Lack of clarity about the requirements for the Small Business Lending Fund that was established last year by the Small Business Jobs Act led to confusion among both lenders and borrowers alike, according to a new government report.

The report, released Wednesday by the Government Accountability Office, found that many applicants were not notified for months that their loan applications had not been approved and hundreds of applicants did not know about rules against restrictions on paying dividends. Few banks even applied for the program because they did not expect demand for small business loans to increase.

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

The Treasury’s initial announcement of program requirements did not make clear that applicants could not have restrictions on paying dividends, which affected over 200 applicants. The Treasury also did not explain the rationale for its funding decisions to applicants and other stakeholders.

Many applicants who were not approved were not notified until September 2011—almost four months after the application deadline and initial disbursements of funds. Although the Treasury had several outreach efforts to communicate with the public about SBLF, such efforts have not always been timely or clear to applicants and other stakeholders and could contribute to the SBLF being poorly understood by the public and Congress, said the report.

Fewer institutions applied for the SBLF and received funding than initially anticipated, in part because many banks did not anticipate that demand for small business loans would increase. The SBLF was authorized to invest up to $30 billion, but the Treasury funded just 332 of the 935 applications, investing about $4 billion, or 13 percent, of the authorized funds. The institutions that applied to and were funded by the SBLF were primarily institutions with total assets of less than $500 million.

In addition, the GAO’s analysis showed that compared with banks that did not apply to SBLF, funded banks had fewer problem loans and small loans (under $1 million) and less capital. The GAO’s nationally representative survey of community banks showed that respondents’ most common reason for not applying to the SBLF program was a lack of demand for small business loans.

The report acknowledged that the Treasury adopted procedures to help ensure that applicants were evaluated consistently and were likely to repay funds. However, the lack of clarity in explaining program requirements and decisions created confusion among applicants, according to the GAO. The evaluation process included input from federal and state regulators, reviews of small business lending plans, and estimates of the applicants’ ability to repay funds.

The GAO’s analysis of the inputs that the Treasury Department relied on for its decisions showed that the Treasury generally followed its process, although additional steps were taken for some applicants, such as revising repayment estimates to include updated information provided by federal regulators.

The Treasury has not yet finalized its plans for assessing the SBLF’s impact on small business lending or procedures for monitoring recipients for compliance with program requirements. The GAO’s analysis shows that credit is still difficult to obtain, although it has eased some compared with 2009, confirming that the lending environment remains challenging. Such an environment makes Treasury’s planned monitoring and assessments increasingly important.

Treasury officials told the GAO that they have been developing procedures for monitoring compliance, but they are not yet finalized. Similarly, the Treasury is considering various options for evaluating the SBLF’s performance, but complex economic relationships will make linking the SBLF program to job growth difficult.

Treasury officials said that they had been focused on approving applicants and disbursing funds by the statutory deadline of Sept. 27, 2011, and that finalizing procedures and performance indicators had lagged as a result. Now that funding decisions and disbursements have been made, finalizing plans for monitoring compliance and assessing the SBLF’s progress can take precedence.

Without a full and robust assessment, said the GAO, the Treasury will not be able to provide useful information to policymakers about the participants’ compliance and the effectiveness of a capital infusion program as a means of increasing small business lending.

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