Obama Details Small Business Lending Initiatives

President Obama, who has declared creating jobs one of his top priorities for 2010, has finally unveiled details of his $30 billion plan to increase small-business lending through community banks.

The program is part of a two-pronged approach to jump-start small-business lending. The second part is contained in the president’s $3.8 trillion budget for the 2011 fiscal year, which begins on Oct. 1.

But his proposals are far from a slam dunk, despite a 10 percent unemployment rate, the highest in a generation.

Since the administration is using funds from the Troubled Asset Relief Program, or TARP, it must get legislation through Congress authorizing the lending program. Republicans are already kicking up a fuss because TARP was never intended for this use. They are also fretting about the deficit.

The administration projects a record $1.56 trillion deficit for fiscal year 2010, which will fall to $1.3 trillion in 2011. Obama, however, has pledged to cut it in half by the end of 2012.

On top of that, community banks are wary of the program and the strings that might come with it. Separately, critics wonder whether small banks, with traditionally far more conservative lending standards, are the best conduit for jump-starting small-business lending.

In any case, the amount of money is considered a drop in the bucket in terms of overall small-business lending. It equals just over 4 percent of the estimated $700 billion in loans held by domestic banks, large and small, according to Treasury Department figures.

The budget includes an additional $170 million for the Small Business Administration, boosting its total funding to $994 million, with funds targeted at the agency’s lending programs.

Lawmakers like Rep. Nydia Velazquez D-N.Y., who chairs the House Committee on Small Business, believes legislation allowing the SBA to make more loans directly to small businesses would b ae more effective way to jump-start hiring.

Still, the Independent Community Bankers Association, representing those banks targeted by the loan plan, said it strongly endorsed the proposal. Small banks were reluctant to get involved with TARP because of the many strings attached, but the new fund would be separate in order to encourage maximum participation, according to the Treasury Department.

The new fund would also offer incentives to make sure banks loan the money instead of hoarding it to improve their balance sheets. For example, as participating banks increase lending to small firms over 2009 levels, the 5 percent dividend paid to Treasury on that capital investment would be reduced to as low as 1 percent.

The dividend reduction would have key advantages: It would allow banks to leverage the funds to increase lending, and it would encourage them to boost lending over 2009 levels and to do so immediately to lower costs. The dividend rate would increase after five years, however, to encourage repayment of the money.

Banks with less than $1 billion in assets would be eligible to receive capital investments up to 5 percent of their risk-weighted assets. Banks with between $1 and $10 billion in assets would be eligible to receive up to 3 percent of risk-weighted assets. Banks would also have to be approved to participate by federal regulators.

The administration offered an example involving a hypothetical bank with $500 million in risk-weighted assets and $250 million in business loans the end of every quarter of 2009. In 2010, it applies for and receives approval to draw capital equal to 5 percent of its risk-weighted assets from the Small Business Lending Fund (the maximum allowable).

After drawing $25 million in capital from the fund, the bank increases its stock of outstanding small business loans to $275 million, by the end of two years, equaling a 10 percent increase over its 2009 baseline. As a result, the 5 percent dividend rate initially charged on the capital would be reduced to 1 percent, and locked-in for the next three years.

Despite the incentives, the program could hit bottlenecks because banks would be under no obligation to loosen their lending standards. And in the rush to get money out the door, with the aim being to lower costs, many fear they will ultimately be increasing their exposure to loan losses.

In addition to the lending program, the administration has earmarked about $100 billion in business tax credits and other initiatives, in the current 2010 fiscal year, for creating jobs and assisting struggling middle-class families.

The president’s budget will target more money for small businesses by increasing the SBA’s 7(a) loan size from $2million to $5 million; the 504 loan guarantee program will rise from $1.5 million to $5.5 million and microloans will grow from $35,000 to $50,000.

In all, it will commit more than $28 billion to small-business financing, including $17.5 billion for the 7(a) loan program, $7.5 billion for the 504 program and $3 billion for the Small Business Investment Company (SBIC) program -- which provides venture capital financing to small firms. Another $25 million will be targeted at microloans.

In another key initiative it will also provide $5.9 million for the SBA’s international trade and export promotion programs, which are expected to help leverage more than $1.1 billion in capital to small exporters.

The White House has set an ambitious goal of doubling exports over the next five years, and Commerce Secretary Gary Locke is expected to provide the details this week.

Generally, the initiative will target expanding trade advocacy, improving access to credit, especially for small and medium-sized businesses, and rigorously enforcing international trade laws. The government-wide strategy will be coordinated at the cabinet level, according to several reports.

Obama will provide more details about his proposed $33 billion tax cut meant to encourage small businesses to hire new workers, or boost wages, in a speech Friday (Feb. 5) in Baltimore.

Employers would get a $5,000 tax credit for every new worker hired this year and reimbursement for Social Security taxes paid when they increase wages. The administration intends to focus on small companies by limiting the maximum credit to $500,000 per employer.

As the president said in his speech, "there's no magic wand that will make economic problems that were years in the making disappear overnight. But at least he is finally providing the details to get these much needed programs off the ground -- sooner, hopefully, rather than later.