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State Small Business Credit Initiative Regulatory Q&A

Will participation in an SSBCI program result in greater regulatory scrutiny?

In response to an inquiry from Governor Pat Quinn of Illinois, John C. Lyons Jr., Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner, explained how the Office of the Comptroller of the Currency (OCC) views loans made through a State Small Business Credit Initiative (SSBCI) program. In his letter, which is available on, Mr. Lyons states that a bank’s participation in an SSBCI program does not in itself subject the bank to increased supervisory scrutiny.

He also noted that national banks and federal savings associations (collectively, banks) should maintain good lending practices and ensure that their participation in the SSBCI or similar programs is consistent with and supports their institutions’ overall strategic goals and objectives. Examiners consider and evaluate this due diligence process as part of their normal safety and soundness examinations.

What considerations should a bank have when participating in a new public credit enhancement program?

Banks participating in any public credit enhancement program need to make sure they effectively implement the program and comply with all of the necessary public regulations, so that the credit enhancements are honored if there are any problems with the loan.

Can a bank with an enforcement action participate in an SSBCI program?

States are responsible for determining the criteria for participation. States developing criteria for lender participation need to determine their risk tolerance for participation in SSBCI programs.

Formal enforcement actions are one component of publicly available data that states may use to assess a bank’s financial and managerial capacity. The presence of a formal enforcement action, however, may not be the only indicator of an institution’s capacity to engage in small-business lending or to participate in a public credit enhancement program. It is advisable to review more than one indicator when making a determination of a lender’s financial and managerial capacity.

Banks with enforcement actions that are considering participation in the SSBCI should inform their OCC Assistant Deputy Comptroller of their plans. Small-business lending must be part of the bank’s approved business plan, and the bank must have the financial and managerial capacity to make safe and sound loans and comply with the appropriate regulations.

What is an enforcement action?

The OCC Report of Examination (ROE) documents findings and conclusions with respect to its supervisory review of the bank. The ROE is the OCC’s primary method for supervisory communications to the bank regarding the bank’s condition.

An enforcement action is a tool the OCC uses to communicate problems or weaknesses to, and require corrective measures by, a bank’s senior management and board of directors. Once problems or weaknesses are identified and communicated to the bank, the bank’s senior management and board of directors are expected to promptly correct them. Whenever possible, OCC enforcement actions should deal with problems or weaknesses at an early stage, before they develop into more serious supervisory issues or adversely affect a bank’s performance and viability. This may mean taking action before problems or weaknesses are reflected in a bank’s financial condition.

OCC enforcement actions can be considered in two broad categories, informal and formal. Informal actions are used when the bank’s overall condition is sound but it is necessary to obtain written commitments from the bank’s board of directors to ensure identified problems and weaknesses will be corrected. Informal enforcement actions are not publicly disclosed.

Unlike most informal actions, formal enforcement actions are authorized—and sometimes mandated—by statute. Formal enforcement actions are enforceable, disclosed to the public, and generally more severe than informal actions. The OCC uses a wide variety of formal enforcement actions to support its supervisory objectives.

Informal enforcement actions include commitment letters, memorandums of understanding, and approved safety and soundness plans. Formal actions against a bank include orders and formal written agreements within the meaning of 12 USC 1818(b), capital directives under 12 USC 3907, “Prompt Corrective Action” (PCA) directives under 12 USC 1831(o), and safety and soundness orders under 12 USC 1831(p)(1).

Can funds held in a Collateral Support Program account or Capital Access Program reserve account be recognized as part of a bank’s or lender’s allowance for loan and lease losses?

In Collateral Support Programs (CSP), the state opens a cash collateral account at the lender in the amount of the SSBCI collateral support. In the event of default, there is an agreement on how these funds can be drawn by the lender. If the loan is repaid, the funds are paid back to the state.

In a Capital Access Program (CAP), when a participating lender originates a loan, the lender and borrower combine to contribute a percentage of the loan or line of credit, from 2 percent to 7 percent, into a reserve fund held by the lender. Typically the account monies are held in a deposit account on the bank’s books. The state matches the lender’s and borrower’s combined contribution and sends the state contribution to the lender-held reserve account. Each lender’s total CAP reserve fund is available as cash collateral to cover losses on all loans in the lender’s CAP portfolio. Participating loans are originated and serviced by the lender, and the lender may make claims to withdraw from the reserve for losses incurred in the case of a default.

Because funds in the CSP account or CAP reserve account are owned and controlled by a third party, these funds are considered an encumbered asset of the bank and therefore cannot be considered part of the allowance for loan and lease losses (ALLL). Reserve pools and the related guarantees should, however, be disclosed in a footnote in the financial statements.

Are funds held in a CSP account or CAP reserve account considered when a bank or examiner is assessing the adequacy of the amount reserved for loans held in these portfolios?

A cash collateral account for a CSP or a reserve fund account for a CAP reduces credit risk rather than enhancing the ALLL. A CSP provides pledged collateral accounts to lending institutions to enhance collateral coverage of individual loans. Because the funds in the collateral support account serve as collateral for the loan, these funds may be included as collateral along with other collateral held as security for a loan when measuring impairment.

A CAP establishes a loss reserve pool to cover loan losses that may be incurred in a group of loans. All of the CAP premiums are held in a single, pooled reserve account, with the state retaining ownership or co-ownership of the account.  The bank recovers CAP loan losses by offsetting against the CAP reserve fund it holds. The bank itself must absorb any losses over its accumulated CAP reserve fund.

These reserve pools act as insurance against losses in a pool of loans, similar to mortgage insurance on loan pools. In this case, the reserve pool is not considered when determining a bank’s ALLL but rather is treated and accounted for like other insurance policies it holds (i.e., if the realization of the insurance claim is assured, a receivable may be recognized). Impairment on loans covered by the risk reserve pool should be measured without consideration of the limited guarantee backed by the risk reserve pool.

Is a guarantee provided on a loan in the Small Business Credit Guarantee program recognized by regulators when analyzing the adequacy of the ALLL?

The Small Business Credit Guarantee is a fixed-percent guarantee (of the outstanding loan balance) and not a limited guarantee (i.e., not limited to the amount of funds in a risk reserve pool). The accounting for loans subject to the Small Business Credit Guarantee that have not been converted to the risk reserve pool is similar to the accounting for loans with a Small Business Administration guarantee. Impairment of loans subject to the Small Business Credit Guarantee should be measured with consideration of the stated guarantee, so long as it is probable the guarantee will be paid.

If, as stated above, the guarantee is enforceable and determination has been made that the state will honor the guarantee in the event of loss, the examiner and bank can take the guarantee into account when determining the adequacy of the ALLL.

Can premium deposits in the bank’s risk reserve pool in a CAP be counted toward the bank’s capital?

No. Because a state administrator typically owns and controls the premium deposits, these funds do not count toward a bank’s regulatory capital.

Can the guaranteed portion of an SSBCI guaranteed loan be excluded from a bank’s legal lending limit?

The answer depends on the state program. Specifically, the guarantee must be legally enforceable and the guarantor creditworthy.

OCC rules provide that certain types of loans and extensions of credit are not subject to the lending limits. Among those exemptions are “loans or extensions of credit, including portions thereof, to the extent guaranteed or secured by a general obligation of a state or political subdivision and for which the lending bank has obtained the opinion of counsel that the guarantee or collateral is a valid and enforceable general obligation of that public body.”

Under OCC rules, a general obligation of a state or political subdivision means “an obligation supported by the full faith and credit of an obligor possessing general powers of taxation, including property taxation.”

The general obligation exemption requires the lending bank to obtain an opinion of counsel that the guarantee is a valid and enforceable obligation of the state. The national banks that need to rely on this exemption typically are smaller national banks. Because the expense of obtaining an opinion of counsel may be prohibitive for many of these banks, states may want to provide a legal opinion, either from outside counsel or the appropriate state legal official, that the guarantee is a general obligation of a state or political subdivision.

OCC Interpretive Letter 899 provides the specific guidance for this issue.

If a bank makes a loan through the SSBCI program, will it be considered for Community Reinvestment Act purposes?

A loan made through the SSBCI may receive Community Reinvestment Act (CRA) consideration, provided it

  • benefits the bank’s assessment area. The bank may also receive consideration if the SSBCI benefits a broader statewide or regional area and the organization or activity serves geographies or individuals within the assessment areas, or if the bank has adequately addressed the community development needs of its assessment area.
  • meets the definition of a small-business loan or has a primary purpose of community development as defined under the CRA:
    • - Small-business loan means a loan included in “loans to small businesses” as defined in the instructions for preparation of the Consolidated Reports of Condition and Income. Small-business loans are loans of $1 million or less and reported on the call report as “commercial and industrial” or “secured by nonfarm nonresidential properties.” Loans reported as “construction, land development, and other land loans” are not included.
    • - Community development includes activities that provide affordable housing for, or community services targeted to, low- or moderate-income individuals, and activities that promote economic development by financing small businesses and farms. Activities also qualify as community development if they stabilize or revitalize particular low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas. Such activities include creating, retaining, or improving jobs for low- or moderate-income persons.

Does the size of the bank determine how a loan made under the SSBCI program will receive CRA consideration?

Yes. The CRA examination of a bank can vary based on the size of the bank. There are three general categories: small, intermediate small, and large banks. Unlike large and small banks, intermediate small banks have some flexibility in how loans to businesses are considered for CRA purposes.

The category of the size of the bank is determined by asset size. These asset size thresholds are updated annually and published by the OCC. The thresholds are based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million.

Size thresholds for 2014, as of January 1:

  • Small bank: A bank that, as of December 31 of either of the prior two calendar years, had assets of less than $1.202 billion. Small banks may receive CRA consideration for SSBCI loans as small-business loans.
  • Intermediate small bank: A bank with assets of at least $300 million as of December 31 of both of the prior two calendar years and less than $1.202 billion as of December 31 of either of the prior two calendar years. Intermediate small banks have some flexibility regarding these types of loans. A loan originated under the SSBCI program may receive CRA consideration as a small-business loan, or it may receive consideration as a community development loan if the primary purpose of the loan also meets the definition of community development.
  • Large bank: A retail institution with assets that equaled or exceeded $1.202 billion as of both of the prior two calendar year-ends (2012 and 2013). How SSBCI loans are considered for large banks is determined by the dollar amount of the loan. Loans of $1 million or less will be considered small-business loans. Loans greater than $1 million may receive community development consideration if the loans' primary purpose meets the community development definition.

Could SSBCI loans be considered responsive, innovative, or complex?

Possibly. Examiners consider the context within which a bank is evaluated to determine whether a particular loan is responsive to community needs or is considered innovative or complex for that bank. Examiners consider such factors as the types of loans or investments available in the bank’s assessment area or in the broader statewide or regional area that includes the bank’s assessment area; the bank’s capacity for a particular type of activity; and whether the bank was a leader in bringing the loan, program, or project to fruition. What is considered complex for one institution may be considered routine for another.

Banks are encouraged to provide information to their examiners that describes why they believe a particular activity or loan is innovative or complex for their institutions and assessment areas, or in the broader statewide or regional areas that includes the banks’ assessment areas.