Obama proposes $30 billion allocation for small-business loans

By David Cho and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, February 2, 2010; 6:00 AM 

President Obama is set to campaign Tuesday for a plan to allocate $30 billion to community banks that agree to make loans to small businesses, despite skepticism from lawmakers and some industry officials that the program will work.

Senior administration officials said the initiative would offer these banks a chance to get money from the federal bailout program without the same conditions, such as executive pay limits, that were placed on recipients during the financial crisis. Obama plans to outline the proposal, which requires congressional approval, at a town hall meeting in Nashua, N.H.

"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," Obama is expected to say, according to excerpts of his prepared remarks provided by the White House. "The more loans these banks provide to creditworthy small businesses, the better a deal we'll give them."

The initiative is part of a package of proposals that Obama announced during last week's State of the Union address that are intended to create jobs by aiding small businesses, which employ the majority of U.S. workers. Those plans also include $33 billion in tax cuts for firms that create jobs or increase wages.

But, with public anger rising over the nation's 10 percent unemployment rate, the administration has increasingly struggled to win congressional support for its economic agenda. A long series of initiatives, rolled out with great fanfare in recent months, have bogged down on Capitol Hill. On Monday, White House officials presented the proposal as an idea they hoped to discuss with Congress.

"We are proposing this as the core function of a new small-business fund," said a senior official, who spoke on condition of anonymity ahead of the president's remarks. "We also know there are other ideas in Congress."

Some Republicans say the proposed use of the bailout funds would veer too far from the original mandate of the Troubled Assets Relief Program, or TARP. Meanwhile, Rep. Nydia M. Velázquez (D-N.Y.), chairwoman of the House Committee on Small Business, questioned the wisdom of relying on private banks to lend money to small businesses.

Velázquez has advocated for empowering the Small Business Administration to lend directly to small businesses. A bill granting the agency that authority overwhelmingly passed the House in October, but the Senate has not acted on the matter.

"We need to be open to new approaches, such as authorizing the SBA to lend directly to small businesses," she said in a statement last week. "The SBA has the personnel, infrastructure and expertise to get capital to entrepreneurs quickly."

White House spokesman Robert Gibbs said Monday that the administration's proposal deserved bipartisan support.

"What better message to send to the American people than both parties . . . [saying]: 'Let's take $30 billion that the big banks have paid back through TARP, and give that money to community banks to lend a small business?' " Gibbs said.

The administration is proposing to offer small-business lenders a relatively inexpensive way to raise capital. The banks would pay only 5 percent in a dividend to the government. That dividend could be reduced to as little as 1 percent if a bank increased its lending by 10 percent over the next two years. In other words, the more the banks lend to small businesses, the better terms they would get.

The program would only be open only to banks with less than $10 billion in assets.

Several community banking organizations are expected to endorse the idea, including the Independent Community Bankers of America.

But some industry experts cautioned that the proposal does not address some of the key reasons for the decline in lending.

Many small banks are awash in money. But lending has decreased for five consecutive quarters because these firms are thinking twice before making new loans. The Federal Reserve said Monday that banks continue to set an unusually high bar for borrowers, although it added that lenders mostly have stopped adding restrictions.

Demand for loans also has declined as families and businesses wait for the economy to improve.

And bank executives say regulators are requiring much higher levels of capital, an issue that Obama acknowledged during a question-and-answer session last week in Florida.

"We're going to have to make some adjustments there. But that's not something the administration can do directly," Obama said. "We can just encourage these independent regulators to take a closer look at it."

Excluding banks with more than $10 billion in assets also could limit the impact of the program, because large banks make a lot of small-business loans. Banks with more than $10 billion in assets hold 54 percent of outstanding commercial and industrial loans to small businesses, federal data show.

A senior administration official acknowledged that falling demand and stricter regulation have contributed to the lack of small-business lending. But he said there is a "subset of creditworthy small businesses" that could expand if they could get loans.

He added that the plan targets smaller banks because they devote a larger share of their lending to small businesses.

The administration's proposal is modeled after the original bailout program launched in the fall of 2008. Banks can apply for a government investment equaling up to 5 percent of their risk-weighted assets. The investments would increase banks' capital, the amount of money held in reserve against unexpected losses. That allows the banks to make more loans.

Staff writer Michael A. Fletcher contributed to this report.