Obama Announces Plans to Boost Small Business Lending

Lawmakers have developed a tedious habit of constantly referring to small businesses as the engines that drive the nation’s economy and then doing little to help them — aiding instead businesses and banks deemed too big to fail. That changed last week when President Barack Obama announced an eagerly embraced plan to allow small community banks to borrow low-dividend capital from the Treasury Department’s Troubled Asset Relief Program, which will in turn enable them to ramp up their small business loan levels.

Flanked by thousands of boxes of paper records stored by Metropolitan Archives, a Maryland-based business that used an Small Business Administration loan last year to buy its building, Obama said, “There’s still too little credit flowing to our small businesses,” that need financing to stay open or to grow.

Under the administration’s plan, banks with less than $1 billion in assets will be able to borrow at a 3% dividend rate, which is lower than the five-percent rate banks participating in TARP’s Capital Purchase Program currently pay. The rate will increase to 9% after five years to encourage timely repayment.

Community Development Financial Institutions (CDFIs) that lend to small businesses in low-income neighborhoods will be able to borrow capital at a 2% rate for eight years.

No date has been set for when the program will begin, but each bank’s participation is subject to the approval of its federal regulator. In addition banks must submit a plan that explains how the capital would allow them to increase small business lending and includes lending goals based on how much they want to borrow. If approved, they must submit quarterly progress reports.

In a conference call with reporters last week, Gene Sperling, counselor to Treasury Secretary Tim Geithner, said that 56% of the business loans made by the more than 7500 financial institutions that have assets under $1 billion go to small businesses, compared to 21% by those with assets over $1 billion. Treasury has not yet determined how much of an increase the program will yield.

“If you want to help small businesses get more credit you’ve got to make sure that smaller banks that are so often the source of their lending have more capital,” he said. “It’s the community banks that are lending not from Wall Street but from down the street that are the source of credit for so many of the entrepreneurs and small business owners in our country.”

Louis Prezeau, CEO of the City National Bank of New Jersey (No. 3 on the BE Banks List with $495 million in assets), is elated.

“This will help us to do more of what we do, which is help an underserved community. It will be business as usual-plus, with some incentive for us to do more,” he said.

Prezeau, believes institutions like his have been caught in a catch-22 situation in which banking regulators are requiring them to maintain higher capital ratios while encouraging them to do more lending.

“You can’t grow the bank as fast because of restrictions on your ability to leverage capital,” he said, so Obama’s plan is particularly appealing. However, he and other CDFIs, believe that the business plan requirement is a redundant step that will slow the actual lending process and that their annual certification should be sufficient.

“We don’t mind reporting every quarter, but should not be required to provide additional data on [small business lending goals]. That’s what we do, so why are they asking us to file that information again?” he said.

Prezeau believes the administration could instead sweeten the plan by forgiving part of a bank’s previous TARP loans based on its rate of increase small business lending as a result of the new program.

Obama also called on Congress to increase SBA loan limits. Under his recommendation, the agency’s

microloan program would be increased from $35,000 to $50,000; 504 loans would go from $2 million to $5 million for standard borrowers and to $5.5 million from $4 million for manufacturers; and 7(a) loans would go from $2 million to $5 million. Congressional approval would be required but there is bipartisan support such changes in both the House and Senate.

José Mantilla, president of Legacy Bank in Milwaukee (No. 13 on the BE Banks list with $224.5 million in assets and BE Financial Services Institution of the Year), said it would be a “tremendous help” to banks like his because it mitigates the risk and creates liquidity.

“We have been very active as lenders this year and this will help us even further once the legislation is passed,” Mantilla said. “For community banks, raising capital is tough today. Having access to more at a lower cost will allow us to leverage and lend out more funds.”