SBA Loan Market Has a Stimulus of Its Own

SBA Loan Market Has a Stimulus of Its Own (click title to link to article online)
By Emily Flitter
March 17, 2009

An Obama administration plan to stimulate small-business lending could lure wary lenders back to the business and kick-start the struggling market, bankers said Monday.

The administration said it plans to use up to $15 billion of Troubled Asset Relief Program money to buy securitized pools of Small Business Administration loans. It will also raise the government guarantee on SBA loans to 90% and lower the fees charged to both borrowers and lenders.

"This is a real game-changer," said Chris Reilly, the president of CIT Group Inc.'s small-business lending unit. "I think it's a beautifully simplistic solution, as well. This direct buyback of SBA-guaranteed loans, together with the waiver of all the borrower and some lender fees, is very substantial."

Administration officials said they hope the buyback spurs lending by bankers who worry they might not be able to sell SBA loans in the current environment.

"Any community bank — any bank — will know that any loan that they make from this day forward will be able to be sold to someone who packages loans, who themselves will know that there is a buyer," a senior administration official said during a conference call explaining the program.

Guarantee fees for SBA borrowers have been eliminated in both the 7(a) and 504 lending programs; for the 504 program, fees for some lenders were also cut, and government guarantees on 7(a) loans will now be 90%.

"There is an attempt to put public policy behind all the rhetoric," said Tony Wilkinson, the president of the National Association of Government Guaranteed Lenders. "The rhetoric has always been small business is going to lead us out of the recession, but until now you haven't seen the policy to back it up."

The announcement was a reversal from the policies of the Bush administration, which raised fees and cut the SBA's budget for several years.

The announcement by Treasury Secretary Timothy Geithner, together with the implementation of related provisions in the stimulus package designed to encourage small-business lending, signaled a new willingness to use the agency to stimulate the economy.

The new program aims to regenerate a secondary SBA loan market, which dried up as the credit crisis worsened. The administration estimated that there is a backlog of around $3 billion of pooled 7(a) loans that could not be sold to investors.

SBA officials predicted that the frozen secondary market could cause annual SBA lending to sink as low as $10 billion, from its previous average of $20 billion. Lending dropped 57% in the fourth quarter, and officials said it may have fallen even further in the first two months of this year.

Cynthia Blakenship, a vice chairman of Bank of the West in Grapevine, Tex., who participated in a roundtable discussion on the issue Monday with President Obama, said, "Right now our bank is sitting on unsold portions of government-guaranteed loans, because there has been no secondary market."

That and other changes should persuade lenders to renew their SBA programs, she said. "This is a giant step in the right direction to give banks that perhaps have gotten out of the program an incentive to get back to the program. … It will be a shot in the arm to community banks."

Camden Fine, the president of the Independent Community Bankers of America, said the number of banks making SBA loans dropped to 2,700 last year, from 5,200 in 2001.

"The guarantees kept getting cut, the fees kept getting higher, and there were fewer and fewer SBA loan poolers," he said. "This administration has recognized that and is working to reverse what has been a declining trend in SBA lending on the part of community bankers."

Broker-dealers were more cautious, raising concerns that the program could interfere with a facility established by the Federal Reserve Board to lend money to investors looking to buy new securities.

Administration officials said the new program was not meant to cancel out the Fed's Term Asset-Backed Securities Lending Facility, which is accepting its first round of loan applications this month.

"Over time, we believe these programs will be complementary," a senior official said.

The Treasury Department said it had hired an investment manager to purchase any securities packaged on or after July 1, 2008. The administration did not release details on how the securities would be priced or how many pre-existing pools it would purchase.

The administration also said it would begin requiring the 21 largest Tarp recipients to report monthly on their small-business lending activities.