[Congressional Record Volume 153, Number 168 (Thursday, November 1, 2007)]
[Senate]
[Pages S13689-S13691]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE (for herself and Mr. Kerry):
  S. 2288. A bill to establish portfolio quality standards, improve 
lender oversight by the Small Business Administration, create economic 
outcome and performance measurements, strengthen the loan programs 
under section 7(a) of the Small Business Act and title V of the Small 
Business Investment Act of 1958, and for other purposes; to the 
Committee on Small Business and Entrepreneurship.
  Ms. SNOWE. Mr. President, I rise today with Senator Kerry to 
introduce the Small Business Lending Oversight and Program Performance 
Improvements Act of 2007. I truly appreciate Senator Kerry's leadership 
on small business issues and his bipartisan work with me on this bill.
  Small businesses have propelled our Nation's economic growth, 
producing more than 50 percent of our Gross Domestic Product, GDP, and 
creating between 60 to 80 percent of all new jobs annually. The Small 
Business Administration's loan guarantee programs are a vital source of 
financing for many of these small start-up firms, entrepreneurs seeking 
working capital, and small businesses that must purchase larger office 
space or secure factory equipment so they can continue to expand.
  At the same time, the SBA's 7(a) and 504 lending programs will not 
endure if careless oversight, and a lack of standards, allow scandal to 
tarnish the good names of these programs. The 7(a) and 504 lending 
programs will not survive if we cannot prove to taxpayers that the 
money spent to guarantee small business loans actually produces 
economic vitality, opportunity, and new jobs, for our Nation. Make no 
mistake, the only way to protect these integral programs and 
demonstrate their effectiveness and economic growth capacity is through 
the use of concrete measurements.
  In order for the SBA's lending portfolios to grow and allow more 
small firms to secure the capital they require, the SBA must quantify 
both quality and performance by establishing the specific criteria it 
will examine and then assess changes in these factors over time. 
Additionally, these benchmarks must be codified and transparent so that 
lenders and small businesses understand what is being measured.

  The problem is this: although the SBA evaluates portfolio quality, 
and uses these assessments to conduct lender oversight, the SBA has 
failed to provide participating lenders with some of the criteria or 
formulas the Agency uses to determine if their portfolios are sound or 
substandard. This lack of transparency not only hinders the SBA's 
lender oversight capabilities, it causes participating 7(a) and 504 
lenders to be critical of the SBA's ability to accurately assess 
portfolio quality. Regrettably, the SBA's current oversight and 
portfolio quality assessment methods have not prevented recent high-
profile scandals from occurring.
  Currently, the SBA has roughly $60 billion in outstanding loans 
issued to small businesses. Yet incredulously it does not track these 
businesses' economic performance. While the SBA's total loan volume has 
increased substantially over the last 10 years, the agency has no way 
to show how these loans benefitted the U.S. economy. Ultimately, the 
SBA is unaware of how many jobs these loans have created, whether 
company net-sales or revenues have increased after securing capital, or 
how many of these companies prepay, default, or go out of business. 
Though the purpose of these loans is to spur economic growth, the SBA 
does not assess the actual economic outcomes these loans help make 
possible. Without these measurements, how can the SBA attest to the 
incredible economic lift and vitality these loans help generate?
  Two recent Government Accountability Office reports, one from July of 
this year and one from June of 2004, recommended that the SBA improve 
its economic performance and portfolio quality measurements. Our bill 
would implement the GAO's recommendations and improve the performance 
measures for 7(a) and 504 loans. Among other things, the bill would 
require the SBA to: create standards for lenders' portfolio quality; 
increase the transparency of the SBA's lender oversight evaluation 
measures; report on borrowers' economic performance; and create a 7(a) 
and 504 portfolio default rate that can be compared directly to 
commercial lenders' default rates.
  We have an obligation not only to maintain, but to strengthen and 
improve the SBA's key loan programs that I have heard time and again 
are a critical lifeline to the job generators we call small businesses. 
The remedies that Senator Kerry and I are proposing today are necessary 
for the SBA's lending programs to expand, and reach all of the small 
businesses that must have access to capital.
  I urge my colleagues to strongly support the Small Business Lending 
Oversight and Program Performance Improvements Act.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 2228

       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 Lending 
     Oversight and Program Performance Improvement Act of 2007''.

     SEC. 2. FINDINGS.

       Congress finds the following:
       (1) Recent reports by the Government Accountability Office 
     have recommended that the Small Business Administration 
     develop better measurements and methods for measuring the 
     performance of lending programs and the effectiveness of 
     lender oversight.
       (2) A July 2007 report by the Government Accountability 
     Office entitled ``Small Business Administration: Additional 
     Measures Needed to Assess 7(a) Loan Program's Performance'' 
     found the following:
       (A) Determining the success of the loan programs under 
     section 7(a) of the Small Business Act (15 U.S.C. 636(a)) 
     ``is difficult as the performance measures show only outputs 
     - the number of loans provided - and not outcomes, or the 
     fate of the businesses borrowing with the guarantee.''.
       (B) ``The current measures do not indicate how well the 
     agency is meeting its strategic goal of helping small 
     businesses.''.
       (C) ``To better ensure that the 7(a) program is meeting its 
     mission responsibility of helping small firms succeed through 
     guaranteed loans, we recommend that the SBA administrator 
     complete and expand the SBA's current work on evaluating the 
     program's performance measures. As part of that effort, at a 
     minimum, the SBA should further utilize the loan performance 
     information it already collects, including but not limited to 
     defaults, prepayments, and number of loans in good standing, 
     to better report how small businesses fare after they 
     participate in the 7(a) program.''.
       (3) A June 2004 report by the Government Accountability 
     Office entitled ``Small Business Administration: New Services 
     for Lender Oversight Reflect Some Best Practices but Strategy 
     for Use Lags Behind'' found that ``Best practices dictate the 
     need for a clear and transparent understanding of how a risk 
     management service and the tools it provides will be used.''.

     SEC. 3. DEFINITIONS.

       In this Act--
       (1) the terms ``Administration'' and ``Administrator'' mean 
     the Small Business Administration and the Administrator 
     thereof, respectively;
       (2) the term ``base year'' means the year in which a 
     covered loan recipient receives a loan under section 7(a) of 
     the Small Business Act (15 U.S.C. 636(a)) or the 504 Loan 
     Program;
       (3) the term ``covered lender'' means--
       (A) a lender participating in the guarantee loan program 
     under section 7(a) of the Small Business Act (15 U.S.C. 
     636(a)); and
       (B) a State or local development company participating in 
     the 504 Loan Program;
       (4) the term ``covered loan recipient'' means a person that 
     receives a loan under section 7(a) of the Small Business Act 
     (15 U.S.C. 636(a)) or the 504 Loan Program;
       (5) the term ``economic performance evaluation 
     measurements'' means the economic performance evaluation 
     measurements established under section 8(a);
       (6) the term ``504 Loan Program'' means the program to 
     provide financing to small business concerns by guarantees of 
     loans under title V of the Small Business Investment Act of 
     1958 (15 U.S.C. 695 et seq.), which are funded by debentures 
     guaranteed by the Administrator;
       (7) the term ``portfolio quality evaluation standards'' 
     means the portfolio quality evaluation standards established 
     under section 5(a)(1); and

[[Page S13690]]

       (8) the term ``small business concern'' has the same 
     meaning as in section 3 of the Small Business Act (15 U.S.C. 
     632).

     SEC. 4. AUTHORITY.

       Section 5 of the Small Business Act (15 U.S.C. 634) is 
     amended--
       (1) in subsection (b)(14), by striking ``other lender 
     oversight activities'' and inserting ``used to improve 
     portfolio performance and lender oversight through technology 
     and software programs designed to increase program loan 
     quality, management, accuracy, and efficiency and program 
     underwriting accuracy and efficiency''; and
       (2) by adding at the end the following:
       ``(i) In establishing lender oversight review fees 
     described in subsection (b)(14), the Administrator shall 
     follow cost containment and cost control best practices that 
     ensure that such fees are reasonable and do not become 
     burdensome or excessive.''.

     SEC. 5. PORTFOLIO QUALITY EVALUATION STANDARDS.

       (a) Standards.--
       (1) In general.--Not later than 1 year after the date of 
     enactment of this Act, the Administrator shall develop and 
     publish in the Federal Register portfolio quality evaluation 
     standards for covered lenders, which shall include portfolio 
     quality criteria, including--
       (A) a liquidation rate;
       (B) a currency rate;
       (C) a recovery rate;
       (D) a delinquency rate; and
       (E) other portfolio risk indicators.
       (2) Use.--The Administration shall use the portfolio 
     quality evaluation standards--
       (A) to determine the portfolio quality of a covered lender, 
     in comparison to the portfolio quality of all covered 
     lenders; and
       (B) for conducting lender oversight of covered lenders.
       (b) Implementation.--The Administrator shall--
       (1) rank and determine a separate score for each covered 
     lender, on each of the portfolio quality evaluation 
     standards;
       (2) combine the portfolio quality rankings described in 
     paragraph (1) to establish the overall lender portfolio 
     quality score for each covered lender, based on the 
     compliance of that covered lender with the portfolio quality 
     evaluation standards;
       (3) provide a covered lender access to--
       (A) the score of that covered lender for each of the 
     portfolio quality evaluation standards; and
       (B) the overall portfolio quality score for that covered 
     lender; and
       (4) provide a written explanation of the factors affecting 
     the score described in paragraph (3)(A) for a covered lender 
     to that covered lender.
       (c) Quarterly Evaluations.--Not less frequently than once 
     each quarter, the Administrator shall evaluate each covered 
     lender to determine whether--
       (1) there has been a statistically significant adverse 
     change in the criteria evaluated under the portfolio quality 
     evaluation standards relating to a covered lender; and
       (2) the portfolio of that covered lender has a higher 
     concentration of loans made to businesses in a specific North 
     American Industry Classification System code (or any 
     successor thereto) than is typical for businesses in that 
     code, as determined by the Administrator.
       (d) Additional Onsite Review.--
       (1) Deterioration in loan portfolio.--If the Administrator 
     determines that there is significant and sustained 
     statistically adverse change in the loan portfolio of a 
     covered lender, based on the quarterly evaluation of that 
     covered lender under subsection (c), the Administrator 
     shall--
       (A) determine the reason for such deterioration;
       (B) determine if the deterioration should lead to an onsite 
     review of the loan portfolio of that covered lender;
       (C) taking into consideration the opinion of the relevant 
     district director of the Administration, determine whether it 
     is appropriate for the Administrator to adjust the preferred 
     lender or other loan making status of that covered lender;
       (D) document the decision by the Administrator regarding 
     whether to conduct an onsite review or adjust the loan making 
     status of that covered lender; and
       (E) inform that covered lender of any statistically adverse 
     change in loan quality of the portfolio of that covered 
     lender.
       (2) Adverse changes.--If the Administrator determines there 
     has been a statistically significant adverse change in the 
     criteria evaluated under the portfolio quality evaluation 
     standards relating to a covered lender, the Administrator 
     shall determine whether it is necessary to conduct an onsite 
     review of that covered lender.
       (3) Scope of review.--Any onsite review of a covered lender 
     under this subsection shall focus on--
       (A) the credit quality of the loans within the portfolio of 
     that covered lender;
       (B) the soundness of the credit evaluation and underwriting 
     processes and procedures of that covered lender;
       (C) the adherence by that covered lender to the policies 
     and procedures of the Administration; and
       (D) any other measures that the Administrator determines 
     appropriate.
       (e) Defaults.--The Administrator shall provide to a covered 
     lender information relating to any indicator under the 
     portfolio quality evaluation standards that indicate an 
     increased risk of default for specific loans.
       (f) Document Retention.--The Administrator shall maintain 
     an electronic copy of any document relating to any portfolio 
     quality evaluation or onsite review under this section 
     (including documents relating to any determination regarding 
     whether to conduct such a review).
       (g) Data Collection.--The Administrator shall enter into a 
     contract with a fiscal and transfer agent of the 
     Administration under which that fiscal and transfer agent 
     shall provide to the Administrator the data necessary to 
     conduct the quarterly evaluation of covered lenders using the 
     portfolio quality evaluation standards under this section.

     SEC. 6. DEFAULT RATE.

       (a) In General.--Using established industry standards for 
     calculating loan default rates, and not later than 1 year 
     after the date of enactment of this Act, and every year 
     thereafter, the Administrator shall calculate a loan default 
     rate for--
       (1) loans under section 7(a) of the Small Business Act (15 
     U.S.C. 636(a));
       (2) loans under the 504 Loan Program; and
       (3) specialty loan programs under section 7(a) of the Small 
     Business Act or the 504 Loan Program, including the Express 
     Loan program under section 7(a)(31) of the Small Business Act 
     and the Export Working Capital Program under section 7(a)(14) 
     of the Small Business Act.
       (b) Methodology.--Not later than 1 year after the date of 
     enactment of this Act, the Administrator shall publish in the 
     Federal Register the methodology the Administrator will use 
     to calculate default rates under subsection (a).
       (c) Purpose.--The purpose of the default rates calculated 
     under subsection (a) is to provide a cumulative default rate 
     for loans under section 7(a) of the Small Business Act (15 
     U.S.C. 636(a)) and loans under the 504 Loan Program that may 
     be compared directly to the default rates of other commercial 
     loans.

     SEC. 7. COMPUTER MODELING.

       (a) Transparency in Ranking Criteria.--The Administrator--
       (1) shall provide each covered lender with the data, 
     factors, statistical methods, ranking criteria, indicators, 
     and other measures used to make the ranking described in 
     section 5(b); and
       (2) may not charge a fee for providing the information 
     described in paragraph (1).
       (b) Failure to Provide.--In ranking a covered lender under 
     section 5(b), the Administrator may not use any data, factor, 
     statistical method, ranking criteria, indicator, or other 
     measure that the Administrator has not provided to that 
     covered lender.
       (c) Contracts.--Before establishing or modifying any system 
     or mechanism for evaluating the making of loans, the 
     accounting for loans, the underwriting of loans, or otherwise 
     overseeing loans made by covered lenders, the Administrator 
     shall consult with relevant covered lenders.

     SEC. 8. ECONOMIC PERFORMANCE EVALUATION MEASUREMENTS.

       (a) Measurements.--Not later than 1 year after the date of 
     enactment of this Act, the Administrator shall develop and 
     publish in the Federal Register economic performance 
     evaluation measurements for evaluating the economic 
     performance and economic outcomes of each covered loan 
     recipient, which shall include--
       (1) number of individuals employed by that covered loan 
     recipient;
       (2) the annual sales receipts of that covered loan 
     recipient;
       (3) an estimate of the total annual Federal income tax paid 
     by that covered loan recipient;
       (4) whether the covered loan recipient prepaid the covered 
     loan;
       (5) whether the covered loan recipient defaulted on the 
     covered loan;
       (6) the number of businesses operated by covered loan 
     recipients that cease operations; and
       (7) the number of covered loan recipients that establish a 
     new business relating to the business for which that covered 
     loan recipient received a loan under section 7(a) of the 
     Small Business Act (15 U.S.C. 636(a)) or the 504 Loan 
     Program.
       (b) Collection of Information.--
       (1) In general.--On and after the date that is 2 years 
     after the date of enactment of this Act, the Administrator 
     shall electronically collect, as part of the loan application 
     process, from the person applying for a loan under section 
     7(a) of the Small Business Act (15 U.S.C. 636(a)) or the 504 
     Loan Program--
       (A) the number of individuals employed by the applicant;
       (B) the annual sales receipts of the applicant for the year 
     before the date of the application; and
       (C) an estimate of the total annual Federal income tax paid 
     by that covered loan recipient.
       (2) Base year.--The Administrator shall use the information 
     collected under paragraph (1) to establish the base year 
     statistics for the applicant.
       (3) Information compliance.--
       (A) In general.--During the 12-year period beginning on the 
     date that a covered loan recipient receives a loan under 
     section 7(a) of the Small Business Act or the 504 Loan 
     Program, as the case may be, the covered loan recipient shall 
     provide to the Administrator information relating to the 
     economic performance evaluation measurements upon requested.

[[Page S13691]]

       (B) Frequency.--The Administrator shall request information 
     from a covered loan recipient under subparagraph (A) not less 
     frequently than once every 4 years.
       (c) Reporting.--
       (1) In general.--Not later than 6 years after the date of 
     enactment of this Act, and every 4 years thereafter, the 
     Administrator shall publish a report assessing the 
     information relating to the economic performance evaluation 
     measurements submitted by covered loan recipients during the 
     period described in paragraph (2), including an evaluation of 
     the aggregate changes, if any, in the economic performance 
     evaluation measurements since the relevant base years for 
     such covered loan recipients.
       (2) Period.--The period described in this paragraph is--
       (A) for the first report submitted under this subsection, 
     not shorter than the 4-year period before the date of that 
     report;
       (B) for the second report submitted under this subsection, 
     not shorter than the 8-year period before the date of that 
     report; and
       (C) for the third report submitted under this subsection, 
     and each report submitted thereafter, not shorter than the 
     12-year period before the date of that report.

     SEC. 9. PRIVACY.

       In collecting data and preparing reports under this Act, 
     the Administrator shall ensure that the privacy and 
     information of covered loan recipients is protected.

     SEC. 10. EXECUTIVE COMPENSATION.

       Section 503 of the Small Business Investment Act of 1958 
     (15 U.S.C. 697) is amended by adding at the end the 
     following:
       ``(j) Executive Compensation.--
       ``(1) In general.--Except as provided in paragraph (4), a 
     State or local development company shall have a written 
     contract with each executive or highly paid employee of that 
     development company relating to the employment of that 
     executive or highly paid employee, which shall include, for 
     that executive or employee, the amount of compensation, 
     benefits, and any transfer of anything of value to that 
     executive or highly paid employee, including any rental or 
     sale.
       ``(2) Approval by board of directors.--
       ``(A) In general.--A written contract described in 
     paragraph (1) shall be approved by the board of directors of 
     the State or local development company.
       ``(B) Evaluation.--In evaluating a contract described in 
     paragraph (1), the members of the board of directors of a 
     State or local development company shall--
       ``(i) determine the fair market value of the benefits 
     received by an executive or highly paid employee from that 
     development company; and
       ``(ii) evaluate the amount paid by other State or local 
     development companies and commercial lenders for comparable 
     services, including, if a rental of property for that 
     executive or highly paid employee is part of that contract, 
     the amount of annual rent paid locally for comparable 
     property.
       ``(C) Distribution of evaluation.--The board of directors 
     of a State or local development company shall ensure that the 
     information described in subparagraph (B) is made available 
     to each member of that board of directors before the date of 
     the meeting at which the board of directors will determine 
     whether to approve the relevant contract and include the 
     information described in subparagraph (B) in the minutes of 
     that meeting.
       ``(D) Participation.--An executive or highly paid official, 
     and any other party with personal interest in a contract, 
     shall not attend a meeting of the board of directors to 
     determine whether to approve the contract with that executive 
     or highly paid official, unless the members of the board of 
     directors request that executive or highly paid official 
     respond to questions.
       ``(E) Voting.--An executive or highly paid official, and 
     any other party with personal interest in a contract, shall 
     not be present during, and shall not vote on, whether to 
     approve the contract with that executive or highly paid 
     official.
       ``(3) Annual reports.--A State or local development company 
     shall report annually to the Administration regarding the 
     terms of each contract with each executive or highly paid 
     official of that development company.
       ``(4) Exception.--This subsection shall not apply to--
       ``(A) a small State or local development company;
       ``(B) a State or local development company that makes a low 
     number of loans under the 504 Loan Program; or
       ``(C) a State or local development company regulated by a 
     State or local government.
       ``(5) Regulations.--The Administrator shall promulgate 
     regulations to carry out this subsection, including defining 
     the terms `executive', `highly paid', `small State or local 
     development company', and `low number of loans'.''.

     SEC. 11. STUDY AND REPORT ON EXAMINATION AND REVIEW FEES.

       (a) Study.--The Comptroller General of the United States 
     shall conduct a study of the loan guaranty program under 
     section 7(a) of the Small Business Act to determine--
       (1) the scope of lender oversight needed by the 
     Administration;
       (2) what other entities regulate the lenders that 
     participate in that loan guaranty program, what activities 
     are being reviewed, and the scope of such reviews;
       (3) how the amounts of examination and review fees are 
     determined by such other regulatory entities, who pays for 
     such fees, and how they compare with examination and review 
     fees proposed in regulations issued by the Administration on 
     May 4, 2007;
       (4) how examination and review fees factor into the risk-
     adjusted return on capital (or ``RAROC'') ratings of lenders;
       (5) what would be reasonable fees to be charged for 
     Administration lender oversight;
       (6) whether Administration lender oversight functions can 
     be executed in conjunction with other lender reviews 
     currently required by other regulatory entities, including 
     those that review Federal banks, credit unions, or entities 
     reviewed by the Farm Credit Administration; and
       (7) the impact of lender oversight fees proposed by the 
     Administration on lending to borrowers, including cost 
     changes, availability of credit, and increased or decreased 
     lender participation.
       (b) Report.--The Comptroller General shall submit to 
     Congress a report on the results of the study required by 
     subsection (a) not later than 1 year after the date of 
     enactment of this Act.
                                 ______