Congress on Monday approved a deal on a $900 billion COVID-19 economic relief package, which is expected to be signed into law within the next few days. The bill provides $12 billion in support to small lenders focused on low-income and minority communities, buttressing minority-owned banks (MDIs) and community development financial institutions (CDFIs). These funds will be used to establish emergency programs to revitalize and provide long-term financial products and service availability for, and provide investments in, low- and moderate-income and minority communities that have disproportionately suffered from the impacts of the COVID–19 pandemic. This Alert includes a summary of one aspect of the program related to a new Treasury community development capital purchase program and some of our initial observations related to it (which we will refer to for the time being as the “CD CPP Program”). 

The CD CPP Program is reminiscent of the 2008 Capital Purchase Program (part of the 2008 TARP Legislation) (the “2008 CPP”), with notable differences in amount of eligible stock to be purchased as well as materially reduced dividend costs. The amount to be invested could be up to 30% of risk weighted assets [of the MDI/CDFI] versus 3-5% in the 2008 CPP. Moreover, a 2% dividend rate on the “preferred stock” will be imposed on each investment, which is substantially less than the 5% initial rate and 9% post-5-year anniversary rate applied in the 2008 CPP. We believe this offers an opportunity for CDFIs and MDIs to raise significant amounts of new capital at very attractive capital costs.

• Eligible Parties: 
  • Targeted to CDFIs/MDIs to support investments in low- and moderate-income and minority communities that have disproportionately suffered from the impacts of the COVID-19 pandemic.
• Application Process:
  • Available within 30 days of legislation
  • Form TBD; however, applications for 2008 CPP were simple.
  • Investment and lending plan to be included with application
    • Must demonstrate past lending support (at least 30%) in past 2 fiscal years to targeted borrower groups
    • Future support of impacted groups
  • Program termination 6 months post-end of pandemic
• Investment Terms:
  • Cumulative Preferred Stock
    • subordinated debt for parties ineligible for preferred (ex. S corps)
  • Tier 1 Capital Treatment
  • 10-year redemption target (with extensions at higher dividend rates)
  • 2% annual dividend cap
    • Annual payments
    • 1.25% cap if target lending increases to 200-400% of capital investment
    • .5% cap if target lending increases above 400% of capital investment
  • 24-month initial dividend payment deferral
  • Further payment deferral rights for issuers with future capital, income and other challenges
  • Investment Amount (much higher than 2008 CPP which was 3-5% of risk weighted assets (“RWA”))
    • 15% RWA >$2 BN
    • 25% RWA for >$500MM < $2BN
    • 30% RWA <$500MM
  • Resale limitations for securities by Treasury
    • Issuer right of first refusal
    • No more than 25% to be sold to any single purchaser
    • Resale to CDFI non-profit (with issuer consent) for de minimis or no price
  • Governance Restrictions (TBD-possibly similar to 2008 CPP)
    • Executive compensation limits
    • Limits on share repurchases
    • Dividend limits
  • Future MDI calculations to exclude effect of CD CPP Program securities

Further details will be released in the coming weeks by the Treasury Department. 

Nelson Mullins has developed a task force, which is part of the firm’s existing Social Impact and Community Development practice initiative and Minority Financial Institutions practice initiative, to track the implementation of this legislation. We will be providing regular updates as the CD CPP Program develops.