Tag Archive | "Federal Reserve"

Small Business Lending Down; Reasons Still Elude Experts

WASHINGTON — The chairman of the Federal Reserve urged banks and regulators on Monday to help the nation’s small businesses get the loans they needed to create jobs, reported The New York Times.

He also acknowledged that economists could not agree on why such lending has contracted substantially over the last two years.

Small businesses — those having fewer than 500 employees — employ half of all Americans and account for about 60 percent of gross job creation. Federal data indicate that lending to such companies fell to below $670 billion in the first quarter of this year from more than $710 billion in the second quarter of 2008.

The reasons are unclear. Many entrepreneurs say that bank loan officers are denying loans to creditworthy borrowers as part of an overreaction to the bad loans of the last economic expansion and heightened scrutiny by regulators.

But several economists paint a more nuanced picture, arguing that weak economic fundamentals and battered balance sheets have lowered the appetite for new lending. They say that demand could take years to recover.

The Fed chairman, Ben S. Bernanke, acknowledged the uncertainty at the start of a daylong forum on small-business lending at the central bank’s headquarters.

“How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?” Mr. Bernanke asked. “No doubt all three factors have played a role.”

In a broad outreach effort, the Fed held 43 meetings on the financing needs of small businesses, starting on Feb. 3 in Lexington, Ky., and ending on June 30 in Shreveport, La. Two of the meetings, in Miami and Davenport, Iowa, focused on Hispanic-owned businesses. One, in Denver, was centered on the Small Business Administration’s guaranteed-loan programs. At yet another, in Detroit, the challenges facing auto industry suppliers took center stage.

A collapse in the value of real estate and other collateral used to secure loans posed a “particularly severe challenge” to small businesses, Mr. Bernanke said. He recalled that a business owner at the Detroit meeting told him, “If you thought housing had declined in value, take a look at what equipment is worth.”

Some entrepreneurs have resorted to borrowing on their personal credit cards or from their retirement accounts, he noted.

Banks, for their part, say that they have not so much tightened credit as returned to more traditional underwriting standards after being too lax, Mr. Bernanke acknowledged.

“But, though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness,” Mr. Bernanke said, “it seems clear that some creditworthy businesses — including some whose collateral has lost value but whose cash flows remain strong — have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating.”

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Interest Rates Drop for Second Consecutive Month, Federal Reserve Says

Consumer credit increased at an annual rate of 0.5 percent in April, according to the Federal Reserve’s monthly report.

Non-revolving credit, which includes auto loans, rose at an annual rate of 7.1 percent in April. Revolving credit continued its month to month decline and fell at an annual rate of 12 percent.

Interest rates on new-vehicle loans continued to drop and reached 4.13 percent in April, down from 4.28 percent in March, but still higher than 3.94 percent in January.

Loan terms remained stable month to month at 62.8 months in April. This was slightly above the 62.5 months recorded in February and down from the 63.5 months posted in January.

The loan-to-value ratio on new-car loans remained steady month to month at 88 percent in April, but was down from 89 percent in February and 90 percent in January.

Amount financed also fell for the fourth-consecutive month to $27,797 in April, down from $27,912 in March. The amount financed in April was $243 less than the $28,040 recorded in February, and $1,582 less than the $29,379 posted in January.

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Federal Reserve: Interest Rates Increase Slightly in November

Consumer credit dropped 8.5 percent in November 2009, the lowest figure of the year, according to the Federal Reserve’s monthly report.

The interest rate on 48-month new-car loans originated at commercial banks was 6.55 percent, down slightly from the 6.61 percent average recorded in the third quarter 2009. The interest rate on new-car loans originated at auto finance companies increased slightly from 3.42 percent in October 2009 to 3.73 in November 2009.

Loan terms dropped slightly from 64.4 months in October to 63.4 months in November. The loan-to-value ratio on new-car loans dipped to 91 percent in November, a return to its September level, but down from 93 percent in October.

The amount financed fell from $32,223 in October to $30,506 in November, a difference of $1,717.

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Geithner Extends TARP; Hopes to Spur Business Lending

Treasury Secretary Timothy Geithner told Congress that the Obama administration is extending the $700 billion financial-rescue program until next October, saying the U.S. must hold on to the money in case of new financial shocks, Business Week reported.

In a letter to congressional leaders, Geithner said the administration doesn’t expect to deploy more than $550 billion of the funds. He said the Treasury may expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility, an effort to jumpstart securitization markets, as well as continue to use the Troubled Asset Relief Program to help struggling homeowners and small companies.

While the TARP expires on Dec. 31, Geithner can extend it by notifying Congress.

The TARP, passed in October 2008 to prevent a collapse of the financial system, has drawn criticism from Congressional opponents of taxpayer-funded bailouts of banks including Citigroup Inc. The Obama administration, preparing the ground for an extension, has emphasized that the program may also be used to aid homeowners and small companies.

“Too many families, homeowners and small businesses still face severe financial pressure,” Geithner said. “Although bank lending standards are starting to ease, many categories of bank lending continue to contract. This contraction has hit small businesses very hard because they rely heavily on such lending, and do not have the ability to substitute credit from securities.”

The extension could bode well for the National Automobile Dealers Association. It is currently working to get the Small Business Administration to expand its floor-planning program, which has received a low response from lenders.

In public comments about the program over the past several weeks, Geithner has cautioned that shutting it down too soon could hurt the economic recovery.

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Consumer Credit Rebounds to Pre-Cash for Clunkers Levels

Consumer credit patterns returned to their status quo in September, with interest rates, loan terms and loan-to-value ratios reverting to their pre-Cash for Clunkers (C4C) levels, according to the Federal Reserve’s monthly report.

The loan-to-value ratio, which fell to 86 percent in August during C4C, rebounded to 91 percent in September.

The amount financed increased from $24,405 in August to $30,380 in September. Year-to-date, this was the highest level for amount financed for new-car loans.

Additionally, interest rates decreased from 4.06 in August to 3.5 in September, which is more closely aligned with the July figure of 3.43 percent. Loan lengths increased slightly from 61.8 months in August to 63.6 months in September.

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