and CDCI 
funds, $5.69 billion was to repay CPP/CDCI principal. $2.2 billion of 
the ultimate $2.7 billion CPP/CDCI investments were for refinancing 
outstanding CPP and CDCI funds. 

[End of figure] 

The program also attracted institutions from across the country. 
Figure 4 shows the geographic distribution of SBLF investments by 
number of institutions per state and SBLF dollars per state. The Small 
Business Jobs Act required the Secretary of Treasury to consider, 
among other factors, increasing opportunities for small business 
development in high unemployment areas--a consideration Treasury 
sought to address by focusing outreach activities in 10 states with 
the highest unemployment (as well as the District of Columbia), which 
included direct outbound calling efforts to eligible institutions in 
these states. We found that higher levels of state unemployment were 
not associated with greater SBLF funding in the state.[Footnote 38] 

Figure 4: SBLF Investments by State: 

[Refer to PDF for image: combined vertical bar and line graph] 

State: California; 
Number of funded institutions: 30; 
Investments: $274.5 million. 

State: Pennsylvania; 
Number of funded institutions: 23; 
Investments: $190.8 million. 

State: Texas; 
Number of funded institutions: 23; 
Investments: $383.7 million. 

State: Illinois; 
Number of funded institutions: 21; 
Investments: $305.3 million. 

State: Florida; 
Number of funded institutions: 17; 
Investments: $144.6 million. 

State: Tennessee; 
Number of funded institutions: 17; 
Investments: $208 million. 

State: Massachusetts; 
Number of funded institutions: 12; 
Investments: $95 million. 

State: New York; 
Number of funded institutions: 12; 
Investments: $82.5 million. 

State: Wisconsin; 
Number of funded institutions: 11; 
Investments: $100 million. 

State: Minnesota; 
Number of funded institutions: 10; 
Investments: $48.9 million. 

State: Virginia; 
Number of funded institutions: 10; 
Investments: $145.8 million. 

State: Kansas; 
Number of funded institutions: 9; 
Investments: $60 million. 

State: Missouri; 
Number of funded institutions: 9; 
Investments: $173.6 million. 

State: New Jersey; 
Number of funded institutions: 9; 
Investments: $73 million. 

State: North Carolina; 
Number of funded institutions: 8; 
Investments: $115 million. 

State: Colorado; 
Number of funded institutions: 7; 
Investments: $90 million. 

State: Oklahoma; 
Number of funded institutions: 7; 
Investments: $64 million. 

State: Indiana; 
Number of funded institutions: 6; 
Investments: $181.2 million. 

State: Louisiana; 
Number of funded institutions: 6; 
Investments: $187.6 million. 

State: New Hampshire; 
Number of funded institutions: 6; 
Investments: $86.7 million. 

State: Alabama; 
Number of funded institutions: 5; 
Investments: $88.7 million. 

State: Maryland; 
Number of funded institutions: 5; 
Investments: $109.3 million. 

State: Michigan; 
Number of funded institutions: 5; 
Investments: $28.8 million. 

State: Nebraska; 
Number of funded institutions: 5; 
Investments: $38.9 million. 

State: Ohio; 
Number of funded institutions: 5; 
Investments: $14.9 million. 

State: South Carolina; 
Number of funded institutions: 5; 
Investments: $30.5 million. 

State: Washington; 
Number of funded institutions: 5; 
Investments: $124.4 million. 

State: Connecticut; 
Number of funded institutions: 4; 
Investments: $36.5 million. 

State: Georgia; 
Number of funded institutions: 4; 
Investments: $10 million. 

State: Iowa; 
Number of funded institutions: 4; 
Investments: $129.9 million. 

State: Kentucky; 
Number of funded institutions: 4; 
Investments: $14.9 million. 

State: South Dakota; 
Number of funded institutions: 4; 
Investments: $4.5 million. 

State: Utah; 
Number of funded institutions: 4; 
Investments: $45.4 million. 

State: Arkansas; 
Number of funded institutions: 3; 
Investments: $67 million. 

State: District of Columbia; 
Number of funded institutions: 2; 
Investments: $3.1 million. 

State: Maine; 
Number of funded institutions: 2; 
Investments: $13.3 million. 

State: Montana; 
Number of funded institutions: 2; 
Investments: $2 million. 

State: North Dakota; 
Number of funded institutions: 2; 
Investments: $32 million. 

State: West Virginia; 
Number of funded institutions: 2; 
Investments: $11.8 million. 

State: Arizona; 
Number of funded institutions: 1; 
Investments: $141 million. 

State: Delaware; 
Number of funded institutions: 1; 
Investments: $4.5 million. 

State: Idaho; 
Number of funded institutions: 1; 
Investments: $29.9 million. 

State: Mississippi; 
Number of funded institutions: 1; 
Investments: $20 million. 

State: Nevada; 
Number of funded institutions: 1; 
Investments: $8.5 million. 

State: Vermont; 
Number of funded institutions: 1; 
Investments: $1.2 million. 

State: Wyoming; 
Number of funded institutions: 1; 
Investments: $5 million. 

Source: GAO analysis of Treasury data. 

Note: Five states did not have institutions that received SBLF funds: 
Alaska, Hawaii, New Mexico, Oregon, and Rhode Island. 

[End of figure] 

Comparison of SBLF Applicants and Banks to Non-SBLF Peer Banks: 

To better put the financial characteristics of SBLF applicant and 
participant banks in context and to describe the types of institutions 
that were attracted to and funded by SBLF, we generated a group of 
peer institutions that had not applied to SBLF and compared them with 
SBLF applicants and participants (funded banks), in addition to 
comparing SBLF participants with applicants that were not funded. 
[Footnote 39] For example, SBLF participants had lower capital ratios 
and a smaller proportion of certain small business loans (as a 
percentage of total domestic business and farm loans) than the peer 
group. Participants also had higher asset quality than peers. 

* Capital ratios. Both SBLF applicants and participants had less 
capital than their nonapplicant peers. The risk-based capital ratio--
the ratio of total capital to risk-weighted assets--was about 15 
percent for both SBLF applicants and participants, compared with 
roughly 19 percent for peers.[Footnote 40] 

* Small loan portfolio. Both SBLF applicants and participants had a 
smaller proportion of certain small loans on their balance sheets--
that is, loans of less than $1 million for business and commercial 
real estate and less than $500,000 for farms--than nonapplicants. 
[Footnote 41] For SBLF applicants small loans on average comprised 57 
percent of loans, whereas participants had an average of 56 percent. 
For peer banks, the average was 62 percent. 

* Asset quality. SBLF participants compared more favorably to 
applicants that were not funded and their peers in asset quality. 
Problem loans, a measure of asset quality, averaged 2.5 percent for 
SBLF participants compared with 5.7 percent for applicants that were 
not funded and 3.8 percent for peers. 

* CAMELS composite ratings. On average, SBLF participants also had 
better CAMELS composite ratings than applicants that were not funded. 
SBLF banks averaged a CAMELS composite rating of 2.0, while applicants 
that were not funded averaged a CAMELS rating of 2.7, indicating some 
areas of supervisory concern. Nonapplicant peers had an average CAMELS 
composite rating of 2.1.[Footnote 42] 

Banks Frequently Cited Lack of Demand as the Most Important Reason for 
Not Applying to the Program: 

In our nationally representative survey of banks, about four-fifths 
responded that they did not apply or plan to apply to the SBLF 
program.[Footnote 43] The most important reason cited for not applying 
to the SBLF program was little or no anticipated demand for small 
business credit followed closely by a preference not to participate in 
government programs, as shown in figure 5. The banks that did apply 
anticipated loan demand in their respective areas, but indicated that 
their most important reason for applying was because SBLF was a source 
of capital to meet a growing demand for small business credit (as 
shown in figure 5). Other reasons for applying to SBLF were that the 
program's cost of capital was more attractive relative to market 
alternatives and that the program offered the option of refinancing 
CPP/CDCI funds. 

Figure 5: Factors Affecting Banks' Participation in SBLF: 

[Refer to PDF for image: illustrated table] 

Most important reason for not applying to SBLF: 
Little or no anticipated demand for small business credit: 29%; 
Preference to avoid participating in government programs: 25%; 
Other (e.g., no need for additional funding, not eligible to 
participate): 18%; 
SBLF terms were not favorable: 9%; 
SBLF less financially attractive compared to market alternatives: 8%; 
Application process was too burdensome: 6%; 
Plan to avoid taking on new obligations under current economic 
conditions: 5%. 

Most important reason for applying to SBLF: 
Source of capital to meet growing demand for small businesses credit: 
41%; 
Financially attractive compared to market alternatives: 35%; 
Offers ability to refinance CPP/CDCI funds: 18%. 

Source: GAO survey results. 

Note: The 95 percent confidence intervals around the estimates for not 
applying to the SBLF do not exceed plus or minus 5 percentage points. 
The 95 percent confidence intervals around the estimates for applying 
to the SBLF do not exceed plus or minus 12 percentage points. 

[End of figure] 

Treasury Has Not Finalized Plans to Monitor SBLF Participants or Track 
SBLF's Impact: 

Credit Conditions Remain Challenging for Small Businesses: 

The SBLF program was designed to improve small businesses' access to 
credit, which had become difficult to obtain since 2008. We examined 
trends in the credit markets from late 2003 through the third quarter 
of 2011 to document the credit market environment in which the program 
and its participants must operate. As shown in figure 6, from the 
second half of 2003 through early 2008, credit conditions were stable 
and credit was relatively easy to obtain. Credit became increasingly 
difficult to obtain (tight) from 2008 through 2009 in the midst of the 
financial crisis, and it peaked between mid-2009 and mid-2010. Credit 
availability has eased somewhat since its peak. 

Figure 6: Indicators of Small Business Credit Conditions, Third 
Quarter 2003-Third Quarter 2011: 

[Refer to PDF for image: multiple line graph] 

Date: 2003, Q3; 
Borrowing needs not satisfied (NFIB): 6%; 
Credit difficult to obtain (Wells Fargo): 12%; 
Spreads on small loans (Federal Reserve: 4.35. 

Date: 2003, Q4; 
Borrowing needs not satisfied (NFIB): 5.67%; 
Credit difficult to obtain (Wells Fargo): 11%; 
Spreads on small loans (Federal Reserve: 4.31. 

Date: 2004, Q1; 
Borrowing needs not satisfied (NFIB): 6.67%; 
Credit difficult to obtain (Wells Fargo): 14%; 
Spreads on small loans (Federal Reserve: 4.44. 

Date: 2004, Q2; 
Borrowing needs not satisfied (NFIB): 5.33%; 
Credit difficult to obtain (Wells Fargo): 12%; 
Spreads on small loans (Federal Reserve: 4.33. 

Date: 2004, Q3; 
Borrowing needs not satisfied (NFIB): 5.67%; 
Credit difficult to obtain (Wells Fargo): 14%; 
Spreads on small loans (Federal Reserve: 4.25. 

Date: 2004, Q4; 
Borrowing needs not satisfied (NFIB): 4%; 
Credit difficult to obtain (Wells Fargo): 13%; 
Spreads on small loans (Federal Reserve: 4.22. 

Date: 2005, Q1; 
Borrowing needs not satisfied (NFIB): 4.33%; 
Credit difficult to obtain (Wells Fargo): 11%; 
Spreads on small loans (Federal Reserve: 3.98. 

Date: 2005, Q2; 
Borrowing needs not satisfied (NFIB): 5%; 
Credit difficult to obtain (Wells Fargo): 12%; 
Spreads on small loans (Federal Reserve: 3.86. 

Date: 2005, Q3; 
Borrowing needs not satisfied (NFIB): 4.33%; 
Credit difficult to obtain (Wells Fargo): 9%; 
Spreads on small loans (Federal Reserve: 3.81. 

Date: 2005, Q4; 
Borrowing needs not satisfied (NFIB): 4.67%; 
Credit difficult to obtain (Wells Fargo): 10%; 
Spreads on small loans (Federal Reserve: 3.7. 

Date: 2006, Q1; 
Borrowing needs not satisfied (NFIB): 6%; 
Credit difficult to obtain (Wells Fargo): 12%; 
Spreads on small loans (Federal Reserve: 3.62. 

Date: 2006, Q2; 
Borrowing needs not satisfied (NFIB): 5%; 
Credit difficult to obtain (Wells Fargo): 10%; 
Spreads on small loans (Federal Reserve: 3.57. 

Date: 2006, Q3; 
Borrowing needs not satisfied (NFIB): 4%; 
Credit difficult to obtain (Wells Fargo): 11%; 
Spreads on small loans (Federal Reserve: 3.46. 

Date: 2006, Q4; 
Borrowing needs not satisfied (NFIB): 6%; 
Credit difficult to obtain (Wells Fargo): 11%; 
Spreads on small loans (Federal Reserve: 3.43. 

Date: 2007, Q1; 
Borrowing needs not satisfied (NFIB): 5%; 
Credit difficult to obtain (Wells Fargo): 12%; 
Spreads on small loans (Federal Reserve: 3.52. 

Date: 2007, Q2; 
Borrowing needs not satisfied (NFIB): 4.67%; 
Credit difficult to obtain (Wells Fargo): 14%; 
Spreads on small loans (Federal Reserve: 3.35. 

Date: 2007, Q3; 
Borrowing needs not satisfied (NFIB): 4.67%; 
Credit difficult to obtain (Wells Fargo): 13%; 
Spreads on small loans (Federal Reserve: 3.3. 

Date: 2007, Q4; 
Borrowing needs not satisfied (NFIB): 5.67%; 
Credit difficult to obtain (Wells Fargo): 13%; 
Spreads on small loans (Federal Reserve: 3.45. 

Date: 2008, Q1; 
Borrowing needs not satisfied (NFIB): 5%; 
Credit difficult to obtain (Wells Fargo): 13%; 
Spreads on small loans (Federal Reserve: 3.84. 

Date: 2008, Q2; 
Borrowing needs not satisfied (NFIB): 5.67%; 
Credit difficult to obtain (Wells Fargo): 17%; 
Spreads on small loans (Federal Reserve: 3.97. 

Date: 2008, Q3; 
Borrowing needs not satisfied (NFIB): 6.33%; 
Credit difficult to obtain (Wells Fargo): 14%; 
Spreads on small loans (Federal Reserve: 4.03. 

Date: 2008, Q4; 
Borrowing needs not satisfied (NFIB): 6.33%; 
Credit difficult to obtain (Wells Fargo): 20%; 
Spreads on small loans (Federal Reserve: 4.62. 

Date: 2009, Q1; 
Borrowing needs not satisfied (NFIB): 8.67%; 
Credit difficult to obtain (Wells Fargo): 20%; 
Spreads on small loans (Federal Reserve: 4.89. 

Date: 2009, Q2; 
Borrowing needs not satisfied (NFIB): 9%; 
Credit difficult to obtain (Wells Fargo): 26%; 
Spreads on small loans (Federal Reserve: 4.89. 

Date: 2009, Q3; 
Borrowing needs not satisfied (NFIB): 9%; 
Credit difficult to obtain (Wells Fargo): 33%; 
Spreads on small loans (Federal Reserve: 5.14. 

Date: 2009, Q4; 
Borrowing needs not satisfied (NFIB): 9%; 
Credit difficult to obtain (Wells Fargo): 33%; 
Spreads on small loans (Federal Reserve: 5. 

Date: 2010, Q1; 
Borrowing needs not satisfied (NFIB): 10.33%; 
Credit difficult to obtain (Wells Fargo): 37%; 
Spreads on small loans (Federal Reserve: 5.06. 

Date: 2010, Q2; 
Borrowing needs not satisfied (NFIB): 9%; 
Credit difficult to obtain (Wells Fargo): 36%; 
Spreads on small loans (Federal Reserve: 5.1. 

Date: 2010, Q3; 
Borrowing needs not satisfied (NFIB): 9%; 
Credit difficult to obtain (Wells Fargo): 32%; 
Spreads on small loans (Federal Reserve: 5.1. 

Date: 2010, Q4; 
Borrowing needs not satisfied (NFIB): 9%; 
Credit difficult to obtain (Wells Fargo): 35%; 
Spreads on small loans (Federal Reserve: 5.04. 

Date: 2011, Q1; 
Borrowing needs not satisfied (NFIB): 7.67%; 
Credit difficult to obtain (Wells Fargo): 32%; 
Spreads on small loans (Federal Reserve: 5.04. 

Date: 2011, Q2; 
Borrowing needs not satisfied (NFIB): 8.33%; 
Credit difficult to obtain (Wells Fargo): 30%; 
Spreads on small loans (Federal Reserve: 4.94. 

Date: 2011, Q3; 
Borrowing needs not satisfied (NFIB): 7.67%; 
Credit difficult to obtain (Wells Fargo): 34%; 
Spreads on small loans (Federal Reserve: 4.69. 

Source: GAO analysis of Wells Fargo, National Federation of 
Independent Business, and Federal Reserve data. 

Note: The indicators in the figure and the organizations that measure 
them are the following: (1) the National Federation of Independent 
Business, a small business trade association, surveys its members on 
whether or not their borrowing needs have been satisfied; (2) Wells 
Fargo conducts a survey of small business with a sample constructed by 
Gallup and Dun & Bradstreet; and (3) the Federal Reserve surveys banks 
on the price of credit for loans of various sizes. 

[End of figure] 

Other indicators that we reviewed also demonstrate easier access to 
credit since the 2007-2009 financial crisis. According to a Federal 
Reserve survey of relatively large banks, more banks began easing than 
tightening standards for loans to small firms starting in the third 
quarter of 2010. Further, lending to small businesses began increasing 
in the second half of 2009, according to a measure of loan 
originations.[Footnote 44] While credit availability has eased since 
2009, movement in each indicator of small business lending has been 
volatile in the last few years, and small business credit remains 
tight relative to historical averages. However, a return to credit 
conditions of the boom years prior to the financial crisis would not 
necessarily be expected. Although small business credit conditions 
have improved since the 2007-2009 financial crisis, uncertainty about 
future credit conditions and the economic outlook increases the 
importance of monitoring SBLF participants going forward. 

Treasury Has Not Finalized Plans for Monitoring SBLF Participants and 
the Program's Impact Because Focus Has Been on Implementation: 

Treasury has not finalized plans to monitor SBLF participants. 
Treasury officials acknowledged the need for ongoing analysis, 
monitoring, and reporting on SBLF participants, but at this time only 
has some procedures in place and preliminary plans for other 
procedures. These plans include potentially hiring outside firms to 
assist in managing the $4.03 billion SBLF portfolio, using such firms 
to evaluate the financial data that SBLF institutions provide, and 
developing a system to detect inconsistent or inaccurate information 
that might be submitted in participants' quarterly supplemental 
reports. Treasury has taken some steps toward monitoring and reporting 
on SBLF participants. For example, in October 2011, Treasury began 
publishing, on its website, SBLF transaction reports that include 
dividend payment information. These reports include, among other 
things, all SBLF participants, the dividend payments expected and 
received, and total payments to date. 

Similarly, Treasury has not finalized plans to assess the impact of 
the SBLF program. Treasury is required to provide a written report to 
Congress on a quarterly basis that includes information about how 
participating institutions have used the SBLF funds they received. 
Treasury officials stated that their plans for assessing impact are 
still being developed. However, Treasury officials told us that they 
have some preliminary plans, including tracking the number of small 
business loans using data from SBLF participants' quarterly 
supplemental reports in order to gauge increased small business 
lending; conducting an annual survey of small business lending; and 
conducting a study on how women-and minority-owned small businesses 
have been impacted by the program. Treasury officials have also 
considered comparing SBLF banks and a non-SBLF bank peer group to 
identify any relationships between the program and small business 
lending. Officials noted that they are still considering various 
approaches for how to assess the program's impact, including how to 
collect and report needed data. In addition, Treasury officials 
acknowledged particular difficulties associated with linking SBLF to 
growth in employment, including how to account for the role of loans 
in keeping businesses operating that might otherwise have shut down, 
and how to treat loan refinancing. 

Treasury officials told us that they have not finalized their plans 
for monitoring SBLF participants or assessing the impact of the 
program because they have been focused on implementing the program. As 
discussed, Treasury was evaluating applicants and making funding 
decisions through most of September. While Treasury officials said 
they recognize the importance of such assessments, they stated that 
they have not had sufficient time to devote to fully developing their 
plans. 

Treasury faces a number of challenges as it moves forward in 
finalizing long-term plans to monitor SBLF participants and evaluate 
the SBLF program. First, Treasury will likely need to monitor SBLF 
participants without direct input from the federal regulators. 
According to Federal Reserve, OCC, and FDIC officials, there are 
currently no plans to coordinate with Treasury in monitoring SBLF 
banks. Regulators noted that their role, as defined by the statute, 
was to provide input to Treasury about the banks' financial viability 
during the application process. The statute does not give the 
regulators a role in monitoring SBLF banks, and regulators stated that 
SBLF banks will not be treated differently or have their own set of 
exam procedures during their supervisory examinations. One agency 
noted that they will review bank lending practices as part of the 
regular examination process. Second, the relationship between small 
business lending and job growth is complex, and making conclusions 
about the impact of the program on employment based on lending at SBLF 
banks will not be straightforward. Third, while using a control group 
to assess performance is a best practice, any assessment could be 
complicated by the fact the SBLF banks will report their small 
business lending in a way that is inconsistent with call reports of 
non-SBLF banks (the peer group). For example, as noted earlier, SBLF 
considers small loans to be those under $10 million, whereas the call 
reports collect data on loans under $1 million (or under $500,000 in 
the case of farm-related loans). Without comparable data for peers, 
measuring the impact it of SBLF on small business credit availability 
will be difficult. 

Internal control standards for the federal government state that 
internal control activities are a major part of efficiently and 
effectively managing a program.[Footnote 45] Control activities, such 
as (1) proper execution of transactions and events, (2) accurate and 
timely recording of transactions and events, (3) and establishing and 
reviewing performance measures, are an integral part of an agency's 
planning, implementing, reviewing, and accountability for stewardship 
of government resources and achieving effective results. Establishing 
performance measures and developing a process for monitoring 
participating financial institutions will be critical to identifying 
and addressing any potential problems in these institutions' 
compliance with program requirements.[Footnote 46] Until Treasury 
finalizes its plans for monitoring compliance and assessing impact in 
a timely manner, it will not be positioned to anticipate and manage 
payment problems and other program risks. For example, if the 
macroeconomic conditions deteriorate, SBLF participants may not have 
as many opportunities to lend to small businesses as originally 
planned, and participants may be obliged to pay a higher dividend rate 
than they originally anticipated. Participants may also need to 
preserve their capital and thus may be unable to pay dividends or 
their respective regulators may restrict their ability to do so if 
their condition warrants such a restriction, for example, if economic 
conditions deteriorate sufficiently. Furthermore, SBLF participants 
may loosen their underwriting standards to meet higher lending 
targets, a concern shared by OCC. Such factors will also need to be 
considered as Treasury develops its plans for monitoring and assessing 
the impact of the SBLF program. Until Treasury's plans are finalized 
and implemented, it will not be able to provide information on the 
effectiveness of the SBLF program.[Footnote 47] 

Conclusions: 

Intended to improve the flow of credit to small businesses, the SBLF 
program attracted fewer banks and community development loan funds 
than expected and encountered significant delays in providing funding. 
Instances of poor communication during the first year of the SBLF 
program created confusion among applicants. Although Treasury 
conducted numerous outreach efforts to inform potential applicants and 
the public about the program, some communications were incomplete or 
unclear. Specifically, Treasury did not initially make clear that 
participants would have to be free of restrictions on paying 
dividends, and more than 200 applicants that could not make such 
payments applied to the program without knowing that they would not 
meet program requirements. Moreover, Treasury did not explain to 
applicants its reasons for not accepting them in the SBLF program, and 
many of these applicants did not find out that they had not been 
approved until months after applying. Treasury later took steps to 
improve communications by working with the bank regulators to 
determine how to communicate to banks the reasons for not being 
approved. However, the experience of SBLF applicants highlights the 
importance of timely, transparent communications throughout the 
program implementation process, a lesson that will continue to be 
important going forward. 

SBLF's impact on small business lending will be difficult to measure, 
both because Treasury has yet to finalize evaluation plans and because 
multiple factors affect lending trends. Treasury has not fully 
developed procedures to monitor participants for compliance with the 
program's requirements or measures to assess SBLF's effectiveness in 
increasing small business lending. Establishing procedures is an 
important component of accountability for stewardship of government 
resources. As we found in reviewing Treasury's application evaluation 
process, procedures also may need to adapt to changing circumstances, 
and such adjustments should be clearly documented. Monitoring 
compliance, including compliance with program terms such as dividend 
payments, and taking steps to ensure that the data participants 
provide on their small business lending are accurate, is important 
going forward. In addition, the reports on small business lending will 
be an important component of measuring the effectiveness of SBLF. 
Efforts to measure SBLF's impact will be difficult because many 
factors affect trends in small business and other lending. In 
addition, limited participation in the program highlights the 
challenge of balancing the need to protect taxpayer interests with the 
desire to distribute SBLF funds to struggling areas of the economy. 
Treasury's efforts to consider approaches for isolating the impact of 
SBLF will be critical to providing a rigorous assessment of whether 
the program is effective. While Treasury officials said that they had 
been unable to complete plans to monitor compliance and assess SBLF's 
impact on small business lending during the application and initial 
disbursement process, now is the time for Treasury to finalize its 
plans for monitoring compliance and assessing SBLF. Without a thorough 
assessment of the SBLF program's performance, Congress and other 
policymakers will lack important information about the effectiveness 
of capital infusion programs for increasing small business lending. 

Recommendations for Executive Action: 

While Treasury took steps to evaluate SBLF applicants in a consistent 
manner and provide information about the program through numerous 
outreach efforts, we recommend that the Secretary of the Treasury take 
the following three additional actions going forward: 

* To promote transparency and improve communication with SBLF 
participants and other interested stakeholders, such as Congress and 
the bank regulators, Treasury should apply lessons learned from the 
application review phase of SBLF to help improve its communication 
strategy going forward. 

* To enhance the transparency and accountability of the SBLF program, 
Treasury should finalize (1) procedures for monitoring participants, 
including procedures to ensure that Treasury is receiving accurate 
information on participants' small business lending and (2) plans for 
assessing the performance of the SBLF program, including measures that 
can isolate the impact of SBLF from other factors that affect small 
business lending. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to Treasury, FDIC, Federal Reserve, 
and OCC for review and comment. Treasury provided written comments, 
which are reprinted in appendix III. In its comments, Treasury agreed 
with our three recommendations and stated it is taking steps to 
incorporate these recommendations into existing plans and procedures 
to further support transparency and accountability. Treasury noted 
that it has worked to achieve a high level of transparency and 
accountability throughout the implementation of the SBLF program. For 
example, Treasury stated that it had conducted extensive outreach with 
potential applicants, including participating in industry events, 
teleconferences, and webinars. Treasury also provided technical 
comments, which we incorporated as appropriate. In addition, FDIC, 
Federal Reserve, and OCC provided technical comments, which we 
incorporated as appropriate. 

We are sending copies of this report to the appropriate congressional 
committees, Treasury, FDIC, Federal Reserve, and OCC. The report also 
is available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact A. Nicole Clowers at (202) 512-8678 or 
clowersa@gao.gov. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made major contributions to this report are 
listed in appendix IV. 

Signed by: 

A. Nicole Clowers: 
Director Financial Markets and Community Investment: 

List of Committees: 

The Honorable Debbie Stabenow: 
Chairwoman: 
The Honorable Pat Roberts: 
Ranking Member: 
Committee on Agriculture, Nutrition and Forestry: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Vice Chairman: 
Committee on Appropriations: 
United States Senate: 

The Honorable Tim Johnson: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Kent Conrad: 
Chairman: 
The Honorable Jeff Sessions: 
Ranking Member: 
Committee on the Budget: 
United States Senate: 

The Honorable Max Baucus: 
Chairman:
The Honorable Orrin G. Hatch: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable Mary L. Landrieu: 
Chairman: 
The Honorable Olympia J. Snowe: 
Ranking Member: 
Committee on Small Business and Entrepreneurship: 
United States Senate: 

The Honorable Frank D. Lucas: 
Chairman: 
The Honorable Collin Peterson: 
Ranking Member: 
Committee on Agriculture: 
House of Representatives: 

The Honorable Hal Rogers: 
Chairman: 
The Honorable Norm Dicks: 
Ranking Member: 
Committee on Appropriations: 
House of Representatives: 

The Honorable Paul Ryan: 
Chairman: 
The Honorable Chris Van Hollen: 
Ranking Member: 
Committee on the Budget: 
House of Representatives: 

The Honorable Spencer Bachus: 
Chairman: 
The Honorable Barney Frank: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Sam Graves: 
Chairman: 
The Honorable Nydia Velazquez: 
Ranking Member: 
Committee on Small Business: 
House of Representatives: 

The Honorable Dave Camp: 
Chairman: 
The Honorable Sander Levin: 
Ranking Member: 
Committee on Ways and Means: 
House of Representative: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of our report were to examine (1) the procedures that 
the Department of the Treasury (Treasury) developed to implement SBLF 
and evaluate applications for Small Business Lending Fund (SBLF) 
funds; (2) the characteristics of institutions applying to and 
receiving SBLF funds and the factors that may have influenced banks' 
decision to participate; and (3) Treasury's plans to monitor SBLF 
participants and measure the SBLF's progress in increasing small 
business lending. 

To assess Treasury's evaluation process for SBLF applications, we 
reviewed Treasury's policies, procedures, and internal controls for 
SBLF, including nonpublic documents, such as the Treasury's internal 
control procedures and Application Review Committee and Investment 
Committee minutes, and publicly available material from the SBLF 
website. We reviewed Treasury's and the four federal regulators' 
respective roles and responsibilities with respect to evaluating 
applicants and compared them with the same roles for the Capital 
Purchase Program (CPP), a capital infusion program under the Troubled 
Asset Relief Program (TARP) that is similar to SBLF. We interviewed 
officials from Treasury, Federal Deposit Insurance Corporation (FDIC), 
Board of Governors of the Federal Reserve System (Federal Reserve), 
the Office of the Comptroller of the Currency (OCC), and the Office of 
Thrift Supervision (OTS) to obtain information on their SBLF applicant 
evaluation processes and to discuss the similarities and differences 
between SBLF and CPP in terms of their roles and the processes for 
evaluating applicants. We also interviewed representatives of industry 
trade groups, including American Bankers' Association, International 
Franchise Association National Federation of Independent Business, 
Independent Community Bankers Association, and the National 
Association of Government Guaranteed Lenders to obtain their 
perspectives on SBLF and the application process. 

To identify applicants that fell outside of Treasury's stated 
evaluation parameters, we obtained data from Treasury, FDIC and SNL 
Financial (SNL) for all applicants on key inputs that Treasury used to 
inform its funding decisions, including CAMELS composite ratings, 
repayment probability, performance ratios, lending plan scores, 
dividend restriction information, and results of regulators' financial 
viability assessments. To assess the reliability of Treasury's data, 
we (1) performed electronic checking for errors in accuracy and 
completeness; (2) reviewed related documentation, such as minutes from 
the Application Review Committee and Investment Committee; and (3) 
held numerous meetings and remained in ongoing correspondence with 
Treasury to discuss data fields, analysis procedures, and weekly data 
updates. When we found inconsistencies, for example, between the 
weekly data updates or between the data and published information, we 
clarified them with Treasury. For example, during our interviews with 
Treasury, we learned that 60 applicants were approved by Treasury but 
did not close and were labeled in the same category ("withdrawn") as 
applicants that were not approved. After clarifying and resolving our 
questions pertaining to the data, we concluded that the updated data 
set was reliable for the purpose of identifying applicants that fell 
outside of Treasury's stated evaluation parameters. 

Using this updated and corrected data set, we performed an analysis 
for all 935 applicants to identify which of the applicants, both 
approved and nonapproved, fell out of Treasury's stated evaluation 
parameters (Table 1 lists the key data that Treasury used to inform 
its funding decisions and their corresponding parameters). We compared 
all data fields pertaining to Treasury's stated evaluation parameters, 
such as the regulator's viability assessment, repayment probability 
estimates, and lending plan results to Treasury's decision data field 
to identify those applicants outside of the parameters. We did not 
review the evaluation documents, such as regulator's supervisory 
consultation memos and minutes from the Application Review and 
Investment Committees for all 935 applicants. 

Table 1: Main Parameters Treasury Used for Evaluating SBLF Applicants: 

Key Data: Eligibility; 
Parameters: Treasury determined only all approved applicants must 
first pass the initial eligibility check. 

Key Data: Positive financial viability; 
Parameters: Treasury determined only all approved applicants must 
first receive a positive financial viability assessment from their 
respective regulators. 

Key Data: CAMELS composite ratings[A]; 
Parameters: Treasury considered CAMELS composite ratings of 1, 2 or 3 
as acceptable. Per the legislation, problem banks (i.e., banks with 
CAMELS composite ratings of 4 and 5) were not eligible. 

Key Data: Repayment probability estimate; 
Parameters: Treasury determined that repayment probability of 80 
percent as the minimum acceptable. An initial estimate was developed 
by financial agents. Treasury reviewed this initial estimate and, if 
needed, updated the estimate to incorporate confidential supervisory 
information. 

Key Data: Key performance ratios; 
Parameters: Treasury considers the following as thresholds that would 
require further review: 
* Classified assets ratio: Classified assets/Net Tier 1 capital + 
allowance for loan and lease losses (ALLL): greater than 100 
percent[B]; 
* Nonperforming loans ratio: Nonperforming loans (NPLS) + other real 
estate owned (OREO)/Net Tier 1 capital + ALLL: greater than 40 percent; 
* Construction and development loans: Construction and development 
loans/Total risk-based capital: greater than 300 percent[C]. 

Key Data: Lending plan scores; 
Parameters: Treasury evaluated the lending plans as either responsive 
or nonresponsive. Treasury rated applicants' lending plan based on a 
12 point evaluation. Any applicants that received 8 points or above, 
their lending plans were deemed responsive. The ones that received 7 
points or below were deemed nonresponsive. 

Key Data: Dividend restrictions; 
Parameters: Treasury determined only applicants that are able to pay 
dividends to SBLF funds could be approved. 

Source: GAO summary of Treasury documentation. 

[A] This exclude CDLFs, because CDLFs do not face the same regulatory 
reporting requirements as banks and thus do not have supervisory data. 

[B] Tier 1 capital is considered the most stable and readily available 
capital for supporting a bank's operations. It covers core capital 
elements, such as common stockholder's equity and noncumulative 
perpetual preferred stock. 

[C] Classified assets are known only by the regulators, so the 
financial agents would not be able to do this in the absence of the 
supervisory consultation memos. The "allowance for loan and lease 
losses" (ALLL) is an account maintained by financial institutions to 
cover incurred losses in their loan and lease portfolios. The "other 
real estate owned" (OREO) is an account used for examination and 
reporting purposes that primarily includes real estate owned by a 
financial institution as a result of foreclosure. 

[End of table] 

Using the results from this analysis, we then selected a small, 
nongeneralizable sample of 15 applicants that appeared to be 
particularly out of line with Treasury's stated parameters for 
additional review. In selecting the sample, we attempted to identify 
at least 3 applicants from each of the following categories: 

* 6 approved outliers that had a repayment probability of less than 63 
percent: 

* 3 nonapproved applicants that had a repayment probability of greater 
than 95 percent: 

* 3 approved outliers that had nonperforming loan ratios of greater 
than 55 percent: 

* 3 nonapproved applicants that had a no nonperforming loans: 

Because our findings are based on a nongeneralizable sample, they 
cannot be generalized to all applicants. However, because they 
represent significant deviations from Treasury's stated evaluation 
parameters, our analysis provides useful examples of how Treasury used 
these inputs in making funding decisions. As part of this analysis, we 
reviewed minutes from the Application Review Committee and Investment 
Committee, and interviewed Treasury officials. Our criteria for 
assessing Treasury's evaluation process drew from GAO's Standards for 
Internal Control in the Federal Government and past GAO work, 
particularly on CPP.[Footnote 48] 

To describe the characteristics of institutions that applied for and 
received SBLF program funds, we collected and analyzed data from 
Treasury. For example, we analyzed the number of institutions that 
applied; the number of institutions that were approved and 
nonapproved; the number of institutions that applied to refinance CPP 
or CDCI funds; and the institutions' geographic locations. To 
determine the extent to which the distribution of SBLF funds was 
associated with state unemployment rates, we collected state 
unemployment rates from the Bureau of Labor Statistics and compared 
the data against both the number of funded institutions and the 
dollars of funding by state, using correlations and regression 
analysis. 

We developed a comparable peer group of banks that did not receive 
SBLF program funds and compared their financial condition and recent 
small business lending with that of SBLF bank applicants and 
participants. We analyzed the proportion of loans worth less than $1 
million (or less than $500,000 in the case of farm-related loans) as 
an indicator a one kind of small business lending. This definition is 
different from qualified small business lending under SBLF, which 
includes loans for under $10 million to firms with revenue less than 
$50 million. Peers were chosen based on size, geographic location, and 
type of institution. We excluded CDLFs from the analysis comparing 
applicants and participants with peers. These are not regulated 
depository institutions, and the lack of supervisory information did 
not enable us to describe comparable financial characteristics. For 
certain comparisons of applicants with peers, we omitted problem banks 
that were ineligible for SBLF so that the two groups would be more 
comparable. We obtained CAMELS composite ratings from FDIC for both 
applicants and peers. We assessed the reliability of the data used for 
our analyses by, for example, reviewing prior GAO work and inspecting 
data for missing observations and outliers. We found that they were 
sufficiently reliable to describe the characteristics of SBLF banks 
and their peers. 

To determine banks' reasons for applying or choosing not to apply to 
the SBLF program, we conducted a nationally representative survey of 
executives of banking institutions with less than $10 billion in total 
assets.[Footnote 49] Based on lists of financial institutions provided 
by FDIC, OTS, and the Federal Reserve, we identified 6,733 
institutions with less than $10 billion in total assets to be included 
in our population for this survey. We selected a stratified random 
sample of 794 institutions from the population of 6,733 (see table 2). 
We stratified the population into four strata based on the amount of 
assets and whether the entity was part of a holding company or a stand 
alone bank or thrift. The sample size was determined to produce a 
proportion estimate within each stratum that would achieve a precision 
of plus or minus 7 percentage points or less, at the 95 percent 
confidence level. We then inflated the sample size for an expected 
response rate of 50 percent. Because of the smaller number of banks 
and holding companies with assets greater than $5 billion and less 
than $10 billion, we selected all of these with certainty. 

We received valid responses from 510 (64 percent) out of the 794 
sampled banking institutions. The weighted response rate, which 
accounts for the differential sampling fractions within strata, is 66 
percent. We identified eight banking institutions in our sample that 
were either closed or were improperly included in the sampling frame. 
We classified these as out of scope institutions and adjusted our 
estimates so they are generalized only to the 6,659 (+/-58) 
institutions estimated to be in-scope institutions in the population. 

Table 2: Population, Sample Size, and Respondent Information for GAO 
Survey: 

Stratum: Holding company $5-$10 billion; 
Population size: 63; 
Sample size: 63; 
Out of scope: 2; 
Respondents within scope: 30. 

Stratum: Holding company Less than $5 billion; 
Population size: 5,118; 
Sample size: 378; 
Out of scope: 5; 
Respondents within scope: 249. 

Stratum: Banks $5-$10 billion; 
Population size: 5; 
Sample size: 5; 
Out of scope: 0; 
Respondents within scope: 4. 

Stratum: Banks less than $5 billion; 
Population size: 1,547; 
Sample size: 348; 
Out of scope: 1; 
Respondents within scope: 219. 

Stratum: Total; 
Population size: 6,733; 
Sample size: 794; 
Out of scope: 8; 
Respondents within scope: 502. 

Source: GAO survey results. 

[End of table] 

The Web-based survey was administered from June 15, 2011 to August 15, 
2011. Bank executives were sent an e-mail invitation to complete the 
survey on a GAO Web server using a unique username and password. 
Nonrespondents received several reminder e-mails and a letter from GAO 
to complete the survey. The practical difficulties of conducting any 
survey may introduce additional nonsampling errors, such as 
difficulties interpreting a particular question, which can introduce 
unwanted variability into the survey results. We took steps to 
minimize nonsampling errors by pretesting the questionnaire with four 
banks in April 2011. We conducted pretests to make sure that the 
questions were clear and unbiased and that the questionnaire did not 
place an undue burden on respondents. An independent reviewer within 
GAO also reviewed a draft of the questionnaire prior to its 
administration. We made appropriate revisions to the content and 
format of the questionnaire after the pretests and independent review. 
All data analysis programs were independently verified for accuracy. 

To assess Treasury's plans to monitor participants and measure SBLF's 
effectiveness, we interviewed Treasury officials about their intended 
work. To describe trends in small business credit markets, we used a 
number of indicators to describe market conditions before and during 
the implementation of SBLF. These indicators included data from a 
survey conducted by the National Federation of Independent Business on 
whether members' borrowing needs are being satisfied; a survey by 
Wells Fargo addressing banks' ease or difficulty in obtaining credit; 
and the Federal Reserve's bank survey on the cost of credit for loans 
of various sizes. For additional information on current credit market 
conditions, we also used data from a Federal Reserve's survey of large 
banks (Senior Loan Officer Opinion Survey) and an estimate of small 
business loan originations developed by Thomson Reuters and PayNet. To 
determine the reliability of these data sources, we relied on previous 
GAO work and interviewed company representatives as appropriate to 
learn about their data collection methods and any changes to their 
controls. Based on our analysis we determined that, while the 
individual sources were not independently crucial to our findings, 
they were sufficiently reliable together to document patterns in the 
small business credit markets. 

We conducted this performance audit from December 2010 to December 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Responses to Questions from GAO's Survey on the SBLF 
Program: 

We distributed a Web-based survey to 794 banking institutions from the 
population of 6,733 to determine whether they applied to the SBLF 
program and the reasons for their decision.[Footnote 50] We received 
valid responses from 510 (64 percent) out of the 794 sampled 
institutions. Tables 3-7 below show the responses to questions from 
the survey. Because we followed a probability procedure based on 
random selections, our sample is only one of a large number of samples 
that we might have drawn. Because each sample could have provided 
different estimates, we also provide the lower and upper bound 
estimates at a 95 percent confidence interval. The weighted response 
rate, which accounts for the differential sampling fractions within 
strata, is 66 percent. For more information about our methodology for 
designing and distributing the survey, see appendix I. 

Table 3: Has your bank applied, or does it plan to apply, to the SBLF 
program? 

Responses: Yes, we applied; 
Estimated percentage: 18; 
95 percent confidence interval-lower bound: 14; 
95 percent confidence interval-upper bound: 22. 

Responses: Yes, we plan to apply; 
Estimated percentage: 2; 
95 percent confidence interval-lower bound: <1; 
95 percent confidence interval-upper bound: 3. 

Responses: No; 
Estimated percentage: 80; 
95 percent confidence interval-lower bound: 77; 
95 percent confidence interval-upper bound: 84. 

Source: GAO survey results. 

[End of table] 

Table 4: What are the reasons your bank had for applying for funding 
through the SBLF program? 

Responses: It is a source of capital to meet growing demand for small 
business credit; 

A reason; 
Percentage: 94%; 
95 percent confidence interval-lower bound: 86%; 
95 percent confidence interval-upper bound: 98%. 

Not a reason; 
Percentage: 6%; 
95 percent confidence interval-lower bound: 2%; 
95 percent confidence interval-upper bound: 14%. 

Responses: It is financially attractive in relation to the expected 
cost of capital relative to market alternatives; 

A reason; 
Percentage: 91%; 
95 percent confidence interval-lower bound: 81%; 
95 percent confidence interval-upper bound: 97%. 

Not a reason; 
Percentage: 9%; 
95 percent confidence interval-lower bound: 3%; 
95 percent confidence interval-upper bound: 19%. 

Responses: It offers the ability to refinance Capital Purchase Program 
(CPP) funds through the SBLF program; 

A reason; 
Percentage: 31%; 
95 percent confidence interval-lower bound: 20%; 
95 percent confidence interval-upper bound: 44%. 

Not a reason; 
Percentage: 69%; 
95 percent confidence interval-lower bound: 57%; 
95 percent confidence interval-upper bound: 80%. 

Responses: Other; 
95 percent confidence interval-lower bound: 18%; 
95 percent confidence interval-upper bound: 68%. 

95 percent confidence interval-lower bound: 32%; 
95 percent confidence interval-upper bound: 82%. 

Source: GAO survey results. 

Note: Examples of "Other" responses included the program offering a 
source of capital to grow and Tier 1 capital treatment. 

[End of table] 

Table 5: Of all the reasons your bank had for applying for funding 
through the SBLF program, which one was the most important reason for 
applying? 

Responses: It is a source of capital to meet growing demand for small 
business credit; 
Percentage: 41%; 
95 percent confidence interval-lower bound: 29%; 
95 percent confidence interval-upper bound: 52%. 

Responses: It is financially attractive in relation to the expected 
cost of capital relative to market alternatives; 
Percentage: 35%; 
95 percent confidence interval-lower bound: 23%; 
95 percent confidence interval-upper bound: 46%. 

Responses: It offers the ability to refinance Capital Purchase Program 
(CPP) funds through the SBLF program; 
Percentage: 18%; 
95 percent confidence interval-lower bound: 9%; 
95 percent confidence interval-upper bound: 29%. 

Responses: Other; 
Percentage: 7%; 
95 percent confidence interval-lower bound: 2%; 
95 percent confidence interval-upper bound: 16%. 

Source: GAO survey results. 

Note: Examples of "Other" responses included the program offering a 
source of capital to grow and Tier 1 capital treatment. 

[End of table] 

Table 6: What are the reasons your bank had for NOT applying for 
funding through the SBLF program? 

Responses: We have little or no anticipated demand for small business 
credit; 

A reason; 
Percentage: 42%; 
95 percent confidence interval-lower bound: 36%; 
95 percent confidence interval-upper bound: 47%. 

Not a reason; 
Percentage: 58%; 
95 percent confidence interval-lower bound: 53%; 
95 percent confidence interval-upper bound: 64%. 

Responses: We plan to avoid taking on new obligations during current 
economic conditions; 

A reason; 
Percentage: 22%; 
95 percent confidence interval-lower bound: 17%; 
95 percent confidence interval-upper bound: 26%. 

Not a reason; 
Percentage: 78%; 
95 percent confidence interval-lower bound: 74%; 
95 percent confidence interval-upper bound: 83%. 

Responses: We prefer to avoid participation in government programs; 

A reason; 
Percentage: 50%; 
95 percent confidence interval-lower bound: 44%; 
95 percent confidence interval-upper bound: 55%. 

Not a reason; 
Percentage: 50%; 
95 percent confidence interval-lower bound: 45%; 
95 percent confidence interval-upper bound: 56%. 

Responses: The SBLF was less financially attractive in relation to the 
expected cost of capital relative to market alternatives; 

A reason; 
Percentage: 28%; 
95 percent confidence interval-lower bound: 23%; 
95 percent confidence interval-upper bound: 34%. 

Not a reason; 
Percentage: 72%; 
95 percent confidence interval-lower bound: 66%; 
95 percent confidence interval-upper bound: 77%. 

Responses: The terms of participation were unfavorable; 

Not a reason; 
Percentage: 36%; 
95 percent confidence interval-lower bound: 30%; 
95 percent confidence interval-upper bound: 41%. 

Not a reason; 
Percentage: 64%; 
95 percent confidence interval-lower bound: 59%; 
95 percent confidence interval-upper bound: 70%. 

Responses: The application process was too burdensome; 

A reason; 
Percentage: 32%; 
95 percent confidence interval-lower bound: 27%; 
95 percent confidence interval-upper bound: 37%. 

Not a reason; 
Percentage: 68%; 
95 percent confidence interval-lower bound: 63%; 
95 percent confidence interval-upper bound: 73%. 

Responses: Other; 

A Reason; 
Percentage: 38%; 
95 percent confidence interval-lower bound: 30%; 
95 percent confidence interval-upper bound: 47%. 

Not a reason; 
Percentage: 62%; 
95 percent confidence interval-lower bound: 53%; 
95 percent confidence interval-upper bound: 70%. 

Source: GAO survey results. 

Note: Examples of "Other" responses included not being eligible to 
apply for the program or not needing additional capital at the time. 

[End of table] 

Table 7: Of all the reasons your bank had for NOT applying for funding 
through the SBLF program, which one was the most important reason for 
NOT applying? 

Responses: We have little or no anticipated demand for small business 
credit; 
Percentage: 29%; 
95 percent confidence interval-lower bound: 24%; 
95 percent confidence interval-upper bound: 34%. 

Responses: We plan to avoid taking on new obligations during current 
economic conditions; 
Percentage: 5%; 
95 percent confidence interval-lower bound: 3%; 
95 percent confidence interval-upper bound: 7%. 

Responses: We prefer to avoid participation in government programs; 
Percentage: 25%; 
95 percent confidence interval-lower bound: 20%; 
95 percent confidence interval-upper bound: 30%. 

Responses: The SBLF was less financially attractive in relation to the 
expected cost of capital relative to market alternatives; 
Percentage: 8%; 
95 percent confidence interval-lower bound: 5%; 
95 percent confidence interval-upper bound: 11%. 

Responses: The terms of participation were unfavorable; 
Percentage: 9%; 
95 percent confidence interval-lower bound: 6%; 
95 percent confidence interval-upper bound: 13%. 

Responses: The application process was too burdensome; 
Percentage: 6%; 
95 percent confidence interval-lower bound: 4%; 
95 percent confidence interval-upper bound: 9%. 

Responses: Other; 
Percentage: 18%; 
95 percent confidence interval-lower bound: 14%; 
95 percent confidence interval-upper bound: 22%. 

Source: GAO survey results. 

Note: Examples of "Other" responses included not being eligible to 
apply for the program or not needing additional capital at the time. 

[End of table] 

[End of section] 

Appendix III: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C. 20220: 

December 1, 2011: 

A. Nicole Clowers: 
Director, Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Ms. Clowers: 

Thank you for the opportunity to review and comment on the GAO's draft 
report regarding the Small Business Lending Fund ("SELF"). We 
appreciate your staff's collaborative approach in evaluating this 
initiative over a 13-month period that encompassed much of the 
program's design and implementation. 

The Department of the Treasury ("Treasury") welcomes the GAO's 
conclusion that "Treasury adopted procedures to help ensure that 
applicants were evaluated consistently and were likely to repay 
funds," as these objectives were central elements of the program's 
design. 

Throughout the implementation of the SBLF program, Treasury has worked 
to achieve a high level of transparency and accountability. Treasury 
engaged in extensive outreach with potential applicants, participating 
in over 50 industry events, teleconferences, and webinars as well as 
initiating more than 4,600 outbound calls directly to institutions. To 
date, Treasury has also published 15 program and transaction reports, 
including an initial assessment of increases in small business lending 
among SBLF participants and a detailed study of the program's 
potential impact on lending to women-, veteran-, and minority-owned 
small businesses. 

Treasury agrees with the GAO's three recommendations - each of which 
is aimed at furthering the objectives of transparency and 
accountability - and is taking steps to incorporate these 
recommendations into our existing plans and procedures. 

In closing, we appreciate the constructive relationship we have 
developed with you and your team. We look forward to continuing to 
work together on this important program. 

Sincerely, 

Signed by: 

Don Graves, Jr. 
Deputy Assistant Secretary for Small Business, Community Development, 
and Affordable Housing Policy: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Nicole Clowers, (202) 512-8678, or Clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contact above, Kay Kuhlman, Assistant Director; 
Tania Calhoun; Emily Chalmers; Pamela Davidson; Colin Gray; Simin Ho; 
Michael Hoffman; Jonathan Kucskar; and Angela Messenger made key 
contributions to this report. 

[End of section] 

Footnotes: 

[1] House Committee on Small Business, The State of Small Business 
Access to Capital and Credit: The View from Secretary Geithner, 112TH 
Cong., 1ST sess., 2011. 

[2] Pub. L. No. 111-240, 124 Stat. 2504 (2010). 

[3] In this report, "banks" refers to banks, thrifts, and bank and 
thrift holding companies. For the purposes of the SBLF program, a CDLF 
is an entity that is certified by Treasury as a community development 
financial institution (CDFI) loan fund. CDFI is a specialized 
financial institution that works in market niches that are underserved 
by traditional financial institutions. 

[4] S. 681, 112th Cong. (2011). On April 6, 2011, members of the House 
also introduced a bill to give TARP's Special Inspector General 
oversight of the SBLF. H.R. 1387, 112TH Cong.(2011). 

[5] The Dodd-Frank Act eliminated the OTS, which chartered and 
supervised federally chartered savings institutions and savings and 
loan holding companies. Rulemaking authority previously vested in the 
OTS was transferred to the OCC for savings associations and to the 
Federal Reserve for savings and loan holding companies. Supervisory 
authority was transferred to the OCC for federal savings associations, 
to the FDIC for state savings associations, and to the Federal Reserve 
for savings and loan holding companies and their subsidiaries, other 
than depository institutions. The transfer of these powers was 
completed on July 21, 2011, and OTS was officially abolished 90 days 
later (Oct. 19, 2011). 12 U.S.C. §§ 5411-5413. 

[6] The CAMELS rating system is a U.S. supervisory tool that describes 
a bank's overall condition and that is used to classify the nation's 
banks. The composite rating is based on financial statements and 
regulators' on-site examinations and has six components--capital 
adequacy, asset quality, management, earnings, liquidity, and 
sensitivity to market risk--that make up the acronym. It rates banks 
on a scale of 1 to 5, with 1 being the strongest. Evaluations of the 
six CAMELS components take into consideration a bank's size and 
sophistication, the nature and complexity its banking activities, and 
its risk profile. 

[7] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[8] Community Development Capital Initiative (CDCI) is part of the 
TARP program that makes capital available to certain certified CDFIs 
for the purposes of increasing lending to small businesses and other 
community development projects. 

[9] The weighted response rate accounts for the differential sampling 
fractions within strata. More information can be found in appendix II. 

[10] A call report is the common reference name for the quarterly 
reports of condition and income filed with regulators by every 
national bank, state-chartered Federal Reserve member bank, and 
insured state nonmember bank. 

[11] Treasury's guidance also excludes loan portions guaranteed by the 
Small Business Administration and those for which a third party 
assumes risk. 

[12] The problem bank list is a confidential list created and 
maintained by the FDIC listing banks that are in jeopardy of failing. 
In general, "problem" institutions are those institutions with 
financial, operational, or managerial weaknesses that threaten their 
continued financial condition. Depending upon the degree of risk and 
supervisory concern, they received a composite CAMELs rating of either 
"4" or "5". 

[13] Some banking institutions are formed as either S-corporations (S-
corps) or mutual organizations (mutuals) which will affect the form of 
Treasury's investment. An S-corporation makes a valid election to be 
taxed under subchapter S of chapter 1 of the Internal Revenue Code and 
thus does not pay any income taxes. Instead, the corporation's income 
or losses are divided among and passed through to its shareholders. A 
mutual organization is a company that does not issue capital stock 
and, therefore, has no shareholders. It is also "owned" by its members 
(e.g., deposit customers) rather than by stockholders. Many thrifts 
and insurance companies are mutuals. Insurance companies are not 
eligible to participate in SBLF. 

[14] The capital is in the form of Tier 1 capital for banks that issue 
preferred stock to Treasury. Tier 1 capital is considered the most 
stable and readily available capital for supporting a bank's 
operations. It covers core capital elements, such as common 
stockholder's equity and noncumulative perpetual preferred stock. The 
SBLF funds are Tier 2 capital for institutions that are subchapter S 
Corps and Mutuals and that issue subordinated securities to Treasury. 
According to the June 13, 2011, interim final rule from the Federal 
Reserve, S-Corp and Mutual bank holding companies with less that $500 
million in consolidated assets may exclude the SBLF subordinated 
securities from debt. CDLFs issue unsecured equity equivalent capital 
that does not constitute a class of stock or represent equity 
ownership in the issuer. 

[15] Treasury may require matching private capital and limit SBLF 
funding to 3 percent of risk-weighted assets. Risk-weighted assets are 
weighted according to credit risk and are used in the calculation of 
required capital levels. Specifically, all assets are assigned a risk 
weight according to the credit risk of the obligor or the nature of 
the exposure and the nature of any qualifying collateral or guarantee, 
where relevant. Off-balance sheet items, such as credit derivatives 
and loan commitments, are converted into credit equivalent amounts and 
also assigned risk weights. The risk weight categories are broadly 
intended to assign higher-risk weights to--and require banks to hold 
more capital for--higher-risk assets, and vice versa. See 12 C.F.R. 
Part 3 (OCC); 12 C.F.R Part 208 and Part 225, App. A & B (Federal 
Reserve); 12 C.F.R. Part 325 (FDIC); and 12 C.F.R. Part 567 (OTS). 

[16] As the number of applications increased over time, Treasury 
requested additional support from the regulators. The Federal Reserve, 
FDIC, and OTS provided a total of four senior financial analysts as 
detailees, who acted as Treasury employees, to review applicants. 

[17] Specifically, OCC used three conclusions: (1) nonobjection, (2) 
nonobjection conditioned on private capital raised of a specified 
amount, or (3) unable to support the request for SBLF funding to 
provide information for Treasury's evaluation. OTS also provided a 
"positive" or "negative" assessment on each applicant. 

[18] SBLF staff also requested input from state banking regulators, 
but state regulators were not required to provide it. 

[19] In particular, the SBLF Program Office reviewed the Small 
Business Lending Plans to determine if applicants include key 
information, such as (1) the communities served and the SBLF's ability 
to meet their lending needs; (2) loan demand in the communities 
served, including a quantitative assessment by loan or business type; 
(3) the applicant's historical small business lending growth and 
experience; (4) participation in Small Business Administration, U.S. 
Department of Agriculture, or state small business lending programs; 
(5) the resources that the applicant dedicated to small business 
lending activities; (6) the role of small business lending within the 
applicant's overall corporate strategies and business objectives; (7) 
current qualified small business lending as a percentage of total loan 
portfolios; and (8) the applicant's use of general media outlets for 
outreach; and (9) the applicant's targeting of individuals that 
represent, work with or are women, minorities, or veterans. 

[20] These detailees worked as Treasury employees and were compensated 
by Treasury during their assignment on the Application Review 
Committee. They were not serving on behalf of their respective 
regulators. 

[21] Treasury used three key performance ratios for evaluating 
applicants that measured the following types of assets, as a 
percentage of capital reserves: classified assets, nonperforming 
loans, and construction and development loans. For a more detailed 
discussion on the specific parameters for these key ratios, see 
appendix I. 

[22] In our 2010 report on CPP, we found that because Treasury relied 
on the regulators to make recommendations for CPP investments, it had 
limited oversight of regulators' reasons for recommending withdrawals 
from the program. As a result, CPP participants might not have 
received equal treatment. We recommended that Treasury establish a 
process to monitor applicants for programs similar to CPP to ensure 
that they were treated equitably. For more information on our 
recommendation, see GAO, Troubled Asset Relief Program: Opportunities 
Exist to Apply Lessons Learned from the Capital Purchase Program to 
Similarly Designed Programs and to Improve the Repayment Process, 
[hyperlink, http://www.gao.gov/products/GAO-11-47] (Washington, D.C.: 
Oct. 4, 2010). 

[23] Some applicants had less than 30 days to close because Treasury's 
decisions to approve them were made after August 30, 2011. 

[24] We selected key inputs used by Treasury to guide its decisions 
and performed an analysis for all 935 applicants to determine which 
applicants, both approved and nonapproved, fell out of Treasury's 
stated parameters for the various inputs. We did not review the 
evaluation documents, such as regulator's supervisory consultation 
memos, minutes from the Application Review and Investment Committees 
for all 935 applicants. For a more information on our methodology, see 
appendix I. 

[25] For the remaining two, the lending plan was not responsive 
because the projected small business lending increase was not greater 
than or equal to amount requested. Treasury's documents indicated that 
one was rewarded less than what they asked for, and the other one had 
an amount that was a bit shy of this threshold, but was ultimately 
approved. 

[26] Treasury officials suggested that loss share agreements and other 
guarantees--that protect banks against risk of losses from certain 
nonperforming assets--could explain accepted applicants with elevated 
ratios of nonperforming loans. 

[27] Treasury officials noted that a number of the 535 nonapproved 
applicants withdrew from the application process prior to Treasury's 
evaluation. 

[28] Treasury indicated that they subsequently found that 16 of the 
175 applicants either had dividend restrictions or withdrew before 
Treasury's consideration. 

[29] None of these banks had a CAMELS score of 1. 

[30] A Treasury IG official told us that the next IG report will focus 
on Treasury's evaluation process and will review a sample of decisions 
more in depth, including the role of the repayment probability 
estimates in Treasury's funding decisions. 

[31] Specifically, OCC used three conclusions: (1) nonobjection, (2) 
nonobjection conditioned on private capital raised of a specified 
amount, or (3) unable to support the request for SBLF funding to 
provide information for Treasury's evaluation. OTS also provided a 
"positive" or "negative" assessment on each applicant. 

[32] According to Treasury, they also tried to obtain dividend 
restriction information from the state regulators. However, state 
regulators did not consistently report this information, and certain 
states subsequently decided not to participate in the supervisory 
consultation process. 

[33] Treasury subsequently posted this information on its website in 
May 2011. 

[34] Fifty-three of these applicants would have been ineligible 
regardless of whether they had dividend restrictions because they did 
not meet the eligibility criteria established by the act by either 
being on FDIC's problem bank list or having more than $10 billion in 
assets. 

[35] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[36] The $17.4 billion figure was reported in Treasury's submission to 
the President's 2012 budget. 

[37] The amounts for total assets were obtained from the institutions' 
call reports and exclude CDLFs, which do not submit call reports and 
did not report total assets. 

[38] Statistically, the correlation between unemployment and the 
amount of funding (or the number of funded institutions) is 
indistinguishable from zero. More funding did tend to go to states 
with greater GDP, but there is no relationship between unemployment 
and the amount of funding even after controlling for state GDP. There 
is variation in unemployment rates within states, and our analysis at 
the state level does not account for this. 

[39] We developed a peer group of institutions by matching each 
applicant with an institution in the same general category of 
institutions (e.g., thrifts) and in the same state. We did not assess 
banks' individual financial condition; rather, we looked at averages 
of certain indicators to make comparisons between the groups. In order 
to make the two groups more comparable, we also omitted problem banks 
from both applicants and peers when comparing these groups, as these 
institutions are ineligible for SBLF. We excluded CDLFs for the 
analysis of both applicants and peers. The lack of supervisory 
information for CDLFs did not enable us to describe comparable 
financial characteristics. For more information, see appendix I. 

[40] For risk-based capital ratios, the adequately capitalized minimum 
is 8 percent and is equivalent to internationally adopted Basel 
minimums that apply to both banks and bank holding companies. 

[41] This definition of small loans is based on regulatory submissions 
and is different from the SBLF definition, which defines qualified 
small business lending as loans below $10 million to firms with 
revenue less than $50 million annually. Regulatory submissions do not 
include information according the SBLF definition of qualified small 
business lending. 

[42] The comparison of applicants to peer banks excludes problem 
banks. When we included problem banks in the applicant and peer 
groups, both had average CAMELS ratings of about 2.5. 

[43] GAO conducted a nationally representative survey of 794 banks, 
thrifts, and bank and thrift holding companies with total assets of 
less than $10 billion to gather information on their reasons for 
choosing to apply or not apply for SBLF. The final sample included 794 
banks out of a total population of 6,733. 510 banks, or 64 percent, 
responded to the survey. The weighted response rate was 66 percent. 

[44] The Small Business Lending Index (SBLI) is a measure of new loans 
to small businesses developed by Thomson Reuters and PayNet Inc. 

[45] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[46] Once risks have been identified, they should be analyzed for 
their possible effect. Risk analysis generally includes estimating the 
risk's significance, assessing the likelihood of its occurrence, and 
deciding how to manage the risk and what actions should be taken. 
Because governmental, economic, industry, regulatory, and operating 
conditions continually change, mechanisms should be provided to 
identify and deal with any special risks prompted by such changes. 

[47] In prior reports, we have reported that internal controls are a 
major part of efficiently and effectively managing a program, and 
developing a process for monitoring participating financial 
institutions will be critical to identifying and addressing any 
potential problems in these institutions' compliance with program 
requirements. 

[48] [hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]. 

[49] Banking institutions includes banks, thrifts, and bank and thrift 
holding companies. 

[50] Banking institutions includes banks, thrifts, and bank and thrift 
holding companies. 

[End of section] 

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