Some community-based lenders in Chicagoland are expressing displeasure over a requirement that they pay interest on any federal funds received under President Barack Obama’s $30 billion plan to boost the number of small-business loans.
Bankers interviewed said the requirement, recently released along with other preliminary details of the president’s job stimulus program, will discourage community financial institutions from participating in the program.
However, a Forest Park lender said the program seems to fit perfectly with its expansion plans. Daniel Watts, president of Forest Park National Bank & Trust Co., disagreed with the opinion offered by several Chicago bankers that the president’s plan is unworkable.
According to the plan, dubbed the “small business lending fund,” banks with less than $10 billion in assets could apply for money repaid to the government’s bank bailout program. The money they receive would be earmarked for lending to small businesses looking to expand and add jobs.
Watts, who just joined the Forest Park bank after working under Michael Kelly in Oak Park, said that is exactly what he wants to do.
A press statement from the White House explaining the elements of the small business lending program said the interest, or dividend rate, for a capital investment payable by community lenders to the federal government under the program would begin at 5 percent. Reductions to 1 percent would be given, however, “if a bank demonstrates increased small business lending relative to a baseline set in 2009.”
Watts noted that his bank’s strategy this year is to increase small business lending by 5 to 10 percent. So for his bank, which has assets worth $175 million, the plan plays into the strategy and provides a good incentive to make more loans. And, unlike executives of other community banks interviewed, he said, “5 percent capital is very cheap.”
The fund is to be established separately from the government’s Troubled Asset Relief Program that places strict restrictions on banks from lending to small businesses.
“If it is only capital that would be good. But if it is capital at a 5 percent rate that will be not so good,” said Richard Loundy, chairman of Devon Bank, which caters to residents in and around the city’s West Rogers Park community.
Loundy’s Devon Bank, with assets of $300 million would qualify for the program, as would First Eagle Bank, with $320 million in assets, located in the city’s Near West Side neighborhood.
Andy Salk, president and CEO of First Eagle, said he’s still unclear on how Obama’s small business lending program will work.
“It appeared that the cost (of capital) was 5 percent going in. That’s the real issue,” Salk said. “What does it take to go from 5 percent to 1 percent money in this environment? How much in loan volume do you need to do to get to the first percent?”
According to Loundy, community banks “can get money to lend” and would not necessarily need to sign up for the federal program. He said they could raise funds for lending to small businesses by increasing customer deposits or by offering higher rates on certificates of deposits and checking accounts.
“The real problem is that the examiners are so rigid in the examination of the loan that we are going to find it hard to lend to good borrowers and small businesses,” Loundy said.
Loundy also said the government has “missed the target”; he recommended an existing solution – the U.S. Small Business Administration, or SBA, loan.
“If they made it easier to get an SBA loan with a government guarantee that would be better,” he added referring to the Section 7(a) loans of the U.S. Small Business Administration. The SBA does not lend directly to small businesses but guarantees up to 90 percent of loans made to small businesses by banks or other lenders.
In March, the Obama administration pumped $15 million into the small business loan market as a move to create jobs. It also temporarily raised the SBA guarantee on small business loans to the 90 percent level from the earlier guarantee of 75 percent. Subsequently, in December President Obama extended the SBA’s enhanced loan program, which was announced in March, through Feb. 28.
Economist Charles M. Kahn, chairman of the department of finance at the University of Illinois, Urbana -Champaign, described the lending program as a “clever plan.” Nevertheless, he said the 5 percent dividend rate in the Obama administration’s lending fund program is not a good deal if community banks are not going to do small business lending.
“It forces those banks to decide if they are interested in doing small business lending. If they are going to, indeed, then it is a good deal for them. It is an inducement for them in that direction.”
Watts recognized that the Obama lending plan as described so far still appears unclear.
“The details, when revealed, will make or break the program,” Watts said.