[Congressional Record Volume 149, Number 139 (Friday, October 3, 2003)]
[Senate]
[Pages S12458-S12461]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE (for herself, Mr. Pryor, and Mr. Bond):
  S. 1713. A bill to amemd title IV of the Small Business Investment 
Act of 1958, relating to pilot program for credit enhancement 
guarantees on pools of non-SBA loans; to the Committee on Small 
Business and Entrepreneurship.
  Ms. SNOWE. Mr. President, I rise today to introduce the Small 
Business Credit Liquidity Act of 2003, and I am pleased to be joined by 
my colleagues, Senator Pryor and Senator Bond, as sponsors of this 
bill.
  The genesis of this legislation was a proposal made by the Small 
Business Administration. When the President's Fiscal Year 2004 budget 
request was transmitted to the Congress this past February, it stated 
that the SBA was exploring a possible new approach to expand the 
opportunities of small businesses to access capital markets by 
facilitating the securitization of non-SBA small business loans, i.e., 
loans that were not already guaranteed by the SBA. Increasing access to 
capital is a high priority of small businesses, and has been one of the 
Committee's priorities throughout its history. We are always seeking 
innovative ways to increase access to capital for small businesses, 
while at the same time measuring the cost and risk of loss that the 
Federal government must incur to facilitate such financing. 
Accordingly, we recognized the potential benefits of this proposal for 
small businesses across the Nation.
  At our roundtable on April 30, 2003, the Committee discussed the idea 
of the securitization of non-SBA small business loans. The SBA reported 
that it had been exploring this type of program for some time and 
thought the idea had considerable merit. The agency was uncertain, 
however, whether it had the statutory authority to develop and 
implement such a program, absent legislative authorization. After the 
roundtable, we consulted with the SBA and with participants in the 
small business financing industry to determine the program's 
appropriate elements.
  In addition to the support the SBA expressed for the proposal in its 
budget request, at the Committee's roundtable, and in subsequent 
discussions with Committee staff, the SBA took other steps to help make 
the proposal a success. For example, the agency entered into a contract 
with Dun & Bradstreet and with Fair, Isaacs, Co., to create a credit 
scoring model for small businesses, similar to individual consumer 
credit scores, to help small businesses gauge their credit quality. The 
scoring model will be an important asset to the pooling proposal by 
providing uniformity of pricing, thus reducing one obstacle to the 
securitization of non-SBA small business loans. The Office of Advocacy 
of the SBA has also helped build support for the proposal by 
publicizing the need to take the foundational steps to build a 
secondary market for small business loans, rather than later trying to 
create such a market in one step when economic pressures called for an 
immediate response.
  Support for a program to securitize small business loans has also 
been advocated by the Board of Governors of the Federal Reserve System. 
In its September 2002 Report to the Congress on the Availability of 
Credit to Small Businesses, the Federal Reserve stated that the 
securitization of small business loans could ``substantially influence 
the availability of credit'' to small businesses. The Federal Reserve 
noted that one primary benefit of a secondary market would be that 
small business borrowers could enjoy lower financing costs.
  In addition to the Federal Reserve report, other studies have shown 
that small businesses could benefit from an efficient secondary market 
for small business loans. Several, including the Federal Reserve 
report, have noted that a primary obstacle to a wide-spread secondary 
market for small business loans has been the lack of standardized 
information to evaluate and price small business loans efficiently for 
resale. As noted, the SBA has exercised foresight by securing the 
contract with Dun & Bradstreet and Fair, Isaacs to address this 
problem. With the information provided by this new credit-scoring 
model, the securitization of non-SBA small business loans will be far 
more feasible.
  With input from the SBA, small businesses, and financial firms in 
hand, and having considered many studies regarding small business 
credit and the effectiveness of secondary markets, we included a 
provision similar to this Act in S. 1375, the Small Business 
Administration 50th Anniversary Reauthorization Act of 2003, which was 
approved unanimously by the Committee on July 10, 2003.
  Working with Senator Pryor and with other colleagues, we endeavored 
to provide sufficient specificity in the instructions the legislation 
gives the SBA regarding the pilot program, so as to ensure that the 
pooling proposal provides the greatest benefit to small businesses in 
need of capital while limiting risk to the Federal government.

[[Page S12459]]

  Unfortunately, despite all the hard work and input from the SBA and 
from other participants in the small business financing industry, some 
apparently either failed to recognize or understand the benefits for 
small businesses that exist in this idea that originated with the SBA. 
In the interest of expediting the passage of S. 1375 before the SBA's 
authorizing legislation expired, I reluctantly removed that provision 
from S. 1375 to focus on those elements of the bill that had to be 
enacted before the legislation expired. I continue to appreciate the 
benefits of this proposal, and I am now introducing this provision as a 
separate bill. With the support this proposal already has, I am 
confident we can implement this innovative program, and I look forward 
to the benefits it can provide as we try to assist small businesses to 
prosper, create more jobs, and pull the economy out of its current 
doldrums.
  The Small Business Credit Liquidity Act of 2003 authorizes the Small 
Business Administration (SBA) to develop and implement an innovative 
three-year pilot program to facilitate the securitization of small 
business loans in order to increase the liquidity of capital available 
to small businesses. Under the pilot program, the SBA could provide 
partial guarantees on pools of securitized small business loans that 
are not otherwise guaranteed by the SBA. The legislation seeks to 
increase capital available to small businesses, without creating 
additional risk for the government since the SBA's guarantees would be 
paid for by fees charged to the financial firms administering the 
pooling of loans, and thus no appropriations will be necessary.
  I believe this pilot program has a great potential to provide 
increased access to capital on terms that are beneficial to small 
businesses. The pilot program will also allow lenders, including small 
lenders such as community banks, to utilize their capital better, and 
make more loans available to small businesses on better terms, by 
increasing the liquidity of existing loans.
  The pooling structure is based on similar arrangements for home 
mortgages, credit card loans, and car loans, which have active 
secondary markets based upon their pooling and securitization. The 
increased liquidity of loans provided by a secondary market allows 
lenders to be confident that the loans they make can be sold to 
investors, so that the lenders can utilize again capital that is 
otherwise locked into existing loans. In addition, because lenders 
receive a quick ``turnaround'' on the loans that they make and then 
sell to investors, the profit that the lenders receive from the 
interest rates charged to borrowers becomes less important for the 
lenders, who can receive a smaller per-loan profit, but increase the 
number of loans they make, and thereby receive a greater profit. 
Lenders are thus able to make more loans and to provide better terms to 
borrowers on those loans.
  As Chair of the Committee on Small Business, I realize that access to 
credit for small businesses is often a challenge. The Committee has 
consistently found that encouraging more lending to small businesses 
that have a likelihood to succeed, grow, and create new jobs is a sound 
national policy. The pilot program takes advantage of the successful 
example of the prior securitizations of SBA small business loans, and 
of changes in the investment community, to facilitate lending in the 
small business community for years to come.
  This pilot program is not a departure from the SBA's current practice 
of guaranteeing loans and regulating the securitization of those loans. 
The SBA already regulates the securitization of both guaranteed 
portions of 7(a) and 504 loans to small businesses and non-guaranteed 
portions of the same loans. These loans are made both by Federally-
regulated lenders and by lenders that are not federally regulated. In 
Fiscal Year 2002, the SBA regulated the securitization of $3.4 billion 
in government-guaranteed 7(a) loans to small businesses. When the 
guaranteed portions of the 7(a) loans are securitized separately from 
the non-guaranteed portions, the SBA is guaranteeing 100 percent of the 
loan pools.
  This bill authorizes a pilot program with a much more modest SBA 
involvement than is represented by the SBA's current financing 
programs. Under the pilot program, financial firms approved by the SBA 
would pool loans not individually guaranteed by the SBA. These pooling 
entities would then issue securities offering returns based upon the 
returns from the loans in the pool. The securities would be rated by a 
rating agency and sold to investors.
  The pooling entities, also known as ``loan poolers,'' would also 
offer a partial ``first-loss'' guarantee to investors on the 
securities' returns. If the loans had insufficient returns to pay the 
expected returns on the securities, the pooling entities' guarantees 
would be the first guarantees called into performance to pay investors. 
The SBA would issue partial, not complete, ``second-loss'' guarantees 
on the return from the securities, but not on individual loans within 
the pool. The agency's guarantees would thus be available only after 
the first-loss guarantees offered by the loan poolers are exhausted.
  Significantly, the cost of the SBA guarantees will be fully funded by 
fees paid by the loan poolers, so no Federal appropriations will be 
necessary. The bill provides that the SBA will adjust the fees required 
from the poolers under the pilot program annually, as necessary.
  The legislation also includes other provisions to ensure that the 
pilot program will not lead to increased risk or liability for the 
government. In particular, it caps the SBA's guarantees on any loan 
pool at a maximum of 25 percent of the value of the securities issued 
for that loan pool. In contrast, the SBA's guarantees for the 7(a) and 
504 loan programs are as high as 90 percent and 40 percent, 
respectively, of each loan in those programs. Moreover, in the 504 loan 
program the SBA is in a first-loss position, sustaining the loss of its 
full guaranteed amount on a defaulted loan before the private lender 
incurs any loss, whereas in the pilot program the SBA will be in a 
second-loss position.
  In addition, the bill requires that firms licensed as loan poolers 
adhere to certain standards, such as being well-capitalized and 
maintaining sufficient reserves. The bill also provides that the SBA 
will set standards for the licensed poolers and will review these 
entities annually to verify that they are conforming with SBA 
requirements. Among the requirements the SBA would establish for such 
loan poolers would be standards relating to loan delinquency, default, 
liquidation, and loss rates. If any licensed loan pooler fails to meet 
the SBA's standards, the SBA may terminate the pooler's participation 
in the pilot program.
  To ensure that the pilot program is initially implemented on a 
manageable scale, the legislation specifies that no individual loan 
pool created by a licensed pooler will exceed $350 million in loans in 
fiscal year 2004, $400 million in loans in fiscal year 2005, or $450 
million in loans in fiscal year 2006. The bill also specifies that the 
SBA's total guarantees under the pilot program will not exceed $2.1 
billion for fiscal year 2004, $3.25 billion for fiscal year 2005, or 
$4.5 billion for fiscal year 2006.
  Finally, this legislation requires three separate types of reports to 
ensure that the pilot program is properly monitored and evaluated. 
First, the SBA must provide to the Senate and House Committees on Small 
Business a report detailing the pooling program before it is 
implemented, and wait 50 days after submitting the report before 
implementing the program. In addition, the SBA must file with the 
Congress, in the SBA's Budget Request and Performance Plan, an annual 
report about the program's performance. To strengthen the on-going 
oversight of the pilot program, the bill also specifies that the SBA's 
annual report to Congress will include information about the pooled 
loans, including delinquency, default, loss, and recovery rates. Third, 
the GAO is required to study the program once implemented, and report 
on the program's performance, including any effects the program may 
have on the 504 or 7(a) programs, before calendar year 2006.
  My Small Business Committee has received expressions of support for 
the pilot program from representatives of thousands of small businesses 
that believe the program could improve access to capital, and could 
improve the terms of loans received, for many small businesses, 
particularly those without significant real estate property to use as

[[Page S12460]]

collateral. In particular, support for the program has been expressed 
by minority-owned small businesses and by women-owned small businesses. 
For these small businesses, which often have less real estate 
collateral than other small businesses, this pilot program holds great 
potential for creating capital resources to meet their financing needs.
  For instance, a recent study by the SBA's Office of Advocacy, issued 
in September 2003, reveals that small businesses owned by women are 
more likely than other small businesses to rely on expensive personal 
credit cards to finance the business, rather than more traditional 
types of loans. For these small businesses, an increase in the 
availability of traditional business loans, with lower financing costs 
and on terms beneficial to the borrowers, would be a welcome 
development.
  In addition, the same study showed that minority-owned small 
businesses, in addition to being less likely than other small 
businesses to obtain credit, were far less likely to obtain their 
credit from traditional Federally regulated depository institutions, 
and were more likely to resort to financing their businesses through 
sources such as family, friends, and acquaintances of the business 
owners. While this bill does not address subjective lender behavior, it 
does address the objective cost/profit opportunity presented to a 
lender by a loan to a small business, including a minority-owned or 
women-owned small business. If a lender is able to sell a conventional 
small business loan in an efficient secondary market, the potential 
downside cost of the loan to the lender, e.g., its default risk, is 
decreased, and the lender is assured that its capital will still be 
available for other loans.
  Financial firms currently involved in the pooling and securitization 
of loans issued in the SBA's two primary loan guaranty programs, under 
Section 7(a) of the Small Business Act (``7(a) loans'') and under 
Section 504 of the Small Business Investment Act of 1958 (``504 
loans''), have also expressed their support for the program, and have 
stated their belief that it will increase small businesses' access to 
effective capital.
  In closing, the Small Business Credit Liquidity Act of 2003 is an 
innovative approach to a persistent problem for small businesses in 
this country--access to capital. I believe it has the potential to 
address this problem for small businesses with effectively no risk to 
the Federal Government. At a time when our small enterprises are 
helping to lead the country back onto the road to economic recovery, we 
should be doing all we can to eliminate obstacles facing small 
businesses, which hold the greatest potential for job creation in 
America today. This bill is an important step in that direction, and I 
urge my colleagues to join me in supporting its enactment.
  I ask unanimous consent that the text of the bill and a summary of 
its provision be printed in the Record.
  There being no objection, the additional material was ordered to be 
printed in the Record, as follows:

              Small Business Credit Liquidity Act of 2003


                         Summary of Provisions

       The Small Business Credit Liquidity Act of 2003 authorizes 
     the Small Business Administration (SBA) to develop a three-
     year pilot program to facilitate the securitization of small 
     business loans, and thereby improve the opportunities for 
     small businesses to obtain capital by increasing the 
     liquidity of small business loans.
       Under the pilot program:
       Financial firms, after being licensed by the SBA, would 
     create ``pools'' of conventional small business loans, i.e., 
     small business loans not individually guaranteed by the SBA.
       These financial firms, also known as ``loan poolers,'' 
     would then issue securities, rated by rating agencies, which 
     would offer returns based upon the returns from the loans in 
     the pools. The securities would be sold to private investors.
       The loan poolers would offer partial ``first-loss'' 
     guarantees to investors on the securities' returns (i.e., on 
     the pools themselves, rather than on individual loans). If 
     the loans had insufficient returns to pay the expected 
     returns on the securities, the pooling entities' guarantees 
     would be the first guarantees called into performance to pay 
     investors.
       The SBA would issue additional guarantees, on the pools 
     rather than on individual loans, that would be in a ``second 
     loss'' position, meaning that the private investors would 
     receive the full first-loss guarantees from the loan poolers 
     before any SBA guarantee was applied. The SBA's second-loss 
     guarantees for each pool would be limited to 25 percent of 
     the size of that pool.
       The SBA's second-loss guarantees would be funded 
     exclusively through fees paid by loan poolers, and would 
     therefore require no appropriated funds.
       The SBA would be required to report its plan for the 
     program to the Senate and House Committees on Small Business 
     before implementing the program. The SBA would also be 
     required to file with the Congress, in the agency's Budget 
     Request and Performance Plan, an annual report about the 
     program's performance. In addition, the General Accounting 
     Office (GAO) would be required to study the pilot program 
     after it began and analyze its results.
       To ensure that the pilot program is initially implemented 
     on a manageable scale, loan pools under the pilot program 
     would have maximum individual sizes beginning at $350 million 
     for fiscal year 2004 and increasing to $450 million for 
     fiscal year 2006. In addition, the SBA's guarantees would be 
     limited to maximum amounts of $2.1 billion for fiscal year 
     2004, $3.25 billion for fiscal year 2005, and $4.5 billion 
     for fiscal year 2006.
       The program will sunset at the end of fiscal year 2006 
     unless it is reauthorized by Congress.

                                S. 1713

       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 Credit 
     Liquidity Act of 2003''.

     SEC. 2. PILOT PROGRAM FOR GUARANTEES ON POOLS OF NON-SBA 
                   LOANS.

       Title IV of the Small Business Investment Act of 1958 (15 
     U.S.C. 692 et seq.) is amended by adding at the end the 
     following:

                ``Part C--Credit Enhancement Guarantees

       ``Sec. 420. (a)(1) The Administration is authorized, upon 
     such terms and conditions as it may prescribe, in order to 
     encourage lenders to increase the availability of small 
     business financing by improving such lenders' access to 
     reasonable sources of funding, to provide a credit 
     enhancement guarantee, or commitment to guarantee, of the 
     timely payment of a portion of the principal and interest on 
     securities issued and managed by not less than 2 qualified 
     entities authorized and approved by the Administration.
       ``(2) The entities authorized under this subsection to act 
     as issuers and managers of pools or trusts of loans shall be 
     well-capitalized, as defined by the Administration, and shall 
     maintain sufficient reserves to allow securities to be issued 
     representing interests in each pool or trust that are rated 
     as investment grade by a nationally-recognized rating agency.
       ``(3) The authority of the entities authorized under this 
     subsection shall be reviewed annually by the Administration 
     and may be renewed upon the satisfactory completion of such 
     review.
       ``(4) The Administration shall set and maintain standards 
     for entities authorized under this subsection, including 
     standards relating to delinquency, default, liquidation, and 
     loss rates.
       ``(5) If an entity authorized under this subsection fails 
     to meet the standards set pursuant to paragraph (4), the 
     Administration may terminate the entity's participation in 
     the pilot program under this subsection.
       ``(b)(1)(A) The Administration may provide its credit 
     enhancement guarantees in respect of securities that 
     represent interests in, or other obligations issued by, a 
     trust, pool, or other entity whose assets (other than the 
     Administration's credit enhancement guarantee and credit 
     enhancements provided by other parties) consist of loans made 
     to small business concerns.
       ``(B) As used in this paragraph, the term `small business 
     concern' has the meaning given that term in either the Small 
     Business Act (15 U.S.C. 631 et seq.) or this Act (15 U.S.C. 
     661 et seq.).
       ``(2) The credit enhancement guarantees provided by the 
     Administration under paragraph (1) shall be second-loss 
     guarantees that are only available after the full payment of 
     credit enhancement guarantees offered by the entities 
     authorized to act as issuers and managers of pools or trusts 
     of loans under this section.
       ``(3) A pool or trust of loans shall not be eligible for 
     guarantees under this section--
       ``(A) if the value of such loans exceeds $350,000,000 in 
     fiscal year 2004;
       ``(B) if the value of such loans exceeds $400,000,000 in 
     fiscal year 2005; or
       ``(C) if the value of such loans exceeds $450,000,000 in 
     fiscal year 2006.
       ``(4) All loans under paragraph (1) shall be originated, 
     purchased, or assembled and managed consistent with 
     requirements prescribed by the Administration in connection 
     with this credit enhancement guarantee program.
       ``(5) The Administration shall prescribe requirements to be 
     observed by the issuers and managers of the securities 
     covered by credit enhancement guarantees to ensure the safety 
     and soundness of the credit enhancement guarantee program.
       ``(c) The full faith and credit of the United States is 
     pledged to the payment of all amounts the Administration may 
     be required to pay as a result of credit enhancement 
     guarantees under this section.
       ``(d)(1) The Administration may issue credit enhancement 
     guarantees in an amount--
       ``(A) not to exceed $2,100,000,000 in fiscal year 2004;

[[Page S12461]]

       ``(B) not to exceed $3,250,000,000 in fiscal year 2005; and
       ``(C) not to exceed $4,500,000,000 in fiscal year 2006.
       ``(2) The Administration shall set the percentage and 
     priority of each credit enhancement guarantee on issued 
     securities at a level not to exceed 25 percent of the value 
     of the securities so that the amount of the Administration's 
     anticipated net loss (if any) as a result of such guarantee 
     is fully reserved in a credit subsidy account funded wholly 
     by fees collected by the Administration from the issuers or 
     managers of the pool or trust.
       ``(3) The Administration shall charge and collect a fee 
     from the issuer based on the Administration's guaranteed 
     amount of issued securities, and the amount of such fee shall 
     equal the estimated credit subsidy cost of the 
     Administration's credit enhancement guarantee.
       ``(4) The fees provided for under this subsection shall be 
     adjusted annually, as necessary, by the Administration.
       ``(5) The Federal government shall not appropriate any 
     funds to finance credit enhancement guarantees under this 
     section.
       ``(e) Report and Analysis.--
       ``(1) Report.--
       ``(A) In general.--During the development and 
     implementation of the pilot program, the Administrator shall 
     submit a report on the status of the pilot program under this 
     section to Congress in each annual budget request and 
     performance plan.
       ``(B) Contents.--The report submitted under subparagraph 
     (A) shall include, among other items, information about the 
     loans in the pools or trusts, including delinquency, default, 
     loss, and recovery rates.
       ``(2) Analysis and report.--Not later than December 30, 
     2005, the Comptroller General shall--
       ``(A) conduct an analysis of the pilot program under this 
     section; and
       ``(B) submit a report to Congress that contains a summary 
     of the analysis conducted under subparagraph (A) and a 
     description of any effects, not attributable to other causes, 
     of the pilot program on the lending programs under section 
     7(a) of the Small Business Act (15 U.S.C. 636(a)) and title V 
     of this Act.
       ``(3) Implementation.--
       ``(A) Report.--After completing operational guidelines to 
     carry out the pilot program under this section, the 
     Administration shall submit a report, which describes the 
     method in which the pilot program will be implemented, to--
       ``(i) the Committee on Small Business and Entrepreneurship 
     of the Senate; and
       ``(ii) the Committee on Small Business of the House of 
     Representatives.
       ``(B) Timing.--The Administration shall not implement the 
     pilot program under this section until the date that is 50 
     days after the report has been submitted under subparagraph 
     (A).
       ``(f) Sunset Provision.--This section shall remain in 
     effect until September 30, 2006.''.
                                 ______