Posts Tagged ‘SBA’

Anonymous Banker: The Worst is Yet to Come. An estimated $1 Trillion in New and Legacy CMBS TALF funds to bailout the financial industry

Sunday, December 6th, 2009

I’m a small business advocate.  Always have been, always will be.  It colors my thought process and separates me from our leaders who  believe that this nation’s economic recovery rests in the hands of big business, big banks and Wall Street.

Our leaders publicly  pronounce  the importance of small business.  They publicly sell many of their economic recovery plans under the guise of supporting small business.  The reality is that many of their plans, and in particular the New and Legacy CMBS TALF program, have absolutely nothing to do with supporting  small business recovery.  It is all about recapitalizing the banks at the expense of the taxpayers for generations to come.  It is all about profit distribution at the highest level of the food chain …. and I’m sorry to say, small business doesn’t fall in that category.  The $50 Billion and soon to be $1 Trillion dollar TALF program, including both new and legacy CMBS, is a prime example of  taxpayer sponsored programs touted to be in support of small business.  But it IS NOT!!!

The Rhetoric

In March 2009, the FRBNY explained why they were establishing the TALF program

The ABS markets historically have funded a substantial share of consumer credit and U.S. Small Business Administration (SBA)-guaranteed small business loans.  Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.  The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

 In April 2009, Ben Bernanke wrote a letter to the Congressional Oversight Panel stating:

The Term Asset-Backed Securities Loan Facility (TALF) is a funding facility through which the Federal Reserve Bank of New York extends three-year loans collateralized by certain types of ABS that are, in turn, backed by loans to consumers and small businesses. The facility is designed to help market participants meet the credit needs of households and small businesses by supporting the issuance of those ABS.

Also in April 2009, Thomas Baxter, General Council to the FRBNY stated in a letter to the Special Inspector General for the Troubled Asset Relief Program that “We remain committed to advance the policy purpose of the TALF — to make credit more readily available to U.S. consumers and businesses, a critical cornerstone for the recovery of the U.S. economy.”

In October 2009, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation stated:

The FDIC has been vocal in its support of bank lending to small businesses in a variety of industry forums and in the interagency statement on making loans to creditworthy borrowers that was issued last November. (2008)  I would like to emphasize that the FDIC wants banks to make prudent small business loans as they are an engine of growth in our economy and can help to create jobs at this critical juncture.

And as recently as October 2009, President Obama  gave a presentation    describing his commitment to Small Business and outlining his plans to improve lending to the Small Business Sector.

“Over the past decade and a half, America’s small businesses have created 65 percent of all new jobs in the country.  More than half of all Americans, working in the private sector, are either employed by a small business or own one.  These companies are the engine of job growth in America.  They fuel our prosperity and that’s why they have to be at the forefront of our recovery.”

The “Small Business Mantra” is heard from every level within our government.  But from where I sit, it is all just rhetoric.  And so I challenge them, in these writings, to put meaningful programs in place.  Most recently, I challenged the fact that TALF had not provided any financing for newly issued CMBS but had only been used to finance existing CMBS. 

At the time of that writing , I foolishly believed that  CMBS TALF funds would be used to encourage banks to lend to small businesses purchasing an existing piece of commercial property or building a new piece of commercial property or perhaps refinancing a current commercial mortgage into a lower rate.  I must have been in la-la land to even have imagined such a thing. 

The First New TALF CMBS Deal -  DDR 1 Depositor LLC Trust 2009

On November 27, 2009,  the Federal Reserve Bank of New York through the CMBS TALF program made the first $72 Million loan collateralized by a new CMBS securitization.    Here is how they are using our tax dollars (and its is not in support of small business!).   Developers Diversified Realty Corp  is a REIT that owns shopping malls across the United States.  As a group, these properties already   carried substantial loans. Goldman Sachs Mortgage Company is reported to have refinanced these 28 shopping malls  with a loan of $400 Million dollars. 

It was reported   that Developers Diversified Realty Corp.  used the proceeds of this  $400 million, five-year loan to pay down debt and reduce balances on revolving credit facilities.

The blended interest rate on the loan is 4.2 percent.

The company has repaid more than $270 million of mortgage debt with a weighted average duration of 1.2 years and an interest rate of 6.2 percent, the real estate investment trust said.

This $400 Million dollar package of  SHOPPING MALL loans  was then transferred into a securitization (Commercial Mortgage Backed Security)  called DDR I Depositor LLC Trust 2009.    The Federal Reserve Bank of New York then used this pool of shopping mall loans  as collateral to a $78 Million dollar loan to the Investment Bank within Goldman Sachs.  The lender, Goldman Sachs Mortage Company received the $400 Million dollars back from a combination of the loan proceeds from the Federal Reserve Bank of New York and the sale of the rest of the Commercial Mortgage Backed Security (CMBS) to other investors.    In reality, this transaction simply swapped old debt for new debt, and one set of investors for another set of investors …… with the Taxpayers having invested $78 Million dollars.  

Where exactly in this scenario do you see a benefit to small business?  There isn’t any.

What we need are innovative ideas and meaningful programs  in support of small business

I recently read an article entitled:  Learn the Five Secrets of Innovation in which Hal Gregersen told CNN, “What the innovators have in common is that they can put together ideas and information in unique combinations that nobody else has quite put together before.”

It is time for our government leaders to show some innovation in their thinking and in the programs they support.   Everyone, at all levels of government and within the financial industry,  recognizes that Commercial Real Estate  will create the next round of substantial losses for the banks and Wall Street Financial Companies that have been deemed too big to fail  and  for  other institutional investors and REITs.  We cannot allow the TALF program to become just another bailout for the $3 Trillion dollar Commercial Real Estate bubble that is about to implode.

In June 2009, William Dudly, the President and CEO of the FRBNY stated that:

“One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses among many of the firms that dominate the financial industry. As the magnitude and widespread nature of these problems became evident in the early part of 2007, there was an abrupt loss of confidence and a sharp and sustained increase in risk aversion among investors. Liquidity in short-term funding markets seized up as concerns over the viability of many bank and non-bank financial institutions increased.

After all, in recent years, the CMBS market has satisfied about 40% of the credit needs of the commercial mortgage sector. If this market is closed, then the refinancing of maturing mortgages will be exceedingly difficult and this will exacerbate the drop in commercial real estate prices, loan defaults and the pressure on bank capital.

I am confident that we will continue to build on our initial success, reopening credit channels to consumers and businesses.”

Well, Mr. Dudley, I am a taxpayers and therefore, through TALF, an investor in these new and legacy CMBS.   I have absolutely no confidence in the program that has been laid out.  I believe that this economy will only recover through  ongoing support of credit programs to consumers and the Small Business Community.  We need programs  that adhere to the many guidelines set forth to ensure safety and soundness in lending.  This is my percolate-up theory of economics as compared to your current trickle-down theory.  

Try some these  ideas on for size.  I’m sure you have some highly paid thinkers in your group that can tweak these ideas into effective programs.

1.  If you are going to use the TALF program to REFINANCE malls, then tag on conditions that favor small business.  Require the owners of the property (the REIT’s for example) to pass some of  savings from the reduction in the loan’s interest rate on to their Small Business tenants.  These small business tenants should  qualify based on revenue size or store size  and perhaps would have to document a reduction in revenue to receive the rent reduction.  In the Developers Diversified refinace deal there was a 2% interest rate reduction on a $400 Million dollar loan which translates into a savings to the REIT of  $8 Million dollars a year.  Even if that savings was shared by half,  the  small business tenants of these 28 malls would benefit from a combined rent reduction of  $4 Million dollars a year.  

In this manner, everyone has a chance to recover.  I have interviewed countless small business owners that rent properties in malls and I’ve recommended that they ask their landlords to grant a rent concession. Big malls always answer the same:   No way!   And yet they often write into their lease agreements that the small business tenant has to pay an increase in rent if their sales exceed a certain dollar size (for example $1 Million).  If the REITs want to share in increased earnings during prosperous years, then they should also have to share the cost savings benefits we, the taxpayers, are affording to them through the CMBS TALF program. 

I have also noticed that many of the smaller strip mall operators are making these concessions.  Where are we on this?  Is our government only capable of designing programs that support  the big boys by allowing them to reap all the cost benefits, but at the expense of small business and the taxpayer? 

2.  I understand that one of the tax requirements of a REIT is that they must pass on 90% of their income to their investors.  This rule does not encourage REITs to reserve for a rainy day and set aside capital to weather future economic storms.  Our government regulating agencies, the IRS and the SEC for example, must  work in concert to prevent a recurrence of this financial crisis.  All parties with a vested interest in the transaction must be prepared to absorb their own losses without benefit of bailout through our tax dollars.  Requiring 90% profit distribution is simply setting us all up for failure. 

3.   Set aside a portion of the TALF dollars specifically to fund newly issued CMBS comprised of commercial real estate loans under $3 Million dollars currently held on the books of  community banks across America.    Let all the community banks participate in a securitization pool and lay off their best small business commercial real estate loans into that pool.   As a group, they will share in the losses.  But since the FRBNY is lending on a non-recourse basis, the losses are limited to the “haircut”, and each bank will know exactly how much future exposure they have to losses from their investment in this pool.  In this way, the community banks will be able to participate in the recapitalization currently only afforded to the big greedy banks and Wall Street firms.  This process should  reduce the number of community bank failures and make Sheila Bair a very happy woman indeed.

When the loans are taken off the balance sheet of the community banks through this mechanism, these banks will enjoy a financial benefit.  The value of this benefit must be passed on to the borrowers through a reduction in their interest rates or at the very least shared between the community bank lender and the small business borrower.   The lower rate will translate into lower default rates and the savings experienced by the small business owner could potentially mean more jobs and lower unemployment.  All good things for our economic recovery. 

4.  The big banks, those deemed too big to fail, are not meeting their fundamental obligation to lend during this economic crisis.  And yet, I see them raising capital and paying back the government TARP loans.  I’m glad to have the funds back in our coffers.  But these same big banks are also recapitalizing on the backs of the consumer and small business owners as evidenced by the spread on rates they are paying the depositors and the usurous rates they are charging their borrowers.  In particular, I speak of the systematic rate increases applied across the industry to credit card holders.  

These are the same banks that were saved from insolvency a year ago when our tax dollars bailed out  FANNIE MAE and FREDDIE MAC.    Afterall, the financial institutions carried and are still carrying billions, perhaps trillions,  in toxic loans disguised as government guaranteed MBS’s in their capital accounts.  Yet, these “too big to fail” financial institutions continue to pay increasing dividends to their shareholders instead of using these funds to recapitalize and prepare for the next round of losses.  And there will be a next round of losses  from the commercial real estate bubble that is about to burst. 

Our government leaders know who these banks are or they would not be making such a great effort to bail them out through the TALF program.  Our government leaders need to grow a set of balls and initiate legislation that curtails  dividend payments.  These financial companies and banks must accumulate additional capital through a dividend reduction program.   The reduction in dividend payments to shareholders should also help fund some meaningful modifications of the consumer mortgages they still hold on their books.  These same banks should not be allowed to finance mortgage servicing requirements through TALF.

TALF is not about Small Business

It’s time to examine the TALF program from a different perspective because the direction it is taking today is not working for me and my fellow taxpayers.  The FRBNY, to date,  has financed $53 Billion dollars worth of ABS and has committed  over $1 Trillion dollars in support through this program.  To date, over $22 Billion has been used to divest the big banks of toxic credit card assets (43%), toxic auto loans of over $10 Billion dollars (20%), toxic commercial real estate loans of over $7 Billion dollars (14%) and a mere $1.6 Billion dollars in SBA loans (3%).  

Additionally,  our government leaders have seen fit to extend the TALF program for newly issued (which simply means refinanced) CMBS to June 30, 2010 but have only extended TALF with respect to Small Business Loans to March 31, 2010.   This is reflective of their true lack of commitment to the small business sector.  While they all talk-the-talk, their programs clearly prove that they do not understand the tremendous  contribution the small business sector could make to our economic recovery.   

How can our leaders expect us to believe, based on these results, that TALF truly has,  as its mission statement, the goal to:  

Help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

TALF is a financial industry bailout program through and through.    As Mr. Dudley so eloquently stated:  “One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses amoung many of the firms that dominate the financial industry.”   While the recapitalization of the banking and financial sector IS a vital component of this nation’s economic recovery, it is time that our leaders ensure that government programs, sponsored by our tax dollars,  provide equal benefit to the consumer and small business sector.  Without this, there is no hope of recovery.

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Anonymous Banker Weighs in on the failure of the SBA ARC program

Wednesday, August 19th, 2009
I thought I would be inundated with (America’s Recovery Capital) ARC loan requests over the last few months.  But alas, even the small business owners across America know that the program is nothing more than rhetoric.
 
I finally put through one request that I thought should be approved.  The funding would have given this particular client some breathing room to make it through this depression.  Yes, you heard me right….. I dare to use the word depression.  Not surprisingly, the client was declined.  Why?  Well according to Small Business Administration guidelines, the business had to either show evidence of profitability or positive cash flow in one of the past two years.  Unfortunately,  this company had a loss of about $2500 in 2008.  Never mind that it has been in business for ten years, and has been current on all payments.  Or that it has personal credit scores of 685 and 745.  Or that it has received a 20% increase in revenue for 2009 due to some new local-government contracts, and indeed that its cash flow projections show a return to strong profitability in 2009 and 2010.  Apparently, a loss is a loss is a loss.  It only took the bank ten days to come back with a rejection. 
 
I was so outraged that I went back to the SBA site to check on the progress of the ARC program and the list of participating banks and number of loans made by each bank.  There has been a total of 1193 ARC loans made to date.  Let’s assume that each loan was for the maximum amount of $35,000.  That equates to almost $42 Million dollars in SBA support provided through the ARC program to America’s entire small business community.   Did you perhaps notice that I did not use the word billions.
 
The names of the banks that participated in this program were, for the most part, unknown to me.  Most of them were not any of the big banks that have received so much help from the government…. or more correctly, the taxpayers and citizens of this country.  Bank of America and Citibank were not listed as lenders.  Regions, Sun Trust, and Wells Fargo did appear on the list, along with JPMorgan Chase who has made no more than 2 ARC loans in the State of New Jersey and no more than 8 ARC loans in the State of New York -two of their largest markets.
 
It’s impossible  to tell how many ARC loans were made by each bank.   In President Obama’s new age of transparency (yes I’m being sarcastic), the SBA website did not see fit to break out the totals for each bank.  Instead SBA duplicitously inserted the total number of loans made in each state next to the name of the first bank listed. This, of course, leaves the reader guessing to what extent the other banks participated.  COME ON, Ms. Mills!!!  Your report makes it clear that you don’t want anyone to be able to do a simple tally and know unequivically the lack of support the banks, that took so much from us, are providing to the small business community.
 
The Recovery Act allocated a mere $255 Million dollars for ARC loans to the entire United States Small Business community.  Now it is falling short of even my lowest expectations. 
 
I expected that those paltry funds would be gobbled up in the first 60 days of the program.  But not more than 16% of the funds have been dispersed through the banks.   Is this because  the small business owner is not really suffering through this economic crisis?   No one could possibly believe that!  Or perhaps the banks, which we have bailed out, have once again refused to meet their fundamental role as lenders?  If the banks cannot find their way clear to make loans to small business owners, loans, mind you, that are 100% guaranteed by the government, then clearly they are not doing their job.
 
And if the applicants are not qualifying for loans under this program, then what does that say about the state of this nation’s economic recovery?  Wake up  and take notice.  The ARC plan has failed.  And the government’s transparent abandonment of the small business community in their economic recovery plan is quite clear to all of us.  If this is the best it can do, then this country is in big, big trouble.

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Anonymous Banker Asks: “Did our country’s leading banks lose their SBA lending rights”

Saturday, May 16th, 2009

In light of the devastatingly poor SBA lending results and the fact that the SBA has been dragging their feet in implementing the new lending programs dictated by the Economic Recovery Act, I started reading deep into the bowels of the SBA website and the Code of Federal Regulations that govern the criteria banks must meet in order to have SBA lending and SBA securitization status.

And after doing so, one has to wonder if ANY of our leading banks are qualified, under clearly defined government regulations,  to partipate in the SBA lending programs.

The SBA Website and  the Code on Federal Regulation  states that the banks have to meet these criteria:

1.  Operate in a safe and sound condition using commercially reasonable lending policies, procedures, and standards employed by prudent Lenders. 

That rule alone takes most of our banks off the SBA lending list.  They all violated the regulations on safety and soundness and in so doing created this nation’s economic crisis .

2.   Have continuing good character and reputation, and otherwise meet and maintain the ethical requirements of §120.140

Dictionary.com defines reputation as  the estimation in which a person or thing is held, especially by the community or the public generally.  How many of our nation’s leading banks would be considered by our general population to have a good reputation?   I can’t think of any, can you?

3.  Holding sufficient permanent capital to support SBA lending activities (for SBA Lenders with a Federal Financial Institution Regulator, meeting capital requirements for an adequately capitalized financial institution is considered sufficient permanent capital to support SBA lending activities)

Based on the recent stress test results and our governments demands that the following banks raise additional capital:  Bank of America, Wells Fargo, Citigroup, Regions, SunTrust, Fifth Third, PNC and KeyCorp; can one imagine that these banks have met the requirements to be adequately capitalized?  If they were, then why would we be demanding that they raise additional capital?  Does that mean that somehow, behind the scenes, these banks have been told that they don’t qualify as SBA lenders?  Is it any wonder that our Small Business Community can’t find any SBA lenders among the biggest banks that took our taxdollars in the bailout? 

Based on this information and what I see each day as a banker to the Small Business Community, it is my general opinion that our government leaders are completely and intentionally fooling us into believing that there is any support intended for the Small Business Community.  It simply is not so!

 

SBA Securitization Market

If my suspicions are correct, then I think it is incumbent upon the Small Business Administration to direct the small business owner accordingly and come clean with the general public.

The Code of Federal Regulations CFR 120.4 also defines the conditions that need to be met for a bank to securitize their SBA loans.  And this is where it gets really interesting.  Our leaders expound on the need to get the securitization markets flowing in order to stimulate lending and the future of our economic recovery.  This mission is the foundation on which the TALF program was built and at the core of the American Recovery and Reinvestment Act of 2009.  Yet, based on the criteria defined in CFR 120.4, it is unlikely that any of our lead banks will be able to securitize SBA loans.  If SBA loans cannot be securitized, then that would mean that the banks would have to hold them on their books, and we all know that isn’t going to happen.

Here are a few of the guidelines, but I recommend that you all read the code in its entirety:

1.  Securitization —A “securitization” is the pooling and sale of the unguaranteed portion of SBA guaranteed loans to a trust, special purpose vehicle, or other mechanism, and the issuance of securities backed by those loans to investors in either a private placement or public offering.

2.  A Lender may only securitize 7(a) loans that will be fully disbursed within 90 days of the securitization’s closing date.  If  the amount of a fully disbursed loan increases after a securitization settles, the Lender must retain the increased amount.

This part pretty much kills any chance of a small business obtaining an SBA working capital line under the 7(a) program. 

3.  Have satisfactory SBA performance, as determined by SBA in its discretion. The Lender’s Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, on-site review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission);

Which part of the SBA’s Guiding Principles  is our banking industy supporting as they systematically withdraw credit from small business, systematically increase business credit card rates to upwards of 25% and have generally refused to support the small business owner through any meaningful lending programs?

According to IRS.gov, in 2006 (the most updated numbers they had)  there were 22 million sole proprietor tax returns filed in 2006 and an additional 3.2 million S-corp returns filed for businesses with revenue under $1 million dollars.  These companies generated over 1.2 trillion dollars in revenue and paid salaries of over $200 Billion dollars and rent (supporting our nations commercial property owners) of over $70 Billion dollars.

If the Big Banks are not going to support this group through meaningful lending programs, then perhaps it is time for Ms. Mills and the SBA to focus on providing  the incentives and support required for the community banks to increase their lending initiatives to the local markets they serve so well.

Our regulators have failed us in the past and I’d like to know if  the SBA is  enforcing the regulations that are in place that dictate exactly what banks are allowed to participate in SBA lending and securitizations.  I think that in light of the new transparency rules supported by President Obama, we have a right to know if the lead banks are simply refusing to participate in SBA lending or if they have been justifiably banned from participating for non-compliance of our goverment regulations. 
 
If my suspicions are correct, then I think it is incumbent upon your office to direct the small business owner accordingly and come clean with the general public.
 

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Anonymous Banker weighs in on SBA and the Economic Recovery Act: Rhetoric or Redemption – Time will tell

Friday, April 10th, 2009

Is the new SBA lending program simply more bailout for banks or truly designed to help the stuggling small business owner? 

 

Well, really, who cares?  With all the billions being poured into the financial companies and auto industry, any plan that helps the small business owner is a good plan, in my book. 

 

I see three components in the Economic Recovery Act that should help revive lending to our nation’s small business community.  That is, IF the banks actually cooperate and finally start to meet their fundamental role of making loans.

 

The first program will make available $15 Billion dollars in SBA 7(a) loans and 504 loans backed by guarantees  to the banks of up to 90% .  Borrowers will not have to pay SBA lending fees which provides a meaningful cost savings in their quest to obtain working capital.  It is under this program that our Community Banks have an opportunity to shine and to show our Congressional leaders the vital role they play in supporting the business communities they serve.

 

The government originally rolled out the TALF program, designed to jump-start the securitization markets for Credit Card, Auto, Student….. and yes, tagged onto the end, Small Business Loans.  In an effort to increase credit availability and support economic activity, the Federal Reserve Bank of New York  agreed to lend money, on a non-recourse basis, to investors who purchase Asset Backed Securities from banks. Thusfar, regardless of the guarantees, the TALF program has not increased Small Business lending initiatives by the banks.  The reasons are obvious:  First, in this economic environment the investors don’t want even the small risk associated with SBA lending.  And secondly, because the confidence in these asset backed securities  has been completely eroded, no one really wants to buy them.  And finally, our leaders have not required the banks to start lending, but merely to file reports that will reflect how little they are doing.

 

So with TALF doomed to failure, at least as far as Small Business Lending is concerned, our leaders have gone back to the drawing board to sweeten the pot.

 

It’s TALF with a twist.  While this $15 Billion program provides the originating bank with a 90% guarantee, the government realized that they would not be able to budge the banks unless the banks had assurances that they could divest themselves of these loans after they made them.  With that in mind, our Treasury Department announced that it “will be a ready buyer of the loans in the secondary market.”  

 

And this is where the community banks and perhaps credit unions will play a vital role in getting these funds into the hands of the small business owner.  These banks will originate the SBA loans and sell them, ONE AT A TIME, to the broker/dealer.  The broker/dealer will gather these loans together, from the originating banks,  and sell them….. directly  to the government.

 

Since the announcement of this program, there’s been a big to-do about whether the broker-dealers will participate or whether the Federal Plan to Aid Small Businesses is Flawed.  It seems that since the $15 Billion dollars, used to fund this program, is coming from TARP funds, the broker-dealers that act as the intermediary between the originating banks and the Treasury may be subjecting themselves to TARP restrictions such as limits on Executive Compensation. 

 

Personally, I don’t believe that President Obama, our Congressional leaders or the folks in the Treasury Department intended this interpretation.  Perhaps the simplest way of looking at this is to see these broker-dealers as ‘contracted intermediaries’ by the Treasury Department.  The Treasury cannot be expected to purchase one loan at a time from the banks across our nation.  In order for the program to work, they must have a broker-dealer facilitate the purchasing, packaging and subsequent resale of these loans to the Treasury.  There you have it – and I am sure over the next few days, and with the encouragement of the SBA’s new Administrator, Karen Gordon Mills, this situation will be resolved to everyone’s satisfaction.  Perhaps this is an opportunity for Treasury to create a working partnership with a broker-dealer that didn’t put up barriers to the success of this plan.   

 

This is a plan that will work.   It’s smaller than I would have liked, but it should bring a sense of renewed confidence to our Small Business Community.  New money, new loans, community bank lending, and an opportunity to revitalize our economy one business at a time, create and save jobs and send a clear message that the small business owner’s significant contribution to our economic recovery is recognized and supported.

 

ARC Stabilization Loan

The second program, which has not been rolled out by the SBA yet – but coming soon, is the ARC Stabilization Loan (America’s Recovery Capital).   These loans are to be originated by pre-approved bank lenders (yes many of those same banks that have refused to make business loans over the last several months but had no trouble taking billions in bailout funds from the government).   The loans will be backed 100% by the SBA and will have a maximum loan size of thirty-five thousand dollars. 

 

The $255 million dollars in ARC funding translates into a significantly higher loan volume because it represents the guarantee and the interest subsidy provided by the program.  Borrowers will not have to start repayment for twelve months and full repayment is expected within five years.  Since the SBA will  subsidize the interest on these loans,  the ARC program will provide relief to the business owners as our nation makes its way through the beginnings of our economic recovery. 

 

Once again, I’m counting on Ms. Mills to move this program along to where it needs to be.  I’ve had several conversations with local SBA District Offices and would have liked to see the terms of this program more clearly defined.  The big question is this:  Will ARC merely provide “six months worth of interest payments on existing loans” to the small business owner?  Because if that is the case, then the vast majority of these loans will be for extremely small amounts that banks will be uninterested in processing and ultimately will not make very much difference for the small business owner. 

 

These first two programs, to be truly meaningful, should allow the banks to refinance some of the smaller working capital credit lines that are, today, being systematically pulled by the banks?  I understand that Chase, for example, recently froze working capital credit lines for tens of thousands of their business clients, the vast majority of these lines being under $100,000.  And they are not alone in this process.  I’m told that it is Chase’s intention to give these customers an opportunity to present updated financial information and to reinstate the credit lines for those businesses found to be credit worthy under the bank’s new credit criteria.  Refinancing these credit lines under newly created SBA loans funded by the ARC program or what I lovingly call the ‘TALF with a twist” program, would be an excellent alternative to leaving the viable small business owner without any form of credit.  Additionally, and under the right circumstances, one effective use of these funds would be to refinance credit card debt accumulated by our small business owners, many of whom are now subject to the interest rate increases upwards of 20% recently implemented by the banks.  Most of these borrowers would significantly benefit from the relief provided by SBA lines and particularly those that provide interest rate relief.   

 

Make no mistake about it.  The ARC program, if used as I describe above, would most certainly be, yet another, bailout for the banking industry.   But let’s put that aside for the moment.  My concern today is for the Small Business Community who is, once again being slammed by our financial industry leaders when they most need our help.  Let us hope that these programs will allow the small business owner to refinance their existing debt, significantly reduce their monthly payments and gain the temporary relief to their cash flow needed to weather this economic storm.  We need to help them keep their workers employed, pay their rent and remain in business. 

 

Don’t be fooled.  This is not a bailout program for the business that is out-of-business but hasn’t come to terms with that finality.  The ARC program states that the business has to be ‘viable’ and what that means is yet to be determined.  Borrowers should expect to provide financial information regarding sales/revenue and income.  So for those small business owners that over-extended through the business liar-loans,  businesses that ‘stated income’ that they now cannot support with tax returns:  I don’t think you will qualify.  And if you are one of the small business owners that like to make money, but don’t want to pay taxes:   You won’t qualify either.  If you can’t make it on your own, then the banks will be writing off your debt and taking the loss.  Shame on the banks and shame on you.  

 

I’d like to add one final observation.  When a bank cancels a business credit line, they do this without warning.  The line is simply frozen and no additional draws are allowed.  A letter is sent to the business owner requesting updated financial information, AFTER the credit line is revoked.   In a frenzy, the business owner faxes in their financials to a nameless, faceless person who evaluates their condition.  In my experience, I have seen the following reasons provided in the bank’s refusal to reinstate the lines of credit:  (a)  Decrease in revenue and/or profit (b) weaknesses in cash flow  (c)  debt to income too high. 

 

Well, no s_ _ t, Sherlock!   We ARE in a recession, and I dare not use the “D” word here.  Our country, and the world, is in the grips of an economic tsunami that the banks caused. This situation is rooted in the financial industries endless quest for greater profits and the absence of any safe and sound lending practices, further compounded by our Regulators refusal to halt the industry’s despicable practices over the last ten years.

 

We are now caught between a rock and a hard place.  These loans are the hardest to underwrite.  The smaller businesses that will benefit from ARC funds and from refinancing debt under the ‘TALF with a twist’ funds,  simply don’t have anything for the banks to wrap their greedy little arms around.  And it will be difficult to determine which company truly has a chance of weathering the storm and which, despite any refinance of debt, will be forced to close its doors.  Furthermore, simply terming out working capital lines will not provide the relief needed.  We need to slash their interest rates, continue the lines as revolving credit so that it can be used and re-used over the next three years, and then, after a time, term it out.  SBA already has the product matching this description.  Now the SBA has to give the banks specific criteria so they are comfortable  with the conversion.  There can’t be any second guessing or Monday morning quarterbacking on this process.  If President Obama, our Congressional leaders and our Regulators are truly committed to helping the small business owners across this great nation, then DO IT.  Jump in with both feet.  Yes, there will be losses.  But there will also be jobs saved and tax revenues generated and an increase in confidence so critical to our recovery.    

 

The third program, which is already in effect, is the expansion of the existing Micro-loan program.  These loans are granted by special non-profit community-based lenders  throughout the country (microlenders), and not typically by banks.  It provides for fifty million in new loans.  But don’t count on any special rates.  SBA website reports that micro-loan interest rates range from 8% to 13% , which is still better than the usurious rates many banks have started to apply to business credit cards and small revolving lines of credit.  Most microloans are directed at the very small and struggling business and yet, these are the loans that come with application fees in the $500 range.  I am unmoved by this program and so far, disappointed in the channels that are supposed to get these funds into the hands of the small business owner. 

 

For those business owners still interested in applying for a micro-loan, finding a lender might prove difficult.  You can start by visiting this website: http://www.sba.gov/localresources/district/az/index.html and selecting your local SBA office from the dropdown box.

 

Congratulations to Arizona, Los Angeles, San Diego and Santa Ana California,   Jacksonville Florida, Boston Mass, Nebraska, New Hampshire, NY-New York,  Oregon, Rhode Island, South Dakota, Houston-Texas, Utah, Virginia, Seattle-Washington and West Virginia.  If I left any out, I apologize.  But COME ON – SBA site developers.  The folks out here need help and only 17 of the 71 offices appear to provide any information on current SBA lenders and/or Microlenders in your area. 

 

And to our New York District Office, our thanks for your prompt reporting of loan volume in your area and the names of the banks that have continued to support our Small Business Community during these last five months.  Your site reports that for the SBA fiscal year which ended September 30, 2008 there was an AVERAGE of 290  7(a) loans made each month and over $33Million in 7 (a) loans made within your district each month.  However, from October 1, 2008 through February 28, 2009, in this same district, only an AVERAGE of 70  7(a) loans were made each month and only an average of about $14.5 Million in 7(a) loans were issued.  These figures support that over the last five months, SBA  7(a) loans decreased in number by 75% and in dollars of loans granted by 56%. 

 

SBA should require that every district office post up-to-date SBA lending results.  It’s important for the business owners in our country to understand which banks are supporting the needs of the small business community and the economic recovery of this nation, and which banks have snubbed their noses at our leaders’ endless pleas to apply the bailout funds to meaningful lending programs.   The New York District Report indicates that  JP Morgan Chase, who accepted $25 Billion in TARP funds,  dropped from the number one SBA lender to number  9, having made a total of 40 SBA loans totaling just over $2.8 Million.  Bank of America, who received $45 Billion in TARP funds, moved from the #2 spot to number 33.  BofA’s support of the small business owner was represented by 12 SBA loans totaling $410,000.  And Citbank, who previously held the number 5 ranking,  made a total of 3 SBA loans totaling  just over $1 million dollars.  This nation provided Citibank with $50 Billion dollars.  I leave it to the reader to draw their own conclusions from these numbers.

 

To America’s small business owners and to each and every individual, I offer the following advice:  Stop complaining and DO something.  Go establish a banking relationship with one of your local community banks and reward them with your bank accounts.  If possible, pick one of the banks on the top of the SBA participation list. Check out their bank rating here:  http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx?t=cb. Find the best bank in your area and encourage all your friends and business associates to move their accounts.  Yes, it will be inconvenient to make a move.  But if we, the people, act together in unison, we can send a clear message to the financial industry that we will not stand by and let them tear of life out of this country with their greed and avarice, and then reward them by banking with them.  We will not do business with them, when they have failed us, and continue to fail us,  so miserably. 

 

And to President Obama and our Congressional leaders:  We thank you for your efforts and we look forward to a prompt and effective resolution to the release and implementation of your new SBA Recovery Plan.  Please hurry!!!

 

 

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