WASHINGTON — The massive stimulus package moving through Congress aims to unclog the market for Small Business Administration loans by providing financing to the broker-dealers that buy and securitize them.
The version the House passed last week also would increase the government guarantee on certain types of SBA loans to 95%, from 75%.
The version pending in the Senate would temporarily remove the guarantee fees the SBA charges lenders, making the loans more profitable because a portion of the yield would no longer go back to the agency. It would also increase the loan limit on 7(a) SBA loans to $3 million from $2 million.
Both bills would authorize an SBA-run financing facility that would lend to broker-dealers at 25 basis points above the federal funds rate. The lending program's goal would be to give broker-dealers a source of cheap funding with which to buy newly made SBA loans from originators.
The facility may do its job, but observers say it would be more effective if the government would agree to make changes to an upcoming lending program designed by the Federal Reserve Board. Together, the two programs could get the market for securitized SBA loans moving again.
Part of the logjam in the secondary market for SBA loans has been caused by an inventory of undesirable pools of SBA loans — pools with low yields and high prices — that their creators, the broker-dealers, have not been able to sell. Many broker dealers borrowed money to buy the loans that went into these bad pools, and are now focused on maintaining their inventories and riding out the credit market freeze rather than buying more attractively priced new loans.
The broker-dealer lending facility in the stimulus "would allow the dealers at least temporarily to have an attractive financing source so they could take their inventory and move it over to that line," said Scott Taylor, a vice president based in Memphis for Shay Financial Services Inc. of Miami. "The hope is that by clearing our lines up, the market would be able to seek its own level."
The legislation mandates the facility "be used for the purpose of financing the inventory of the government guaranteed portion" of SBA loans. Most observers said they did not interpret the language to forbid using the facility to refinance existing pools.
Mike Haught, the director of the SBA trading desk at Vining Sparks IBG LP, said that since SBA loans are backed by the full faith and credit of the government, "it's been inconceivable that we'd have any trouble finding financing for this stuff." Nevertheless, his firm and others have encountered such trouble, gumming up the works.
"The problem's not so much the size of our inventories, it's the uncertainty on the financing side of it," he said. "These problems wouldn't even been an issue with us if there weren't some shakiness on the part of financing."
SBA lenders and broker-dealers would have more freedom to work out the prices on new loans being sold into the secondary market, rather than continuing in an environment in which broker-dealers' only bids on new SBA loans are defensively low. "If that happens, then you've kind of restored a flow in the market," Mr. Taylor said.
Chris Reilly, the president of CIT Group Inc.'s small-business lending unit, supports what is happening in Congress but said policymakers also need to adjust the Term Asset-Backed Securities Loan Facility, the Fed program set to begin this month.
Talf will lend money to investors against collateral made up of approved asset-backed securities, including those backed by pools of SBA loans. But it will only cover those pools created after Jan. 1.
The program is designed to unfreeze the credit markets by allowing participants to use securities they already have as tools to buy and trade new securities. But its date restriction has meant that broker-dealers who trade SBA loans cannot unload their older loan pools on to Talf. Neither can investors.
Critics claim that means the market could remain frozen.
Broker-dealers and SBA lenders are pressing the Fed to change the terms of the Talf program so that older pools can be accepted as well.
Trade groups have lobbied the agency, and the SBA itself has requested that the terms be revised.
"I have to say I'm a little skeptical," Ms. Reilly said. "To think that people are going to double and triple their inventory levels without an end buyer, I just don't know if that's going to happen."
Mr. Taylor said he has complained to "anybody and everybody" about the Talf terms. Ms. Reilly said, "The problem has been communicated loud and clear, and if they really want Talf to have an impact they're going to have to address this issue."
The Fed has said it is weighing changes to Talf, but declined to comment for this story.
A spokesman for the SBA said that the agency would not discuss the legislation until it had moved farther along. "So far, we have a bill passed by the House, and we have a Senate bill that's got through the Appropriations Committee but hasn't been voted on by the Senate," he said. "These bills are still moving targets as to their SBA elements, and for now, we just prefer to wait and see what the conference bill looks like."