[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]



 
                     CONGRESSIONAL OVERSIGHT PANEL

                         MAY OVERSIGHT REPORT *

                               ----------                              

      THE SMALL BUSINESS CREDIT CRUNCH AND THE IMPACT OF THE TARP

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                  May 13, 2010.--Ordered to be printed

    * Submitted under Section 125(b)(1) of Title 1 of the Emergency 
        Economic Stabilization Act of 2008, Pub. L. No. 110-343

           CONGRESSIONAL OVERSIGHT PANEL MAY OVERSIGHT REPORT





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                     CONGRESSIONAL OVERSIGHT PANEL

                         MAY OVERSIGHT REPORT *

                               __________

      THE SMALL BUSINESS CREDIT CRUNCH AND THE IMPACT OF THE TARP

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                  May 13, 2010.--Ordered to be printed

    * Submitted under Section 125(b)(1) of Title 1 of the Emergency 
        Economic Stabilization Act of 2008, Pub. L. No. 110-343
                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                             Paul S. Atkins
                           Richard H. Neiman
                             Damon Silvers
                           J. Mark McWatters



                            C O N T E N T S

                                                                   Page
Executive Summary................................................     1
Section One......................................................     4
    A. Introduction..............................................     4
    B. Background................................................     5
        1. The Heterogeneity of Small Businesses and Associated 
          Data Problems..........................................     5
        2. Sources of Small Business Lending.....................     8
    C. The Credit Crunch.........................................    11
        1. Small Business Lending During the Credit Crunch: What 
          Happened Then, and What Has Happened Since?............    13
        2. Other Small Business Lending Data.....................    17
        3. Data from Past Recessions.............................    18
        4. Lending by Participants in the Capital Purchase 
          Program (CPP)..........................................    20
    D. Government Lending Initiatives and Small Business.........    24
        1. Pre-Crisis............................................    24
        2. Crisis Programs.......................................    28
        3. Other Programs........................................    38
    E. Examining the Continued Contraction in Lending............    39
        1. What is Going Wrong? Supply, Demand, and Regulation 
          Arguments..............................................    39
        2. Is There any Evidence that any Government Program is 
          Helping?...............................................    48
        3. Lender Size and Lending Technologies..................    49
    F. New Initiative for Small Business Lending.................    55
        1. Program Details.......................................    56
        2. The Rationale for Locating the SBLF Outside of the 
          TARP...................................................    57
        3. Issues with the SBLF: Will the SBLF Increase Lending 
          to Small Businesses?...................................    61
    G. Conclusion................................................    68
Annex I: Pending Legislation Related to Small Business Lending...    71
Annex II: State Small Business Credit Programs Established in 
  Response to the Crisis.........................................    79
Section Two: Additional Views....................................    83
    A. J. Mark McWatters and Paul S. Atkins......................    83
Section Three: Correspondence with Treasury Update...............    89
Section Four: TARP Updates Since Last Report.....................    90
Section Five: Oversight Activities...............................   106
Section Six: About the Congressional Oversight Panel.............   107
Appendices:
    APPENDIX I: LETTER TO CHAIR ELIZABETH WARREN FROM SECRETARY 
      TIMOTHY GEITHNER RE: CPP RESTRUCTURINGS, DATED MAY 3, 2010.   108
    APPENDIX II: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIR 
      ELIZABETH WARREN RE: GM REPAYMENT TO TARP, DATED MAY 6, 
      2010.......................................................   110
======================================================================


                          MAY OVERSIGHT REPORT

                                _______
                                

                  May 13, 2010.--Ordered to be printed

                                _______
                                

                          EXECUTIVE SUMMARY *

    Small businesses have long been an engine of economic 
growth and job creation in America. More than 99 percent of 
American businesses employ 500 or fewer employees, and together 
these companies employ half of the private workforce and create 
two out of every three new jobs. If the Troubled Asset Relief 
Program (TARP) is to meet its Congressional mandate to promote 
growth and create jobs, then it clearly must address the needs 
of small businesses.
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    * The Panel adopted this report with a 5-0 vote on May 12, 2010.
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    The Secretary of the Treasury recently designated small 
business credit as one of the primary focuses of the TARP, and 
he pledged TARP funds ``for additional efforts to facilitate 
small business lending.'' Because the Congressional Oversight 
Panel is mandated to review the Secretary's use of his TARP 
authority, oversight in this area is an important statutory 
role of the Panel.
    Credit is critical to the ability of most small businesses 
to purchase new equipment or new properties, expand their 
workforce, and fund their day-to-day operations. If credit is 
unavailable, small businesses may be unable to meet current 
business demands or to take advantage of opportunities for 
growth, potentially choking off any incipient economic 
recovery.
    Unfortunately, small business credit remains severely 
constricted. Data from the Federal Reserve shows that lending 
plummeted during the 2008 financial crisis and remained sharply 
restricted throughout 2009. Although Wall Street banks had been 
increasing their share of small business lending over the last 
decade, between 2008 and 2009 their small business loan 
portfolios fell by 9.0 percent, more than double the 4.1 
percent decline in their entire lending portfolios. Some 
borrowers looked to community banks to pick up the slack, but 
smaller banks remain strained by their exposure to commercial 
real estate and other liabilities. Unable to find credit, many 
small businesses have had to shut their doors, and some of the 
survivors are still struggling to find adequate financing.
    Treasury has launched several TARP initiatives aimed at 
restoring health to the financial system, but it is not clear 
that these programs have had a noticeable effect on small 
business credit availability. The largest TARP program, the 
Capital Purchase Program (CPP), provided hundreds of billions 
of dollars in new capital to banks, but Treasury did not 
require recipients to use the money to improve credit access. 
In fact, after receiving the money, most recipients decreased 
their lending. The Term Asset-Backed Securities Loan Facility 
helped to restore liquidity to the securitized lending market, 
but because relatively few small business loans are 
securitized, the program had little impact on small business 
lending. Although the Public-Private Investment Partnership 
program remains in its early stages, it has not targeted and 
will likely not target the smaller financial institutions that 
often serve small businesses.
    Looking forward, Treasury has announced several new 
initiatives to improve credit access for small businesses. Two 
programs, the Community Development Capital Initiative (CDCI) 
and the Small Business Administration Securities Purchase 
Program, are proceeding under Treasury's existing TARP 
authority, but their effects are likely to be limited. The CDCI 
will serve only a limited number of very small institutions, 
while the Securities Purchase Program would affect only loans 
guaranteed by the Small Business Administration, which make up 
a small percentage of the small business lending market.
    The administration has also proposed a much larger and 
broader lending program, the Small Business Lending Fund 
(SBLF), which would provide $30 billion in low-cost capital to 
small and mid-sized banks, along with incentives to increase 
lending. The SBLF's prospects are far from certain. The program 
would require legislative approval, and even if it is 
established by Congress immediately, it may not be fully 
operational for some time. It could arrive too late to 
contribute meaningfully to economic recovery. Moreover, banks 
may shun the program for fear of being stigmatized by its 
association with the TARP, or they may wish to avoid taking on 
SBLF liabilities at a time when their existing assets, such as 
commercial real estate, remain in jeopardy. The SBLF also 
raises questions about whether, in light of the CPP's poor 
performance in improving credit access, any capital infusion 
program can successfully jump-start small business lending. 
Supply-side solutions that rely on bank balance sheets, such as 
the CPP and the SBLF, may not increase lending.
    Even if Treasury succeeds in increasing the supply of 
credit, its efforts may still come to naught if the demand for 
credit fails to keep pace. In the fourth quarter of 2008, net 
57.7 percent of the respondents to the Federal Reserve Board's 
Survey of Senior Loan Officers reported that demand had fallen 
for small business loans--a figure that rose to 63.5 percent 
the following quarter. Even now, net 9.3 percent of the survey 
respondents continue to report falling demand, suggesting that 
some of the reduction in small business lending may be the 
result of a lack of demand.
    A small business loan is, at its heart, a contract between 
two parties: a bank that is willing and able to lend, and a 
business that is creditworthy and in need of a loan. Due to the 
recession, relatively few small businesses now fit that 
description. To the extent that contraction in small business 
lending reflects a shortfall of demand rather than of supply, 
any supply-side solution will fail to gain traction. Treasury 
should be mindful of this concern and should consider creative 
solutions that engage banks, state-based lending consortia, and 
other market participants. The debate over whether small 
business lending is constrained by supply or demand is a 
reminder of the absence of high-quality data about current 
lending practices. Such poor data have made it far more 
difficult to pinpoint the causes of today's problems and, as a 
result, to find effective solutions. Treasury should take 
active steps to gather more detailed and dependable data about 
small business lending, and put data-reporting requirements in 
place so that in the future policymakers will not be forced to 
make decisions with too little information about what is 
actually happening.
    Because small businesses play such a critical role in the 
American economy, there is little doubt that they must be a 
part of any sustainable recovery. It remains unclear, however, 
whether Treasury's programs can or will play a major role in 
putting small businesses on the path to growth.

                              SECTION ONE


                            A. Introduction

    Credit is often described as the ``lifeblood'' of an 
economy. The financial shocks of September and October 2008 and 
the ensuing credit freeze not only pushed down asset prices and 
increased the cost of credit, they also impaired consumer and 
business confidence. In the absence of confidence and credit, 
economic growth suffered and continues to suffer. 
Notwithstanding Treasury's efforts through the Troubled Asset 
Relief Program (TARP) to spur lending in general and smaller 
business lending in particular, lending continues to contract. 
This report addresses the continued contraction in lending in 
the context of Treasury's announced plans to re-focus the TARP 
on encouraging small business lending.
    Whether Treasury's solutions for small business lending are 
likely to be effective depends on its assessment of and 
approach to the problem: why, in the face of the TARP and other 
efforts to increase small business lending, is such lending 
still contracting? One explanation is that the continued 
recessionary environment, with soft demand for goods and 
services, is inhospitable to business expansion and lending 
generally. Other explanations proffered for the contraction 
include: low credit supply and low credit demand caused by 
capital weakness, other alternative uses of funds, more 
stringent regulatory requirements, and the potential for 
further regulation, among other reasons. Differences of opinion 
about the problem matter; after all, whether a solution is 
likely to work depends on whether it accurately targets the 
problem. Existing government programs or initiatives largely 
attempt to increase credit supply, and use, variously, 
guarantees, capital infusions, secondary market solutions such 
as securitizations, and, in very limited cases, direct lending. 
Treasury's proposed approach also focuses on credit supply and 
involves a capital infusion program to shore up the supply of 
capital for banks that lend to small businesses, reducing the 
cost of capital as the bank lends more. By focusing on 
incentives--primarily a ``carrot'' approach--and separating one 
of the new small business programs from the TARP, Treasury 
hopes to alleviate some of the concerns that smaller banks have 
had with taking money from TARP programs. Treasury hopes that 
these banks will then lend to the smaller businesses that, 
without access to the debt capital markets, must depend on 
banks for credit.
    This report examines the ongoing lending contraction and 
discusses the government programs or initiatives that have 
affected bank lending and liquidity, both before and after the 
crisis. It presents the arguments for the source of the 
contraction--supply, demand, economic conditions, and 
regulation, among others--in the context of past, current, and 
future government efforts to increase lending. The report then 
evaluates Treasury's plans for the TARP as a spur to small 
business lending in light of Treasury's assertion that the 
TARP, as currently constituted, is not restoring adequate 
lending levels. Treasury argues that participation in the TARP 
has been unattractive for the smaller banks that do a majority 
of their lending to smaller businesses and that this is a 
reason for the shortfalls in small business lending. As a 
consequence, Treasury has designed a capital infusion program 
for smaller banks--those of $10 billion or less in assets--in 
hopes that this will spur lending where prior capital infusion 
programs, which provided the majority of their funds to larger 
institutions, did not. Treasury's reliance on capital infusions 
for these institutions may, however, be misplaced: not only are 
smaller banks still under substantial stress and unable to 
shoulder the burden of leading the economy into recovery, but 
there are also poor data underlying the proposition that 
capital infusions increase lending.
    The subject of small business lending falls under the 
Panel's mandate to examine the Secretary of the Treasury's use 
of authority under EESA and the impact of the TARP on the 
markets.\1\
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    \1\ See EESA Section 125(1)(A)(i) and (ii).
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                             B. Background


1. The Heterogeneity of Small Businesses and Associated Data Problems

    The credit crunch of 2008 affected different economic 
sectors in different ways, and the Panel has addressed the 
effect of the crisis on a variety of sectors.\2\ In May 2009, 
the Panel addressed small business lending and evaluated the 
impact of the Federal Reserve Bank of New York's (FRBNY) and 
the Treasury's Term Asset-Backed Lending Facility (TALF). The 
report examined the design of the TALF, which was intended to 
restart securitization markets, and questioned whether any 
securitization program could help meet the credit needs of 
small businesses. The report also examined other sources of 
small business credit, including credit cards and informal 
credit sources, such as angel investors, family, and friends. 
The report noted Treasury's assertion that restoring access to 
credit has multiplier effects throughout the economy, and 
examined the difficulties that small businesses were having, in 
May 2009, in obtaining credit of any kind.\3\ A year has passed 
since that report, but despite a variety of government programs 
and initiatives designed to add liquidity and spur lending, 
commercial lending has continued to contract.\4\
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    \2\ See, e.g., Congressional Oversight Panel, February Oversight 
Report: Commercial Real Estate Losses and the Risk to Financial 
Stability, at 54, 75, 80 (Feb. 10, 2010) (online at cop.senate.gov/
documents/cop-021110-report.pdf) (hereinafter ``COP February Oversight 
Report'') (explaining that the commercial mortgage-backed securities 
market was ``virtually frozen from July 2008 to May 2009,'' making it 
difficult for borrowers to finance and refinance commercial real estate 
loans, and expressing concern about future commercial real estate 
defaults); Congressional Oversight Panel, September Oversight Report: 
The Use of TARP Funds in the Support and Reorganization of the Domestic 
Automotive Industry, at 3 (Sept. 9, 2009) (online at cop.senate.gov/
documents/cop-090909-report.pdf) (noting that the financial crisis 
turned American automakers' ``long-term slump into an acute crisis'' by 
reducing demand and constricting the credit they needed to conduct day-
to-day operations); Congressional Oversight Panel, Special Report on 
Farm Loan Restructuring, at 8 (July 21, 2009) (online at 
cop.senate.gov/documents/cop-072109-report.pdf) (finding that the farm 
sector's strong position at the outset of the crisis helped it weather 
a downturn in commodity prices and a modest tightening of farm credit, 
but cautioning that the situation was not yet stable); Congressional 
Oversight Panel, March Oversight Report: The Foreclosure Crisis: 
Working Toward a Solution, at 16-23 (Mar. 6, 2009) (online at 
cop.senate.gov/documents/cop-030609-report.pdf) (describing how the 
recession exacerbated the foreclosure crisis caused by the mortgage 
market's shift to riskier, less affordable mortgage products). See also 
Congressional Oversight Panel, April Oversight Report: Assessing 
Treasury's Strategy: Six Months of TARP, at 27-35 (Apr. 7, 2009) 
(online at cop.senate.gov/documents/cop-040709-report.pdf) (summarizing 
metrics).
    \3\ See generally Congressional Oversight Panel, May Oversight 
Report: Reviving Lending to Small Businesses and Families and the 
Impact of the TALF (May 7, 2009) (online at cop.senate.gov/documents/
cop-050709-report.pdf) (hereinafter ``COP May Oversight Report'').
    \4\Although this report focuses on commercial and industrial (C&I) 
loans, institutions report declining loan and lease balances across 
many types of loans. See generally Federal Deposit Insurance 
Corporation, Quarterly Banking Profile (Feb. 1, 2010) (online at 
www2.fdic.gov/qbp/2009dec/qbpall.html). The FDIC defines C&I loans as 
``loans for commercial and industrial purposes to sole proprietorships, 
partnerships, corporations, and other business enterprises, whether 
secured (other than by real estate) or unsecured, single-payment or 
installment,'' in the form of either direct or purchased loans, for 
domestic offices only. See Federal Deposit Insurance Corporation, 
Schedule RC-C--Loans and Lease Financing Receivables (online at 
www.fdic.gov/regulations/resources/call/crinst/605rc-c1.pdf) (accessed 
May 11, 2010). This data is reported by commercial banks annually. 
There are three classifications of commercial & industrial (C&I) loans 
with original values below $1 million that this report generally uses 
as a proxy for small business lending: C&I loans with original values 
less than $100 thousand (Call Report line RCON 5565); C&I loans with 
original values between $100 thousand and $250 thousand (Call Report 
line RCON5567); C&I loans with original values between $250 thousand 
and $1 million (Call Report line RCON5569). The number of these loans 
can be found on Call Report lines RCON5564, RCON5566, and RCON5568 
respectively. Federal Financial Institutions Examination Council, 
Consolidated Reports of Condition and Income for A Bank With Domestic 
and Foreign Offices--FFIEC 031, at 26 (online at www.ffiec.gov/PDF/
FFIEC_forms/FFIEC031_201003_f.pdf) (accessed May 11, 2010).
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    One problem in trying to analyze small business lending, or 
in identifying and designing programs for spurring small 
business lending, arises from the difficulty in determining 
what, precisely, constitutes a small business. ``Small 
business'' has been variously defined by Congress and various 
agencies, including the Small Business Administration (SBA), 
the Federal Reserve Board of Governors (Federal Reserve), and 
others.\5\ These definitions depend on sector, assets, number 
of employees, and revenue.\6\ The myriad definitions not only 
complicate any discussion of small business but also make it 
difficult to compare data and results across studies and 
surveys in a field in which, as an added complication, data are 
notoriously hard to obtain.\7\ As an example of the 
difficulties, the most comprehensive source for information 
about small business finances was the now-discontinued Federal 
Reserve's Survey of Small Business Finances (SSBF). The final 
SSBF was published in 2006 based on 1998-2003 data collected 
between June 2004 and January 2005.\8\ Even without the time 
lag the SSBF has been viewed as incomplete,\9\ and of course it 
does not take into account the credit crunch and the market 
turmoil of 2008-2009.\10\
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    \5\ In the Small Business Act of 1953, Congress defined small 
businesses as those that are: (1) independently owned and operated; (2) 
not dominant in their field of operation; and (3) under a certain size. 
Small Business Act of 1953, Pub. L. No. 85-536 (codified at 15 U.S.C 
632(a)).
    \6\ Within the parameters of this definition, the SBA sets 
industry-specific size standards. The criteria are based on either 
revenue streams or number of employees, resulting in wide variation 
among industries. See U.S. Small Business Administration, Summary of 
Size Standards by Industry (online at www.sba.gov/
contractingopportunities/officials/size/summaryofssi/index.html) 
(accessed May 6, 2010). For example, a retail company is a small 
business if it has less than $7 million in annual revenue, while a 
construction company is a small business if it has less than $33.5 
million in annual revenue. Similarly, to qualify as a small business 
under the SBA standards, a manufacturing company must have fewer than 
1,500 employees, but a wholesale company must have fewer than 100 
employees. U.S. Small Business Administration, Size Standards FAQ's 
(online at www.sba.gov/contractingopportunities/officials/size/
SIZE_STANDARDS_FAQS.html) (accessed May 6, 2010). In addition to the 
variation in the SBA size standards, various government agencies use 
means and methods of defining small businesses that differ from those 
used by the SBA. For example, the Internal Revenue Service has 
developed a definition that designates partnerships and corporations 
(including S corporations) with assets of $5 million or less--as well 
as all sole proprietorships--as small businesses. See Government 
Accountability Office, Tax Administration: IRS Faces Several Challenges 
As It Attempts To Better Serve Small Businesses, at 3 (Aug. 2000) (GAO/
GGD-00-166) (online at www.gao.gov/archive/2000/gg00166.pdf). In one 
study, the Federal Reserve defines a small business as a non-farm 
entity with fewer than 500 employees. See Traci L. Mach and John D. 
Wolken, Financial Services Used by Small Businesses: Evidence from the 
2003 Survey of Small Business Finances (Oct. 2006) (online at 
www.federalreserve.gov/pubs/bulletin/2006/smallbusiness/
smallbusiness.pdf) (hereinafter ``Financial Services Used by Small 
Businesses''). The Small Business Act also states that ``[u]nless 
specifically authorized by statute, no Federal department or agency may 
prescribe a size standard for categorizing a business concern as a 
small business concern, unless such proposed size standard'' is 
approved by the SBA Administrator. Small Business Act of 1953, Pub. L. 
No. 85-536 (codified at 15 U.S.C.Sec. 632(a)(2)(C)). This report will 
not rely on a specific small business definition, but will instead 
specify the definitions used according to the discussion.
    \7\ Small businesses obtain credit from formal and informal sources 
and may keep informal accounts. Even in a more formal credit 
application, success can depend in part on relationships between the 
parties. Katherine Samolyk, Small Business Credit Markets: Why do We 
Know So Little About Them?, FDIC Banking Review, Vol. 10, No. 2, at 16 
(1997) (online at www.fdic.gov/bank/analytical/banking/1998mar/
small.pdf) (hereinafter ``Small Business Credit Markets'').
    \8\ Financial Services Used by Small Businesses, supra note 6, at 
A167. This survey was discontinued because the broad variety in small 
businesses rendered it very expensive.
    \9\ Among other things, the SSBF provides information about a 
firm's most recent credit application, but does not include data about 
the prospective borrower's options at the time of the loan application. 
Further, the survey only captures a firm's situation--employment, 
balance sheet, income statement, and so forth--in conjunction with an 
application for credit if the firm applied for credit in the survey 
year. See Small Business Credit Markets, supra note 7, at 20.
    \10\ The primary data sources upon which this report relies are the 
SSBF, the National Federation of Independent Businesses (NFIB), the SBA 
Office of Advocacy, the National Small Business Association, the 
Federal Reserve's Senior Loan Officer Survey, which has a category for 
small businesses and the National Bureau of Economic Research with the 
recognition that these sources may not fully capture the circumstances 
of small business lending now. Where studies or surveys may not fully 
capture present circumstances, the report attempts to identify the 
issues.
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    The lack of data, however, does not reflect the importance 
of small business for the economy. Small businesses of less 
than 500 employees are, among other things, America's largest 
new job producers, with the majority of these new jobs created 
in the start-up phase of the cycle. These businesses comprise 
one half of the private sector, while large businesses comprise 
the other half, a dynamic that has been relatively stable for 
several decades.\11\ Small businesses collectively employ 
approximately 50 percent of all private-sector workers.\12\ 
Since the mid-1990s, small businesses have created 60 to 80 
percent of jobs.\13\ Moreover, small businesses produce about 
half of the nation's private, nonfarm real gross domestic 
product (GDP).\14\ Further, many of the businesses commonly 
encompassed by definitions of ``small business'' can be quite 
large, for example, one definition captures all businesses with 
annual sales of up to $50 million.\15\ The vast majority of the 
businesses that fall under the SBA definition are, however, 
very small businesses.\16\ Their health and ability to enjoy 
economic recovery are critical to the overall economy. If a 
small business needs and cannot obtain credit, it may be unable 
to finance its operations and be forced to close.\17\
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    \11\ Brian Headd, Small Business Administration Office of Advocacy, 
An Analysis of Small Business and Jobs, at 3-4, 7-8 (Mar. 2010) (online 
at www.sba.gov/advo/research/rs359tot.pdf). Small businesses create and 
eliminate new jobs at faster rates than large businesses, but the 
greater share of net new jobs are created by small businesses. Many 
small businesses do not add substantial numbers of jobs after the 
initial start-up phase, and therefore the majority of the job creation 
occurs at the outset. With job creation, of course, comes job 
destruction, as 95 percent of start-ups are firms with fewer than 20 
employees--and firms with fewer than 20 employees account for 95 
percent of closures.
    \12\ See Id., at 4; Financial Services Used by Small Businesses, 
supra note 6 (defining small businesses as those with less than 500 
employees). See also U.S. Small Business Administration, Small Business 
Profile (online at www.sba.gov/advo/research/profiles/09us.pdf) 
(accessed May 6, 2010). For state-specific small business employment 
statistics, see U.S. Small Business Administration, Small Business 
Profiles for the States and Territories (online at www.sba.gov/advo/
research/profiles) (accessed May 6, 2010).
    \13\ In 2008, there was a net loss of 3.1 million jobs, many of 
which may have been lost in small businesses: in the first three 
quarters of 2008, the United States lost approximately 1.7 million 
jobs, of which 60 percent were from small businesses. U.S. Small 
Business Administration, Office of Advocacy, The Small Business 
Economy: A Report to the President, at 9 (July 2009) (online at 
www.sba.gov/advo/research/sb_econ2009.pdf) (hereinafter ``Small 
Business Economy Report'').
    \14\ Id., at 1.
    \15\ Board of Governors of the Federal Reserve System, January 2010 
Senior Loan Officer Opinion Survey on Bank Lending Practices (Feb. 1, 
2010) (online at www.federalreserve.gov/boarddocs/snloansurvey/201002/
default.htm) (hereinafter ``January 2010 Senior Loan Officer Opinion 
Survey on Bank Lending Practices'').
    \16\ Financial Services Used by Small Businesses, supra note 6, at 
A167.
    \17\ Congressional Oversight Panel, Written Testimony of Paul 
Smiley, president, Sonoran Technology and Professional Services, 
Phoenix Field Hearing on Small Business Lending, at 2 (Apr. 27, 2010) 
(online at cop.senate.gov/documents/testimony-042710-smiley.pdf) 
(hereinafter ``Testimony of Paul Smiley'').
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2. Sources of Small Business Lending

    At present, banks are the most important source for small 
business credit. Before the credit crunch, small businesses had 
access to a variety of sources of credit, many of which have 
since been reduced or eliminated.\18\ One important 
distinction, however, between smaller and larger businesses is 
access to the public credit markets.\19\ Although some 
businesses that fall under the SBA's definition of small have 
publicly traded debt, the vast majority of smaller businesses 
do not. This increases smaller businesses' reliance on the 
forms of credit to which they have access, in particular bank 
credit.
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    \18\ Consistent with the variety in small businesses themselves, 
small businesses use a variety of financial services: liquid asset 
accounts, credit lines, loans and capital leases, and financial 
management services. Liquid asset accounts constitute checking and 
savings accounts; credit lines, loans and capital leases include lines 
of credit, mortgages used for business purposes, motor vehicle loans, 
equipment loans, capital leases, and other loans; and financial 
management services involve transaction services, credit card and debit 
card processing services and other similar services. See Financial 
Services Used by Small Businesses, supra note 6, at A173. Suppliers of 
financial services include depository institutions, which consist of 
banks, thrifts and credit unions, and non-depository institutions, 
which include finance companies and factors, leasing companies, and 
insurance and mortgage companies. Small businesses also use additional 
non-depository sources, including credit cards, family, individuals, 
business firms, government sources, and venture capital firms. The 
exact volume of small business financing that comes from each of these 
sources can be difficult to determine beyond the rough sketches that 
survey results provide. For example, a loan from an angel investor, 
friend, or family member will not appear on a bank's call report, nor 
will drawing down on personal savings in order to finance small 
business activity. COP May Oversight Report, supra note 3, at 12. 
Similarly, trade credit is a significant, if informal, source of small 
business financing. Trade credit can take many forms, depending on the 
business or industry, but is business-to-business and generally 
involves a delay between the date services or goods are provided and 
the payment date. The NFIB observes that there are counterbalances to 
the impulse to tighten trade credit during a recession because 
tightening trade credit terms can depress sales. The NFIB reports, 
consistent with this observation, that about 44 percent of small 
businesses surveyed said that there had been no change in the 
availability of trade credit, although 27 percent said that terms had 
tightened, of which 12 percent said that terms had tightened 
significantly. Similarly, 65 percent of small businesses reported 
making no change in their trade credit policies, and 29 percent 
reported they had tightened their trade credit policies, of which 13 
percent reported that they had tightened their policies significantly. 
The effect of tightening trade credit can be to send small businesses 
to more formal sources of credit, such as credit cards. National 
Federation of Independent Businesses, Small Business Credit in a Deep 
Recession, at 17 (Feb. 2010) (online at www.nfib.com/Portals/0/PDF/
AllUsers/research/studies/Small-Business-Credit-In-a-Deep-Recession-
February-2010-NFIB.pdf) (hereinafter ``Small Business Credit in a Deep 
Recession'').
    \19\ Although this is an important distinction in access to credit, 
data typically used in this field, such as the Federal Reserve's Survey 
of Senior Loan Officers, does not distinguish between businesses that 
can and cannot access public credit markets. See generally Board of 
Governors of the Federal Reserve System, April 2010 Senior Loan Officer 
Opinion Survey on Bank Lending Practices (May 3, 2010) (online at 
www.federalreserve.gov/boarddocs/SnLoanSurvey/201005/fullreport.pdf) 
(hereinafter ``April 2010 Senior Loan Officer Opinion Survey'').
---------------------------------------------------------------------------
    The landscape for small business financing in the last 
decade, not surprisingly, reflects the boom and bust that 
characterizes the markets overall.\20\ During the early and 
middle part of the last decade, small businesses used a basic 
set of products--traditional bank credit (loans or credit 
lines), credit cards, business mortgages, and owner financing--
but did so at rapidly increasing rates. From 2003, year-over-
year growth in small business debt rose to about 12 percent in 
2005; growth continued in 2006 and 2007, but at lower rates. 
Credit standards for small businesses eased during the same 
period. The net percentage of National Federation of 
Independent Businesses (NFIB) survey respondents reporting 
difficulties in obtaining credit, as well as the short-term 
loan rate, were historically low. Demand for commercial and 
industrial (C&I) loans peaked in 2004 and 2005, with nearly 40 
percent of banks reporting increased demand for C&I loans by 
small firms. Business credit card use grew quickly, possibly 
because of aggressive marketing on the part of business credit 
card companies, and in 2003, 48 percent of small businesses 
used business cards, up from 34 percent in 1998.\21\ Small 
businesses used credit cards, however, as a cash-management or 
convenience tool: in a study published at the beginning of 
2008, before the crisis, NFIB found that 76 percent of small 
business owners typically paid off their credit card balances 
every month.\22\ Finally, by the end of 2005-2006, home equity 
extraction had exceeded $60 billion, and many start-ups were 
funded through home equity loans.\23\
---------------------------------------------------------------------------
    \20\ Unless otherwise sourced, data in this paragraph is from the 
Board of Governors of the Federal Reserve System, Report to the 
Congress on the Availability of Credit to Small Businesses, at 10, 14, 
16, 19, 31 (Oct. 2007) (online at www.federalreserve.gov/boarddocs/
rptcongress/smallbusinesscredit/sbfreport2007.pdf) (hereinafter 
``Federal Reserve Report to Congress'').
    \21\ See Financial Services Used by Small Businesses, supra note 6, 
at A181.
    \22\ National Federation of Independent Businesses, National Small 
Business Poll: Credit Cards, Vol. 8, No. 3, at 6 (June 2008) (online at 
www.411sbfacts.com/files/SBP_V8I3_CreditCards_4%20(3).pdf) (hereinafter 
``National Small Business Poll''). Of course, the contrary point is 
also true: before the crisis nearly one in four small businesses with a 
credit card was rolling over that debt in order to create longer term 
financing.
    \23\ U.S. Small Business Administration and U.S. Department of the 
Treasury, Report to the President: Small Business Financing Forum, at 
45 (Nov. 18, 2009) (online at www.financialstability.gov/docs/
Small%20Business%20Financing%20Forum%20Report%20FINAL.PDF) (hereinafter 
``Small Business Financing Forum Report'') (citing the ``Federal 
Reserve Board, Case/Shiller'').
---------------------------------------------------------------------------
    Since the crisis, small businesses have generally used the 
same types of credit as they did during the boom, but they 
experience less availability. One recent survey found that as 
of July 2009, 46 percent of small business owners relied on 
bank loans to finance their business operations and that bank 
loans were the most common source of financing, followed by 
earnings from the business, and credit cards.\24\ Although more 
than half of small businesses continue to use personal and 
business credit cards, a relatively steady 70 to 80 percent of 
those small businesses still do not carry a balance on the 
card, and, despite the more limited availability of other 
credit, use the cards for transactional convenience.\25\ In 
addition, the use of home equity lines of credit has been 
severely curtailed: the fall in housing prices has drastically 
reduced the amount of equity extracted from homes, and it is no 
longer a significant source of financing for small 
businesses.\26\
---------------------------------------------------------------------------
    \24\ National Small Business Association, 2009 Year-End Economic 
Report, at 8 (Jan. 20, 2010) (online at www.nsba.biz/docs/
10eoy_survey.pdf) (hereinafter ``2009 Year-End Economic Report'').
    \25\ These numbers appear to be relatively constant over time. See 
Board of Governors of the Federal Reserve System, 2003 Survey of Small 
Business Finance, at A181 (2003) (online at www.federalreserve.gov/
pubs/oss/oss3/ssbf03/ssbf03home.html) (describing the 1998-2003 
period). See also Federal Reserve Report to Congress, supra note 20 
(discussing SSBF data); National Small Business Poll, supra note 22, at 
6 (data from late 2007-early 2008); Small Business Credit in a Deep 
Recession, supra note 18, at 7 (citing data from 2008-2009 and stating 
that between 70 and 79 percent of small businesses pay the balance on 
their credit cards in full each month). The data for small business 
lending, however, captures the balances on the cards before they are 
paid off as part of the metrics on revolving debt. NFIB conversations 
with Panel staff (Mar. 18, 2010). Credit card debt is unattractive 
credit: it is high-cost and often variable at the option of the card 
issuer. Credit card availability is now also more restricted compared 
to before the crisis. In the most recent Federal Reserve Senior Loan 
Officer Survey, in a special question, respondents also indicated that 
they had tightened terms for business credit cards compared to before 
the crisis (``A majority of respondents indicated that their standards 
for approving .  .  . business credit card accounts are currently 
tighter than the longer-run average level that prevailed before the 
crisis. In addition, significant net fractions of respondents to these 
special questions indicated that their banks had tightened their terms 
on business credit card loans to small firms--for both new and existing 
accounts--over the past six months''). April 2010 Senior Loan Officer 
Opinion Survey, supra note 19. See Section E.3, infra, for further 
discussion of business credit cards.
    \26\ Small Business Financing Forum Report, supra note 23, at 45. 
(``Home equity extraction is no longer available for owner's 
investment.'') The 2003 SSBF found that 15 percent of the total value 
of small business loans in that year was collateralized by personal 
real estate. In more recent data, of the small business owners surveyed 
by the NFIB, approximately 16 percent of small business owners have a 
mortgage that helps to finance the business or used the residence as 
collateral for purchasing business assets. Small Business Credit in a 
Deep Recession, supra note 18, at 18. However, the NFIB survey does not 
provide the time frame in which the small business owner took out the 
mortgage, and so the NFIB's numbers may reflect mortgages taken out 
when such credit was more widely available.
---------------------------------------------------------------------------
    Banks, small and large, are therefore currently the most 
important source for small business credit: according to the 
Federal Reserve, small businesses receive over 90 percent of 
their funding from banks.\27\ Small businesses borrow from both 
large and small banks, and while large and small banks each 
represent approximately 50 percent of the dollar value of loans 
to small businesses, this equivalence obscures the involvement 
each sort of bank has with small business lending.\28\ For 
example, relative to their assets, community banks have an 
outsized share of small business lending. According to the 
Federal Deposit Insurance Corporation (FDIC), community banks 
account for 38 percent of small business and farm loans, 
despite representing only 11 percent of bank industry 
assets.\29\ Medium and larger banks, however, still have over 
50 percent of the market, even if it is a smaller share 
relative to their assets. Large banks' share of the market grew 
substantially over the course of the last decade, and although 
their market share may now be shrinking, they still have 
substantial influence.\30\
---------------------------------------------------------------------------
    \27\ Small Business Financing Forum Report, supra note 23, at 43.
    \28\ See Section E.3, infra. The smallest banks, with assets of 
under 100 million, by some measures do as much as two thirds of their 
lending to small businesses. Office of the Special Inspector General 
for the Troubled Asset Relief Program, Quarterly Report to Congress, at 
110 (Apr. 20, 2010) (online at www.sigtarp.gov/reports/congress/2010/
April2010_Quarterly_Report_to_Congress.pdf) (hereinafter ``April 2010 
SIGTARP Quarterly Report''). Unlike this report, however, SIGTARP 
includes in its metrics certain farm loans. The proportion of loans to 
small businesses, even for small banks, is much smaller if only C&I 
loans are included.
    \29\ Congressional Oversight Panel, Written Testimony of Stan Ivie, 
San Francisco regional director, Federal Deposit Insurance Corporation, 
Phoenix Field Hearing on Small Business Lending, at 8 (Apr. 27, 2010) 
(online at cop.senate.gov/documents/testimony-042710-ivie.pdf) 
(hereinafter ``Phoenix Field Hearing on Small Business Lending'').
    \30\ See Section E.3, infra, for a more complete discussion.
---------------------------------------------------------------------------
    Small businesses borrow from depository institutions 
through a variety of mechanisms. The first is a conventional 
loan, through which a bank provides capital to a small business 
in exchange for regular interest payments and collateral. A 
small business can also seek a loan from a bank with the 
assistance of the SBA. The SBA has two major small business 
loan programs. First, under its 7(a) program, the SBA is 
authorized to guarantee loans for working capital. For fiscal 
year 2010, Congress authorized up to $17.5 billion for the 7(a) 
loan program. Second, under its 504 program, the SBA is 
authorized to guarantee loans for the development of small 
assets such as land, buildings, and equipment that will benefit 
local communities.\31\ For fiscal year 2010, Congress 
authorized up to $7.5 billion for the 504 loan program.
---------------------------------------------------------------------------
    \31\ 504 projects are generally made up of a senior lien of up to 
50 percent from a private lender combined with a junior lien of up to 
40 percent from a certified development company with at least 10 
percent equity from the small business. The junior lien is backed by a 
100 percent SBA-guaranteed debenture. See Section D.2(b)(iii), infra, 
for a discussion of these programs during the crisis.
---------------------------------------------------------------------------
    While SBA programs have helped promote lending to small 
businesses, SBA-guaranteed loans constitute only a small 
percentage of total small business lending.\32\ In a recent 
survey of small business owners, only four percent reported 
using SBA-guaranteed loans in 2008.\33\ Moreover, the 
Government Accountability Office (GAO) has calculated that, in 
recent years, only about four percent of the total value of 
outstanding small business loans is guaranteed through the 7(a) 
program.\34\ As a result, any government strategy that seeks to 
promote small business access to credit from depository 
institutions must address conventional loans in addition to 
SBA-guaranteed loans. This report deals primarily with credit 
provided by depository institutions, in particular addressing 
C&I loans--which are in essence loans for commercial and 
industrial purposes that may be secured or unsecured, but are 
not secured by real estate.\35\
---------------------------------------------------------------------------
    \32\ 2009 Year-End Economic Report, supra note 24, at 8. The SBA 
approved $23 billion of loans in FY 2007, $20 billion in FY 2008, $15 
billion in 2009, and $10.5 billion as of March 31, 2010. U.S. Small 
Business Administration, Table 2--Gross Approval Amount by Program 
(online at www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_bud_lperf_grossapproval.pdf) (accessed May 7, 2010). For FY 2007-
2008, the last year for which such numbers are available, the SBA 
estimated that the total amount of small business loans outstanding was 
$711.3 billion. See U.S. Small Business Administration, Small Business 
and Micro Business Lending in the United States, for Data Years 2007-
2008, at 4 (May 2009) (online at www.sba.gov/advo/research/
sbl_08study.pdf).
    \33\ 2009 Year-End Economic Report, supra note 24, at 8.
    \34\ See Government Accountability Office, Small Business 
Administration: Additional Measures Needed to Assess 7(a) Loan 
Program's Performance, at 7 (July 2007) (GAO-07-769) (online at 
www.gao.gov/new.items/d07769.pdf). In an appendix to that report, GAO 
explains how this calculation was made: ``To compare the number and 
amount of outstanding small business loans to 7(a) loans, we used the 
[FDIC call reports] for U.S. banks. .  .  . We considered the call 
report data on loans under $1 million to be a proxy for general small 
business loans, even though there is no attempt to directly link the 
loans to the size of the firm accessing credit in the call report 
data.''
    \35\ Small businesses, typically larger firms, may also obtain a 
line of credit from a bank: these lines of credit are more likely to be 
used for flexible expenses, such as working capital. According to the 
NFIB, the vast majority of survey respondents reported that their 
credit lines were renewed, while roughly the same number of small 
businesses had credit lines as in the prior year. In 2009, relatively 
few small businesses reported that changes in their credit lines 
adversely impacted their business. Small Business Credit in a Deep 
Recession, supra note 18, at 6. A small business may also use a line of 
credit differently from a loan: for example, a predominantly 
contracting firm may use a line of credit for hiring, while others may 
use it for working capital. See Testimony of Paul Smiley, supra note 
17, at 3. For all businesses, drawdowns on existing lines of credit 
count as additional loans on the balance sheets of U.S. banks, and 
therefore would be encompassed by the report's discussion of C&I loans. 
See Victoria Ivashina and David Scharfstein, Bank Lending During the 
Financial Crisis of 2008, at 13 (Mar. 8, 2010). However, such draw-
downs do not technically increase the amount of credit available in the 
economy. See Lei Li, TARP Funds Distribution and Bank Loan Growth, at 
4-5 (Mar. 1, 2010) (online at papers.ssrn.com/sol3/
papers.cfm?abstract_id=1515349). Accordingly, the high rate of draw 
downs following the crisis (apparently done to increase cash reserves, 
see Victoria Ivashina and David Scharfstein, Liquidity Management in 
the Financial Crisis, at 2 (Nov. 2009)) may have had the effect of 
overstating the amount of credit available.
---------------------------------------------------------------------------

                          C. The Credit Crunch

    By the time the U.S. economy was officially in recession in 
December 2007,\36\ credit markets had been tightening for some 
time. Rating agencies' downgrades of mortgage-related 
securities that they had earlier called ``low-risk,'' and the 
ripple effects of the downgrades, had weakened investor 
confidence. Investors feared (correctly) that losses would 
spread.\37\ Credit then tightened sharply with the bankruptcy 
of Lehman Brothers and the near-collapse of AIG in September 
2008,\38\ events that shortly led, according to Treasury's 
chief economist, to ``a seizing up of financial markets and 
plummeting consumer and business confidence.'' \39\ Credit 
markets froze and credit spreads rose to unprecedented levels, 
including the TED spread, which rapidly increased.\40\ The 
stock market plummeted, and real GDP fell at a rapid pace.\41\ 
By the fall of 2008, the U.S. economy was considered to be in a 
credit crunch.\42\
---------------------------------------------------------------------------
    \36\ National Bureau of Economic Research, Determination of the 
December 2007 Peak in Economic Activity, at 1 (Dec. 11, 2008) (online 
at www.nber.org/cycles/dec2008.pdf).
    \37\ Congressional Oversight Panel, December Oversight Report: 
Taking Stock : What Has the Troubled Asset Relief Program Achieved?, at 
9 (Dec. 9, 2009) (online at cop.senate.gov/documents/cop-120909-
report.pdf) (hereinafter ``COP December Oversight Report'').
    \38\ Council of Economic Advisors, Economic Report of the 
President, at 27 (Feb. 2010) (online at www.gpoaccess.gov/eop/2010/
2010_erp.pdf) (hereinafter ``Economic Report of the President''); Alan 
B. Kruger, chief economist and assistant secretary for economic policy, 
U.S. Department of the Treasury, Keynote Address at the American 
Academy of Actuaries, The Links Between the Financial Crisis and Jobs, 
at 2 (July 20, 2009) (online at www.treas.gov/offices/economic-policy/
AK-Actuaries-07-20-2009.pdf) (hereinafter ``Links Between the Financial 
Crisis and Jobs'').
    \39\ Id., at 2.
    \40\ Economic Report of the President, supra note 38, at 27. The 
TED spread is defined as the difference between the interest rates of 
the 3-month London interbank offered rate (LIBOR) (the rate at which 
banks lend to each other in London's interbank money market) and the 3-
month Treasury bill. Since short-term Treasury securities are largely 
seen as a risk-free investment, the difference between LIBOR and 3-
month Treasury Bills should reflect the confidence of banks in one 
another, and by extension the perceived risk in the lending markets. 
See Federal Reserve Bank of Minneapolis, Measuring Perceived Risk--The 
TED Spread (Dec. 2008) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=4120) (hereinafter ``Measuring 
Perceived Risk--The TED Spread'').
    \41\ Links Between the Financial Crisis and Jobs, supra note 38, at 
2.
    \42\ ``A credit crunch occurs when the supply of credit is 
restricted below the range usually identified with prevailing market 
interest rates and the profitability of investment projects. Credit 
crunches often involve a reduction in the funds that depository 
institutions, such as commercial banks and savings and loans, channel 
from savers to investors. Credit crunches affect economic activity 
because most small- and medium-sized businesses depend on banks when 
financing investment projects or current operations. Thus, unusual 
circumstances that force depositories to reduce business loans can 
restrict the activity of these firms regardless of market interest 
rates.'' See Council of Economic Advisors, Economic Report of the 
President, at 46 (Feb. 1992) (online at fraser.stlouisfed.org/
publications/erp/issue/1584/download/5985/ERP_1992.pdf).
---------------------------------------------------------------------------
    The credit crunch was accompanied by severe declines in 
numerous economic markers and widespread anxiety and 
uncertainty. The value of the stock market plunged 24 percent 
in the fall of 2008 and another 15 percent by the end of 
January 2009.\43\ Real GDP declined at an annual rate of 2.7 
percent in the third quarter of 2008, 5.4 percent in the fourth 
quarter of 2008, and 6.4 percent in the first quarter of 
2009.\44\ As Figure 1 illustrates, the TED spread, which 
reflects the perception of risk in the credit markets, was at 
its highest point in October 2008, when it reached 457 basis 
points.\45\
---------------------------------------------------------------------------
    \43\ Economic Report of the President, supra note 38, at 27.
    \44\ Economic Report of the President, supra note 38, at 27.
    \45\ As the economy began to stabilize, the TED spread narrowed. In 
January 2009, this spread declined to 94 basis points and further 
declined to reach a low of 19 basis points at December 31, 2009. By May 
5, 2010, the spread had further declined to 21 basis points. For 2009, 
the TED spread averaged 53.8 basis points. For the period January 1, 
2010 to May 5, 2010, the TED spread averaged approximately 15 basis 
points. See SNL Financial.
---------------------------------------------------------------------------

                       FIGURE 1: TED SPREAD \46\

     
---------------------------------------------------------------------------
    \46\ SNL Financial.
    [GRAPHIC] [TIFF OMITTED] 56095A.001
    
1. Small Business Lending During the Credit Crunch: What Happened Then, 
        and What Has Happened Since?

    As discussed above in Section A, it is difficult to gather 
data about small business credit or to generalize across small 
business market participants. One source of information on 
trends, however, is the Federal Reserve's Senior Loan Officer 
Opinion Survey on Bank Lending Practices (Survey of Senior Loan 
Officers), which is based on quarterly data reported by the 
Survey of Senior Loan Officers respondents, and addresses 
changes in the supply of and demand for loans to businesses and 
households.\47\
---------------------------------------------------------------------------
    \47\ All data in this section are derived from the chart data in 
the Survey of Senior Loan Officers from the quarter specified in the 
discussion. The percentages cited in this report from the Survey of 
Senior Loan Officers are all ``net percentages.'' The Federal Reserve 
explains:

      For questions that ask about lending standards, reported 
      net percentages equal the percentage of banks that reported 
      tightening standards (`tightened considerably' or 
      `tightened somewhat') minus the percentage of banks that 
      reported easing standards (`eased considerably' or `eased 
      somewhat'). For questions that ask about demand, reported 
      net fractions equal the percentage of banks that reported 
      stronger demand (`substantially stronger' or `moderately 
      stronger') minus the percentage of banks that reported 
      weaker demand (`substantially weaker' or `moderately 
---------------------------------------------------------------------------
      weaker').

See January 2010 Senior Loan Officer Opinion Survey on Bank Lending 
Practices, supra note 15. Board of Governors of the Federal Reserve 
System, Senior Loan Officer Opinion Survey on Bank Lending Practices, 
Chart Data (May 3, 2010) (online at www.federalreserve.gov/boarddocs/
snloansurvey/201005/chartdata.htm). The Survey of Senior Loan Officers 
does not provide metrics as to specific increases in markets such as 
interest rates or demand. Instead, it measures the percentage of Survey 
of Senior Loan Officers respondents that report increases, decreases, 
or no change from the last survey in the metric discussed. For example, 
the Survey of Senior Loan Officers respondents will describe whether 
loan demand has increased or decreased, but not by how much. (Based on 
responses from the current Survey of Senior Loan Officers, the United 
States is still in an environment in which credit is tightening, albeit 
more slowly than in late 2008 and early 2009). The information in the 
Survey of Senior Loan Officers is gathered from responses from 55 
domestic banks in the fourth quarter of 2009 (56 respondents in the 
first quarter of 2010) and 23 U.S. branches and agencies of foreign 
banks. The discussion in this section is based only upon the domestic 
banks, particularly because the foreign bank information did not 
include lending to small businesses. The Survey of Senior Loan Officers 
distinguishes between large and middle market firms and small business 
firms. Large and middle market firms are based on annual sales of $50 
million or more. Small business firms are based on annual sales of less 
than $50 million. For this discussion, references to large businesses 
also include middle market firms.
    The Survey of Senior Loan Officers data indicate whether 
conditions are tightening or easing, as of the last Survey of 
Senior Loan Officers, credit conditions were still tightening, 
albeit more slowly than they had been at the end of 2008 and 
the beginning of 2009. Data from various quarters of the Survey 
of Senior Loan Officers show a precipitous drop in lending to 
small businesses in the last quarter of 2008, and conditions 
that remained tight throughout 2009. Figure 2 shows that credit 
for commercial loans for large and small businesses was 
tightest in the fourth quarter of 2008, and tightened more 
slowly from its low point over the course of 2009. For loans to 
small businesses, in the first quarter of 2008, 51.8 percent of 
the Survey of Senior Loan Officers respondents reported that 
they had tightened credit standards, but by the fourth quarter 
of that year, that percentage had risen to 69.2 percent. Credit 
remained tight during the first part of 2009: in the first 
quarter of 2009, 42.3 percent of the Survey of Senior Loan 
Officers respondents reported that they had tightened credit 
standards. By the fourth quarter of 2009, however, only 3.7 
percent of the Survey of Senior Loan Officers respondents 
reported that they had further tightened credit standards. In 
the first quarter of 2010, the net percentage of Survey of 
Senior Loan Officers respondents that reported further 
tightening of credit standards was zero. These data largely 
reflect the fact that most banks had already tightened their 
lending over the course of the previous quarters.\48\
---------------------------------------------------------------------------
    \48\ For the fourth quarter of 2009, none of the Survey of Senior 
Loan Officers respondents reported ``easing of credit standards'' for 
small business commercial lending. See January 2010 Senior Loan Officer 
Opinion Survey on Bank Lending Practices, supra note 15, at 12. For 
commercial lending to large businesses, only 3 respondents reported 
credit standards ``easing somewhat'' and none of the respondents 
reported ``tightened '' credit standards. Id. One of the Survey of 
Senior Loan Officers respondents reported ``easing of credit 
standards'' for small business commercial lending, which was offset by 
one respondent that reported ``tightened somewhat'' of credit 
standards. See April 2010 Senior Loan Officer Opinion Survey on Bank 
Lending Practices, supra note 19, at 12. For commercial lending to 
large businesses, only 6 respondents reported credit standards ``easing 
somewhat,'' which was offset by two respondents that reported 
``tightened somewhat'' of credit standards. April 2010 Senior Loan 
Officer Opinion Survey on Bank Lending Practices, supra note 19, at 11.
---------------------------------------------------------------------------

    FIGURE 2: NET PERCENTAGE OF DOMESTIC BANKS REPORTING TIGHTENING 
 STANDARDS FOR C&I LOANS (DIFFERENCE BETWEEN RESPONDENTS THAT REPORTED 
      TIGHTENED CREDIT STANDARDS VS. EASED CREDIT STANDARDS) \49\

     
---------------------------------------------------------------------------
    \49\ For the charts in this section that address the Survey of 
Senior Loan Officers, net percentage is defined as the difference 
between the number of the Survey of Senior Loan Officers respondents 
reporting tightening credit standards over easing of credit standards. 
The chart points for 1990 through 2010 are based on the quarterly data 
for the previous three months. For example, the 2010 chart point (the 
last available) is based on information for the first quarter ended 
March 31, 2010.
[GRAPHIC] [TIFF OMITTED] 56095A.002

    At the same time that banks reported tightened credit 
standards in 2008 and 2009, commercial lending demand by both 
large and small businesses weakened. As Figure 3 illustrates, 
commercial lending demand for both large and small businesses 
declined quarterly starting in the second quarter of 2008. In 
the first quarter of 2008, 16.1 percent of the Survey of Senior 
Loan Officers respondents reported that small business 
commercial lending demand fell, compared to a faster decline in 
the fourth quarter of 2008, when 57.7 percent of the Survey of 
Senior Loan Officers respondents reported falling loan demand. 
According to the Survey of Senior Loan Officers, small business 
commercial lending reached its lowest point in the first 
quarter of 2009, when 63.5 percent of the Survey of Senior Loan 
Officers respondents reported declining commercial loan demand. 
In the fourth quarter of 2009 and the first quarter of 2010, 
however, 29.6 percent and 9.3 percent, respectively, of the 
Survey of Senior Loan Officers respondents reported falling 
loan demand, suggesting that demand continued to be soft, 
although not falling as precipitously as in the first quarter 
of 2009--although this could mean that demand had already 
fallen so low that it was difficult for it to fall further.

 FIGURE 3: NET PERCENTAGE OF DOMESTIC BANKS REPORTING STRONGER DEMAND 
 FOR C&I LOANS (DIFFERENCE BETWEEN RESPONDENTS THAT REPORTED STRONGER 
                     LOAN DEMAND VS. WEAKER DEMAND)

[GRAPHIC] [TIFF OMITTED] 56095A.003


    An indicator of credit cost, and therefore availability, is 
the ``net interest rate spread.'' The net interest rate spread 
measures the difference between the average interest yield 
received by banks on interest-earning assets (e.g., loans, 
mortgage-related securities and investments) and the average 
interest rate the bank has to pay on deposits and borrowings 
(i.e., cost of funds). If the cost of funds is constant, wider 
spreads usually indicate that banks perceive greater risk and 
are charging higher interest rates, while narrower spreads 
indicate that banks perceive less risk. It is difficult, 
however, to predict loan volume from interest rate spreads, 
because the spreads can reflect a variety of different factors, 
including perceived risk, efforts to rebuild capital, and cost 
of funds, any of which can push loan volumes in different 
directions. Net interest rate spreads for loans to all 
businesses widened in 2008, peaked in the fourth quarter of 
2008, and began to narrow in 2009 and the first quarter of 
2010.\50\ Figure 4 shows the percentage of banks reporting 
change in net interest rate spreads on a quarterly basis for 
large businesses and small businesses. For loans to small 
businesses, 63.6 percent of the Survey of Senior Loan Officers 
respondents reported widening spreads in the first quarter of 
2008, a number that surged to 88.5 percent in the fourth 
quarter of 2008, and barely moderated to 75 percent in the 
first quarter of 2009. By the fourth quarter of 2009 and first 
quarter of 2010, however, only 14.8 percent and 9.3 percent, 
respectively, of the Survey of Senior Loan Officers respondents 
reported widening net interest rate spreads.
---------------------------------------------------------------------------
    \50\ As in prior economic downturns, interest rate spreads on 
smaller (for this data, $1 million or below) C&I loans have increased 
since the beginning of the financial crisis by about a full percentage 
point relative to the Federal Funds rate, an increase that also applied 
to larger loans. This pattern is typical during a recession and 
reflects a tightening in loan underwriting and the imposition of a 
higher risk premium on loans to businesses during periods of economic 
distress and dislocation. Spreads overall are currently higher than 
during the boom and higher than during the 2001-2002 recession, and are 
historically high, if not particularly unusual for recessionary 
periods. See Board of Governors of the Federal Reserve System, Survey 
of Terms of Business Lending (May 5-9, 1997--Feb. 1-5, 2010) (online at 
www.federalreserve.gov/releases/e2/).
---------------------------------------------------------------------------

FIGURE 4: NET PERCENTAGE OF DOMESTIC BANKS REPORTING INCREASING SPREADS 
OF LOAN RATES OVER BANKS' COST OF FUNDS (DIFFERENCE BETWEEN RESPONDENTS 
THAT REPORTED WIDER NET INTEREST RATE SPREADS VS. NARROWED NET INTEREST 
                             RATE SPREADS)

[GRAPHIC] [TIFF OMITTED] 56095A.004

2. Other Small Business Lending Data

    The drop in commercial loan demand was accompanied by lower 
numbers of loans and lower dollar amounts of loans outstanding. 
Figures 5 and 6 illustrate the dollar amount and number of 
loans outstanding in commercial loans at domestic commercial 
banks and indicate that after a surge last decade these numbers 
stagnated from 2007 through 2009.\51\ From 2006 to 2007, there 
was a 99 percent increase in commercial loans of less than 
$100,000,\52\ resulting in a 12 percent increase in the dollar 
amount of commercial loans outstanding and an 89.7 percent 
increase in the number of loans outstanding. Commercial loans 
of smaller amounts are generally presumed to be to small 
businesses, and the data therefore indicate that there was an 
explosion in small business lending by commercial banks during 
the boom.\53\ From 2007 to 2009, however, the dollar amount of 
outstanding commercial loans decreased by 3.7 percent, and the 
number of loans increased by 0.5 percent, showing the 
preliminary signs of decline.
---------------------------------------------------------------------------
    \51\ The dollar amount and number of loans outstanding do not 
necessarily show a dramatic change when economic conditions change 
(unless the loans are callable). The maturities of commercial loans 
are, however, typically for a specific period (usually between one and 
five years). Accordingly, in a recessionary period, the number of loans 
and the dollar amount of loans outstanding would not necessarily 
immediately or dramatically decrease.
    \52\ SBA suggests that some of these microloans are credit card 
loans, as it attributes growth in such loans over the 2007-2008 period 
to marketing of business credit cards. See Small Business Economy 
Report, supra note 13, at 75.
    \53\ All lending went up during the boom, but in contrast to small 
businesses, larger corporations often accessed the capital markets, not 
banks, for credit. During the boom, the capital markets were widely 
accessible to larger corporations. By contrast, at present all lending 
has been contracting, although ``[bond] issuance has picked up 
considerably. . .'' See Alan B. Kruger, chief economist and assistant 
secretary for economic policy, U.S. Department of the Treasury, 
Statement for the Treasury Borrowing Advisory Committee of the 
Securities Industry and Financial Markets Association (May 3, 2010) 
(online at treasury.gov/press/releases/tg683.htm). Cf. Securities 
Industry and Financial Markets Association, Research Quarterly: 4Q and 
Full Year 2009, at 17 (Feb. 12, 2010) (online at www.sifma.org/
uploadedFiles/Research/ResearchReports/2010/
CapitalMarkets_ResearchQuarterly_20100212_SIFMA.pdf) (``Total corporate 
bond issuance fell 4.3 percent to $207.9 billion in the 4Q'09 from 
$217.3 billion in 3Q'09, but was above the $81.1 billion issued in the 
same year-earlier period'').
---------------------------------------------------------------------------

   FIGURE 5: C&I LOANS OUTSTANDING AT COMMERCIAL BANKS (ADJUSTED FOR 
                            INFLATION) \54\

     
---------------------------------------------------------------------------
    \54\ SNL Financial. These figures were converted into 2005 dollars 
using the GDP deflator. See Federal Reserve Bank of St. Louis, Gross 
Domestic Product: Implicit Price Deflator (online at 
research.stlouisfed.org/fred2/data/GDPDEF.txt) (accessed May 7, 2010).
[GRAPHIC] [TIFF OMITTED] 56095A.005

         FIGURE 6: NUMBER OF C&I LOANS BY ACTUAL LOAN SIZE \55\

     
---------------------------------------------------------------------------
    \55\ SNL Financial.
    [GRAPHIC] [TIFF OMITTED] 56095A.006
    
3. Data from Past Recessions

    The prior tables and discussion show that during the credit 
crunch interest rate spreads surged, demand for commercial 
lending plummeted, and recovery has been slow. Past recessions, 
in 1981, 1990, and 2001, provide some points of comparison for 
evaluating whether the current credit constriction is in line 
with past experience. The relative value of past data for the 
current inquiry can depend in part on the source for the 
recession: for example, the 1981 and 2001 recessions were 
primarily the result of high interest rates, while the 1990 
recession was primarily the result of a deflationary credit 
collapse.\56\ The current recession began with the collapse of 
a credit boom and concurrent devaluations in a variety of 
sectors, including housing.\57\ Despite these differences, 
prior downturns can provide a useful point of comparison.
---------------------------------------------------------------------------
    \56\ The data included in this discussion are derived from the 
National Bureau of Economic Research (NBER), which measures the length 
of recessions. The recession of 1981 began in July 1981 and ended in 
November 1982 (the ``1981 recession''). The recession of 1990 began in 
July 1990 and ended in March 1991 (the ``1990 recession''). In 
addition, the 2001 recession began in March 2001 and ended in November 
2001 (the ``2001 recession''). See National Bureau of Economic 
Research, Business Cycle Expansions and Contractions (online at 
www.nber.org/cycles.html) (hereinafter ``Business Cycle Expansions and 
Contractions'') (accessed Mar. 22, 2010). The 1981 recession was the 
result of tight monetary policies which led to high interest rates. See 
Congressional Budget Office, The Prospects for Economic Recovery, at 14 
(Feb. 1982) (online at www.cbo.gov/ftpdocs/51xx/doc5135/doc03b-
Entire.pdf). The 1990 recession was the result of a combination of 
``pessimistic consumers, the debt accumulations of the 1980s, the jump 
in oil prices after Iraq invaded Kuwait, a credit crunch induced by 
overzealous banking regulators, and attempts by the Federal Reserve to 
lower the rate of inflation.'' Federal Reserve Bank of San Francisco, 
Economic Review No. 2: What Caused the 1990-1991 Recession, at 33 
(1993) (online at www.frbsf.org/publications/economics/review/1993/93-
2_34-48.pdf). The 2001 recession was the result of the dot.com era 
coming to a close and high interest rates, exacerbated by the attacks 
of 9/11. See Mary Daly and Fred Furlong, Profile of a Recession--the 
U.S. and California, Federal Reserve Bank of San Francisco Economic 
Letter, No. 2002-04, at 1-2 (Feb. 22, 2002) (online at www.frbsf.org/
publications/economics/letter/2002/el2002-04.pdf). See also Michael D. 
Bordo and Joseph G. Haubrich, Credit Crises, Money and Contractions: An 
Historical View, National Bureau of Economic Research, Working Paper 
15389, at 12-13 (Sept. 2009) (online at www.nber.org/papers/
w15389.pdf).
    \57\ Links Between the Financial Crisis and Jobs, supra note 38, at 
3. See also Markus K. Brunnermeier, Deciphering the Liquidity and 
Credit Crunch 2007-2008, Journal of Economic Perspectives, Volume 23, 
Number 1, at 77-78 (online at princeton.edu/markus/research/papers/
liquidity_credit_crunch.pdf).
---------------------------------------------------------------------------
    Figure 7 tracks outstanding commercial lending, adjusted 
for inflation, at all domestic commercial banks across the 
recessions of 1981, 1990, and 2001. As the chart illustrates, 
the dollar amount of outstanding commercial loans for domestic 
banks decreased only 3.8 percent during the 1981 recession, and 
commercial lending did not significantly stall afterwards. The 
rate of increase in commercial lending after 1981, however, was 
sluggish compared to the increases following the recessions of 
1990 and 2001. After the end of the 1990 recession, by 
contrast, the dollar amount of outstanding commercial loans 
continued to decline. In January 1994, the dollar value of 
outstanding commercial loans reached a low of $737 billion, 
representing decreases of 16.7 percent and 13.3 percent, 
respectively, from the beginning and end of the 1990 
recession.\58\ Similarly, the post-recessionary period of the 
early 2000s shows constriction in commercial lending like that 
which followed the 1991 recession. While the total amount of 
outstanding commercial loans decreased only five percent 
between March and November 2001, after the end of the 2001 
recession outstanding commercial loans continued to decline. In 
May 2004, the dollar amount of outstanding commercial loans had 
fallen 24.3 percent and 20.4 percent, respectively, from the 
beginning and end of the 2001 recession.\59\
---------------------------------------------------------------------------
    \58\ The percentage declines are calculated as follows. Total 
average July 1990 outstanding commercial loans were $885 billion and 
January 1994 average outstanding commercial loans totaled $737 billion. 
$885 billion less $737 billion equals $148 billion. $148 billion 
divided by $885 billion equals 16.7 percent. Total March 1991 
outstanding commercial loans were $851 billion and January 1994 
outstanding commercial loans totaled $738 billion. $851 billion less 
$738 billion equals $113 billion. $113 billion divided by $851 billion 
equals 13.3 percent.
    \59\ The percentage declines are calculated as follows. Total March 
2001 average outstanding commercial loans were $1.2 trillion and May 
2004 outstanding commercial loans totaled $908 billion. $1.2 trillion 
less $908 billion equals $292 billion. $292 billion divided by $1.2 
trillion equals 24.3 percent. Total November 2001 outstanding 
commercial loans were $1.14 trillion, and May 2004 outstanding 
commercial loans totaled $908 billion. $1.14 trillion less $908 billion 
equals $232 billion. $232 billion divided by $1.14 trillion equals 20.4 
percent.
---------------------------------------------------------------------------
    As noted above, data from these recessions, while useful, 
provide imperfect models upon which to gauge current 
conditions.\60\ From the present vantage point it is also 
difficult to gauge whether the recovery, when it appears, will 
be comparable to the past data, as those analyses evaluate 
several years, and such evaluations for this recession lie in 
the future. The data show, however, that lending is very 
sensitive to economic cycles, and lending in and after recent 
past recessions has either stagnated or fallen.
---------------------------------------------------------------------------
    \60\ As another point of comparison, the Survey of Senior Loan 
Officers conducted during the 2001 recession, in the first quarter of 
2001, stated that 34.5 percent of Survey respondents reported falling 
small business commercial loan demand and a faster decline in the 
fourth quarter of 2001, where 45.4 percent of Survey respondents 
reported falling loan demand. See Board of Governors of the Federal 
Reserve System, Senior Loan Officer Opinion Survey on Bank Lending 
Practices, Chart Data (Feb. 1, 2010) (online at www.federalreserve.gov/
boarddocs/snloansurvey/201002/chartdata.htm).
---------------------------------------------------------------------------

  FIGURE 7: OUTSTANDING C&I LOANS IN COMMERCIAL BANKS (SEASONALLY AND 
                        INFLATION-ADJUSTED) \61\

     
---------------------------------------------------------------------------
    \61\ The shaded areas reflect periods of recession. See Business 
Cycle Expansions and Contractions, supra note 56 (accessed May 7, 
2010). The NBER has not yet determined whether the recession that began 
in December 2007 has ended nor established the date of its ending. This 
chart assumes that this recession ended at the end of Q2 2009, the last 
quarter of net decline in the GDP. See Bureau of Economic Analysis, 
Gross Domestic Product (online at www.bea.gov/national/txt/dpga.txt) 
(accessed Apr. 5, 2010). See also Board of Governors of the Federal 
Reserve System, Assets and Liabilities of Commercial Banks in the 
United States (Instrument: Commercial and industrial loans; All 
Commercial Banks; SA) (online at www.federalreserve.gov/datadownload/
Choose.aspx?rel=H.8) (accessed May 7, 2010). The above figures for 
outstanding C&I loans were averaged for each year and then adjusted 
using the GDP deflator. The figure for 2010 reflects averaged data 
through April 21, 2010. The 2010 average was then adjusted using the 
2009 GDP deflator mechanism.
[GRAPHIC] [TIFF OMITTED] 56095A.007

4. Lending by Participants in the Capital Purchase Program (CPP)

    As Congress contemplates the Small Business Lending Fund 
(SBLF), it is worth questioning whether the Capital Purchase 
Program (CPP), a TARP-funded capital infusion program for large 
and small banks, led to an increase in overall lending levels 
or small business lending levels.\62\ The data show that 
lending by the largest CPP recipients, those with assets over 
$100 billion, and recipients of 81 percent of the funds 
disbursed under the CPP--declined, a decrease that is all the 
more stark given that lending appears to have increased at 
medium-sized banks, those with assets between $10 and $100 
billion, although those received only 11.4 percent of CPP 
funds.\63\
---------------------------------------------------------------------------
    \62\ In addition to the CPP, the Targeted Investment Program (TIP) 
was an additional TARP-funded capital infusion program. The only 
institutions that received TIP funds were Citigroup and Bank of 
America, each of which received $20 billion. Upon repayment of funds by 
these institutions, the TIP was terminated in December 2009.
    \63\ See Section E.3, infra, for further detail.
---------------------------------------------------------------------------
    Although it is possible to question whether lending levels 
might have decreased further absent the CPP, there are no data 
to support or challenge this assertion. In particular, two gaps 
in reporting and data gathering have made it nearly impossible 
to make a useful evaluation of the effectiveness of capital 
infusion programs for the purposes of increasing lending.\64\ 
The first is Treasury's failure, at the outset of the CPP, to 
require tracking of funds received through the TARP. Although 
Treasury intended CPP recipients to increase the flow of credit 
to U.S. borrowers, the CPP contracts' terms failed to establish 
how this objective must be met, measured, or reported. 
Treasury's failure to condition TARP assistance on specific 
requirements, including reporting, as previously identified by 
the Panel, contributes to an incomplete picture of how 
recipients used TARP funds.\65\
---------------------------------------------------------------------------
    \64\ Although SIGTARP's recent report contains, in Figure 2.12, a 
chart comparing small-business loans versus TARP assistance by bank 
size, this chart only shows correlation, and not causation. April 2010 
SIGTARP Quarterly Report, supra note 28, at 110 (``Although CPP was 
meant for investments in healthy and viable banks, some CPP recipients 
have filed for bankruptcy protection'').
    \65\ When asked how institutions used the TARP funds they were 
given, Treasury raised the difficulty in tracking individual dollars 
through an institution in response--in essence, that because money is 
fungible, it is not useful to track particular funds. Nevertheless, as 
the Panel and SIGTARP have noted, Treasury could have conditioned 
receipt of TARP assistance upon requirements to report the usage of 
those funds and the overall lending activities of the institutions in 
question. See Congressional Oversight Panel, January Oversight Report: 
Taking Stock: Accountability for the Troubled Asset Relief Program, at 
57 (Jan. 9, 2009) (online at cop.senate.gov/documents/cop-010909-
report.pdf); COP December Oversight Report, supra note 37, at 108-111. 
See also Congressional Oversight Panel, January Oversight Report: 
Exiting TARP and Unwinding Its Impact on the Financial Markets, at 5 
(Jan. 14, 2010) (online at cop.senate.gov/documents/cop-011410-
report.pdf) (hereinafter ``COP January Oversight Report''); Office of 
the Special Inspector General for the Troubled Asset Relief Program, 
SIGTARP Survey Demonstrates that Banks Can Provide Meaningful 
Information on Their Use of TARP Funds (July 20, 2009) (online at 
sigtarp.gov/reports/audit/2009/SIGTARP_Survey_Demonstrates _That_Banks_ 
Can_Provide_Meaningfu_ %20Information_On_ Their_Use_Of_TARP_Funds.pdf). 
Further, banking industry witnesses at the Panel's Field hearing in 
Phoenix stated that they would support a tracking requirement for 
capital infusion programs. See Congressional Oversight Panel, Testimony 
of Candace Wiest, president and chief executive officer, West Valley 
National Bank, Transcript: Phoenix Field Hearing on Small Business 
Lending (Apr. 27, 2010) (publication forthcoming) (online at 
cop.senate.gov/hearings/library/hearing-042710-phoenix.cfm) 
(hereinafter ``Testimony of Candace Wiest'').
---------------------------------------------------------------------------
    The second is Treasury's poor data collection requirements. 
In October 2008 Treasury began to track the lending activity of 
the top 22 recipients under the CPP. Treasury did not require 
these institutions to break out their small business lending 
until April 2009.\66\ As discussed in Section A, although 
metrics for small business lending depend on shifting 
definitions of firm size and loan amount, when it requested 
data, Treasury provided these institutions with guidance which 
relied heavily on the respective institution's internal loan 
classification system. At present, however, Treasury no longer 
requires institutions that have repaid their TARP funding to 
participate in the survey. Therefore, as of January 2010, the 
survey no longer consists of lending data for these 22 
institutions, and Figure 8 below reflects data only through 
November 2009, the last reporting period that included monthly 
data for all of these institutions.\67\ To date, only 10 of 
these 22 institutions continue to provide lending data to 
Treasury.\68\ As a result of the limited data provided by 
Treasury, it is difficult to track small business lending and 
overall lending for all CPP recipients.
---------------------------------------------------------------------------
    \66\ The existing source for this information is the FDIC, which 
currently provides these data on an annual basis--a rough measure from 
which to evaluate shorter term trends.
    \67\ U.S. Department of the Treasury, The Monthly Lending and 
Intermediation Snapshot (Apr. 16, 2010) (online at 
www.financialstability.gov/impact/ 
monthlyLendingandIntermediationSnapshot.htm) (compiling data from April 
2009 to November 2009).
    \68\ The top 22 CPP recipients comprise the following: American 
Express, Bank of America, Bank of New York Mellon, BB&T, Capital One, 
CIT, Citigroup, Comerica, Fifth Third, Goldman Sachs, Hartford, 
JPMorgan Chase, KeyCorp, Marshall & Illsley, Morgan Stanley, Northern 
Trust, PNC, Regions, State Street, SunTrust, U.S. Bancorp, and Wells 
Fargo. The following 10 banks continue to report to Treasury: CIT, 
Citigroup, Comerica, Fifth Third, Hartford, KeyCorp, Marshall & 
Illsley, PNC, Regions, and SunTrust. See Id.
---------------------------------------------------------------------------
    As Figure 8 illustrates, both small business lending and 
the small business average loan balance decreased through 
November 2009 for the top 22 CPP recipients. The average small 
business loan balance for these institutions decreased 4.6 
percent from April 2009 to November 2009. Total small business 
originations for these institutions decreased by 7.4 percent 
for this same period. These declines are, however, comparable 
to declines in these institutions' total lending; their total 
average loan balance decreased by 5.2 percent during the same 
period, and their total loan originations decreased by 
approximately 10.4 percent.\69\
---------------------------------------------------------------------------
    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

   FIGURE 8: SMALL BUSINESS LENDING BY TOP 22 CPP RECIPIENTS MONTHLY 
                          LENDING SURVEY \70\

[GRAPHIC] [TIFF OMITTED] 56095A.008

    The Panel believes that Treasury's currently limited data 
collection is at best regrettable. In addition, Treasury has 
changed the way in which it reports CPP data. Treasury 
previously published a survey of the top 22 CPP recipients. 
Treasury currently publishes the Capital Purchase Program 
Monthly Lending Report, which measures only three metrics in 
comparison to the 26 measured by the survey of the top 22 CPP 
recipients. Data from institutions that received CPP funding 
should remain in the survey so as to better enable taxpayers to 
determine the ways in which these institutions are 
participating in the market. Ultimately, to the Panel's dismay, 
the late inclusion of small-business lending metrics and the 
new, more limited data that Treasury publishes make it very 
difficult to track CPP recipients' lending, including small-
business lending, over time.\71\
---------------------------------------------------------------------------
    \71\ Of the CPP recipients who have repaid their funds, only Bank 
of America breaks out its small business lending. The Panel has 
previously noted its frustration with similar gaps in Treasury's data. 
At that time, Treasury did not include small business lending in its 
monthly reports. Although Treasury remedied that omission, the new 
structure of and data included in the reports poses similar problems. 
See COP May Oversight Report, supra note 3, at 17-18.
---------------------------------------------------------------------------
    Capital infusions are a rough answer to a multifaceted 
problem, and clear data could have been very valuable, 
particularly given that there is some evidence that, rather 
than lending, banks are keeping cash. Looking at past 
recessionary periods, cash as a percentage of total assets at 
banks has oscillated, but not dramatically, with relatively 
minimal responsiveness to recessions. In 2008, however, banks 
began to retain cash out of line with past recessions. There 
are several possible sources for this phenomenon. The downturn 
in the economy has injected more uncertainty--and therefore 
more room for subjective analysis--into the process of 
determining the appropriate level of loan loss reserves, and 
banks may fear that bank examiners will impose conservative 
loan loss reserve requirements. Banks may also keep cash in 
anticipation of the passage of financial regulatory reform 
legislation that will likely increase capital requirements.\72\ 
The Federal Reserve's decision in October 2008 to pay interest 
on excess reserves has also created an additional incentive to 
hold cash.\73\ In addition, banks experiencing capital 
weakness--due to anticipated losses in the CRE market or 
balance sheets still plagued by troubled assets--may hold cash 
as a means of buttressing their capital position. It is too 
soon to determine whether the more ordinary oscillations of 
cash retention will resume again, or whether cash levels will 
return to pre-crisis levels. Because these questions are not 
particular to small business lending, and, further, may 
implicate policy considerations (such as monetary policy) 
beyond the scope of this report, this report does not attempt 
to deal with them in depth.
---------------------------------------------------------------------------
    \72\ See Senate Committee on Banking, Housing, and Urban Affairs, 
Summary: Restoring American Financial Stability, at 1 (Mar. 17, 2010) 
(online at banking.senate.gov/public/_files/
FinancialReformSummaryAsFiled.pdf) (hereinafter ``Senator Dodd 
Financial Regulation Reform Summary'').
    \73\ See Board of Governors of the Federal Reserve System, Interest 
on Required Balances and Excess Balances (Oct. 6, 2008) (online at 
www.federalreserve.gov/monetarypolicy/reqresbalances.htm) (describing 
the policy, and noting that setting the interest rate on such balances 
would give the Federal Reserve additional monetary policy tools).
---------------------------------------------------------------------------

          FIGURE 9: CASH AS A PERCENTAGE OF TOTAL ASSETS \74\

     
---------------------------------------------------------------------------
    \74\ FBR Capital Markets.
    [GRAPHIC] [TIFF OMITTED] 56095A.009
    
    As Congress contemplates the Small Business Lending Fund 
(SBLF), another program that would provide capital to banks, 
data on any links between capital infusions and increased 
lending could have substantially and usefully informed the 
program. After all, even if low loan volume is in fact the 
result of constrictions in supply, an assertion that is by no 
means clear, a bank might not necessarily use an unrestricted 
capital infusion to increase leverage. The bank may also use it 
to shore up capital weakness; free up funds for safer 
investment elsewhere; or be held as cash, among other things. 
Regrettably, given the lack of data, and the multiple uses that 
banks can have for capital infusions, it is difficult 
uncritically to accept the proposition that another supply-side 
capital infusion program will, this time, unlock credit.

          D. Government Lending Initiatives and Small Business


1. Pre-Crisis

    In stable credit markets, the government's effort to 
facilitate small business lending relies chiefly on programs 
run by the SBA.\75\ The SBA acts as direct lender or guarantor 
on a principal loan portfolio of $91.9 billion.\76\ Guarantees, 
which comprise the bulk of the SBA's outstanding loan 
portfolio, derive from the agency's 7(a) and 504 loan programs, 
and its small business investment company program (SBIC).\77\ 
Direct loans originate from the SBA's microloan and disaster 
loan programs. The expansion of SBA-guarantee programs is a key 
part of the government's economic recovery strategy, as 
discussed below.\78\ This report discusses the pre-crisis 
programs, their administration, and their expansion in order to 
assess recovery efforts, present and future.
---------------------------------------------------------------------------
    \75\ Monetary, fiscal, and regulatory policies executed by other 
government entities also affect lending markets, including those 
supporting small businesses, but they are beyond the scope of this 
report. Multiple federal agencies provide direct loans and loan 
guarantees, as well, in support of targeted sectors, including the 
housing, education, business and development, and export markets. For a 
further discussion of these agencies and programs, see Office of 
Management and Budget, Analytical Perspectives: Budget of the United 
States Government, Fiscal Year 2011, at 345-358 (Feb. 1, 2010) (online 
at www.whitehouse.gov/omb/budget/fy2011/assets/topics.pdf) (hereinafter 
``Analytical Perspectives: 2011 Budget'').
    \76\ Includes unaudited data through March 31, 2010. U.S. Small 
Business Administration, Table 1--Unpaid Principal Balance by Program 
(online at www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_bud_lperf_upbreport.pdf) (accessed May 12, 2010).
    \77\ In fiscal 2009, guarantees on 7(a) and 504 loans accounted for 
55 percent and 26 percent of the SBA's outstanding loan portfolio, 
respectively. See U.S. Small Business Administration, Summary of 
Performance and Financial Information for Fiscal Year 2009, at 18 (Feb. 
22, 2010) (online at www.sba.gov/idc/groups/public/documents/
sba_homepage/serv_aboutsba_perf_summ.pdf) (hereinafter ``SBA 
Performance Summary for 2009'').
    \78\ Historically SBA-guaranteed loans account for only a sliver of 
the aggregate small business lending market. See note 32, supra.
---------------------------------------------------------------------------
            a. Guarantee Programs
            i. 7(a) and 504 Loan Programs
    The SBA's 7(a) and 504 programs guarantee small business 
loans that private lending institutions would otherwise be 
unlikely to extend under reasonable terms. Proceeds on 7(a) 
loans can be used for most general business purposes; 504 loans 
apply primarily to real estate purchases and improvements.\79\ 
SBA does not evaluate borrower applications directly for either 
program, instead relying on participating institutions to make 
lending determinations and underwrite qualifying loans. 
Guarantees, pre-crisis, typically covered 85 percent of the 
value of a 7(a) loan and 40 percent of the financing for 504 
projects on loans up to $1.5 million.\80\ Lenders are required 
to provide monthly reports to SBA on the status of their SBA-
guaranteed portfolio. SBA monitors lender risk--the likelihood 
SBA will need to purchase the guaranteed portion of defaulted 
business loans--through a third-party contractor. To offset 
program costs, SBA charges 7(a) program lenders a single up-
front fee and yearly servicing fees, and it charges 504 
borrowers a one-time guarantee fee and annual program fees.\81\
---------------------------------------------------------------------------
    \79\ Financing for 504 loans is delivered through certified 
development companies (CDCs), nonprofit community development 
corporations. In a typical 504 transaction, a third-party private 
lender provides 50 percent of the project's financing pursuant to a 
first-lien mortgage, a CDC provides up to 40 percent of the financing 
through a debenture that is fully guaranteed by SBA and takes a junior-
lien, and a borrower contributes the remaining 10 percent. U.S. Small 
Business Administration, Office of Financial Assistance, Lender and 
Development Company Loan Programs, SOP 50-10(5), at 238 (Aug. 1, 2008) 
(online at www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_sops_50105.pdf) (hereinafter ``Lender and Development Company Loan 
Programs'').
    \80\ For 7(a) loans, pre-crisis, the SBA guaranteed 75 percent on 
loans in excess of $150,000 and 85 percent on those below. The maximum 
loan approved by the private lender could not exceed $2.0 million. For 
504 loans, CDC participation was capped at $1.5 million for a single 
project, $2.0 million if certain public policy goals are met, and $4.0 
million for manufacturing businesses. U.S. Small Business 
Administration, Quick Reference to SBA Loan Program (Oct. 1, 2008) 
(online at www.sba.gov/idc/groups/public/documents/wv_clarksburg/
wv_sbaquickreferenceguide.pdf).
    \81\ Lender and Development Company Loan Programs, supra note 79, 
at 151, 158, 313-314.
---------------------------------------------------------------------------
            ii. Small Business Investment Company Program
    The small business investment company program allows SBICs, 
which are private SBA-licensed venture capital funds, to raise 
capital by issuing SBA-guaranteed debentures. SBICs leverage 
this capital, combining private funds with those borrowed, to 
make debt and equity investments in qualifying small 
businesses. Borrowing, pre-crisis, was limited to 300 percent 
of an SBIC's private capital base, or $150 million per SBIC and 
$225 million if multiple licenses are under common control. 
Debentures have 10-year terms with semiannual interest payments 
and a balloon principal payment at final maturity.\82\ Pools of 
debentures are securitized and sold to investors through 
periodic public offerings, with market-set interest rates. 
Portfolio management and investment decisions are made by the 
SBICs' fund managers, pursuant to certain portfolio 
restrictions.
---------------------------------------------------------------------------
    \82\ Prepayment is without penalty and must be made in whole on a 
semiannual payment date. U.S. Small Business Administration, The SBIC 
Program: Application Process (online at www.sba.gov/aboutsba/
sbaprograms/inv/forsbicapp/INV_APPLICATION_PROCESS.html) (accessed May 
6, 2010).
---------------------------------------------------------------------------
            b. Direct Lending Programs
            i. Microloan Program
    The SBA's microloan program offers small short-term loans 
to small businesses for any general operating purpose, except 
real estate purchases.\83\ The SBA does not evaluate borrowers 
for creditworthiness. Borrowers submit loan applications 
directly to participating local intermediaries--nonprofit 
organizations with lending experience--that make credit 
decisions at the local level. To minimize risk to the SBA, 
intermediaries are required to contribute 15 percent of any 
loan from internal sources. The SBA distributes funds directly 
to the intermediaries, which, in turn, extend loans to 
borrowers.\84\ Loans are capped at $35,000 and average about 
$13,000 per borrower. Each microloan must be repaid by the 
borrower within six years. The intermediaries are not required 
to make any payments during the first year, although interest 
begins to accrue immediately after the SBA disburses funds to 
the intermediary. The SBA determines an intermediary's 
repayment schedule on a case-by-case basis within a maximum 10-
year period. As security, the SBA takes a first lien position 
in an intermediary's dedicated funds and any microloan payments 
receivable.\85\
---------------------------------------------------------------------------
    \83\ The SBA also distributes grants to the intermediaries to 
assist borrowers with marketing, management, and technical assistance. 
Grants cannot exceed 25 percent of an intermediary's outstanding SBA 
loan balance. The intermediaries must also contribute at least 25 
percent of any grant. U.S. Small Business Administration, Technical 
Assistance Funds (online at www.sba.gov/financialassistance/
prospectivelenders/micro/taf/index.html) (accessed May 6, 2010).
    \84\ An intermediary cannot borrow more than $750,000 from the SBA 
in its first year in the program. In future years, an intermediary's 
obligation cannot exceed an aggregate of $3.5 million, subject to 
statutory limitations on the total amount of funds available per state. 
U.S. Small Business Administration, Terms & Conditions for 
Intermediaries (online at www.sba.gov/financialassistance/
prospectivelenders/micro/terms/index.html) (accessed May 6, 2010).
    \85\ Dedicated funds include: (1) a microloan revolving fund, which 
contains proceeds from SBA loans, contributions from non-federal 
sources, and payments from microloan borrowers; and (2) a loan loss 
reserve fund maintained at a level equal to 15 percent of the 
outstanding balance of the notes receivable owed to an intermediary by 
its microloan borrowers. Id.
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            ii. Disaster Loan Program
    The SBA's disaster loan program offers low-interest, fixed-
rate loans to homeowners, renters, and businesses in declared 
disaster areas. Unlike the underwriting for its other programs, 
the SBA evaluates disaster loan applications and directly makes 
credit determinations.\86\ Disaster loans are available in two 
forms: those for physical property damage, and those for 
economic injury.\87\ Individuals may collect up to $240,000 for 
physical damage to their primary residence and personal 
effects. Businesses may collect up to $2 million for joint 
physical and economic injury assistance. Disaster loans are 
available in advance of anticipated insurance payments. 
Borrowers are then required to use any insurance payments to 
pay down their outstanding SBA obligations. The SBA adjusts 
interest rates on disaster loans periodically and applies 
separate rates depending on whether a borrower has access to 
third-party credit. Interest on economic injury loans is capped 
at four percent. For borrowers with third-party credit access, 
the maximum loan term is 30 years; for those without, the 
maximum is three years.\88\ Repayment schedules are established 
on a case-by-case basis.
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    \86\ Following a disaster, SBA conducts borrower outreach and 
support. After receipt of a loan application, staff in SBA's Loan 
Processing and Disbursement Center review the borrowers' eligibility, 
credit, and repayment ability. Approved applications are assigned to an 
SBA loss verifier, who verifies physical losses and estimates property 
damage. Next, the staff underwrites the application and reviews the 
applicant's credit history, repayment ability, and eligibility in 
greater depth. If approved, SBA issues the first disbursement of the 
unsecured portion of the loan--up to $14,000 for physical disaster 
loans. After SBA verifies lien requirements on the collateral property, 
it may disburse an additional secured portion of the physical disaster 
loan. Because no physical repairs are associated with economic injury 
disaster loans, SBA generally makes full disbursement for these loans 
once collateral and insurance requirements are met. Government 
Accountability Office, Small Business Administration: Additional Steps 
Should Be Taken to Address Reforms to the Disaster Loan Program and 
Improve the Application Process for Future Disasters, at 8 (July 29, 
2009) (GAO-09-755) (online at www.gao.gov/new.items/d09755.pdf).
    \87\ Borrowers requesting economic injury loans from the SBA must 
first seek access to credit through private credit sources; those 
requesting loans for physical property damage only are not bound to 
this initial requirement. See U.S. Small Business Administration, 
Frequently Asked Questions about Physical Disaster Business Loans 
(online at www.sba.gov/services/disasterassistance/basics/FAQs/
index.html) (accessed May 11, 2010).
    \88\ U.S. Small Business Administration, Fact Sheet about U.S. 
Small Business Administration (SBA) Disaster Loans (online at 
www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_da_disastr_loan_factsht.pdf) (accessed May 11, 2010).
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            c. Credit Crunch: Why SBA Programs were Inadequate
    An active secondary market for 7(a) and 504 loans allows 
lending institutions to transfer risk and raise capital by 
selling the guaranteed portion of their loans into securitized 
pools, which are then sold to investors.\89\ In 504 loan 
transactions, the non-SBA-guaranteed first lien mortgages are 
also pooled and securitized. Lenders use capital raised in the 
secondary market to extend additional 7(a) and 504 loans to 
borrowers. In fall 2008, the secondary markets for SBA-
guaranteed 7(a) loans and non-SBA-guaranteed 504 first lien 
mortgages froze, mirroring broader credit market 
conditions.\90\ Monthly volume on 7(a) secondary market 
securities, which had averaged $328 million during fiscal 2008, 
dropped dramatically, averaging $100 million between October 
2008 and January 2009.\91\ The credit contraction filtered into 
the primary market for SBA loans, in part, because of the 
unique manner in which these loans are securitized. A small 
group of specialized broker-dealers buy SBA loans directly from 
the lending institutions that originate them, then hold these 
loans in their securities inventory until they have a 
sufficient number to assemble into securitization pools. This 
process requires broker-dealers to borrow funds to finance 
their inventory of loans pending their pooling and sale to 
investors. When the spread between the prime interest rate and 
LIBOR began to tighten--narrowing already thin investment 
returns on SBA-guaranteed securities--investor demand 
significantly dropped.\92\ This strained the capacity of 
broker-dealers, who experienced both liquidity and credit 
pressures. Broker-dealers were largely unable to raise capital 
by securitizing their current inventories, nor could they sell 
their inventories to pay off existing loans. At the same time, 
because the institutions that traditionally lend to broker-
dealers faced the same uncertain economic climate, and in some 
cases an impaired financial position, as well, they tightened 
broker-dealers' credit access, reducing their lines of credit, 
or withdrawing them altogether.\93\ Lending institutions, which 
now were unable to sell SBA loans to broker-dealers, transfer 
their risk, and raise capital for new loans, significantly 
curtailed their lending to borrowers under the SBA's programs. 
Concurrently, the crisis of confidence spread to the real 
economy, diminishing loan demand.\94\ Combined, these factors 
led to a sizeable fall in 7(a) and 504 loan originations. From 
October 2008 to January 2009, monthly gross approvals for 7(a) 
and 504 loans dropped 45 percent from fiscal 2008 averages, 
from $1.5 billion to $830 million.\95\
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    \89\ In 7(a) transactions, lenders generally retain the 
nonguaranteed portion on their balance sheets. Government 
Accountability Office, Status of the Small Business Administration's 
Implementation of Administrative Provisions in the American Recovery 
and Reinvestment Act of 2009, at 4 (Jan. 19, 2010) (GAO-10-298R) 
(online at www.gao.gov/new.items/d10298r.pdf).
    \90\ The secondary market for the SBA-guaranteed debenture portion 
of 504 loans remains largely intact. See COP May Oversight Report, 
supra note 3, at 52. See U.S. Small Business Administration, Q&A for 
Small Business Owners (online at www.sba.gov/idc/groups/public/
documents/sba_homepage/recovery_act_faqs.pdf) (accessed May 7, 2010) 
(hereinafter ``SBA Recovery Act FAQs'').
    \91\ SBA Performance Summary for 2009, supra note 77, at 19.
    \92\ As a measure of borrowing and lending, Prime/LIBOR tracks the 
rate U.S. banks charge their most creditworthy customers (Prime) 
compared to LIBOR. While the three-month LIBOR rate generally was 300 
basis points below the Prime rate, in October 2008, the spread 
tightened, with LIBOR exceeding the Prime rate for a time. Because SBA 
pools are tied to the Prime rate and most investors use a LIBOR-based 
source of funds, this significantly dampened demand. See Coastal 
Securities, Inc., State of the SBA Market (Dec. 3, 2008) (online at 
www.coastalsecurities.com/
GGL_Market_Info%5CState%20of%20the%20SBA%20Markets_2008_12_03.pdf) 
(``as would be expected, many of these investors [sat] on the sidelines 
waiting for this spread to return to its historical level'').
    \93\ COP May Oversight Report, supra note 3, at 52-53.
    \94\ See Section E for further details. See also SBA Performance 
Summary for 2009, supra note 77, at 20.
    \95\ SBA Performance Summary for 2009, supra note 77, at 19.
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2. Crisis Programs

    Since the onset of the financial crisis, the federal 
government has instituted a series of programs designed to 
support lending and liquidity. These programs generally fall 
into three categories: (1) capital infusions; (2) support for 
secondary markets; and (3) guarantee programs.
            a. Capital Infusions
    Capital infusions are intended to stabilize and shore up 
the balance sheets of financial institutions. A more stable 
balance sheet theoretically allows a bank to use its excess 
capital in ways other than building reserves, including 
lending.
            i. Capital Purchase Program (CPP)
    Treasury's principal TARP program to provide banks with 
capital and stabilize the financial system has been the CPP, 
which based funding upon the size of the participating 
institution.\96\ Treasury hoped that with a strengthened 
capital base, ``financial institutions [would] have an 
increased capacity to lend to U.S. businesses and consumers and 
to support the U.S. economy.'' \97\ CPP funding terminated on 
December 29, 2009. The program provided approximately $205 
billion in capital to 707 financial institutions, including 
over 650 small and medium-sized financial institutions.\98\
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    \96\ As of May 6, 2010, $65.3 billion in CPP funds is still 
outstanding to 637 institutions. See U.S. Department of the Treasury, 
Troubled Asset Relief Program Transactions Report for Period Ending May 
6, 2010 (May 10, 2010) (online at www.financialstability.gov/docs/
transaction-reports/
5_10_10%20Transactions%20Report%20as%20of%205_6_10.pdf).
    \97\ U.S. Department of the Treasury, Capital Purchase Program 
(Nov. 3, 2009) (online at www.financialstability.gov/roadtostability/
capitalpurchaseprogram.html).
    \98\ House Committee on Financial Services and House Committee on 
Small Business, Written Testimony of Herbert M. Allison, Jr., assistant 
secretary for financial stability, U.S. Department of the Treasury, 
Condition of Small Business and Commercial Real Estate Lending in Local 
Markets, at 2 (Feb. 26, 2010) (online at www.house.gov/apps/list/
hearing/financialsvcs_dem/allison.pdf) (hereinafter ``Herb Allison 
Testimony before House Financial Services and House Small Business 
Committees''). See also Section C.4, infra.
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            ii. Term Auction Facility (TAF)
    The Federal Reserve's Term Auction Facility (TAF) is a loan 
program created in December 2007 as a response to the then-
frozen interbank lending market. Under the TAF, the Federal 
Reserve auctions 28-day or 84-day loans to banks. Depository 
institutions eligible to access the Federal Reserve's discount 
window can submit bids.\99\ The Federal Reserve then ranks the 
bids from the highest to the lowest and awards loans, starting 
with the highest rate bid, until the auctioned funds are 
exhausted. The banks secure the TAF loans with collateral that 
would be eligible for discount-window loans.
---------------------------------------------------------------------------
    \99\ Bids are between $5 million and 10 percent of the auctioned 
funds at an interest rate within Federal Reserve guidelines.
---------------------------------------------------------------------------
    The amount of funds lent to banks through the TAF each 
month varies greatly. In the initial months of the program, the 
Federal Reserve offered $20 billion for auction each 
month,\100\ although this amount increased to $150 billion as 
the credit crunch worsened.\101\ No termination date for TAF 
has been announced, but the Federal Reserve has been steadily 
reducing the amount of funds offered.\102\
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    \100\ Board of Governors of the Federal Reserve System, Federal 
Reserve and Other Central Banks Announce Measures Designed to Address 
Elevated Pressures in Short-Term Funding Markets (Dec. 12, 2007) 
(online at www.federalreserve.gov/monetarypolicy/20071212a.htm).
    \101\ Board of Governors of the Federal Reserve System, Federal 
Reserve and Other Central Banks Announce Further Coordinated Actions to 
Expand Significantly the Capacity to Provide U.S. Dollar Liquidity 
(Sept. 29, 2008) (online at www.federalreserve.gov/monetarypolicy/
20080929a.htm).
    \102\ In the most recent auction in March 2010, the Federal Reserve 
auctioned $25 billion, of which only $3.4 billion was actually loaned 
out. Board of Governors of the Federal Reserve System, Press Release 
(Mar. 9, 2010) (online at www.federalreserve.gov/monetarypolicy/
20100309a.htm) (announcing the results of the March 8, 2010 TAF 
Auction).
---------------------------------------------------------------------------
            iii. Community Development Capital Initiative (CDCI)
    On October 21, 2009, the White House announced a small 
business lending initiative under the TARP to invest lower cost 
capital in Community Development Financial Institutions 
(CDFIs).\103\ According to Treasury, the financial crisis 
strained the resources of many CDFIs, many of which saw 
decreased lending demand and decreased funding.\104\
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    \103\ The primary mission of CDFIs is to promote economic 
development in struggling areas, both urban and rural, that are 
underserved by traditional financial institutions. CDFIs are certified 
by Treasury's CDFI Fund, which was created in order to promote economic 
revitalization and community development in low-income communities. In 
order to maintain CDFI certification (and, therefore, to be eligible 
for CDCI assistance), financial institutions must document that over 60 
percent of their small business lending and other economic development 
activities target low-income communities or underserved populations. 
U.S. Department of the Treasury, Community Development Capital 
Initiative (online at www.financialstability.gov/roadtostability/
comdev.html) (hereinafter ``Community Development Capital Initiative'') 
(updated Mar. 26, 2010).
    \104\ House Committee on Financial Services, Written Testimony of 
Michael S. Barr, assistant secretary for financial institutions, U.S. 
Department of the Treasury, Community Development Financial 
Institutions (CDFIs): Their Unique Role and Challenges Serving Lower-
Income, Underserved, and Minority Communities, at 2 (Mar. 9, 2010) 
(online at www.house.gov/apps/list/hearing/financialsvcs_dem/barr.pdf). 
As Assistant Secretary Barr notes, the American Recovery and 
Reinvestment Act (ARRA) also provided increased support to CDFIs, 
allowing the CDFI Fund to award $98 million in assistance to 69 CDFIs 
as well as an additional $1.5 billion in New Markets Tax Credit (NMTC) 
authority for the 2008 and 2009 fiscal years.
---------------------------------------------------------------------------
    On February 3, 2010, Treasury announced final terms for the 
CDCI.\105\ Under the initiative, a CDFI may receive a capital 
infusion if its regulators determine that it is eligible for 
the program.\106\ CDFI banks, thrifts, and credit unions will 
be able to receive capital at a dividend rate of two percent 
(compared to the five percent rate under the CPP). Given that 
the Administration anticipates capital investments to CDFIs to 
be below $100 million, Treasury expects that the participating 
CDFIs will likely be within EESA's de minimis exception \107\ 
and will not have to issue warrants. Participants will, 
however, be subject to the executive compensation requirements 
that apply to other TARP recipients. In the program's final 
form, Treasury included an increase in the amount of capital 
available to CDFIs, equal to up to five percent of a CDFI's 
risk-weighted assets,\108\ and an allowance for CDFIs that have 
already received CPP funding to convert their existing 
investments, so long as they do not participate in both TARP 
programs simultaneously. CDFI credit unions--which were not 
eligible to participate in the CPP--will be allowed to apply 
for subordinated debt for up to 3.5 percent of total assets 
(which is roughly equivalent to the rates offered to CDFI banks 
and thrifts).
---------------------------------------------------------------------------
    \105\ See U.S. Department of the Treasury, Obama Administration 
Announces Enhancements for TARP Initiative for Community Development 
Financial Institutions (Feb. 3, 2010) (online at 
www.financialstability.gov/latest/pr_02032010.html); U.S. Department of 
the Treasury, CDCI Program FAQs (online at www.financialstability.gov/
docs/CDCI/CDCI%20FAQs.pdf) (accessed May 11, 2010).
    \106\ Institutions that would not otherwise be recommended for 
participation by their regulator can also participate under certain 
circumstances. In such cases, Treasury will provide dollar-for-dollar 
matching capital investments, for up to five percent of a CDFI's risk-
weighted assets, against private capital investments. Treasury will 
provide matching capital investments so long as the CDFI is in a viable 
position after the receipt of the new private and Treasury capital. 
Treasury will not provide capital to a CDFI until the institution has 
in fact raised the private capital, and its investment will also be 
senior to the matching investment. Community Development Capital 
Initiative, supra note 103 (updated Mar. 26, 2010).
    \107\ EESA Sec. 113(d)(3)(A). EESA requires that the government 
receive warrants in exchange for all TARP investments. 12 
U.S.C.Sec. 5223(d). However, a ``de minimis'' provision allows Treasury 
to create exemptions from this requirement for small institutions. See 
12 U.S.C. Sec. 5223(d)(3)(A) (``The Secretary shall establish de 
minimis exceptions to the requirements of this subsection, based on the 
size of the cumulative transactions of troubled assets purchased from 
any one financial institution for the duration of the program, at not 
more than $100,000,000''). Treasury has not yet published any 
regulation establishing a formal de minimis exception. To date, 
exceptions have been considered only for CDFIs receiving less than $50 
million.
    \108\ The amount of capital available under the CDCI as a 
percentage of risk-weighted assets is greater than under the CPP. Under 
the CPP term sheet, ``[e]ach [qualifying financial institution] may 
issue an amount of Senior Preferred equal to not less than 1 percent of 
its risk-weighted assets and not more than the lesser of (i) $25 
billion and (ii) 3% of its risk weighted assets.'' U.S. Department of 
the Treasury, Term Sheet for CPP Preferred, at 1 (online at 
www.financialstability.gov/docs/CPP/termsheet.pdf). Treasury 
anticipates that the increased risk-weighted assets percentage under 
the CDCI (up to five percent) will allow CDFIs to leverage their 
capital, multiplying the amount of lending in low-income communities.
---------------------------------------------------------------------------
    According to Treasury, about 210 institutions will be 
eligible for capital assistance under this initiative, 
including 60 banks and thrifts (with a total of $21 billion in 
assets) and 150 credit unions (with a total of $5 billion in 
assets). The application to participate in the CDCI must have 
been received by April 30, 2010.\109\ Treasury has projected 
that the CDCI will use $780.2 million of TARP funds. Treasury 
has noted that CDFIs are already meeting the Administration's 
lending objectives because they must conduct between 60 and 80 
percent of their lending in low- and moderate-income 
communities in order to be certified as CDFIs.\110\
---------------------------------------------------------------------------
    \109\ U.S. Department of the Treasury, CDCI FAQ Regarding 
Application Deadline (online at www.financialstability.gov/docs/CDCI/
CDCI%20FAQ%20Regarding%20Application%20Deadline.pdf) (accessed May 11, 
2010).
    In conversations with Panel staff, the American Bankers Association 
indicated that it has been in touch with some banks seeking to convert 
to CDFIs in order to take advantage of this program, and that the CDFIs 
are generally pleased with the terms of the new program, especially 
because they feel they were left out of the previous TARP capital 
infusion initiatives. ABA conversations with Panel staff (Mar. 22, 
2010).
    \110\ Treasury conversations with Panel staff (Feb. 2, 2010).
---------------------------------------------------------------------------
            b. Supporting Secondary Markets
    The government has developed numerous initiatives for 
supporting secondary lending markets. Secondary markets allow 
depository institutions either to sell or securitize loans, 
converting potentially illiquid assets into cash and shifting 
assets off their balance sheets.
            i. Term Asset-Backed Securities Loan Facility (TALF)
    Driven by the asset-backed securities (ABS) market freeze 
in the fall of 2008, the Federal Reserve and Treasury announced 
the creation of the Term Asset-Backed Securities Loan Facility 
(TALF) in late November 2008. The TALF was designed to promote 
renewed issuance of consumer and business asset-backed 
securities (ABS) at more normal interest rate spreads.\111\ 
Every month, the FRBNY made loans to investors to purchase 
securities backed by certain classes of securities.\112\ These 
securities were then pledged to the FRBNY as collateral.\113\
---------------------------------------------------------------------------
    \111\ Board of Governors of the Federal Reserve System, Press 
Release (Nov. 25, 2008) (online at www.federalreserve.gov/newsevents/
press/monetary/20081125a.htm); Federal Reserve Bank of New York, Term 
Asset-Backed Securities Loan Facility: Frequently Asked Questions (Apr. 
1, 2010) (online at www.newyorkfed.org/markets/talf_faq.html) 
(hereinafter ``TALF: Frequently Asked Questions'').
    \112\ Eligible classes of ABS include auto loans, student loans, 
credit card loans, equipment loans, floorplan loans, insurance premium 
finance loans, small business loans fully guaranteed as to principal 
and interest by the SBA, receivables related to residential mortgage 
servicing advances (servicing advance receivables) or commercial 
mortgage loans. During 2009, the program was expanded to allow 
investors to finance both existing and newly issued commercial 
mortgage-backed securities (CMBS).
    \113\ TALF: Frequently Asked Questions, supra note 111. The FRBNY 
is authorized to lend up to $200 billion in 3- or 5-year nonrecourse 
loans under this program, while Treasury agreed to commit as much as 
$20 billion of TARP funds as a backstop to defray the losses realized 
by the FRBNY if loan defaults occur. U.S. Department of the Treasury, 
Consumer & Business Lending Initiative (July 17, 2009) (online at 
www.financialstability.gov/roadtostability/lendinginitiative.html). As 
of May 5, 2010, Treasury had loaned $104 million to TALF. See Federal 
Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) 
(May 6, 2010) (online at www.federalreserve.gov/releases/h41/Current/). 
For Treasury's backstop to be fully depleted and for FRBNY to incur any 
loan losses subsequently, however, posted collateral would need to 
decline in value by over one-third. See COP December Oversight Report, 
supra note 37, at 50.
---------------------------------------------------------------------------
    As of February 26, 2010, the TALF has supported the 
secondary market for 480,000 SBA-guaranteed loans to small 
businesses, 2.6 million auto loans, 876,000 student loans, over 
100 million corporate and consumer credit card accounts, and 
100,000 loans to larger businesses.\114\ Since the TALF's 
inception, rate spreads for ABS have declined significantly (by 
as much as 75 percent on average), and some argue that the TALF 
has revitalized the securitization markets overall.\115\ In a 
recent report, however, GAO noted that while market conditions 
for some TALF-eligible asset classes have seen some 
improvements, other asset classes, such as commercial mortgage-
backed securities (CMBS),\116\ remain weak, and their 
securitization markets are still fragile.\117\ The TALF ceased 
making loans collateralized by newly issued and legacy ABS on 
March 31, 2010; loans collateralized by newly issued CMBS will 
end on June 30, 2010, unless the Federal Reserve Board extends 
the facility.\118\
---------------------------------------------------------------------------
    \114\ House Committee on Financial Services and House Committee on 
Small Business, Written Testimony of Elizabeth A. Duke, governor, Board 
of Governors of the Federal Reserve System, Condition of Small Business 
and Commercial Real Estate Lending in Local Markets, at 7 (Feb. 26, 
2010) (online at www.house.gov/apps/list/hearing/financialsvcs_dem/
duke.pdf) (hereinafter ``Elizabeth Duke Testimony before House 
Financial Services and House Small Business Committees''). See also 
TALF: Frequently Asked Questions, supra note 111.
    \115\ See, e.g., Herb Allison Testimony before House Financial 
Services and House Small Business Committees, supra note 98, at 2; 
Elizabeth Duke Testimony before House Financial Services and House 
Small Business Committees, supra note 114, at 8.
    \116\ CMBSs are asset-backed bonds based on a group, or pool, of 
commercial real-estate permanent mortgages.
    \117\ Government Accountability Office, Troubled Asset Relief 
Program: Treasury Needs to Strengthen its Decision-Making Process on 
the Term Asset-Backed Securities Loan Facility, at 36-37 (Feb. 2010) 
(GAO-10-25) (online at www.gao.gov/new.items/d1025.pdf).
    \118\ Federal Reserve Bank of New York, Term Asset-Backed 
Securities Loan Facility: Frequently Asked Questions--Changes from 
February 17 FAQs (Apr. 1, 2010) (online at www.ny.frb.org/markets/talf/
faq_100401_blackline.pdf).
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            ii. Public-Private Investment Program (PPIP)
    Treasury announced the Public-Private Investment Program 
(PPIP) on March 23, 2009. PPIP is designed to allow banks and 
other financial institutions to shore up their capital by 
removing troubled assets from their balance sheets.\119\ The 
PPIP creates public-private investment funds (PPIFs) financed 
by private investors, whose capital contributions are matched 
dollar-for-dollar by Treasury using TARP funds. The investment 
funds may also obtain debt financing from Treasury equal to the 
full value of the fund's capital investments. As of March 31, 
2010, Treasury has committed approximately $30 billion to eight 
funds; approximately 88 percent of the PPIP portfolio holdings 
are non-agency residential mortgage-backed securities 
(RMBS),\120\ and 12 percent are CMBS.\121\
---------------------------------------------------------------------------
    \119\ U.S. Department of the Treasury, Legacy Securities Public-
Private Investment Program, Program Update--Quarter Ended December 31, 
2009 (Jan. 29, 2010) (online at www.financialstability.gov/docs/
External%20Report%20_%2012_09%20FINAL.pdf). Although the PPIP, when 
announced, included both a legacy loans program and a legacy securities 
program, the legacy loan program has been postponed. U.S. Department of 
the Treasury, Press Release (Jul. 8, 2009) (online at 
www.financialstability.gov/latest/tg_07082009.html); Federal Deposit 
Insurance Corporation, Press Release (Jun. 3, 2009) (online at 
www.fdic.gov/news/news/press/2009/pr09084.html).
    \120\ RMBSs are asset-backed bonds based on a group, or pool, of 
residential real estate permanent mortgages.
    \121\ U.S. Department of the Treasury, Legacy Securities Public-
Private Investment Program, Program Update--Quarter Ended March 31, 
2010 (Apr. 20, 2010) (online at www.financialstability.gov/docs/
External%20Report%20_%2003_10%20Final.pdf) (hereinafter ``PPIP Program 
Update--Quarter Ended March 31, 2010'').
---------------------------------------------------------------------------
    Treasury has made very little information available about 
the PPIP. It is difficult to determine whether small and 
medium-sized banks have participated in this program by selling 
assets to the PPIFs, but it is likely that they have not.\122\
---------------------------------------------------------------------------
    \122\ Treasury does not track PPIP purchases by institution size. 
However, some answers can be surmised. Larger banks are significantly 
more likely than small and medium-sized banks to hold secondary market 
securities on their balance sheets, limiting the exposure of smaller 
banks, in general, to these legacy assets. To date, as PPIP purchases 
have been only RMBS and CMBS, it is unlikely that smaller banks have 
participated in the program. See Independent Community Bankers of 
America (ICBA) conversations with Panel staff (Mar. 25, 2010); Rajeev 
Bhaskar, Yadav Gopalan, and Kevin L. Kliesen, Commercial Real Estate: A 
Drag for Some Banks but Maybe Not for U.S. Economy, The Regional 
Economist (Jan. 2010) (online at research.stlouisfed.org/publications/
regional/10/01/commercial-real-estate.pdf). See also COP February 
Oversight Report, supra note 2, at 130.
---------------------------------------------------------------------------
            iii. SBA 7(a) and 504 Securities Purchase Programs
    In addition to the TALF, Treasury has allocated $15 billion 
of EESA funds for a program to make direct purchases of 
securities backed by the government-guaranteed portion of SBA 
7(a) loans and the non-government-guaranteed first lien 
mortgage loans affiliated with the SBA's 504 loan program. As 
discussed above, prior to the fall of 2008, there was a healthy 
secondary market for the government-guaranteed portion of SBA 
7(a) loans. In the fall of 2008, however, the secondary market 
for SBA 7(a) loans froze altogether.\123\ Unable to shed the 
associated risk from their books, and free up capital to make 
new loans, commercial lenders significantly curtailed their SBA 
lending and other lending activities.\124\ Treasury announced 
its SBA 7(a) initiative in March 2009 to help restart small 
business credit markets and provide an additional source of 
liquidity designed to foster new lending.\125\
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    \123\ See Section C.1, supra, for further discussion of the 
freezing of the credit markets in the fall of 2008.
    \124\ U.S. Department of the Treasury, Fact Sheet: Unlocking Credit 
for Small Businesses (Oct. 19, 2009) (online at 
www.financialstability.gov/roadtostability/unlocking Credit for 
SmallBusinesses.html) (hereinafter ``Fact Sheet: Unlocking Credit for 
Small Businesses''). Lenders sell their SBA loans into the secondary 
loan markets to provide an alternative funding source in addition to 
deposits and other funding sources, such as lines of credit and debt 
issuance proceeds. Lenders can thereby raise funds for additional 
lending, manage their liquidity needs, earn fees by servicing the sold 
loans, and avoid tying up capital. Although lenders' exposure to SBA-
guaranteed loans is substantially reduced by participation in the SBA 
program, an inability to sell SBA loans to broker-dealers prevents the 
redeployment of generated capital to extend additional loans. 
Government Accountability Office, Size of the SBA 7(a) Secondary 
Markets is Driven by Benefits Provided, at 8 (May 1999) (GAO-99-64) 
(online at www.gao.gov/archive/1999/gg99064.pdf).
    \125\ As originally described, Treasury's 7(a) securities purchases 
will be guided by its financial agent, EARNEST Partners, an investment 
manager with SBA-guaranteed loan experience. U.S. Department of the 
Treasury, Financial Agency Agreement for Asset Management Services for 
SBA Related Loans and Securities (Mar. 16, 2009) (online at 
www.financialstability.gov/docs/ContractsAgreements/
TARP%20FAA%20SBA%20Asset%20Manager%20_%20Final%20to%20be%20posted.pdf). 
While Treasury may purchase securities directly from ``pool 
assemblers'' and banks, it can accept or reject offers, depending on 
its evaluation (as assisted by the work of its investment manager) of 
the bids in the context of the current and historical market rates for 
SBA and other securities. Treasury has stated that it will purchase the 
securities at prices that will provide banks with liquidity for small 
business loans and protect the taxpayers' interest. Treasury 
conversations with Panel staff (Mar. 2, 2010); U.S. Department of the 
Treasury, Unlocking Credit for Small Businesses: FAQ on Implementation 
(Mar. 17, 2009) (online at www.financialstability.gov/docs/FAQ-Small-
Business.pdf) (hereinafter ``Unlocking Credit for Small Businesses: FAQ 
on Implementation'').
---------------------------------------------------------------------------
    Treasury has made $5.3 billion available for this direct 
purchase program. Despite stating that 7(a) and 504 purchases 
would begin by May 2009,\126\ Treasury did not implement the 
program until March 19, 2010 (with purchases totaling $57.9 
million of SBA 7(a) securities in trades that settled or are 
scheduled to settle on March 24 and May 28, respectively).\127\ 
Treasury indicated that it started to make purchases recently 
in light of the conclusion of the TALF and the uncertainty 
surrounding the extension of certain American Recovery and 
Reinvestment Act (ARRA) provisions related to small businesses 
(and in particular, the government's 90 percent guarantee of 
SBA-backed loans).\128\ Treasury believes that the direct 
purchase program will allow it to have a program ready if the 
small business lending market dips because of the TALF's 
conclusion. As this program is still in its early stages, its 
eventual size remains unclear, but Treasury notes that it is 
launching this program with a ``buy-and-hold'' strategy and 
with the intent to provide liquidity in, but not dominate, the 
market. At present, Treasury states that it does not intend to 
target a certain number of trades, but will continue to make 
purchases going forward and intends to purchase different types 
of securities. Treasury is still in the process of formulating 
specific metrics to evaluate its effectiveness, but notes that 
it continues to monitor closely the health of the secondary 
market and has regular conversations with its financial agent 
regarding current market conditions.\129\ Treasury has to date 
not made any purchases of 504 first-lien mortgage securities 
under this program and has no present plans to make such 
purchases.\130\
---------------------------------------------------------------------------
    \126\ Government Accountability Office, Troubled Asset Relief 
Program: One Year Later, Actions are Needed to Address Remaining 
Transparency, and Accountability Challenges, at 79-80 (Oct. 8, 2009) 
(GAO-10-16) (online at www.gao.gov/new.items/d1016.pdf); Unlocking 
Credit for Small Businesses: FAQ on Implementation, supra note 125. 
Treasury had previously indicated that it would stand ready to purchase 
new securities backed by the guaranteed portions of 7(a) loans packaged 
between March and December 2009, providing ``assurances to community 
banks and other lenders that they can sell the new 7(a) loans they 
make, providing them with cash they can use to extend even more 
credit.'' Fact Sheet: Unlocking Credit for Small Businesses, supra note 
124. Treasury did not take these actions, however, due to the delay in 
commencing this program.
    \127\ U.S. Department of the Treasury, Troubled Asset Relief 
Program: Transactions Report for Period Ended April 16, 2010, at 29 
(online at www.financialstability.gov/docs/transaction-reports/4-20-
10%20Transactions%20Report%20as%20of%204-16-10.pdf). These transactions 
are backed by 90 small business loans across 30 states. Treasury 
conversations with Panel staff (Mar. 31, 2010).
    \128\ Treasury conversations with Panel staff (Mar. 31, 2010). See 
Section D.2(c)(ii), supra (discussing the 90 percent guarantee).
    \129\ Treasury conversations with Panel staff (Mar. 2, 2010).
    \130\ Treasury conversations with Panel staff (Apr. 29, 2010).
---------------------------------------------------------------------------
    This program raises a variety of issues, including whether 
there is a need to purchase these securities (the market may be 
restarting on its own) \131\ and whether the program will 
affect access to credit for small businesses in a meaningful 
manner, because only a small fraction of small business loans--
approximately three to four percent--are guaranteed through the 
SBA's 7(a) program.\132\ In addition, while 40-45 percent of 
7(a) loans have been securitized historically, very few non-SBA 
small business loans are securitized (due to a lack of 
documentation and data on their performance),\133\ limiting the 
effectiveness of a secondary-market-driven program. 
Accordingly, the Panel concluded in its May 2009 oversight 
report that any program targeted at restarting the secondary 
market for securities backed by SBA loans, no matter how well 
designed or successful, could only have a limited impact in 
addressing the overall credit concerns of America's small 
businesses.\134\ Treasury acknowledges that SBA loans are a 
comparatively small piece of small business financing and that 
its SBA purchase program is not the most important component of 
the government's package of assistance to small businesses. 
Treasury believes it is nonetheless useful to provide a 
flexible backstop for the secondary market for SBA loans.\135\
---------------------------------------------------------------------------
    \131\ See, e.g., Herb Allison Testimony before House Financial 
Services and House Small Business Committees, supra note 98.
    \132\ See Section B.2, infra.
    \133\ See Congressional Oversight Panel, May Oversight Report: 
Reviving Lending to Small Businesses and Families and the Impact of the 
TALF, at 50-58 (May 7, 2009) (online at cop.senate.gov/reports/library/
report-050709-cop.cfm) (hereinafter ``COP May Oversight Report'') 
(citing Devon Pohlman, Federal Reserve Bank of Minneapolis, With 
Support, Securitization Could Boost Community Development Industry 
(Nov. 2004) (online at www.minneapolisfed.org/publications_papers/
pub_display.cfm?id=2416)). See also Ron J. Feldman, Federal Reserve 
Bank of Minneapolis, An Update on the Securitization of Small Business 
Loans (Sept. 1997) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=3632) (stating that ``the 
heterogeneity of small business loans has made it difficult for a firm 
to act as a conduit to the securitization market for small business 
lenders''); Kenneth Temkin and Roger C. Kormendi, U.S. Small Business 
Administration, An Exploration of a Secondary Market for Small Business 
Loans, at 6 (Apr. 2003) (online at www.sba.gov/advo/research/
rs227_tot.pdf).
    \134\ COP May Oversight Report, supra note 133, at 19, 57-58.
    \135\ Treasury conversations with Panel staff (Mar. 31, 2010).
---------------------------------------------------------------------------
            iv. Fannie Mae and Freddie Mac
    Fannie Mae (Fannie) and Freddie Mac (Freddie) are 
government-sponsored enterprises (GSEs) that were chartered by 
Congress with a mission to provide liquidity, stability, and, 
affordability to the U.S. housing and mortgage markets. Fannie 
and Freddie operate in the U.S. secondary mortgage market by 
purchasing and securitizing mortgages, rather than making 
direct mortgage loans.\136\
---------------------------------------------------------------------------
    \136\ Congress established Fannie in 1938 to create a secondary 
market for FHA-insured loans, but its charter was amended in 1954 so 
that it could focus on the secondary market more generally. In 1970, 
Congress established Freddie as a new government-chartered entity to 
provide an additional source of liquidity for mortgage loans. See 
Analytical Perspectives: 2011 Budget, supra note 75, at 349.
---------------------------------------------------------------------------
    The features of the GSEs' government charters (e.g., a line 
of credit with Treasury, public mission requirements, limited 
competition, lower capital requirements) created a perception 
of a government guarantee, and resulted in Fannie and Freddie 
becoming significantly overleveraged and undercapitalized. In 
2008, Fannie and Freddie reported combined losses in excess of 
$108 billion.\137\ The Federal Housing Finance Agency (FHFA) 
placed Fannie and Freddie into conservatorship on September 6, 
2008, and they continue to function as government-backed 
enterprises.\138\
---------------------------------------------------------------------------
    \137\ Federally regulated banks must hold four percent capital 
against their mortgages, but Fannie and Freddie were required to hold 
only 2.5 percent capital against their on-balance sheet mortgage 
portfolio, and only 0.45 percent against mortgages they guaranteed. See 
House Committee on Financial Services, Written Testimony of Timothy F. 
Geithner, secretary, U.S. Department of the Treasury, Housing Finance-
What Should the New System Be Able to Do?: Part I-Government and 
Stakeholder Perspectives, at 8-11 (Mar. 23, 2010) (online at 
www.house.gov/apps/list/hearing/financialsvcs_dem/testimony_-
_geithner.pdf) (hereinafter ``House Financial Services Testimony of 
Timothy Geithner'') (discussing the role of the GSEs, their collapse, 
and placement into conservatorship).
    \138\ In connection with the GSEs being placed into 
conservatorship, Treasury agreed to provide financial support to the 
GSEs through the establishment of Preferred Stock Purchase Agreements. 
In December 2009, Treasury decided to replace the $200 billion cap on 
Treasury's funding commitment to each GSE with a formulaic cap that 
increases above $200 billion by the amount of any losses and decreases 
by any gains (but not below $200 billion), which will become permanent 
at the end of three years. See Analytical Perspectives: 2011 Budget, 
supra note 75, at 350.
---------------------------------------------------------------------------
    Fannie's and Freddie's securitization and guarantee 
functions have long played a dominant role in housing finance, 
but this role has increased as a result of the recent lack of 
private capital in the mortgage origination market.\139\ In 
early February 2010, Fannie announced plans to increase 
substantially its ``purchases of delinquent loans from single-
family [mortgage-backed securities] trusts,'' while Freddie 
announced plans to purchase ``substantially all'' loans that 
are 120 or more days delinquent.\140\ By purchasing and 
securitizing mortgage loans, Fannie and Freddie shore up the 
balance sheets of financial institutions, theoretically helping 
banks re-deploy capital and extend new credit to households and 
businesses.
---------------------------------------------------------------------------
    \139\ In 2009, Fannie and Freddie ``provided approximately 72 
percent of all the liquidity to the single-family mortgage market and 
approximately 80 percent of the liquidity to the multifamily market,'' 
purchasing or guaranteeing $823.6 billion and $548 billion, 
respectively, in mortgage loans and mortgage-related securities. 
Freddie Mac, Supporting the Nation's Housing Recovery (online at 
www.freddiemac.com/corporate/company_profile/FM_housing_crisis.html) 
(accessed May 7, 2010); Fannie Mae, Mission Performance Report, at 3 
(Mar. 2010) (online at www.fanniemae.com/media/pdf/2010/mission-
performance-report.pdf); House Financial Services Testimony of Timothy 
Geithner, supra note 137, at 11 (noting that the GSEs financed or 
guaranteed ``just under 40 percent'' of new single-family mortgage 
originations in 2006; the increased role in 2009 is a result of the 
``near complete absence of private capital in the mortgage origination 
market'').
    \140\ Fannie Mae, Fannie Mae to Purchase Delinquent Loans from 
Single-Family MBS Trusts (Feb. 10, 2010) (online at www.fanniemae.com/
newsreleases/2010/4938.jhtml?p=Media&s=News+Releases); Freddie Mac, 
Freddie Mac to Purchase Substantial Number of Seriously Delinquent 
Loans From PC Securities (Feb. 10, 2010) (online at www.freddiemac.com/
news/archives/mbs/2010/20100210_pc_securities.html). As discussed 
above, mortgage-backed securities are asset-backed bonds based on a 
group, or pool, of residential or commercial permanent mortgages.
---------------------------------------------------------------------------
            c. Guarantee Programs \141\
---------------------------------------------------------------------------
    \141\ The guarantee programs discussed in this section are not TARP 
initiatives, but rather come from a variety of non-Treasury government 
actors. See, e.g., Federal Deposit Insurance Corporation, Temporary 
Liquidity Guarantee Program (online at www.fdic.gov/regulations/
resources/tlgp/index.html) (accessed May 7, 2010); The White House, 
FAQs for Citizens (online at www.recovery.gov/FAQ/Pages/
ForCitizens.aspx) (accessed May 7, 2010).
---------------------------------------------------------------------------
    The third category of government crisis programs involves 
guarantees.\142\ Unlike direct capital infusions, guarantees do 
not require the immediate outlay of cash (and if the guarantees 
expire without having been triggered, cash may never be 
needed). Their main purposes are to reduce the risk associated 
with potential payment defaults and to encourage lenders and 
investors to risk their money in distressed and uncertain 
markets. By ensuring that the government will at least 
partially absorb losses, guaranteeing liabilities or 
backstopping losses on assets can help establish financial 
stability and calm the financial markets. During the financial 
crisis, the federal government dramatically expanded its role 
as a guarantor.
---------------------------------------------------------------------------
    \142\ While the Panel's discussion of guarantees focuses on several 
guarantee programs, the Panel notes that various forms of guarantee 
programs were used by the federal government during the financial 
crisis. For example, under the Asset Guarantee Program (AGP), Treasury, 
the FDIC, and the Federal Reserve guaranteed, until the program was 
ended in December 2009, approximately $250.4 billion of Citigroup's 
assets. The guarantee, originally for $301 billion, followed a 
continued deterioration of Citigroup's financial status after it 
received CPP funds. In addition, through the Temporary Guarantee 
Program for Money Market Funds (TGPMMF), Treasury reassured anxious 
investors by guaranteeing that money market funds would not fall below 
$1.00 per share. See COP January Oversight Report, supra note 65, at 
49.
---------------------------------------------------------------------------
            i. Temporary Liquidity Guarantee Program (TLGP)
    The FDIC created the Temporary Liquidity Guarantee Program 
(TLGP) in October 2008 in order to provide liquidity in the 
interbank lending market and restore confidence in banks and 
other financial institutions. The program has two aspects: (1) 
the Debt Guarantee Program (DGP), which guarantees newly issued 
senior unsecured debt of insured depository institutions and 
most U.S. bank holding companies; and (2) the Transaction 
Account Guarantee Program (TAG), which guarantees certain 
noninterest-bearing transaction accounts at insured depository 
institutions.\143\ Under the DGP, upon the uncured failure of a 
participating institution to make a scheduled payment of 
principal or interest, the FDIC pays the unpaid amount and then 
makes the scheduled payments of principal and interest through 
maturity.\144\
---------------------------------------------------------------------------
    \143\ Final Rule: Temporary Liquidity Guarantee Program, 12 CFR 
370, 73 Fed. Reg. 72244 (Nov. 26, 2008) (online at www.fdic.gov/news/
board/08BODtlgp.pdf). In the fall of 2008, the FDIC issued a six-month 
extension of the TAG until June 30, 2010. Insured depository 
institutions participating in the extended TAG are subject to higher 
fees. All insured depository institutions participating were able to 
opt out of the extension. All eligible institutions were automatically 
enrolled in the DGP, but had until December 5, 2008 to opt out if they 
did not want to participate. ``Eligible institutions'' are FDIC-insured 
depository institutions, U.S. bank holding companies, U.S. financial 
holding companies, U.S. savings and loan holding companies, and 
affiliates of insured depository institutions. The FDIC-insured 
branches of foreign banks were not included. 12 CFR Sec. 370.2(a)(1).
    \144\ 12 CFR Sec. 370.3(a). The program did not guarantee debt of 
less than 30 days' maturity or debt maturing after June 30, 2012 (as 
debt maturing after June 30, 2012 was considered long-term non-
guaranteed debt). While the DGP closed to new debt issuances on October 
31, 2009, the FDIC will continue to guarantee debt issued prior to that 
date until the earlier of its maturity or June 30, 2012. The DGP was 
originally set to expire on June 30, 2009, but the FDIC extended it to 
October 31, 2009. The FDIC also established a six-month emergency 
guarantee facility to be made available to insured institutions and 
other participants in the DGP, but it is only available to institutions 
that cannot issue debt without the guarantee, and carries significantly 
higher fees. See Federal Deposit Insurance Corporation, Extension of 
Temporary Liquidity Guarantee Program (Mar. 18, 2009) (online at 
www.fdic.gov/news/news/financial/2009/fil09014.html); Federal Deposit 
Insurance Corporation, Expiration of the Issuance Period for the Debt 
Guarantee Program, Establishment of Emergency Guarantee Facility 
(online at www.fdic.gov/news/board/NoticeSept9no6.pdf) (accessed May 7, 
2010).
---------------------------------------------------------------------------
    Approximately 6,500 financial institutions, mostly smaller 
institutions, chose to opt out of the DGP, largely because 
smaller banks do not typically issue debt, so the program was 
functionally irrelevant to them.\145\ As March 31, 2010, 32 
insured depository institutions with $10 billion or less in 
assets had a total of $1.6 billion in debt outstanding under 
the DGP, as compared to $305.4 billion in total outstanding 
debt for all issuers.\146\ The DGP therefore appears to have 
had little impact on smaller banks. While the TAG applied to 
all depository institutions and likely encouraged some 
depositors to keep their noninterest-bearing transaction 
accounts in banks, its particular impact on smaller banks is 
difficult to determine.
---------------------------------------------------------------------------
    \145\ See, e.g., Federal Deposit Insurance Corporation, List of 
Entities Opting Out of the Debt Guarantee Program (Dec. 8, 2009) 
(online at www.fdic.gov/regulations/resources/TLGP/optout.html).
    \146\ Federal Deposit Insurance Corporation, Monthly Reports on 
Debt Issuance Under the Temporary Liquidity Guarantee Program (Apr. 16, 
2010) (online at www.fdic.gov/regulations/resources/tlgp/
total_issuance03-10.html).
---------------------------------------------------------------------------
            ii. Increased Government Guarantee on SBA 7(a) Loans
    Finally, as part of its Small Business and Community 
Lending Initiative, the Administration has encouraged lending 
institutions to participate in SBA programs. The ARRA includes 
a provision that reduces the risk to private lenders by 
temporarily increasing the government guarantee on loans issued 
through the SBA's 7(a) loan program to as much as 90 
percent.\147\ According to SBA, this enhancement (combined with 
other ARRA small business enhancements) has reduced operating 
costs for small business owners and brought lenders back to SBA 
loan programs.\148\
---------------------------------------------------------------------------
    \147\ See SBA Recovery Act FAQs, supra note 90. Prior to this 
increase, the guarantees were for up to 85 percent for loans at or 
below $150,000, and up to 75 percent for larger loans. See note 80, 
supra.
    ARRA also includes other provisions targeted at small businesses, 
such as a provision authorizing the SBA to make low-interest loans to 
systemically important secondary broker-dealers who pool SBA loans to 
sell into the secondary market; a provision temporarily waiving up-
front fees that the SBA charges on 7(a) loans that increase the cost of 
credit for small businesses; and a provision temporarily eliminating 
certain fees typically charged on 504 loans. The fee waivers were made 
retroactive to the enactment of the ARRA on February 17, 2009. The 
legislation also cut taxes for small businesses, permitting them to 
write off more of their expenses and to earn an instant refund on their 
taxes by ``carrying back'' their losses five years instead of two.
    Under ARRA, the SBA received $730 million, which included $375 
million to increase the SBA guarantee on 7(a) loans to 90 percent and 
to waive borrower fees on most 7(a) and 504 loans. Those funds expired 
on November 23, 2009, and an additional $125 million appropriation was 
provided in December 2009, as well as authority to continue both 
programs through February 2010. These funds expired in late February 
2010. On March 2, 2010, President Obama signed legislation authorizing 
an additional $60 million for the program and extending until March 28, 
2010 ARRA's fee relief and enhanced guarantee provisions. On March 26, 
2010, President Obama authorized an additional $40 million and signed 
another extension of the special ARRA provisions through April 30, 
2010. On April 15, 2010, the President authorized an additional $80 
million and signed a fourth extension through May 31, 2010. U.S. Small 
Business Administration, SBA Recovery Lending Extended Through May 
(Apr. 16, 2010) (online at www.sba.gov/idc/groups/public/documents/sba-
homepage/news-release-10-15.pdf).
    \148\ U.S. Small Business Administration, Extension of SBA Recovery 
Lending Programs Will Support $1.8 Billion in Small Business Lending 
(Mar. 4, 2010) (online at www.sba.gov/idc/groups/public/documents/
sba_homepage/news_release_10_06.pdf) (``The increased guarantee and 
reduced fees on SBA loans helped put almost $22 billion into the hands 
of small business owners and brought more than 1,100 lenders back to 
SBA loan programs. As a result, average weekly loan approvals by SBA 
have climbed by 87 percent compared to the weekly average before 
passage of the Recovery Act''); House Committee on Financial Services 
and House Committee on Small Business, Written Testimony of Karen G. 
Mills, administrator, U.S. Small Business Administration, Condition of 
Small Business and Commercial Real Estate Lending in Local Markets, at 
1 (Feb. 26, 2010) (online at www.house.gov/apps/list/hearing/
financialsvcs_dem/mills.pdf).
    In addition to continuing to call for a permanent increase in the 
maximum loan sizes for the SBA's 7(a) and 504 programs, the 
Administration has also recently announced two new small business 
lending legislative proposals: a refinancing program for small business 
owner-occupied commercial real estate and an expanded working capital 
loan program. The CRE refinancing initiative would temporarily expand 
the SBA's existing 504/CDC program to support refinancing for small 
business owner-occupied CRE loans that are maturing in the next few 
years. The working capital loan program would temporarily raise the cap 
on SBA Express loans from $350,000 to $1 million in order to allow 
expanded access to working capital. U.S. Small Business Administration, 
Fact Sheet: Administration Announces New Small Business Commercial Real 
Estate and Working Capital Programs, at 2-3 (Feb. 5, 2010) (online at 
www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_factsheet_cre_refi.pdf).
    Furthermore, President Obama recently signed an executive order 
promulgating the Administration's National Export Initiative, which is 
designed to increase access to trade financing for businesses, with a 
new $2 billion per year effort to increase support for small- and 
medium-sized businesses. The White House, President Obama Details 
Administration Efforts to Support Two Million New Jobs by Promoting New 
Exports (Mar. 11, 2010) (online at www.whitehouse.gov/the-press-office/
president-obama-details-administration-efforts-support-two-million-new-
jobs-promoti).
---------------------------------------------------------------------------

3. Other Programs

    Many state and local entities have programs to support 
small business lending within their geographic boundaries. 
These programs generally mirror, on a smaller scale, tools 
employed by SBA, including both direct lending and loan 
guarantees.\149\ State and local programs serve a similar 
policy goal, as well--to facilitate credit for borrowers who 
cannot otherwise obtain credit from private lending sources. 
If, moving forward, increased loan demand exposes a 
``structural shortfall in supply,'' as some market participants 
suggest, state and local programs may provide an effective 
complement to Treasury's strategy.\150\ Treasury has indicated 
its openness to tap the existing infrastructure and expertise 
of state and local entities in this regard.\151\ For a 
discussion of state programs created or expanded to address the 
contraction in small business lending, see Annex II.
---------------------------------------------------------------------------
    \149\ Senate Committee on Small Business and Entrepreneurship, What 
Works for Small Businesses (2008 Edition).
    \150\ Senate Banking, Housing, and Urban Affairs, Subcommittee on 
Economic Policy, Written Testimony of Raj Date, chairman and executive 
director, Cambridge Winter Center for Financial Institutions Policy, 
Restoring Credit to Main Street: Proposals to Fix Small Business 
Borrowing and Lending Problems, at 1 (Mar. 2, 2010) (online at 
banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=6f18ee9b-
ee97_49db_86b4_07d8983198ab) (hereinafter ``Testimony of Raj Date 
before the Senate Banking Committee''). See Federal Reserve Bank of 
Atlanta, Small Business Survey (Apr. 2010) (hereinafter ``Federal 
Reserve Bank of Atlanta Small Business Survey'').
    \151\ Treasury conversations with Panel staff (Apr. 14, 2010).
---------------------------------------------------------------------------

           E. Examining the Continued Contraction in Lending


1. What's Going Wrong? Supply, Demand, and Regulation Arguments

    Low lending levels can be difficult to analyze, as numerous 
factors--bank strength or weakness, number of creditworthy 
borrowers, soft demand for goods and services, and 
deleveraging, among other things--can all contribute in varying 
ways to lending levels. Further, the relative importance of 
these factors in the overall mix can shift over time, as demand 
and supply shift and interact.
            a. Demand-based Arguments
            i. Need for Credit: Sales
    For many industries, demand for credit is a reflection of 
sales. A sale can necessitate credit to cover increased 
expenses during the period after the sale has been made but 
before payment has been received. For example, a manufacturing 
company would need to buy materials and produce goods to fill 
an order before payment for the order has been received. A 
company may need to hire additional staff to meet demand and 
may need to pay the new employees' salaries for several pay 
periods before the new employees begin to generate new revenue. 
This dynamic, of course, also applies in the contrary 
situation: low demand for a business's goods or services is 
likely, in turn, to decrease that business's demand for credit.
    Some element of the current low lending levels is likely 
attributable to low demand for sales. According to a survey by 
the NFIB, access to credit is not the primary concern of small 
businesses at this time. Only eight percent of those surveyed 
identified access to credit as their most pressing concern, 
although, of course, these respondents may nonetheless have 
sought credit during this period.\152\ The primary concerns, 
according to the survey, were lack of sales (50 percent) and 
uncertainty about the economy (22 percent).\153\ The Federal 
Reserve Bank of Atlanta (FRBA) has also recently completed a 
survey of small businesses, seeking information about their 
borrowing experiences since the start of the recession.\154\ 
Approximately 25 percent of FRBA small firm respondents that 
had not applied for credit in the last three months cited as 
one reason, among other listed options, that sales/revenue did 
not warrant it.\155\ Such concerns, common in the midst of any 
recession, will necessarily depress demand for credit.
---------------------------------------------------------------------------
    \152\ Small Business Credit in a Deep Recession, supra note 18, at 
1.
    \153\ Small Business Credit in a Deep Recession, supra note 18, at 
1. The survey did not ask whether access to credit was a concern at 
all; it asked only whether access to credit was a business's 
``primary'' concern. It is therefore possible that more than eight 
percent of respondents were concerned about credit but had other, more 
pressing concerns that they identified as ``primary.''
    \154\ Federal Reserve Bank of Atlanta Small Business Survey, supra 
note 150. The survey collected responses from 267 firms in the real 
estate, construction, retail, manufacturing, service, and other 
industries in the Federal Reserve Bank Sixth district. The majority of 
firms had fewer than 250 employees, and annual revenues of less than $5 
million. Approximately one third of participating firms had less than 
$1 million in annual revenues. The survey did not have start-up 
respondents.
    \155\ Respondents were able to ``check all that apply.'' Other 
reasons cited were: credit terms offered by lenders will be 
unfavorable, sufficient cash on hand, existing line of credit meets 
needs, do not think lenders will approve request, will not need credit, 
and other. Of these, the preponderance of the responses were 
concentrated in the following categories (in descending order): 
sufficient cash on hand, sales/revenue, existing line of credit meets 
needs and will not need credit. The next most common category was ``do 
not think lenders will approve request,'' discussed further below, 
followed by ``credit terms unfavorable,'' and ``other.''
---------------------------------------------------------------------------
    Information provided by the banks themselves reflects 
similar conditions. The Federal Reserve's Survey of Senior Loan 
Officers from the last quarter of 2009 reported that, overall, 
demand for commercial and industrial loans was flat or down in 
that quarter,\156\ and that a majority of survey respondents at 
domestic banks that saw decreased demand attributed it to a 
decreased need for inventory financing and accounts receivable 
financing,\157\ both of which suggest low sales volumes. The 
most recent report, covering the first quarter of 2010, showed 
demand to be flat overall.\158\ In addition to the above 
factors, in the first quarter of 2010, a majority of 
respondents also attributed flat demand to decreased customer 
investment in plant or equipment and an increase in customer 
internally generated funds.\159\ Furthermore, recessions are 
typically accompanied by broad deleveraging,\160\ which 
suggests that a decrease in loan demand is to be expected.
---------------------------------------------------------------------------
    \156\ January 2010 Senior Loan Officer Opinion Survey on Bank 
Lending Practices, supra note 15, at 11, 23.
    \157\ January 2010 Senior Loan Officer Opinion Survey on Bank 
Lending Practices, supra note 15, at 11, 26 (67 percent of respondents 
stated that ``customer inventory financing needs decreased'' was 
``somewhat important'' to weaker loan demand, and 10 percent stated 
that it was ``very important''; 81 percent stated that ``customer 
accounts receivable financing needs decreased'' was ``somewhat 
important''; and 10 percent said it was ``very important''; 57 percent 
said that the factor of ``customer investment in plant or equipment 
decreased'' was ``somewhat important,'' and 38 percent said it was 
``very important''; and 52 percent said that the factor of ``customer 
internally generated funds increased'' was ``somewhat important,'' and 
10 percent said it was ``very important'').
    \158\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 11, 23 (showing that 64 percent of banks report that demand for C&I 
loans from large and mid-size firms was ``about the same'' since the 
last quarter, and 68 percent report that demand for C&I loans from 
small firms was also ``about the same'' since the last quarter).
    \159\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 11, 26.
    \160\ McKinsey & Co., Debt and Deleveraging: The Global Credit 
Bubble and Its Economic Consequences, at 13 (Jan. 2010) (online at 
www.mckinsey.com/mgi/reports/freepass_pdfs/debt_and_deleveraging/
debt_and_deleveraging_full_report.pdf) (noting that ``empirically . . . 
deleveraging has followed nearly every major financial crisis in the 
past half-century'').
---------------------------------------------------------------------------
            ii. Desire for Credit: Creditworthiness and the 
                    ``Discouraged Borrower''
    In his testimony before the Panel last month, FDIC San 
Francisco Regional Director Stan Ivie noted that ``our 
community banks [that have sufficient capital] clearly want to 
lend, but the demand is not there from the creditworthy 
borrowers. It seems like the healthy borrowers who could borrow 
are not interested in borrowing at this time.'' \161\ In this 
light, low demand can also be attributable to several different 
borrower characteristics. Borrowers may be healthy and 
uninterested in credit, unhealthy and interested in credit but 
unable to meet requirements, or, finally, may be the so-called 
``discouraged'' borrowers: would-be borrowers who do not seek 
credit because they believe (rightly or wrongly) that they 
would not be approved if they applied. According to the NFIB 
survey, eight percent of respondents fit into the category of 
discouraged borrowers: five percent of respondents sought no 
credit because of fear of rejection. Of those who did seek 
credit, 35 percent sought less than they wanted because they 
did not believe they would be approved. Approximately 15 
percent of respondents across various industries in the FRBA 
survey who did not apply for credit cited a belief that they 
would not be approved as one reason for failing to seek 
it.\162\ It is not clear how many of those who were denied 
credit might have obtained financing in a better economy, or 
how many ``discouraged borrowers'' may have actually been 
extended credit had they sought it.\163\ It is also unclear how 
many of these would-be borrowers were creditworthy and 
therefore actually eligible for financing: put another way, 
their concerns may have been well-founded. A small business may 
therefore state that it is interested in receiving credit, but 
if that business does not apply for financing, it does not 
create measurable demand for loans.
---------------------------------------------------------------------------
    \161\ Congressional Oversight Panel, Testimony of Stan Ivie, San 
Francisco regional director, Federal Deposit Insurance Corporation, 
Transcript: Phoenix Field Hearing on Small Business Lending (Apr. 27, 
2010) (publication forthcoming) (online at cop.senate.gov/hearings/
library/hearing-042710-phoenix.cfm) (hereinafter ``Testimony of Stan 
Ivie''). Mr. Ivie also noted, however, that ``many banks have financial 
difficulties right now with their credit quality and they need to 
reserve their capital for losses and future losses which results in 
less capital and liquidity to lend . . . to borrowers.'' Id. In the 
FRBA study, those firms that had not applied for credit in the three 
months before the survey cited, in order (high to low), sufficient cash 
on hand, sales/revenue, existing line of credit meets needs, will not 
need credit, do not think lenders will approve request, credit terms 
unfavorable, and other as their reasons for not applying. See note 154, 
supra.
    \162\ The survey permitted respondents to mark ``all that apply.'' 
Potential borrowers may also be unaware that some banks are still 
looking to make loans. At the Panel's hearing in Phoenix, the president 
of a small local bank expressed concerns about notifying potential 
borrowers that her bank was in a position to lend: ``We don't have the 
distribution center necessarily to get out there. We don't have large 
advertising budgets . . . So I think that's part of the issue, as well, 
is just getting the word out there that we are looking.'' Testimony of 
Candace Wiest, supra note 65.
    \163\ The FRBA survey also found that a small number--13 out of 267 
respondents--stated that they had not applied for credit in the last 
three months because they believed that the terms on which the credit 
would be offered would be unfavorable, while 25 out of 267 respondents 
did not apply for credit because they feared they would be rejected. 
The survey permitted respondents to ``check all that apply,'' and 
therefore there may be overlap between these and the other available 
choices. Federal Reserve Bank of Atlanta Small Business Survey, supra 
note 150, at 48.
---------------------------------------------------------------------------
    Finally, in addition to those businesses that are not 
seeking loans (either because they do not need them or do not 
believe they will receive them), there are businesses that have 
sought credit, but have been in some fashion disappointed in 
their efforts. To the extent that a would-be borrower is an 
attractive applicant but cannot obtain financing, that suggests 
there is a problem with capital supply. To the extent, however, 
that the would-be borrower is not an attractive credit risk, 
that may support an argument regarding a lack of demand. 
Although only a small percentage of those surveyed by the NFIB 
cited access to credit as their largest business concern, this 
figure does not indicate how many of those particular 
respondents may have sought and been denied credit. According 
to the NFIB survey, 55 percent of respondents sought credit in 
2009.\164\ Of those, 60 percent were not able to meet all of 
their credit needs, and 23 percent were unable to meet any of 
their credit needs.\165\ In the FRBA survey, only about one 
third of respondents reported that they had sought credit in 
the past three months. Of those who sought credit, 39 percent 
were denied, and another 20 percent received less than they had 
requested. Thirty-six percent received the full amount 
requested. In this environment, therefore, seeking credit may 
not necessarily meet with all or even partial success.
---------------------------------------------------------------------------
    \164\ Small Business Credit in a Deep Recession, supra note 18, at 
1.
    \165\ In comparison, a survey of small and mid-sized businesses by 
the National Small Business Association (NSBA) found that 70 percent of 
respondents were able to obtain ``adequate'' financing in 2008 and that 
67 percent of respondents in the 2007 survey said the same. National 
Small Business Association, 2008 Survey of Small and Mid-Sized Business 
(2008) (online at www.nsba.biz/docs/2008bizsurvey.pdf).
---------------------------------------------------------------------------
            iii. Borrower Condition
    In addition to soft demand for goods and services, 
borrowers themselves may not be in a position to borrow. 
Discussions of credit demand typically focus on demand by 
creditworthy loan applicants. But many small businesses, even 
those that have weathered the recession, have nonetheless been 
battered by it. Generally, banks require small businesses to 
show revenues that have increased quarter after quarter before 
they are willing to extend credit. Some businesses have had 
their credit damaged, but even a business owner with perfect 
credit may have a weak balance sheet showing sales that are at 
best flat but are more likely to be trending downward.\166\
---------------------------------------------------------------------------
    \166\ It is, furthermore, impossible to determine how many 
businesses were never established because of the recession. For 
example, many start-up businesses have traditionally used home equity 
loans to fund the first few years of their existence. This market, 
however, has almost entirely dried up since the start of the crisis. 
See Section B.2, supra.
---------------------------------------------------------------------------
    Additionally, there may be other pressures on small 
businesses that depress demand. Some small businesses may use 
real estate--either the owner's residence, the business 
premises, or some other property--as collateral for commercial 
credit. Severely depressed real estate prices across the 
country have impacted the quality of businesses' balance sheets 
and have decimated businesses' ability to provide sufficient 
collateral to obtain the credit they need.\167\ Furthermore, to 
the extent a mortgage is underwater, a business owner may lose 
additional flexibility inasmuch as he or she may not be able to 
sell the property to pay off a loan or relocate, or may not be 
able to sell one piece of property to buy another. Finally, 
demand for credit may also be affected by tax or regulatory 
concerns, although each individual business may be affected 
differently. When decreased cash flow results from tax 
increases, it could decrease the ability of firms to borrow, 
because they have less cash available for servicing a 
debt.\168\
---------------------------------------------------------------------------
    \167\ Some small businesses may argue that a business today with 
flat, or even slightly depressed, sales is a very sturdy business since 
only the most stable enterprises were able to pass through 2009 and 
remain standing. Banks argue, however, that they are not venture 
capitalists: they do not invest in businesses but make loans and so 
want there to be sufficient sales and collateral to ensure the loan is 
repaid. See Philadelphia Business Journal, Business Lending Tougher 
(July 11, 2008) (online at www.bizjournals.com/philadelphia/stories/
2008/07/14/story2.html) (quoting William Dunkelburg, Professor of 
Economics at Temple University and Chairman of Liberty Bell Bank: 
``banks are not venture capitalists. If there's no collateral or 
business history, they are supposed to be judicious and make low-risk 
loans'').
    \168\ Small businesses can also face disproportional regulatory 
compliance costs. See Small Business Economy Report, supra note 13, at 
38-39 (``small businesses face disproportionately higher costs per 
employee than their larger counterparts in complying with federal 
regulations'').
---------------------------------------------------------------------------
    As stated above, however, the elements of low lending 
levels may shift over time. Although demand has, overall, been 
down in the last year, there are indications that many business 
owners have at least started thinking about borrowing again. 
According to the American Bankers Association (ABA), some of 
its members have reported an increase in inquiries from small 
business owners about the availability and terms of loans.\169\ 
These inquiries have not yielded an increase in demand for 
actual loans,\170\ and the latest Senior Loan Officer Survey 
showed inquiries to be flat in the most recent quarter,\171\ 
but the National Small Business Association (NSBA) and the NFIB 
have both stated that they expect their members to see 
increased sales this year and in 2011.\172\ One expert has 
testified that:
---------------------------------------------------------------------------
    \169\ ABA conversations with Panel staff (Mar. 22, 2010); Senate 
Committee on Banking, Housing and Urban Affairs, Written Testimony of 
Arthur C. Johnson, chairman and chief executive officer, United Bank of 
Michigan, on Behalf of the American Bankers Association, Restoring 
Credit to Main Street: Proposals to Fix Small Business Borrowing and 
Lending Problems, at 5 (Mar. 2, 2010) (online at banking.senate.gov/
public/index.cfm?FuseAction=Hearings.Testimony
&Hearing_ID=745bbf42-ab72-45de-90d2-17ab8af2aaeb&Witness_ID=9308a897-
6f34-402b-a772
-e512c6240a24) (noting that demand for small business loans has fallen 
``dramatically'' since the start of the recession).
    \170\ ABA conversations with Panel staff (Mar. 22, 2010).
    \171\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 11, 28.
    \172\ NSBA conversations with Panel staff (Mar. 24, 2010); NFIB 
conversations with Panel staff (Mar. 22, 2010).

        [o]ver the coming quarters . . . the binding constraint 
        on small business lending will shift from a deficit of 
        demand, to a deficit of supply. As the real economy 
        begins to recover, we should expect demonstrably 
        credit-worthy small business owners to begin to demand 
        credit in greater amounts. As that demand materializes, 
        however, it is quite possible that it will go unmet by 
        the financial system. Indeed, it seems likely that the 
        threat of a shortfall of credit supply will be more 
        pronounced in small business than anywhere else in the 
        credit markets.\173\
---------------------------------------------------------------------------
    \173\ Testimony of Raj Date before the Senate Banking Committee, 
supra note 150, at 3.

Many respondents to the FRBA survey also stated that they would 
seek credit in the near future to fund business expansion. Mr. 
Ivie has similarly testified before the Panel that the lack of 
demand from qualified borrowers is ``a confidence issue and 
once we see the economy start to recover and employment start 
to recover, then I think the businesses will be more willing to 
borrow.'' \174\ If demand increases, and small firms are unable 
to obtain needed credit to keep pace with an improving economy, 
it could impair the ability of these companies to contribute to 
our nation's overall recovery. Should businesses see sales 
improve in late 2010 or 2011, strong credit markets will be 
essential for this uptick in sales to translate into 
improvement in the economy overall, and the next question must 
be whether, under current conditions, there would be sufficient 
supply to meet a potential increase in demand.
---------------------------------------------------------------------------
    \174\ Testimony of Stan Ivie, supra note 161.
---------------------------------------------------------------------------
            b. Supply-side Arguments: Lenders
    If there is an increase in demand, it is not clear that the 
banks are ready to meet it. Like the small business owners who 
responded to the NFIB survey, many of the banks that responded 
to the Survey of Senior Loan Officers cited uncertainty about 
the economy as a key concern. Overall, the banks that responded 
to the Federal Reserve survey did not tighten credit in the 
quarter ended March 31, 2010, although the majority of these 
banks had already undergone significant tightening of their 
credit standards in the first two quarters of 2009, most of 
which has not yet been unwound.\175\ Of the respondents who 
stated that their credit standards had tightened in the first 
quarter of 2010, 62 percent said that ``less favorable or more 
uncertain economic outlook'' was ``somewhat important,'' and 
another 19 percent said that it was ``very important.'' \176\ 
Additionally, 87 percent said that ``reduced tolerance for 
risk'' was at least ``somewhat important.'' \177\ In contrast, 
decreased liquidity in secondary markets for these loans, 
defaults by borrowers in public debt markets, deterioration in 
their bank's current or expected capital position, and 
deterioration in their bank's current or expected liquidity 
position were not cited as particularly important factors.\178\
---------------------------------------------------------------------------
    \175\ Elizabeth Duke Testimony before House Financial Services and 
House Small Business Committees, supra note 114.
    \176\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 11, 17.
    \177\ January 2010 Senior Loan Officer Opinion Survey on Bank 
Lending Practices, supra note 15, at 11, 17 (50 percent said ``somewhat 
important'' and 37 percent said ``very important''). These numbers 
reflect a less optimistic outlook than those from the Senior Loan 
Officer Opinion Survey for the last quarter of 2009. According to that 
survey, of the banks that tightened lending standards, only nine 
percent cited ``less favorable or more uncertain economic outlook'' as 
a very important factor, and 27 percent cited ``reduced tolerance for 
risk'' as a very important factor.
    \178\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 11, 17. (56 percent of respondents said that decreased liquidity in 
secondary markets was ``not important,'' 87 percent said increased 
defaults were not important, 91 percent said deterioration in their 
bank's current position was ``not important,'' and 75 percent said 
deterioration in their bank's current or expected capital position was 
``not important'').
---------------------------------------------------------------------------
    There is also the problem of the health of the banks 
themselves. In a stable economy, banks will extend credit and 
seek a risk-adjusted rate of return.\179\ But in the current 
environment, many banks have suffered from increased loan 
defaults and, as a result, have insufficient capital to make 
additional loans.\180\ Raising capital, however, has been 
difficult in the last year, even for healthy banks, given the 
scarcity of capital and the uncertainty that has clouded any 
predictions about the entire sector. These uncertainties 
include interest rate risk, unrealized losses, and the prospect 
of tighter capital requirements, among other things.\181\ Not 
only does such uncertainty make raising capital difficult, it 
also may lead banks to conserve capital instead of making 
loans. The difficulty in raising capital is underscored by the 
sector's instability, highlighted in a recent statement by FDIC 
Chairman Sheila Bair, who recently said she believed that 
``we'll go above the 2009 level [of 140 bank failures], but 
that bank failures will peak this year. The institutions by 
asset size might be a little smaller, but there will be more of 
them.'' \182\
---------------------------------------------------------------------------
    \179\ See Section B, supra (describing the growth in credit over 
the early part of the last decade).
    \180\ Elizabeth Duke Testimony before House Financial Services and 
House Small Business Committees, supra note 114, at 3 (noting that 
``for most commercial banks, the quality of existing loan portfolios 
continues to deteriorate even as levels of delinquent and nonperforming 
loans remain on the rise. Throughout 2009, loan quality deteriorated 
significantly for both large and small banks, and the latest data from 
the fourth quarter indicate continuing elevated loss rates across all 
loan categories'').
    \181\ See Section F.3(a), infra.
    \182\ Janet Morrissey, FDIC's Sheila Bair on Bank Failures and Too-
Big-To-Fail, Time (Apr. 9, 2010) (online at www.time.com/time/business/
article/0,8599,1978560,00.html) (quoting Chairman Bair). This level is 
still lower than peak failures in 1988 and 1989, but is nonetheless 
much higher than the period from 1989 to the present, or than the 
decades preceding the late 1980's. See Federal Deposit Insurance 
Corporation, Failures and Assistance Transactions (online at 
www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (accessed May 11, 2010) 
(compiling statistics from 1934 to 2008).
---------------------------------------------------------------------------
    At present, there are more than 700 banks on the FDIC's 
``watch list.'' The commercial real estate sector also poses a 
problem for banks and particularly for community banks, whose 
portfolios hold a much larger share of such loans than large 
banks.\183\ The secondary market for these loans has been 
severely affected, and impaired commercial tenancy rates show 
no sign of improving in the near term.\184\ Finally, to the 
extent that 2010 continues to see high bank failure rates, the 
pool of existing smaller banks that are the most likely to 
engage in so-called relationship lending--in which the bank 
considers the loan applicant holistically, drawing on an 
ongoing relationship with the business and its owner--will 
likely shrink, leaving fewer local banks available.\185\ Unless 
conditions in the smaller banking sector improve substantially, 
smaller banks may not have the capacity to meet future 
increased demand.\186\
---------------------------------------------------------------------------
    \183\ See Federal Deposit Insurance Corporation, The Future of 
Banking in America: Community Banks: Their Recent Past, Current 
Performance, and Future Prospects (Jan. 2005) (online at www.fdic.gov/
bank/analytical/banking/2005jan/article1.html) (noting that 
``[a]lthough community banks control less than 14 percent of banking-
sector assets, they fund almost 29 percent of the industry's commercial 
real estate lending''). Also, for a general discussion, see the Panel's 
February 2010 report. COP February Oversight Report, supra note 2, at 
19-26.
    \184\ See, e.g., Congressional Oversight Panel, Written Testimony 
of Jon D. Greenlee, associate director, Division of Bank Supervision 
and Regulation, Board of Governors of the Federal Reserve System, 
Atlanta Field Hearing on Commercial Real Estate, at 5-6 (Jan. 27, 2010) 
(online at cop.senate.gov/documents/testimony-012710-greenlee.pdf).
    \185\ See Section E.3, infra (discussing lending technologies). See 
also Testimony of Stan Ivie, supra note 161 (discussing relationship 
lending and the threats to the community banks best positioned to 
conduct this type of lending).
    \186\ While larger banks presumably would be able to absorb some of 
an increase in demand, they have been generally pulling back from the 
small business lending sector, making the degree to which they might 
move into the sector unclear. See Section E.3, infra.
---------------------------------------------------------------------------
    There are signs that the availability of capital is 
improving, however. At the Panel's recent hearing in Phoenix, 
Mr. Ivie testified that ``As a result of that, we are starting 
to see capital come in to some of our institutions. We've had 
several of our institutions recently have success in accessing 
the capital markets and raising capital.'' \187\ Any 
improvement in the availability of capital should help provide 
banks with a broader range of options.
---------------------------------------------------------------------------
    \187\ Testimony of Stan Ivie, supra note 161. A recent release from 
the law firm Wachtell, Lipton, Rosen & Katz reflects similar 
conditions: ``[t]he first four months of 2010 have seen strong equity 
market interest in financial institutions carried forward from 2009'' 
and that''[t]he numerous announced and priced deals of the last several 
weeks have been more concentrated in community and regional banks.'' 
Wachtell, Lipton, Rosen, & Katz, LLP, Financial Institutions 
Developments, Recent Transactions Show Continued Strong Capital Market 
Interest in a Diversity of Financial Institutions (May 6, 2010).
---------------------------------------------------------------------------
            c. Additional Supply-based Arguments
    Despite overall bank weakness, there are, nonetheless, 
banks that state that they are able, willing, and eager to 
increase lending but that the current regulatory climate makes 
this extremely difficult. There have been anecdotal reports 
that bank examiners have become more conservative and have 
required increasing levels of capital in the last year. Federal 
Reserve Board Governor Elizabeth Duke testified in February 
that:

        [s]ome banks may be overly conservative in their small 
        business lending because of concerns that they will be 
        subject to criticism from their examiners. While 
        prudence is warranted in all bank lending, especially 
        in an uncertain economic environment, some potentially 
        profitable loans to creditworthy small businesses may 
        have been lost because of these concerns, particularly 
        on the part of small banks. Indeed, there may be 
        instances in which individual examiners have criticized 
        small business loans in an overly reflexive 
        fashion.\188\
---------------------------------------------------------------------------
    \188\ Elizabeth Duke Testimony before House Financial Services and 
House Small Business Committees, supra note 114, at 5.

To allay fears within the industry that bank examination 
standards might be discouraging lending to creditworthy 
borrowers by requiring potentially excessive capital levels, 
federal banking regulatory agencies and the Conference of State 
Bank Supervisors issued an Interagency Statement on Meeting the 
Credit Needs of Creditworthy Small Business Borrowers on 
February 5, 2010.\189\ The statement stresses that financial 
institutions that engage in prudent small business lending and 
base their decisions on the creditworthiness of individual 
borrowers will not be subject to supervisory criticism. This 
statement builds upon principles in existing guidance, 
including the Interagency Statement on Meeting the Needs of 
Creditworthy Borrowers and the Policy Statement on Prudent 
Commercial Real Estate Loan Workouts, issued in November 2008 
and October 2009, respectively. According to Assistant 
Secretary of the Treasury for Financial Stability Herbert M. 
Allison, Jr., this new guidance ``should yield greater 
consistency among the agencies and help banks provide prudent 
small business lending.'' \190\ Banking industry groups, 
however, maintain that, while the statement is appreciated, it 
has done little to change the behavior of individual 
examiners.\191\
---------------------------------------------------------------------------
    \189\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, National Credit Union Administration, 
Office of the Comptroller of the Currency, Office of Thrift 
Supervision, and Conference of State Bank Supervisors, Interagency 
Statement on Meeting the Credit Needs of Creditworthy Small Business 
Borrowers (Feb. 5, 2010) (online at www.federalreserve.gov/newsevents/
press/bcreg/bcreg20100205.pdf).
    \190\ Herb Allison Testimony before House Financial Services and 
House Small Business Committees, supra note 98, at 4.
    \191\ ICBA conversations with Panel staff (Mar. 25, 2010).
---------------------------------------------------------------------------
    While it is impossible to determine whether examiners are 
adhering to stated guidelines or whether they are taking a more 
conservative approach--bank examinations are confidential and 
are conducted on a case-by-case basis--banks may perceive a 
difference in the way examinations are handled because of 
certain provisions within the accounting rules. For example, if 
a loan is restructured because of borrower distress (i.e., 
``troubled-debt restructure''), that loan cannot be pooled for 
the purposes of setting loan loss reserve levels.\192\ Instead, 
loan reserves must be set aside to offset the specific risk 
that the restructured loan presents. Because banks may now have 
a larger percentage of restructured loans on their books, and 
because these loans may remain on the books for a longer 
period, banks may be required to keep high loan loss reserves 
to offset the specific risks presented by these loans. 
Moreover, bank examiners may face a larger number of situations 
that require the use of the individual examiner's judgment 
because the current economic outlook, and often the value of a 
given asset, is less predictable than in better economic times, 
and that judgment may conflict with the bank's. At the Panel's 
most recent hearing in Phoenix, Mr. Ivie testified to the 
reasons that the perception exists that the bank examiners have 
imposed overly rigorous standards on banks making small 
business loans.\193\ First he noted that ``[e]xaminers will not 
criticize financial institutions for making good loans or 
entering into prudently structured workout arrangements.'' The 
reason, he stated, that banks may disagree with the examiners' 
stance on refinanced loans is that, in cases where a borrower's 
condition has deteriorated to the point that it is making 
interest payments out of the proceeds of the loan itself, the 
examiners are unwilling to consider this to be a performing 
loan. The combination of these factors may have led banking 
groups to see examiners' behavior as increasingly conservative 
and restrictive.
---------------------------------------------------------------------------
    \192\ See Accounting Standard Codification (ASC) 310-10-35, 
Receivables--Scope and Scope Exceptions.
    \193\ Phoenix Field Hearing on Small Business Lending, supra note 
29, at 9-11.
---------------------------------------------------------------------------
    Without taking a position on the current regulatory 
atmosphere, the Panel notes that the balance between sufficient 
regulation and over-regulation is a fine one. In an overly 
permissive regulatory environment, banks may tend to make 
riskier loans, exacerbating the economy's precarious position. 
In an overly restrictive regulatory environment, however, banks 
may become too conservative, and there will be insufficient 
credit available to help pull the economy out of the recession.
    The ABA has also indicated that the lump-sum prepayment of 
$45 billion, or 3.25 years' worth of insurance premiums, that 
the FDIC required of its member banks in the fourth quarter of 
2009 has depleted capital levels at institutions that could 
have otherwise used that money for lending.\194\ The FDIC, 
however, has rejected this assertion. Chairman Bair has 
testified that ``[p]repayment would not materially impair the 
capital or earnings of insured institutions'' and that ``the 
FDIC believes that most of the prepaid assessment would be 
drawn from available cash and excess reserves, which should not 
significantly affect depository institutions' current lending 
activities.'' \195\ Chairman Bair supported this assertion by 
noting that FDIC-insured institutions are more liquid than they 
were a year ago and that they currently hold 22 percent more in 
liquid balances than they did last year. Given the current 
lending environment, there are banks that have high capital, 
and for these institutions, these fees may not have had much 
effect. Banks that are capital-constrained, however, may have 
been more affected by these frontloaded fees, and might then be 
less able to provide loans than banks with healthier capital 
levels. Ultimately, because examinations are confidential, it 
is difficult to assess banks' capacity to lend, especially 
since banks have been required to draw on capital to increase 
loan loss reserves as a buffer against potential increased 
defaults as borrowers continue to stumble in the recovering 
economy.
---------------------------------------------------------------------------
    \194\ American Bankers' Association, Letter to Robert Feldman, 
executive secretary, Federal Deposit Insurance Corporation (Oct. 28, 
2009) (online at www.fdic.gov/regulations/laws/federal/2009/
09c109AD49.PDF). The FDIC explained this action in a press release, 
stating that:

      Prepayment of assessments will allow the industry to 
      strengthen the cash position of the Deposit Insurance Fund 
      (DIF) immediately, while allowing the capital impact of 
      deposit insurance assessments to be felt gradually over 
      time as the industry improves its own financial position. 
      The banking industry has substantial liquidity to prepay 
      assessments. As of June 30, FDIC-insured institutions held 
      more than $1.3 trillion in liquid balances, or 22 percent 
      more than they did a year ago. Prepaying assessments will 
      put the industry's liquid balances to good use in 
      conserving capital and helping to maintain the capacity of 
      banks to lend while they rebuild the DIF. FDIC analysis 
      indicates that this arrangement is much less likely to 
---------------------------------------------------------------------------
      impair bank lending than a one-time special assessment.

Federal Deposit Insurance Corporation, Banks Tapped to Bolster FDIC 
Resources, FDIC Board Approves Proposed Rule to Seek Prepayment of 
Assessments (Sept. 29, 2009) (online at www.fdic.gov/news/news/press/
2009/pr09178.html).
---------------------------------------------------------------------------
    \195\ See Senate Committee on Banking, Housing and Urban Affairs, 
Written Testimony of Sheila C. Bair, chairman, Federal Deposit 
Insurance Corporation, Examining the State of the Banking Industry 
(Oct. 14, 2009) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=6277ecd6-1d5c-4d07-a1ff-
5c4b72201577).
---------------------------------------------------------------------------
    To the extent that well-capitalized banks are not lending--
either because of tighter standards or because of uncertainty 
about the economy--it seems that, beginning with the start of 
the crisis, these banks have kept capital in very low-risk, low 
return investments such as U.S. Treasury bonds, with the 
Federal Reserve, which now pays limited interest on such 
funds,\196\ or in similar investments. Banks' holdings in 
Treasuries, for example, have spiked since the start of the 
current recession.\197\ While still only a small percent of the 
overall sector--just one percent--this increase indicates a 
strong trend toward safe investments at the expense of profit. 
Assuming a normal business cycle, however, such safe but low-
earning assets may not be sufficient to satisfy bank 
shareholders, and as bank executives feel pressure to increase 
earnings again, banks may develop some appetite, although 
likely still limited, for investments that provide greater 
reward even if it means taking on a certain amount of 
additional risk.
---------------------------------------------------------------------------
    \196\ Board of Governors of the Federal Reserve System, Press 
Release (Oct. 6, 2008) (online at www.federalreserve.gov/
monetarypolicy/20081006a.htm) (announcing plan to pay limited interest 
on depository institutions' required and excess reserve balances).
    \197\ Federal Reserve Bank of St. Louis, Economic Research: Series: 
USGSEC, U.S. Government Securities at All Commercial Banks (online at 
research.stlouisfed.org/fred2/series/USGSEC?cid=99) (accessed May 11, 
2010).
---------------------------------------------------------------------------
    Ultimately, low lending levels have many contributing 
factors, among them the instability of some of the banks that 
lend and low sales demand, which often results in low demand 
for credit. These dynamics are, however, always in flux. If 
sales improve and--as anticipated by some FRBA respondents--
credit demand increases, it is not clear that smaller banks, 
which are still under enormous stress, are prepared to handle 
that demand.
2. Is There any Evidence that any Government Program is Helping?
    Three of the operational TARP programs could have a direct 
or indirect effect on small business lending: the capital 
injection programs, the TALF, and the PPIP.
    Capital injection programs, the primary example of which is 
the CPP, can have an indirect effect on small business lending. 
It is possible that the capital injection programs succeeded at 
maintaining a certain level of small business lending that 
would otherwise have fallen even more sharply, though any such 
impact would be very difficult to measure since Treasury did 
not require all TARP recipients to report on their lending 
levels or use of TARP funds. Even with the additional capital, 
however, and as discussed in Section C above, there was a 
decline in small business lending among the 22 largest CPP 
recipients. Indeed, the Panel has previously noted that 
Treasury did not require recipients to increase, or even 
maintain, lending levels to small businesses or consumers under 
the CPP.\198\ While the agreement signed by CPP participants 
included a recital that ``the Company agrees to expand the flow 
of credit to U.S. consumers and businesses on competitive terms 
to promote the sustained growth and vitality of the U.S. 
economy,'' this language is merely precatory.\199\
---------------------------------------------------------------------------
    \198\ See generally COP May Oversight Report, supra note 3, at 17.
    \199\ U.S. Department of the Treasury, Securities Purchase 
Agreement [CPP]: Standard Terms, at 7 (online at 
www.financialstability.gov/docs/CPP/spa.pdf) (hereinafter ``Securities 
Purchase Agreement [CPP]: Standard Terms'') (accessed May 11, 2010).
---------------------------------------------------------------------------
    The TALF is one of the few TARP programs that could have 
had a direct effect on small business lending.\200\ As 
discussed in Section D.2, above, small business loans were one 
of the categories of eligible collateral under the program. The 
program has settled loans collateralized by $2.15 billion in 
small business loan ABS.\201\ Treasury has told Panel staff 
that, like the other TALF sectors, the TALF had an 
``announcement effect'' in opening up the SBA-loan secondary 
markets at a time that they were severely constricted.\202\ 
That said, however, as the Panel discussed in its May 2009 
report, securitization programs generally have little effect on 
small business lending. Generally, the only small business 
loans that are securitized are those that are SBA-backed, and 
they constitute a fraction of the small business lending 
market.\203\
---------------------------------------------------------------------------
    \200\ In addition to small business loans, small businesses that 
use credit cards for borrowing might have benefited from TALF to the 
same extent as other credit card borrowers. $26 billion in loans backed 
by credit card receivables were settled in TALF. Data provided by 
Federal Reserve Bank of New York.
    \201\ Data provided by Federal Reserve Bank of New York.
    \202\ Treasury conversations with Panel staff (Apr. 1, 2010). See 
also Section D.1(c), supra.
    \203\ See generally COP May Oversight Report, supra note 3, at 50-
51. See also Section D.2(b)(iii) discussing the limited role of 
securitization of small business loans, supra.
---------------------------------------------------------------------------
    The PPIP might also be having an indirect effect on credit 
availability to small businesses. By removing risky assets from 
bank balance sheets, it should theoretically free up capital 
that could be used for new lending. The program has likely not 
been used, however, by small and community banks.\204\ And to 
the extent that it is used, its relatively small footprint 
would not be able to provide a significant effect on the small 
business lending market. Finally, as the PPIFs have only 
recently begun to purchase assets, any effects from the program 
have yet to be seen.
---------------------------------------------------------------------------
    \204\ ICBA conversations with Panel staff (Mar. 25, 2010). Treasury 
does not track which banks sell assets into the program. In fact, the 
PPIP Legacy Loans Program, which would have purchased whole loans from 
banks and would probably have seen greater participation from small and 
medium banks, has been shelved indefinitely. See COP December Oversight 
Report, supra note 37, at 24, 179.
---------------------------------------------------------------------------
    Ultimately, it is not clear that any of the TARP programs 
in place to date has had a noticeable effect on small business 
lending. As discussed above, many of the operational TARP 
programs are irrelevant to small banks. These programs were 
designed for general applicability, rather than specifically 
for small banks or smaller businesses, and had modest effects 
on small business lending, if any.\205\
---------------------------------------------------------------------------
    \205\ Treasury officials maintain that all of Treasury's programs, 
including the potential new small business lending fund, are intended 
to act in tandem, and that no one program is solely responsible for 
addressing small business lending. Treasury conversations with Panel 
staff (Apr. 14, 2010).
---------------------------------------------------------------------------
3. Lender Size and Lending Technologies
    Small business lenders can generally be divided into four 
categories: smaller banks (those with under $10 billion in 
assets), mid-sized banks (those with $10 billion to $100 
billion in assets), the largest banks (those with over $100 
billion in assets), and non-bank lending institutions. The 
supply of small business loans has declined since 2008, with 
all types of lenders reducing lending since the crisis.\206\ 
The FDIC has attributed the decline in total lending across all 
sizes of institutions to ``[t]ighter underwriting standards, 
deleveraging by institutions seeking to improve their capital 
ratios, and slack loan demand. . . .'' \207\ Within these 
general declines in lending levels, however, there has also 
been a series of market shifts. Some lenders have exited the 
market. In addition, the different methods of making lending 
decisions by bank lenders of varying sizes and types can be 
more favorable than others to small businesses, and can change 
in importance over time. Based on multiple factors, it appears 
that market share may be shifting back toward smaller banks, 
which may result in new pressures for small businesses.
---------------------------------------------------------------------------
    \206\ This discussion of declining lending levels by bank size and 
the effect of lending technologies does not address contributing 
factors such as decreased demand, which is discussed in Section E.1, 
supra.
    \207\ Phoenix Field Hearing on Small Business Lending, supra note 
29, at 3-4.
---------------------------------------------------------------------------
            a. Size and Type of Lender: Shifts in Market Share
            i. Lender Size and Market Share
    All sizes of banks provide loans to small businesses, with 
roughly half the total dollar volume coming from smaller banks. 
Smaller banks, those with assets less than $10 billion, 
provided 46.7 percent of the dollar value of all small business 
loans in 2009. The largest banks, those with more than $100 
billion in assets, provided 34 percent of small business loans 
that year. As shown in Figure 10, these numbers have changed 
over the past decade. In 1999, the biggest banks provided only 
14.9 percent of small business loans, while banks with under 
$10 billion in assets provided 56.9 percent. Similarly, in 
2002, 52.8 percent of small-denomination commercial loans were 
made by banks with less than $10 billion in assets.\208\ From 
2006 to 2008, however, the largest banks' share of small 
business lending jumped considerably--from 26.6 percent of the 
market in 2006 to 37.4 percent in 2008. The small business 
lending market share of the smallest banks--those with less 
than $1 billion in assets--has been falling fairly steadily 
over the past decade.\209\ The relatively equal share of the 
market between smaller banks, on the one hand, and medium and 
larger banks, on the other, does not capture the unequal 
distribution of banks' exposure to small business lending. Even 
though smaller banks provide roughly half of the total dollar 
volume of all small business lending, small business lending 
makes up a significantly larger portion of their lending 
portfolios than it does for larger banks. As shown in Figure 
11, in 2009 C&I loans of under $1 million made up 9.3 percent 
of the portfolios of the smallest banks, and 6.7 percent of the 
portfolios of banks with between $1 and $10 billion in assets. 
By contrast, it made up 4.4 percent for banks with between $10 
and $100 billion in assets and only 2.5 percent of banks with 
assets over $100 billion.
---------------------------------------------------------------------------
    \208\ SNL Financial.
    \209\ SNL Financial. All figures based on dollar volume of loans.
---------------------------------------------------------------------------

FIGURE 10: SOURCES OF SMALL BUSINESS LENDING_OUTSTANDING C&I LOANS (OF 
  LESS THAN $1 MILLION) AT COMMERCIAL BANKS OF VARYING SIZES (SIZE BY 
                             ASSETS) \210\

      
---------------------------------------------------------------------------
    \210\ Federal Deposit Insurance Corporation, Statistics on Banking 
(Instrument: Loans and Leases--Small Business Loans) (online at 
www2.fdic.gov/sdi/main4.asp) (accessed May 5, 2010).
[GRAPHIC] [TIFF OMITTED] 56095A.010

  FIGURE 11: PERCENTAGE OF BANK LENDING GOING TO SMALL BUSINESSES_C&I 
   LOANS UNDER $1 MILLION AS A PERCENTAGE OF ALL LOANS AT COMMERCIAL 
                       BANKS, BY BANK SIZE \211\

      
---------------------------------------------------------------------------
    \211\ SNL Financial.
    [GRAPHIC] [TIFF OMITTED] 56095A.011
    
            ii. Shifts in Market Share after the Credit Crisis
    The shift of market share from smaller banks to larger 
banks reversed during and after the crisis. From 2008 to 2009, 
the largest banks' small business loan portfolios fell by 9.03 
percent. This decline is higher than the 4.1 percent decline in 
such banks' entire lending portfolios. During this time period 
the smallest banks' small business lending portfolios fell by 
2.67 percent, while their entire lending portfolios fell 0.2 
percent. Banks with assets between $1 billion and $100 billion 
grew their small business portfolios as well as their entire 
lending portfolios during this time.\212\ Similarly, since the 
start of the crisis, large banks have cut back on all lending 
to an even greater degree than have smaller banks.\213\ One 
study found that small business customers of larger banks 
(those with more than $100 billion in assets) have been less 
likely than customers of smaller banks to receive the credit 
they wanted.\214\
---------------------------------------------------------------------------
    \212\ Banks with assets between $1 and $10 billion grew their small 
business loan portfolio by 6.6 percent; banks with assets between $10 
and $100 billion grew them by 17.4 percent, after they fell 12.4 
percent the prior year. SNL Financial.
    \213\ Phoenix Field Hearing on Small Business Lending, supra note 
29, at 4 (``Institutions with total assets greater than $100 billion as 
of December 31st reported an aggregate net decline in total loans and 
leases of $116.8 billion in the quarter, or over 90 percent of the 
total industry decline. On a merger-adjusted basis, at community banks 
that filed reports as of December 31st, total loan and lease balances 
decreased $4.3 billion during the quarter. A majority of institutions 
(53.2 percent) reported declines in their total loan balances during 
the quarter''); Elizabeth Duke Testimony before House Financial 
Services and House Small Business Committees, supra note 114, at 2. See 
Section E.1(c), supra (discussing in detail credit conditions over 
time).
    \214\ Small Business Credit in a Deep Recession, supra note 18, at 
8.
---------------------------------------------------------------------------
    At the same time that larger banks pulled back, non-bank 
lending sources left the market. Prior to the credit crunch, 
institutions such as CIT Group, GE Capital, and Allied Capital 
became major players in this field. CIT was the largest 
originator of SBA 7(a) loans for nine consecutive years.\215\ 
CIT was also a major lender to the retail industry, 
particularly in the factoring sector.\216\ The bankruptcies of 
CIT and Allied Capital's Ciena Capital portfolio lender, as 
well as the constriction in securitization markets, have 
negatively impacted small business lending.\217\ Many small 
business owners were also hurt by major small business credit 
card issuer Advanta's late May 2009 announcement that it was 
closing all of its credit card lines effective June 1, 
2009.\218\
---------------------------------------------------------------------------
    \215\ National Small Business Association, CIT Bankruptcy: What it 
Means for Small Business (Nov. 4, 2009) (online at www.nsba.biz/
content/printer.2638.shtml).
    \216\ Letter from Tracy Mullin, president and chief executive 
officer, National Retail Federation, to Timothy Geithner, secretary, 
U.S. Department of the Treasury, NRF Letter To Treasury Secretary About 
CIT (July 14, 2009) (online at www.nrf.com/
modules.php?name=Pages&sp_id=1092) (``CIT is one of the very few 
lenders who act as a `factor' for the thousands of small and middle-
sized vendors who supply U.S. retailers with much of the merchandise 
sold in their stores. . . . [A] factor provides the short-term 
financing that allows a vendor to produce goods once an order from a 
retailer has been received''). Through factoring, a small business will 
sell a receivable stream to a lender. CIT was the largest provider of 
factoring services to small businesses. Professor Gregory Udell 
conversations with Panel staff (Apr. 5, 2010).
    \217\ CIT Group exited bankruptcy in December 2009. CIT Group, CIT 
Shares Commence Trading on New York Stock Exchange (Dec. 10, 2009) 
(online at www.businesswire.com/portal/site/cit/
index.jsp?ndmViewId=news_view&newsId=20091210005961&newsLang=en). It 
has reentered the small business lending market with a commitment for 
$500 million in new loans and the issuance of TALF-eligible equipment 
lease ABSs. CIT Group, CIT Gives Boost to Small Businesses--Commits 
$500 Million in New Loans and Waives Packaging Fee (Dec. 14, 2009) 
(online at www.businesswire.com/portal/site/cit/
index.jsp?ndmViewId=news_view&newsId=20091214005577&newsLang=en); CIT 
Group, CIT Closes $667 Million TALF-Eligible Equipment Lease 
Securitization (Mar. 11, 2010) (online at www.businesswire.com/portal/
site/cit/
index.jsp?ndmViewId=news_view&newsId=20100311006452&newsLang=en). On 
April 27, 2010, CIT made its first post-bankruptcy earnings 
announcement, with better than expected earnings of $97.3 million or 49 
cents per share. During the earnings call, CEO John Thain said that 
small business lending ``applications were up 70% in terms of dollar 
volume.'' CIT Group, Q1 2010 CIT Group Earnings Conference Call, at 2 
(Apr. 27, 2010) (at phx.corporate-ir.net/
External.File?item=UGFyZW50SUQ9NDI5NTV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
    \218\ Advanta Corp., Form 8-K (May 22, 2009) (online at 
www.sec.gov/Archives/edgar/data/96638/000115752309004084/a5970987.txt).
---------------------------------------------------------------------------
            b. Lending Technologies and Lender Size
    Although the FDIC cited institutional deleveraging, 
decreased demand, and tighter underwriting standards for the 
overall drop in lending, this would not explain shifts in 
market share from larger to smaller banks.\219\ An explanation 
for both the increase and subsequent decrease in large banks' 
presence in the small business lending market may lie in the 
different uses of ``lending technologies'' among large and 
small banks over the course of the last decade. Both large and 
small banks' small business lending can be divided into four 
categories of ``lending technologies''--relationship lending, 
asset-based lending, credit scoring, and financial statement 
lending.\220\ The last three categories can together be 
considered ``transaction based'' lending, as they are all based 
on ``hard'' data about the borrower or collateral. Credit 
scoring is done almost entirely by large banks, and 
relationship lending almost entirely by small banks.\221\ The 
other two are performed by large and small banks alike.\222\
---------------------------------------------------------------------------
    \219\ See Phoenix Field Hearing on Small Business Lending, supra 
note 29, at 3-4.
    \220\ Asset-based lending is done based on the availability of 
collateral. Financial statement lending is based on the strength of the 
business's balance sheet and income statements.
    \221\ See Testimony of Stan Ivie, supra note 161.
    \222\ Of course, much lending is a combination of two or more of 
these lending technologies. Gregory F. Udell, How Will a Credit Crunch 
Affect Small Business Finance?, Federal Reserve Bank of San Francisco 
Economic Letter, Number 2009-09 (Mar. 6, 2009) (online at 
www.frbsf.org/publications/economics/letter/2009/el2009-09.pdf).
---------------------------------------------------------------------------
    Credit scoring is an adaptation of a method long used in 
consumer lending, developing statistical techniques to put a 
number on a small business's credit risk. Credit scoring uses 
``information from the financial statements of the business, 
[with] heavy weighting  . .  put on the financial condition and 
history of the principal owner, given that the creditworthiness 
of the firm and the owner are closely related for most small 
businesses.'' \223\ Credit scoring is primarily used for loans 
of under $250,000.\224\ It grew in importance for small 
business loans in the early part of the last decade, and one 
early study found that credit scoring increased the likelihood 
that a large bank would make a small business loan in a low- or 
moderate-income area. A more impersonal form of lending, it was 
less labor-intensive, less costly, and less dependent on 
collateral. It may have reduced spreads for small business 
loans and increased credit availability,\225\ and may be 
responsible for some portion of larger banks' growing market 
share over the course of the decade.
---------------------------------------------------------------------------
    \223\ Allen N. Berger and Gregory F. Udell, Small Business Credit 
Availability and Relationship Lending: The Importance of Bank 
Organisational Structure, Economic Journal, at 8 (2002) (online at 
www.federalreserve.gov/PUBS/feds/2001/200136/200136pap.pdf) 
(hereinafter ``The Importance of Bank Organisational Structure'').
    \224\ Id., at 8.
    \225\ W. Scott Frame, Michael Padhi, and Lynn Woosley, The Effect 
of Credit Scoring on Small Business Lending in Low- and Moderate-Income 
Areas, at 1, 3-4 (Apr. 2001) (online at www.frbatlanta.org/
filelegacydocs/wp0106.pdf).
---------------------------------------------------------------------------
    With the post-crisis reduction of lending by larger banks, 
the dominance of credit scoring has reversed with a shift back 
towards relationship lending. Unlike credit scoring and other 
transaction-based lending, relationship lending is based on 
what are called ``soft'' data.\226\ Relationship lending 
involves a small bank manager or loan officer who is part of 
the same community as the small business owner; through this 
long-term relationship, the bank develops ``soft'' 
information--knowledge and comfort level with the borrower's 
financial stability, business potential, and lending risk.\227\ 
Smaller banks' physical presence in communities and their 
knowledge of the local economy, culture, and population make 
them a natural source for such small business lending.\228\
---------------------------------------------------------------------------
    \226\ The Importance of Bank Organisational Structure, supra note 
223, at 3.
    \227\ ``[T]he lender bases its decisions in substantial part on 
proprietary information about the firm and its owner through a variety 
of contacts over time. This information is obtained in part through the 
provision of loans and deposits and other financial products. 
Additional information may also be gathered through contact with other 
members of the local community, such as suppliers and customers, who 
may give specific information about the firm and owner or general 
information about the business environment in which they operate. 
Importantly, the information gathered over time has significant value 
beyond the firm's financial statements, collateral, and credit score, 
helping the relationship lender deal with informational opacity 
problems. . . .'' The Importance of Bank Organisational Structure, 
supra note 223, at 9.
    \228\ Testimony of Raj Date before the Senate Banking Committee, 
supra note 150, at 5.
---------------------------------------------------------------------------
    Small businesses that obtain credit through relationship 
lending at local banks are less reliant on the three hard data 
categories. The manager of a small bank who has grown up with a 
small business owner might be more willing to overlook a slow 
six-month period, knowing, for example, that the business owner 
was dealing with a difficult family situation at the time. This 
informal process could pose a problem, however, for borrowers 
who are shut out of the small bank lending market by their 
local bank's capital constraints. If these borrowers must then 
turn to small banks in other communities or to larger banks, 
they might need to rely more heavily on hard data. This could 
be problematic for some small businesses that relied on 
relationship lending, as they could lack audited financial 
statements or assets that could serve as collateral.\229\ If 
one of these businesses lost its relationship lender because of 
weak capital at the bank or the bank's failure or 
consolidation, it would probably take some time for that 
business to assemble the documentation or collateral needed to 
obtain new credit.\230\
---------------------------------------------------------------------------
    \229\ Gregory F. Udell, How Will a Credit Crunch Affect Small 
Business Finance?, Federal Reserve Bank of San Francisco Economic 
Letter, Number 2009-09 (Mar. 6, 2009) (online at www.frbsf.org/
publications/economics/letter/2009/el2009-09.html).
    \230\ See Elizabeth Duke Testimony before House Financial Services 
and House Small Business Committees, supra note 114, at 4-5 
(``Established banking relationships are particularly important to 
small businesses, who generally do not have access to the broader 
capital markets and for whom credit extension is often based on private 
information acquired through repeated interactions over time. When 
existing lending relationships are broken, time may be required for 
other banks to establish and build such relationships, allowing lending 
to resume'').
---------------------------------------------------------------------------
    These shifts in and shocks to the small business lending 
landscape mean that portions of the market share of small 
business lending are shifting back to smaller banks. This 
could, however, lead to greater instability for small 
businesses. Because of large banks' size, they are able to make 
large volumes of small business loans even though these loans 
remain a small part of their portfolio. By contrast, small 
banks make a similar amount of small business loans, but those 
loans constitute a larger portion of their lending portfolios, 
so pressures on the small business lending markets affect those 
small banks to a greater degree. Small banks tend to have 
greater concentrations of commercial real estate assets, and 
are therefore in greater danger of a potential commercial real 
estate crunch. In fact, smaller banks with the highest exposure 
to commercial real estate provide approximately 40 percent of 
all small business loans.\231\ A higher market share of small 
business lending for these banks could portend a tight market 
for small business credit until banks are able to resolve their 
commercial real estate portfolios.
---------------------------------------------------------------------------
    \231\ COP February Oversight Report, supra note 2, at 42; Dennis P. 
Lockhart, president and chief executive officer, Federal Reserve Bank 
of Atlanta, Remarks at the Urban Land Institute's Emerging Trends in 
Real Estate Conference, Economic Recovery, Small Businesses, and the 
Challenge of Commercial Real Estate (Nov. 10, 2009) (online at 
www.frbatlanta.org/news/speeches/lockhart_111009.cfm).
---------------------------------------------------------------------------
    Large banks' reducing lending to small business pushes more 
of the small business lending market onto smaller banks, at the 
same time that many of these smaller banks are struggling to 
resolve their commercial real estate portfolios. The end result 
of shifting smaller business lending back to smaller banks is 
difficult to predict, and whether the shift is stable remains 
to be seen. Given that Treasury intends to focus on smaller 
banks ($10 billion or less) in order to spur small business 
lending, the role and market share of smaller banks takes on 
substantial importance.

              F. New Initiative for Small Business Lending

    In his State of the Union address on January 27, 2010, 
President Barack Obama announced the creation of a new fund to 
support lending to small businesses.\232\ Less than one week 
later, on February 2 and 3, 2010, the Administration announced 
two separate programs with the shared goal of fueling small 
business lending: the CDCI and the SBLF. The CDCI, a $780 
million program that is discussed in more detail above, will 
use TARP funds to target lending in underserved and minority 
communities.\233\ In contrast, the proposed SBLF would be 
established through new legislation, which would transfer $30 
billion in repaid TARP funds to a non-TARP program.\234\ The 
SBLF would then inject capital into small and medium banks and 
use incentives to encourage them to increase their lending. To 
exempt the SBLF from current congressional budget process 
requirements (``paygo rules''), the Administration had 
originally designated the $30 billion expenditure as an 
``emergency requirement,'' and had also proposed a reduction in 
the ceiling on TARP purchase authority.\235\ In a more recent 
draft, the Administration has left open the most appropriate 
means of offsetting the cost of the program.\236\
---------------------------------------------------------------------------
    \232\ President Obama first announced his plan for the program 
during a speech in Landover, Maryland on October 21, 2009. The White 
House, Remarks by the President on Small Business Initiatives (Oct. 21, 
2009) (online at www.whitehouse.gov/the-press-office/remarks-president-
small-business-initiatives-landover-md).
    \233\ See Section D.2, supra (for an extended discussion of the 
CDCI).
    \234\ The White House, Small Business Lending Fund--Fact Sheet 
(Feb. 2, 2010) (online at www.whitehouse.gov/sites/default/files/FACT-
SHEET-Small-Business-Lending-Fund.pdf) (hereinafter ``Small Business 
Lending Fund Fact Sheet''). On May 7, the Administration provided 
Congress with revised proposed legislation for the program, and the 
discussion of the SBLF in this report is based upon that proposal. It 
modifies the original proposal in some respects, and includes a 
provision that replaces the paygo provisions with a statement that the 
``Administration will work with the Congress to determine the most 
appropriate means of offsetting the cost of the program.'' Draft 
legislation provided to the Panel by Treasury (May 7, 2010).
    \235\ Prior version of draft legislation provided to the Panel by 
Treasury (Apr. 13, 2010). According to the Administration, ``paygo'' is 
a statutory rule that would require the government to ``pay for new tax 
or entitlement legislation'' such that ``[c]reating a new non-emergency 
tax cut or entitlement expansion would require offsetting revenue 
increases or spending reductions.'' The White House, Message from the 
President to Congress Regarding PAYGO Legislation (June 9, 2009) 
(online at www.whitehouse.gov/the_press_office/Message-from-the-
President-to-Congress-regarding-PAYGO-legislation/). Section 4(g) 
provides an exemption for ``emergency requirements.'' Statutory Pay-As-
You-Go Act of 2010, Pub. L. 111-139 (Feb. 12, 2010) (online at 
www.gpo.gov/fdsys/pkg/PLAW-111publ139/pdf/PLAW-111publ139.pdf) (``If a 
provision is designated as an emergency requirement under this Act, CBO 
or OMB, as applicable, shall not include the budgetary effects of such 
a provision in its estimate of the budgetary effects of that PAYGO 
legislation'').
    \236\ Draft legislation provided to the Panel by Treasury (May 7, 
2010).
---------------------------------------------------------------------------

1. Program Details

    Banks would be eligible for the SBLF only if they hold less 
than $10 billion in assets. To receive the funds, a bank would 
first need to receive approval from its regulator. The program 
would divide eligible institutions into two categories: banks 
with less than $1 billion in assets (small banks) and banks 
with between $1 billion and $10 billion in assets (medium 
banks). Small banks would be eligible for investments of Tier 1 
capital of up to five percent of their risk-weighted assets, 
while the cap for medium banks would be set at three percent. 
Receiving banks could then leverage these funds to the extent 
permitted by their regulators.\237\
---------------------------------------------------------------------------
    \237\ Small Business Lending Fund Fact Sheet, supra note 234. In 
most cases, the capital provided would be Tier 1. Treasury 
conversations with Panel Staff (Apr. 29, 2010).
---------------------------------------------------------------------------
    The core of the SBLF program is an incentive for banks to 
increase lending. Participating institutions would pay a 
dividend of five percent, which could drop as low as one 
percent if the bank ``demonstrates increased small business 
lending relative to a baseline set in 2009'' and rise to seven 
percent if the bank's lending rate decreases or plateaus after 
two years.\238\ The SBLF currently defines ``small business 
lending'' as any loan made by a bank with less than $10 billion 
in assets that falls into one of four categories: (1) 
commercial and industrial loans, (2) owner-occupied, non-farm, 
non-residential real estate loans, (3) loans to farmers and 
loans that finance agricultural production, and (4) loans 
secured by farmland.\239\ For every 2.5 percent incremental 
increase in loans made by small and medium banks, the dividend 
would be reduced by one percent. The enumerated loans would be 
monitored for a two-year period, starting on the date of the 
investment. Based on the lending rate at the end of that two-
year period, the dividend rate would be ``locked-in'' and ``the 
bank would benefit from this attractive rate for the following 
three years.'' By contrast, if the bank's lending rate 
decreased or stayed the same over those two years, the dividend 
rate would rise to seven percent. At the end of this five-year 
period, the dividend rate would increase to nine percent, which 
would provide an incentive for banks to repay the funds.\240\ 
Banks that had previously received CPP or CDCI funds would have 
an additional incentive to participate: they could convert the 
terms of their CPP or CDCI funds to the more favorable terms of 
the SBLF.\241\
---------------------------------------------------------------------------
    \238\ According to the draft legislation, the reduced dividend 
would apply only to an amount of the investment that a bank uses to 
increase lending. Draft legislation provided to the Panel by Treasury 
(May 7, 2010) (``The reduction in the dividend or interest rate payable 
to Treasury by any eligible institution shall be limited such that the 
rate reduction shall not apply to an amount of the investment made by 
Treasury that is greater than the increase in lending realized under 
this program'').
    \239\ Because it does not impose a cap on the size of loans, this 
definition would permit loans in excess of $1 million to be categorized 
as ``small business lending.'' Draft legislation provided to the Panel 
by Treasury (May 7, 2010). Treasury maintains that while imperfect, the 
definition will serve as an appropriate proxy for small business 
lending--Treasury asserts that the overwhelming majority of loans made 
by small and medium banks go to small businesses. Treasury 
conversations with Panel staff (Apr. 14, 2010).
    \240\ Small Business Lending Fund Fact Sheet, supra note 234.
    \241\ Under the CPP program, institutions are required to pay a 
dividend of five percent for the first five years and nine percent 
thereafter. Although the initial dividend under the CPP is identical to 
the initial dividend under the SBLF, the CPP dividend is fixed and is 
not eligible for subsequent reduction. There is presently some debate 
as to the implications of the refinance provision. See House Committee 
on Financial Services, Written Testimony of Linus Wilson, professor of 
finance, University of Louisiana at Lafayette (May 11, 2010) (online at 
www.house.gov/apps/list/hearing/financialsvcs_dem/
wilson_testimony_5.11.10.pdf) (stating that the conversion provision 
could be used by financial institutions to cancel their warrants).
---------------------------------------------------------------------------
    Unlike the CPP, the SBLF includes mild penalties for banks 
that take the money and do not use it to lend. As explained 
above, the program balances a dividend decrease with a dividend 
increase: if a bank does not increase or decreases its lending 
by the end of the two-year period, the dividend increases to 
seven percent. The SBLF is also distinct from the CPP in that 
it requires applicant banks to submit a ``small business 
lending plan'' describing how they plan to address the needs of 
small businesses.\242\ However, the SBLF does not require banks 
to report on how they use the funds beyond reports to the FDIC. 
Using an incentive strategy to encourage banks to lend 
distinguishes the SBLF from the CPP, which included no lending 
incentive.
---------------------------------------------------------------------------
    \242\ Draft legislation provided to the Panel by Treasury (May 7, 
2010).
---------------------------------------------------------------------------

2. The Rationale for Locating the SBLF Outside of the TARP

            a. The TARP ``Stigma''
    Treasury maintains that it is necessary to situate the SBLF 
outside of the TARP in order to avoid the TARP ``stigma.'' In 
December 2009 testimony before the Panel, Treasury Secretary 
Timothy Geithner stated that banks are reluctant to accept TARP 
funds because they fear that they will be ``stigmatized'' and 
subject to restrictions that ``might make it harder for them to 
run their businesses.'' He added that banks view TARP funds as 
a ``sign of weakness, not strength'' \243\ and that ``[w]e had 
600 small banks withdraw their applications from TARP because 
they were scared about the stigma and the conditions that would 
come.'' \244\ Similarly, Assistant Secretary Allison has 
testified that ``while Treasury has the existing authority and 
funding today to create a small business lending facility under 
TARP, we are convinced that if we did so, the number of small 
and medium-sized banks willing to participate would decline 
dramatically'' as a result of the ``belief that a `stigma' is 
associated with the TARP program.'' \245\
---------------------------------------------------------------------------
    \243\ Congressional Oversight Panel, Transcript: COP Hearing with 
Treasury Secretary Timothy Geithner (Dec. 10, 2009) (online at 
cop.senate.gov/hearings/library/hearing-121009-geithner.cfm).
    \244\ House Committee on the Budget, Testimony of Timothy F. 
Geithner, secretary, U.S. Department of the Treasury, Treasury 
Department Fiscal Year 2011 Budget (Feb. 24, 2010) (online at 
www.cq.com/display.do?dockey=/cqonline/prod/data/docs/html/transcripts/
congressional/111/congressionaltranscripts111-
000003297661.html@committees&metapub=CQ-
CONGTRANSCRIPTS&searchIndex=0&seqNum=2).
    \245\ Herb Allison Testimony before House Financial Services and 
House Small Business Committees, supra note 98, at 5.
---------------------------------------------------------------------------
    The perception of a TARP stigma is widespread. One small 
business group said that bank customers view the acceptance of 
TARP funds as a sign that a bank is on the verge of 
failure.\246\ In testimony before the Senate Banking Committee, 
Arthur C. Johnson, chairman of the American Bankers 
Association, stated that:
---------------------------------------------------------------------------
    \246\ NFIB conversations with Panel staff (Mar. 18, 2010).

        using TARP money to fund [a small business lending 
        program] raises the very real possibility that the TARP 
        stigma will discourage banks from participating. This 
        is because hundreds of banks that had never made a 
        subprime loan or had anything to do with Wall Street 
        took TARP capital with their regulator's 
        encouragement--even though they did not need it--so 
        they could bolster their lending and financial 
        position. Then within weeks, they were demonized and 
        subject to after-the-fact restrictions.\247\
---------------------------------------------------------------------------
    \247\ Senate Banking, Housing, and Urban Affairs, Subcommittee on 
Economic Policy, Written Testimony of Arthur C. Johnson, chairman, 
American Bankers Association, Restoring Credit to Main Street: 
Proposals to Fix Small Business Borrowing and Lending Problems, at 8 
(Mar. 2, 2010) (online at banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=9ca4a5af-0b8f-4e8d-a2ca-
95d846c1f3f2) (hereinafter ``Testimony of Arthur Johnson before the 
Senate Banking Committee'') (emphasis in original). Treasury confirmed 
that in recent months banks have consistently been reluctant to 
participate in the TARP due to a fear of after-the-fact restrictions 
and a perception that TARP funds carry a stigma. Treasury conversations 
with Panel staff (Apr. 7, 2010).

    Similarly, industry sources maintain that the public sees 
the word ``TARP'' as equivalent to ``bailout'' and that a 
program designed to alleviate the toxic asset problem became 
toxic for banks.\248\ Data on the CPP are consistent with the 
notion of a developing TARP stigma: despite widespread 
participation at the outset of the program, participation 
dwindled over time, despite the lack of substantial improvement 
in the banking sector.\249\ Assistant Secretary Allison 
testified that small banks have faced pressure from competitors 
that use the `` `TARP recipient' label in negative 
advertising.'' \250\ The public's negative perception of the 
TARP may also have resulted from the sense that it was used as 
a bailout of weak banks, even though the government initially 
declared that the funds would be used to support healthy 
institutions.\251\ As the Panel noted in its January report, 
``TARP was supposedly given to healthy banks but in many 
instances this was not the case.'' \252\
---------------------------------------------------------------------------
    \248\ ABA conversations with Panel staff (Mar. 22, 2010); Greater 
Phoenix Economic Council Delegation conversations with Panel staff 
(Apr. 13, 2010) (for information about the Greater Phoenix Economic 
Council, see www.gpec.org/).
    \249\ For example, only six institutions received CPP funds in 
October 2009--two months from the end of the program in December 2009--
but 65 institutions received funds in March 2009. U.S. Department of 
the Treasury, Troubled Asset Relief Program: Transactions Report for 
Period Ending April 9, 2010, at 9-10, 13 (Apr. 13, 2010) (online at 
www.financialstability.gov/docs/transaction-reports/4-13-
10%20Transactions%20Report%20as%20of%204-9-10.pdf). One witness at the 
Panel's Field Hearing in Phoenix noted that at the outset taking TARP 
funds was viewed as a sign of health and stability but that over time 
taking the funds was viewed more negatively. See also Congressional 
Oversight Panel, Testimony of James Lundy, president and chief 
executive officer, Alliance Bank of Arizona, Transcript: Phoenix Field 
Hearing on Small Business Lending (Apr. 27, 2010) (publication 
forthcoming) (online at cop.senate.gov/hearings/library/hearing-042710-
phoenix.cfm).
    \250\ Herb Allison Testimony before House Financial Services and 
House Small Business Committees, supra note 98, at 6. For example, in 
Texas, Worthington National Bank received $5 million in new deposits in 
one month after it erected anti-TARP billboards, such as ``Just say no 
to bailout banks. Bank responsibly,'' ``Did your bank take a bailout? 
We didn't,'' and ``Don't feed the Big Banks.'' The bank's CEO said, ``I 
guess people are voting with their checkbooks because people have had a 
tremendous response to this campaign.'' He initiated the campaign 
because he was ``vehemently opposed'' to accepting TARP funds and 
wanted to distinguish his bank from competitors that participated in 
the TARP. ``How can we be leaders in our community and in our industry 
and to our children when we're taking handouts?'' he asked. Worthington 
National Bank, No TARP For Us (accessed Mar. 30, 2010) (citing Fox 
Business, Why One Bank Said No to TARP (online at 
video.foxbusiness.com/v/3884664/why-one-bank-said-no-to-tarp)).
    \251\  U.S. Department of the Treasury, Statement by Secretary 
Henry M. Paulson, Jr. on Actions to Protect the U.S. Economy (Oct. 14, 
2008) (online at www.financialstability.gov/latest/hp1205.html) (``Our 
goal is to see a wide array of healthy institutions sell preferred 
shares to the Treasury, and raise additional private capital, so that 
they can make more loans to businesses and consumers across the 
nation''). See COP December Oversight Report, supra note 37, at 31 
(``In addition to costing taxpayers, the recent bank failures call into 
question Treasury's assertion that CPP funds were only available to 
`healthy' or `viable' banks''); Office of the Special Inspector General 
for the Troubled Asset Relief Program, Quarterly Report to Congress, 
at 53 (Jan. 30, 2010) (online at sigtarp.gov/reports/congress/2010/
January2010_Quarterly_Report_to_Congress.pdf) (``Although CPP was meant 
for investments in healthy and viable banks, some CPP recipients have 
filed for bankruptcy protection'').
    \252\ COP January Oversight Report, supra note 65, at 41 n.192.
---------------------------------------------------------------------------
    In addition, industry sources maintain that restrictions 
that were applied after banks accepted TARP funds have made 
banks hesitant to participate in the TARP, as they have no 
guarantee that the restrictions in place at the time they 
accept government funds will remain constant.\253\ For support, 
industry sources point to the passage of ARRA four months after 
the TARP was established. When banks first received funds under 
the TARP in October 2008, the only compensation restrictions 
were those set forth in EESA.\254\ After the ARRA amended 
EESA's executive compensation provisions, Treasury issued 
regulations creating more stringent compensation 
restrictions.\255\ The regulations established a Special Master 
\256\ and gave him wide latitude to oversee compensation 
policies at institutions that had received ``exceptional 
financial assistance.'' \257\ As a result, TARP recipients are 
currently subject to different compensation restrictions from 
those that existed at the outset of the program.\258\
---------------------------------------------------------------------------
    \253\ Congressional Oversight Panel, August Oversight Report: The 
Continued Risk of Troubled Assets, at 46 (Aug. 11, 2009) (online at 
cop.senate.gov/documents/cop-081109-report.pdf) (``As with all TARP 
programs, there is a risk that banks and investors may be wary of the 
program because fears that participation will subject them to statutory 
restrictions, including those that they cannot anticipate. Government 
involvement has been viewed by many institutions as subject to 
unpredictable change''); ICBA conversations with Panel staff (Mar. 25, 
2010); Testimony of Arthur Johnson before the Senate Banking Committee, 
supra note 247, at 8 (``We would urge Congress to distinguish any new 
proposal it considers from TARP in order to avoid creating a program 
that permits after-the-fact restrictions'').
    \254\ 12 U.S.C. Sec. 5221.
    \255\ ARRA was signed into law by President Obama on February 17, 
2009. It authorized Treasury to issue standards governing executive 
compensation. On June 15, 2009, Treasury issued regulations governing 
executive compensation. 31 CFR Sec. 30.
    \256\ Kenneth Feinberg was appointed as the Special Master on June 
10, 2009. The White House, Press Briefing by Press Secretary Robert 
Gibbs and Secretary of Commerce Gary Locke (June 10, 2009) (online at 
www.whitehouse.gov/the-press-office/briefing-secretary-commerce-gary-
locke-and-press-secretary-robert-gibbs-6-10-09).
    \257\  See 31 CFR Sec. 30.1.
    \258\ There is some debate about the importance of executive 
compensation restrictions. Assistant Secretary Allison stated that 
executive compensation was a concern in testimony before the House 
Financial Services Committee and the House Small Business Committee. 
See Herb Allison Testimony before House Financial Services and House 
Small Business Committees, supra note 98, at 5 (``Smaller institutions, 
in particular, have struggled with the executive compensation 
restrictions that are the same for all institutions, regardless of 
size. . . . This creates a situation where, for example, a small 
community bank may not be permitted to make severance payments to a 
bank teller or secretary due to the `golden parachute' prohibition that 
applies to senior executives and the next five highest-paid employees. 
Banks with few employees wind up disproportionately affected''). Some 
industry sources, however, have stated that executive compensation is 
not an issue for small banks. ABA conversations with Panel staff (Mar. 
23, 2010).
---------------------------------------------------------------------------
    TARP recipients have also been excluded from a benefit 
provided by the Worker, Homeownership, and Business Assistance 
Act of 2009.\259\ Enacted on November 6, 2009, the Act 
permitted taxpayers with net operating losses in 2008 and 2009 
to apply those losses to tax payments made in five preceding 
tax years, a provision known as the ``net operating loss 
carryback'' (NOL carryback).\260\ Before this law was enacted, 
the NOL carryback applied only to two preceding tax years. The 
Act stated explicitly that the benefit would not apply to TARP 
recipients.\261\ Bank industry sources have stated that when 
banks accepted TARP funds, they had no reason to anticipate 
that their status as TARP recipients would cause them to be 
denied access to subsequent benefits afforded to their non-TARP 
competitors.\262\
---------------------------------------------------------------------------
    \259\ Pub. L. 111-92 (Nov. 6, 2009).
    \260\ 26 U.S.C. Sec. 172.
    \261\ 26 U.S.C. Sec. 56 note. TARP recipients are excluded even if 
they have already repaid the TARP funds. Internal Revenue Service, 
Questions and Answers for The Worker, Homeownership, and Business 
Assistance Act of 2009--Section 13 5-year Net Operating Loss (NOL) 
Carryback (Feb. 24, 2010) (online at www.irs.gov/newsroom/article/
0,,id=217370,00.html) (``Q2: Who cannot make an extended carryback 
election under WHBAA? A: Taxpayers that received certain benefits 
(whether or not they were repaid) under the Emergency Economic 
Stabilization Act of 2008 (TARP recipients) or any taxpayer that was a 
member of the TARP recipient's affiliated group during 2008 or 2009 may 
not make a WHBAA election'').
    \262\ Industry sources conversations with Panel staff (Mar. 25, 
2010); Treasury conversations with Panel staff (Apr. 7, 2010) (stating 
that the exclusion from the net operating loss provision made the 
stigma worse because it made institutions so fearful of retroactive 
restrictions that they were reluctant to participate).
---------------------------------------------------------------------------
            b. Will the SBLF Avoid the TARP ``Stigma''?
    It is not clear that creating a new program outside of the 
TARP will be sufficient to insulate it from the TARP-era stigma 
associated with financial institutions that accept government 
money and persuade banks to participate. At a Panel hearing, 
one bank president implied that banks may be hesitant to accept 
government funds in the future because they are likely to be 
more cautious about the possibility that the public will react 
negatively.\263\ Treasury officials state that members of 
Congress have expressed concern that any linkage between the 
new program and the TARP would discourage participation, even 
if the sole connection is the transfer of funds from one 
program to the other.\264\
---------------------------------------------------------------------------
    \263\ See Congressional Oversight Panel, Testimony of Peter 
Prickett, president and chief executive officer, First National Bank--
Fox Valley, Transcript: COP Field Hearing on Small Business Lending in 
Milwaukee, at 56 (Apr. 29, 2009) (online at cop.senate.gov/documents/
transcript-042909-milwaukee.pdf) (hereinafter ``Transcript: COP Field 
Hearing on Small Business Lending in Milwaukee'') (``[M]aybe we . . . 
did not think enough about the public perception of the whole [TARP] 
program'').
    \264\ Treasury conversations with Panel staff (Apr. 7, 2010).
---------------------------------------------------------------------------
    Treasury officials have suggested that the new program 
might be able to insulate itself from some of these stigma 
concerns if it were able to secure immediate participation from 
an anchor group of banks.\265\ However, bank participation in 
the SBLF is likely to hinge upon the form and scope of 
restrictions imposed on recipients of SBLF funds.\266\ To the 
extent that banks have become frustrated by TARP restrictions, 
such as limits on executive compensation and increased 
regulatory oversight,\267\ their willingness to accept SBLF 
funds will be contingent upon the new program's ability to 
distance itself from the TARP. The Administration appears to be 
responsive to this concern, as Assistant Secretary Allison 
affirmed that ``participating banks would not be subject to 
TARP conditions.'' \268\ In addition, the draft contains 
assurances that the SBLF is ``separate and distinct'' from the 
TARP and that if there is a subsequent ``change in law that 
modifies the terms of the investment or program in a materially 
adverse respect,'' then a bank may repay the investment 
``without impediment,'' provided that its regulators 
agree.\269\ The assurances have, however, limited substance. 
Establishing the SBLF as ``separate and distinct'' from the 
TARP will have little effect if in the current economic and 
political environment, banks are subject to a stigma for 
accepting government money no matter the name of the program. 
Moreover, the assurance that banks may repay their TARP funds 
if the government imposes after-the-fact restrictions not only 
fails to distinguish the SBLF from the CPP--after all, CPP 
recipients also could repay with the approval of the 
appropriate regulator--but also provides little solace for 
banks in light of the NOL carryback. As discussed above, banks 
that received TARP funds were denied the NOL benefit even if 
they had already repaid their TARP money. The assurance cannot 
prevent a similar situation from occurring with the SBLF.
---------------------------------------------------------------------------
    \265\ Treasury conversations with Panel staff (Apr. 7, 2010).
    \266\ See Herb Allison Testimony before House Financial Services 
and House Small Business Committees, supra note 98, at 5 (``Previous 
TARP programs may have seen reduced participation as a result of 
several factors, including certain statutory restrictions'').
    \267\ Transcript: COP Field Hearing on Small Business Lending in 
Milwaukee, supra note 263, at 56 (``I can tell you about every other 
week, I get another letter from some office I have never heard of with 
all kinds of questions about what we are doing with the money and this 
and that'').
    \268\ Herb Allison Testimony before House Financial Services and 
House Small Business Committees, supra note 98, at 5.
    \269\ Draft legislation provided to the Panel by Treasury (May 7, 
2010).
---------------------------------------------------------------------------
    In spite of Treasury officials' intention to ensure that 
the new program is distinct from the TARP, the SBLF is 
identical to the TARP in one key respect: the government 
provides public money to private banks. From the taxpayer's 
point of view--and from the banking industry's point of view--
this core similarity may make the SBLF look uncomfortably 
similar to the TARP. In testimony before the Panel, one bank 
president suggested that a new program that uses TARP funds--
even one that is established free of some of the restrictions 
that have plagued TARP participation--may be met with 
skepticism.\270\ Consequently, the fact that the new program 
has a different name may not be enough to insulate it from the 
TARP stigma. And if the new program fails to address the 
concerns of banks, they may decline to participate in the 
SBLF.\271\
---------------------------------------------------------------------------
    \270\ See Testimony of Candace Wiest, supra note 65.
    \271\  Without taking a position on the merits of these concerns, 
the Panel notes that businesses, including banks, always face 
regulatory uncertainty--the uncertainty of TARP restrictions is 
therefore arguably a difference of degree, not kind.
---------------------------------------------------------------------------
    On the other hand, although any new program must be one in 
which banks will participate, if it excessively limits 
Treasury's flexibility, Treasury may be unable to cure flaws in 
the program, possibly harming taxpayers. Any new program must 
balance the need to ensure adequate regulatory stability so as 
to maintain interest in participation against the need to 
preserve programmatic flexibility. Any new program should also 
require participating institutions to gather data so that 
Treasury and the taxpayers can evaluate whether it is, in fact, 
accomplishing its goals.

3. Issues with the SBLF: Will the SBLF Increase Lending to Small 
        Businesses?

            a. Structural Problems of the SBLF
    Whether the SBLF will spur lending is contingent upon three 
factors: an accurate diagnosis of the factors currently 
inhibiting small business lending, a viable strategy for 
spurring lending, and program mechanics that will implement 
that strategy effectively. First, the potential effectiveness 
of the SBLF depends upon an accurate diagnosis of contraction 
in small business lending. The SBLF assumes that the 
contraction in lending stems at least in part from reduced 
supply as opposed to reduced demand. The SBLF will be less 
relevant if declining business sales play a larger role in 
lending contraction than banks' rejections of loan 
applications.\272\
---------------------------------------------------------------------------
    \272\ See Section E.1 (discussing whether the problem results more 
from limited supply or limited demand). To the extent that the problem 
is one of demand, a supply-side solution is unlikely to have a 
significant effect.
---------------------------------------------------------------------------
    Second, even if the SBLF is based on an accurate diagnosis 
of the problems in small business lending, it employs a model 
that may exhibit some of the same weaknesses as the CPP. Like 
the CPP, the SBLF injects capital into banks, assuming that an 
improved capital position will increase lending--despite the 
lack of evidence that the CPP did so. The SBLF is, admittedly, 
not identical to the CPP and may spur more lending than the CPP 
because it provides an incentive to increase lending: even 
after two years, at seven percent, the capital provided is 
still relatively cheap. Nonetheless, participating institutions 
may decide to keep the government's money, rather than use it 
to increase lending. As discussed above, there are many 
pressures on banks' balance sheets, and banks that face capital 
constraints are less likely to lend.\273\ Moreover, the SBLF 
includes a mild penalty for banks that fail to increase 
lending. Treasury maintains that if banks do not use the money 
to lend, the taxpayer will either suffer no cost or may profit 
on the program.\274\ According to Treasury, the universal 
dividend increase at five years provides a strong incentive to 
repay the investment, regardless of whether the bank increases 
its lending.\275\ Nonetheless, the distinctions between the 
SBLF and the CPP have the potential to be mild.
---------------------------------------------------------------------------
    \273\  FDIC conversations with Panel staff (Apr. 30, 2010).
    \274\ Treasury conversations with Panel staff (Apr. 7, 2010).
    \275\ Treasury conversations with Panel staff (Apr. 7, 2010).
---------------------------------------------------------------------------
    Finally, even if the problem is primarily credit supply, 
and even if capital injections are capable of alleviating the 
problem, the SBLF must still be designed in such a way as to 
increase lending. The SBLF offers a lending incentive: dividend 
reductions are offered as a reward to banks that increase their 
lending, while dividend increases reinforce the point. Unlike 
some aspects of prior TARP programs, the SBLF is primarily 
designed around an incentive structure. Treasury appears to be 
betting that an incentive-based program will spur lending to 
small business on a scale and scope that prior TARP programs 
did not.
    Whether the program is likely to be effective--aside from 
the question of whether it is necessary or useful--hinges on 
several questions. First, is the incentive--a ratio of 2.5:1 of 
lending increases to dividend decreases, and a dividend 
increase for banks whose lending decreases or stagnates--
sufficient to generate a change in bank behavior? Industry 
sources maintain that a 2.5:1 ratio is likely to be 
insufficient in the current environment to inspire a meaningful 
increase in banks' lending practices.\276\ Other trade 
organizations echoed the concern that the program is too weak 
to have the desired effect, as concerns about heightened 
enforcement of existing regulations and uncertainty about the 
stringency of future regulation are likely to outweigh the 
effect of the incentive.\277\ For example, industry sources 
point to the fact that among other things, Congress is 
considering legislation that would restructure the regulation 
of the financial sector,\278\ as well as legislation that would 
impose a new tax on financial institutions.\279\ Banks may find 
it difficult to incorporate a lending incentive into their 
short-term plans when they are faced with the possibility of 
more stringent regulation.\280\ Of course, it is difficult to 
ascertain the extent to which these factors contribute to low 
lending levels. As discussed in more detail above, other 
factors--such as a bank's capital position, anticipated CRE 
losses, and interest rate risk--may also inhibit lending.\281\
---------------------------------------------------------------------------
    \276\ ABA conversations with Panel staff (Mar. 22, 2010).
    \277\ NSBA conversations with Panel staff (Mar. 22, 2010).
    \278\ See, e.g., Senator Dodd Financial Regulation Reform Summary, 
supra note 72. See also American Bankers Association, Issues of 
Interest: Regulatory Restructuring (May 4, 2010) (online at 
www.aba.com/Press+Room/071609RegulatoryRestructuring.htm) (hereinafter 
``Issues of Interest: Regulatory Restructuring'').
    \279\ Senate Committee on Finance, Written Testimony of James 
Chessen, chief economist, American Bankers Association, The President's 
Proposed Fee on Financial Institutions Regarding TARP: Part 2, at 5-10, 
(May 4, 2010) (online at finance.senate.gov/imo/media/doc/
050410JC1.pdf).
    \280\ ABA conversations with Panel staff (Mar. 22, 2010). See also 
Issues of Interest: Regulatory Restructuring, supra note 278.
    \281\ See Section E, supra.
---------------------------------------------------------------------------
    Second, the incentive must be sufficient to overcome other 
barriers to lending. As the Administration has stated, it lacks 
the authority ``directly'' to alter the capital reserve 
requirements imposed on banks by independent banking 
regulators.\282\ In addition, from the banks' standpoint, 
interest rate risk,\283\ unrealized losses, continuing problems 
with residential and commercial mortgages, the prospect of 
tighter capital requirements, and the proposed implementation 
of mark-to-market accounting that would force the 
acknowledgment of losses are all major concerns that are likely 
discouraging banks from lending.\284\ In particular, some banks 
may face future challenges as a result of holding troubled real 
estate assets on their books.\285\ If banks are forced to 
report losses on these assets in the coming months and years, 
even banks that currently appear to be well-capitalized may be 
forced to raise additional capital. Banks that face capital 
constraints are less likely to lend.\286\
---------------------------------------------------------------------------
    \282\ The White House, Remarks by the President and the Vice 
President at Town Hall Meeting in Tampa, Florida (Jan. 28, 2010) 
(online at www.whitehouse.gov/the-press-office/
remarks-president-and-vice-president-town-hall-meeting-tampa-florida) 
(hereinafter ``Remarks by the President and the Vice President at Tampa 
Town Hall Meeting'') (stating that the Administration cannot 
``directly'' adjust capital requirements imposed by bank regulators).
    \283\ Industry sources stated that many banks are concerned about 
interest rate risk and are reluctant to lock themselves into long-term 
loans at a time of historic interest rate lows. Regulators have also 
expressed concerns about the impact of interest rate risk on lending to 
small businesses. See Sheila C. Bair, chairman, Federal Deposit 
Insurance Corporation, Remarks at the FDIC's Symposium on Interest Rate 
Risk Management (Jan. 29, 2010) (online at www.fdic.gov/news/
conferences/irr_final.pdf) (``Rapid changes in rates are especially 
worrisome because of the adverse impact it can have on bank lending and 
earning''). See also ABA conversations with Panel staff (Mar. 22, 
2010). However, testimony during the Panel's field hearing suggested 
that some banks believe that they can manage interest rate risk. See 
Congressional Oversight Panel, Testimony of Lynne Herndon, Phoenix city 
president, BBVA Compass Bank, Transcript: Phoenix Field Hearing on 
Small Business Lending (Apr. 27, 2010) (publication forthcoming) 
(online at cop.senate.gov/hearings/library/hearing-042710-phoenix.cfm) 
(hereinafter ``Testimony of Lynne Herndon'').
    \284\ Interest rate risk is a concern not only for current lending, 
but for the future stability of the banking system. Current 
historically low interest rates do not make new lending particularly 
profitable on a risk-adjusted basis. Since it is likely that interest 
rates will rise in the near future, banks have few incentives to make 
new, fixed-rate loans at the current low rates. Because their cost of 
capital is so low, banks lose little by holding cash and Treasuries. 
This issue was highlighted in a recent statement by the Federal 
Financial Institutions Examination Council (FFIEC), which warned banks 
to be aware of, and manage, interest rate risk. Federal Financial 
Institutions Examination Council, Financial Regulators Issue Interest 
Rate Risk Advisory (Jan. 7, 2010) (online at www.ffiec.gov/press/
pr010710.htm). The possible implementation of mark-to-market 
accounting, which would force banks to acknowledge losses on loans and 
other assets that are currently being booked at substantially more than 
market value, may also be discouraging banks from lending. See 
Financial Accounting Standards Board, Accounting for Financial 
Instruments Summary of Decisions Reached to Date As of March 31, 2010 
(Mar. 31, 2010) (online at www.fasb.org/cs/
ContentServer?c=Document_C&pagename= 
FASB%2FDocument_C%2FDocumentPage&cid=1176156422130). Finally, stricter 
bank capital requirements may also be imposed as part of the Basel II 
Accords. See Federal Deposit Insurance Corporation, Implementation of 
New Basel Capital Accord in the U.S. (online at www.fdic.gov/
regulations/laws/publiccomments/basel/index.html) (accessed Apr. 14, 
2010).
    \285\ Testimony of Lynne Herndon, supra note 283 (``But I do think 
that there are many banks in Phoenix that are strong that do want to 
loan money but are struggling to sort of get around the whole issue of 
the capital constraints, dealing with a lot of the issues that we've 
been talking about today, either the existing risk in the portfolio or 
the pending risks that might be coming from reappraisal due to real 
estate''); COP February Oversight Report, supra note 2, at 2 (``The 
Congressional Oversight Panel is deeply concerned that commercial loan 
losses could jeopardize the stability of many banks, particularly the 
nation's mid-size and smaller banks, and that as the damage spreads 
beyond individual banks that it will contribute to prolonged weakness 
throughout the economy'').
    \286\ FDIC conversations with Panel staff (Apr. 30, 2010).
---------------------------------------------------------------------------
    The SBLF does not address these issues, nor any of the 
issues affecting small business credit demand. For this reason, 
if regulatory and market uncertainty outweighs the positive 
effects of the incentive, the SBLF is not likely to have a 
significant effect. In response to this concern, Treasury has 
stressed that the SBLF is not a standalone program but is 
rather part of a package of programs designed to strengthen 
small businesses in the wake of the financial crisis, including 
the various SBA programs.\287\
---------------------------------------------------------------------------
    \287\ See Section D.1, supra.
---------------------------------------------------------------------------
    Finally, the SBLF assumes that small banks are a pure 
conduit for lending to smaller businesses. The definition of 
small business lending in the draft legislation is broad, 
includes farm lending of various kinds, and is not keyed, in 
any way, to the size of the business or farm receiving the 
loan. At one level, this is understandable: as discussed above, 
it is difficult to craft a definition of ``small business'' 
that captures a consistent market.\288\ But at another level, 
this choice relies upon the assumption that when a smaller bank 
makes a loan, the recipient of that loan is more likely than 
not to be a small business. It remains possible that a smaller 
bank, inconsistent with the purpose of the legislation, could 
use these funds to make loans to larger entities.
---------------------------------------------------------------------------
    \288\ See Section B.1, supra.
---------------------------------------------------------------------------
            b. Other Issues Associated with the SBLF
    An additional risk is that the SBLF may reward banks that 
would have increased their lending even in the absence of 
government support. The SBLF's incentive structure is 
calculated in reference to 2009 lending levels, which were low 
by historical standards. If a bank increases its lending--not 
as a result of receiving the SBLF funds but simply to return to 
a more normal lending level commensurate with its long-term 
business model--then it will receive a reduced cost of funds. 
The low lending levels in 2009 also make it unlikely that the 
penalty provision will have much teeth: because the program 
uses a low baseline, and many banks may be able to increase 
their lending levels within two years of receiving SBLF funds. 
In effect, a bank may receive a government reward and avoid a 
penalty simply for acting in its normal course of business. In 
response to this concern, Treasury stated that while it is 
accurate that some small banks may receive an undeserved reward 
from participating in the program, Treasury believes that this 
minimal cost is worthwhile in light of the potential benefit 
for small businesses.\289\
---------------------------------------------------------------------------
    \289\ Treasury conversations with Panel staff (Apr. 7, 2010).
---------------------------------------------------------------------------
    Even if the SBLF's incentive is sufficiently strong, the 
program may produce one key unintended consequence. A capital 
infusion program that provides financial institutions with 
cheap capital and a penalty for banks that do not increase 
lending runs the risk of creating moral hazard by encouraging 
banks to make loans to borrowers who are not creditworthy. 
Although, in the legislation, the carrot--an up to four percent 
decrease--is arguably stronger than the stick--a two percent 
increase--the stick nonetheless increases the incentive. The 
stronger the incentive, the greater the likelihood that the 
program will spur some amount of imprudent lending activity. As 
evidenced by recent events, imprudent lending activity may in 
turn inflate a small lending and commercial loan bubble, \290\ 
a result of using an increasing supply of money for 
transactions of diminishing credit quality. Treasury maintains 
that this concern is minimal as the SBLF was designed to 
minimize the chances that banks will use the capital to make 
risky bets. The program does not shift risk away from the banks 
that receive the capital: any institution that receives funds 
under the SBLF is obligated to repay that money to Treasury and 
therefore will lose money if it makes a bad loan. A bank is 
also obligated to pay Treasury an annual dividend of one to 
seven percent, depending on the bank's lending activity. The 
dividend and repayment requirements are likely to decrease the 
chances that banks squander the capital on imprudent 
lending.\291\
---------------------------------------------------------------------------
    \290\ The potential bubble also could have disproportionate impact 
across sectors and geographical areas, concentrating consequences if 
the bubble were to burst.
    \291\ Treasury conversations with Panel staff (Apr. 7, 2010).
---------------------------------------------------------------------------
    Further, it is unlikely that the obligation to repay 
Treasury will impose significant stress on a bank: the SBLF 
limits the amount that a bank may receive up to five percent of 
risk-weighted assets, and it requires the Secretary to consult 
with a bank's regulator prior to making the capital 
investment.\292\ Even in the unlikely event that a bank uses 
all of the SBLF capital to make loans that eventually default, 
its balance sheet should not be severely affected. Treasury 
stated that when it designed the program, it worked closely 
with banking regulators to ensure that the SBLF would not 
threaten the safety and soundness of banking institutions.\293\ 
On the other hand, Treasury should remain focused on this issue 
since some participating banks may experience losses on real 
estate loans and other stresses on their balance sheets; for 
such institutions, the obligation to repay Treasury may present 
a challenge.
---------------------------------------------------------------------------
    \292\ Medium banks are eligible to receive a maximum of three 
percent of risk-weighted assets. Draft legislation provided to the 
Panel by Treasury (May 7, 2010).
    \293\ Treasury conversations with Panel staff (Apr. 7, 2010).
---------------------------------------------------------------------------
    For the SBLF to be effective by its terms, it must avoid 
both a weak incentive structure that does not spur lending and 
an overly robust incentive structure that generates a high rate 
of undesirable lending. To avoid a return to the imprudent 
lending practices of recent years, it is vital that 
institutions employ prudent due diligence standards and that 
regulators enforce these standards. The result of such 
standards is that some borrowers will not receive credit, but 
in the interest of avoiding a return to the lending bubble of 
the mid-2000s, this is a cost that the system should be 
prepared to bear. As Secretary Geithner has stated, ``we can't 
go back to the situation we had over the last 10 years'' in 
which ``incentives for risk taking . . . overwhelmed all the 
basic checks and balances in the system.'' \294\
---------------------------------------------------------------------------
    \294\ Charlie Rose, An Hour with Timothy Geithner, U.S. Treasury 
Secretary (May 6, 2009) (online at www.charlierose.com/view/interview/
10278).
---------------------------------------------------------------------------
            c. Alternatives to the SBLF
    Supply-side solutions for small business lending may be 
ineffectual if the problem is demand. Nonetheless, some small 
businesses assert that because sales are beginning to 
improve,\295\ the government should institute a program to 
ensure that small businesses have adequate access to 
credit.\296\ Some small business owners and members of Congress 
have called for direct lending to small businesses, but the 
Administration has justified its approach--investing capital in 
banks rather than lending directly to small businesses--as a 
means of generating more loan volume. In a town hall meeting in 
Florida, President Obama said that a direct lending program 
would require a ``massive bureaucracy'' and would ``take too 
long'' to set up.\297\ Treasury also has stated that it does 
not believe that the federal government should decide which 
businesses receive loans and which do not.\298\
---------------------------------------------------------------------------
    \295\ U.S. Census Bureau, Advance Monthly Sales for Retail and Food 
Services (Apr. 14, 2010) (online at www.census.gov/retail/marts/www/
marts_current.html); Federal Reserve Bank of Atlanta Small Business 
Survey, supra note 150, at 40.
    \296\ Congressional Oversight Panel, Testimony of Cindy Anderson, 
chief executive officer, Great Biz Plans, Transcript: Phoenix Field 
Hearing on Small Business Lending (Apr. 27, 2010) (publication 
forthcoming) (online at cop.senate.gov/hearings/library/hearing-042710-
phoenix.cfm). (``I don't know that the do nothing else option is a 
viable option''); Congressional Oversight Panel, Testimony of Mary 
Darling, chief executive officer, Darling Environmental and Surveying, 
Inc., Transcript: Phoenix Field Hearing on Small Business Lending (Apr. 
27, 2010) (publication forthcoming) (online at cop.senate.gov/hearings/
library/hearing-042710-phoenix.cfm) (``To do nothing would be 
terrible'').
    \297\ Remarks by the President and the Vice President at Tampa Town 
Hall Meeting, supra note 282. Although there are a large number of SBA-
affiliated banks, there are a relatively small number of SBA offices. 
According to Treasury, a direct lending program would fail to take 
advantage of the expertise of the SBA-affiliated banks, while requiring 
a massive effort to increase the number of SBA offices. Treasury 
conversations with Panel staff (Apr. 7, 2010).
    \298\ Treasury conversations with Panel staff (Apr. 1, 2010).
---------------------------------------------------------------------------
    Others have proposed a hybrid approach in which the 
government would contract with private banks to administer a 
lending program for small businesses. The program would be 
funded by the government. The administrative costs would be 
minimal, and banks would have an incentive to participate 
because they would receive fees for loans they facilitate. One 
potential problem with such a program is that the government--
and not the banks--would bear the risks associated with the 
loans, which might result in banks using government money to 
make imprudent loans. Accordingly, any such program would need 
to require banks to retain some portion of the risk.
    Treasury maintains that capital infusions are preferable to 
either the direct lending or hybrid models because they would 
permit a bank to leverage Treasury investments and would 
therefore have a broader stimulative effect on small business 
lending.\299\ Secretary Geithner, Management and Budget 
Director Peter Orszag, and Chair of the Council of Economic 
Advisers Christina Romer have stated that the SBLF's impact 
could be amplified ``because the capital could be leveraged 
several times into new loans.'' \300\ For example, assuming 
that banks are permitted to leverage capital at a 10:1 ratio, 
the provision of $10 in SBLF funds would permit a bank to loan 
$100 to small businesses. Accordingly, unless a bank retained 
more than 90 percent of the funds it received under the SBLF, a 
capital-based program could produce more lending than the 
alternatives. Of course, there is no evidence that the capital 
injected under the CPP produced this leveraging effect, making 
it difficult to evaluate this theory.
---------------------------------------------------------------------------
    \299\ Treasury conversations with Panel staff (Apr. 14, 2010).
    \300\ House Committee on Appropriations, Joint Written Testimony of 
Timothy F. Geithner, Peter R. Orszag, and Christina D. Romer (Mar. 16, 
2010) (online at treasury.gov/press/releases/tg589.htm).
---------------------------------------------------------------------------
    Another alternative would be to permit banks to use 
government-provided capital to fund state lending consortia, 
such as those that exist in New York and South Carolina.\301\ 
The New York Business Development Corporation (NYBDC), for 
example, uses funding from member banks to make loans to small 
businesses, ``many of which do not meet the requirements for 
traditional financing.'' \302\ Because of the single-purpose 
nature of consortium lending, this approach may be effective 
for deploying capital directly into new small business loans, 
rather than using it to shore up a bank's balance sheet. A 
consortium could also leverage contributed capital several 
times over.\303\
---------------------------------------------------------------------------
    \301\ New York Business Development Corporation, About Us (online 
at www.nybdc.com/aboutus.html) (hereinafter ``NYBDS: About Us'') 
(accessed May 6, 2010). See also Business Development Corporation of 
South Carolina, Welcome (online at www.businessdevelopment.org/
index.php) (accessed May 6, 2010). See Section D.3, infra. State 
lending consortia function primarily to: (1) allow participant banks to 
share risk and realize profits on loans they were unlikely to offer 
otherwise; (2) facilitate lending expertise that a participant bank may 
lack; and (3) ease credit access for local small businesses.
    \302\ NYBDS: About Us, supra note 301 (accessed May 6, 2010).
    \303\ Many of the existing consortia operate, at least in part, as 
certified CDFI or CDC lenders, leading to overlap with other Treasury 
recovery programs. See also U.S. Department of the Treasury, Certified 
Community Development Financial Institutions--By Organization Type 
(online at www.cdfifund.gov/docs/certification/cdfi/CDFIbyOrgType.pdf) 
(accessed May 6, 2010). While the similar purpose could have the 
benefit of making the programs run more fluid and enhancing their 
effectiveness, it may also strain existing resources.
---------------------------------------------------------------------------
    This option would be most effective if it included an 
incentive that encourages banks to provide funds to consortia. 
For example, just as the SBLF's lending incentive primarily 
rewards banks based on the loans they make, a consortium-
oriented approach could employ an incentive that rewards banks 
for contributions they make to a consortium.\304\ Because 
lending consortia already exist in states like New York and 
South Carolina, using those existing consortia to increase 
small business lending could require a limited investment in 
administrative costs and would take advantage of existing 
institutional expertise, although building programs from 
scratch in other states might take a substantial amount of 
time.\305\ Treasury has stated that it is open to the idea of 
promoting programs at the state level, and it is working with 
states to identify lending targets.\306\ The Panel takes no 
position on whether any of the programs described above, 
including the SBLF, should be implemented.
---------------------------------------------------------------------------
    \304\ There are a variety of alternative options for funding state 
lending programs. For example, the government could create special 
purpose vehicles that would match private funds with government funds, 
using a model that is similar to programs like the PPIP. In this model, 
the combined private and government capital would go to the special 
purpose vehicle, which would then use the capital to finance state 
consortia. Because the government would not be providing all of the 
money, it would not bear all of the risk. Lending consortia could 
leverage the public-private funds as permitted by capital requirements. 
If the matching program used a public-private match ratio of 1:1 and 
regulatory capital ratios are set at 10:1, then every dollar of 
government investment could result in $20 in lending.
    \305\ See Testimony of Lynne Herndon, supra note 283.
    \306\ Treasury conversations with Panel staff (Apr. 14, 2010). On 
May 7, 2010, the Administration proposed a second small business 
initiative to Congress. Entitled the State Small Business Credit 
Initiative, the program would provide federal funding to states that 
create or have specific programs to support small business lending. In 
order to receive federal funds, these state-based programs would need 
to provide financial institutions with ``portfolio insurance'' for 
business loans. The insurance would cover only loans of less than $5 
million that were made to business borrowers of fewer than 500 
employees, and any loan covered by the program would need to place a 
``meaningful amount of [a financial institution's] own capital 
resources at risk in the loan.'' The program would also provide federal 
funding to states that create, or have existing, credit support 
programs--including collateral support programs, loan participation 
programs, and credit guarantee programs--so long as the state can 
demonstrate that every $1 of state funding produces at least $1 of new 
private credit. Draft legislation provided to the Panel by Treasury 
(May 7, 2010).
---------------------------------------------------------------------------

                             G. Conclusion

    There are significant challenges in designing programs to 
make credit available to small businesses. The wide variety 
among small businesses makes it difficult to collect data, 
target individual trends, and effectively stimulate small 
business lending. Because small businesses are so 
heterogeneous, it is easier and arguably more efficient for 
Treasury and other government actors to use regulated entities 
like banks as conduits to small businesses. The banks are 
easily identifiable, and, compared to the information that the 
government is likely to have on the assets and overall position 
of a small business, the government has greater familiarity 
with the bank. Indeed, most of the approaches that Treasury and 
other government actors have taken in attempting to spur small 
business lending rely on such intermediaries: capital 
infusions, guarantees, and secondary market support all depend 
upon an intermediary, generally a bank, to help manage aid to 
the small business. In this model, the bank or other 
intermediary uses its infrastructure to evaluate the borrower, 
underwrite, and later administer the loan. For its part, the 
government uses its relative familiarity with the bank and the 
banking industry to provide a backstop, such as a guarantee or 
other assistance, while it relies on the bank for the practical 
problems of lending.
    That said, however, while for practical purposes it may be 
useful to use a regulated intermediary, this makes the 
intermediary the lynchpin in a government program, a role for 
which it is not a perfect match, because the bank's incentives 
and challenges are not identical to the government's. Whether 
the form of government's involvement is effective, furthermore, 
depends on the assets the bank holds. Guarantees and secondary 
market support, for example, are useful only if the 
intermediary holds assets that can be securitized or 
guaranteed.
    Treasury has stated that it believes that providing cheap 
capital to the smaller banks--with an incentive to increase 
lending, and as part of a larger package of programs including 
SBA programs--will unlock the credit that CPP did not. It is 
true that the SBLF, unlike the CPP, provides incentives for 
banks to lend, which may result in a different outcome. In many 
ways, however, the SBLF substantially resembles the CPP: it is 
a bank-focused capital infusion program that is being 
contemplated despite little, if any, evidence that such 
programs increase lending. Had Treasury gathered more 
consistent data, including ongoing data from the top 22 CPP 
recipients, it might have been possible to have a complete 
basis of comparison for lending by these institutions since 
EESA was enacted. In the absence of that data--data showing 
what recipients did with the CPP funds or any effort to track 
lending in a way that can be meaningfully evaluated--the Panel 
is skeptical that Treasury has the grounds on which to make 
such an assumption. After all, the largest CPP recipients did 
not lend more: quite the contrary. Further, the SBLF imposes 
only a mild penalty on banks that take the funds but fail to 
increase lending, and there is nothing in the SBLF to create 
accountability or linkages between the receipt of funds and 
loans, something that even some small banks have said that they 
would welcome.
    Treasury's prior attempts to spur small business lending by 
providing capital infusions to smaller banks through the TARP 
have foundered in part because smaller banks have resisted 
taking TARP funds. Accordingly, the SBLF, as presently 
envisioned, is outside the TARP. It uses capital infusions to 
intermediaries and creates an incentive structure that rewards 
banks for higher loan levels to small businesses. Whether it is 
likely to be productive depends, however, not only on whether 
banks take the funds but also on whether it, as another capital 
infusion program, accurately targets the source of the 
contraction. Even if the problem is primarily credit supply, 
capital infusions increase lending only if the bank does not 
use them to fill in holes in its capital structure or to hold 
as a hedge against anticipated future losses. Furthermore, the 
SBLF has been proposed in the face of questions as to whether 
the lending constriction is, in fact, a problem of supply--
whereas if low lending results from low demand, then it is 
difficult to see how yet another bank-focused approach is 
likely to have an effect. Without taking any position on 
whether Treasury should adopt any particular lending program, 
including the SBLF, other approaches that are less dependent on 
healthy bank balance sheets, such as state-level consortia, or 
programs in which banks take first losses and first profits 
with a public backstop, might more likely achieve Treasury's 
stated objectives. Treasury's ability to influence the market 
and its reserve of funds are not unlimited. Treasury should 
evaluate carefully the need for a new program as well as its 
likely effectiveness and prudence, given that an ill-conceived 
program may tie up funds that could be used to better effect 
elsewhere.
    The Panel recommends that Treasury and the relevant federal 
regulators:
     Establish a rigorous data collection system or 
survey that examines small business finance in the aftermath of 
the credit crunch and going forward: the Federal Reserve Bank 
of Atlanta has commenced a demand-side survey, for example, 
that could potentially be expanded to other Federal Reserve 
banks. Such a survey should include demand- and supply-side 
data and include data from banks of different sizes (both TARP 
recipients and non-TARP recipients), because the lack of timely 
and consistent data has significantly hampered efforts to 
approach and address the crisis;
     Require, as part of any future capital infusion 
program, reporting obligations that would make it easier to 
evaluate whether the support provided by the program actually 
has the capacity to achieve the hoped-for results;
     As part of its consideration of small business 
lending, evaluate whether a capital infusion program is likely 
to have the effect of increasing lending, and is therefore 
worth pursuing;
     Consider specifying minimum standards for 
underwriting SBLF loans in order to be sure that the incentives 
embedded in any program do not spur imprudent lending; and
     If the SBLF is to be pursued, evaluate whether the 
SBLF can be implemented quickly enough to make any difference 
at all, particularly given that announcements followed by 
inaction may negatively affect the market.
     ANNEX I: PENDING LEGISLATION RELATED TO SMALL BUSINESS LENDING


Senate:

Small Business Job Creation Act of 2010, introduced March 10, 2010 (S. 
        3103)

     Sponsor: Olympia Snowe (R-ME)
     Status: Referred to the Committee on Finance 
(March 10, 2010)
     Summary: (1) Increases the 7(a) loan guarantee to 
90 percent until January 2011 and the maximum loan amount;\307\ 
(2) Increases the maximum loan amounts of 504 loans;\308\ (3) 
Increases the loan limit on microloans from $35,000 to $50,000, 
and increases the maximum loan limit of loans made to microloan 
intermediaries from $3.5 million to $5 million;\309\ (4) 
Regulates the sale of 7(a) loans in secondary markets; and (5) 
Establishes low interest financing under Local Development 
Business Loan Program.
---------------------------------------------------------------------------
    \307\ The SBA's 7(a) Loan Program, named after the section of the 
Small Business Act that authorizes it, is the agency's primary loan 
guarantee program. Under the program, a bank or similar financial 
institution will extend a loan to a qualifying business and the SBA 
will guarantee repayment of a certain percentage of the loan amount, as 
specified in the Act. U.S. Small Business Administration, 7(a) Loan 
Program (online at www.sba.gov/financialassistance/borrowers/
guaranteed/7alp/index.html) (accessed May 6, 2010).
    \308\ The CDC/504 Loan Program is another loan guarantee program 
that provides long-term, fixed-rate financing to small business, 
through intermediary Certified Development Companies, for certain fixed 
assets (e.g., land, structures, machinery, and equipment). U.S. Small 
Business Administration, 504 Loan Program (online at www.sba.gov/
financialassistance/borrowers/guaranteed/CDC504lp/index.html) (accessed 
May 6, 2010).
    \309\ The Microloan Program authorizes the SBA to make funds 
available to certain nonprofit, community-based organizations for the 
purpose of providing microloans to small businesses. These loans may be 
used for working capital or for purchasing ``inventory, supplies, 
furniture, fixtures, machinery, and/or equipment.'' U.S. Small Business 
Administration, Micro-Loan Program (online at www.sba.gov/
financialassistance/borrowers/guaranteed/mlp/index.html) (accessed May 
6, 2010).
---------------------------------------------------------------------------

Boosting Entrepreneurship and New Jobs Act, introduced January 28, 2010 
        (S. 2967)

     Sponsor: Benjamin Cardin (D-MD)
     Status: Referred to the Committee on Finance 
(January 28, 2010)
     Summary: (1) Directs the SBA and Treasury to 
establish a joint, direct loan program for small businesses, 
funded with $30 billion made available under the Emergency 
Economic Stabilization Act of 2008; (2) Increases the percent 
guarantee and maximum loan amount of 7(a) loans and increases 
the maximum loan amount of microloans; and (3) Increases the 
maximum loan amounts of 504 loans.

Small Business Lending Enhancement Act of 2009, introduced December 21, 
        2009 (S. 2919)

     Sponsor: Mark Udall (D-CO); Original Co-Sponsors: 
Charles Schumer (D-NY), Joseph Lieberman (I-CT), Olympia Snowe 
(R-ME), Barbara Boxer (D-CA), Susan Collins (R-ME), Kirsten 
Gillibrand (D-NY)
     Status: Referred to the Committee on Banking, 
Housing, and Urban Affairs (December 17, 2009)
     Summary: Under the Federal Credit Union Act, (1) 
Increases the total permissible amount of member business loans 
by an insured credit union to a limit of 25 percent of the 
credit union's total assets; and (2) Increases, from $50,000 to 
$250,000, the maximum total extension of credit before a member 
loan is considered a member business loan.

Small Business Job Creation and Access to Capital Act of 2009, 
        introduced December 10, 2009 (S. 2869)

     Sponsor: Mary Landrieu (D-LA); Original Co-
Sponsor: Olympia Snowe (R-ME)
     Status: Committee on Small Business and 
Entrepreneurship. Ordered to be reported with an amendment 
favorably (December 17, 2009)
     Summary: (1) Increases the loan limit on 7(a) 
loans; (2) Increases the loan limit on 504 loans; (3) Increases 
the loan limit on microloans from $35,000 to $50,000, and 
increases the maximum loan size of loans made to microloan 
intermediaries from $3.5 million to $5 million; (4) Authorizes 
the use of 504 loans to refinance short-term commercial real 
estate debt into long-term, fixed rate loans; (5) Extends, 
through December 31, 2010, the authorization to provide 90 
percent guarantees on 7(a) loans and fee elimination for 
borrowers on 7(a) and 504 loans, as originally set out in the 
American Recovery and Reinvestment Act of 2009 (ARRA); and (6) 
Directs the SBA to create a website where small businesses can 
identify lenders in their communities.

CREATE Growth and Jobs Act, introduced December 9, 2009 (S. 2855)

     Sponsor: Robert Menendez (D-NJ)
     Status: Referred to the Committee on Banking, 
Housing, and Urban Affairs (December 9, 2009)
     Summary: (1) Authorizes direct SBA loans up to 
$1.5 million for operations, acquisition, or expansion to 
businesses that are creditworthy but cannot obtain credit 
elsewhere; (2) Specifies maximum loan terms and overall size of 
the program; and (3) Makes use of TARP funds for 
implementation.

Small Business Intermediary Lending Pilot Program Act of 2009, 
        introduced November 17, 2009 (S. 2780)

     Sponsor: Carl Levin (D-MI)
     Status: Referred to the Committee on Small 
Business and Entrepreneurship (November 17, 2009)
     Summary: Authorizes direct SBA 20-year loans of up 
to $3 million at one percent interest to a maximum of 20 non-
profit, intermediary lenders, which then shall lend this money 
out in increments of up to $200,000 to eligible small 
businesses.

The Small Business Access to Capital Act, introduced October 21, 2009 
        (S. 1832)

     Sponsor: Mary Landrieu (D-LA); Original Co-
Sponsors: John Kerry (D-MA), Jeanne Shaheen (D-NH), Robert 
Casey, Jr. (D-PA), Benjamin Cardin (D-MD), Tom Harkin (D-IA)
     Status: Referred to the Committee on Small 
Business and Entrepreneurship (October 21, 2009)
     Summary: (1) Increases maximum loan amounts under 
7(a), Microloan, and 504 programs; (2) Allows borrowers to 
refinance previous business debt under the Local Development 
Business Loan Program; (3) Applies single-business investment 
limits to New Market Venture Capital companies; and (4) The 
increase in 7(a) loan amounts and the refinancing power created 
by this Act will expire October 1, 2010.

Bank on Our Communities Act, introduced October 21, 2009 (S. 1822)

     Sponsor: Jeff Merkley (D-OR); Original Co-Sponsor: 
Barbara Boxer (D-CA)
     Status: Referred to the Committee on Banking, 
Housing, and Urban Affairs (October 21, 2009)
     Summary: (1) Amends the Emergency Economic 
Stabilization Act of 2008 to require the Secretary of the 
Treasury to take into account the needs and viability of small 
financial institutions when carrying out his duties under the 
Act; (2) Establishes, within Treasury, the Community Credit 
Renewal Fund to provide up to $15 billion in assistance to 
community banking institutions; and (3) Establishes lending 
incentives to encourage community banks to extend commercial 
and industrial loans and penalties if certain benchmarks are 
not met.

IMPACT Act of 2009, introduced August 6, 2009 (S. 1617)

     Sponsor: Sherrod Brown (D-OH); Original Co-
Sponsors: Evan Bayh (D-IN), Kirsten Gillibrand (D-NY), Jeff 
Merkley (D-OR), Debbie Stabenow (D-MI)
     Status: Referred to the Committee on Energy and 
Natural Resources, subcommittee on Energy (August 6, 2009); 
Hearings held (December 8, 2009)
     Summary: Directs the Department of Commerce to 
provide state grants to establish revolving loan funds that 
would lend to small and medium-sized manufacturers for the 
purpose of producing clean energy technology and energy 
efficient products or reducing emissions from manufacturing 
facilities.

The Next Step for Main Street Credit Availability Act, introduced 
        August 6, 2009 (S. 1615)

     Sponsor: Olympia Snowe (R-ME)
     Status: Referred to the Committee on Small 
Business and Entrepreneurship (August 6, 2009)
     Summary: Increases maximum loan amounts under 
7(a), Microloan, and 504 programs.

House of Representatives:

To permit the use of previously appropriated funds to extend the Small 
        Business Loan Guarantee Program, introduced March 25, 2010 
        (H.R. 4938)

     Sponsor: Jose Serrano (D-NY-16)
     Status: Became Public Law No. 111-150 (March 26, 
2010)
     Summary: (1) Provides additional funding of $40 
million for an existing SBA program, established under ARRA, 
that reduces or eliminates fees related to small business 
lending and loan guarantees; and (2) Extends, to April 30, 
2010, SBA authority to guarantee loans under this program.

Main Street Survival Act, introduced December 16, 2009 (H.R. 4340)

     Sponsor: Artur Davis (D-AL-7)
     Status: Referred to the House Committee on 
Financial Services (December 16, 2009)
     Summary: Requires Treasury to create a three-year 
Main Street Revolving Loan Fund Program to provide temporary 
loans to businesses with less than 1,000 full-time employees. 
Loans from this program may only be used to fund operations and 
are limited to $1 million with a nine-month term.

Small Business Job Creation and Access to Capital Act of 2009, 
        introduced December 14, 2009 (H.R. 4302)

     Sponsor: Neil Abercrombie (D-HI-1); Original Co-
Sponsor: Nita Lowey (D-NY-20)
     Status: Referred to the House Committee on Small 
Business (December 14, 2009)
     Summary: (1) Increases maximum loan amounts under 
7(a), Microloan, and 504 programs; (2) Extends SBA authority to 
reduce loan fees for 7(a) and 504 loans through 2010; (3) 
Applies single-business investment limits to New Market Venture 
Capital companies; (4) Requires the SBA to broaden the scope of 
small business standards to include other measures; and (5) 
Allows borrowers to refinance previous business debt under the 
local development business loan program, subject to certain 
restrictions (if the debt was (i) incurred within 2 years prior 
to SBA application, (ii) commercial, (iii) not guaranteed by 
federal agency, (iv) used to acquire fixed assets, (v) 
collateralized by the fixed asset, and (vi) a loan which the 
borrower has been current on for at least one year).

Small Business Emergency Capital Assistance Act of 2009, introduced 
        December 11, 2009 (H.R. 4295)

     Sponsor: Joe Courtney (D-CT-2)
     Status: Referred to the House Committee on Small 
Business (December 11, 2009)
     Summary: Requires the SBA to establish a program 
to extend direct loans (maximum of $1.5 million with 25-year 
repayment program) to small businesses that are economically 
healthy, have good credit, and are unable to obtain loans with 
reasonable terms from a non-federal source.

To Establish SBA Direct Lending Program, introduced December 10, 2009 
        (H.R. 4265)

     Sponsor: John Yarmuth (D-KY-3)
     Status: Referred to the Committee on Small 
Business, Financial Services (December 10, 2009)
     Summary: (1) Requires the SBA to establish a 
program to extend direct loans (maximum of $500,000 or 10 
percent of annual business revenue, whichever is less) to small 
businesses; and (2) Uses TARP funds to implement the program.

American Workers, State, and Business Relief Act, introduced December 
        7, 2009 (H.R. 4213)

     Sponsor: Charles Rangel (D-NY-15)
     Status: Passed House (December 9, 2009); Passed 
Senate (March 10, 2010)
     Summary: (1) Provides additional funding of $560 
million for an existing SBA program, established under the 
American Recovery and Reinvestment Act of 2009, that reduces or 
eliminates fees related to small business lending and loan 
guarantees; and (2) Extends, to December 30, 2010, SBA 
authority to reduce or eliminate fees and guarantee loans under 
this program.

Small Business Financing and Investment Act of 2009, introduced October 
        20, 2009 (H.R. 3854)

     Sponsor: Kurt Schrader (D-OR-5); Original Co-
Sponsors: Nydia Velazquez (D-NY-12), Deborah Halvorson (D-IL-
11), Ann Kirkpatrick (D-AZ-1)
     Status: Passed House (October 29, 2009); Referred 
to Senate committee: Received in the Senate and Read twice and 
referred to the Senate Committee on Small Business and 
Entrepreneurship (November 2, 2009)
     Summary: (1) Creates two new programs: (i) the 
Small Business Early Stage Investment program, which assists 
early stage businesses in capital intensive industries by 
providing grant funding that will match funds from investment 
companies, and (ii) the Small Business Health Information 
Technology Financing program, which will increase access to 
capital, through equity investing and affordable credit, for 
small businesses seeking to purchase health information 
technology; (2) Increases the maximum loan size of 7(a) loans 
and simplifies the process for lenders; (3) Increases the SBA 
guarantee on 7(a) loans to 90 percent; (4) Removes fees on 7(a) 
and 504 loans; (5) Changes the American Recovery Capital (ARC) 
Loan Program \310\ to reduce documentation, expand eligibility, 
and increase the maximum loan amount from $35,000 to $50,000; 
(6) Establishes the Capital Backstop Program that would allow 
the SBA to lend directly to certain small businesses;\311\ and 
(7) Directs the SBA to expand the New Markets Venture Capital 
and Renewable Energy Capital Investment programs.
---------------------------------------------------------------------------
    \310\ The ARC loan program was created under ARRA to provide fully 
guaranteed loans to small businesses for the purpose of making payments 
toward principal and interest on existing debts. U.S. Small Business 
Administration, SBA ARC Loan Program (online at www.sba.gov/recovery/
arcloanprogram/index.html) (accessed May 6, 2010).
    \311\ This program allows small businesses to submit loan 
applications directly to the SBA. If the SBA finds that the small 
business is eligible for a loan under 7(a) standards, the application 
will be forwarded to preferred lenders. If no preferred lender chooses 
to accept the loan application, the SBA then must ``originate, 
underwrite, close, and service'' the loan. Small Business Financing and 
Investment Act of 2009, H.R. 3854, 111th Cong. Sec. 111 (2009).
---------------------------------------------------------------------------

Small Business Microlending Expansion Act of 2009, introduced October 
        7, 2009 (H.R. 3737)

     Sponsor: Brad Ellsworth (D-IN-8)
     Status: Passed House (November 7, 2009); Referred 
to the Committee on Small Business and Entrepreneurship 
(November 9, 2009)
     Summary: (1) Requires intermediary lenders in the 
Microloan Program to report relevant borrower information to 
credit reporting agencies; (2) Removes ``short-term only'' 
requirement from the Microloan Program; (3) Broadens 
eligibility for intermediary lenders; (4) Increases limits on 
loans to intermediaries to $1 million (from $750,000) in the 
first year and to $7 million (from $3.5 million) in remaining 
years; (5) Increases maximum percentage of grant funds (from 25 
percent to 35 percent) that may be used by intermediaries for 
information and technical assistance to small businesses; (6) 
Increases maximum loan amount to small businesses that qualify 
for a reduced rate (from $7,500 to $10,000); (7) Authorizes the 
SBA to make interest assistance grants to intermediaries to 
lower rates for small businesses; and (8) Authorizes the SBA to 
make microloan technical assistance loans, direct loans, and 
interest assistance loans for FY2010-2011.

American Small Business Innovation Act, introduced September 30, 2009 
        (H.R. 3684)

     Sponsor: Joe Sestak (D-PA-7)
     Status: Referred to the Committee on Small 
Business (September 30, 2009)
     Summary: (1) Requires the SBA to expand the New 
Market Venture Capital Fund by approving at least one venture 
fund in each region, adding additional requirements to the 
funds, and authorizing SBA grants to assist the funds; and (2) 
Establishes Office of Angel Investment within the SBA and 
requires the Office to fund approved angel groups and make 
grants to increase awareness and education about angels.

Small Business Lending Promotion Act of 2009, introduced September 9, 
        2009 (H.R. 3546)

     Sponsor: Joe Sestak (D-PA-7); Original Co-Sponsor: 
Steve Kagen (D-WI-8), Madeleine Bordallo (D-Guam)
     Status: Referred to the Committee on Small 
Business (September 9, 2009)
     Summary: Requires the SBA to continue to 
administer the Community Express Program in the same manner in 
which it carried out the Community Express Pilot Program.\312\
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    \312\ The Community Express Pilot Program required lenders to 
ensure that a borrower had received satisfactory technical assistance 
before providing SBA-guaranteed loans.
---------------------------------------------------------------------------

Promoting Lending to America's Small Businesses Act of 2009, introduced 
        July 29, 2009 (H.R. 3380)

     Sponsor: Paul Kanjorski (D-PA-11); Original Co-
Sponsor: Edward Royce (R-CA-40)
     Status: Referred to the Committee on Financial 
Services (July 29, 2009)
     Summary: Under the Federal Credit Union Act, (1) 
Increases the total permissible amount of member business loans 
by an insured credit union to a limit of 25 percent of the 
credit union's total assets; (2) Increases, from $50k to $250k, 
the maximum total extension of credit before a member loan is 
considered a member business loan; and (3) Removes the 
requirement that credit unions increasing business lending be 
adequately capitalized, now requiring only approval from NCUA; 
(4) Narrows definition of ``member business loan.''

Job Creation through Entrepreneurship Act of 2009, introduced May 12, 
        2009 (H.R. 2352)

     Sponsor: Heath Shuler (D-NC-11); Original Co-
Sponsors: Blaine Luetkemeyer (R-MO-9), Nydia Velazquez (D-NY-
12), Glenn Thompson (R-PA-5), Kathleen Dahlkemper (D-PA-3), 
Vern Buchanan (R-FL-13), Glenn Nye III (D-VA-2), Aaron Schock 
(R-IL-18), Joe Sestak (D-PA-7), Dennis Moore (D-KS-3), Yvette 
Clarke (D-NY-11), Jason Altmire (D-PA-4), Michael Michaud (D-
ME-2), Deborah Halvorson (D-IL-11), Kurt Schrader (D-OR-5)
     Status: Passed House (May 20, 2009); Referred to 
the Committee on Small Business and Entrepreneurship (May 21, 
2009)
     Summary: (1) Requires the SBA to establish the 
Veterans Business Center Program to provide business training 
and counseling to veterans; (2) Broadens the Women's Business 
Center Program by removing restrictions and requiring certain 
studies and disclosures; and (3) Modernizes the Small Business 
Development Center Program by providing grant funding to 
increase access to capital, add contract procurement and green 
technology training, and create helplines for advice and 
resources.

Small Business Microloan Modernization Act of 2009, introduced March 
        26, 2009 (H.R. 1756)

     Sponsor: Dean Heller (R-NV-2)
      Status: Referred to the Committee on Small 
Business, Finance and Tax subcommittee (March 26, 2009)
     Summary: (1) Requires intermediary lenders in the 
Microloan Program to report relevant borrower information to 
credit reporting agencies; (2) Removes ``short-term only'' 
requirement from Microloan Program; (3) broadens eligibility 
for intermediary lenders; (4) Increases maximum loan amount to 
a small business that qualifies for reduced rate (from $7,500 
to $10,000); and (5) Increases maximum percentage of grant 
funds (from 25 percent to 35 percent) that may be used by 
intermediaries for information and technical assistance to 
small businesses.

To increase participation in 7(a) Loans, introduced January 15, 2009 
        (H.R. 575)

     Sponsor: Jim Gerlach (R-PA-6)
     Status: Referred to the Committee on Small 
Business, Finance and Tax subcommittee (January 15, 2009)
     Summary: Expands the number of loans eligible for 
greater SBA participation by raising the threshold loan amount 
from $150,000 to $500,000.

Veteran-Owned Small Business Promotion Act of 2009, introduced January 
        8, 2009 (H.R. 294)

     Sponsor: Steve Buyer (R-IN-4); Original Co-
Sponsors: Gus Bilirakis (R-FL-9), John Boozman (R-AK-3), Thomas 
Rooney (R-FL-16), Vern Buchanan (R-FL-13), Ginny Brown-Waite 
(R-FL-5)
     Status: Referred to the Committee on Veterans' 
Affairs, subcommittee on Economic Opportunity (January 9, 
2009); Hearings held (September 24, 2009)
     Summary: (1) Reinstates the Veteran-owned Small 
Business Loan Program under the Department of Veterans Affairs; 
(2) Repeals authority to make direct loans and replaces it with 
authority for loan guarantees; (3) Increases the maximum loan 
amount from $200,000 to $500,000; (4) Authorizes Department of 
Veterans Affairs to subsidize lenders to lower interest rates 
by 0.5 percent; and (5) Allows treatment of veteran-owned 
businesses as disadvantaged for purposes of contract awards 
under the Small Business Act.
ANNEX II: STATE SMALL BUSINESS CREDIT PROGRAMS ESTABLISHED IN RESPONSE 
                          TO THE CRISIS \313\

     
---------------------------------------------------------------------------
    \313\ State responses to the contraction in small business lending 
continue to be largely constrained by fiscal pressures. Steep declines 
in state tax receipts coupled with balanced budget requirements led to 
substantial spending cuts and draws on existing reserves, limiting 
states' flexibility to expand or create new programs. The Panel 
contacted the Small Business Administration's Small Business 
Development Centers and each state's Chamber of Commerce for a list of 
new or expanded small business credit programs. The programs in this 
Annex represent a compilation of their responses and internal research: 
these programs are not tracked at the federal level and this list may 
not be comprehensive. As noted in Section D.3, supra, numerous state 
and local programs existed prior to the financial crisis to support 
small business lending; programs in this Annex constitute only those 
that have been created or expanded in direct response to the credit 
crunch, and only those that rely on financial intermediaries to deploy 
capital as of the date of this report.
---------------------------------------------------------------------------

Colorado

Date of Inception: May 7, 2009
Program: Access to Capital
    Colorado's Access to Capital initiative provides public 
funding of $2.5 million to restart the state's Colorado Credit 
Reserve Program. This program contains a pooled loan-loss 
reserve fund that banks may access to recover losses on 
eligible loans. By reducing risk for participating banks, the 
program seeks to generate an estimated $50 million in private 
bank loans for state businesses.\314\
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    \314\ The program originally ended in 2006 due to lack of funding. 
See Office of Governor Bill Ritter, Jr., Governor Ritter Signs `Access 
To Capital' Business Bill (May 7, 2009) (online at www.colorado.gov/cs/
Satellite?c=Page&cid=1241701582408&pagename=GovRitter%2FGOVRLayout).
---------------------------------------------------------------------------

Delaware

Date of Inception: April 20, 2009
Program: Small Business LIFT (Limited Investment for Financial 
    Traction) Program
    The LIFT program enables eligible small businesses, with an 
existing line of credit and between 3 and 50 employees, to 
defer principal and pay no interest on amounts drawn from the 
line of credit over a two-year period.\315\ Under the terms of 
the program, the Delaware Economic Development Office, using up 
to $5 million from the state's strategic fund, pays to the bank 
the monthly interest on a borrower's line of credit up to 
$25,000, until June 30, 2011, after which the borrower makes 
the required principal payments during the next five years.
---------------------------------------------------------------------------
    \315\ Delaware Economic Development Office, Delaware Small Business 
LIFT Program FAQ (Apr. 20, 2009) (online at dedo.delaware.gov/pdfs/
business/Business_LIFT_program.pdf).
---------------------------------------------------------------------------

Illinois

Date of Inception: October 16, 2008
Program: Treasurer's Access to Capital Program
    As an expansion to the existing Treasurer's Access to 
Capital Program, the Illinois Treasurer will reallocate an 
additional $1 billion in state investments to interest-bearing 
deposit accounts at small and medium-sized banks and credit 
unions. By increasing these financial institutions' capital 
bases, the state seeks to spur lending to businesses and 
consumers. Under the new program, banks can request up to an 
additional $25 million.\316\
---------------------------------------------------------------------------
    \316\ The state deposits are limited to no more than 10 percent of 
a bank's total deposits with no more than $100 million aggregate total 
in any one bank. Office of Illinois State Treasurer Alexi Giannoulias, 
Giannoulias Commits $1 Billion to Illinois Financial Institutions (Oct. 
16, 2008) (online at www.treasurer.il.gov/news/press-releases/2008/
PR16October2008.htm).
---------------------------------------------------------------------------

Maryland

Date of Inception: December 7, 2009
Program: Small Business Credit Recovery Program
    Maryland established the Small Business Credit Recovery 
Program within the Maryland Industrial Development Financing 
Authority (MIDFA). The program directs $10 million to MIDFA's 
existing conventional loan guaranty program to target small 
businesses by reducing maximum loan amounts, streamlining the 
approval process, and waiving half of MIDFA's one percent 
fee.\317\
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    \317\ Office of Maryland Governor Martin O'Malley, Governor Martin 
O'Malley Outlines Economic Agenda to Strengthen Small Business, Create 
Jobs (Dec. 7, 2009) (online at www.governor.maryland.gov/pressreleases/
091207.asp).
---------------------------------------------------------------------------

Michigan

Dates of Inception: December 7, 2009; February 5, 2010; May 20, 
    2009
Programs: (1) Michigan CD Stimulus Program; (2) Credit Union 
    Small Business Financing Alliance; (3) Michigan Supplier 
    Diversification Fund
    (1) The Michigan CD Stimulus Program places $150 million in 
certificates of deposit at below market rates with state 
regulated banks and credit unions, with the condition that 80 
percent of the funds will be loaned out to Michigan businesses 
and consumers.\318\
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    \318\ State of Michigan Department of Treasury, Michigan CD 
Stimulus Program Guidelines (online at www.michigan.gov/treasury/
0,1607,7-121-1753_37621-153406_,00.html) (accessed May 7, 2010).
---------------------------------------------------------------------------
    (2) The Michigan Economic Development Corporation (MEDC) 
and Michigan League of Credit Unions (MLCU) have entered into a 
financing alliance with 33 credit unions committing to make $43 
million in new small business loans. The MEDC will provide 
education and technical assistance to small business owners 
through its 12 regional Michigan Small Business and Technology 
Development Centers (MI-SBTDC) and help connect borrowers to 
participating credit unions. Participating credit unions are 
all certified SBA lenders.\319\
---------------------------------------------------------------------------
    \319\ The Credit Union Small Business Financing Alliance, About the 
CUSBFA (online at www.cusbfa.com/About_the_CUSBFA_13.html) (accessed 
May 7, 2010).
---------------------------------------------------------------------------
    (3) The Michigan Supplier Diversification Fund supports 
lending to state automotive supply companies through loan 
participation and collateral support programs. With annual 
funding of between $12 and $13 million over the past two years, 
the program targets companies, especially auto parts suppliers, 
that are transitioning to qualified industries, usually 
technology-related fields, with the purpose of diversifying the 
state's industry. In the loan participation component, the 
MEDC, using proceeds from the Michigan Strategic Fund, 
purchases a portion of a loan from a lender and defers payment 
from a borrower on that portion for up to three years. The 
collateral support component provides cash collateral accounts 
to lenders to enhance borrowers' collateral coverage. In both 
components, state participation is generally capped at $500,000 
per borrower.\320\
---------------------------------------------------------------------------
    \320\ Michigan Economic Development Corporation, Michigan Supplier 
Diversification Fund (online at ref.michiganadvantage.org/cm/attach/
7EBEE373-6CFA-4392-B68B-8A27A5DBC39A/DivFund_LoanProg.pdf) (accessed 
May 7, 2010).
---------------------------------------------------------------------------

New Jersey

Dates of Inception: December 16, 2008
Programs: Main Street Business Assistance Program
    The Main Street Business Assistance Program provides 
financial support and guarantees to participating banks who 
offer loans to small and medium-sized businesses. The program 
has two components: a loan participation and/or guarantee 
offered by the New Jersey Economic Development Authority (EDA) 
through participating commercial banks; and a line of credit 
guarantee offered through the EDA's 13 preferred lender 
partners. Maximum participation in a bank loan is 25 percent, 
up to $1 million for fixed assets and $750,000 for working 
capital, and the maximum bank loan guarantee is 50 percent, up 
to $2 million for fixed assets and $1.5 million for working 
capital. The interest rate on EDA loan participations is fixed 
at five percent for a maximum of five years. The line of credit 
guarantee, which applies to either fixed assets or working 
capital, covers up to 50 percent of the total transaction, up 
to $250,000.\321\
---------------------------------------------------------------------------
    \321\  New Jersey Economic Development Authority, Financing 
Programs--Main Street Business Assistance Program (online at 
www.njeda.com/web/Aspx_pg/Templates/
Npic_Text.aspx?Doc_Id=939&menuid=1298&topid=718&levelid=6&midid=1175) 
(accessed May 11, 2010).
---------------------------------------------------------------------------

New York

Date of Inception: January 21, 2010
Program: ``Credit for Success, Second Look'' Program
    The ``Credit for Success, Second Look'' Program offers 
small business owners an appeal process if they have been 
turned down for lending or had their line of credit reduced. 
Following the rejection, the small business is referred to the 
appropriate Small Business Development Center for possible 
repackaging and resubmittal to a regional lending consortium 
for a second review. Loans to borrowers are capped at $25,000, 
cannot exceed more than $150,000, and must be SBA-
guaranteed.\322\
---------------------------------------------------------------------------
    \322\ New York Business Development Corporation, Credit For 
Success: The Regional Lending Consortia Program (online at nybdc.com/
documents/RegionalLendingConsortiums-WebContentwithLogo.pdf) (accessed 
May 7, 2010).
---------------------------------------------------------------------------

Ohio

Dates of Inception: May 6, 2009; January 26, 2010
Programs: Ohio and Huntington Job Growth Partnership
    In the Ohio and Huntington Job Growth public-private 
lending partnership, Huntington Bank committed $1 billion in 
new loans to small and medium-sized businesses through May 
2012. Under the agreement, the state provides administrative 
assistance and expanded use of its existing programs.\323\ In 
particular, the program expects to make use of the Treasurer's 
GrowNow linked deposit program, which offers small business 
owners a three percent rate reduction on bank interest rates on 
loans of up to $400,000. Under GrowNow, the Ohio Treasury 
deposits funds at below-market rates with participating 
lenders, who pass along the rate reductions to qualifying small 
business owners.\324\
---------------------------------------------------------------------------
    \323\ The partnership creates the Huntington Bank Business Advisory 
Council, with a dedicated Ohio Department of Development liaison, and 
commits the ``state's regional economic development coordinators to 
administer projects and provide free, confidential underwriting 
analysis and consulting services.'' The partnership expects to also 
leverage the Ohio 166 Loan, Ohio Capital Access Program, and federal 
SBA loan programs to maximize the availability of funds. Ohio 
Department of Development, State of Ohio and Huntington Bank Launch $1 
Billion Partnership to Grow, Retain and Attract Businesses and Jobs 
(May 6, 2009) (online at development.ohio.gov/newsroom/2009PR/May/
GovernorsOffice/4.htm).
    \324\ Ohio Treasury Department, We're Growing Ohio's Small 
Businesses NOW (online at tos.ohio.gov/ForBusiness/
Default.aspx?Section=GrowNow) (accessed May 7, 2010).
---------------------------------------------------------------------------

Virginia

Date of Inception: March 30, 2009
Program: Local Government Investment Pool Act
    Virginia's House Bill 2583 requires that ten percent, or an 
estimated $400 million, of the Local Government Investment 
Pool's assets (LGIP) be deposited in Virginia financial 
institutions. The LGIP offers the state's public entities 
participation in a specially structured investment fund managed 
by the Investment Division of the State Treasurer's office.
                     SECTION TWO: ADDITIONAL VIEWS


                A. J. Mark McWatters and Paul S. Atkins

    We concur with the issuance of the May report and offer the 
additional observations noted below. We appreciate the spirit 
with which the Panel and the staff approached this complex 
issue and incorporated suggestions offered during the drafting 
process.
    In order to suggest a solution to the challenges currently 
facing the commercial credit and small business lending 
markets, it is critical that we thoughtfully identify the 
sources of the underlying difficulties. Without a proper 
diagnosis, it is likely that we may craft an inappropriately 
targeted remedy with adverse, unintended consequences.
    The problems presented by today's commercial credit and 
small business lending markets would be easier to address if 
they were solely based upon the undersupply of commercial and 
small business credit in certain well-defined regions of the 
country. Unfortunately, the commercial credit and small 
business lending markets must also assimilate a drop in demand 
from borrowers who have suffered a reversal in their business 
operations and prospects over the past two years. In our view, 
there has been a decrease in demand for commercial and small 
business credit and many potential borrowers have withdrawn 
from the credit markets due to, among other reasons:
     their desire to de-leverage;
     the introduction of enhanced underwriting 
standards by lenders and their regulators;
     the diminishing opportunity for prudent business 
expansion;
     the crippling effects of the recession; and
     the increasing tax and regulatory burdens facing 
small and large businesses.\325\
---------------------------------------------------------------------------
    \325\ Taxes decrease cash flow that is available for debt service.
    Compliance with new regulatory requirements increases the fees and 
expenses a business must pay to its attorneys, CPAs, consultants, and, 
quite often, new employees hired to manage the process. Funding these 
fees and expenses is particularly burdensome for small businesses that 
do not operate with the economies of scale necessary to spread 
compliance costs over a significant revenue base.
    All other inputs being equal, taxes and compliance costs decrease 
cash flow available for debt service and thus decrease the level of 
debt a firm may undertake. In addition, less leverage may decrease a 
firm's return on equity and market capitalization.
---------------------------------------------------------------------------
    In a recent hearing on commercial credit and small business 
lending held by the Panel in Phoenix, one of the witnesses, 
Candace Wiest, the president and CEO of West Valley National 
Bank (WVNB), remarked in her written testimony:

        The question of demand is difficult. WVNB certainly has 
        room to expand lending, given that we have 39% Tier 1 
        capital and almost 50% leverage capital. Explained 
        another way, we have originated $25,000,000 in loans 
        and still have $16,000,000 in capital. We could grow 
        the Bank by $100,000,000 in new assets and not need any 
        new capital. . . . Our lack of loan growth is a 
        reflection of the impact of the recession on the small 
        businesses in this state. While the rest of the country 
        has experienced varying degrees of recession, I believe 
        Arizona has been functioning in a depression. . . . As 
        a result, we have not met our lending projections. Last 
        year we funded approximately $10,000,000 in new 
        credits. We would do more, but it is difficult to find 
        anyone who has not been impacted and remains 
        creditworthy.

    While WVNB is apparently ready, willing and able to extend 
credit, Ms. Wiest is struggling to identify qualified borrowers 
that are in need of additional debt capital. In other words, 
WVNB is not suffering from an undersupply of capital to lend 
but from the diminished demand for commercial and small 
business credit.\326\
---------------------------------------------------------------------------
    \326\ Another witness at the hearing, James H. Lundy, President and 
CEO of Alliance Bank of Arizona, stated in his written testimony:

      While Alliance Bank of Arizona is running against industry 
      norms and adding net loan growth when many banks are not, I 
      don't want to leave the impression that this is not an 
      extremely difficult lending environment. The recession has 
      sharply decreased loan demand from many Arizona businesses. 
      Every bank portfolio experiences normal runoff, and, in 
      this environment, a higher level of charge-offs than 
      normal. Thus, increasing loan outstandings in the current 
      environment is quite challenging. Considered in combination 
      with requests from regulators for more capital and the 
      heavy emphasis on rapidly reducing real estate 
      concentrations it is no surprise that loan totals are 
---------------------------------------------------------------------------
      shrinking at many banks.

Congressional Oversight Panel, Written Testimony of James H. Lundy, 
president and chief executive officer, Alliance Bank of Arizona, 
Phoenix Field Hearing on Small Business Lending, at 3 (Apr. 27, 2010) 
(online at cop.senate.gov/documents/testimony-2710-lundy.pdf).
---------------------------------------------------------------------------
    The third bank officer to testify at the hearing, Lynne B. Herndon, 
Phoenix City President of BBVA Compass, stated in her written 
testimony:

      In the 4th Quarter of 2008, business owners experienced a 
      dramatic halt in revenues. During this quarter and in 2009, 
      business owners struggled to reset the expense structures 
      of their companies in response to the 50-75% reduction in 
      top line revenues. Liquidity and capital were drained as 
      businesses needed excess reserves to fund losses. Companies 
      put expansion plans on hold and tried to curb borrowing 
      where possible. Loan demand dropped dramatically during 
---------------------------------------------------------------------------
      this period.

      BBVA Compass continued to make business loans during 2008 
      and 2009 and is doing so currently. While the bank's 
      structure and terms were similar to previous years, it was 
      and is challenging to underwrite borrowers in the current 
      economic environment. Most companies recorded a loss in 
      2009 and some in 2008. 2010 looks to be breakeven at best 
      for many companies. These profitability trends are 
      challenging for banks given that we have to maintain higher 
      levels of capital in order to carry watchlist loans. In 
      other words, banks must have higher levels of capital in 
      order to continue to bank existing credits that have had 
      poor performance or in order to entertain new loans to 
      companies coming off of poor performance.

      In order to compensate for poor performance in previous 
      years, BBVA Compass is placing more emphasis on strong 
      sponsorship, higher levels of equity in real estate or 
      excess availability in borrowing bases. Underwriting the 
      economic risk is more difficult and access to liquidity is 
      important. Companies still in business in 2010 have 
      probably weathered the worst and should be survivors. These 
      borrowers are most likely creditworthy. Banks are now able 
      to obtain appropriate pricing for market risk in deals.

Congressional Oversight Panel, Written Testimony of Lynne B. Herndon, 
city president--Phoenix, BBVA Compass Bank, Phoenix Field Hearing on 
Small Business Lending, at 2 (Apr. 27, 2010) (online at cop.senate.gov/
documents/testimony-042710-herndon.pdf).
    Evidence from the borrower side of the lender-borrower 
equation supports this anecdotal evidence. The Panel's report 
discusses a survey by the National Federation of Independent 
Businesses, which concludes that ``access to credit is not the 
primary concern of small businesses at this time. Only eight 
percent of those surveyed identified access to credit as their 
most pressing concern, although, of course, these respondents 
may nonetheless have sought credit during this period.'' \327\
---------------------------------------------------------------------------
    \327\ See Section E.1(a)(i).
---------------------------------------------------------------------------
    Conversely, the Administration has focused on the 
undersupply of commercial and small business credit \328\ and, 
not surprisingly, has proposed a government-sponsored program 
to remedy the putative problem. If instituted as proposed, the 
Small Business Lending Fund (SBLF) will permit a subset of 
commercial and small business lenders to obtain capital from 
the federal government at very favorable rates, provided the 
lenders agree to use the proceeds to extend credit to small 
business borrowers.\329\ We are troubled that providing 
financial institutions with capital at below-market rates may 
lead to imprudent lending activity \330\ and, perhaps, the 
inflation of a series of government sanctioned and subsidized 
asset bubbles. If the government convinces--or pressures--
financial institutions to accept cheap credit based on 
financial incentives for the recipients to off-lend the 
proceeds, then we fully anticipate the government will 
accomplish just that. Yet, is this not what we recently 
experienced in the sub-prime and securitized debt lending 
crisis--too much money chasing transactions of diminishing 
credit quality?
---------------------------------------------------------------------------
    \328\ See Donna Borak, Fed Survey: Some Big Banks Loosen 
Underwriting Criteria, American Banker (May 4, 2010) (online at 
www.americanbanker.com/issues/175_84/underwriting-criteria_1018530-
1.html); see Joshua Zumbrun and Scott Lanman, Fed Says Most Surveyed 
Banks Didn't Tighten Lending Standards, Bloomberg.com, (May 4, 2010) 
(online at www.bloomberg.com/apps/news?pid=20601068&sid=aVfYj2OMrV7U#).
    \329\ We note that the Administration has yet to announce the 
source of any offsets for this program. At first, in announcing the 
program, the Administration stated that the funds for the program were 
to be repaid TARP funds transferred from the TARP, but the current 
draft of the proposed legislation provides instead that the source of 
the offsets for the program will be negotiated with Congress.
    \330\ Recipients of SBLF investments may operate with a cost of 
capital that is lower than non-subsidized financial institutions and, 
as such, may develop a distinct competitive advantage over their peers. 
Since borrowers will prefer to obtain credit from the lowest cost 
provider of financial services, it's quite possible that non-subsidized 
lenders will be priced out of the market. As the market for subsidized 
loans increases the government may be tempted to invest additional 
taxpayer resources in a ``successful'' program which may drive 
additional non-subsidized lenders from the market. After a few cycles, 
private sector lenders may serve as mere originators and servicers of 
loans with substantially all of the risk of default shifted to the 
taxpayers. In addition, the guarantee programs offered by the Small 
Business Administration serve as another example of small business 
lending that is subsidized by the government.
---------------------------------------------------------------------------
    The Administration's proposal appears to share much of its 
design and business model with those adopted by Fannie Mae and 
Freddie Mac. Treasury should have learned from Fannie and 
Freddie that the combination of easily accessible below-market 
credit matched with pressure to lend--regardless of credible 
demand or the employment of prudent underwriting standards--
serves as the perfect recipe for the extension of problematic 
loans and the creation and implosion of asset bubbles. The 
Administration's program also seems at cross-purposes with the 
recent actions of federal and state banking regulators who have 
become increasingly cautious--perhaps overly cautious--
regarding extensions and renewals of credit by regulated 
financial institutions. It is indeed ironic for the 
Administration to propose a program of cheap credit-driven 
lending, while at the same time federal and state banking 
regulators in thousands of individual examinations have become 
excessively onerous in their second-guessing of banks' lending 
decisions and determinations of status of loans. It is also 
counterproductive for any government to subsidize loan 
originations so as merely to increase the ``loan count'' that 
may be reported to the taxpayers.
    We also very much doubt that the SBLF program will 
otherwise attenuate the taint and stigma associated with a 
dusted-off and repackaged ``TARP II'' or ``Son-of-TARP'' 
program. The taxpayers are far too sophisticated to fall for 
this trick and financial institutions are far too wary from 
their experience with TARP not to expect that the government 
will change the terms of the program mid-stream. The stigma 
associated with the TARP principally centers on the risk that 
the government may change the rules mid-stream and subject the 
recipients to adverse rules and regulations. Candace Wiest 
noted in her written testimony before the Panel that WVNB 
withdrew its application for TARP funds because ``we saw new 
conditions being added daily and witnessed the growing stigma 
being directed at TARP banks. Because we did not want to enter 
into an agreement with a government who could alter the terms 
at any time, we chose to withdraw our application.''
    This photograph taken in Northern Virginia near the 
Washington, DC area succinctly tells the story.
[GRAPHIC] [TIFF OMITTED] 56095A.012

    From our perspective, the SBLF is just another government 
sanctioned subsidy to--and bailout of--the financial community 
that will create a host of adverse, unintended consequences. In 
addition to the adverse unintended consequences that may arise 
from a newly instituted SBLF, similar questions are presented 
by those programs pursuant to which the Small Business 
Administration (SBA) is authorized to guarantee a significant 
percentage of any losses generated from certain eligible loans. 
In the Panel's recent hearing, an SBA official stated in his 
written testimony that an SBA guarantee provides ``an extra 
incentive for risk adverse lenders to lend to small 
businesses.'' \331\ While this is no doubt true, it is critical 
to recognize that lenders often become risk-averse only after 
conducting a thorough due diligence and underwriting analysis 
of their potential borrowers. As a matter of sound public 
policy, lenders should not commit to extend credit to 
problematic borrowers solely because the SBA has agreed to 
absorb a significant percentage of any losses arising from such 
loans. The subprime lending crisis arose in part because 
originating lenders neglected to perform a thorough due 
diligence analysis of their prospective borrowers, confident in 
the belief that, with Fannie Mae or Freddie Mac credit support, 
they would be able to off-load their sketchy loans to 
investment banks for inclusion in residential mortgage-backed 
securities prior to their default. The SBA should continue to 
develop and implement transparent and fully accountable 
internal control and underwriting procedures to ascertain that 
it does not accept risky loans into its guarantee programs.
---------------------------------------------------------------------------
    \331\ Congressional Oversight Panel, Written Testimony of Robert J. 
Blaney, district director for Arizona, Small Business Administration, 
Phoenix Field Hearing on Small Business Lending (Apr. 27, 2010) (online 
at cop.senate.gov/documents/testimony-042710-blaney.pdf).
---------------------------------------------------------------------------
    Further, if it develops that there are no restrictions on 
combining SBLF and SBA programs, that combination may create a 
particularly toxic mix for the taxpayers. If a financial 
institution extends credit sourced from SBLF capital and the 
SBA assumes 90 percent of the risk of loss from such loan, then 
the taxpayers will suffer the burden of subsidizing a below 
market capital contribution to the financial institution and 
also bear the overwhelming bulk of the loss if the borrower 
defaults under the loan, while the financial institution 
pockets any profits from the transaction. This result is 
particularly perverse if the financial institution was well-
capitalized and prepared to extend credit without assistance 
from the SBLF and SBA programs.
    In our view, instead of requiring the taxpayers to 
subsidize another round of imprudent short-term credit 
expansion, commercial and small business lenders--in 
consultation with their regulators where appropriate--should 
adopt long-term business models and strategies that incorporate 
objective and transparent due diligence standards that permit 
well-run borrowers to receive credit on reasonable terms and 
the lenders to earn an appropriate risk-adjusted rate of 
return. Regrettably, some potential borrowers will fail the 
heightened underwriting standards and will not receive their 
requested extensions of credit. This should not necessarily 
cause angst, but should indicate that the credit markets have 
moved away from an ``anything-goes'' mentality where borrowers 
often over-extended their leverage and some financial 
institutions survived through the clever interpretation of 
accounting rules and the implicit guarantee of their 
obligations by the American taxpayers.
    Any suggested solution to the challenges facing commercial 
credit and small business lenders and borrowers that focuses 
only on the undersupply of credit to the exclusion of the 
economic difficulties facing prospective borrowers appears 
unlikely to succeed. The challenges confronting the commercial 
credit and small business lending markets are not unique to 
that industry, but instead are indicative of the systemic 
uncertainties manifest throughout the larger economy. Until 
small and large businesses regain the confidence to hire new 
employees and expand their business operations, it is doubtful 
that the demand for properly underwritten commercial and small 
business credit will sustain a meaningful recovery. As long as 
businesses are faced with the multiple challenges of rising 
taxes, increasing regulatory burdens, the threat of frivolous 
lawsuits arising from an erratic litigation system, enhanced 
political risk associated with unpredictable governmental 
interventions in the private sector, and uncertain health care 
and energy costs, it is unlikely that they will 
enthusiastically assume the entrepreneurial risk necessary for 
protracted economic expansion and a recovery of the commercial 
credit and small business lending markets. With the ever-
expanding array of less-than-friendly rules, regulations and 
taxes facing businesses and consumers, we should not be 
surprised if businesses remain reluctant to hire new employees, 
consumers remain cautious about spending, and the commercial 
credit and small business lending markets continue to struggle.
    In our view, the Administration could encourage the robust 
recovery of the commercial credit and small business lending 
markets--as well as the overall U.S. economy--by sending an 
unambiguous message to the private sector that it will not 
directly or indirectly raise the taxes or increase the 
regulatory burden of commercial credit and small business 
market participants and other business enterprises. Without 
such express action, the recovery of the commercial credit and 
small business lending markets will most likely proceed at a 
sluggish and costly pace.
    Once the demand for credit from qualified borrowers has 
rebounded, we think private sector financial institutions will 
return to the credit markets without hesitation. After all, the 
principal business of these financial institutions is the 
extension of thoughtfully underwritten credit to financially-
stable and prudently-managed borrowers. Locating these 
borrowers in the current economic environment with the daunting 
overhang of tax and regulatory uncertainty will remain a 
challenge for Candace Wiest of WVNB and her peers.
           SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

    Secretary of the Treasury Timothy Geithner sent a letter to 
Chair Elizabeth Warren on May 3, 2010,\332\ in response to a 
series of questions presented by the Panel regarding 
restructuring of Treasury's investments under the Capital 
Purchase Program, and regarding estimates of its remaining 
exposure to future bank failures among CPP recipients.\333\
---------------------------------------------------------------------------
    \332\ See Appendix I of this report, infra.
    \333\ See Appendix I of the Panel's April Oversight Report. 
Congressional Oversight Panel, April Oversight Report: Evaluating 
Progress on TARP Foreclosure Mitigation Programs, at 227 (Apr. 14, 
2010) (online at cop.senate.gov/documents/cop-041410-report.pdf) 
(hereinafter ``COP April Oversight Report'').
---------------------------------------------------------------------------
    On behalf of the Panel, Chair Elizabeth Warren sent a 
letter on May 6, 2010,\334\ to Secretary of the Treasury 
Timothy Geithner, presenting a series of questions regarding 
General Motors' April 20th repayment of $4.7 billion of TARP 
debt, and its public announcement in relation to that 
repayment. The Panel has requested a written response from 
Treasury by June 5, 2010.
---------------------------------------------------------------------------
    \334\ See Appendix II of this report, infra.
              SECTION FOUR: TARP UPDATES SINCE LAST REPORT


                           A. TARP Repayments

    In April 2010, four institutions completely redeemed the 
preferred shares given to Treasury as part of their 
participation in the CPP. Treasury received $1.24 billion in 
CPP repayments from these institutions. Of this total, Discover 
Financial Services repaid $1.22 billion. A total of 13 banks 
have fully repaid their preferred stock TARP investments 
provided under the CPP in 2010.

                      B. CPP Warrant Dispositions

    As part of its investment in senior preferred stock of 
certain banks under the CPP, Treasury received warrants to 
purchase shares of common stock or other securities in those 
institutions. During April, two institutions repurchased 
warrants from Treasury for $20 million and Treasury sold the 
warrants of PNC Financial Services Group, Inc. at auction for 
$324 million in proceeds. Furthermore, on March 7, 2010, 
Treasury sold 11,479,592 Comerica common stock warrants through 
a secondary public offering. Treasury announced that it expects 
the aggregate net proceeds from this offering to be over $181 
million. Finally, Treasury received $237 thousand in proceeds 
from the sale of additional preferred shares received from two 
privately held financial institutions. Treasury has liquidated 
the warrants it holds in 53 institutions for total proceeds of 
$6 billion.

        C. Treasury Secretary Geithner Updates Congress on EESA

    On April 23, 2010, Secretary Geithner sent a letter to 
House and Senate leadership, offering a commentary regarding 
the current state of the economy with respect to the 
initiatives put forth by the Emergency Economic Stabilization 
Act (EESA). Among the points discussed were current TARP 
commitments and repayments as of April 16, 2010, projected 
losses from various TARP initiatives, and the state of 
financial regulation reform. The letter also detailed various 
government financing programs and plans for the taxpayer's exit 
from these initiatives.

               D. Treasury Releases PPIP External Report

    Treasury has released a report detailing the performance as 
of March 31, 2010 of the Legacy Securities Public-Private 
Investment Program (PPIP). As of that date, $25.1 billion of 
capital has been closed, with private funds contributing $6.3 
billion. Treasury's exposure includes $6.3 billion of equity 
capital and $12.5 billion of debt capital. The portfolio 
holdings of all public-private investment funds (PPIFs) include 
$8.8 billion in non-agency RMBS and $1.2 billion in CMBS. The 
cumulative net performance of the eight fund managers since 
inception ranges from 1.1 percent to 20.6 percent.

          E. Treasury Responses to GAO Recommendations on TALF

    In February 2010, the Government Accountability Office 
(GAO) offered three recommendations to Treasury regarding its 
management of the Term Asset-Backed Securities Lending Facility 
(TALF). On April 6, 2010, Treasury, in response to these 
recommendations, stated that they will continue to work with 
the Federal Reserve Bank of New York and the Federal Reserve 
Board to closely monitor any risks associated with CMBS. In 
addition, Treasury further committed to improving transparency 
and communication with the Federal Reserve Board and FRBNY with 
regards to decision-making for TALF.

                               F. Metrics

    Each month, the Panel's report highlights a number of 
metrics that the Panel and others, including Treasury, the 
Government Accountability Office (GAO), Special Inspector 
General for the Troubled Asset Relief Program (SIGTARP), and 
the Financial Stability Oversight Board, consider useful in 
assessing the effectiveness of the Administration's efforts to 
restore financial stability and accomplish the goals of EESA. 
This section discusses changes that have occurred in several 
indicators since the release of the Panel's April report.
     Interest Rate Spreads. Interest rate spreads have 
risen slightly since the Panel's April report. The conventional 
mortgage spread, which measures the 30-year mortgage rate over 
10-year Treasury bond yields, increased by 8.3 percent during 
April. The TED Spread, which is used as a proxy for perceived 
risk in the financial markets, increased by 62 percent in 
April.\335\ The TED Spread has decreased 95 percent since the 
enactment of EESA. The interest rate spread for AA asset-backed 
commercial paper, which is considered mid-investment grade, has 
decreased by 15.2 percent since the Panel's April report. This 
metric, down 97 percent since the enactment of EESA, has nearly 
returned to pre-crisis levels. The interest rate spread on A2/
P2 nonfinancial commercial paper, a lower-grade investment than 
AA asset-backed commercial paper, increased by 16 percent 
during April.
---------------------------------------------------------------------------
    \335\ Measuring Perceived Risk--The TED Spread, supra note 40.

                    FIGURE 12: INTEREST RATE SPREADS
------------------------------------------------------------------------
                                                         Percent Change
             Indicator                Current Spread   Since Last Report
                                      (as of 5/5/10)       (4/14/10)
------------------------------------------------------------------------
Conventional mortgage rate spread                 1.3                8.3
 \336\............................
Overnight AA asset-backed                        0.07             (15.2)
 commercial paper interest rate
 spread \337\.....................
Overnight A2/P2 nonfinancial                     0.15                 16
 commercial paper interest rate
 spread \338\.....................
------------------------------------------------------------------------
\336\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release H.15: Selected Interest Rates: Historical Data
  (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
  www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
  H15_MORTG_NA.txt) (accessed May 5, 2010); Board of Governors of the
  Federal Reserve System, Federal Reserve Statistical Release H.15:
  Selected Interest Rates: Historical Data (Instrument: U.S. Government
  Securities/Treasury Constant Maturities/Nominal 10-Year, Frequency:
  Weekly) (online at www.federalreserve.gov/releases/h15/data/
  Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed May 5, 2010).
\337\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: AA Asset-Backed Discount Rate,
  Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed May 5, 2010); Board of Governors of the
  Federal Reserve System, Federal Reserve Statistical Release:
  Commercial Paper Rates and Outstandings: Data Download Program
  (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
  at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
  May 5, 2010). In order to provide a more complete comparison, this
  metric utilizes the average of the interest rate spread for the last
  five days of the month.
\338\ Board of Governors of the Federal Reserve System, Federal Reserve
  Statistical Release: Commercial Paper Rates and Outstandings: Data
  Download Program (Instrument: A2/P2 Nonfinancial Discount Rate,
  Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
  Choose.aspx?rel=CP) (accessed May 5, 2010). In order to provide a more
  complete comparison, this metric utilizes the average of the interest
  rate spread for the last five days of the month.

     Housing Indicators. Both the Case-Shiller 
Composite 20-City Index as well as the FHFA Housing Price Index 
decreased slightly in February 2010. The Case-Shiller and FHFA 
indices remain 6.6 percent and 4.5 percent below the levels at 
the time EESA was enacted, and remain 6.6 percent below and 4.5 
percent below, respectively, the levels at the time EESA was 
enacted. Foreclosure actions, which include default notices, 
scheduled auctions, and bank repossessions, increased by 19 
percent from March. This metric has increased by 31 percent 
since the enactment of EESA.

                                          FIGURE 13: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
                                                                              Percent Change
                                                            Most Recent         from Data        Percent Change
                       Indicator                            Monthly Data    Available at time    since October
                                                                              of Last Report          2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \339\......................            367,056                 19                 31
S&P/Case-Shiller Composite 20-City Index \340\.........              146.1               (.1)              (6.6)
FHFA Housing Price Index \341\.........................                194               (.2)              (4.5)
----------------------------------------------------------------------------------------------------------------
\339\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
  PressRelease.aspx) (hereinafter ``Foreclosure Activity Press Releases'') (accessed May 5, 2010). Most recent
  data available for March 2010.
\340\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20
  Index) (online at www.standardandpoors.com/spf/docs/case-shiller/SA_CSHomePrice_History.xls) (hereinafter
  ``S&P/Case-Shiller Home Price Indices'') (accessed May 5, 2010). Most recent data available for February 2010.
\341\ Federal Housing Finance Agency, U.S. and Census Division Monthly Purchase Only Index (Instrument: USA,
  Seasonally Adjusted) (online at www.fhfa.gov/webfiles/15669/MonthlyIndex_Jan1991to_Latest.xls) (hereinafter
  ``U.S. and Census Division Monthly Purchase Only Index'') (accessed May 5, 2010). Most recent data available
  for February 2010.

 FIGURE 14: FORECLOSURE ACTIONS AS COMPARED TO THE HOUSING INDICES (AS 
                        OF FEBRUARY 2010) \342\

      
---------------------------------------------------------------------------
    \342\ Foreclosure Activity Press Releases, supra note 339 (accessed 
May 5, 2010); S&P/Case-Shiller Home Price Indices, supra note 340 
(accessed May 5, 2010); U.S. and Census Division Monthly Purchase Only 
Index, supra note 341 (accessed May 5, 2010). The most recent data 
available for the housing indices is as of February 2010.
[GRAPHIC] [TIFF OMITTED] 56095A.013

     Senior Loan Officer Survey. On May 3, 2010, the 
Board of Governors of the Federal Reserve System released the 
results of its ``Senior Loan Officer Opinion Survey on Bank 
Lending Practices.'' While the survey results continued to 
reflect banks' concerns regarding the current status of the 
commercial real estate (CRE) market, there was marked 
improvement in the respondents' sentiments. Figure 15 shows the 
net percentage of survey respondents who reported tightening 
standards for CRE loans. While this metric was 12.5 percent 
during the Q2 2010 reporting period, signaling relatively tight 
standards for CRE lending, it is now at its lowest level since 
the Q3 2006 reporting period. Figure 16 further illustrates 
both the remaining apprehension in the CRE market as well as 
the relative improvement compared to the height of the crisis. 
Although the net percentage of respondents who reported 
stronger demand for CRE loans remains negative, the negative 
7.1 percent figure for the Q2 2010 reporting period is the 
highest level that this measure has been since the Q3 2006 
reporting period.

FIGURE 15: NET PERCENTAGE OF DOMESTIC RESPONDENTS TIGHTENING STANDARDS 
         FOR COMMERCIAL REAL ESTATE LOANS (AS OF Q2 2010) \343\

     
---------------------------------------------------------------------------
    \343\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 6.
[GRAPHIC] [TIFF OMITTED] 56095A.014

 FIGURE 16: NET PERCENTAGE OF DOMESTIC RESPONDENTS REPORTING STRONGER 
     DEMAND FOR COMMERCIAL REAL ESTATE LOANS (AS OF Q2 2010) \344\

      
---------------------------------------------------------------------------
    \344\ April 2010 Senior Loan Officer Opinion Survey, supra note 19, 
at 6.
[GRAPHIC] [TIFF OMITTED] 56095A.015


     Weekly Mortgage Application Survey. The Mortgage 
Bankers Association (MBA) Weekly Mortgage Application Survey is 
comprised of 15 indices covering mortgage applications for a 
variety of loan types. As Figure 17 illustrates, there has been 
a marked increase in this measure since the beginning of the 
year. This metric has increased by 37 percent in 2010, a trend 
which many analysts ascribe in part to the impact of the Home 
Buyer Tax Credit, which expired on April 30, 2010.\345\
---------------------------------------------------------------------------
    \345\ Internal Revenue Service, First-Time Homebuyer Credit (May 3, 
2010) (online at www.irs.gov/newsroom/article/
0,,id=204671,00.html?portlet=7).
---------------------------------------------------------------------------

            FIGURE 17: MBA WEEKLY APPLICATIONS SURVEY \346\

      
---------------------------------------------------------------------------
    \346\ Mortgage Bankers Association, Weekly Applications Survey 
(online at mortgagebankers.org/ResearchandForecasts/ProductsandSurveys/
WeeklyApplicationSurvey) (accessed May 7, 2010). Data accessed through 
Bloomberg Data Service.
[GRAPHIC] [TIFF OMITTED] 56095A.016

    Existing Home Sales. Existing home sales, as tracked by the 
National Association of Realtors, have increased six percent in 
2010. There were 5.35 million existing home sales in March, a 
seven percent increase from the previous month. The monthly 
amount of existing home sales has increased 10 percent since 
the enactment of EESA in October 2008.

                  FIGURE 18: EXISTING HOME SALES \347\

     
---------------------------------------------------------------------------
    \347\ National Association of Realtors, Existing Home Sales (online 
at www.realtor.org/research/research/ehsdata) (accessed May 5, 2010). 
Historical data provided by Bloomberg Data Service.
[GRAPHIC] [TIFF OMITTED] 56095A.017

                          G. Financial Update

    Each month, the Panel summarizes the resources that the 
federal government has committed to economic stabilization. The 
following financial update provides: (1) an updated accounting 
of the TARP, including a tally of dividend income, repayments, 
and warrant dispositions that the program has received as of 
March 31, 2010; and (2) an updated accounting of the full 
federal resource commitment as of April 29, 2010.

1. The TARP

            a. Costs: Expenditures and Commitments
    Treasury has committed or is currently committed to spend 
$520.3 billion of TARP funds through an array of programs used 
to purchase preferred shares in financial institutions, provide 
loans to small businesses and automotive companies, and 
leverage Federal Reserve loans for facilities designed to 
restart secondary securitization markets.\348\ Of this total, 
$219.4 billion is currently outstanding under the $698.7 
billion limit for TARP expenditures set by EESA, leaving $479.4 
billion available for fulfillment of anticipated funding levels 
of existing programs and for funding new programs and 
initiatives. The $219.4 billion includes purchases of preferred 
and common shares, warrants and/or debt obligations under the 
CPP, AIGIP/SSFI Program, PPIP, and AIFP; and a loan to TALF 
LLC, the special purpose vehicle (SPV) used to guarantee 
Federal Reserve TALF loans.\349\ Additionally, Treasury has 
spent $57.8 million under the Home Affordable Modification 
Program, out of a projected total program level of $50 billion.
---------------------------------------------------------------------------
    \348\ EESA, as amended by the Helping Families Save Their Homes Act 
of 2009, limits Treasury to $698.7 billion in purchasing authority 
outstanding at any one time as calculated by the sum of the purchase 
prices of all troubled assets held by Treasury. Pub. L. No. 110-343 
115(a)-(b); Helping Families Save Their Homes Act of 2009, Pub. L. No. 
111-22 Sec. 402(f) (reducing by $1.23 billion the authority for the 
TARP originally set under EESA at $700 billion).
    \349\ U.S. Department of the Treasury, Troubled Asset Relief 
Program Transactions Report for Period Ending April 29, 2010 (May 5, 
2010) (online at www.financialstability.gov/docs/transaction-reports/5-
3-10%20Transactions%20Report%20as%20of%204-29-10.pdf) (hereinafter 
``Treasury Transactions Report'').
---------------------------------------------------------------------------
            b. Income: Dividends, Interest Payments, CPP Repayments, 
                    and Warrant Sales
    As of April 29, 2010, a total of 70 institutions have 
completely repurchased their CPP preferred shares. Of these 
institutions, 43 have repurchased their warrants for common 
shares that Treasury received in conjunction with its preferred 
stock investments; Treasury sold the warrants for common shares 
for nine other institutions at auction.\350\ In April 2010, 
four CPP participants repurchased warrants for $20 million. 
Warrants for common shares of PNC Financial Services Group, 
Inc. were sold at auction for $324 million in proceeds. In 
total, Treasury received $344 million in proceeds from the 
disposition of warrants in April. Treasury received $1.24 
billion in repayments for complete redemptions from four CPP 
participants during April. The largest repayment was $1.22 
billion from Discover Financial Services. In addition, Treasury 
receives dividend payments on the preferred shares that it 
holds, usually five percent per annum for the first five years 
and nine percent per annum thereafter.\351\ To date, Treasury 
has received approximately $22.0 billion in net income from 
warrant repurchases, dividends, interest payments, and other 
considerations deriving from TARP investments,\352\ and another 
$1.2 billion in participation fees from its Guarantee Program 
for Money Market Funds.\353\
---------------------------------------------------------------------------
    \350\ Id.
    \351\ See, e.g., Securities Purchase Agreement [CPP]: Standard 
Terms, supra note 199 (accessed May 11, 2010).
    \352\ U.S. Department of the Treasury, Cumulative Dividends and 
Interest Report as of December 31, 2009 (Jan. 20, 2010) (online at 
www.financialstability.gov/docs/dividends-interest-reports/
December%202009%20Dividends%20and%20Interest%20Report.pdf); Treasury 
Transactions Report, supra note 349.
    \353\ U.S. Department of the Treasury, Treasury Announces 
Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009) 
(online at www.treasury.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
            c. TARP Accounting

                              FIGURE 19: TARP ACCOUNTING (AS OF APRIL 29, 2010) 354
----------------------------------------------------------------------------------------------------------------
                                                                              Total
                                                 Anticipated     Actual    Repayments/    Funding      Funding
                                                   Funding      Funding      Reduced    Outstanding   Available
                TARP Initiative                   (billions    (billions     Exposure    (billions    (billions
                                                 of dollars)  of dollars)   (billions   of dollars)  of dollars)
                                                                           of dollars)
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program (CPP) 355.............       $204.9       $204.9       $137.3    356 $67.6           $0
Targeted Investment Program (TIP) 357..........         40.0         40.0           40            0            0
AIG Investment Program (AIGIP)/Systemically             69.8     358 49.1            0         49.1         20.7
 Significant Failing Institutions Program
 (SSFI)........................................
Automobile Industry Financing Program (AIFP)...         81.3         81.3     359 8.87         72.5            0
Asset Guarantee Program (AGP) 360..............          5.0          5.0      361 5.0            0            0
Capital Assistance Program (CAP) 362...........  ...........  ...........  ...........  ...........  ...........
Term Asset-Backed Securities Lending Facility           20.0     363 0.10            0         0.10         19.9
 (TALF)........................................
Public-Private Investment Program (PPIP) 364...         30.0         30.0            0         30.0            0
Supplier Support Program (SSP) 365.............      366 3.5          3.5          3.5            0            0
Unlocking SBA Lending..........................         15.0    367 0.058            0        0.058       14.942
Home Affordable Modification Program (HAMP)....       368 50     369 0.13            0         0.13         49.9
Community Development Capital Initiative (CDCI)     370 0.78            0            0            0         0.78
    Total Committed............................        520.3          414  ...........        219.4        106.2
    Total Uncommitted..........................        178.4  ...........        194.7  ...........    371 373.1
        Total..................................       $698.7       $414.1       $194.7       $219.4       $479.4
----------------------------------------------------------------------------------------------------------------
354 Treasury Transactions Report, supra note 349.
355 As of December 31, 2009, the CPP was closed. U.S. Department of the Treasury, FAQ on Capital Purchase
  Program Deadline (online at www.financialstability.gov/docs/
  FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
356 Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific
  Coast National Bancorp ($4.1 million), as losses on the Transactions Report. Therefore Treasury's net current
  CPP investment is $65.3 billion due to the $2.3 billion in losses thus far. Treasury Transactions Report,
  supra note 349.
357 Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under the
  TIP on December 9 and December 23, 2009, respectively. Therefore the Panel accounts for these funds as repaid
  and uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from Wells Fargo
  and Citigroup (Dec. 22, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm) (hereinafter
  ``Treasury Receives $45 Billion in Repayments from Wells Fargo and Citigroup'').
358 AIG has completely utilized the $40 billion made available on November 25, 2008 and drawn-down $7.54 billion
  of the $29.8 billion made available on April 17, 2009. This figure also reflects $1.6 billion in accumulated
  but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury's investment from cumulative
  preferred shares to non-cumulative shares. American International Group, Inc., Form 10-K for the Fiscal Year
  Ending December 31, 2009 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/5272/000104746910001465/
  a2196553z10-k.htm); Treasury Transactions Report, supra note 349, at 45; information provided by Treasury
  staff in response to Panel request.
359 On April 20, 2010, General Motors repaid the remaining $4.7 billion in loans. A $986 million loan remains
  outstanding to old GM. Treasury Transactions Report, supra note 349.
360 Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation terminated the asset guarantee
  with Citigroup on December 23, 2009. The agreement was terminated with no losses to Treasury's $5 billion
  second-loss portion of the guarantee. Citigroup did not repay any funds directly, but instead terminated
  Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now
  counted as uncommitted. Treasury Receives $45 Billion in Repayments from Wells Fargo and Citigroup, supra note
  357.
361 Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available, Treasury
  did not receive a repayment in the same sense as with other investments. Treasury did receive other income as
  consideration for the guarantee, which is not a repayment and is accounted for in Figure 20.
362 On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC, was
  in need of further capital from Treasury. GMAC subsequently received an additional $3.8 billion in capital
  through the AIFP on December 30, 2009. U.S. Department of the Treasury, Treasury Announcement Regarding the
  Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html);
  Treasury Transactions Report, supra note 349.
363 Treasury has committed $20 billion in TARP funds to a loan funded through TALF LLC, a special purpose
  vehicle created by the Federal Reserve Bank of New York. The loan is incrementally funded and as of March 31,
  2010, Treasury provided $104 million to TALF LLC. This total includes accrued payable interest. Treasury
  Transactions Report, supra note 349; Federal Reserve Bank of New York, Factors Affecting Reserve Balances
  (H.4.1) (April 29, 2010) (online at www.federalreserve.gov/releases/h41/).
364 On April 20, 2010, Treasury released its second quarterly report on the Legacy Securities Public-Private
  Investment Partnership. As of that date, the total value of assets held by the PPIP managers was $10 billion.
  Of this total, 88 percent was non-agency Residential Mortgage-Backed Securities and the remaining 12 percent
  was Commercial Mortgage-Backed Securities. PPIP Program Update--Quarter Ended March 31, 2010, supra note 121.
365 On April 5, 2010 and April 7, 2010, Treasury's commitment to lend to the GM SPV and the Chrysler SPV
  respectively under the ASSP ended. In total, Treasury received $413 million in repayments from loans provided
  by this program ($290 million from the GM SPV and $123 million from the Chrysler SPV). Further, Treasury
  received $101 million in proceeds from additional notes associated with this program. Treasury Transactions
  Report, supra note 349.
366 On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
  billion. This action reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5
  billion to $1 billion. GM Supplier Receivables LLC, the special purpose vehicle (SPV) created to administer
  this program for GM suppliers has made $290 million in partial repayments and Chrysler Receivables SPV LLC,
  the SPV created to administer the program for Chrysler suppliers, has made $123 million in partial repayments.
  These were partial repayments of drawn-down funds and did not lessen Treasury's $3.5 billion in total exposure
  under the ASSP. Treasury Transactions Report, supra note 349.
367 Treasury settled on the purchase of three floating rate Small Business Administration 7(a) securities on
  March 24, 2010, and another on April 30, 2010. Treasury anticipates a settlement on one floating rate SBA 7a
  security on May 28, 2010. As of May 3, 2010, the total amount of TARP funds invested in these securities was
  $58.64 million. Treasury Transactions Report, supra note 349.
368 On February 19, 2010, President Obama announced the Housing Finance Agency Innovation Fund for the Hardest
  Hit Housing Markets (HFA Hardest Hit Fund), his proposal to use $1.5 billion of the $50 billion in TARP funds
  allocated to HAMP to assist the five states with the highest home price declines stemming from the foreclosure
  crisis: Nevada, California, Florida, Arizona, and Michigan. The White House, President Obama Announces Help
  for Hardest Hit Housing Markets (Feb. 19, 2010) (online at www.whitehouse.gov/the-press-office/president-obama-
  announces-help-hardest-hit-housing-markets). On March 29, 2010, Treasury announced $600 million in funding for
  a second HFA Hardest Hit Fund which includes North Carolina, Ohio, Oregon Rhode Island, and South Carolina.
  U.S. Department of the Treasury, Administration Announces Second Round of Assistance for Hardest-Hit Housing
  Markets (Mar. 29, 2010) (online at www.financialstability.gov/latest/pr_03292010.html). Until further
  information on these programs is released, the Panel will continue to account for the $50 billion commitment
  to HAMP as intact and as the newly announced programs as subsets of the larger initiative. For further
  discussion of the newly announced HAMP programs, and the effect these initiatives may have on the $50 billion
  in committed TARP funds, see section D.1 of the Panel's April report. COP April Oversight Report, supra note
  333.
369 In response to a Panel inquiry, Treasury disclosed that, as of April 30, 2010, $132.5 million in funds had
  been disbursed under HAMP. As of April 29, 2010, the total of all the caps set on payments to each mortgage
  servicer was $39.9 billion. Treasury Transactions Report, supra note 349.
370 On February 3, 2010, the Administration announced an initiative under TARP to provide low-cost financing for
  Community Development Financial Institutions (CDFIs). Under this program, CDFIs are eligible for capital
  investments at a two percent dividend rate as compared to the five percent dividend rate under the CPP. In
  response to Panel request, Treasury stated that it projects the CDCI program to utilize $780.2 million.
371 This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($178.4 billion) and
  the repayments ($194.7 billion).


                                                             FIGURE 20: TARP PROFIT AND LOSS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Warrant
                                                      Dividends \372\  Interest \373\  repurchases \374\  Other proceeds   Losses \375\        Total
                   TARP initiative                     (as of 03/31/    (as of 03/31/   (as of 04/29/10)   (as of 03/31/   (as of 04/29/   (millions of
                                                       10) (millions    10) (millions     (millions of     10) (millions   10) (millions     dollars)
                                                        of  dollars)    of  dollars)        dollars)       of  dollars)     of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...............................................          $15,121            $628            $6,043           $2,525        ($2,334)         $21,983
CPP.................................................           10,658              28             4,772               --         (2,334)          13,124
TIP.................................................            3,004              --             1,256               --  ..............           4,260
AIFP................................................            1,138             576                15               --  ..............           1,729
ASSP................................................              N/A              15                --               --  ..............              15
AGP.................................................              321              --                 0      \376\ 2,234  ..............           2,555
PPIP................................................               --               9                --         \377\ 15  ..............              24
Bank of America Guarantee...........................               --              --                --        \378\ 276  ..............             276
--------------------------------------------------------------------------------------------------------------------------------------------------------
\372\ U.S. Department of the Treasury, Cumulative Dividends and Interest Report as of March 31, 2010 (Apr. 16, 2010) (online at
  www.financialstability.gov/docs/dividends-interest-reports/March%202010%20Dividends%20and%20Interest%20Report.pdf) (hereinafter ``Cumulative Dividends
  and Interest Report as of March 31, 2010'').
\373\ Id.
\374\ Treasury Transactions Report, supra note 349.
\375\ Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as
  losses on the Transactions Report. A third institution, UCBH Holdings, Inc. received $299 million in TARP funds and is currently in bankruptcy
  proceedings. Treasury Transactions Report, supra note 349.
\376\ As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
  received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks for trust preferred securities in June
  2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with a
  $2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. At the end of Citigroup's participation in the FDIC's
  TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP
  to the Treasury. Treasury Transactions Report, supra note 349.
\377\ As of March, 31, 2010, Treasury has earned $15 million in membership interest distributions from the PPIP. Cumulative Dividends and Interest
  Report as of March 31, 2010, supra note 372.
\378\ Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
  agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
  the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
  U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
  Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
  %20executed.pdf).

            d. Rate of Return
    As of May 5, 2010, the average internal rate of return for 
all financial institutions that participated in the CPP and 
fully repaid the U.S. government (including preferred shares, 
dividends, and warrants) was 10.7 percent. The internal rate of 
return is the annualized effective compounded return rate that 
can be earned on invested capital.
            e. Warrant Disposition

                  FIGURE 21: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS AS OF MAY 7, 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                Panel's best
                                                                               Warrant         Warrant           valuation       Price/est.
                       Institution                         Investment date    repurchase   repurchase/sale      estimate at        ratio         IRR
                                                                                 date           amount        repurchase date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp....................................         12/12/2008     5/8/2009         $1,200,000         $2,150,000        0.558         9.3%
Iberiabank Corporation..................................          12/5/2008    5/20/2009          1,200,000          2,010,000        0.597         9.4%
Firstmerit Corporation..................................           1/9/2009    5/27/2009          5,025,000          4,260,000        1.180        20.3%
Sun Bancorp, Inc........................................           1/9/2009    5/27/2009          2,100,000          5,580,000        0.376        15.3%
Independent Bank Corp...................................           1/9/2009    5/27/2009          2,200,000          3,870,000        0.568        15.6%
Alliance Financial Corporation..........................         12/19/2008    6/17/2009            900,000          1,580,000        0.570        13.8%
First Niagara Financial Group...........................         11/21/2008    6/24/2009          2,700,000          3,050,000        0.885         8.0%
Berkshire Hills Bancorp, Inc............................         12/19/2008    6/24/2009          1,040,000          1,620,000        0.642        11.3%
Somerset Hills Bancorp..................................          1/16/2009    6/24/2009            275,000            580,000        0.474        16.6%
SCBT Financial Corporation..............................          1/16/2009    6/24/2009          1,400,000          2,290,000        0.611        11.7%
HF Financial Corp.......................................         11/21/2008    6/30/2009            650,000          1,240,000        0.524        10.1%
State Street............................................         10/28/2008     7/8/2009         60,000,000         54,200,000        1.107         9.9%
U.S. Bancorp............................................         11/14/2008    7/15/2009        139,000,000        135,100,000        1.029         8.7%
The Goldman Sachs Group, Inc............................         10/28/2008    7/22/2009      1,100,000,000      1,128,400,000        0.975        22.8%
BB&T Corp...............................................         11/14/2008    7/22/2009         67,010,402         68,200,000        0.983         8.7%
American Express Company................................           1/9/2009    7/29/2009        340,000,000        391,200,000        0.869        29.5%
Bank of New York Mellon Corp............................         10/28/2008     8/5/2009        136,000,000        155,700,000        0.873        12.3%
Morgan Stanley..........................................         10/28/2008    8/12/2009        950,000,000      1,039,800,000        0.914        20.2%
Northern Trust Corporation..............................         11/14/2008    8/26/2009         87,000,000         89,800,000        0.969        14.5%
Old Line Bancshares Inc.................................          12/5/2008     9/2/2009            225,000            500,000        0.450        10.4%
Bancorp Rhode Island, Inc...............................         12/19/2008    9/30/2009          1,400,000          1,400,000        1.000        12.6%
Centerstate Banks of Florida Inc........................         11/21/2008   10/28/2009            212,000            220,000        0.964         5.9%
Manhattan Bancorp.......................................          12/5/2008   10/14/2009             63,364            140,000        0.453         9.8%
CVB Financial Corp......................................          12/5/2008   10/28/2009          1,307,000          3,522,198        0.371         6.4%
Bank of Ozarks..........................................         12/12/2008   11/24/2009          2,650,000          3,500,000        0.757         9.0%
Capital One Financial...................................         11/14/2008    12/3/2009        148,731,030        232,000,000        0.641        12.0%
JP Morgan Chase & Co....................................         10/28/2008   12/10/2009        950,318,243      1,006,587,697        0.944        10.9%
TCF Financial Corp......................................          1/16/2009   12/16/2009          9,599,964         11,825,830        0.812        11.0%
LSB Corporation.........................................         12/12/2008   12/16/2009            560,000            535,202        1.046         9.0%
Wainwright Bank & Trust Company.........................         12/19/2008   12/16/2009            568,700          1,071,494        0.531         7.8%
Wesbanco Bank, Inc......................................          12/5/2008   12/23/2009            950,000          2,387,617        0.398         6.7%
Union Bankshares Corporation............................         12/19/2008   12/23/2009            450,000          1,130,418        0.398         5.8%
Trustmark Corporation...................................         11/21/2008   12/30/2009         10,000,000         11,573,699        0.864         9.4%
Flushing Financial Corporation..........................         12/19/2008   12/30/2009            900,000          2,861,919        0.314         6.5%
OceanFirst Financial Corporation........................          1/16/2009     2/3/2010            430,797            279,359        1.542         6.2%
Monarch Financial Holdings, Inc.........................         12/19/2008    2/10/2010            260,000            623,434        0.417         6.7%
Bank of America.........................................   \379\ 10/28/2008     3/3/2010      1,566,210,714      1,006,416,684        1.533         6.5%
                                                             \380\ 1/9/2009
                                                            \381\ 1/14/2009
Washington Federal Inc./Washington Federal Savings &             11/14/2008     3/9/2010         15,623,222         10,166,404        1.537        18.6%
 Loan Association.......................................
Signature Bank..........................................         12/12/2008    3/10/2010         11,320,751         11,458,577        0.988        32.4%
Texas Capital Bancshares, Inc...........................          1/16/2009    3/11/2010          6,709,061          8,316,604        0.807        30.1%
Umpqua Holdings Corp....................................         11/14/2008    3/31/2010          4,500,000          5,162,400        0.872         6.6%
City National Corporation...............................         11/21/2008     4/7/2010         18,500,000         24,376,448        0.759         8.5%
First Litchfield Financial Corporation..................         12/12/2008     4/7/2010          1,488,046          1,863,158        0.799        15.9%
PNC Financial Services Group Inc........................         12/31/2008    4/29/2010        324,195,686        346,800,388        0.935         8.7%
Comerica Inc............................................         11/14/2008     5/12/201  \382\ 181,102,043        276,426,071        0.655        10.7%
    Total...............................................  .................  ...........      6,154,669,024      6,058,253,403        1.016        10.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
\379\ Investment date for Bank of America in CPP.
\380\ Investment date for Merrill Lynch in CPP.
\381\ Investment date for Bank of America in TIP.
\382\ Auction sale is scheduled to close on May 18, 2010. These are the projected net proceeds to Treasury.


  FIGURE 22: VALUATION OF CURRENT HOLDINGS OF WARRANTS AS OF MARCH 26,
                                  2010
------------------------------------------------------------------------
                                       Warrant valuation (millions of
      Stress test financial                       dollars)
    institutions with warrants    --------------------------------------
           outstanding                 Low          High         Best
                                     estimate     estimate     estimate
------------------------------------------------------------------------
Wells Fargo & Company............      $540.54    $2,209.85    $1,064.25
Citigroup, Inc...................        19.99     1,110.40       275.66
SunTrust Banks, Inc..............        31.49       400.67       201.59
Regions Financial Corporation....        18.28       235.00       128.94
Fifth Third Bancorp..............       131.51       429.22       257.79
Hartford Financial Services             532.06       869.84       622.70
 Group, Inc......................
KeyCorp..........................        26.64       178.64       105.34
AIG..............................       253.30     1,710.58     1,231.02
All Other Banks..................       803.13     1,858.64     1,374.15
    Total........................     2,356.93     9,002.84     5,261.44
------------------------------------------------------------------------

2. Other Financial Stability Efforts

            Federal Reserve, FDIC, and Other Programs
    In addition to the direct expenditures Treasury has 
undertaken through the TARP, the federal government has engaged 
in a much broader program directed at stabilizing the U.S. 
financial system. Many of these initiatives explicitly augment 
funds allocated by Treasury under specific TARP initiatives, 
such as FDIC and Federal Reserve asset guarantees for 
Citigroup, or operate in tandem with Treasury programs, such as 
the interaction between PPIP and TALF. Other programs, like the 
Federal Reserve's extension of credit through its section 13(3) 
facilities and SPVs and the FDIC's Temporary Liquidity 
Guarantee Program, operate independently of the TARP.
    Figure 23 below reflects the changing mix of Federal 
Reserve investments. As the liquidity facilities established to 
address the crisis have been wound down, the Federal Reserve 
has expanded its facilities for purchasing mortgage-related 
securities. The Federal Reserve announced that it intended to 
purchase $175 billion of federal agency debt securities and 
$1.25 trillion of agency mortgage-backed securities.\383\ As of 
April 29, 2010, $169 billion of federal agency (government-
sponsored enterprise) debt securities and $1.1 trillion of 
agency mortgage-backed securities were purchased.\384\ These 
purchases are now completed.\385\ In addition, $178.5 billion 
in GSE MBS remain outstanding as of April 2010 under Treasury's 
GSE Mortgage Backed Securities Purchase Program.\386\
---------------------------------------------------------------------------
    \383\ Board of Governors of the Federal Reserve System, Minutes of 
the Federal Open Market Committee, at 10 (Dec. 15-16, 2009) (online at 
www.federalreserve.gov/newsevents/press/
monetary/fomcminutes20091216.pdf) (``[T]he Federal Reserve is in the 
process of purchasing $1.25 trillion of agency mortgage-backed 
securities and about $175 billion of agency debt'').
    \384\ Board of Governors of the Federal Reserve System, Factors 
Affecting Reserve Balances (H.4.1) (May 6, 2010) (online at 
www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (hereinafter 
``Factors Affecting Reserve Balances (H.4.1)'').
    \385\ Board of Governors of the Federal Reserve System, FOMC 
Statement (Dec. 16, 2009) (online at www.federalreserve.gov/newsevents/
press/monetary/20091216a.htm) (``In order to promote a smooth 
transition in markets, the Committee is gradually slowing the pace of 
these purchases, and it anticipates that these transactions will be 
executed by the end of the first quarter of 2010''); Board of Governors 
of the Federal Reserve System, Factors Affecting Reserve Balances (Feb. 
4, 2010) (online at www.federalreserve.gov/Releases/H41/Current/).
    \386\ U.S. Department of the Treasury, MBS Purchase Program: 
Portfolio by Month (online at www.financialstability.gov/docs/
Apr%202010%20Portfolio%20by%20month.pdf) (accessed May 6, 2010). 
Treasury received $42.2 billion in principal repayments $10.3 billion 
in interest payments from these securities. U.S. Department of the 
Treasury, MBS Purchase Program Principal and Interest (online at 
www.financialstability.gov/docs/
Apr%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf) 
(accessed May 6, 2010).
---------------------------------------------------------------------------

FIGURE 23: FEDERAL RESERVE AND FDIC FINANCIAL STABILITY EFFORTS (AS OF 
                         APRIL 28, 2010) \387\

[GRAPHIC] [TIFF OMITTED] 56095A.018

3. Total Financial Stability Resources (as of April 29, 2010)

    Beginning in its April 2009 report, the Panel broadly 
classified the resources that the federal government has 
devoted to stabilizing the economy through myriad new programs 
and initiatives as outlays, loans, or guarantees. Although the 
Panel calculates the total value of these resources at nearly 
$3 trillion, this would translate into the ultimate ``cost'' of 
the stabilization effort only if: (1) assets do not appreciate; 
(2) no dividends are received, no warrants are exercised, and 
no TARP funds are repaid; (3) all loans default and are written 
off; and (4) all guarantees are exercised and subsequently 
written off.
---------------------------------------------------------------------------
    \387\ Federal Reserve Liquidity Facilities include: Primary credit, 
Secondary credit, Central Bank Liquidity Swaps, Primary dealer and 
other broker-dealer credit, Asset-Backed Commercial Paper Money Market 
Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial 
Paper Funding Facility LLC, Seasonal credit, Term auction credit, Term 
Asset-Backed Securities Loan Facility. Federal Reserve Mortgage Related 
Facilities include: Federal agency debt securities and Mortgage-backed 
securities held by the Federal Reserve. Institution Specific Facilities 
include: credit extended to American International Group, Inc., the 
preferred interests in AIA Aurora LLC and ALICO Holdings LLC, and the 
net portfolio holdings of Maiden Lanes I, II, and III. Factors 
Affecting Reserve Balances (H.4.1), supra note 384 (accessed May 6, 
2010). For related presentations of Federal Reserve data, see Board of 
Governors of the Federal Reserve System, Credit and Liquidity Programs 
and the Balance Sheet, at 2 (Nov. 2009) (online at 
www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport200911.pdf). The TLGP figure reflects the monthly 
amount of debt outstanding under the program. Federal Deposit Insurance 
Corporation, Monthly Reports on Debt Issuance Under the Temporary 
Liquidity Guarantee Program (Dec. 2008-Mar. 2010) (online at 
www.fdic.gov/regulations/resources/TLGP/reports.html). The total for 
the Term Asset-Backed Securities Loan Facility has been reduced by $20 
billion throughout this exhibit in order to reflect Treasury's $20 
billion first-loss position under the terms of this program.
---------------------------------------------------------------------------
    With respect to the FDIC and Federal Reserve programs, the 
risk of loss varies significantly across the programs 
considered here, as do the mechanisms providing protection for 
the taxpayer against such risk. As discussed in the Panel's 
November report, the FDIC assesses a premium of up to 100 basis 
points on TLGP debt guarantees.\388\ In contrast, the Federal 
Reserve's liquidity programs are generally available only to 
borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the 
borrower. If the assets securing a Federal Reserve loan realize 
a decline in value greater than the ``haircut,'' the Federal 
Reserve is able to demand more collateral from the borrower. 
Similarly, should a borrower default on a recourse loan, the 
Federal Reserve can turn to the borrower's other assets to make 
the Federal Reserve whole. In this way, the risk to the 
taxpayer on recourse loans only materializes if the borrower 
enters bankruptcy. The only loan currently ``underwater''--
where the outstanding principal loan amount exceeds the current 
market value of the collateral--is the loan to Maiden Lane LLC, 
which was formed to purchase certain Bear Stearns assets.
---------------------------------------------------------------------------
    \388\ Congressional Oversight Panel, November Oversight Report: 
Guarantees and Contingent Payments in TARP and Related Programs, at 36 
(Nov. 11, 2009) (online at cop.senate.gov/
documents/cop-110609-report.pdf).

                FIGURE 24: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF APRIL 29, 2010) i
----------------------------------------------------------------------------------------------------------------
                                                                Treasury     Federal
                Program (billions of dollars)                    (TARP)      reserve        FDIC        Total
----------------------------------------------------------------------------------------------------------------
Total.......................................................       $698.7     $1,642.6       $670.4     $2,995.2
Outlays ii..................................................        271.4      1,316.3         69.4      1,630.6
    Loans...................................................         37.8        326.3            0        380.1
    Guarantees iii..........................................           20            0          601          621
    Uncommitted TARP Funds..................................        369.5            0            0        363.4
AIG iv......................................................         69.8         91.8            0        161.6
    Outlays.................................................       v 69.8      vi 25.4            0         95.2
    Loans...................................................            0     vii 66.4            0         66.4
    Guarantees..............................................            0            0            0            0
Citigroup...................................................           25            0            0           25
    Outlays.................................................      viii 25            0            0           25
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Capital Purchase Program (Other)............................         42.6            0            0         42.6
    Outlays.................................................      ix 42.6            0            0         42.6
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Capital Assistance Program..................................          N/A            0            0        x N/A
TALF........................................................           20          180            0          200
    Outlays.................................................            0            0            0            0
    Loans...................................................            0      xii 180            0          180
    Guarantees..............................................        xi 20            0            0           20
PPIP (Loans) xiii...........................................            0            0            0            0
    Outlays.................................................            0            0            0            0
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
PPIP (Securities)...........................................       xiv 30            0            0           30
    Outlays.................................................           10            0            0           10
    Loans...................................................           20            0            0           20
    Guarantees..............................................            0            0            0            0
Home Affordable Modification Program........................           50            0            0           50
    Outlays.................................................        xv 50            0            0           50
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Automotive Industry Financing Program.......................     xvi 72.5            0            0         72.5
    Outlays.................................................         59.0            0            0         59.0
    Loans...................................................         13.5            0            0         13.5
    Guarantees..............................................            0            0            0            0
Auto Supplier Support Program...............................          3.5            0            0          3.5
    Outlays.................................................            0            0            0            0
    Loans...................................................     xvii 3.5            0            0          3.5
    Guarantees..............................................            0            0            0            0
Unlocking SBA Lending.......................................      xvii 15            0            0           15
    Outlays.................................................           15            0            0           15
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Community Development Capital Initiative....................     xix 0.78            0            0         0.78
    Outlays.................................................            0            0            0            0
    Loans...................................................         0.78            0            0         0.78
    Guarantees..............................................            0            0            0            0
Temporary Liquidity Guarantee Program.......................            0            0          601          601
    Outlays.................................................            0            0            0            0
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0       xx 601          601
Deposit Insurance Fund......................................            0            0         69.4         69.4
    Outlays.................................................            0            0     xxi 69.4         69.4
    Loans...................................................            0            0            0            0
    Guarantees..............................................            0            0            0            0
Other Federal Reserve Credit Expansion......................            0      1,370.8            0      1,370.8
    Outlays.................................................            0  xxii 1,290.            0      1,290.4
                                                                                     4
    Loans...................................................            0     xxiii 80            0           80
    Guarantees..............................................            0            0            0            0
Uncommitted TARP Funds......................................        369.6            0            0        369.6
----------------------------------------------------------------------------------------------------------------
i All data in this exhibit is as of April 29, 2010 except for information regarding the FDIC's Temporary
  Liquidity Guarantee Program (TLGP). This data is as of March 31, 2010.
ii The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
  classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
  etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
  anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
  estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
  announcements, and are subject to further change. Outlays used here represent investment and asset purchases
  and commitments to make investments and asset purchases and are not the same as budget outlays, which under
  section 123 of EESA are recorded on a ``credit reform'' basis.
iii Although many of the guarantees may never be exercised or exercised only partially, the guarantee figures
  included here represent the federal government's greatest possible financial exposure.
iv AIG received an $85 billion credit facility (reduced to $60 billion in November 2008 and then to $35 billion
  in December 2009) from the Federal Reserve Bank of New York. A Treasury trust received Series C preferred
  convertible stock in exchange for the facility and $0.5 million. As a result, Treasury owns a 77.9 percent
  voting majority in AIG. The Series C preferred shares are convertible to common stock, which gives the trust
  79.9 percent of the common stock from AIG. Treasury received a warrant for two percent of AIG common stock
  through purchases of Series D. Also, Treasury received 150 warrants translating to 3,000 common equity shares
  for its purchase of Series F preferred stock. Government Accountability Office, Troubled Asset Relief Program:
  Status of Government Assistance Provided to AIG (Sept. 2009) (GAO-09-975) (online at www.gao.gov/new.items/
  d09975.pdf).
v This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25,
  2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
  bonuses paid to AIG Financial Products employees). As of March 31, 2010, AIG had utilized $47.5 billion of the
  available $69.8 billion under the AIGIP/SSFI and owed $1.6 billion in unpaid dividends. This information was
  provided by Treasury in response to a Panel inquiry.
vi As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009, the
  amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
  preferred equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These SPVs
  were established to hold the common stock of two AIG subsidiaries: American International Assurance Company
  Ltd. (AIA) and American Life Insurance Company (ALICO). As of March 31, 2010, the book value of the Federal
  Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC was $16.26 billion and $9.15
  billion in preferred equity respectively. Hence, the book value of these securities is $25.416 billion, which
  is reflected in the corresponding table. Federal Reserve Bank of New York, Factors Affecting Reserve Balances
  (H.4.1) (April 29, 2010) (online at www.federalreserve.gov/releases/h41/).
vii This number represents the full $35 billion that is available to AIG through its revolving credit facility
  with the Federal Reserve Bank of New York (FRBNY) ($27.1 billion had been drawn down as of May 6, 2010) and
  the outstanding principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of
  March 31, 2010, $14.8 billion and $16.6 billion respectively). The figures for the amount outstanding under
  the Maiden Lane II and III loans from the FRBNY do not reflect the accrued interest payable to the FRBNY.
  Income from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers' exposure
  to losses over time. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report
  on Credit and Liquidity Programs and the Balance Sheet, at 17 (Oct. 2009) (online at www.federalreserve.gov/
  monetarypolicy/files/monthlyclbsreport200910.pdf). On December 1, 2009, AIG entered into an agreement with
  FRBNY to reduce the debt AIG owes the FRBNY by $25 billion. In exchange, FRBNY received preferred equity
  interests in two AIG subsidiaries. This also reduced the debt ceiling on the loan facility from $60 billion to
  $35 billion. American International Group, AIG Closes Two Transactions That Reduce Debt AIG Owes Federal
  Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online at phx.corporate-ir.net/
  External.File?item=UGFyZW50SUQ9MjE4ODl8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1).
viii As of April 29, 2010, the U.S. Treasury held $25 billion of Citigroup common stock under the CPP. U.S.
  Department of the Treasury. This amount consists of 7.6 billion shares valued on October 28, 2008 at $3.25 per
  share. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
  April 29, 2010 (May 3, 2010) (online at www.financialstability.gov/docs/transaction-reports/5-3-
  10%20Transactions%20Report%20as%20of%204-29-10.pdf).
ix This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion investment
  in Citigroup identified above, and the $137.3 billion in repayments that are reflected as available TARP
  funds. This figure does not account for future repayments of CPP investments, dividend payments from CPP
  investments, or losses under the program. U.S. Department of the Treasury, Troubled Asset Relief Program
  Transactions Report for Period Ending April 29, 2010 (May 3, 2010) (online at www.financialstability.gov/docs/
  transaction-reports/5-3-10%20Transactions%20Report%20as%20of%204-29-10.pdf).
x On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
  need of further capital from Treasury. GMAC, however, received further funding through the AIFP. Therefore,
  the Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding
  the Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
xi This figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. However, as of April 29,
  2010, TALF LLC had drawn only $104 million of the available $20 billion. Board of Governors of the Federal
  Reserve System, Factors Affecting Reserve Balances (H.4.1) (May 6, 2010) (online at www.federalreserve.gov/
  Releases/H41/Current/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
  Period Ending April 29, 2010 (May 3, 2010) (online at www.financialstability.gov/docs/transaction-reports/5-3-
  10%20Transactions%20Report%20as%20of%204-29-10.pdf). As of March 29, 2010, investors had requested a total of
  $73.3 billion in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF
  loans had been settled ($12 billion in CMBS and $59 billion in non-CMBS). Federal Reserve Bank of New York,
  Term Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/
  CMBS_recent_operations.html) (accessed May 5, 2010); Federal Reserve Bank of New York, Term Asset-Backed
  Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/talf--operations.html) (accessed May
  5, 2010).
xii This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
  of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
  (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
  Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
  $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
  responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
  the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
xiii It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design
  as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit
  Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at
  www.fdic.gov/news/news/press/2009/pr09084.html); Federal Deposit Insurance Corporation, Legacy Loans Program--
  Test of Funding Mechanism (July 31, 2009) (online at www.fdic.gov/news/news/press/2009/pr09131.html). The
  sales described in these statements do not involve any Treasury participation, and FDIC activity is accounted
  for here as a component of the FDIC's Deposit Insurance Fund outlays.
xiv As of February 25, 2010, Treasury reported commitments of $19.9 billion in loans and $9.9 billion in
  membership interest associated with the program. On January 4, 2010, Treasury and one of the nine fund
  managers, TCW Senior Management Securities Fund, L.P., entered into a ``Winding-Up and Liquidation
  Agreement.'' U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period
  Ending April 29, 2010 (May 3, 2010) (online at www.financialstability.gov/docs/transaction-reports/5-3-
  10%20Transactions%20Report%20as%20of%204-29-10.pdf).
xv Of the $50 billion in announced TARP funding for this program, $39.9 billion has been allocated as of April
  29, 2010. However, as of February 2010, only $57.8 million in non-GSE payments have been disbursed under HAMP.
  Disbursement information provided in response to Panel inquiry; U.S. Department of the Treasury, Troubled
  Asset Relief Program Transactions Report for Period Ending April 29, 2010 (May 3, 2010) (online at
  www.financialstability.gov/docs/transaction-reports/5-3-10%20Transactions%20Report%20as%20of%204-29-10.pdf).
xvi A substantial portion of the total $81.3 billion in loans extended under the AIFP have since been converted
  to common equity and preferred shares in restructured companies. $18.2 billion has been retained as first lien
  debt (with $1 billion committed to old GM, and $12.5 billion to Chrysler). This figure ($72.5 billion)
  represents Treasury's current obligation under the AIFP after repayments.
xvii See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending
  April 29, 2010 (May 3, 2010) (online at www.financialstability.gov/docs/transaction-reports/5-3-
  10%20Transactions%20Report%20as%20of%204-29-10.pdf).
xviii U.S. Department of Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at
  www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit Markets
  For Small Businesses By Purchasing Up to $15 Billion in Securities'').
xix This information was provided by Treasury staff in response to Panel inquiry.
xx This figure represents the current maximum aggregate debt guarantees that could be made under the program,
  which is a function of the number and size of individual financial institutions participating. $305.4 billion
  of debt subject to the guarantee is currently outstanding, which represents approximately 51 percent of the
  current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
  Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (March 31, 2010) (online at www.fdic.gov/
  regulations/resources/tlgp/total_issuance12-09.html). The FDIC has collected $10.4 billion in fees and
  surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance
  Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program (Mar. 31, 2009) (online at
  www.fdic.gov/regulations/resources/tlgp/fees.html).
xxi This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
  failures in the third and fourth quarters of 2008 and the first, second and third quarters of 2009. Federal
  Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement
  (Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_/income.html); Federal
  Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement
  (Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/income.html);
  Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income
  Statement (First Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/
  income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
  Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/
  income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
  Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/
  income.html). This figure includes the FDIC's estimates of its future losses under loss-sharing agreements
  that it has entered into with banks acquiring assets of insolvent banks during these five quarters. Under a
  loss-sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
  bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
  of these assets and 95 percent of losses of another portion of assets. See, e.g., Federal Deposit Insurance
  Corporation, Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank, Austin, Texas, FDIC and
  Compass Bank, at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-
  tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC disclosed that there were
  approximately $132 billion in assets covered under loss-sharing agreements as of December 18, 2009.
  Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since
  there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather
  than as guarantees.
xxii Outlays are comprised of the Federal Reserve Mortgage Related Facilities and the preferred equity holdings
  in AIA Aurora LLC and ALICO Holdings LLC. The Federal Reserve balance sheet accounts for these facilities
  under Federal agency debt securities, mortgage-backed securities held by the Federal Reserve, and the
  preferred interests in AIA Aurora LLC and ALICO Holdings LLC. Board of Governors of the Federal Reserve
  System, Factors Affecting Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
  Choose.aspx?rel=H41) (accessed May 5, 2010). Although the Federal Reserve does not employ the outlays, loans
  and guarantees classification, its accounting clearly separates its mortgage-related purchasing programs from
  its liquidity programs. See Board of Governors of the Federal Reserve, Credit and Liquidity Programs and the
  Balance Sheet November 2009, at 2 (Nov. 2009) (online at www.federalreserve.gov/monetarypolicy/files/
  monthlyclbsreport200911.pdf).
On September 7, 2008, Treasury announced the GSE Mortgage Backed Securities Purchase Program (Treasury MBS
  Purchase Program). The Housing and Economic Recovery Act of 2008 provided Treasury the authority to purchase
  Government Sponsored Enterprise (GSE) MBS. Under this program, Treasury purchased approximately $214.4 billion
  in GSE MBS before the program ended on December 31, 2009. As of March 2010, there was $178.5 billion still
  outstanding under this program. U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month
  (online at www.financialstability.gov/docs/Apr%202010%20Portfolio%20by%20month.pdf) (accessed May 5, 2010).
  Treasury has received $42.2 billion in principal repayments and $10.3 billion in interest payments from these
  securities. U.S. Department of the Treasury, MBS Purchase Program Principal and Interest (online at
  www.financialstability.gov/docs/Apr%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf)
  (accessed May 5, 2010).
xxiii Federal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary
  credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
  Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility
  LLC, Seasonal credit, Term auction credit, Term Asset-Backed Securities Loan Facility, and loans outstanding
  to Bear Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors Affecting
  Reserve Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed May 5,
  2010).

                   SECTION FIVE: OVERSIGHT ACTIVITIES

    The Congressional Oversight Panel was established as part 
of the Emergency Economic Stabilization Act (EESA) and formed 
on November 26, 2008. Since then, the Panel has produced 17 
oversight reports, as well as a special report on regulatory 
reform, issued on January 29, 2009, and a special report on 
farm credit, issued on July 21, 2009. Since the release of the 
Panel's April oversight report, which assessed Treasury's 
ongoing efforts to mitigate the country's high home foreclosure 
rate using TARP initiatives, the following developments 
pertaining to the Panel's oversight of the TARP took place:
     The Panel held a hearing in Phoenix, Arizona on 
April 27, 2010, discussing the small business credit crunch and 
ways TARP initiatives could be used to help reinvigorate small 
business lending. The Panel heard testimony from senior 
officials from the local field offices of the Federal Deposit 
Insurance Corporation and the Small Business Administration, as 
well as from representatives of Phoenix-area community banks 
and small businesses. A video recording of the hearing, the 
written testimony from the hearing witnesses, and Panel 
members' opening statements all can be found online at 
cop.senate.gov/hearings.

Upcoming Reports and Hearings

    The Panel will release its next oversight report in June. 
The report will examine how one of the largest recipients of 
TARP financial assistance, American International Group, Inc. 
(AIG), got into financial trouble, assess some of the 
regulatory challenges presented by such an entity, and discuss 
Treasury's ongoing financial assistance to AIG under the AIG 
Investment Program (AIGIP) and the continued support for the 
company from the Federal Reserve Bank of New York. It will 
identify the parties that benefited from the rescue of AIG and 
will assess the company's progress in its plans to repay the 
taxpayers and the governmental entities' plans to exit their 
AIG holdings.
    The Panel is planning a hearing in Washington on May 26, 
2010, to discuss the topic of the June report. The Panel 
intends to hear testimony from current and former executives at 
AIG, counterparties that benefited from government support to 
the firm, as well as relevant senior policymakers and 
government regulators.
          SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

    In response to the escalating financial crisis, on October 
3, 2008, Congress provided Treasury with the authority to spend 
$700 billion to stabilize the U.S. economy, preserve home 
ownership, and promote economic growth. Congress created the 
Office of Financial Stability (OFS) within Treasury to 
implement the Troubled Asset Relief Program. At the same time, 
Congress created the Congressional Oversight Panel to ``review 
the current state of financial markets and the regulatory 
system.'' The Panel is empowered to hold hearings, review 
official data, and write reports on actions taken by Treasury 
and financial institutions and their effect on the economy. 
Through regular reports, the Panel must oversee Treasury's 
actions, assess the impact of spending to stabilize the 
economy, evaluate market transparency, ensure effective 
foreclosure mitigation efforts, and guarantee that Treasury's 
actions are in the best interests of the American people. In 
addition, Congress instructed the Panel to produce a special 
report on regulatory reform that analyzes ``the current state 
of the regulatory system and its effectiveness at overseeing 
the participants in the financial system and protecting 
consumers.'' The Panel issued this report in January 2009. 
Congress subsequently expanded the Panel's mandate by directing 
it to produce a special report on the availability of credit in 
the agricultural sector. The report was issued on July 21, 
2009.
    On November 14, 2008, Senate Majority Leader Harry Reid and 
the Speaker of the House Nancy Pelosi appointed Richard H. 
Neiman, Superintendent of Banks for the State of New York, 
Damon Silvers, Director of Policy and Special Counsel of the 
American Federation of Labor and Congress of Industrial 
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb 
Professor of Law at Harvard Law School, to the Panel. With the 
appointment on November 19, 2008, of Congressman Jeb Hensarling 
to the Panel by House Minority Leader John Boehner, the Panel 
had a quorum and met for the first time on November 26, 2008, 
electing Professor Warren as its chair. On December 16, 2008, 
Senate Minority Leader Mitch McConnell named Senator John E. 
Sununu to the Panel. Effective August 10, 2009, Senator Sununu 
resigned from the Panel, and on August 20, 2009, Senator 
McConnell announced the appointment of Paul Atkins, former 
Commissioner of the U.S. Securities and Exchange Commission, to 
fill the vacant seat. Effective December 9, 2009, Congressman 
Jeb Hensarling resigned from the Panel and House Minority 
Leader John Boehner announced the appointment of J. Mark 
McWatters to fill the vacant seat.

  APPENDIX I: LETTER TO CHAIR ELIZABETH WARREN FROM SECRETARY TIMOTHY 
           GEITHNER RE: CPP RESTRUCTURINGS, DATED MAY 3, 2010

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APPENDIX II: LETTER TO SECRETARY TIMOTHY GEITHNER FROM CHAIR ELIZABETH 
           WARREN RE: GM REPAYMENT TO TARP, DATED MAY 6, 2010

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