Congressional Oversight Panel Releases Oversight Report on Reviving Lending
Without Access to Credit Small Businesses and Families Will Continue to Struggle
May 7, 2009
WASHINGTON, D.C. – May 7, 2009, the Congressional Oversight Panel (COP) released its May Oversight Report, “Reviving Lending to Small Businesses and Families and the Impact of the TALF.”
Beginning in 2008, small business lenders and borrowers reported signs of a credit slowdown, and banks have continued to report to the Federal Reserve a tightening of lending standards. By April 2009, only 29% of small businesses reported that all their borrowing needs were being met. Small businesses create new jobs and invest in their communities, which they cannot do without access to credit.
Consumption makes up approximately 70% of the economy, highlighting the importance of household spending. Credit is an important part of household spending, and the latest data reveal that consumer borrowing fell at an annual rate of 3.5%, with most of the decline coming from a drop in credit card borrowing.
To provide more access to credit, the U.S. Treasury Department created the Term Asset-Backed Securities Loan Facility (TALF) program, one of the 12 programs under TARP. TALF is intended to support more lending by financing credit through asset-backed securities. The COP’s report focuses on two main questions as it assesses the TALF program: 1) is the TALF program well-designed to attract new capital and 2) even if it is well designed, is it likely to have an impact on credit access for small businesses and households?
The Report finds that the program is designed to attract investors by giving them loans on special terms that reduce their risk of buying these asset backed securities. There are also some drawbacks to the structure of the program which may keep some investors away such as restrictions on the sale of the securities.
It is hard to measure the impact of the TALF program on increasing access to credit because it is not clear if the constriction of the credit market is a product of reduced credit-worthiness of borrowers, which TALF cannot address. While TALF might provide more funds to the lenders for lending, the program is based on asset backed securities, which have never been a source of significant funding for small business loans. On the consumer side, reduced credit card balances may be a sign that households are deliberately reducing their debt loads in response to difficult economic times. Thus, while the TALF program may improve access to credit markets, it will not necessarily lead to increased borrowing by families.
The full report can be found at http://cop.senate.gov/documents/cop-050709-report.pdf. The Panel held a companion hearing to this report in Milwaukee, Wisconsin, “Small Business Lending in Milwaukee.” Materials from the hearing can be found on the Panel’s website.
The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and to provide recommendations on regulatory reform.
Contact: Shanan Guinn 202.224.1670