[Congressional Record Volume 148, Number 148 (Friday, November 15, 2002)]
[Senate]
[Pages S11219-S11222]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SUBSIDY RATE FOR SMALL BUSINESS LOANS
Mr. REID. Mr. President, I ask unanimous consent that the Senate
proceed to the consideration of S. 3172 introduced earlier today by
Senator Bond.
The PRESIDING OFFICER. The clerk will report the bill by title.
The legislative clerk read as follows:
A bill (S. 3172) to improve the calculation of the Federal
subsidy rate with respect to certain small business loans,
and for other purposes.
There being no objection, the Senate proceeded to consider the bill.
Mr. KERRY. Mr. President, I ask my colleagues to support the small
business subsidy rate improvement bill before the Senate today. It is
not perfect, but it takes us a step in the right direction. It takes us
a step in the right direction by reversing a current 60-percent cut in
loan dollars available to small businesses through the Small Business
Administration's flagship 7(a) loan program, and it includes a budget
change mid-year with OMB's blessing, which is unprecedented. However,
it does not go far enough in correcting the way the government
calculates the
[[Page S11220]]
cost and fees of the SBA's small business loans. Specifically, the
Administration would not also support our proposal to correct the
errors in the subsidy rate used for the 504 development company loan
program--errors that result in severe overcharging of thousands of
dollars to 504 borrowers and lenders.
As so many of us in the Senate, House and White House have heard for
moths, the small business community supported the Senate's plan to
enact a recommendation by the General Accounting Office as part of one
of the continuing resolutions. However, that provision was blocked time
and again by a few Republican Congressmen on behalf of the
Administration. We are now faced with leaving small businesses strapped
for financing until next year or enacting this bill that would put in
place something called an econometric model to calculate the subsidy
rate for the 7(a) program immediately, but for one year only.
Our goal--that of Senator Bond, Senator Conrad, Senator Domenici,
Senator Hollings, Senator Byrd, and myself--was to right years of wrong
in which the government has played budget games with the two largest
loan programs at the Small Business Administration. Our goal was to end
a double-standard in which the government cooks the books but small
businesses get penalized if a comma is missing on their financial
statements. Our goal was to put transparency, accuracy, and fairness
into a system that has overcharged small business borrowers and
private-sector lenders more than $2 billion fees, fees that are
tantamount to a tax on small businesses.
Specifically, our goal, in technical talk, was to put in place budget
systems in this fiscal year that would more accurately calculate the
cost of providing loans through the SBA's 7(a) and 504 lending
programs, thereby maximizing appropriations to leverage an additional
$6 billion in small business loans and assessing fees that are more in
line with the true cost of providing the loans. In the end, it would
stimulate lending by creating a greater incentive for lenders to loan
in these uncertain economic times, it would leave more money in the
pockets of small businesses, and it would allow almost 190,000 jobs to
be created or retained.
There is a lot of concern among small business trade groups, bankers,
and members of Congress about adopting an econometric model at this
stage because the administration has not been forthcoming with
supporting documentation and the estimated subsidy rates over the
testing period have varied greatly. Without that information, it is
unreasonable to expect the small business community to trust the
government. They have been fighting this problem for too long to settle
for mere promises, when promises have been broken time and again. In
the coming months I look forward to working with the Administration to
get this information and give all of us confidence that this model is
more predictive and accurate.
On the plus side, as I mentioned earlier, passing this legislation
would reverse the 60-percent cut in the 7(a) loan program by patching
together $6 billion in lending dollars. That restoration of loan
dollars is significant on a micro and macro level. In my home state of
Massachusetts, small businesses stand to lose $121 million in loan
dollars and almost 3,700 jobs if this bill isn't passed. Nationwide, a
loss of $6.2 billion in loans would translate into 189,000 jobs either
lost or not created. In this economy, we can not afford to lose any
more jobs or block job creation.
To my many colleagues who have courageously fought for small
businesses on this issue--from Senator Bond and Senator Conrad to
Congressman Manzullo and Congresswoman Velazquez--I thank them. To the
small business groups--from 7(a)'s NAGGL and 504's NADCO to the small
business coalition lead by the U.S. Chamber of Commerce, which included
among many others, the National Black Chamber of Commerce, National
Small Business United, and the American Bankers Association--I am proud
to work with them. Because of your grassroots efforts, probably every
member of Congress knows what a subsidy rate is and how it hurts the
small business community when it is left uncorrected year after year.
Last, I thank the Office of Management and Budget for reaching this
agreement with our Committee, the Committee on Small Business &
Entrepreneurship, the Committee on Budget, and the Committee on
Appropriations. I know they are strongly opposed, in general, to
changes to their subsidy rates, and, in particular, to any adjustment
to the budget mid-year. But, small businesses do not care about
technicalities and budget intricacies; they care about access to
capital. This bill accomplishes that.
Mr. President, I ask unanimous consent that the following be printed
in the Record: a letter from the small business coalition; a letter to
OMB from our Committee with the Committee on budget regarding this
issue; and a letter from OMB Director Mitch Daniels regarding the
FY2003 subsidy rate for the 7(a) loan program.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Small Business Access
to Capital Coalition,
September 18, 2002.
Hon. John Kerry,
Chairman, Committee on Small Business & Entrepreneurship,
U.S. Senate, Washington, DC.
Dear Chairman Kerry: On behalf of the hundreds of thousands
of small businesses represented by the undersigned
organizations, we are writing you to ask your support for
legislation that would limit the use of outdated default rate
data in calculating the subsidy rate for the Small Business
Administration (SBA) 7(a) an 504 programs.
The undersigned associations believe government policies
that foster and encourage robust entrepreneurial activity and
small business ownership provide the basis for economic
prosperity important to the long term vitality and success of
our nation. Many of our small business members indicate that
one major obstacle to entry or expansion of a small business
is the availability and access to capital for small
enterprises.
One source of funding, the SBA 7(a) and 504 guaranteed loan
programs, play an important role in providing an alternative
means of accessing capital for some small business owners
where funding has not been available through conventional
lending methods. However, in a recent Government Accounting
Office (GAO) report, it was determined that the use of overly
conservative default rate data by the SBA resulted in
overestimated defaults for 1992 through 2000 by over $2
billion for the 7(a) program alone when compared to actual
loan performance.
Indeed, overly conservative default rates used in
calculating the subsidy rate, according to the GAO report,
has during the same period, resulted in the overestimation of
the cost of the 7(a) program by nearly $1 billion.
Furthermore, consistent yearly program reestimates of this
magnitude serve to undermine the intent of Congress during
the appropriations process.
Even so, overly conservative default rate assumptions are
still being used to calculate FY 2003 subsidy rates,
resulting in diminished numbers or sizes the loans capable of
being made given current program funding levels. Taken into
account historic levels of demand, we can anticipate program
shortages that may needlessly shutout some small businesses
to sorely needed funds to start or grow their businesses,
thus limiting their contribution to the fragile economic
recovery.
The consistent use of overly conservative default rate
date, resulting in the overestimation of the subsidy rate for
the 7(a) and 504 programs by SBA is not only contrary to the
spirit and intent of the Credit Reform Act, but an affront on
Congresses role in determining program funding levels in the
appropriations process. As a result, we encourage Congress to
take legislative action to assure the FY 2003's subsidy rate
calculation and future calculations will be limited to the
use of recent default rate data that reflect the use of
revised program credit standards and thus preserve the
integrity of the appropriations process.
AeA, Air Conditioning Contractors of America, American
Bankers Association, American Hotel & Lodging Association,
American Nursey & Landscape Association, Association of Small
Business Developmemt Centers, Asian American Hotel Owners
Association, Hotel Brokers International, Independent
Community Bankers Association, International Franchise
Association.
National Association of Development Companies, National
Association of Government Guaranteed Lenders, National
Association of Small Disadvantaged Businesses, National
Association of Women Business Owners, National Black Chamber
of Commerce, National Restaurant Association, National Small
Business United, National Tooling & Machining Association,
Tire Industry Association, U.S. Chamber of Commerce, United
Motorcoach Association, Women Impacting Public Policy, Yellow
Pages Integrated Media Association.
[[Page S11221]]
____
U.S. Senate,
Washington, DC, April 22, 2002.
Hon. Mitchell Daniels,
Director, Office of Management and Budget, Eisenhower
Executive Office Building,
17th and Pennsylvania Ave., NW, Washington, DC.
Dear Mr. Daniels: We are writing to express our concern
about what appears to be the continued and routine over-
estimation by OMB of the cost of the Small Business
Administration's 504 and 7(a) loan programs to the government
under the requirements of the Federal Credit Reform Act
(Credit Reform). The Senate has repeatedly raised this issue
with the OMB, most recently in the FY 2002 appropriations
cycle, at a Roundtable held by the Senate Committee on Small
Business and Entrepreneurship last fall, and in meetings
between Senate Budget Committee staff and OMB staff.
Last fall, the SBA Administrator publicly stated, and your
senior OMB staff indicated to our staff, that the subsidy
rate for the 7(a) program would be cut at least in half, all
else being equal. Unfortunately, the 2003 budget request
reflects that only half of that goal has been accomplished.
Given the systematic mis-estimates in these programs, this
progress, while in the right direction, has been too slow and
does not do much to engender confidence in the
Administration's approach in light of SBA or OMB mistakes in
budget documents over the years.
In our view, failure to solve the problem will continue the
unfair practice of forcing small business borrowers and
lenders, year after year, to pay fees that are substantially
higher than necessary to participate in and cover the
government's cost of these programs.
The nexus of the problem appears to be the use of overly
conservative loan default rates as part of each program's
cost calculation under Credit Reform and the failure to
adequately weight historical data to reflect more accurately
the program changes, both statutory and regulatory, that have
resulted in reduced default rates and improved program
performance.
The FY 2003 credit subsidy rate for the 504 program assumes
an 8.3 percent loan default rate. But program statistics from
the Bank of New York suggest the rate is in the 4 percent
range instead. Use of the higher default rate results in the
average 504 borrower unnecessarily paying approximately
$10,000 in excess fees to participate in this program. We
should emphasize that this program receives no federal
appropriations and is totally funded through fees. Yet, since
1997 the program has paid nearly $400 million in excess fees
to the U.S. Treasury as a result of OMB reestimates. Since
1995, the use of overly conservative default rate assumptions
in the 7(a) program has resulted in total downward re-
estimates of $1.429 billion, including interest.
The SBA testified earlier this year that it is developing
an econometric model to estimate more accurately the default
rate for each program. But, although we have already been
told for at least a year how ``econometric'' modeling
promises to be the solution, there is little to show for this
new approach--at least, we have not seen anything yet.
Because of the slow progress in the past and the experience
of unfulfilled expectations, we remain skeptical that the
emerging modeling approach will offer a significant
improvement over previous approaches or that it will be ready
with satisfactory results in time for the 2004 budget.
Therefore, we request that OMB keep all of us up to date of
the progress of the modeling through periodic briefings with
our staff so we have an opportunity to ask questions.
Continued use of overly conservative assumptions in the
credit reform model for both of these programs and the
resulting continuation of downward re-estimates could
undermine support for Credit Reform, which we do not want to
see happen. The bias in the estimates for these two programs
is simply unacceptable. We do not expect perfect subsidy rate
estimates year-in and year-out, yet we do expect that over
time the re-estimate will be randomly distributed around
zero. One year the estimates may be high and the next year
they may be low, but over time they should balance out.
Unfortunately, that is not true today, and we are not
optimistic that change will occur, absent your active
intervention, any time soon.
Repeated opportunities to address this problem have not
been realized. We believe the problem has dragged on too
long. At a minimum, we expect the Administration to submit
and support a budget amendment for 2003 for sufficient
subsidy appropriations that will make possible $11 billion of
7(a) loan volume given the too-high subsidy rate OMB is
currently using. Alternatively, if you expect that a review
of the 2003 submission will reveal mistakes in the subsidy
rates that would allow OMB to execute the 2003 budget using
rates other than those published in the submission, as has
occurred in other years, please submit that review. We would
appreciate receiving your response to our letter, including
the requests for an amendment and periodic meetings, by June
1, 2002. If legislative changes are necessary, we welcome
your suggestions.
Sincerely,
Pete V. Domenici,
Kent Conrad,
John F. Kerry,
Christopher S. Bond.
____
Executive Office of the President,
Office of Management and Budget,
Washington, DC, November 14, 2002.
Hon. Donald A. Manzullo,
Chairman, Committee on Small Business, U.S. House of
Representatives, Washington, DC.
Dear Mr. Chairman: Thank you for your letter of November
12, regarding the subsidy rate for small business loans.
As you know, the Administration is committed to improving
the Small Business Administration's (SBA) ability to more
accurately estimate the cost of subsidizing small business
loans. This will enable the agency to allocate its resources
more effectively, determine program risk more precisely, and
increase its ability to target loan programs to the most
deserving recipients.
In accordance with the commitment that the Administration
made one year ago, the Office of Management and Budget has
just approved SBA's 7(a) econometric subsidy model to
calculate its fiscal year 2004 resource requirements.
Further, in light of the fact that this improved subsidy
calculation procedure is now available, the Administration
would support legislation that allows us to implement the
econometric model for fiscal year 2003 as well. Applying the
econometric model would produce a subsidy rate of 1.04
percent rather than the 1.76 percent submitted in the FY 2003
budget.
Please let us know if you need any more information.
Sincerely,
Mitchel E. Daniels, Jr.,
Director.
Mr. KERRY. Last, I want to remember Senator Wellstone, a true
advocate for small business who faithfully attended our committee
hearings and markups and worked hard to help the 7(a) and 504 programs
not just on this issue, but every single time. His contributions were
great, and I wish he were here to see this agreement pass.
Mr. BOND. Mr. President, I rise today in support of legislation that
has just been introduced to permit the Office of Management and Budget
(OMB) to use a recently-completed econometric model to calculate the
credit subsidy rate for the 7(a) small business loan guarantee program,
the flagship loan program at the Small Business Administration. This
bill, once signed into law by President Bush, will allow the 7(a) loan
program to meet the borrowing demands of our Nation's small businesses,
which is approximately $10 billion for Fiscal Year 2003. Without this
bill, the program would limit 7(a) loans to less than $5 billion for FY
2003. In addition, the bill will permit unobligated, no-year funds
previously appropriated for the STAR terrorist disaster recovery loans
to be used for the 7(a) loan program.
The ``econometric model'' is a significant reform in the way the SBA
and OMB calculates the credit subsidy rate for the 7(a) loan program.
The bill provides that the OMB and SBA will adopt the new econometric
model effective retroactively to October 1, 2002. Developed by the SBA
and OMB, the econometric model will use far more comprehensive data
about individual borrowers and loans when forecasting anticipated
defaults and establishing loan reserves to cover them.
Under the Credit Reform Act of 1990, the annual appropriation for the
SBA must, in advance, provide sufficient funds to cover the cost of a
Federal loan guarantee, after taking into consideration the fees paid
by small business borrowers and lenders under the 7(a) program. This
amount, referred to as the credit subsidy rate, is determined by the
OMB prior to the submission of the President's annual Budget Request to
the Congress.
Critics of the credit subsidy rate for the 7(a) program have cited
the use of historical loan-performance data that pre-dates the
enactment of the Federal Credit Reform Act as a major cause of a credit
subsidy rate that greatly exceeds actual loan performance. The
consequence is the use of the most conservative loan-default rates,
year-in and year-out, and the failure by the OMB and the SBA to adjust
historical loan performance data to reflect 7(a) program changes, both
statutory and regulatory, that have led to real reductions in the
default rates and improved program performance. According to an in-
depth analysis undertaken by the General Accounting Office (GAO), the
excessively high credit subsidy rates have resulted in nearly $1
billion in unnecessary fees being paid by small business borrowers and
lenders to the U.S. Treasury.
It is very unrealistic to believe that a 100% accurate credit subsidy
rate estimate can be derived for the 7(a) loan program, or for any
other Federal credit program. The econometric model, designed to
calculate the 7(a) credit subsidy rate, is a major improvement over the
``old'' model. Originally, the
[[Page S11222]]
Administration stated that the econometric model would not be available
until FY 2004. After exhaustive negotiations with the senior White
House staff, I was able to secure an agreement to accelerate their use
of the model retroactive to October 1, 2002, the beginning of FY 2003.
The bill before us today is designed to waive a key provision of the
Federal Credit Reform Act that prohibits the Congress from changing a
credit subsidy rate estimate once it has been transmitted to the
Congress as part of the President's annual budget submission. This may
be the first time this provision has been waived since implementation
of the Act in FY 1992.
We would not be where we are today resolving this important matter
without the tireless efforts of my colleagues in the Senate and the
House of Representatives. Mr. Manzullo, Chairman of the House Committee
on Small Business, fought for this change every step of the way. The
Ranking Member, Ms. Velazquez, was especially vigilant in her efforts.
In the Senate, my colleague from Massachusetts and Chairman of the
Committee on Small Business and Entrepreneurship, John Kerry, has kept
the Committee focused on resolving this issue for the past year and has
insisted that we resolve the credit subsidy rate controversy for FY
2003.
Resolving the 7(a) credit subsidy rate issue is good for small
businesses. It will mean more jobs and economic fuel to grow start-up
and growing small businesses. I urge each of my colleagues to vote a
resounding ``Aye'' for this important bill.
Mr. REID. Mr. President, I ask unanimous consent that the bill be
read three times, passed, and the motion to reconsider be laid on the
table with no intervening action or debate, and that any statements
related to the bill be printed in the Record.
The PRESIDING OFFICER. Without objection, it is so ordered.
The bill (S. 3172) was read three times and passed, as follows:
S. 3172
Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled,
SECTION 1. SUBSIDY RATE FOR SMALL BUSINESS LOANS.
Notwithstanding section 502(5)(F) of the Federal Credit
Reform Act of 1990 and section 254(j) of the Balanced Budget
and Emergency Deficit Control Act of 1985, the Director of
the Office of Management and Budget, in calculating the
Federal cost for guaranteeing loans during fiscal year 2003
under section 7(a) of the Small Business Act (15 U.S.C.
636(a)) may use the most recently approved subsidy cost model
and methodology in conjunction with the program and economic
assumptions, and historical data which were included in the
fiscal year 2003 budget. After written notification to
Congress, the Small Business Administration shall implement
the validated, OMB-approved subsidy rate for fiscal year
2003, using this model and methodology. Such rate shall be
deemed to have been effective on October 1, 2002.
SEC. 2. USE OF EMERGENCY FUNDS FOR SMALL BUSINESS LOANS.
Chapter 2 of division B of the Department of Defense and
Emergency Supplemental Appropriations for Recovery from and
Response to Terrorist Attacks on the United States Act, 2002
is amended by striking ``For emergency expenses'' after
``business loans program account'' and inserting the
following: ``For loan guarantee subsidies under section 7(a)
of the Small Business Act (15 U.S.C. 636(a)) or for emergency
expenses''.
____________________