Priming the Small Business Loan Pump

January 15, 2011

As the recession drags on, the rhetoric over small business lending has taken on added importance, as evidenced by a forum earlier this week, hosted by the Federal Deposit Insurance Corporation (FDIC) and broadcast by the cable network CNBC.

The forum - aptly titled Overcoming Obstacles to Small Business Lending - featured Federal Reserve Board Chairman Ben S. Bernanke, FDIC Chairman Sheila C. Bair, Congressional leaders, business group leaders and a few bankers.

Both Bernanke and Bair expressed optimism about the state of lending to small businesses, but they also cautioned that it will take more than federal initiatives and optimistic economic forecasts to prime the small business lending pump.

"A combination of factors have created issues and challenges for small businesses, but it is turning around in terms of credit availability," Bair said in a statement released during the forum to announce a new small business hotline.

The hotline - 1.855.FDICBIZ - offers a vehicle for small business owners to lodge concerns about banks holding back on lending due to overly cautious bank examiners, and is operational Monday through Friday between the hours of  9:00 am and 5:00 pm Eastern.

The FDIC said it is committed to responding to any issues or concerns involving banks it regulates that come in through the hotline and to refer others to the appropriate regulatory agencies.

The agency also announced a special Web site for small businesses: www.fdic.gov/smallbusiness.

Senator Mark Warner (D-VA) took part in the forum and praised the FDIC's "second look hotline" acknowedging it as a step toward improving the lot of small businesses and the community banks that serve many of these businesses.

"I have heard from a lot of Virginia bankers and small businesses about somewhat mixed messages we're sending from Washington: while we want to increase small business lending, we also are encouraging more responsible lending by banks," Warner said.

Rep. Spencer Bachus (D-AL), Chairman of the House Financial Services Committee, also addressed the January 13th event. He criticized what he described as "arbitrarily applied regulatory directives," and overly zealous examiners that "create uncertainty and impede recovery."

"Instead of focusing on patterns and practices that suggest poor underwriting or lax risk management, some examiners are micromanaging the daily activities of our community banks," Bachus said.

Who's to Blame: Banks or Feds?

Bernanke and Bair insisted that examiners have been instructed to be more flexible with lenders, particularly regarding loans to small businesses that are well known to the lenders and have good credit experiences. And they suggested some bankers may be using examiners as excuses - that it's the banks, not examiners, that are holding back.

Either way, there is at least a perception among owners of small businesses that credit conditions continue to deteriorate, especially for small companies. A recent poll by the research and consulting firm Greenwich Associates, for example, found two-thirds of small business owners believe banks are not meeting the needs of creditworthy companies.

Bernanke, in remarks to the forum, suggested banks rely too much on collateral when considering loans to small businesses. Many small business owners use their homes or commercial properties as collateral for loans, which can be problematic with falling real estate values.

Karen Mills, chief of the Small Business Administration, told those attending the forum that her agency is working out details of a rule change that will allow qualifying businesses to refinance owner-occupied commercial real estate mortgages into SBA loans.

Meanwhile, the SBA announced earlier this month that stepped up guarantee activity, ushered in by the Small Business Jobs Act of 2010, facilitated $12 billion in loans between September 27 (when the legislation was signed into law) and December 31. The Jobs Act, among other things, included $505 million in subsidies to support loan enhancements, such as reduced fees and higher loan guarantees.

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