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Trouble For Another Lending Program
By Marc Tracy
It was treated as rather triumphant earlier this week when the Small Business Administration announced that its program of 100%-backed, interest-free $35,000 loans would become operational next month. We're a little more skeptical of the so-called America's Recovery Capital (ARC) program--among other things, emphasizing it indicates an undue sense of importance attached to credit--but, y'know, sure, it's more good thing than bad.
However, now comes news that the program might run into trouble in practice. The problem? Though the loans are 100%-backed by the government, they are actually to be made by private lenders. Which means the lenders have to agree to make the loans, and are under no obligation to do so. And many of them are balking. "Some banks will join the ARC program simply for the civic value of helping small business customers," this article says, "but others say they won't participate unless it's in their financial interests to do so. One official at a major SBA lender, who declined to speak publicly, said that the loans' small size and bureaucratic overhead mean they probably won't be a 'profitable, effective solution' for his bank."
There are numerous legitimate reasons for these banks' skepticism. For one thing, since the loans are interest-free, the only money in them for the banks comes from what the government gives them as subsidy, an amount the SBA hasn't really crafted yet. For another, the SBA has not yet laid out its specific guidelines for which businesses would be eligible for the loans--only that the borrowers must be both behind on existing bank loans and also "viable".
This is all too reminiscent of the the fate of the plan to use $15 billion from the TARP fund to buy small-business loans on the secondary market. That plan is in turmoil because the holders of the loans--like these lenders, they are private actors--are hesitant to participate in the program for many perfectly valid reasons stemming from the perfectly valid reason of self-interest.
This pattern almost suggests that the government would be better off taking the $250 million allocated in the stimulus package for the ARC loans and just making the loans itself, without all this extra overhead and hassle. Almost suggests just that.
Comments (0)May 22, 2009 11:39 AM
