[Congressional Record Volume 144, Number 117 (Tuesday, September 8, 1998)]
[Senate]
[Pages S9978-S9979]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY (for himself, Mr. Wellstone, Mr. Harkin, and Ms. 
        Landrieu):
  S. 2448. A bill to amend title V of the Small Business Investment Act 
of 1958, relating to public policy goals and real estate appraisals, to 
amend section 7(a) of the Small Business Act, relating to interest 
rates and real estate appraisals, and to amend section 7(m) of the 
Small Business Act with respect to the loan loss reserve requirements 
for intermediaries, and for other purposes; to the Committee on Small 
Business.


                  SMALL BUSINESS LOAN ENHANCEMENT ACT

 Mr. KERRY. Mr. President, today I am joined by Senators 
Wellstone, Harkin, and Landrieu, to introduce the ``Small Business Loan 
Enhancement Act.'' To give small businesses more of an advantage, we 
propose small but significant changes to the Small Business 
Administration's three primary lending programs: the 7(a) guaranteed 
business loan program, the 504 Development Company program, and the 
Microloan program. These changes would foster loans to growing women-
owned businesses and enhance small business lending by saving costs for 
small business borrowers, reducing paperwork for lenders, and 
increasing available capital for microloans and technical assistance. 
This bill will also enable small businesses to use SBA's most popular 
loan guarantee program to fix year 2000 problems.
  Women-owned businesses are increasing in number, range, diversity and 
earning power. They constitute one-third of the 23 million small 
businesses in the United States, contribute more than $2.38 trillion 
annually in revenues to the economy and range in industry from 
advertising agencies to manufacturing. Addressing the special needs of 
women-owned businesses serves not only these entrepreneurs, but also 
the economic strength of this nation as a whole. Since 1992, SBA has 
managed to increase access to capital for women and has worked in 
earnest to move women entrepreneurs away from expensive credit card 
financing to more affordable loans for financing their business 
ventures. While the percentage of 504 loans to women-owned businesses 
has increased from 4.2 percent in 1987 to 14.7 percent in 1998, we need 
to increase lending opportunities to better reflect that 40 percent of 
all businesses are owned by women. By expanding the public policy goals 
of the 504 loan program to include women-owned businesses, we are 
ensuring that loans to eligible women business owners aren't capped at 
$750,000 but are now available for as much as $1 million. According to 
Certified Development Company professionals, loan underwriters are 
conservative when it comes to approving loans for more than $750,000 
and that this directive would undoubtedly help eligible women business 
owners get the financing they need to expand their facilities and buy 
equipment as their businesses grow.
  In addition to increasing access to capital, the SBA plays a critical 
role in eliminating barriers that keep entrepreneurs from entering the 
economy, reducing regulatory burdens and lowering transaction costs. 
The Senate has an opportunity to reduce time and costs to both lenders 
and small business borrowers in real estate transactions by modernizing 
appraisal requirements for real estate transactions for 7(a) and 504 
loans. Under current operating procedures, where more than $100,000 of 
the authorized loan proceeds in a financing package includes real 
estate (acquisition, construction and improvement to land and 
buildings), SBA requires a state-certified or state-licensed appraisal. 
Our bill would raise the requisite appraisal amount to $250,000, 
consistent with other agencies, including, among others, the Federal 
Reserve System, the Federal Deposit Insurance Corporation and the 
Office of Thrift Supervision. Raising the threshold does not increase 
the government's risk in these loans because the bill specifies that 
lenders must require a state-certified or state-licensed appraisal on 
loans less than $250,000 if that is their standard for similar non-SBA 
loans. Depending on the area of the country, savings in the 7(a) and 
504 programs are estimated to be from $1,000 to $5,000 per loan by 
requiring an evaluation instead of a state-certified or state-licensed 
appraisal. In the 504 program, this change is estimated to save money 
for 2,000 out of the some 6,000 annual 504 borrowers, which are often 
minority and women-owned businesses.
  To complement those regulatory improvements, this bill also 
encourages lenders to use the 7(a) program for their borrowers by 
streamlining paperwork requirements those lenders must complete after a 
7(a) loan defaults. Two years ago, Congress enacted a requirement that 
reduced by one percent the interest rate paid on the guaranteed portion 
of defaulted 7(a) loans. Although the change was expected to 
substantially decrease the subsidy costs of the program, this has not 
proved to be the case. Instead, it has created a paperwork burden 
disproportionately high compared to the savings realized.
  To help small businesses meet the escalating challenges of the Year 
2000 computer problem, also called the Y2K problem, this bill clarifies 
Congressional intent that the 7(a) guaranteed loan program be used for 
this purpose. As amended, the 7(a) loan program will specify that small 
businesses can use these loans to finance the cost of making their 
systems and computers Y2K-compliant. In addition to legitimate concerns 
about function and survival that make this provision important for 
small businesses, Y2K compliance will also be a regulatory concern for 
bankers and small business borrowers. We understand that bank 
regulators will be requiring lenders to survey their borrowers and to 
certify that they are Y2K-compliant. Congress recognizes that small 
businesses may be harmed by the Y2K problem and that the 7(a) program 
is an appropriate means and established SBA program that can 
immediately help them deal with it. In fiscal year 1997, the 7(a) loan 
program reached more than 40,000 businesses, making 45,288 loans and 
approving loans totalling $9.5 billion.
  The last component of this bill amends SBA's Microloan program. This 
important economic development tool has, in six short years, provided 
close to 7,000 microloans worth some $68 million. More than 40 percent 
of those loans went to women, 42 percent went to minorities, and 11 
percent went to veterans. This program, which provides loans that 
average $10,000 and can be for as little as a few hundred dollars, has 
improved the landscape of some our country's poorest communities, 
creating jobs, helping people move from public assistance to weekly 
paychecks, and contributing to the tax base. As stated in a July Boston 
Business Journal article, ``There are many people out there who can't 
get traditional bank loans because they have bad credit histories, or 
no credit histories or no assets.'' In spite of these realities that 
make microentrepreneurs too risky for banks, the government has 
suffered no losses in this program. It is successful because it helps 
entrepreneurs turn their talents into businesses, such as a furniture 
upholsterer or a pet shop, and then augments the capital infusion by 
providing technical assistance to teach microentrepreneurs how to run a 
successful business.
  This amendment would authorize the SBA Administrator to reduce an 
microlender's loan loss reserve (a reserve of cash to guarantee that 
the government is paid back if a loan defaults) from 15 percent to not 
less than ten percent after an intermediary has been participating in 
the microloan program for at least five years and has demonstrated its 
ability to maintain a healthy loan fund. Each microlender's loan loss 
reserve will be established based on its average loss rate for the 
previous five-year period. Because of the program's success so far, 36 
out of 42 microlenders would qualify under this bill's requirements to 
maintain a loan loss reserve of ten percent rather than 15 percent. The 
proposed change would continue to protect the government's interest in 
these loans and at the same time enhance the program because it frees 
up cash that microlenders can reprogram for more microloans or 
technical assistance.
  In closing, I want to again thank my colleagues for supporting this 
bill. If enacted, they will have improved the business climate and 
taken a few more steps to ensure that small businesses have access to 
capital, are less burdened by regulations and paperwork, have the 
resources to meet Y2K problems and that women-owned businesses can get 
loans of sufficient size to expand their businesses.
  Mr. President, I thank my colleagues for their support and ask 
unanimous

[[Page S9979]]

consent that the full text of the bill be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 2448

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Small Business Loan 
     Enhancement Act''.

     SEC. 2. LOANS FOR PLANT ACQUISITION, CONSTRUCTION, 
                   CONVERSION, AND EXPANSION.

       (a) Public Policy Goals.--Section 501(d)(3)(C) of Small 
     Business Investment Act of 1958 (15 U.S.C. 695(d)(3)(C)) is 
     amended by inserting ``or women-owned business development'' 
     before the comma.
       (b) Real Estate Appraisals.--Section 502(3) of the Small 
     Business Investment Act of 1958 (15 U.S.C. 696(3)) is amended 
     by adding at the end the following:
       ``(F) Real estate appraisals.--
       ``(i) Loans exceeding $250,000.--Notwithstanding any other 
     provision of law, if a loan under this section involves the 
     use of more than $250,000 of the loan proceeds for a real 
     estate transaction, prior to disbursement of the loan, the 
     Administrator shall require an appraisal of the real estate 
     by a State licensed or certified appraiser.
       ``(ii) Loans of $250,000 or less.--Notwithstanding any 
     other provision of law, if a loan under this subsection 
     involves the use of $250,000 or less of the loan proceeds for 
     a real estate transaction, prior to disbursement of the loan, 
     the participating lender may, in accordance with the policy 
     of the participating lender with respect to loans made 
     without a government guarantee, require an appraisal of the 
     real estate by a State licensed or certified appraiser.
       ``(iii) Definition.--In this subparagraph, the term `real 
     estate transaction' includes the acquisition or construction 
     of land or a building and any improvement to land or to a 
     building.''.

     SEC. 3. SECTION 7(A) LOAN PROGRAM.

       (a) Year 2000 Technology Requirements.--Section 7(a) of the 
     Small Business Act (15 U.S.C. 636(a)) is amended, in the 
     matter preceding paragraph (1), by inserting ``and to assist 
     small business concerns in meeting technology requirements 
     for the Year 2000,'' after ``and working capital,''.
       (b) Real Estate Appraisals.--Section 7(a) of the Small 
     Business Act (15 U.S.C. 636(a)) is amended by adding at the 
     end the following:
       ``(27) Real estate appraisals.--
       ``(A) Loans exceeding $250,000.--Notwithstanding any other 
     provision of law, if a loan guaranteed under this subsection 
     involves the use of more than $250,000 of the loan proceeds 
     for a real estate transaction, prior to disbursement of the 
     loan, the Administrator shall require an appraisal of the 
     real estate by a State licensed or certified appraiser.
       ``(B) Loans of $250,000 or less.--Notwithstanding any other 
     provision of law, if a loan guaranteed under this subsection 
     involves the use of $250,000 or less of the loan proceeds for 
     a real estate transaction, prior to disbursement of the loan, 
     the participating lender may, in accordance with the policy 
     of the participating lender with respect to loans made 
     without a government guarantee, require an appraisal of the 
     real estate by a State licensed or certified appraiser.
       ``(C) Definition.--In this paragraph, the term `real estate 
     transaction' includes the acquisition or construction of land 
     or a building and any improvement to land or to a 
     building.''.
       (c) Interest Rates.--Section 7(a)(4) of the Small Business 
     Act (15 U.S.C. 636(a)(4)) is amended--
       (1) by striking ``(4)'' and all that follows through 
     ``Notwithstanding'' and inserting the following:
       ``(4) Interest rates.--Notwithstanding''; and
       (2) by striking subparagraph (B).

     SEC. 4. MICROLOAN PROGRAM.

       Section 7(m)(3)(D) of the Small Business Act (15 U.S.C. 
     636(m)(3)(D)) is amended--
       (1) in the first sentence, by striking ``The 
     Administrator'' and inserting the following:
       ``(i) In general.--The Administrator''; and
       (2) by striking the second sentence and inserting the 
     following:
       ``(ii) Level of loan loss reserve fund.--

       ``(I) In general.--Subject to subclause (II), the 
     Administration shall require the loan loss reserve fund to be 
     maintained at a level equal to not more than 15 percent of 
     the outstanding balance of the microloans owed to the 
     intermediary.
       ``(II) Reduction of loan loss reserve requirement.--After 
     the initial 5 years of an intermediary's participation in the 
     program under this subsection, upon the initial request of 
     the intermediary made at any time after that period, the 
     Administrator shall annually conduct a review of the average 
     annual loss rate of the intermediary and, if the intermediary 
     demonstrates to the satisfaction of the Administrator that 
     the average annual loss rate for the intermediary during the 
     preceding 5-year period is less than 15 percent, and the 
     Administrator determines that no other factor exists that is 
     likely to impair the ability of the intermediary to repay all 
     obligations owed to the Administration under this subsection, 
     the Administrator shall reduce that annual loan loss reserve 
     requirement to reflect the actual average annual loss rate 
     for that intermediary during that period, except that in no 
     case shall the loan loss reserve requirement for an 
     intermediary be reduced to less than 10 percent of the 
     outstanding balance of the microloans owed to the 
     intermediary.''.

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