Obama Proposes More Small-Biz Initiatives

Feb 16, 2010

On the heels of his proposal to create a Small Business Lending Fund proposal, President Barack Obama recently announced two more small-business initiatives, one aimed at increasing working capital for small firms and the other at allowing small businesses to refinance owner-occupied commercial real estate loans.

Increasing working capital
Obama’s proposal temporarily would increase the cap on U.S. Small Business Administration (SBA) Express loans from $350,000 to $1 million. The administration argues that this proposal would expand the availability of Express loans to more small firms, which would improve small-businesses’ overall access to capital.

Lenders are permitted to use their own paperwork for Express loans, which can be structured as revolving lines of credit. Express loans carry a significantly smaller guarantee, however: 50 percent versus the temporary--but soon to expire--90 percent guarantee associated with 7(a) loans.

The administration claims that fees would cover “virtually” all of the added costs of the proposal.

Refinancing
Obama’s proposal also temporarily would allow small-business owners—who are current on all loan payments and have a loan maturing in the next year—to refinance their owner-occupied commercial real estate mortgages through the SBA 504 program.

Borrowers with either existing 504 loans or conventional commercial real estate loans would be eligible to apply for help refinancing up to 90 percent of their current property values.

Normally, 504 loans only can be used for new development or construction but the American Recovery and Reinvestment Act (ARRA) granted expanding businesses the ability to use 504 loans to refinancing existing debt. The new proposal would allow even non-expanding firms to refinance using the 504 program.

The administration argues that this proposal would allow many current and solvent borrowers to refinance their existing commercial real estate loans, as the 504 program currently does not allow for the refinancing of maturing debt. It estimates that the initiative would help refinance up to $18.7 billion each year in commercial real estate that might otherwise be foreclosed and liquidated.

Since nearly half of commercial real estate loans are held by community banks, the administration also argues that the proposal would free up community banks’ capital and lead to increased small-business lending.

Under the proposal, lenders that refinance mortgages for existing customers would make a loan for up to 70 percent of the current property value and SBA would help refinance the remaining 20 percent. The SBA would help refinance up to 40 percent of the refinancing loans lenders extend for new customers.

Under the administration’s proposal, the temporary, zero-subsidy CRE refinancing program would be funded through additional fees and not through a Congressional appropriation.

Outlook
As with the Small Business Lending Fund proposal, both of these initiatives would require Congressional action and it is far from certain that sufficient support exists for their passage.

Although Sen. Mary Landrieu (D-La.), chair of the U.S. Senate Committee on Small Business and Entrepreneurship, supports the proposal, Rep. Nydia Velázquez (D-N.Y.), chair of the U.S. House Committee on Small Business, opposes it.

Velázquez asserts that the 504 program “is intended to promote job growth and economic development… [but] expanding the initiative to refinance commercial real estate debt does not create jobs and, in fact, may dilute the program, drawing resources away from projects that do have job creation potential.”

Velázquez —who in the past has proposed legislation entirely eliminating the SBA Express program— also opposes temporarily increasing the cap on Express loans, pointing out that they have the highest default rate of any SBA loan program.

Velázquez also opposes increasing the limits on SBA 7(a), 504, and micro- loans, an initiative that has been endorsed by NSBA, the White House, and a coalition comprised of dozens of organizations representing a vast cross-section of small-business community.