Washington DC: Treasury Finalizing SBA Loan Purchase Program

Breaking SBA Lending Logjam
Treasury Set to Buy Loans With $15 Billion in Bailout Funds


By David Cho
Washington Post Staff Writer
Wednesday, July 22, 2009

The Treasury Department is finalizing a $15 billion initiative to stimulate lending by the Small Business Administration by using funds from the federal bailout program to buy up SBA loans.

After private investors grew reluctant last year about buying SBA loans from the firms that finance them, these firms found themselves weighed down with old loans, which prevented them from funding new loans for small businesses.

Yet even as the government prepares to roll out its initiative, which was announced by President Obama in March, executives at some financial firms that provide SBA loans say that private financing for them is already reviving. This recovery in SBA credit markets has begun to clear away the loans clogging the books of loan financiers.

But by itself, that has not removed all the obstacles facing small businesses that want SBA financing. Some lenders remain wary about issuing new credit to small businesses, seeing them as a risky bet in a struggling economy, according to financial executives.

So the Obama administration is taking a two-pronged approach to problems confronting SBA lending. Officials said the initiative to use bailout money to buy loans is designed to assure lenders and their financiers that a reliable source of funding will be available even if private investors again become skittish. That effort could be launched within days. While SBA credit markets are healthier than several months ago, they remain vulnerable to a relapse if, for instance, the wider financial industry suffers another crisis of investor confidence, officials said.
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Separately, administration officials are weighing whether to increase the amount businesses can borrow from the SBA, possibly by using a portion of the $700 billion bailout package.

The government program to buy up SBA loans includes a concession to small business loan providers aimed at resolving a problem that had hamstrung the effort: These financial firms were balking at conditions imposed on this and other initiatives by the bailout law adopted by Congress. For one, firms selling SBA loans to the government are required to give it ownership stakes. But many have no stock to offer; others are divisions of large corporations.

Treasury officials are now considering offering these financial firms a deal. They would be able to issue stakes to the government and then repurchase them immediately. The officials have concluded that this quick flip would fulfill the requirements of the bailout legislation.

Under the law, SBA financiers also would face limits on executive pay if these firms sold their loans to the government. But several industry officials said the restriction has become less of a hurdle because the administration last month dropped its salary cap of $500,000.

The recovery of the SBA credit markets has been a rare bright spot for small business lending. While SBA loans remain a fraction of the overall credit issued to small businesses, these government-backed loans have been on the upswing since the administration's $787 billion economic stimulus package was approved by Congress in February. That legislation waived many of the fees that banks pay to the government for offering SBA loans and raised the public guarantee on any loan losses to 90 percent.

Moreover, Obama's announcement of the $15 billion program in March contributed to the revival even before the effort began, according to Gene Sperling, a senior Treasury official.

"There is little doubt that the . . . $15 billion purchasing backstop had a positive announcement impact on secondary market activity," he said. "Despite the improvement we have seen in part due to the announcement of our policy, we feel that with small businesses facing such an uncertain economic environment, a strong secondary-market policy is still a critical piece of any larger effort to help small businesses lending."
An SBA spokesman said loan volume in the agency's most popular programs has risen 45 percent since the stimulus bill passed.

Some industry officials said the Treasury's $15 billion initiative took too long to develop and, if enacted now, would have little impact on credit markets that have already substantially healed. Others disagreed.

"There could be another disruption and it would be nice to have a fall-back program," a senior executive at a large lender said.

CIT, a leading small business lender that barely avoided bankruptcy this past weekend, had been the first to test out the SBA credit markets. In mid-April, the company offered $160 million worth of SBA loans to investors and received multiple bids. That attracted the attention of other SBA financiers, called pool assemblers, who package SBA loans and trade them like stocks.

Executives at these firms attributed improvements in the credit markets to action by the Federal Reserve. By purchasing government bonds called Treasurys, the Fed helped lower interest rates. That in turn allowed lenders and investors in the credit markets to borrow at lower cost, allowing them to make a profit on the SBA loans they buy with borrowed money. SBA loans became especially desirable because the government guarantees 90 percent of any losses.
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Anthony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, said more incentives must be offered to banks to get them to increase credit to small businesses. Wilkinson has been lobbying the administration to increase how much companies can borrow through the SBA.

"Historically, its small businesses that lead us out of recessions," he said. "They can't do that if they can't get access to capital."