Can Obama Crack the Code on Small Business Lending?

Faced with continuing complaints from small businesses over the credit crunch, President Obama has turned to a presidential prerogative usually reserved for times when all else fails—the bully pulpit.

First he went on the venerable news program “60 Minutes” to scold “fat cat” bankers. Then he summoned the nation’s top banking executives to the White House for a widely publicized summit. Next week, he plans to meet with representatives of the nation’s smaller community banks.

Besides attempting to score political points and demonstrate his concern, the president’s jawboning is part of a broader administration effort to shake more credit out of the nation’s banks. But whether the administration can crack the code on small business lending in the current economy remains to be seen.

Despite year-long administration efforts, the amount of credit available to small businesses is shrinking at an alarming rate. Major banks cut their small business loan balances by $1 billion alone in October, according to a new Treasury Department report released this week.

A separate Treasury Department study released last month examined 22 banks that got the most help from the Treasury’s bailout programs earlier this year. It found that they had slashed small business lending by $11.6 billion since April 2009, when the Treasury started requiring monthly reports. In all, lending fell 4.3 percent to $257.7 billion during that time.

Not surprisingly, alarm bells went off in the White House, prompting the president to make a public display of his concern.

But the American Bankers Association, the industry’s major trade group, shot back. It released a statement pointing out that 21 of the largest bailed-out banks had made $2.2 trillion in new loans since receiving funds from the Troubled Asset Relief Program (TARP).

They also blamed Washington for creating a conflicting regulatory environment, which has stymied lending. “Well-intentioned efforts to address problems can have the unintended consequence of making things worse,” the banking lobbying group said in its report.

Banks also say that they have taken major hits on their small business loan portfolios. Small business defaults have been soaring during the recession, forcing at least two key small business lenders, CIT Group and Advanta, to file for bankruptcy to reorganize their debts.

CIT has since emerged from bankruptcy and is back in business. It pledged this week to waive fees for the next three months on all approved Small Business Administration (SBA) loan applications.

Meanwhile, community banks, which typically have assets of $10 billion or less, say they are caught between a rock and a hard place. They claim less creditworthy borrowers are seeking loans at a time when regulators are pressing them to improve capital reserves and cut risk, which forces them to tighten lending standards.

Community banks provide about half of all small business loans of $100,000 or less, and one-third of all small business loans of $1 million or less, according to the Independent Community Bankers of America.

In October, Obama unveiled a Treasury Department and SBA effort to cut the cost of capital for community banks to help spur lending by tapping TARP funds. But the program has yet to get off the ground, according to a CNN report.

In the meantime, the SBA’s program to boost lending proved to be so popular it quickly ran out of money. More than 700 SBA loan applications, totaling $390 million, are on hold until Congress can appropriate more money.

SBA Administrator Karen Mills said this week in a speech that the administration and Congress are working on a new incentives to spur small business lending. Among them, she said, is for the administration to abolish capital gains taxes on small business investments and create short-term tax cuts for small businesses that hire new employees.

She also said she is seeking changes to boost the maximum size of an SBA-backed loan to $5 million, compared with the current $2 million maximum, to meet demand for loans that size. Limits would also increase on 504 loans to $5.5 million from $1.5 million and on microloans to $50,000 from $35,000.

The SBA is also seeking an extension of its 90 percent guarantee on SBA-backed loans and a waiver of SBA fees on 7(a) loans and borrower fees on both 7(a) and 504 loans through Dec. 31, 2010. Legislation to do both is pending in Congress. The efforts have boosted SBA loan volume by 80 percent and convinced 1,200 lenders that had dropped out of SBA programs to start lending again.

President Obama is also expected this week to sign an omnibus appropriations bill that raises the SBA’s budget to $824 million for FY 2010. That’s up from less than $570 million appropriated in FY 2008, the last Bush administration budget.

As for the major banks, they have pledged to boost lending in 2010. But what that means in terms of overall impact is subject to debate.

Bank of America, for example, said this week it will boost its 2010 SMB lending by $5 billion over this year’s level. But after cutting its small business loan portfolio every month since April 2009, the National Small Business Association notes that the overall increase will be just “moderate” compared with its pre-recessionary lending levels.

In the past six months, the bank has reduced its outstanding small business credit balances by $2.6 billion, a 6 percent decline, according to the Treasury Department report.

Wells Fargo, the nation’s biggest small business lender with a $73 billion portfolio, has also pledged to increase small business loan originations by $16 billion, or 25 percent, over this year. But that comes on top of a $3 billion, or 4 percent, cut in its loan portfolio since April.

Some critics note that the lending efforts will be aimed at herding small business owners into costly credit card programs with variable interest rates that can be raised on a whim. JPMorgan Chase, for example, pledged to increase small business lending by up to $4 billion in 2010. But it will channel much of its new lending into small business credit cards that charge interest rates as high as 30 percent.

In contrast, the prime rate, usually reserved for top bank customers, is 3.25 percent, and the rate at which banks borrow money from the Federal Reserve, or lend money to each other (usually overnight), ranges between 0.25 percent and 0.50 percent.

With spreads like that, the big banks won’t be lending to small businesses, they’ll be loan-sharking. President Obama better not step down from the bully pulpit just yet.