Obama SBA Credit Program Hits Obstacle

The Obama Administration's new initiative to free up credit for small businesses with an infusion of $15 billion for loans has hit a snag after the major lenders targeted by the program said they would not participate.

The Washington Post has reported that none of the six "middleman" lenders who account for 80 percent of the secondary market in Small Business Association (SBA) loans are willing to participate in the program. The financiers, which include SunTrust Bank, Coastal Securities and Signature Bank, object to requirements that include limits on executive pay and giving an ownership stake to the government.

Freeing up credit is goal

The program was welcomed by many in the small business community when it was unveiled two weeks ago. The goal was to free up credit in the secondary markets by buying up $15 billion in small business loans, thereby making that cash available for new loans.

The program was targeted at the secondary lenders who typically buy up SBA loans from the original lenders and repackage them as securities to be offered to other investors. Since the market for such securities has tightened up, it was thought that having the government purchase $15 billion in loans would provide a fresh shot of capital to make additional loans to small businesses.

Secondary lenders say no thanks

However, as the Washington Post reports, the six major secondary lenders have all indicated that they find it more advantageous to simply hold onto the loans and collect the interest on them, rather than resell them and submit to government restrictions.

Administration officials reportedly have described the program as a work in progress and that they are reworking the proposal.

The volume of loans guaranteed under the SBA's primary small business program has dropped nearly 60 percent since October. New lending in 2009 has less than $10 billion, about half of what it would be in a typical year.

The administration's new SBA program has also been criticized for attempting to generate demand for loans where little exists. Many small businesses are putting off capital projects because of uncertainty over the economy.