WASHINGTON – Treasury Secretary Geithner announced plans this week to take immediate action to help ensure that credit gets flowing again to entrepreneurs and business owners. As another part of the Consumer and Business Lending Initiative, by the end of the month the Treasury Department will begin making direct purchases of securities backed by SBA loans to get the credit market moving again, and it will stand ready to purchase new securities to ensure that community banks and credit unions feel confident in extending new loans to local businesses.

These purchases, combined with higher loan guarantees and reduced fees, will help provide lenders with the confidence that they need to extend credit, knowing they both have a backstop against their risk and a source of liquidity, the administration said. These measures will complement other steps the administration is taking to help small businesses recover and grow, including several tax cuts under the Recovery Act.

The Obama Administration said it believes that economic recovery will be driven in large part by America�??s small businesses, which have generated about 70 percent of net new jobs annually over the past decade. But as the flow of credit has dried up during this recession, small business owners who were prudent and responsible have been set back by the behavior of others in our financial system who were not. Businesses with strong credit histories have seen loan applications denied due to conditions that have nothing to do with their own actions and are now struggling to expand their businesses, make their payments or even keep workers on their payrolls. As a result, while the U.S. Small Business Administration (SBA) typically guarantees about $20 billion in loans annually, new lending is trending below $10 billion this year.

The Obama Administration has already taken several positive steps to ensure that small businesses have access to the credit they need to support an economic recovery. The American Recovery and Reinvestment Act signed by the President provides for increased guarantees and reduced fees for certain Small Business Administration loans. In February, the Treasury Department made a special effort under the Consumer and Business Lending Initiative to improve terms for securities backed by SBA loans in the TALF.

1. Jumpstart Credit Markets For Small Businesses By Purchasing Up to $15 Billion in Securities

Begin Direct Purchases of Securities Backed by Loans from SBA�??s 7(a) Program: Traditionally, SBA lending has been supported by an active secondary market, as community banks and other lenders sell the government-guaranteed portion of their loans, providing them with new capital to make additional loans. But since last fall, this secondary market �?? which has historically supported over 40 percent of SBA�??s 7(a) lending program �?? has frozen up. As a result, both lenders, including community banks and credit unions, and the �??pool assemblers�?� that securitize their loans have been left with government-guaranteed SBA loans and securities on their books. This has prevented them from making or buying new loans. Today, the Treasury Department announces that �?? in order to get credit moving immediately to small businesses �?? it will:

Stand Ready to Purchase Securities Backed by 7(a) Loans Packaged Since Last July: Treasury has hired an investment manager who will be authorized to purchase �?? starting by the end of this month �?? securities backed by guaranteed portions of 7(a) loans packaged on or after July 1, 2008. This will help clear the backlog of securities that has built up since the beginning of the credit crisis last year, providing pool assemblers and banks with a source of liquidity so that new lending can occur.

Stand Ready to Purchase New 7(a) Securities Packaged Between Now and the End of the Year: Between now and the expiration of Emergency Economic Stabilization Act (EESA) authority on December 31, 2009, Treasury stands ready to purchase new securities backed by the guaranteed portions of 7(a) loans. By making this pledge, Treasury provides assurances to community banks and other lenders that they can sell the new 7(a) loans they make, providing them with cash they can use to extend even more credit.

Make Direct Purchases to Unlock Credit Markets for SBA�??s 504 Community Development Loan Program: The SBA�??s 504 program combines government-backed loans with mortgage loans from private lenders to provide long-term financing of up to $10 million that directly supports economic development within a community. First-lien mortgage loans made by private-sector lenders �?? which account for 50 percent of the financing for 504 projects, and are not SBA guaranteed �?? were often traded in the past on an active secondary market that has frozen in the last year, leaving billions in unsold assets on the books of banks. To get the 504 lending market moving again, Treasury will:

Stand Ready to Purchase Securities Packaged From 504 First-Lien Mortgages: Treasury will stand ready to buy first-lien mortgage securities connected to SBA�??s 504 loan program. No later than May, Treasury will begin purchasing securities packaged on or after July 1, 2008 that meet eligibility criteria designed to protect taxpayers.

Prepare to Buy 504 First-Lien Mortgage Securities That Receive New SBA Guarantees: As part of the Recovery Act, SBA is working to develop a secondary market guarantee program for securities issued from pooled 504 first mortgage loans. Once this program is fully implemented by SBA, Treasury will stand ready to purchase these government-guaranteed securities.

Provide Liquidity While Keeping The Secondary Market in Place: These direct purchases of 7(a) and 504 securities will provide liquidity to lenders, including community banks and credit unions, enabling them to restart the process of recycling capital and extending loans. At the same time, the TALF component of the Consumer and Business Lending Initiative will provide investors with an attractive source of financing, allowing them to continue participating in the market. This is intended to keep the existing secondary market in place so that private investors can replace the government as the purchaser of these securities when market conditions return to normal.

2. Temporarily Raise Guarantees to Up to 90 Percent in SBA�??s 7(a) Loan Program:

The purpose of the 7(a) loan program is to provide a government guarantee that reduces the risk lenders face when they make loans to borrowers who cannot find credit elsewhere. But during the current recession, the guarantees �?? up to 85 percent for loans at or below $150,000 and up to 75 percent for larger loans �?? have not been large enough to give banks the confidence they need to lend. As part of its implementation of the Recovery Act, the SBA announces:

An Increase in Maximum Loan Guarantees to 90 Percent: Beginning today, any lender who participates in the 7(a) program can request a guarantee from the SBA of up to 90 percent for each eligible loan. This temporarily available increase in guarantees will help provide banks with the greater confidence they need to extend credit during the current recession.

A Confidence Boost Lenders Need to Extend Credit: Combined with Treasury�??s efforts to unlock secondary markets, higher loan guarantees will ensure that lenders have both greater safeguards against possible credit losses and assurances that there will be an active secondary market to purchase their loans and provide the liquidity they need to keep lending.

3. Temporarily Eliminate SBA Loan Fees to Reduce the Cost of Capital

Elimination of Borrower and Lender Fees for 504 Loans: On any new eligible 504 applications submitted beginning today, SBA will temporarily eliminate the Certified Development Company (CDC) processing fees charged to borrowers and the third-party participation