OCTOBER 18, 2011

Good morning Chairman Landrieu, Ranking Member Snowe and members of the Committee.  Thank you for the opportunity to submit this statement for the hearing record.

The American Association of Bank Directors provides advocacy, informational and educational support for bank and savings institution directors.  Many of the institutions that our members serve need more capital in order to lend more to small businesses in their communities but cannot successfully tap the currently dysfunctional private capital markets for reasons largely out of their control.

The SBLF was a well-conceived program to promote small business lending and create jobs, which is at the top of everyone’s agenda at this critical point in our economy.  Unfortunately, partly for reasons set forth below, it was not as successful as it could have been.  If Congress extends the program, it is essential that the legislation address the issues raised in my statement.

We have received reports that a number of qualified banks were not approved for an investment under the SBLF program solely because they passed board resolutions requested by the primary bank regulator or entered into other administrative documents that required them to obtain the prior approval of the regulator for any dividend payment.  These restrictions are being applied to hundreds if not thousands of banks.  The imposition of the restrictions does not, by itself, question the viability of the institution or its capacity to repay Treasury’s investment in the institution.

We believe that participation in the program, assuming it is extended, could be significantly increased by rescinding the belated and unanticipated policy change announced by Treasury in late May that disqualified applicants solely because the institution had agreed with their primary regulator not to pay a dividend without prior regulatory approval.  The statute did not bar these applicants from participating.  Rather, Treasury erected this barrier on its own accord and applied it to many otherwise qualified institutions.

Treasury applied this policy even when the primary federal banking regulator recommended an institution for SBLF funding, the institution had previously paid all of its TARP dividends with the primary regulator’s approval, the institution’s financial condition had stabilized or improved, and the institution was considered well-capitalized and profitable.  We understand that banking regulators had identified for the Treasury Department companies it believed met the primary requirements of the programs despite having dividend restrictions in place.

In fact, a letter dated August 23, 2011 from Patrick M. Parkinson, Director of the Fed’s Division of Banking Supervision and Regulation to Camden Fine, Executive Director of the ICBA, stated “We have identified for the Treasury department companies that we believe meet the primary requirements of the program despite having ‘dividend restrictions’ in place.”

Treasury’s belated announcement of the new policy set off a rush by applicants to request their bank regulators to remove or waive any dividend prior approval requirement for SBLF purposes.  Treasury gave applicants until August 1, 2011 to certify that applicants had no such restriction in place or to seek a waiver.  However, removal of regulatory dividend approval requirements was difficult if not impossible for applicants to obtain from their primary bank regulators since federal banking agencies typically reconsider these requirements only after scheduled bank examinations are completed.

Any legislation that will extend the SBLF program should explicitly direct Treasury not to disqualify applicants solely because they have agreed to obtain prior approval from their primary bank regulator before paying dividends.  If the primary bank regulator, which has far superior knowledge of the applicant than does Treasury, has advised Treasury that the company or bank has met the primary requirements of the program, that advice should weigh heavily in favor of approval.

Applicants for SBLF funding that did not receive funding now need to reassess their lending plans and possibly reduce their loan portfolios, leaving small businesses, including those in America’s inner cities, with significantly less credit.  This result can be reversed by the extension of the SBLF program and the funding of investments in viable banks and companies.

Thank you for your consideration.