Congress on the Move: The Securitization of Small Business Loans and Other Aspects of the New Banking Legislation

By Miller, Dianne | Journal of Commercial Lending, September 1994 | Go to article overview

Congress on the Move: The Securitization of Small Business Loans and Other Aspects of the New Banking Legislation


Miller, Dianne, Journal of Commercial Lending


In August, Congress passed HR 3474, the Riegle Community Development, Credit Enhancement and Regulatory Improvement Act of 1994, an omnibus banking bill wit provisions that run the gamut from community development lending to consumer protection to reduction of regulatory burden to reform of the flood insurance program. HR 3474 also aims to increase lending to small businesses by facilitating the development of a secondary market for small business loans. Th bill has been presented to President Bill Clinton, and he has indicated that he will sign it.

Legislative Background

A secondary market for small business loans is not a new idea in Congress--support has been building over the past several years, fueled by the success of mortgage-backed securities and evidence of a "credit crunch" that substantially reduced the amount of credit available to small businesses.(1) Several alternative secondary market proposals were introduced in Congress in 1994, including bills to create a new small business government-sponsored enterprise (GSE)(2) and to involve the Treasury Department in certifying "secondary market facilitating organizations."(3) The legislation that prevailed, however, minimized the government's participation in the small business secondary market, leaving it to develop in the private sector.

The Small Business Loan Securitization and Secondary Market Enhancement Act of 1994,(4) contained in Title II of HR 3474, is patterned after a 10-year old initiative, the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA), whic led to increased private sector participation in the mortgage-backed securities market.(5) SMMEA amended the federal securities, banking, pension, and tax laws and preempted some state securities and investment laws to make it possible for banks, thrifts, and other private sector entities to issue mortgage-backed securities. In addition, the Securities and Exchange Commission (SEC) recently exempted structured or asset-backed financings from the Investment Company Act of 1940 to further encourage the development of private sector secondary market initiatives.(6)

Although some small business loans have been securitized, a number of legal regulatory, and practical barriers have prevented robust growth of the secondar market.(7) Barriers include the following:

* Bank capital and accounting rules that discourage the sale of loans with recourse.

* Securities delivery and margin requirements that inhibit the pooling process.

* The potential for double taxation.

* Lack of standardization of loans. The Small Business Loan Securitization an Secondary Market Enhancement Act, however, removes these impediments so that th secondary market may develop without forcing transactions to fit into narrow legal or regulatory categories.

Without competition from GSEs--which has somewhat restricted the growth of the private mortgage-backed securities market--the small business secondary market should develop into a profitable line of business for lenders.

Provisions of the Legislation

The Small Business Loan Securitization and Secondary Market Enhancement Act is not a structured program; rather, it is a series of changes to existing law tha will allow a secondary market for small business loans to develop. The legislation begins by creating a new small business-related security, defined a an investment-grade security (as determined by a statistical rating organizatio such as Moody's or Standard & Poor's) that represents an interest in a pool of small business loans or leases or provides for payment of principal in relation to payments, or a reasonable projection of payments, on a pool of small busines loans or leases.

For secondary market purposes, a small business is defined as a business that meets the criteria for a small business concern established by the Small Business Administration (SBA) under Section 3(a) of the Small Business Act. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Congress on the Move: The Securitization of Small Business Loans and Other Aspects of the New Banking Legislation
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.