Securitization of small-business loans is still a fledgling activity dominated by nonbank lenders, but several bankers predict it will take off in the next five years.

Executives with leading small-business lenders expect banks to begin embracing securitization as a means of generating more loans without risking additional capital.

"We're taking a strong look at it," said Lucy Reid, executive vice president of Wells Fargo Bank. "It's on our list of things to do." Wells Fargo plans to increase its small-business lending sixfold in 10 years, to $25 billion.

As with mortgages, selling small-business loans in the public marketplace reduces a bank's reliance on risky interest income while creating more stable fee income from servicing loans.

Nonbank lenders such as Money Store have securitized both the guaranteed and nonguaranteed portions of their Small Business Administration loans. But banks have lagged behind.

That's about to change.

Robin Wantland, senior vice president of Banc One Texas, expects large banks to start passing their loans to investors within three years.

"There will be a profit motive, because it will allow the banks the liquidity to make more loans," Mr. Wantland said. Banc One Texas does not securitize its small-business loans.

Begun in 1972, the securitization of small-business loans allows lenders to sell their loans directly to institutional investors or to repackagers who in turn sell some of them to the marketplace.

According to the Small Business Administration, nearly half of all SBA loans are securitized. That figure has ballooned from $5 million in the mid-1970s and peaked at $2.3 billion in 1994.

"The banks are seeking sources of income that don't involve the use of their assets," said John Barrickman, president of Atlanta-based New Horizons Financial Group.

The portion of loans securitized dipped to $1.9 billion in 1995 because of an increase in fees charged by the SBA, but began to climb again this year.

Earlier this year, the Small Business Administration increased the amount of the unguaranteed portion of its "preferred lender" loans that may be securitized.

Banks selling their loans must keep only 10% of the value of the loans made under the SBA program. Banks were required to keep 20%.

The change in SBA requirements prompted Sierra West Bancorp of Truckee, Calif., to double a planned $20 million securitization earlier this year.

"It's an alternative to deposits," said Bill McGaughey, Sierra West senior vice president and treasurer. "We have been strapped for deposits because our loan generation exceeded the deposit growth."

Nonbank lenders such as Money Store were the first participants in the securitization market because they have no access to insured deposits and need capital to fuel their growth.

But securitization of small-business loans is still hampered by a lack of standard loan terms and a scarcity of long-term performance data, Mr. Barrickman said.

He said that standardization of loans and credit scoring, a method of assessing loan risk with computer data bases, will fuel the growth of securitization.

That means large banks with extensive loan portfolios and tested credit scoring systems could have a leg up going into the securitization market, Mr. Barrickman said.

Regardless of large banks' debut in securitization, Mr. McGaughey said, the market has room for community banks and sales of smaller pools of business loans.

"The market is so huge that there will be lots of opportunities for good servicers," Mr. McGaughey said. "I don't see Wells Fargo or Bank of America taking the market away."

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