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Small-Business Lending Gets a Boost

By David Cho and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, March 17, 2009

The Obama administration yesterday unveiled a series of measures to help the nation's small businesses, saying it would spend up to $15 billion to help them get the loans they need to weather the economic crisis.

"Small businesses are the heart of the American economy," Obama said in announcing the measures. "They're responsible for half of all private-sector jobs, and they created roughly 70 percent of all new jobs in the past decade. . . . But today, too many entrepreneurs can't access the capital to start, operate or grow their business. Too many dreams are being deferred or denied by a form letter canceling a line of credit."

Under the administration's plan, the government will buy the small-business loans that are clogging the books of community banks and other lenders, allowing the institutions to start lending again. The government will also increase its guarantee of the Small Business Administration's primary loan program, reducing the amount of money lenders can lose if borrowers default on loans.

The administration will pay for the initiatives with funds from the $700 billion financial rescue program. While that decision was welcomed by lawmakers who have called for more money to be used for Main Street instead of Wall Street, some critics said the government is relying on a broken program that may end up benefiting big banks and lenders more than small businesses.

Through the SBA, lenders would see larger profits and take fewer risks than they would through ordinary loan programs. As a result, lenders could steer borrowers into the SBA program even when they qualify for ordinary loans, said Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University.

"This is a system that rewards banks," she said.

Treasury Secretary Timothy F. Geithner yesterday admonished the nation's largest banks for withholding loans to many small businesses, telling the banks that they helped create the current mess and "bear a special responsibility for helping America get out of it" by increasing the flow of credit, especially since they have benefited from massive federal bailouts. He said the administration will now require the country's top 21 banks receiving federal assistance to include small-business loans in their monthly reports.

"We need you to put that assistance to work for the American economy," Geithner said at the White House. "Many banks in this country took too much risk, but the risk now to the economy is that you will take too little risk."

The volume of government-subsidized SBA loans has plummeted, as lenders have been scared away by a rapid rise in defaults.

Bob Coleman, publisher of the Coleman Report, an industry newsletter for SBA lenders, said the government's willingness to absorb a larger share of banks' losses should bring lenders back into the market.

"We will have additional losses, but a couple hundred million in losses is an excellent return to retain the jobs that are out there and to create new jobs," Coleman said. "It makes excellent economic sense to get involved with this process."

Other analysts said even if the government's intervention works, its impact may be limited. The SBA program historically accounts for a minuscule share of lending to small businesses -- in 2006, about 4 percent of the dollar volume of loans to small businesses.

De Rugy, who has studied the SBA program and testified twice before Congress about its shortcomings, said the program encourages banks to make loans without regard for risk because the loss is mostly covered by the government. She said the administration's plan to increase the amount of loss covered by the government to 90 percent would make the problem worse, further exposing taxpayers.

"You basically encourage a system that gives an incentive for the banks to lend money without being careful," de Rugy said. "We're making this less costly for the banks and less costly for the borrowers, but we're exposing taxpayers more."

White House advisers predicted that the $15 billion program for small-business loans could cost the federal government very little as loans are repaid over time. But they acknowledged that the final cost of the program -- and how it will end once the economy has recovered -- is unknown.

The moves announced yesterday also include the elimination of fees to motivate more lending by banks to small businesses.

Staff writers Michael D. Shear and William Branigin contributed to this report.

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