WASHINGTON Tucked between titles in the community development bank bill is a proposed law that may spell relief for small business and commercial real estate loan secondary markets.

The Small Business Loan Securitization and Secondary Market Enhancement Act of 1994, as the law will be known, takes the indirect approach to establishing a new secondary market.

Adopting an approach championed by Sen. Alfonse M. D'Amato, R-N.Y., the bill does not create a new agency. Instead, it eases regulatory, and capital rules that lawmakers believe have inhibited development of a secondary market.

Bankers are hoping this will translate into something traditionally not associated with small business loans: liquidity.

The Riegle Community Development and Regulatory Improvement Act, which contains the loan securitization measure, passed both houses of Congress last month, and President Clinton is all but certain to sign it.

Small business loans and commercial real estate loans historically have suffered from their own diversity. Each is so different from the other that it is next to impossible to package and securitize them.

"One of the major problems with the loan market has been heterogeneity," said Martin "Dev" Strischek, president of Robert Morris Associates, the association of commercial loan officers.

The new law promises "a homogenization of the process that's healthy for everyone, both borrower and lender," said Mr. Strischek. He is also executive vice president and senior credit policy officer of Barnett Bank of Palm Beach County, Fla., a $3 billion-asset commercial bank in a $40 billion system of 32 affiliate banks.

One major bottleneck that would be eased by the bill is required-recourse rules.

Currently, a bank must reserve at least 8% against a loan pool it sells off into a secondary market, even if it retains responsibility for a smaller portion of the pool.

"Originators must take some risk for the loans they sell, but the current capital standard against loans has a chilling effect," said Karen Shaw, president of the Institute for Strategy Development.

"The new legislation is designed to make capital rules approximate the risk."

The community development bill would mandate that regulators implement capital requirements for small business and commercial and multifamily real estate loan sales that more closely reflect the risk held by the bank.

The amount of reserves would be capped at an amount equal to a bank's retained recourse.

"This would eliminate unrealistically expensive hurdles into the marketplace," said Jeffrey D. DeBoer, vice president and general counsel for the National Realty Committee, a group of commercial real estate lenders and developers.

"It's extremely beneficial to institutions that want to move mortgages and small business loans into the secondary market," Mr. DeBoer said. "It will help banks in the business of acquiring mortgages from other institutions to package them and sell them. There are a lot of investors with a huge appetite for buying these loans."

On the small business loan securitization front, the legislation would preempt states' differing blue-sky and registration laws, thus decreasing compliance costs.

"If you comply with the federal requirements, you will be treated like a federal security," Mr. DeBoer said. "The benefits will be an expanded marketplace, more investors, and lower transaction costs for the issuing institutions."

States will still have seven years to adopt more stringent standards, if they wish.

Securitization of commercial and multifamily real estate would get a long-sought shot in the arm as well.

Real estate proponents have been pushing securitization as an important way to prevent another boom-bust situation like the downturn of the late 1980s and early 1990s.

Commercial real estate comes in too many odd shapes and sizes to make the market as liquid as the residential real estate market, where the basic home mortgage formed a relatively uniform asset that could be moved more easily through the marketplace.

The frozen commercial and multifamily read estate market was in serious need of a helping hand, and industry sources view the new legislation as a step in the right direction.

"It's a step that we believe will help make sure that the downturn doesn't happen again, as far as the liquidity crunch and the withdrawal of credit and capital are concerned," Mr. DeBoer said.

"This legislation will help even out that sort of valley in the cycle."

An additional implication of the new legislation is the welcome mat it will put-in front of lenders' doors to encourage small businesses to take out loans, Mr. Strischek said.

"For the last few years we have been banging our head against the wall to let businesses know that we do want to lend to them," said Mr. Strischek.

"Clearly the perception is that banks don't want to make loans to small businesses. I think this bill has the value of saying to small business borrowers that the banks are interested in lending to them."

The bill would also allocate ,$50 million for state-sponsored lending programs that help support lenders that provide credit to eligible small business borrowers.

Although most industry watchers hailed the new law, some warned that the measure could hurt the banking industry in the long run.

Commercial lenders face the same potential problems that savings and loan associations did when mortgage securitization eliminated their importance. as dedicated housing financiers, according to Ms. Shaw.

Business loan securitization could undermine one of the few businesses in which banks still have a competitive edge, she said.

"The push for these changes comes from nonbank financial companies," said Ms. Shaw. "Banks are intermediaries. It is their essence to hold loans to maturity. They've been losing market share in many of their original lines of business, and this threatens a very critical market in which banks still have competitive strength. The cost and regulatory structure changes will be enormous."

However, most seem to believe that the new rules will be a step in the right direction for banks.

"Time will tell," said Josh Tenuta, senior federal legislative representative for the American Bankers Association.

"But when investors understand how these things work. and bankers begin to understand the performance of small business loans, these markets will evolve and it will benefit bankers immensely."

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