Obama Administration to Roll Out Plan to Transfer $30 billion to Community Banks to Spur Small Business Lending

Feb 2, 2010 6:00am

ABC News' Karen Travers reports: Today the White House will announce a proposal to transfer $30 billion out of TARP to create a new small business lending fund, which will be separate and distinct from the TARP program.

President Obama highlighted this proposal in his State of the Union address last Wednesday. He travels to Nashua, NH today to tour a local business and hold a town meeting. In announcing this new program, the president will note that in the current http:// economy, small businesses are struggling to get loans as lending standards at community banks have tightened. 

“That’s why today, I’m announcing a proposal to take $30 billion of the money that was repaid by Wall Street banks, and use it to create a new Small Business Lending Fund that will provide capital for community banks on Main Street,” the president will say according to excerpts provided by the White House. “These are the small, local banks that work most closely with our small businesses – that provide them their first loan, and watch them grow through good times and bad.”

“The more loans these banks provide to creditworthy small businesses, the better a deal we’ll give them on capital from this Fund,” Obama will say. “Combined with my proposal back in December to continue waiving fees and increasing guarantees for SBA-backed loans, this will help small banks do even more of what our economy needs – ensure that small businesses are once again the engine of job growth in America.”

Under the proposal, the $30 billion will be directed to community banks – those that have $10 billion or less in assets – and would not have TARP-like restrictions that are in the current program. There are 8000 community banks that would be eligible to participate. 

A senior administration official said these banks are the “pipeline to small business lending” and this proposal is aimed at helping small businesses expand, grow and create jobs. 

“Small businesses are under a lot of stress and have taken a greater fall in their loss of jobs and have not had pick up in job growth that we would like to see going forward,” one official said. 

The Obama Administration believes that there have been problems in the credit markets for small businesses where some worthy ones were not able to get the credit they needed to expand and contribute to economic recovery. 

So why is the administration doing this and what do they hope to gain?

First, they wanted a proposal that would get the maximum participation to stimulate job growth. 

“Community banks who would otherwise be interested in capital that would help them do more for small business lending were hesitant to take it not only out of fear of TARP restrictions but also stigma and potential for retroactive legislation that would affect them if they were a TARP recipient,” a senior administration official said. 

To combat concerns from community bankers, the Obama Administrations believed that to have the strongest possible effect on small business lending, it needed to create a new program. 

“Obviously congress will have to make its decisions on how to ensure the proper accountability and transparency,” a senior official said. “but they will be able to do so from a clean slate.”

These banks will have the opportunity to take capital at “attractive terms” which will become “increasingly attractive” as they increase their small business lending, a senior official said. This means a bank with less than $1 billion in assets could receive capital investments up to 5% of their risk-weighted capital. The dividend rate for a capital investment provided under the program would begin at 5%, but with reductions to as low as 1% if a bank demonstrates increased small business lending relative to a baseline set in 2009. 

“We think this incentive structure will help maximize the best bang for the buck,” a senior official said. “And by creating incentive structure, we encourage banks, give them an incentive not to hoard or hold the capital but to increase small business lending and to give more attractive rates. 

What's Next?

The proposal tomorrow is just that – a proposal and the elements are not etched in stone, a senior official said. Rather they give an example of what senior officials said was a “smart and logical” structure that will help use dollars for maximum impact to spur small business lending. 

A senior official indicated there wouldn’t be the backlash with this proposal that was seen with the TARP funding. 

“I think when you have the US Congress create a small business lending fund it just will take on an entirely different character and I think most of the public and most of the members of Congress maintain a very positive view to the community banks around the country,” this official said. “I think there will be a very very different and more positive attitude toward a program that from its origination and by its design is for lending on Main Street by helping local banks increase their lending to local small businesses. 

- Karen Travers

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