Loan program burdened by success

By:  Bert Caldwell
Source: The Spokesman-Review

With President Barack Obama refocusing on the plight of small business, how ironic that one of the administration’s most successful initiatives will expire this week for lack of funding.

And how frustrating for Bob Beck, Mountain West Bank senior vice president and the area’s pre-eminent U.S. Small Business Administration lender.

Beck was among the bankers and business owners who met with U.S. Sen. Maria Cantwell last week to discuss small-business access to credit. He says the talk was encouraging.

That was Tuesday, the same day the SBA reminded employees a no-fee lending program – with 90 percent of the loan guaranteed by the federal government – terminates today. The $730 million set aside for the program in the stimulus bill has been exhausted, as has a supplemental $125 million set aside in December.

The program was a victim of its own success.

As of Jan. 29, the SBA had approved $14.6 billion in loans, in part by working with more than 1,000 lenders who had dropped out of the popular 7(a) loan program before 2008. Weekly loan volume for the agency’s two most popular programs had almost doubled.

Today the guarantee to lenders drops to 75 percent, and businesses will have to pay a 3 percent fee suspended when the higher guarantees were put in place.

“It will kill the program,” Beck says.

A loan with a 90 percent guarantee was risk-free to a bank, he says, because a business’s deposits normally exceeded the portion not backed by the SBA. If a business defaults, the lender can make itself whole by claiming the deposits.

That’s a comfort not only to the bankers but to regulators as well. Bank examiners with zero tolerance for marginal credits will look less kindly on a loan guaranteed at only 75 percent.

Loans not approved for the 90 percent guarantee by today will be placed in a “recovery loan queue” to await possible additional funding. Although the U.S. House of Representatives may undertake to do that this week, Obama has wrapped renewal in a package that quickly drew fire from Rep. Nydia Velázquez, D-N.Y., chairwoman of the Committee on Small Business.

Velázquez says the administration plan would increase guarantees on “express” loans that would be made without a government backstop. And permitting the refinancing of existing commercial real estate and capital equipment loans does nothing to create new jobs, as the program was intended to do.

That recovery queue is likely to be a long one unless Congress acts. Good luck with that.

The atmosphere is so poisonous that Cantwell has asked the administration to get on with its proposal to make $30 billion available to banks for small business loans without waiting for Congress to set the parameters. She would like the amount bumped to $50 million. Because the money would be carved out of the Troubled Asset Relief Program, Republicans have pounced on what they believe is a misuse of those funds. Result: Immediate stalemate.

Meanwhile, Cantwell says, businesses are losing credit lines vital to their survival.

Although a foe of TARP, Cantwell has suggested ways the program can be modified to ensure that banks loan the money – by lowering the interest rate they pay the U.S. Treasury as business loan volume increases, for example. The trick is to identify the banks that could make loans if they had additional capital, an asset in short supply at many institutions.

The SBA, which had some tough years itself under the Bush administration, is the tool in place that works for banks and businesses alike. Why not use it first?