Lending Fund Gets a Hearing

Congress finally is starting to consider the Obama administration’s proposal to create a $30 billion fund that would provide cheap capital to community banks for use in making loans to small businesses.

The House Financial Services Committee today held a hearing on the plan—seven months after President Barack Obama unveiled it a warehouse in suburban Maryland. The plan has been tweaked some since then, but the concept remains the same: The federal government would provide capital to community banks at dividend rates of as low as 1 percent if these banks hit certain targets for lending to small businesses.

Community banks were picked for this initiative because they’re more focused on small business lending than large banks are. Large banks sharply reduced their lending to small businesses in response to the financial crisis, despite infusions of billions of dollars in Troubled Asset Relief Program capital from the U.S. government.

The Obama administration wants Congress to include this $30 billion fund in a new jobs package focusing on small businesses that also would eliminate capital gains taxes on investments in certain small businesses, extend higher loan guarantees and reduced fees on Small Business Administration loans, and increase the maximum size of SBA loans. These proposals also have been kicking around for a while, but have yet to make it to the president’s desk.

At the rate the Small Business Lending Fund proposal is going, the credit crunch may be over before the program is implemented.

Plus, the program may not work. The Independent Community Bankers Association supports it, but that’s to be expected. They’d be getting a heck of a deal from the government, at cheaper rates for capital than was provided through the Troubled Asset Relief Program, and without the TARP stigma and restrictions that led many banks to stay away from—or wish they’d stayed away from—that program.

“We believe that the SBLF could attract broad participation by banks and result in more lending to small businesses,” said ICBA Chairman James MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Michigan.

Community banks could leverage the $30 billion in federal capital into $300 billion in new lending, a “tremendous bang for the buck,” MacPhee said.

Gene Sperling, the Treasury Department official who crafted the SBLF proposal, noted a provision has been added to the program that would increase the dividend rate for banks that don’t lend more to small businesses—“a further incentive for participants to extend more credit.”

The additional capital provided to community banks should enable them to cope with losses on their commercial real estate portfolios without cutting back on small business lending, Sperling added.

The idea sounds good in theory, but the proposal has a couple of problems. First, where would the $30 billion come from? Initially, the administration proposed transferring $30 billion in unused TARP money into this new fund, but many members of Congress are so soured on TARP that they want to end the program, not find new uses for the money.

Congress could just decide this is one of those “emergency” programs that don’t need to be paid for, but supposedly we’re in a job-creating economic recovery now, so that rationale is increasingly suspect.

Second, some folks think providing more capital to banks isn’t the answer to increasing small business lending. A report by TARP’s Congressional Oversight Panel concluded the Small Business Lending Fund’s prospects “are far from certain.”

“Even if it is established by Congress immediately, it may not be fully operational for some time,” the report stated. “It could arrive too late to contribute meaningfully to economic recovery.”

Plus, the fund may not be TARP, but it’s still government money, so there’s always the potential for Congress to slap conditions on it. That should make banks nervous.

TARP’s failure to increase small business lending “raises questions about whether…any capital infusion program can successfully jump-start small business lending,” the report concluded.

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Kent Hoover is the Washington bureau chief for bizjournals.