WASHINGTON -- With Congress preparing to wrap up work on community development legislation, regulators on Tuesday urged lawmakers to adopt a Senate-passed measure that would encourage securitization of small-business loans.

At the same time, the regulators trashed a rival plan approved by the House Banking Committee. The House bill would give the federal government a heavy role in the development and oversight of a secondary market for all kinds of commercial loans.

The Senate plan "is the proper approach to encouraging a secondary market," said Richard S. Carnell, assistant Treasury secretary for financial institutions. "The bill places a reliance on the private sector to develop a market, avoiding the potential expansion of government liability for nonguaranteed small-business loans that is inherent in some other proposals."

Buoyed by the success of the secondary market for home mortgages, lawmakers and regulators want to encourage such markets for a broader array of loans. With an opportunity to sell their loans in secondary markets, lenders may be willing to extend more credit without jeopardizing financial stability.

Legal Impediments

Limited markets already exist for some commercial loans. But a variety of legal impediments - as well as the loans' lack of standardization - has prevented the markets from taking off.

And lawmakers still have not agreed upon the best approach to encourage this securitization. Some have argued for more limited action, to remove existing legal and regulatory impediments and let private markets do the rest. Others want deeper government involvement in the establishment and oversight of these secondary markets.

They have also not yet agreed on what type of loans they should include. Some lawmakers and regulators want to limit the initiative to include just small-business loans. Others want to include all kinds and sizes of commercial loans.

Hashing Out Details

House and Senate members are expected to hash out these issues in conference committee negotiations on the final bill.

In anticipation of the debate, representatives of the Treasury Department, the Federal Reserve, and the Securities and Exchange Commission were called before the House Energy and Commerce subcommittee on telecommunications and finance Tuesday to discuss the various approaches.

Secondary market legislation could "help protect small businesses from the effects of cyclical restrictions on credit, such as those that prevailed around the country in the late 1980s and early 1990s," said Rep. Edward J. Markey, D-Mass., the panel's chairman.

The Senate version of the community development bill includes a provision to remove a variety of legal barriers - in securities, banking, pension, and tax laws - that hamper the creation of secondary markets for small business loans. That plan was introduced by Senator Alfonse D'Amato, R-N.Y.

In addition, the Senate version includes a provision to encourage a similar market for commercial real estate loans.

Additional Regulation

The House bill, sponsored by Rep. Paul E. Kanjorski, D-Pa., would create a new arm of the Treasury Department to oversee the secondary markets. Loans to businesses of all sizes, including community development loans, would be included.

Commissioner J. Carter Beese of the Securities and Exchange Commission said that proposal "poses serious problems." He called it a "radical and unnecessary response" to the question of how best to encourage the securitization of small-business loans.

Bankers testifying later at the hearing agreed with the regulators that the Senate plan is the way to go.

"The banking community does not believe any new or specialized regulatory or governmental structure is necessary for the purpose of overseeing the development of private secondary markets," said William G. McNinch, chairman and CEO of Community Bank in Beaumont, Tex.

While encouraging limited efforts to spur secondary markets, regulators warned that they will be unlikely to rival the size and success of those for home mortgages. In part, that is because these loans are so much more difficult to standardize.

Market of Dreams?

"There is an element in this proposal of, if you build it, will they come?" Mr. Beese said.

What is more, they warned that the secondary markets could create new problems. For example, Federal Reserve Governor John P. LaWare said documentation burdens could skyrocket, and applicants that don't conform to the rigid standards of the new markets could be shut out from credit opportunities.

"There are some side effects or unintended consequences that may be counterproductive," he said.

Mr. LaWare also criticized changes in capital requirements the Senate bill would mandate for small-business loans that are securitized.

"This is clearly a relaxation of capital standards," he said.

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