Obama Proposes Small Business Lending Fund

Feb 2, 2010

During a town-hall meeting in New Hampshire yesterday, President Barack Obama called on Congress to enact legislation creating a Small Business Lending Fund, aimed at increasing community banks’ small-business lending.

According to the administration’s proposal, the fund would be financed with $30 billion transferred from the Troubled Asset Relief Program (TARP). The fund, as envisioned by the Administration, would offer capital to small- and medium-sized banks (defined as those with assets of less than $10 billion) under terms providing “strong incentives” to increase their small-business lending.

NSBA has advocated for using TARP funds to improve small-business owners’ access to capital since early 2009.  The Administration first proposed an infusion of lower-cost capital to community banks in October 2009, but the outline of the initial proposal proved unpopular with an important segment of the population: community banks. They complained about increased regulations and restrictions connected to TARP and its stigma.

The current proposal seeks to address those concerns by clearly defining the Small Business Lending Fund as a program separate and distinct from TARP, devoid of its strings and negative connotations. Since the Administration believes that the fund must be created by legislation, it has left the exact details of the plan to Congress but it did outline what components it would like included in the final product.

The Administration proposes that participating banks would be able to receive up to 5 percent of their risk-weighted assets in capital investments from the fund. Specifically, banks with less than $1 billion in assets would be eligible to receive up to 5 percent of their risk-weighted assets, and banks with more than $1 billion but less than $10 billion would be eligible to receive up to 3 percent of their risk-weighted assets. Participating banks also would be required to be approved by their primary federal regulator, although existing Capital Purchase Program participants (with less than $10 billion in assets) would be permitted to convert their capital to the new program.

Participating banks could then earn reduced dividend rates for the capital investment, as they increased their lending to small firms, using 2009 data as a baseline set. The dividend rate would begin at 5 percent, but banks could receive a 1 percent decrease for every 2.5 percent increase in incremental business lending they achieve in a two-year period. Participating banks could achieve a minimum dividend rate of 1 percent. Under the proposal, the sooner participating banks increased their small-business lending the sooner they could realize the dividend-rate reduction; and any new small-business lending since January 1, 2010 would be considered. To encourage timely repayment, any reduced dividend rate would be increased after five years.

Generally supportive of the proposal, NSBA looks forward to working with Congress and the Administration on its details. NSBA also urges quick action on the proposal, as America’s small-business owners cannot afford to have initiatives that may ease the crippling credit crunch mired in the same legislative muck that has bogged down too many other worthwhile bills.