Ever So Slowly, a New Loan Program Takes Shape

If an award were given for persistence, it would definitely go to Rep. John LaFalce (D.-N.Y.), chairman of the House Small Business Committee. For the past 10 years, LaFalce has struggled to create a government-sponsored secondary market for small-business loans as a way to boost the flow of capital to entrepreneurs.

But the Venture Enhancement and Loan Development Administration for Smaller Undercapitalized Enterprise, or Velda Sue as it is commonly known, has languished for more than a decade. LaFalce, an outspoken small-business advocate from Upstate New York, insists that “Velda Sue is alive and well.” Still, many congressional insiders are convinced she is dead.

LaFalce admits that this is not the best time to be creating a new government entity. Although the White House supports the concept of a secondary market for small-business loans, Vice President Al Gore Jr. is aggressively streamlining the bureaucracy, trying to eliminate government agencies, not create them.

“The President has said we need to facilitate development of a secondary market for small-business loans,” LaFalce said. “Now it seems the easiest thing is to go about it piecemeal.”

Proponents believe that up to $50 billion worth of small-business loans could ultimately be packaged and sold to investors. A new secondary market would not only free up more capital as banks pooled and sold off their loans, but it would provide investors with attractive new opportunities aimed at fueling economic growth.

Despite widespread support, at least six bills dealing with creation of a secondary market for small-business loans are stalled in various committees. The most promising one, introduced by Sen. Alfonse D’Amato (R.-N.Y.), was approved by the Senate Banking Committee, and a similar measure drafted by Rep. Paul Kanjorski (D-Penn.) was introduced in the House.

“The odds are as high as 90% for passing a securitization bill in 1994,” predicted Bob Zimmer, a Republican staff member on the House Banking Committee. Zimmer is one of many congressional staffers who believe the private sector can create a secondary market for small-business loans without much government assistance.

“Many experts believe the securitization can be done without the government assuming any of the risk,” Zimmer said.

Pooling and selling loans is not a novel concept. Currently about 50% of the nation’s $1.5 trillion in residential mortgages has been packaged into securities through government-sponsored Freddie Mac and Fannie Mae.

*

Student loans totaling $27 billion, $64.5 billion worth of credit card receivables and $59.8 billion worth of auto loans have also been pooled and sold as securities, according to an Oct. 13 report issued by the Senate Committee on Banking, Housing and Urban Affairs.

The private sector, tired of waiting for Congress to act, is slowly moving toward creating the secondary market. Two years ago, Chrysler Corp.’s finance subsidiary issued $350 million in securities backed by a pool of small-business loans secured by real estate. Last March, Money Store issued $76 million in securities backed by the unguaranteed portion of some Small Business Administration loans. And in April, Santa Monica-based Fremont General Corp. sold $200 million worth of securities backed by a pool of small- and medium-sized-business loans.

There are also smaller players on the market. Target Income Fund, managed by Tustin-based Finance 500 Inc., has packaged and sold about $8.1 million worth of short-term small-business credit lines and loans, according to President Lance Hicks.

The fund, which is registered with the Securities and Exchange Commission, has a diversified portfolio containing about 40 short-term loans and credit lines issued to small businesses. Hicks said many of the businesses are thriving but, for one reason or another, had trouble obtaining traditional bank financing. Current borrowers range from makers of plastic, clothing, computer software and hospital equipment to several small employment agencies and freight companies.

“The fund is essentially run like a bank,” explained Hicks. Business owners submit applications for funds to be used for a revolving credit line or short-term loan. The loans, which generally carry an interest rate of 4% to 5% over the prime rate, are collateralized by accounts receivable and corporate assets.

“The ongoing challenge is to match the money we have available with the best companies,” Hicks said.

Target Income Fund relies on Reid Rutherford, chairman and chief executive of Palo Alto-based Exxe Data Corp., and his marketing representatives to screen and process loan applications. The 9-year-old company also designs software and systems to help banks and other financial institutions pool and sell small-business loans.

“The last market left for the banking industry is the small-business market,” Rutherford said. The problem? “Banks do have money to lend now, but the reality is that they don’t want to put it out in small amounts.”

*

Rutherford says he’s optimistic that the secondary market for small-business loans is about to take off and that his 35-employee firm is prepared to provide the tools to help financial institutions make it happen. (For information on applying for a Target Income Fund loan or credit line, write to Exxe Data Corp., 1170 E. Meadow Drive, Palo Alto, CA 94303-4234.)

Meanwhile, Rep. LaFalce says he’s not convinced that funds such as Target Income and even bigger private investors can solve the continuing small-business credit crunch alone.

“These (securitized loans) are dribbles in comparison to what we need,” he said. LaFalce also says that even after a decade of trying, he’s not ready to give up on Velda Sue.

“There’s a lot of life in the old gal,” LaFalce said. “Rumors of her demise have been greatly exaggerated.”