Obama tries to fix small-business loans

President Obama is trying to jump-start the Small Business Administration and convince more lenders to make government-backed Section 7a loans to: stores with sales under $6 million; factories with under 500 workers; wholesalers with under 100 workers. His announcement here.

Obama wants to refloat the sinking SBA loan market in hopes of pumping more capital into struggling firms. In the past year, "Wachovia and Bank of America have really dropped off, and the nonbank lenders -- Small Business Source of Houston, Business Loan Express fo New York, UPS Capital, CIT, Main Street Lender of Washington, D.C., -- they've all suspended operations," said Ethan Smith, lawyer at Fort Washington-based Starfield & Smith PC, which specializes in SBA loans.

How will Obama fix that? "The biggest thing they announced is that Treasury will be purchasing $15 billion of SBA-backed loan securities," Smith told me. They're trying to jump-start the market for buying (SBA) loans, which took a huge hit when markets froze up in August." Investors who helped banks finance the loans had been borrowing money at the London interbank offered rate (Libor), investing it in SBA loans tied to the prime US lending rate, and pocketing the difference -- up to 2.5%. When the market froze and Libor soared, the loans were no longer profitable -- but if Treasury starts buying them they may become more popular with investors.

Also, SBA has agreed to boost its loan guarantees to 90% (or a maxium $1.5 million per loan), from the previous 75%; and to eat loan fees, which gobbled up to 3.75% of each loan, Smith noted.

"The phones have been ringing all day," said Brian Zwaan, president of Penn Liberty Bank, on Tuesday, a day after the SBA annnouncement. "For example, we're approviing a woman who's going to buy an operating Auntie Annie's Pretzels franchise. She needs $780,000. If the SBA can guarantee 90% of the loan" -- backed by a second mortgage on her home, and the business's cash flow -- "she's saving $20,000 in fees and points. It's a wonderful incentive for her and us."

Smith says Pennsylvania banks like PNC, Sovereign, Susquehanna, Harleysville, Continental and Penn Liberty are still active in the market. Continental said yesterday it's hiring ex-SBA lender Daniel M. Sossaman to do new SBA loans. But bankers say privately they're worried SBA is suffering, like the economy in general, as more borrowers have trouble repaying their loans. It can take SBA months to reimburse banks, adding to lenders' risk.