Due to recent turmoil in U.S. credit markets, many lenders have been reluctant to offer conventional loans--that is, loans not guaranteed by the federal government--to small businesses so that they can finance their operations and capital needs. While the Small Business Administration's (SBA) principal loan guarantee programs, the 7(a) and 504 programs, are intended to help small businesses raise critical financing that they may have difficulty obtaining from other sources, the availability of such loans has also declined. Under the 7(a) program, SBA traditionally has provided lenders guarantees on up to 85 percent of the value of loans to qualifying small businesses in exchange for fees to help offset the costs of the program. Under the 504 program, which generally applies to small business real estate and other fixed assets, SBA provides certified development companies with a guarantee on up to 40 percent of the financing of the projects' costs in exchange for fees--the small business borrowers and other lenders provide the remaining 60 percent of the financing on an unguaranteed basis. Traditionally, lenders, such as banks, that participate in the 7(a) or 504 programs often sell qualifying small business loans on the 7(a) and 504 secondary markets to raise funds necessary for additional lending. However, from mid-2008 to early-2009, investors that had typically purchased securities collateralized by the pools of 7(a) guaranteed small business loans and certain 504 loans largely withdrew from the secondary markets due to potential losses, and as a result, many such loans remained on the balance sheets of the broker-dealers that package the securities or on the balance sheets of the original lenders. According to SBA, the dollar volume of 7(a) loans sold as securities on the secondary market dropped from $425.4 million to $85.9 million, or 79.8 percent, from the end of the third quarter of 2008 to the end of the first quarter of 2009. Under the American Recovery and Reinvestment Act (ARRA), enacted on February 17, 2009, SBA was required to implement eight new authorities--referred to throughout this report, and by ARRA, as administrative provisions--to help facilitate small business lending and enhance liquidity in the secondary markets. The provisions included requirements for, among other things, (1) temporarily lowering or eliminating certain fees on 7(a) and 504 loans, as well as increasing the maximum guarantee on the former; (2) establishing new programs to facilitate secondary market activity; and (3) establishing a new, temporary guaranteed loan program for viable small businesses experiencing financial hardship, which SBA refers to as the America's Recovery Capital (ARC) Loan Program. The administrative provisions took effect when ARRA was enacted, with certain provisions granting SBA emergency rulemaking authority to hasten their implementation.
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