The New Jersey Economic Development Authority and the Federal Home Loan Bank of New York are teaming up to spur business lending among community banks.
The idea is to offer banks attractive financing rates and guarantees in return for loans to businesses operating in low- and moderate-income areas.
"What we are talking about is getting deals done in the urban areas and to small businesses," said Anthony R. Coscia, chairman of the development authority, which is an independent state entity that promotes business development.
"We are very, very confident a great deal of lending will take place through this program," he added. He said he expects $50 million of loans to be made in the first year of the plan.
The program, slated to begin July 1, marks the first time a state entity and a federal home loan bank have joined together to create such a plan, officials said. Banks that want to participate must be members of the Federal Home Loan Bank of New York.
"We are really excited about the program," said Kevin Aylward, who heads lending for Springfield, N.J.-based Pulaski Savings Bank, a $160-million-asset thrift.
He said the program gives Pulaski an opportunity to expand its loan portfolio by adding business credits.
Under the program, the development authority or a member bank finds a business that qualifies to participate. To be considered for financing, a business must be in operation for at least two years and meet collateral and repayment criteria as well as the requirements of the Federal Home Loan Bank's
The home loan bank's community-investment program requires that the financing must benefit families with incomes of 80% or less of the area median, or the business must be situated in a neighborhood that has at least 51% of such families.
The development authority helps the bank analyze the credit to reduce the risk.
When the bank makes the loan, it borrows the funds from the Federal Home Loan Bank of New York through its community-investment program. The home loan bank offers a lower rate on the funds, which is passed to the borrower at below-market interest rates. The development authority, in turn, provides a first loss guarantee for up to 25% of the entire amount of the term of the loan.
Member banks are expected to charge a reasonable interest rate to the borrower not to exceed 200 basis points above the rate at which they borrow from the home loan bank.
$100,000 Minimum Loan
With the development authority's guaranty the maximum loan is $6 million for fixed-asset financing, and $4 million for working capital. The minimum loan amount is $100,000.
Officials said banks that participate in the program can receive credit under the Community Reinvestment Act.
Bankers who have worked closely with the state's development authority to design the program think it can work.
Leigh B. Roberts, senior vice president of Edison-based Crestmont Federal Savings and Loan Association, said nearly every community in the state can participate in the program.