[Congressional Record Volume 152, Number 43 (Thursday, April 6, 2006)]
[Senate]
[Page S3245]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY (for himself and Mr. Pryor):
  S. 2595. A bill to amend the Small Business Investment Act of 1958 to 
modernize the treatment of development companies; to the Committee on 
Small Business and Entrepreneurship.
  Mr. KERRY. Mr. President, today, as Ranking Democrat on the Committee 
on Small Business and Entrepreneurship, I am introducing a 
reauthorization bill for the Small Business Administration's (SBA) 504 
Loan Guaranty Program. This legislation goes beyond simply 
reauthorizing the 504 loan program. Not only does this bill provide 
adequate authorization levels in the 504 loan program, but it also 
takes on important oversight and accountability issues pertaining to 
the operation of Certified Development Companies (CDC). The issues that 
I will present in detail below are well overdue and failure on 
Congress's behalf to deal with them before the end of the fiscal year 
when the program expires will shortchange our borrowers, and ultimately 
our communities who reap the benefits of the local economic development 
that the 504 loan program is intended to provide.
  For more than 20 years, the 504 loan program has provided long-term 
financing for growing businesses with long-term (up to 20 years), 
fixed-rate financing for major fixed assets, such as purchasing land 
and making improvements, including existing buildings, grading, street 
improvements, utilities, parking lots and landscaping; construction of 
new facilities, or modernizing, renovating or converting existing 
facilities; or purchasing long-term machinery and equipment. The 504 
loan is made through a collaboration between the Certified Development 
Company (which provides 40 percent of the financing), a private sector 
lender (covering up to 50 percent of the financing) and a contribution 
of at least 10 percent from the small business being helped. This 
program is a national leader in federal economic development finance 
programs and demonstrates it through, creating or retaining over 1.4 
million jobs, backing more than $25 billion in loans, and leveraging 
over $30 billion in private investment.
  These incredible returns to our community could not be possible 
without the solid mission of the program that drives the types of 
projects and borrowers it serves. This program was not established to 
simply make loans--it was established to promote local economic 
development and to create jobs. I cannot think of another federal 
economic development program that has created over 605,000 jobs, as the 
504 program has done. Last year alone, the 504 program created over 
145,000 jobs. As the demand for 504 loans continues to grow, it is more 
important than ever to reaffirm the mission of the 504 program and to 
ensure that the 504 program is reauthorized at adequate levels to meet 
this growth.
  To address this issue, my bill reauthorizes the 504 Loan Program for 
three additional years at $8,500,000,000, fiscal year 07, 
$9,500,000,000 fiscal year 08, and $10,500,000,000, fiscal year 09. 
These levels are based on the current pace of program growth to ensure 
that there is more than adequate authorization. The fiscal year 06 504 
demand is projected to exceed $7 billion, and the last 3 years have 
shown growth rates of 28 percent, 26 percent, and 26 percent. A low 
authorization level would either force the SBA to shut down the program 
or to ration credit throughout the year to avoid a shut-down.
  As I mentioned previously, this bill goes beyond simply reauthorizing 
the 504 loan program for an additional three years. It makes some much-
needed changes to the structure of our CDCs, which are responsible for 
the delivery of this program and which are essential to the success of 
the 504 loan program.
  Year after year, I have heard about the dangers that structural 
changes pose to the CDC industry and the 504 loan program in 
maintaining the mission of economic development. One of the major 
changes experienced by CDCs includes the centralization of all 504 loan 
processing, loan servicing and liquidation functions from 70 SBA 
district offices to one or two centers in the country. This has 
resulted in a huge backlog, estimated at 900 loans waiting to be 
liquidated. This backlog results in a loss of revenue through delaying 
or completely writing off defaulted loans. This has the potential to 
drive up subsidy costs of the program and therefore fees on borrowers, 
CDCs and lenders. This bill puts forward a solution to this issue by 
decentralizing liquidation functions and allowing CDCs, if they choose, 
to foreclose and liquidate defaulted loans or to contract with a 
qualified third-party to perform foreclosure and liquidation of 
defaulted loans in its portfolio. However, CDCs are not required to 
liquidate until SBA has come up with a program to compensate and 
reimburse them for all expenses pertaining to foreclosure and 
liquidation. The expenses would be approved in advance by the 
Administrator or on an emergency basis.
  The biggest structural change that has had a tremendous impact on our 
not-for-profit CDCs is the ability to expand operations into multiple 
states. This structural change, in conjunction with the growing demand 
for 504 loans and CDC operations in providing these loans to small 
businesses, requires Congress to set a statutory course that preserves 
the local economic development intent and mission of the program 
through accountability measures. The 504 program was not created for 
CDCs to expand operations and simply create revenue from one state to 
another. CDCs are more than lenders and should not act like for-profit 
banks. My bill ensures that local communities continue to be the main 
focus of CDCs by requiring that the 25 members of their board and board 
of directors be residents of the area of operations. In addition, CDCs 
will be required to annually submit to the SBA a report on the use of 
all excess funds and local economic development activities in each 
state of operation. This ensures that the members engage, invest, and 
are held accountable to the communities they serve.
  In addition to preserving and growing the 504 loan program, I think 
it is very important to ensure that low-income communities have access 
to 504 loans. As you may know, in 2000 Congress enacted the New Markets 
Tax Credit program to facilitate private sector investment in low-
income communities.
  Theoretically, the program was designed to encourage private 
investors who may never have considered investing in low-income 
communities to do so, thereby attracting new sources of private capital 
for a variety of projects, including retail, childcare and primary 
healthcare centers, which in turn attracts jobs, services and 
additional opportunities to areas that have historically had a 
difficult time sustaining economic development. My bill creates a new 
public policy goal for the ``expansion of businesses in low-income 
communities'' and defines low-income areas as those areas which would 
be eligible for new market tax credits. Under public policy goals, a 
borrower can get a higher loan than the standard limit of $1.5 million. 
For example, a borrower could receive a 504 loan of up to $2 million if 
the proceeds will be directed toward this new public policy goal, or 
any of the currently established eight public policy goals. It is my 
hope that this incentive will increase the number of 504 loans in low-
income communities and therefore build wealth, economic security, and 
employment opportunities which benefit the entire surrounding 
community.
  I want to thank Senator Pryor for his sponsorship of this 
legislation, and thank the many members of the 504 community for 
working with us to identify ways to make this program better than ever. 
I look forward to working with them to enact this legislation before 
the fiscal year expires on September 30, 2006, and ask unanimous 
consent that my statement be included in the Record.
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