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Cascade: No. 71, Spring/Summer 2009

Message from the Community Affairs Officer

Late last year, as the subprime mortgage crisis unfolded, the credit crunch expanded, and the economic downtown continued, we began getting requests to address the concerns of small business. Although we were then focused on the residential turmoil, we planned this issue of Cascade to respond to that need. It will be no surprise to learn that what we confirmed is that there is a problem, but there are also some interesting solutions.

Marty Smith reviews a study prepared for the National Federation for Independent Business Research Foundation. The business owners surveyed expressed their concerns about the recession’s impact on their operations and their subsequent inability to get bank financing. Clearly some are worried that they may not survive the recession.

Additionally, a more direct indication of changing credit standards and lending volumes can be found in the Fed’s quarterly Senior Loan Officer Opinion Survey External Link. The survey (available at www.federalreserve.gov External Link) clearly indicates that banks have reduced lending and tightened underwriting in response to the economic downturn.

But as the banks have tightened their underwriting criteria, other entities are stepping into the breach. Caren Franzini, CEO of the New Jersey Economic Development Authority (NJEDA), has written an article on three NJEDA programs created to reduce risks to banks while also addressing the needs of business borrowers. She also discusses how the federal government’s economic stimulus efforts detailed in the American Recovery and Reinvestment Act (ARRA) complement and expand efforts by the NJEDA to support manufacturing in the state. Nationally, the ARRA also enables the U.S. Small Business Administration to expand its support of small businesses by eliminating fees and increasing guarantees, as David Dickson reports.

For local community development financial institutions (CDFIs), the credit crunch has had both positive and negative effects, as you will see in Keith Rolland’s story about the challenges for CDFIs as they experience changes in loan demand, lending policies, and loan performance. The seven CDFIs interviewed have seen an increased number of loan requests from borrowers with better credit profiles, but some also report increasing loan loss reserves for existing customers. Meanwhile, we have heard separately that other CDFIs have reported that investors have pulled back and are not investing in the CDFIs at the level they may have in previous years.

We also have articles from Delaware, the rural northern and central parts of Pennsylvania, and Small Business Development Centers in this Federal Reserve District.

Please take the time to read these articles. These are tough times, but there are solutions.