Magazine article American Banker

VIEWPOINT: Loan Fund Bill's A $30B Mistake

Magazine article American Banker

VIEWPOINT: Loan Fund Bill's A $30B Mistake

Article excerpt

Byline: Claude A. Hanley Jr.

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act did not mark the end of congressional attempts to re-engineer the financial services industry.

The Senate is considering legislation aimed at helping small businesses:the Small Business Jobs Act. Passed earlier this year by the House, the bill contains a combination of changes to tax provisions and expansion and creation of loan programs designed to aid small businesses.

Some of the proposed changes are temporary, while others will be permanent. According to a story in the July 21 issue ofAmerican Banker, ultimate passage of the bill is uncertain because of parliamentary maneuvering by senators, mainly over tax issues.

A central remedy contained in the bill is the creation of a $30 billion Small Business Lending Fund.

For a period of one year after enactment, eligible insured depositories and community development loan funds with assets of less than $10 billion can access the fund on terms similar to the controversial the Troubled Asset Relief Program, though without some of the earlier program's more onerous stipulations, such as limits on compensation.

The Treasury would make an investment in the eligible institution in the form of preferred stock.

The dividend on the preferred stock would initially be 5%. To kick-start small-business lending, the dividend would drop if loan originations increased. Conversely, if the loan originations did not increase, the dividend would increase to 7% after two and a half years.

The remedy suffers from a number of flaws that will minimize its effectiveness.

First, it is based on an erroneous premise: that scarcity of capital is constraining loan demand. The capital markets have clearly reopened to many financial institutions with assets of less than $10 billion and private equity has begun to flow into the sector as well. …

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