[Congressional Record Volume 142, Number 117 (Friday, August 2, 1996)]
[House]
[Pages H9902-H9903]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             AVAILABILITY OF FINANCIAL ASSISTANCE FROM SBA

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from New York [Mr. LaFalce] is recognized for 5 minutes.
  Mr. LaFALCE. Mr. Speaker, today I am introducing a narrow bill to 
augment Federal dollars which support financial assistance programs for 
small business administered by the Small Business Administration. This 
augmentation would be accomplished by imposing fee increases on 
participants in these programs, and the fees would be effective only 1 
year. During this year, Congress and the Agency would have time to 
develop other ways to reduce the cost of operating the programs.
  Mr. Speaker, I do not generally support the use of fees as a major 
source of funding for SBA programs. I believe that as a matter of 
public policy the Government should pay for this assistance.
  Moreover, it has been shown that the small businesses which receive 
this assistance more than pay its costs through growth in their income 
on which they pay Federal and State taxes. Our investment in these 
firms via Federal money is more than justified.
  Nonetheless, it does not appear that this Congress, despite the 
President's request, will fully fund the three major financial 
assistance programs administered by the SBA. I can see no other answer 
than to impose fees to make up the shortfall. Absent such fees, one of 
these programs will close down entirely, and the others will operate 
well below the level of demand.
  I am very disappointed that the Small Business Committee, which is 
responsible for these programs, has not acted. It is only 60 days until 
the start of the new fiscal year, and Congress will not even be here to 
act more than one-half of the time remaining.
  The committee has become bogged down in an attempt to consider major 
changes in SBA programs. No legislation is ready for House 
consideration.
  I appreciate the committee's desire to make major changes in some 
areas. I even support some of the changes being proposed. But in our 
attempt to develop major legislation, we have delayed enactment of the 
fee increases which are needed if we are to avoid disruption of 
financial assistance to the small business community.
  I have pared down the necessary legislation to the bare essentials. I 
urge my colleagues to consider these essential elements in separate 
legislation which could be presented to the House when we return in 
September.
  Mr. Speaker, we have only a short time remaining in this legislative 
year. We have the responsibility to act now to continue the SBA's loan 
and venture capital programs.
  Further delay in considering a bare-bones bill is bad government. I 
urge prompt consideration of a measure to continue at reasonable 
funding levels the three programs I describe below.
  The first program is the 7(a) loan guarantee program, the primary 
financial assistance program operated by the Small Business 
Administration. Under this program, SBA guarantees to reimburse a 
lender for between 75 and 80 percent of any loss sustained by the 
lender on a loan made to a small business.
  The cost of the program is partially paid by the appropriation of 
Federal money. The balance is from fees paid by both the borrower and 
the lender.
  Legislation enacted last year increased the amount of fees to be paid 
by the borrower. Except on loans of less than $80,000, borrowers now 
pay between 3 percent and 3.875 percent, depending upon the size of the 
loan. In addition, the lender must pay, and absorb as part of its cost 
of doing business, an annual fee of 0.5 percent or one-half of one 
percent.
  During the current fiscal year, 1996, the Office of Management and 
Budget, determined that operation of the 7(a) program, including these 
fees, would result in a subsidy rate of 1.06 percent. This rate 
determines the amount which must be appropriated in order to operate 
the program.
  As a result of a major study of the 7(a) program and a change in the 
method of calculating losses, OMB determined that this rate would 
increase substantially for fiscal year

[[Page H9903]]

1997 to 2.68 percent. And the President proposed full funding at the 
new higher rate, even though it necessitated the budgeting of an 
additional $170 million.
  The House-passed appropriation does not provide the necessary 
funding, although it does provide a slight additional amount of funding 
above the 1996 level. It is my understanding that the proposed Federal 
funding, when added to funds expected to be unused this year, will 
result in a 7(a) program level next year of $6.5 billion.
  On the other hand, demand is expected to be approximately $8.5 
billion, a shortfall of $2 billion.
  I believe that it is our responsibility to address this problem; we 
cannot simply sit back and argue that the Appropriations Committee did 
not provide enough money.
  I would hope that as the 1997 appropriations bill moves through the 
Congress additional moneys could be provided--about an additional $50 
million would allow the program to fund an additional $2 billion in 
guarantees. But I do not believe that we can rely upon this hope.
  This program was underfunded in 1995. The result was chaos. The loan 
window opened and closed. Finally, OMB dictated the result: stretch the 
available money by reducing the maximum loan per borrower. SBA then 
made the necessary reduction and refused any loan in excess of one-half 
of the statutory maximum of $750,000.
  I believe it would be unconscionable to allow this situation to 
repeat itself.
  I reluctantly supported the fees legislated last year. It seemed to 
me to be a choice between imposing the fees and denying small 
businesses access to a Federally guaranteed loan program.
  I believe that we are confronted with the same problem this year, 
although on a much smaller scale. It is my understanding that an 
increase of \1/12\ of 1 percent in the annual lender fee would generate 
sufficient income to restore approximately $2 billion in guarantees.
  This minute increase would amount to less than $100 per year on the 
average loan, and it would decrease each year as the fee is applied to 
the outstanding balance of the loan which is being reduced each year.
  I urge my colleagues to reconsider this very meager fee increase 
which was rejected by the Republican majority on the Small Business 
Committee.
  The second program is one for small businesses in need of long-term 
financing for plant and equipment needs: the development company loan 
program or 504 program.
  Under this program, the small business borrower puts up at least 10 
percent, a bank provides 50 percent and receives a first lien position, 
and a private investor provides the other 40 percent by purchasing a 
debenture issued by a certified development company which is guaranteed 
by the SBA.
  During the current fiscal year, it has been assumed that program 
participants were fully paying the cost of the program; the OMB 
approved subsidy rate was set at zero, and no appropriation of funds 
was necessary to support the program.
  This subsidy rate will increase from zero to 6.85 percent for 1997, 
again as a result of the change in methodology for calculating losses 
in this program.
  The President's budget addressed this need for Federal funding by 
requesting a change in the nature of the program funding--reverting to 
direct Treasury funding instead of the more costly use of the debenture 
guarantee process. This change would be accompanied by the imposition 
of a fee equal to the administrative cost of selling the debentures to 
private investors, thus resulting in no increase in total cost to 
borrowers, but reducing the subsidy rate to zero.

  The majority members of both the Appropriations Committee and the 
Small Business Committee rejected this proposed return to direct 
Treasury funding. And I must admit I have very serious qualms about the 
proposal as I see it as a temporary solution--the current use of the 
private markets is the long range solution and ultimately we would seek 
to return to it.
  But when the Appropriations Committee refused to appropriate any 
money for the 504 program, there appeared to be only one immediate 
answer: impose fees, at least for 1 year.
  There is agreement on most of the fee provisions--a fee of \1/8\ of 1 
percent to be paid by the certified development company as part of its 
cost of doing business; and a fee of one-half of one percent to be paid 
by the lender who was taking a first lien position on its one-half of 
the project cost.
  The disagreement is over the amount of the fee to be paid by the 
borrower. Initially, based upon information received from SBA, I 
believed that an annual fee of \13/16\ of 1 percent, when added to the 
other fees, would be sufficient to reduce the subsidy rate to zero and 
allow the program to operate without the appropriation of any Federal 
funds to pay losses.
  Minutes before the Committee mark-up, however, representatives of OMB 
suddenly decreed that this amount would not be sufficient. Another \2/
16\ would be needed to reach zero.
  I saw no other solution. The Appropriations' Committee was not 
appropriating any money. Either we would have to increase the 
borrower's fee to \15/16\ or there would be no program. The result 
would not be a reduced program; the total absence of Federal funding 
would mean no program whatsoever, unless fee income reduced the cost to 
zero to equate with the complete absence of Federal dollars.
  Due to Republican opposition, I withdrew the amendment. The net 
result: unless we appropriate Federal money, about $21 million, or we 
impose further fee increases to yield the same amount, there will be no 
program next year. That result, to me, is completely unacceptable.
  The third program is the SBIC or Small Business Investment Company 
program. Under this program, the Small Business Administration 
encourages private venture capital to be made available to small 
businesses who need equity capital. This encouragement is to provide 
Federal matching funds to private companies which are licensed by SBA 
as SBICs.
  These matching funds, called leverage, are provided either as 
debentures, or long term loans, or as participating securities, a 
hybrid instrument under which SBA will advance amounts needed to pay 
interest and in return receive re-payment of the advancement plus a 
share of the company's profits. In either case, the debenture or 
participating security is issued by the SBIC, guaranteed by SBA, and 
sold to private investors.
  For 1997, the administration requested the authority to issue $225 
million in debentures and $400 million in participating securities. It 
proposed to support this request partially with appropriated funds, but 
primarily by the imposition of new fees as proposed by an industry task 
force.
  The proposed fees include a one-time up front guarantee fee of 3 
percent of the amount of the leverage plus an annual fee of 1 percent 
of the amount of debentures outstanding.
  I believe that the Small Business Committee will approve the 
requested SBIC fees, but it has not done so to date.
  Even if it approves the full fee, the House-passed appropriations 
bill does not provide sufficient funds to meet anticipated demand. It 
only would fund a program of $150 million in debentures and $325 
million in participating securities. Both levels are too low and would 
result in the denial of assistance to otherwise qualified applicants.
  Mr. Speaker, in conclusion, I urge my colleagues to thoroughly 
consider the prompt enactment of the fees proposed in my legislation 
and to re-consider the amount of appropriated funds which are needed to 
augment this funding.

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