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Week Ending April 27, 2006

H.R.1332 To improve the access to capital programs of the Small Business Administration, and for other purposes.

Small Business lending is modified by this bill that targets lending amounts under $250,000 to rural and community development programs, carries forward a program aiming to increase medical professionals in shortage areas, increases veterans access to small business startup funding, authorizes for loans projects that reduce energy consumption by at least ten percent and modifies certification requirements for participating developer organizations. The bill is in response to a reduction in available capital to small businesses due to increase interest and lending rates and the expected return of veterans in significant numbers who want to start a small business. To programs modified are the 504 program that aims for economic development and local reinvestment and usually involves major fixed assets, and the 7(a) program that provides variable rate, shorter term financing for general business needs. 7(a) loans come from banks and the 504 loans come from Community Development Corporations.

SBA has covered the guarantees with various lender and borrower fees but this bill allows the costs to be covered by appropriated funds for the 7(a) loans. The change is due in part to the reduction and elimination of such fees for some borrowers including veterans and minority borrowers.

The Rural Lending Outreach Program and Community Express Programs would provide loans of $250,000 or less with an 85% guarantee rate. The RLOP loan shall require abbreviated application and documentation requirements and would refer to minimum credit standards that would also limit the rate of default on loans. The CEP program helps with loans, businesses with a majority of ownership individuals who are women, socially or economically disadvantaged or veterans. Loans of $25,000 or less would require no collateral and must be approved or denied in 36 hours. Both program loans must be approved or denied in 36 hours,

The traditional SBA loan program provides funds for working capital, acquisition of furniture, fixtures, machinery and equipment, purchase of inventory, construction, renovation and purchase of real estate and is carried out through a process in which banks make the loans and the SBA guarantees them. Lenders currently gain around .55 percent return on loans under the SBA program.

The SBA Administrator my help to offset fees assessed and collected on loans including loans made by private institutions to small businesses under the SBA lending programs. The Administrator would first look to helping cover fees borne by the borrower and then fees paid by the lenders on a quarterly basis.

Loans to businesses that provide medical professionals in shortage areas include medical, dental and psychiatric services and may only be for opening the business. The SBA may participate to 90% of the financing balance and loan fees are to be cut in half.

Loans to businesses with a majority veterans ownership and allows for SBA involvement to 90% of the financing balance. All loan fees are waived.

The Certified Development Company Economic Development Loan Program provides financing to small businesses by guarantees of loans funded by debentures guaranteed by the SBA and refers to corporate entities that promote and assist growth and development of small business concerns. The CDC must have fewer than 500 employees whose primary function is to provide long term financing to small businesses and support for other local economic development activities. Under the bill the CDCs or their hybrid the Premier Certified lenders Program would benefit from a reduction in the amount of loss reserve required. Now at ten percent reserve of the total loan outstanding, the lending groups would only require a one percent reserve. Excess funds can be drawn but another provision in the bill allows for or requires the SBA to recover on a defaulted loan amounts up to 15%.

Sponsor:  Rep. Melissa L. Bean (D-IL-8^th)

Vote: Passed House 380 to 45 April 25, 2007 (RC 263) A motion to recommit the bill failed 197 to 224 (RC 262)

Cost to the taxpayers: “CBO estimates that implementing H.R. 1332 would cost $316 million in 2008 and $2.3 billion over the 2008-2012 period. CBO estimates that enacting the bill would not affect revenues and would have no significant effect on direct spending”

Earmark Certification:   “Pursuant to clause 9 of rule XXI, H.R. 1332 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9(d), 9(e), or 9(f) of rule XXI.”

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MORE INFORMATION

SECTION BY SECTION ANALYSIS

AMENDMENTS

VII. SECTION-BY-SECTION ANALYSIS OF H.R. 1332

TITLE I

Sec. 101 Authority for fee contributions

This provision would permit the SBA to contribute funds for the purpose of reducing the burden associated with borrower and lender fees on loans in the 7(a) program. Fee contributions would be commensurate with an appropriation, if made available, and a specified program level. To ensure that any amounts made available for the purpose of fee contributions are fully used during the fiscal year, contribution amounts should be adjusted quarterly. Although the precise allocation between lender and borrower fees will be within the discretion of the Administrator, the Committee expects that priority will be given to reducing borrower fees if funds are made available for the purpose of fee reductions.

The Committee intends for this provision to make the 7(a) program more affordable to borrowers and lenders by providing the SBA with authority to contribute funds for the purpose of reducing the burden associated with borrower and lender fees on 7(a) loans. The Committee does not believe that the stability that the program currently enjoys under a zero-subsidy policy will be disturbed. The administration will continue to assess and collect the fees necessary to operate the program without an appropriation and subsidy and will continue to calculate the budget estimates and assumptions for the fiscal year just as it currently does to operate the 7(a) program under a zero subsidy framework. The Committee foresees no circumstance in which the program would cease operation or be short of necessary program level to operate at full capacity.

H.R. 1332 simply provides the administration with the authority to contribute funds to reduce the fee burden associated with 7(a) loans if and when an appropriation is made available. In years when no appropriation is made available, the Committee expects the program to function with the stability that the zero-subsidy policy currently provides. In years when a subsidy is made available, borrowers and lenders will enjoy the benefits of reduced fee burdens.

The Committee does not believe that Section 101 is inconsistent with the Federal Credit Reform Act, nor does it believe that it requires the SBA to revise the loan type mix and performance estimates on a quarterly basis. The Federal Credit Reform Act does not require a one-time estimation of loan program costs and assumptions, only that such estimates and assumptions be initially calculated for the current fiscal year. Further, the Federal Credit Reform Act does not prevent subsequent estimates and revisions to assumptions based on changes to the program during the current fiscal year. Consequently, the Committee does not believe that this provision conflicts with provisions of the Federal Credit Reform Act.

Sec. 102 The Rural Lender Outreach Program

This provision would establish a program to encourage increased lender participation in the 7(a) program by reducing application burdens for borrowers and lenders in rural areas to streamline and expedite the lending process on loans with an 85% guarantee on amounts up to $250,000. Loans made under this program would use abbreviated application and documentation requirements and require the SBA to approve or decline the loan within 36 hours.

The Committee believes that this program will help alleviate the trend of declining lender participation in the 7(a) program, particularly among lenders in rural areas. The Committee anticipates that this program can increase lender efficiency and reduce the cost of processing 7(a) loans for the SBA, lenders, and borrowers, thereby encouraging greater lender participation in the 7(a) loan program. The Committee does not, however, believe that abbreviated application and documentation requirements should result in lower underwriting standards. The Committee intends for loans made under this program to remain consistent with prudent banking practices and that lenders should continue to follow established and proven internal credit review and analysis procedures for loans of similar size and type. To ensure that this occurs, the Committee intends for the SBA to establish minimum credit standards as it feels necessary to limit the rate of default on loans made under this program.

Sec. 103 Make permanent the Community Express program

This provision would make the Community Express pilot program permanent. The program will provide loans to businesses majority owned by women, socially or economically disadvantaged individuals, U.S. military veterans, or businesses located designated in low- and moderate-income areas. Over the past five years, the SBA has relied on the Community Express pilot program as the primary mechanism for making loans to these groups. The Committee believes that this program must be maintained given the decline in both the number and dollar amount of loans that the SBA has made to these groups. From FY 2005 to FY 2006 alone, the number of 7(a) loans made to women-owned businesses declined 10 percent. During the same time period, the number of 7(a) loans to veteran-owned businesses declined 4 percent.

The Committee believes that lenders participating in the program should be allowed to use, to the maximum extent possible, their own loan analyses, loan procedures and loan documentation. This includes their own application forms, internal credit memoranda, notes, collateral documents, servicing documentation and liquidation documentation. However, in using their documents and procedures, the Committee intends for lenders to continue to follow established and proven internal credit review and analysis procedures for loans of similar size and type.

Under the Community Express program, borrowers must receive technical and management assistance (`T.A.') prior to and following loan closing from a local non-profit provider or from the participating lender. The technical assistance must be coordinated, arranged, and when necessary, paid for by the lender. To encourage participating lenders to aggressively address the targeted businesses, and to offset some of the additional costs associated with the technical assistance component, SBA's loan guaranty under the pilot program is the same as under the regular 7(a) program--a maximum of 85% on loans up to $250,000.

The Committee intends for the Community Express program to follow collateral standards that the SBA promulgated under the existing pilot program. For this reason, the SBA shall not require lenders to take collateral for loans less than $25,000. This provision does not, however, require that loans under $25,000 be uncollateralized. To the contrary, a lender may require collateral on loans of $25,000 or less if they feel a particular loan so warrants. This provision will simply preclude the SBA from setting collateral requirements on loans of $25,000 or less. This provision is intended to streamline the lending process, particularly in situations when collateral may be unnecessary.

Sec. 104 Medical professionals in designated shortage areas program

This provision would establish a program to reduce borrower and lender fees by half and increase the guaranty to 90 percent for loans made to doctors and dentists located in Federally designated Health Professional Shortage Areas (HPSAs). The Committee believes that this program, in combination with existing federal assistance programs, will encourage more health professionals to establish their small businesses in HPSAs.

Additionally, this program could be utilized by health professionals located in HPSAs to purchase health information technology (IT) for their small businesses.

Sec. 105 Increased veteran participation program

This provision would establish a program to eliminate borrower and lender fees and increase the guarantee to 90 percent for loans made to veteran-owned small businesses. The Committee believes that this program will significantly ameliorate the declining numbers of military veterans participating in the 7(a) program, particularly at a time when more veterans are returning from active deployments in Iraq and Afghanistan and are seeking capital for their small businesses.

Sec. 106 Alternative size standard

This provision will provide a simplified and straightforward standard for determining small business loan eligibility, thereby. The Committee believes that this provision will encourage greater lender participation in the 7(a) program. At a minimum, the standard must include businesses' maximum tangible net worth and average net income as factors upon which the size determination is based.

The Committee intends for the simplified size standard to be set by the SBA, thereby giving the SBA the opportunity to ensure that this standard addresses any of the concerns it feels necessary. Until that standard is adopted by the SBA, however, the Committee intends for the SBA to use the size standard that currently exists for the 504 program.

Sec. 107 The small bank outreach division

This provision will direct the Administrator to establish a program within an existing office to support regional SBA offices in assisting small lenders who do not participate in the preferred lenders program (PLP) to make 7(a) loans. The Committee intends for this program to be established in an existing element of SBA and does not intend for a new division to be created for this purpose.

The Committee believes that this program will encourage more non-PLP lenders to participate in the 7(a) program.

TITLE II

Sec. 201 Certified development company economic development loan program

This Section provides that the financing program authorized under Title IV of the Small Business Investment Act of 1958 shall be known as the `Certified Development Company Economic Development Loan Program.' The Committee believes that this change will clarify that loans made under section 504 of the Small Business Investment Act of 1958 may be used for the purpose of stimulating community economic development.

Sec. 202 Definitions

This provision codifies the definition of a Certified Development Company (CDC) as a company which the SBA has determined meets the criteria of the new section 506 of the Small Business Investment Act of 1958 (SBIA). The Committee believes that this change is necessary because the SBIA does not define CDCs in general terms.

Sec. 203 Eligibility of development companies to be designated as certified development companies

This provision specifies criteria that a development company must meet in order to issue debentures. A CDC must have fewer than 500 employees and must serve its local community by fostering economic development, creating and preserving jobs, and stimulating private community investment. Except for CDCs certified prior to January 1, 1987, CDCs must operate as not-for-profit entities and must maintain in good standing with all laws, including taxation requirements, in their state of incorporation. This provision will also establish requirements for CDC membership and will require that CDCs be professionally managed and maintain a board of directors that represents its membership.

This provision will require CDCs to maintain a directorate with ties to the states in which it operates and imposes ethical requirements on CDCs and their employees including a prohibition on persons serving as an officer, director or chief executive officer of more than one certified development company. This provision also provides that initially the development company may seek approval only in its State of incorporation and/or a local economic area which may include part of several States. Criteria for subsequent development company expansion require that each additional State be contiguous to the State of incorporation, and require the CDC to add to its membership in the State of incorporation at least 25 members from each additional State, and must add to its board in the State of incorporation at least one member from each additional State.

The Committee intends for these requirements to reinforce CDCs' traditional role in community development and local reinvestment. The Committee believes that many of these requirements are already established by SBA policies and procedures for the 504 program and that most CDCs currently in operation will already meet these standards.

Sec. 204 Definition of rural areas

This provision updates the definition of a rural area to any area except a city or town with a population greater than 50,000 inhabitants or the urbanized area contiguous and adjacent to any such a city or town. The Committee believes that this change is necessary to make the SBA's definition of rural areas consistent with the definition recently enacted in loan programs administered by the U.S. Department of Agriculture.

Sec. 205 Businesses in low-income areas

This provision designates financings in areas eligible for investment under the New Markets Tax Credit Program as a public policy goal under the 504 program, thus making these financings eligible for a larger maximum debenture limit. The Committee believes that this change is consistent with the 504 program's existing purpose of fostering community development and economic investment.

Sec. 206 Combination of certain goals

This provision will allow the ownership interest of two or more owners to be combined to determine whether the small business is at least 51 percent owned by minorities, women or veterans in order to qualify for assistance as a public policy goal. The Committee believes that this change is consistent with the 504 program's existing provision which permits small businesses to qualify as a public policy goal for 504 program financing by majority ownership of a single woman, minority, or veteran.

Sec. 207 Refinancing

This provision will permit a borrower to refinance a limited amount of existing indebtedness secured by a current mortgage on the property being expanded by the 504 project. The amount which could be refinanced would be limited to an amount not to exceed 50 percent of the expansion project and would be limited to situations where the 504 financing will provide better terms or interest rates than currently exists on the debt.

The Committee does not intend for this provision to permit the refinancing of poorly performing debt into the 504 program. Consequently Section 207 expressly requires that the borrower be current on all payments due on the existing debt for at least a year preceding the refinancing. Additionally, the Committee believes that refinancing should be limited solely to amounts that a private sector lender would be unlikely to refinance on a stand alone basis. For this reason, Section 207 is limited to situations where the 504 financing will provide better terms or interest rates than currently existing on the debt.

Sec. 208 Additional equity injections

This provision will enable borrowers to provide more than the required minimum amount of equity and to use the excess equity to reduce the amount of the first mortgage loan, as long as the amount of the first mortgage loan would not be reduced to less than the amount of the SBA guaranteed portion of the loan. The Committee intends for this change to enable high-risk borrowers or start-up businesses to lower the costs associated with 504 financings. Additionally, the Committee believes that this provision will permit more borrowers to qualify for financing in the 504 program.

Sec. 209 Loan liquidations

This provision will require a CDC either to foreclose and liquidate defaulted loans which it made or to contract with a qualified third-party to do so. This provision also imposes a requirement that SBA reimburse a CDC for all expenses incurred by the CDC if the expenses were approved by SBA in advance or were reasonable. The requirement will not be effective, however, until the SBA adopts and implements a program to compensate and reimburse the CDC for expenses associated with foreclosure and liquidation.

Because the 504 program operates as a zero subsidy program, the Committee believes it is essential that defaulted loans be liquidated and recovered in an effectively and timely manner. The Committee intends for Section 209 to strengthen the 504 program by permitting CDCs to play an active role in ensuring that defaulted 504 loans are liquidated in an efficient manner.

Sec. 210 Closing costs

This provision will provide borrowers in the 504 program the option to include loan and debenture closing costs, other than borrower's attorney fees, in the debenture. The Committee believes that this provision will improve efficiency and convenience in the 504 program and result in increased participation in the program.

Sec. 211 Maximum 504 and 7(A) loan eligibility

This provision will permit a 504 borrower to obtain financing in the maximum amount permitted under the 504 program and also to obtain a 7(a) loan in the maximum amount permitted under that program.

The Committee believes that this provision will provide entrepreneurs with increased access to affordable capital in amounts necessary to support capital intensive small businesses. The Committee believes that this is consistent with the express purpose of the 7(a) and 504 programs and that no existing SBA program can adequately fulfill this role by itself.

Sec. 212 Eligibility for energy efficiency projects

This provision permits energy efficiency projects that reduce the borrower's energy consumption by at least 10 percent, to qualify as a public policy goal under the 504 program. The Committee believes that encouraging energy efficiency is consistent with the purpose of the 504 program.

Sec. 213 Loans for plant projects used for energy-efficient purposes

This provision permits energy efficient projects that reduce a borrower's energy consumption by 10 percent to be eligible for the $4,000,000 debenture. The Committee believes that encouraging energy efficiency is consistent with the purpose of the 504 program.

Sec. 214 Extension of period during which loss reserves of premier certified lenders determined on the basis of outstanding balance of debentures

This provision will extend through fiscal year 2008 current law that permits CDCs to base their loan loss reserves on the outstanding balance of debentures.

Sec. 215 Extension of alternative loss reserve pilot program for certain premier certified lenders

This provision will extend current law through fiscal year 2008 that permits CDCs to use an alternative risk-based methodology to calculate their loan loss reserves. In PL 108-232, the SBA was required to conduct a study and report to Congress on the extent that statutory requirements have caused an overcapitalization in loan loss reserve requirements and to evaluate alternative loan loss reserve methodologies, similar to those extended in Sections 214 and 215 of this Act. The Committee is concerned that the SBA has not submitted the study and report as required by PL 108-232.

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AMENDMENTS

Amendment offered by Mr. Matheson.

An amendment numbered 1 printed in House Report 110-108 to add `members of reserve components of the armed forces' as eligible to receive loans under the Community Express Program and the Increased Veteran Participation Program.

On agreeing to the Matheson amendment Agreed to by voice vote.

Amendment offered by Mr. Matheson.

An amendment numbered 2 printed in House Report 110-108 to include `members of qualified Indian tribes' as eligible to participate in the Community Express Program.

On agreeing to the Matheson amendment Agreed to by voice vote

Amendment offered by Mr. Cuellar.

An amendment numbered 3 printed in House Report 110-108 to allow rural small business owners, who do not have a rural lender in their area, to receive the benefits of the Rural Lending Outreach Program through loans issued by any lender enrolled in the 7(a) loan program.

On agreeing to the Cuellar amendment Agreed to by voice vote

Amendment offered by Mr. Inslee.

On agreeing to the Inslee amendment Agreed to by voice vote.

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