Rice proposes placing city's loan portfolio in nonprofit organization

Seattle Mayor Norm Rice is proposing to place the city's small-business loans in a new nonprofit organization to help fledgling firms in distressed areas that can't qualify for bank financing. Rice's plan is to transfer the city's $3.8 million loan portfolio to a development lending company doing business as Community Capital and headed by Jim Thomas, formerly co-chairman of the Central Area Development Association and senior lending officer with now-defunct Emerald City Bank. The second piece of Rice's proposal is to form a business assistance center, to provide technical advice to business borrowers, which would enhance their chances of succeeding - and of repaying loans. "I'm very psyched about this," said Mary Jean Ryan, director of the Mayor's Office of Economic Development. "This has taken a long time, but it's a big thing." Rice's proposal is embodied in an ordinance that was up for consideration this week by the City Council's finance committee. Committee chairwoman Martha Choe said she does not expect either the committee or the full council to raise any issues about the ordinance. "I think there's a lot of excitement about it," she said. As described by Ryan, the basic idea is for the city to sell its $3.8 million loan portfolio to the development lending company, which would be a nonprofit organization licensed by the state to serve as a non-bank lender, making loans but not accepting deposits. As such, it could make loans guaranteed by the U.S. Small Business Administration, something the city can't do. The city also would capitalize the lending company with a $1.8 million loan and a $500,000 grant. And it would finance $100,000 of the business assistance center's operating costs. "In return," Ryan said in a memo explaining the program, "the city gets repaid over a 10-year period in cash or in performance." The lending company and assistance center can win credits against principal and interest payments by meeting performance targets on such things as loan volume, job creation and technical assistance. Ryan said this structure is based on Michigan's successful model of a business and industrial development company. The city has been using federal funds for loans to small businesses for many years, in an effort to create and retain jobs. "Loan assistance has been targeted to blighted communities and low-income populations within the city limits as well as women and minority business enterprises," Ryan said. Typically, targeted borrowers have been turned down by conventional lenders. What's been missing, she said, is technical assistance for these borrowers - "which is crucial when making high-risk loans." Also, Ryan said, "we realized that to grow the loan program, we would need to transfer the loan fund to the private sector." A private lending company could expand its product line, make SBA loans and draw additional capital from foundations, she said. The city reviewed seven applicants to head the new lending and assistance program and chose Thomas, who Ryan said is "familiar with the target market, having worked in small-business development lending in that market for 18 years." Thomas said the program would help people who may have little training or education, but enough skills and interests, to "develop their entrepreneurship abilities." These business borrowers would be among those who fall just below bank lending criteria, he said. They may not have much of a track record, for instance, and may not have reached profitability. "We'll provide them with capital and business assistance, help them grow, and then turn them over to the banking community," Thomas said. "Our goal is to double the portfolio in 10 years." If the program can accomplish that, it should earn enough interest income to support both lending and assistance organizations, he said. The program would do what's called "microenterprise" development of businesses with fewer than five employees. Over the past 10 years, more than 200 organizations doing this have taken root across 44 states, Thomas said. "They've served more than 200,000 individuals borrowers, loaned more than $44 million and assisted more than 54,000 businesses in disadvantaged communities." In Seattle, microlending would concentrate on economically distressed communities in the Central Area, Southeast Seattle, the International District and the Duwamish area, he said. "The idea is to help inner-city communities participate in the American dream." But loans would not be grants, said Choe, a former banker. The lending company will use underwriting criteria, and borrowers "will be required to go through some of the technical-assistance pieces, so they get the support they need," she said. Even so, microlending is riskier than conventional bank lending, which has a default rate of about 2 percent, Thomas admitted. "Organizations like ours are probably in the 6 percent to 7 percent range."