House Lending Inquiry: Lawmakers Probe Banks' Lending To Small Businesses, Commercial Real Estate

WASHINGTON — U.S. regulators fended off complaints Friday from lawmakers and small business owners that overly strict rules for banks have prevented crucial credit from flowing to where it is needed most.

U.S. bank lending last year posted the steepest drop since World War II, with the volume of loans falling by $587.3 billion, or 7.5 percent, from 2008. And some lawmakers are laying the blame on the policies of federal regulators.

At stake at a House hearing was a $30 billion small-business lending fund for banks proposed by President Barack Obama. Criticism echoed that while big Wall Street banks got multibillion-dollar bailouts, community banks that played no role in stoking the financial crisis have been subjected to overly strict directives that are squeezing credit for local businesses.

Martin Gruenberg, the No. 2 official of the Federal Deposit Insurance Corp., disputed accusations that the agency has discouraged banks from extending loans to small business and for commercial real estate.

The FDIC gives banks "considerable flexibility" in decisions to extend loans, Gruenberg said. "We do not instruct banks to curtail prudently managed lending activities."

Federal Reserve Gov. Elizabeth Duke said the central bank and other financial regulators have called on banks to meet the needs of creditworthy borrowers.

Small businesses are seen as a linchpin for the recovery, with the potential to expand and soak up some of the nearly 10 percent unemployment that has ravaged the country and preoccupied Congress.

A House committee chairman urged the Obama administration to work with lawmakers seeking to send federal bailout money directly to small businesses rather than through banks.

Rep. Barney Frank, D-Mass., head of the House Financial Services Committee urged the administration to work on legislation with Rep. Nydia Velazquez, D-N.Y., who heads the Small Business Committee.

Congress must approve the small-business fund proposed by the administration, which would be open to banks with $10 billion or less in assets.

Velazquez and other lawmakers want the $30 billion from the bailout program sent directly to the federal Small Business Administration. It would then decide which businesses should get loans.

Velazquez said a more direct approach is needed to get credit where it is needed.

"That does not mean doing more for financial institutions and expecting the benefits to trickle through to small firms," Velazquez said. "Taking $30 billion and simply handing it to banks – in the hopes that they will make loans – is not sound policy."

Herbert Allison, the assistant Treasury secretary for financial stability, insisted that channeling the money to banks "is not a cost to taxpayers; it's an investment." Allison said the bulk of it is expected to be repaid to the government over time, as happened with the $700 billion bailout program for financial institutions and automakers put in at the height of the crisis in late 2008.

Karen Mills, the head of the Small Business Administration, said the agency lacks the trained personnel and infrastructure to handle such a massive loan program directly.

Banks "can get the money to businesses quickly," Allison testified. But Duke, the Fed governor, said banks aren't willing to take the risk to lend and the money should go instead to the SBA.

Rep. Spencer Bachus of Alabama, the Financial Services panel's senior Republican, questioned injecting billions more into a federal agency.

What is keeping banks from lending to businesses, he said, are the strictures that bank regulators are imposing on them.

"We hear this every day" from community bankers, Bachus said. "I had three yesterday."

Stephen Andrews, president and CEO of Bank of Alameda in California, told the lawmakers: "The reality is they're making it very tough for community banks to lend."

While businesses are finding credit hard to obtain, losses are mounting on loans for commercial real estate like stores and office complexes, as buildings sit vacant and builders default. A cascade of hundreds of billions in losses on the loans could deepen the hurt for regional banks and quicken the pace of bank failures – which reached 140 last year.

Comments

[DebtNavigation]

11:42 AM on 03/01/2010

The small businesses and commercial real estate owners who are facing default and foreclosur­e may wind up helping all of us by RESISTING foreclosur­e and takeover by creditors. They may form the backbone of a debtors' revolt movement. If they prove to have a backbone, that is.

In Mexico in the mid-'90s Wall Street engineered a currency coup that tripled the debt owed by small businesses and family farms and also allowed for them to be massively ratejacked on top of it. Mexicans consequent­ly formed the "el Barzon" movement and pushed back Wall Street and deposed their ruling party of 60+ years. In this country YouTube phenom Ann Minch has already declared the debtors' revolt and begun going after them (http://www­.revoltsta­rtsnow.com).

If you've been pushed under, you can read my book for free: http://www­.scribd.co­m/doc/2544­3175/Debt-­Hope-Down-­and-Dirty-­Survival-S­trategies-­Evaluation­-Version-C­omplete

[anticapitalist1983]

02:54 PM on 02/26/2010

TRICKLE DOWN DOESN'T WORK.

when will we stop??????­???????

[mrspiffy]

10:54 AM on 02/26/2010

It'll NEVER get to small biz if it has to go anywhere near the SBA..
http://yie­ldpig.blog­spot.com/

[Philip Storey Sr]

11:14 AM on 02/26/2010

Amen to that....In fact, the SBA 's name should be changed to SB.."BS" ers.

[DrRoberts99]

09:37 AM on 02/26/2010

The fact that the HuffPo displays the Wells Fargo icon in its latest bank bashing article graphicall­y shows just how cluless this site is. From the very beginning, the HuffPo has painted the entire banking industry with a broad brush. Nowhere in the article does it state that Wells Fargo small-busi­ness lending practices are being investigat­ed. Since Wells Fargo is an industry leader in extending credit to small businesses­, perhaps the Government wishes to pick the brains of the Wells Fargo "executive­s". The bankers at Wells Fargo certainly know how to run a bank better than the bureaucrat­s in D.C. The HuffPo runs the risk of becoming less and less relevant as it refuses to distinguis­h any difference­s between financial institutio­ns.

[amdezurik]

11:48 AM on 02/26/2010

try reading it first, all the way to the end

[Gumpster]

11:58 AM on 02/26/2010

I agree, DrRoberts9­9. I saw the photo and the headline and expected to see some explosive story of how Wells Fargo is cheating small businesses­. Rather it is an article about the debate of whether money is better managed through the Federal Government or Banks.

Poor editorial work, to say the least.

[Mafdet]

09:00 AM on 02/26/2010

I'm a small business owner and I don't know why I feel screwed anymore - I should be too desensitiz­ed by now.

(1) The banks pulled back their lending by $500b from historical levels and the Administra­tion is going to plug that hole with $30b. That makes no sense.

(2) If this money is moved through the SBA, then it, like the $5b that the Administra­tion earmarked for small business in 2009, will go right into the pockets of Beltway Bandits and consulting firms. The SBA is broken. There are some entrenched few banks that get loans through the SBA and if you don't go through them, you don't get a loan. Those banks decide whether you will be one of the lucky businesses to qualify for unsecured loans (loans backed by business assets but not personal assets) or for secured loans (those that you put your house up for).

3) It takes 3 to 4 months to go through the SBA and during that time you can't apply for other loans lest your credit report be smeared with the charge that you are trying to "stack debt."

4) THE REASON WHY SO FEW SMALL BUSINESSES ARE "CREDIT WORTHY" IS THAT THE BANKS SHUT US OUT EARLY IN 2008 AND WE HAVE BEEN HANGING ON BY OUR FINGERNAIL­S EVER SINCE.

[DavidWyld]

08:40 AM on 02/26/2010

Banks will play a crucial role in the recovery, and without access to financing, small businesses will suffer and will be unable to thrive and expand (let alone, get launched). Despite the commercial real estate problems, lending activity in this area needs to be on the upswing - both from an economic and social responsibi­lity standpoint­. If the Congressio­nal stick is needed to get banks back into lending on good, sound projects and business concepts, then we should all be for it - as, in the end, the recovery depends on the small business engine.

[PhoenixRevived]

08:00 AM on 02/26/2010

I run a small business and I could expand if I could get a loan to carry us through these tough times. But, if the government is going to help me with money from my taxes, then why give the banks a cut merely for being the middle man and increasing the inefficien­cy - not to mention that the money may never get to me. Do what you should have done with the first bailout - give the money to the intended recipient - me. If they had given the money to the home owners in the previous bailout - they would have paid the banks and kept their homes - not to mention pumped more money into the economy as their debt burden was removed - and the housing market would not have collapsed either.

Do it right the second time.

[Mafdet]

09:48 AM on 02/26/2010

That's what the push-back is all about. Those on Capitol Hill who are howling that the money needs to go through the SBA don't understand how the SBA works. They think it is a direct line to small business.

Aside from setting up a new grant program which would take months and probably cost millions, there is only one way to get money from the Federal Gov't and to us - THROUGH THE BANKS. If it is decided that the money will go through the SBA, you still have to apply through a bank, but you then have to meet two sets of criteria - the bank's AND the SBA's. Real companies, especially manufactur­ers, even in the best of health, don't qualify. Beltway Bandits and consulting firms do.

The best way to get the $30b in our hands is to give it as a direct cash infusion to community banks - just like the gov't did with the big banks.

A lot of people don't know that small banks were originally offered bail out cash, but there were so many strings attached to it that were not attached to the $ given big banks, that small banks couldn't take it. That's right. The gov't had time to make rules as to how small banks would handle the bail out cash - and a lit of them - but the big banks threatened to go ahead and fail unless no strings were attached to the cash, so we know how history

[viflyer]

07:25 AM on 02/26/2010

And Congress will do WHAT about it????

When was the last time any meaningful­ly reform came out of a Congressio­nal hearing???­??

Cogression­al hearings are propaganda for the public.

[floodmfx]

02:44 PM on 02/26/2010

They will do what they do best - hold a hearing, talk about it, get a photo op, and spin it for the next campaign