Small-Business Lending Aid Nears Key Vote on Hill

WASHINGTON — The House is expected to pass legislation today that would create a $30 billion fund for community banks to boost lending to small businesses, but the bill faces an uphill battle in the Senate.

Republicans continued to portray the legislation as another Troubled Asset Relief Program that will provide funds to banks without any guarantee it will increase lending. That line of argument is only likely to get stronger in the Senate, observers said, where at least one GOP vote is needed to survive a veto threat to the bill.

"This program is perceived as more government money going into banks and that argument plays really well in the Senate," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital. "We've always been skeptical that this can get 60 votes in the Senate."

Democrats sought to rebut the Republicans' claim, arguing that many community banks did not receive Tarp funds and will use the new government money to spur lending.

They also succeeded in solving an earlier problem that had been dogging the bill.

Although House lawmakers had been clear that they did not want to pay for the program with money from Tarp, it was unclear how the new fund would be paid for. But Democrats said Wednesday they would use revenue from a small-business tax bill that was passed by the House on Tuesday.

If the Senate follows suit, that could boost the program's chances for enactment, industry representatives said. "It's going to be a more difficult proposition in the Senate, but if it's included in must-pass tax legislation, I think it's something that could be easily included and passed as part of a larger legislative effort," said Paul Merski, senior vice president and chief economist for the Independent Community Bankers of America.

Whether the Senate will do so is unclear, however. So far, no champion for the program has emerged on the Senate side and members of both parties have expressed skepticism about the program.

The bill would create a $30 billion Small Business Lending Fund to provide capital to community banks to increase small-business lending. The legislation includes incentives designed to ensure the money is used for small-business lending. Bankers would see the dividend they pay on any funds drop as they increased their small-business lending. For example, an initial 5% required dividend could drop to as low as 1% if bankers boosted small-business lending by 10% or more. The program would also be free of the restrictions of Tarp, such as warrants and executive compensation.

Democrats said it was critical to help small businesses. "Last year, our economy suffered an earthquake and the aftershocks are still being felt by small businesses and community banks," said Rep. Ed Perlmutter, D-Colo. "Access to credit is the cement small businesses need to build a solid foundation for job growth and economic recovery. It takes effect immediately, is necessary, costs taxpayers nothing and will lead to job growth in the private sector."

But Rep. Randy Neugebauer, R-Texas, said banks had plenty of capital and that was not the cause of the recent credit crunch. Instead, he said the bill would be a repeat of Tarp. "This bill follows the model of the Tarp program minus the stronger oversight and puts another $30 billion into banks in hopes that lending to small businesses will increase," Neugebauer said. The bill "will lead to more losses for taxpayers and no more improvement for credit for small businesses. Lack of credit is not even the largest problem facing small businesses."

But House Majority Leader Steny Hoyer said community banks continue to complain about access to capital. "This bill can go a long way towards opening up the flow of credit that helps create jobs," he said.

The House adopted a series of amendments to increase disclosure and oversight of the program. Under an amendment by Rep. Glenn Nye, D-Va., a bank would be required to disclose the actual number of loans made to small businesses and compare that amount with its lending in the fourth quarter of 2009. The House also adopted an amendment by Rep. Walt Minnick, D-Idaho, that would allow non-owner-occupied commercial real estate loans to count as small-business loans.

Perlmutter succeeded in adding a measure that would allow small community banks to amortize losses on commercial real estate loans over a six to 10 year period to free up capital to lend. "The banking regulators at the top level tell banks to lend, while the examiners on the ground tell banks the opposite and require more capital," Perlmutter said. "This mixed message is confusing, and it must be clear small-business lending is critical to a robust economic recovery,"

Bankers praised the amendment, which they said could assist in lending but Republicans warned it would create a moral hazard.

Federal regulators agreed and sent letters to lawmakers expressing concerns with the Perlmutter amendment.

They argued allowing banks to forbear or amortize CRE losses would undermine confidence in institutions, create moral hazard and hide the true condition of banks.