Magazine article American Banker

An Adequate Mechanism Already Exists for Securitizing Small-Business Loans

Magazine article American Banker

An Adequate Mechanism Already Exists for Securitizing Small-Business Loans

Article excerpt

Like Rep. John J. LaFalce, chairman of the House Small Business Committee, and like numerous commentators in this and other publications, I believe that small businesses have been hit particularly hard by the tightness in credit markets.

But I do not believe that securitization of small-business loans through a new agency like Velda Sue, which Rep. LaFalce has proposed, will be possible.

Small-business lending requires training as well as numerous credit and business skills.

It is not like originating a home mortgage, where a "product" is being financed by taking advantage of the uniform standards - length of employment, debt-to-income ratios, loan-to-value standards, and so on - routinely considered in the underwriting process.

Loans to small businesses vary tremendously in pricing, structure, guarantees, collateral, and other respects. This diversity would probably prohibit securitization of these assets.

Small businesses cannot be viewed merely as another product being financed.

In fact, there is no need for the extra liquidity that a program like the still-vague Velda Sue would presumably try to provide. But if the aim is to originate loans and obtain interest and fee income while mitigating credit risk, consider the merits of the Small Business Administration's 7(a) loan program.

The program affords small businesses, as defined in the Code of Federal Regulations, the opportunity to finance long term for working capital needs as well as fixed-asset purchases, business acquisitions, leasehold improvements, and certain real estate acquisitions. …

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