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Treasury To Make TARP Money Available For Small Business Lending

TREASSURYBLDG 062309 21Oct09

Wednesday, President Barack Obama has unveiled a series of initiatives designed to increase the flow of credit to small businesses, noting that small businesses are the "backbone" of the American economy and that his administration needed to do more to support them.

"Our small businesses have been some of the hardest hit by this recession," Obama said in a written statement. "There's no question that the steps we've taken have improved the overall climate for small businesses across the country, but there is more we need to do."

The immediate step the administration will take will be to use the Troubled Asset Relief Program, the $700 billion financial rescue package often known as TARP, to offer loans to community banks that support small businesses.

According to a senior administration official, who spoke on condition he not be identified, large banks with more than $1 billion in assets generally make 21% of their loans to small businesses, while smaller banks have on average 56% of their lending in small businesses.

To increase the ability of smaller, community banks to lend to small businesses, the Treasury Department will offer them additional funds at 3 percent interest, provided they're willing to put forward a plan to show how they will use the Treasury funds to support small business, the official said.

That is an even better rate than the 5 percent interest offered on loans that helped prop up the large banks earlier this year - much of which has already been returned to the government.

The better rate is being offered, the official said, both because community banks are more prone to lend to small businesses and because they proved more willing to report on their use of the funds in earlier programs.

Furthermore, Community Development Financial Institutions, which lend in the hardest hit urban and rural areas, will have access to Treasury funds and guarantees at an additional preferred rate of 2 percent, the official said.

Those funds will also be made available to community development credit unions, the first time the Treasury funds will go to credit unions, the official said.

"As we're winding down the larger efforts in TARP for the largest financial institutions, the President wants to make sure we are stepping up everything we can do for small business lending and the banks most prone to lend to small business," he said.

The final terms of the Treasury loans and guarantees are still being finalized, the official said, so the department plans to use the next few weeks as an informal public comment period to potentially make adjustments before making funds available.

The administration is also throwing its weight behind a series of legislative proposals authored by Sens. Olympia Snowe, R-Maine, and Mary Landrieu, D-La., to increase the size of loans that the Small Business Administration can guarantee from $2 million to $5 million in most cases and from $4 million to $5.5 million for manufacturers, a second senior administration official said.

That will enable the SBA to support larger projects, hopefully boosting job creation even further, the official said.

He added that administration officials had heard from the heads of large franchise companies like Dunkin Donuts and Minake that some of their best people had decided against expanding their businesses because they weren't able to get loans large enough to support several additional franchises, which is one problem the loan expansions are hoped to remedy.

The loan change, however, will require action by Congress and the official was unwilling to speculate as to a time frame to accomplish that.

The Treasury and the SBA also plan to host a summit of legislative leaders and stakeholders to determine what additional steps they can take to support small businesses.

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