WASHINGTON — President Obama's moves to spur more small-business lending are largely a grab bag of old ideas and minor tweaks that are unlikely to have much impact, observers said.
Flanked by Treasury Secretary Tim Geithner and Karen Mills, who leads the Small Business Administration, Obama Wednesday unveiled new terms designed to entice community banks to apply for funding under the Troubled Asset Relief Program, and backed plans to revamp SBA loan programs.
But critics were quick to dismiss the changes to Tarp, arguing the administration had not offered enough incentives to get community banks to sign on.
"We do not believe a large number of banks will participate in the program," said Diane Casey-Landry, the chief operating officer of the American Bankers Association. "There has been so much negative publicity associated with banks that have taken [Tarp] money that it's going to be a difficult decision to make."
Under the changes, banks with less than $1 billion of assets may apply for capital from the Treasury if they can show they intend to use the funds for small-business lending. The Treasury agreed to reduce the required dividend paid on such funds to 3% from 5% for the first five years. But the government is leaving other restrictions intact, including limits on executive compensation and requirements for issuing warrants.
Industry representatives said the money could be attractive to some banks, but acknowledged that it was unlikely to broaden the pool of small-business lenders.
"This is fairly low-cost capital to a community bank," said Camden Fine, the president of the Independent Community Bankers of America. "Those banks that are SBA lenders will probably apply for some of this."
Many observers said the Treasury should have provided added incentives beyond a lower dividend if they wanted the program to have a large impact.
Lowering the dividend "helps marginally but I don't think that's what's holding people back from lending or applying," said Robert Clarke, a former comptroller of the currency and now a partner at Bracewell & Giuliani.
Clarke said that even a year after the program began, the Treasury is unclear about what standards it uses to evaluate if an institution should receive funds. The only public condition the administration has set is that a bank must be viable without receiving government money.
"The biggest restraint on the success of the Tarp program as far as community banks are concerned is no one knows what the standards are," he said. "I think the standards need to be more flexible and need to accommodate banks that will be healthy if they have the additional capital."
Kip Weissman, a partner at Luse Gorman, said that the program may work for some community banks but raised concerns about how much detail the Treasury will require the banks to submit on how the money will fund small-business loans.
"What concrete steps do you need?" he asked. "What is the nature of the evidence you need to supply to the government to show you are increasing loans?"
Weissman also said the administration should have targeted banks with between $1 billion and $5 billion in assets, arguing very small institutions are unlikely to be interested.
During his appearance at a warehouse in Landover, Md., which was bought using an SBA 504 loan, President Obama said the plan ensured that community banks will have access to capital at rates that would be "more affordable than the ones offered to our largest financial institutions."
"The major banks that were in critical condition a year ago need no new assistance," he said. "We are winding down that portion of the Tarp program. But to spur lending to small businesses, it's essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on."
Obama's plan also calls for raising the loan limits on the SBA's flagship 7(a) loans as well as its 504 loans to $5 million from $2 million. He also called for Congress to meet with bank regulators, lenders and small businesses to come up with more ways to spur small-business lending.
Little of his plans are new, however. Members of the small-business committees have been meeting for months with lenders, small-business owners and representatives of the SBA to try to figure out how to stimulate lending.
Bills in the House and Senate also would raise loan-size limits and make additional changes to SBA programs that the administration has not yet endorsed, such as reducing the fees borrowers and lenders pay and extending the broader SBA backing that was part of the economic stimulus law enacted earlier this year. (The SBA is currently guaranteeing 90% of the loans it backs, but that is due to drop back to 75% when the economic stimulus money runs out.)
"They were good ideas when I introduced them nearly a year ago, they were good ideas when I reintroduced them in August, and I am pleased that others, including the President, are on board with these critical initiatives," said Sen. Olympia Snowe in a press release.
The House Small Business Committee passed in a voice vote Wednesday a bill that would raise loan-size limits to $3 million and implement a host of other changes to SBA lending programs, including making some of the stimulus provisions permanent.
The changes the SBA made using stimulus money are widely seen as the reason why SBA lending picked up so quickly starting in late February.
But Eric Zarnikow, the SBA's associate administrator for capital access, said the administration had not considered requests to extend the guarantee percentage increases and fee reductions on SBA loans.
"That's not part of this announcement," he said.