[Congressional Record Volume 143, Number 69 (Thursday, May 22, 1997)]
[Extensions of Remarks]
[Pages E1047-E1048]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 NEW LIFE FOR PLANT AND EQUIPMENT LOANS

                                 ______
                                 

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                         Thursday, May 22, 1997

  Mr. LaFALCE. Mr. Speaker, today I am introducing legislation to 
extend the life of the certified development company or 504 loan 
program. It is this guarantee program, operated by the Small Business 
Administration [SBA], which provides a major source of capital for 
small businesses which need long-term financing for plant and equipment 
purposes.
  Mr. Speaker, I am very proud to be able to claim authorship of this 
program. It is a direct descendent of legislation I introduced and 
which was enacted into law in 1980.
  The development company program matches financing from a private 
lender for one-half of the project, with the owner providing 10 to 20 
percent and private investors providing the balance with a guarantee 
from SBA.
  It clearly is an example of encouraging privatization. During the 
initial years of the program, the Treasury provided the matching funds. 
But 1987 legislation changed the source of this portion of the funds 
from the U.S. Treasury to private investors, with an SBA guarantee. The 
program has operated superbly since then.
  Since Wall Street Investors have become involved, the program has 
provided $8.5 billion in SBA guarantees to 26,000 small firms.
  Private lenders more than doubled the amount of this funding with 
their share of the project cost.
  The result has been tremendous, both for the small firms and also for 
the Government. This funding has resulted in the creation of more than 
338,000 jobs by these small business borrowers, along with the 
preservation of additional hundreds of thousands of private sector 
jobs.
  Possibly of equal importance to those of us in Congress is that the 
program has been operating for the past several years at a zero subsidy 
rate. It pays for itself by user fees; no appropriated funds are needed 
to pay anticipated losses in the event a loan defaults.
  But there is cause for alarm. The user fees paid under this program 
are sunset September 30. If they are not extended, the program will 
terminate October 1.
  This should not be permitted to happen.
  I urge my chairman, Jim Talent, and his Senate counterpart, 
Christopher Bond, to rectify this immediately and to move the necessary 
legislation through the legislative process without additonal delay.
  My bill is available as the vehicle or can be used as a guideline for 
the development of other legislation.
  The legislation I have introduced provides the requisite extension of 
user fees for 3 years, although I would hope that we would seek another 
way to fund the program.
  It also provides program authorizations for the same time-frame and 
makes changes in the authorizing legislation. These changes allow us to 
take advantage of the expertise which exists in the personnel employed 
by the certified development companies which deliver and act as loan 
servicing agents for the SBA in regard to loan approval and liquidation 
actions.
  I believe that we need to expand the services these companies 
deliver. This will reduce the program cost and hopefully will allow us 
to reduce user fees reflecting these cost savings.
  I urge favorable consideration of my proposal.
  A detailed summary of my proposal, the Certified Development Company 
Enhancement and Improvement Act of 1997, is attached.

 Summary of Certified Development Company Enhancement & Improvement Act


                        1. Authorization levels

       The bill would authorize continuation of the certified 
     development company program for three years at the following 
     levels:
       1998: $3.0 billion;
       1999: $3.5 billion;
       2000: $4.5 billion.
       For comparison purposes, the 1997 appropriation level is 
     $2.6 billion, although usage is not expected to exceed $2 
     billion.


                                2. Fees

       1996 legislation increased fees under this program in order 
     to reduce the subsidy rate of the program to zero:

[[Page E1048]]

       .9375% or 15/16 of 1% payable annually by the small 
     business borrower;
       .125% or 1/8 of 1% payable annually by the certified 
     development company; and
       .50% or 1/2 of 1% payable by the first mortgage lender on 
     the amount of its loan.
       These fees are sunset September 30, 1997.
       The bill would extend these fees for three additional 
     years, but would expressly limit the amount to the amount 
     necessary to continue the program at a zero subsidy level. If 
     the subsidy rate declined in the future, SBA would be 
     required to reduce the fee.


                  3. Premier Certified Lenders Program

       1994 legislation authorized SBA to establish a premier 
     certified lenders program consisting of up to 15 certified 
     development companies which would receive delegated authority 
     from SBA to approve debentures on behalf of the Agency. In 
     return, the CDC would agree to establish a loss reserve and 
     be responsible for re-paying SBA for up to 10% of any loss on 
     such debentures. The program was sunset September 30, 1997.
       The bill would make this a permanent program and eliminate 
     the ceiling on the number of participants. It would also 
     modify the program by:
       tightening eligibility standards by requiring that CDC 
     applicants demonstrate their proficiency in closing and 
     servicing loans over at least the last two years;
       delegating authority to the CDC to liquidate loans which 
     default;
       allow the CDC to fund its reserve fund by deposits in a 
     Federally insured institution or by an irrevocable letter of 
     credit; and
       Limit the amount of the required reserve fund to 10% of the 
     CDC's exposure, but specifically require the CDC to replenish 
     the reserve fund within 30 days of the payment of any loss or 
     pay the loss from separate funds; and allow the CDC to 
     withdraw the applicable deposit from the reserve fund when 
     the loan is re-paid.
       It also would direct SBA to separately determine both the 
     default rate and the recovery rate on liquidated loans for 
     premier CDCs and to compare it to the default and recovery 
     rates on CDC loans by nonpremier companies. This data would 
     be used to evaluate the adequacy of the reserve fund and to 
     permit reductions, if appropriate.


                  4. multiple borrowers in one project

       The existing statute references SBA authority to a ``small 
     business concern'' (singular), which SBA interprets as 
     precluding several small businesses obtaining financing to 
     participate and locate their businesses in one facility.
       The bill would clarify that multiple small businesses can 
     seek funding to participate in one project site (similar to 
     the authority for multiple borrowers under the 7(a) program).


                 5. partial leases of project premises

       Under current statute, a borrower cannot buy or construct 
     the property unless the borrower will use all of the property 
     (i.e., he cannot lease the property to another except 
     partially for a limited time and only upon a showing of the 
     need for future expansion). This is basically a reflection of 
     policy that SBA does not make loans to landlords. It does, 
     however, prohibit a growing legitimate business concept--
     lease of part of the property for an unrelated purpose, e.g., 
     a mini-mart as part of a gasoline service station.
       The bill would authorize a borrower to lease not more than 
     25% of the property.


                  6. project financing and collateral

       1996 legislation is being interpreted to preclude the 
     seller of property from providing the 15-20% down payment 
     mandated to be made by the borrower/purchaser. Seller 
     financing of the requisite amount, either solely or in 
     combination with the buyer/borrower, would provide the same 
     safety to the SBA funding.
       The bill would permit seller financing to provide the 
     requisite down payment.
       The bill would also specify that collateral be valued at 
     the estimated sale price between a willing buyer and seller 
     and that any decision to require the borrower to provide non-
     project property as collateral for the loan may be made only 
     on a case by case basis.

     

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