USBCI Capital Access Program Policy

Utah Small Business Credit Initiative Capital Access Program (USBCI CAP) Policy — Revised Dec. 4, 2023

1. Program Overview The American Rescue Plan Act of 2021 (ARPA) reauthorized and amended the Small Business Jobs Act of 2010 (SBJA) to provide $10 billion to fund the State Small Business Credit Initiative (SSBCI) as a response to the economic effects of the COVID-19 pandemic.

SSBCI is a federal program administered by the Department of the Treasury (Treasury) to strengthen state programs that support private financing to small businesses. SSBCI is expected to, in conjunction with new small business financing, create billions of dollars in lending and investments to small businesses that need more support to expand and create jobs.

The Utah Small Business Credit Initiative Capital Access Program (USBCI CAP) will assist Utah businesses that need additional borrowings to stabilize, pivot, expand, or restart their business and help new Utah businesses enter the market. The USBCI CAP will provide portfolio insurance to lenders that are insured depository institutions, insured credit unions, or community development financial institutions (CDFIs) (Treasury Guidelines, p. 15). Portfolio insurance is provided as a separate loan loss reserve fund for each participating financial institution.

Approved USBCI CAP loan loss reserve funds are eligible for funding contributions in an amount equal to the premiums paid by the borrower and the financial institution lender to the reserve fund. This amount is calculated on a loan-by-loan basis (see Treasury Guidelines, p.

16). At maximum contribution, the borrower and lender together can only contribute up to 7% of the loan amount to a reserve fund, and the USBCI CAP matches that same contribution with USBCI funds (see Treasury Guidelines, p. 17).

Note: Underlined words in quotation marks are defined in the appropriate section or section 20, starting on page 8 of this document.

2. Program Objectives ● Assist in financing small businesses that are unable to access credit on reasonable terms ● Expand access to capital for underserved communities

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● Provide opportunities to rural and Native American entrepreneurs to create new businesses ● Partner with the Inspire in Utah campaign to expand access to credit for women 3. Private Capital at Risk (PCAR) Lenders enrolled in the USBCI CAP must have a meaningful amount of their capital at risk in the loan. Treasury has determined that because of how CAPs operate, each lender has a significant amount of its capital resources at risk. As required by statute, the borrower and lender together can only contribute up to 7% of the loan amount to a reserve fund, and the jurisdiction matches that same contribution with SSBCI funds. At maximum contribution, the reserve fund only has 14% of each loan, leaving the lender at risk for 86% of the loan (see Treasury Guidelines, p. 17).

4. Assistance to VSBs and SEDI-Owned Businesses Requirement The USBCI CAP must expend a portion of its allocation on loans to assist “Very Small Businesses” (VSBs) and “Socially and economically-disadvantaged individual (SEDI) owned businesses” (see Treasury Guidelines, pgs. 8-13).

The USBCI CAP must expend at least 28.78% of its funding allocation to assist “Socially and economically disadvantaged individual (SEDI) owned businesses” to achieve Utah’s SEDI objective and receive additional incentive funding (see Treasury SEDI objectives).

The USBCI CAP must expend at least 6% of its funding allocation to assist “Very Small Businesses” with under 10 employees (see Treasury Preliminary Allocation Tables).

5. Borrower/Loan Size Requirements ● Eligible borrowers must have fewer than 500 employees (see Treasury Guidelines, p.

18) ● The USBCI CAP will not provide credit if a loan exceeds $5M (see Treasury Guidelines, p. 18) ● The USBCI CAP is the best fit for loans between $25K-$250K 6. Loan Purpose Requirements and Prohibitions ● For each loan enrolled in the CAP, the financial institution must obtain an assurance from each borrower stating that the loan proceeds will not be used for an impermissible loan purpose under the USBCI program (see Treasury Guidelines, p. 18) ● Forms will be provided to financial institutions to verify loans are used for the intended use of the USBCI program

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7. Ineligible Loans The following Treasury guidelines apply to ineligible loans (see Treasury Guidelines, pgs.

18-21): ● Loans to borrowers with 500 or more employees ● Loans to finance a non-business purpose ● Loans to acquire or hold passive investments in real estate (not owner-occupied) ● Loans to finance goodwill or blue-sky ● Loans for land development or speculative ventures ● Loans to repay delinquent federal or state income taxes unless the borrower has a payment plan in place with the relevant taxing authority ● Loans to repay taxes held in trust or escrow (e.g., payroll or sales taxes) ● Loans to reimburse funds owed to any owner, including any equity investment or investment of capital for the business continuance ● Loans to purchase any portion of the ownership interest of any owner of the business, except for the purchase of an interest in an employee stock ownership plan qualifying under section 401 of IRS Code, worker cooperative, or related vehicle, provided that the transaction results in the employee stock ownership plan or other employee-owned entity holding a majority interest (on a fully diluted basis) in the business* ● Loans to businesses or individuals with a negative net worth * The tangible assets of an existing business can be purchased using USBCI proceeds.

8. Ineligible Borrowers The following Treasury guidelines apply to ineligible borrowers (see Treasury Guidelines, pgs.

18-23) ● An executive officer, director, or principal shareholder of the financial institution lender ● A member of the immediate family of an executive officer, director, or principal shareholder of the financial institution lender ● A related interest of the immediate family member of such an executive officer, director, or principal shareholder of the financial institution lender ● State-regulated charitable, religious, or other nonprofit or philanthropic institutions; government-owned corporations; consumer and marketing cooperatives; and faith-based organizations, unless the project is for a “business purpose” ● A business engaged in speculative activities that profit from fluctuations in price, such as wildcatting for oil and dealing in commodities futures, unless those activities are incidental to the regular activities of the business and part of a legitimate risk management strategy to guard against price fluctuations related to the regular activities of the business or through the normal course of trade

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● A business that earns more than half of its annual net revenue from lending activities, unless the business is 1) a CDFI that is not a depository institution or a bank holding company, or 2) a Tribal enterprise lender that is not a depository institution or a bank holding company ● A business engaged in pyramid sales, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants ● A business engaged in activities that are prohibited by federal law or, if permitted by federal law, applicable law in the jurisdiction where the business is located or conducted (this includes businesses that make, sell, service, or distribute products or services used in conjunction with illegal activity, unless such use can be shown to be completely outside of the business’s intended market); this category of businesses includes direct and indirect marijuana businesses (as defined in SBA Standard Operating Procedure 50 10 6) ● A business deriving more than one-third of gross annual revenue from legal gambling activities, unless the business is a Tribal SSBCI participant, in which case the Tribal SSBCI participant is prohibited from using SSBCI funds for gaming activities but is not restricted from using SSBCI funds for non-gaming activities merely due to an organizational tie to a gaming business 9. Monitoring the Annual Claims Rate The claims rate for the USBCI CAP loan loss reserve reflects the compensation a lender may seek for borrower defaults and the amount of USBCI subsidy the lender may receive. The USBCI CAP is intended to support responsible lending that is beneficial to small businesses and not to subsidize high default rate business models.

To ensure USBCI CAP loan loss reserve funds are used consistent with these objectives, GOEO will monitor annual USBCI CAP loan loss reserve claims rates and review lenders whose annual claims rates exceed 6%. The claims rate may be measured by either total capital or number of loans in 12 months. GOEO may disallow a financial institution from enrolling any additional CAP loans if it determines its practices do not meet program standards or if it is using the USBCI CAP to offset the costs of high default rate lending (see Treasury Guidelines, p. 25).

10. Enrollment of Loans in Multiple USBCI Programs One loan cannot be enrolled in more than one approved program at the same time. A lender may not divide one loan into multiple agreements or notes, each enrolled in an approved program, for the same loan purpose (see Treasury Guidelines, p. 42).

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11. Relationship to SBA Lending Programs and Other Federal Loans The USBCI CAP may only enroll a portion of an SBA-guaranteed loan or the unguaranteed portion of any other federal loan with the Treasury's express, prior written consent (see Treasury Guidelines, p. 42).

12. Lending Protection Safeguards In addition to any other federal or state law requirements, the USBCI CAP and their participants must conform to the below minimum national customer protection standards: ● Rate Cap — The interest rate for each loan, at the time of obligation, may not exceed the National Credit Union Administration’s (NCUA) interest rate ceiling for loans made by federal credit unions as described in 12 U.S.C. § 1757(5)(A)(vi)(I) and set by the NCUA board. The NCUA’s permissible interest rate ceiling supports its mission to protect credit unions and consumers. In adopting the NCUA interest rate ceiling, the Treasury aims to ensure that small businesses participating in SSBCI receive economically beneficial loans (Treasury Guidelines, p. 44). ● Fees and Terms — SSBCI-supported transactions may not include: 1. Confessions of judgment 2. Pre-payment or double-dipping fees 3. Upfront fees or charges paid by the small business, excluding fees to the state program, that exceed 3% for loans greater than $25,000 or $750 for loans under $25,000 (see Treasury Guidelines, p. 44) ● Disclosure of Terms — SBCI-supported transactions must include disclosure by the lender of all key terms in an easy-to-understand manner, including but not limited to loan/investment amount; payment obligation/schedule; the terms providing control over cash balances, cash flows, or ownership; conversion rights; future rights to purchase equity; and any fees or extra costs (see Treasury Guidelines, p. 44, FAQ p. 24) ○ For a bank or other depository institution that is subject to federal prudential regulation and supervision, if such an institution uses the institution’s customary documentation as appropriate to the SSBCI-supported transaction, the Treasury will deem the disclosure requirement to be satisfied, except in cases of fraud or violations of otherwise applicable law. ○ For other lenders, Treasury will deem the disclosure requirement to be satisfied, except in cases of fraud or violations of otherwise applicable law, if their

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documentation discloses the following information, as applicable to the terms of the transaction, to the borrower or investee: ○ Total amount of the loan or investment ○ Payment obligation and schedule. For example, $______________ is due by the ________ of each month ○ Any terms giving the lender or investor control over the borrower’s or investee’s cash balances or other assets, cash flows, or ownership (including personal guarantees) ○ Any conversion rights and future rights to purchase equity ○ Any fees or extra costs As noted in the Capital Program Policy Guidelines, this minimum standard applies across all SSBCI programs; however, these standards do not supersede disclosure requirements that may apply under other applicable laws. All applicable federal and state securities and lending disclosure laws, rules, and regulations continue to apply.

13. Loans for Refinancing Lenders may not enroll or refinance loans previously made by another non-affiliated financial institution.

14. Program-Specific Requirements The following Treasury guidelines include program-specific requirements (see Treasury Guidelines, pgs. 17-25). ● All USBCI CAP applications must comply with the U.S. Department of the Treasury’s SSBCI 2.0 guidelines, Frequently Asked Questions (FAQs), and any changes or amendments that may follow ● A real estate investment is NOT considered passive if the borrower occupies 60% or more of a building that is new construction or 51% or more for the acquisition or renovation of an existing building ● Any contract to construct a project financed by loan proceeds must require Utah residents to be given priority; recipients of USBCI CAP funds must demonstrate efforts to obtain Utah labor ● The following statement must appear in either the lender’s note or the loan agreement: “The borrower agrees that as a result of using USBCI CAP funds, it will provide the lender or the USBCI CAP with tracking data as required by the U.S. Department of the Treasury. This reporting requirement expires Dec. 31, 2030.” ● Certifications (templates provided by USBCI CAP) ○ Borrower Use of Proceeds and Conflict of Interest Certification ○ Borrower Sex Offender Certification ○ Borrower Certification Related to Business Enterprises Owned and Controlled by Socially and Economically Disadvantaged Individuals (SEDI-owned businesses)

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○ Lender Use of Proceeds and Conflict of Interest Certification ○ Lender Sex Offender Certification 15. Credit Elsewhere Check Before enrolling a loan in the USBCI CAP, the lender must conduct a “credit not available elsewhere” test. Financial institutions must document that the applicant cannot obtain some or all of the requested funds on reasonable terms from non-federal sources or the SBA, including the third-party lender, without USBCI assistance. If the applicant’s cash flow and collateral, including any third-party guarantee, would cause the applicant’s USBCI loan request to meet the conventional credit standards of the third-party lender, the project is not eligible for a USBCI loan.

If the lender’s loss rate exceeds 6% across its portfolio for non-USBCI-enrolled loans, meaning the lender is issuing loans that exceed the risk profile of the USBCI CAP, the lender is exempted from this standard. To receive this exception, lenders must demonstrate annual loss rates over 6% in the USBCI CAP application process. They must renew their exception as part of their annual report. Lenders receiving this exception will be closely monitored and must ensure that their USBCI CAP loan loss reserve claims rates do not exceed 6% over 12 months. (Revised May 10, 2023).

16. Other Loan Policy Considerations ● “Enrolled Lenders” must have an executed USBCI CAP Master Agreement and are required to adhere to the terms and conditions contained therein ● Loans considered by the USBCI CAP must comply with lender loan policies ● Enrolled lenders are required to submit various data as requested by the state and/or federal government under the USBCI CAP ● Anytime a lender downgrades a USBCI CAP loan, the lender must notify GOEO of the downgrade. Notification must occur within 30 days of the credit downgrade and explain why the credit was downgraded 17. Applications/Commitments ● Information for the application to the USBCI CAP is provided however,the recipient submits information deemed confidential pursuant to Utah law, and the application and information are deemed a public record ● Completed loan applications submitted to the enrolled lender requesting USBCI CAP participation in a new loan with a lender must be signed and include all the required financial information

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● Loan applications must include signed proof (i.e., loan committee minutes, lender certification of approval, etc.) of official approval by the lender ● Completed applications will be processed in the order in which the USBCI CAP receives them ● All completed applications will be reviewed for program compliance by USBCI CAP staff ● Upon approval by the USBCI CAP, a commitment letter will be issued to the enrolled lender listing the terms and conditions that must be complied with by the lender before the loan loss reserve can be funded ● The review and acceptance of all loan documents required do not constitute the concurrence by the USBCI CAP of the accuracy, validity, or legality of the documents presented 18. Funding ● The enrolled lender must receive the documents required in the commitment letter before funding the loan loss reserve ● The enrolled lender must submit a letter to the USBCI CAP requesting the release of the USBCI CAP funds; the letter must certify that all conditions of the commitment letter have been complied with, and copies of all documents required in the commitment letter must be submitted with the letter 19. Definitions Enrolled Lender — To qualify as an Enrolled Lender for the USBCI CAP, a financial institution must have a current executed USBCI CAP Master Agreement and must adhere to the terms and conditions contained therein when servicing any loans under the USBCI CAP. Very Small Business (VSB) — A business with fewer than 10 employees at the time of the loan may include independent contractors and sole proprietors (see Treasury Guidelines, pgs.

12-13).

Socially and Economically Disadvantaged Individual (SEDI) Owned Business — SEDI-owned business needs are being met when USBCI CAP funds are expended for loans to (see Treasury Guidelines, pgs. 8-12): ● Business enterprises that certify that they are owned and controlled by individuals who have had their access to credit on reasonable terms diminished as compared to others in comparable economic circumstances due to their: 1. Membership of a group that has been subjected to racial or ethnic prejudice or cultural bias within American society 2. Gender 3. Veteran status

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4. Limited English proficiency 5. Physical handicap 6. Long-term residence in an environment isolated from the mainstream of American society 7. Membership of a federally or state-recognized Native American tribe 8. Long-term residence in a rural community 9. Residence in a U.S. territory 10. Residence in a community undergoing economic transitions (including communities impacted by the shift towards a net-zero economy or deindustrialization), or 11. Membership of another “underserved community” as defined in Executive Order 13985 ● Business enterprises that certify that they are owned and controlled by individuals whose residences are in CDFI Investment Areas ● Business enterprises which certify that they will operate a location in a CDFI Investment Area ● Business enterprises that are located in a CDFI Investment Area Community Development Financial Institution (CDFI) Investment Area A geographic unit (or contiguous geographic units), such as a census tract located within the United States, that meets established criteria

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