[Congressional Record (Bound Edition), Volume 148 (2002), Part 17]
[Senate]
[Pages 22753-22756]
[From the U.S. 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 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.

[[Page 22754]]

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.
                                  ____



                                                  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

[[Page 22755]]

     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 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.

[[Page 22756]]



     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''.

                          ____________________