WASHINGTON — In an attempt to avoid the stigma of the Troubled Asset Relief Program, President Obama plans to announce today a separate $30 billion program to help small businesses receive loans from community banks.
Although the plan would use money left over from Tarp, it would not carry the same restrictions, including warrant and executive compensation requirements, according to senior administration officials.
Obama plans to discuss the proposal – a critical component to his administration's focus on the economy and jobs – at a town hall meeting in Nashua, New Hampshire later today.
It builds on a plan first unveiled during his State of the Union address last week which called for allocating $30 billion from returned Tarp funds to dole out to community banks to bolster small business lending.
Instead Obama plans to ask Congress for fresh legislation that would transfer $30 billion from Tarp to pay for a new small business lending program.
The bill could move on its own and would be subject to plenty of congressional input, said senior administration officials, but it is part of the broader administration agenda of increasing jobs and improving access to credit.
"Today, I'm announcing a proposal to take $30 billion of the money that was repaid by Wall Street banks, and use it to create a new Small Business Lending Fund that will provide capital for community banks on Main Street," Obama plans to say in his prepared remarks. "These are the small, local banks that work most closely with our small businesses - that provide them their first loan, and watch them grow through good times and bad. The more loans these banks provide to creditworthy small businesses, the better a deal we'll give them on capital from this Fund. Combined with my proposal back in December to continue waiving fees and increasing guarantees for SBA-backed loans, this will help small banks do even more of what our economy needs - ensure that small businesses are once again the engine of job growth in America."
In a background briefing to reporters, senior administration officials acknowledged that community banker input – including significant assistance from Camden Fine, the president of the Independent Community Bankers of America – helped persuade the administration to pursue new legislation, rather than use existing authority under Tarp.
"We spent an extraordinary amount of time exploring different options that we reviewed," said one official. "In the end, the president decided to call for new legislation... We wanted something that would get the maximum participation."
The official said that they worried community banks would not participate in another Tarp program.
"What we have experienced, what you will hear Cam Fine the head of community bankers validate, is that community banks who would otherwise be interested in capital that will help them do more for small business lending were hesitant to take it not only out of fear of the Tarp restrictions but of the stigma and of the potential for retroactive legislation that would touch them if they were a Tarp recipient," the official said.
The official added that there were "at one time 600 community banks in the pipeline to be part of the capital purchase program who dropped out, almost all of them due to concerns over precisely this issue."
"As we had tried to roll out additional plans, this was the roadblock that we felt was difficult to get over," the official said. "So therefore if we would like to have the strongest possible effect on small business lending, we need to create a new program."
Fine said that his group supports the administration's plan.
"ICBA is strongly supportive of this initiative as outlined by the President and Treasury. If this initiative is introduced in Congress, ICBA will work hard for its passage," he said. "Every dollar of capital that goes into a community bank can potentially be leveraged eight to ten times into loans to small businesses. ICBA will work closely with both Congress and the Administration on these and other initiatives that can benefit community banks and Main Street America."
The proposal seeks to tie capital rates to lending performance by improving the attractiveness of terms as small business lending increases.
Administration officials said that they have already talked to congressional leaders and are expecting them to weigh in. Lawmakers could decide to add additional restrictions, but would do so from a "clean slate," officials said.
While the White House plan is not "etched in stone," it is proposing that banks of $1 billion or less in assets can receive up to 5% of risk-weighted assets. Those banks would initially pay a 5% dividend rate, but would see that drop if they can prove their lending increased. For example, banks that boost lending to small businesses by 10% over a baseline in 2009 could pay a dividend rate as low as 1%.
Banks with between $1 billion and $10 billion in assets would be eligible to receive up to 3% of risk-weighted assets through the program.
The proposal calls for giving banks a 1% point decrease in their dividend rate for every 2.5% increase in incremental business lending they achieve over a two-year period, down to a minimum dividend rate of 1%.
Banks would realize this reduction in dividend rate sooner if they make early, but consistent progress towards increased lending.
For purposes of the program, banks would be able to receive the incentive on the basis of new lending beginning Jan. 1, 2010. After five years, the dividend rate would be increased to encourage timely repayment.
Administration officials said it would be up to regulators to determine whether banks are eligible for the program. One key question is whether banks with Camels rating of 3 or worse could qualify for the program.
"This does assume regulators will assess viability," the administration official said.
Administration officials rejected the notion that there would be nothing to stop Congress from adding Tarp-like restrictions to this proposal or coming back later and adding additional strings after the fact.
"If you were to talk to members of Congress they would tell you that the restrictions that have been imposed; that the anger and resentment that has been expressed throughout the country, has been far more directed at the largest financial institutions," the official said. "When you have the United States Congress vote for and create a small business lending fund it will take on an entirely different character."