Accord near on measure to spur flow of credit.

WASHINGTON - Treasury Under Secretary Frank Newman said the administration has just one remaining concern about legislation to spur a secondary market in small-business loans: whether the capital standard would be too lax.

"We believe the present regulatory rules for recourse accounting are too stringent, but we also believe that S 384, as written, goes too far in attempting to liberalize them," Mr. Newman said Thursday in an appearance before the Senate Banking Committee.

Mr. Newman was discussing a bill introduced by Sen. Alfonse M. D'Amato, R-N.Y., that attempts to create a secondary market for small-business loans by removing capital, accounting, and other regulator barriers.

Close to Agreement

Mr. D'Amato said Wednesday he was near an agreement with Treasury on the bill, and Mr. Newman acknowledged that the two sides are very close.

A deal would pave the way not only for the secondary market bill, but for Senate passage of President Clinton's community development bank bill, which would be paired with the D'Amato measure.

Bank regulators appeared satisfied with the discussions between the administration and Sen. D'Amato. Federal Reserve Governor John P. LaWare had initially expressed concern about the bill but said his worries had been largely allayed as the measure has been redrafted.

Under current rules, if a bank sells a loan with partial recourse - as would be the case with securitized loans - it must carry capital against the full amount of the loan.

Contractual Limitations

That treatment "does not fully take into account contractual limitations on the selling bank's recourse obligation," Mr. LaWare said, and regulators have concluded that capital requirements should be reduced to reflect the lower risk of the sold asset. The Fed plans to issue a detailed proposal on the issue in the near future, he said.

In the more recent drafts of the D'Amato bill, Mr. LaWare said, the lower capital requirements would be applied only to institutions that are adequately capitalized and that have the permission of their supervisory agency.

In addition, he said, there will be limits on the aggregate amount of retained recourse eligible for reduced capital.

"So long as these limitations are appropriately specified, we do not believe that the approach in the bill, as we understand it, would threaten safety and soundness," Mr. LaWare said.

Moreover, he added, "it may encourage securitization and the availability of credit to small business firms."

Mr. LaWare also praised the D'Amato bill for taking a private-sector approach, rather than attempting to create a new government agency or new set of government guarantees.

"It is imperative that we avoid adding to the already enormous volume of government liabilities by creating an additional government agency, or increasing the involvement of existing government agencies," he said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER