Fed and Treasury Provide Assistance to Small Businesses

November 25, 2008

Move Comes After Committee Presses Agencies to Act
WASHINGTON, DC – November 25, 2008 – With small businesses facing unprecedented challenges accessing credit, the Federal Reserve and Department of Treasury today announced the creation of a new lending facility aimed at providing liquidity to the small business finance markets. This action comes after a House Small Business Committee hearing held last week with senior Fed and Treasury officials calling for such measures to be taken immediately.
Many small businesses are unable to secure credit on affordable terms, and this action by the Fed and Treasury is long overdue, said Congresswoman Nydia M. Velázquez (D-NY), Chair of the House Small Business Committee. This new lending facility is a good start and should help thaw the small business financing markets.

During the November 20 hearing, and in a subsequent letter to Treasury Secretary Henry Paulson, the Committee pressed the Federal Reserve and Treasury Department for swift action to help a growing number of businesses struggling to secure loans through the Small Business Administration (SBA). The number of SBA loans made through its 7(a) program in the 2008 fiscal year dropped 30 percent from 2007, and since September 15, lending has declined by more than 50 percent.
SBA lending has dropped so far, and so fast, that small businesses have few places to turn right now for financing. Restoring SBA as a source for lending is absolutely critical to jumpstarting the economy, Chairwoman Velázquez said.
This decline is being driven in part by problems in the secondary market, which has nearly seized up as investors have stopped buying SBA loans, leaving many lenders without sufficient capital to make new loans. Increasing SBA lending, one of the largest sources of long-term capital for small businesses, will be an important step forward. Today’s announcement drew praise from the small business community.
 The Committee’s hearings and proactive engagement of the Federal Reserve were instrumental. The resulting new liquidity facility created by the Federal Reserve and Treasury will go a long way in helping ease the real credit crunch facing many everyday business owners and consumers seeking student loans, auto loans, and SBA loans, noted Paul Merski, Chief Economist for the Independent Community Bankers of America.
The new facility, called the Term Asset-Backed Securities Loan Facility (TALF), will support the market for SBA lending and provide liquidity for small business loans. Under the TALF, the Federal Reserve will lend up to $200 billion on highly-rated securities backed by small business loans and other assets. The Federal Reserve will lend an amount equal to the market value of the securities less a haircut and will be secured at all times by the securities themselves. The U.S. Treasury Department – through the Troubled Assets Relief Program (TARP) – will provide $20 billion of credit protection to the Federal Reserve to support the TALF.
 The TALF should provide small businesses with a lifeline in this crisis, but more still needs to be done to fully restore the small business financing markets, Chairwoman Velázquez said. We must continue to take actions to assist small firms, as they will ultimately be the drivers of the economic recovery.