Congress Plans Market for Trading Small Business Loans

Article excerpt

N.Y. Times News Service

WASHINGTON _ Lawmakers in the House and the Senate are mapping out divergent paths to a common objective: creating a secondary market in which small business loans can be bought and sold in much the same fashion that mortgage-backed securities are traded.

Advocates of a secondary market for small business borrowings say it could unleash a flood of investment capital that would wash away the biggest obstacle facing many small companies: a lack of credit.

The point of creating a secondary market is this: The bank that makes the loan to a small business will have a way to sell that loan, at a profit, to investors around the country. And the cash that the bank gets from the loan will enable it to make additional loans. So the secondary market is, in effect, a way to bring more people into the business of lending to small businesses and, at the same time, spread the risk of these loans.

But there is a fundamental difference between the approaches being offered by two New Yorkers, Rep. John J. LaFalce, an upstate Democrat, and the state's Republican senator, Alfonse M. D'Amato. The House proposal would establish a government agency to sponsor the transactions, while the Senate bill would just clear away some of the legal underbrush and let private business and finance manage the market.

Some bankers oppose the LaFalce bill, which would set up a Venture Enhancement and Loan Development Administration for Small, Undercapitalized Enterprises. The elaborate name was devised to produce the acronym Velda Sue, which would join a family tree of nicknamed Federal loan backers, like Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae and Farmer Mac. The Independent Bankers Association of America contends that government subsidies, even implicit ones, would undercut banks making traditional loans.

There are doubters of the D'Amato approach, too, including the North American Securities Administrators Association, a body of state regulators. In the association's view, the Senate proposal would not go far enough to standardize commercial loans before allowing investors to buy and trade them, and the resulting market would not be regulated enough.

Still, proponents of a secondary market say that whatever approach is adopted, it would carry enormous potential.

Marianne K. Smythe, director of the division of investment management at the Securities and Exchange Commission, said the commission had not endorsed a particular approach but thought that creating a secondary market was "probably the best _ and quite possibly the only _ technique for really ending the credit crunch that has afflicted small business across the country."

The SEC has already freed some commercial lenders to package and resell certain loans, exempting them from some securities laws' provisions.

Already, the first such offering is being shaped. A thick prospectus now sitting on the SEC shelves describes a share offering of the Fremont Small Business Loan Master Trust. What investors would be buying are shares in a pool of commercial loans made by a big lender, Fremont Financial Corp. …