New Credit Initiative to Boost Lending to Small Businesses

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The Wall Street Journal
By: Darrell A. Hughes
May 18, 2010

WASHINGTON (Dow Jones Newswires)--The U.S. Treasury Department on Tuesday unveiled a grant initiative that could spur billions in lending to small businesses and help small, minority-owned firms.
Gene Sperling, senior counsel to Treasury Secretary Timothy Geithner, said the new policy is modeled after state-level initiatives known as capital access programs. Sperling told U.S. lawmakers that states would be "required to support at least $10 of lending across all programs for every federal dollar received."

Funds would be funneled through state programs, which Sperling said ensures that "loans are made with sufficient underwriting standards."

According to Sperling, Rep. Gary Peters (D., Mich.) and House Ways and Means Chairman Sandy Levin (D., Mich.) have proposed the program be funded at $2 billion.

Sperling said the administration supports this amount "as part of an overall package that is paid for, and we believe that with such funding the program could support over $20 billion in lending."

While the rules of the state-level programs vary, these programs generally involve having borrowers, lenders and local economic development entities contributing a certain percentage to an investment fund, which is used as collateral to support loans issued to borrowers.

The Treasury official testified before the House Financial Services Committee about the Obama administration's proposed $30 billion small-business lending fund as well as this new program.

The House panel also heard testimony from Paul Brown of the Michigan Economic Development Corporation and Christian Johansson of the Maryland Department of Business and Economic Development. Both economic development entities have CAP initiatives that some observers deem successful.

Sperling said capital access programs, or CAP, have "had a strong track record of reaching minority borrowers." News that the Treasury Dept. is throwing its support behind CAPs is likely to be welcomed by small minority and women-owned entities that have struggled to obtain credit.

Treasury is developing policies that will help small businesses in general, Sperling said, adding that "an important criteria for the initiatives that we support is whether they are especially effective in reaching small businesses--including minority businesses that are not being served well by traditional commercial loans."

However, Small Business Committee Chairwoman Nydia Velazquez (D., N.Y.) said Treasury's CAP effort seems promising but it's not the final answer because it would only be most beneficial to states that already have capital access programs.

Still, the new policy is meant to work alongside the small business fund.

Some remain skeptical of Treasury's proposed $30 billion fund. A recent report from the Congressional Oversight Panel, which oversees the government's $700 billion financial sector bailout, said it's not sure "whether Treasury's programs can or will play a major role in putting small businesses on the path to growth."

The report said the proposed fund "employs the same model that may exhibit some of the same weaknesses" as the Troubled Asset Relief Program's capital purchase program. The program was created to inject capital into mid-size and large banks, with hopes of easing lending constraints but it remains to be seen whether the effort delivered more lending.

But Sperling told U.S. lawmakers that Treasury's small business fund is specifically designed for community banks that are based in neighborhoods, as opposed to the larger Wall Street financial firms.

Additionally, lawmakers on the panel expressed concern about Treasury's ability to fund its $30 billion proposal.

During the question and answer session of the hearing, Rep. Maxine Waters (D., Calif.) warned Treasury's Sperling that the congressional Black and Hispanic caucuses will "seriously" take a look at the financial policies put forth by the Obama administration, and if they fail to address the needs of small minority and women-owned businesses "we will not be poised to support them."

The House panel is expected to take action on legislation pertaining to the small business lending fund in the coming days.

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This page contains a single entry by CFED published on May 19, 2010 3:58 PM.

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