Proponents of a secondary market for small-business loans may finally get a shot at making the small-business loan securitization bill a reality after it received support from the Treasury and the Federal Reserve.

The bill, originally introduced by Sen. Alfonse D'Amato, R-N.Y., during the Bush administration, appeared to be going nowhere. But now, both the Treasury and the Federal Reserve are ready to back a modified version of the bill, and it looks like it will be enacted this year, possibly in conjunction with the administration's community development bill.

The bill, S. 384, is intended to remove regulatory impediments to the development of a secondary market for small business loans, in the hopes that such a market might help reduce the cost of capital for small businesses. At present, that market barely exists, but the bill's backers hope to copy the success of the mortgage-backed securities. which have grown into a trillion-dollar market over the last several decades.

D'Amato's approach favors a market-oriented solution and avoids creating a massive bureaucracy.

Some bankers in the asset securitization market doubt the bill will have much effect, however.

They note that small-business loans are so different that pooling them into a viable security is extremely complex and often impossible. In their view, the bill is simply a political gesture to small businesses, an important constituency on Capitol Hill.

But the bill is gaining ground in Congress. The Treasury and the Federal Reserve have been working closely with D'Amato staffers on a modified version, and top officials from both agencies publicly praised the bill at a Senate Banking Committee hearing Sept. 9.

"While we have not seen a final version of the bill," Federal Reserve Governor John LaWare told the committee, "we believe ... many of its provisions will prove helpful in encouraging the development, through the securitization process, of a secondary market for small-business loans."

But important differences still remain over two key technical issues-recourse accounting and capital standards. Both agencies are concerned that the bill would ease these rules to such a degree that the safety and soundness of the banking system would be threatened.

"We believe that the present regulatory rules of recourse accounting are too stringent," said Frank Newman, undersecretary of the Treasury for domestic finance. "But we also believe that S. 384, as presently written, goes too far in attempting to liberalize them."

"One of the most important safety and soundness considerations is the amount of capital that is maintained to protect banking organizations from any risks associated with loan securitization," LaWare said. "The bill, as introduced, contained capital provisions that in our view would not provide adequate protection to banks involve in securitization."

Both Newman and LaWare said their respective agencies are close to issuing new standards in these areas. Newman said the regulators are,very close to having language on capital standards that would "accommodate the objectives of the bill," while protecting taxpayers from risk and maintaining consistency with international capital standards.

LaWare said the Federal Reserve and the other bank regulators soon will issue a proposal regarding recourse accounting rules and suggested that capital charges for certain asset sales will be reduced.

He also suggested that the Fed would support the idea of giving certain banks "preferential treatment" and allowing them to reduce the amount of capital set aside against risks incurred in asset sales. Such banks would have to be either well-capitalized, or have the permission of their primary regulators.

It appears that D'Amato's bill is on track for rapid Senate passage. Sen. Christopher Dodd, D-Conn., a member of the Banking Committee and a sponsor of the bill, downplayed the differences between the two sides and said a markup of D'Amato's bill could come within a few weeks. That would allow the legislation to go to the floor of the Senate.

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