[Congressional Record (Bound Edition), Volume 150 (2004), Part 6]
[Extensions of Remarks]
[Pages 7501-7503]
[From the U.S. Government Publishing Office, www.gpo.gov]




                   EXPLANATORY STATEMENT ON H.R. 4062

                                 ______
                                 

                        HON. DONALD A. MANZULLO

                              of illinois

                    in the house of representatives

                        Thursday, April 22, 2004

  Mr. MANZULLO. Mr. Speaker, on March 31, 2004, the House took up 
consideration and passed H.R. 4062, a bipartisan bill to resolve 
problems associated with the restrictions imposed by the Small Business 
Administration on loans made pursuant to Sec. 7(a) of the Small 
Business Act. The bill was then passed by the Senate and signed into 
law by the President. Since the bill was taken directly to the floor, 
no committee report accompanies the bill. As Chairman and on behalf of 
the Ranking Democratic Member, Nydia M. Velazquez, I am submitting for 
insertion into the Record, the attached explanation of the bill by its 
sponsors. We would expect the Administrator, in implementing the 
provisions of H.R. 4062, to accord the enclosed explanation the same 
weight in divining congressional intent that the Administrator would 
give to a committee report on a bill that first went through a mark-up 
prior to floor consideration.

                Joint Explanatory Statement on H.R. 4062

 Filed by Chairman Manzullo for himself and Ranking Democratic Member 
                               Velazquez

     Section 1. Additional Temporary Extension of Authorization
       Temporary authorizations are needed to ensure continued 
     operation of certain programs authorized by the Small 
     Business Act and Small Business Investment Act of 1958. This 
     section extends those programs while the House and Senate 
     work out their differences on a broader reauthorization 
     package.
     Section 2. Extension of Certain Fee Authorizations
       The qualified state and local development company (referred 
     to in this statement as ``certified development company'' or 
     ``CDC'') program authorized by Title V of the Small Business 
     Investment Act of 1958 operates on fees charged by the 
     Administrator to lenders. Those fees need to be reauthorized 
     to prevent the program from ceasing operation. Given the 
     complexity of the financing arrangements loans made pursuant 
     to Title V, CDCs and small businesses need sufficient time to 
     develop the appropriate financing packages and submit 
     applications to the Administrator. To accommodate the needs 
     of lenders and borrowers under Title V, the sponsors 
     determined that an extension of the fee authorization through 
     the end of the fiscal year would be appropriate. Furthermore, 
     the sponsors believe that if the recent problems in the loan 
     programs authorized by 7(a) of the Small Business Act were 
     resolved through the end of this fiscal year, equity demands 
     that CDCs be able to operate unencumbered for the same 
     period.
     Section 3. Fiscal Year 2004 Purchase and Guarantee Authority 
         under Title III of the Small Business Investment Act of 
         1958
       The Small Business Investment Company (``SBIC'') program 
     operates without the use of appropriated funds. Fees and 
     profits are used to cover the cost of the program, including 
     coverage of losses in investment portfolios. While the 
     sponsors believe that the fees authorized for the purchase of 
     securities and debentures would allow the program to continue 
     full operation without modification to the authorization 
     levels, clarification to ensure that the program could 
     continue operations was an appropriate course of action. To 
     avoid any possible confusion or action by the Administrator 
     to curtail the operation of the program, the sponsors 
     extended the authorizations for both the purchase of 
     participating securities and guarantees of debentures at FY 
     2003 levels for the rest of the fiscal year.
     Section 4. Combination Financing
       For a number of years, the Administrator authorized the use 
     of so-called piggyback financing when using the loan program 
     authorized by 7(a) of the Small Business Act. The 
     Administrator defines ``piggyback financing'' as a situation 
     in which ``one or more lender(s) provides more than one 
     loan(s) to a single borrower at or about the same time, 
     financing the same or similar purpose, and where the SBA 
     guarantees the loan secured with a junior lien position.'' 
     Small Business Administration, Standard Operating Procedure 
     50-10(4)(E), at 20. Furthermore, the Administrator notes that 
     the determination of ``piggyback financing'' requires an 
     assessment of both the lien position and the commonality of 
     purpose. Id.
       Earlier in the year, the Administrator, presumably pursuant 
     to the authority set forth in Sec. 7(a)(24) of the Small 
     Business Act, made certain policy changes to the operation of 
     the guaranteed loan program. In particular, the Administrator 
     prohibited the use of piggyback financing.
       The sponsors believe that ``piggyback financing'' plays a 
     valuable role in the provision of capital to small 
     businesses. This is particularly the case for small 
     businesses requiring larger loans in cyclical sectors of the 
     economy. The financing technique is quite similar to that 
     statutorily authorized in Title V of the Small Business 
     Investment Act of 1958.
       Section 4 creates, for the rest of fiscal year 2004, a 
     temporary combination-financing program by adding a new 
     paragraph (31) to Sec. 7 of the Small Business Act. The 
     provisions sunset at the end of the fiscal year, i.e., at the 
     end of the day on September 30, 2004.
       The sponsors adopted the more formal language ``combination 
     financing'' rather than the term ``piggyback financing.'' The 
     sponsors define ``combination financing'' as a loan 
     consisting of both a commercial loan and a guaranteed loan. A 
     commercial loan is defined as one that has no portion 
     guaranteed by the government. The sponsors intend the term 
     ``combination financing'' to have the same characteristics as 
     ``piggyback financing'' as that term is used in the Small 
     Business Administration's Standard Operating Procedure 
     already cited in this statement.
       The authorization of combination financing is limited to 
     those situations in which the small business concern 
     (borrower) obtains both a guaranteed loan pursuant to 
     Sec. 7(a) of the Small Business Act and a commercial loan. 
     Again the sponsors intend that the provision should operate 
     in a manner similar to the Small Business Administration's 
     determination that the commercial and guaranteed loans are 
     obtained for the same or similar purposes and the loans are 
     originated and disbursed (in whole or in part) at about the 
     same time.
       To ensure that the public fisc is protected even when the 
     Administrator's lien is subordinate to the commercial loan, 
     the sponsors restricted the size of the combination loan to 
     that of the guaranteed loan. In other words, there is a one-
     to-one ratio between the commercial and guaranteed loans. 
     While the commercial loan cannot exceed the size of the 
     guaranteed loan, the sponsors do not intend to prevent a 
     commercial loan from being smaller than the guaranteed loan.
       The sponsors authorize the commercial loan may be made by 
     the lender that is making the guaranteed loan. However, the 
     sponsors also permit the commercial loan to be made by a 
     different lender as long as the loans meet the simultaneity 
     of time and purpose already limned. In addition, the sponsors 
     also authorize lenders designated as ``Preferred Lenders'' by 
     the Administrator to make the commercial loan in such 
     combination financings.
       The sponsors also authorize lenders designated as 
     ``Preferred Lenders'' by the Administrator to make the 
     commercial loan in combination financings. In order to 
     expedite the processing of combination financings in these 
     circumstances, it is the sponsors' intent that the 
     Administrator process applications for combination financings 
     submitted by such ``Preferred Lenders'' through the Preferred 
     Lenders Program Processing Center.
       The sponsors explicitly authorize the commercial loan to be 
     secured by a lien senior to that of the guaranteed loan. 
     Nothing in this provision prevents the Administrator from 
     continuing or discontinuing this practice after September 30, 
     2004 unless directed otherwise by statute.
       In normal commercial transactions, lenders that take a 
     subordinated lien position on an asset are compensated for 
     the additional risk through additional upfront fees or by a 
     higher interest rate. The Administrator did not require any 
     additional payments or modification of applicable interest 
     rates for taking a junior position in its ``piggyback 
     financing.'' Section 4 requires the Administrator to charge 
     an upfront fee equal to 0.7 percent of the amount of the 
     commercial loan as reimbursement for the risk associated with 
     taking a subordinate lien position. The sponsors expect that 
     the lender that is benefiting from senior lien position to 
     pay the fee.
       While lenders pay all fees charged pursuant to Sec. 7(a) of 
     the Small Business Act, some fees are recoverable from 
     borrowers. Lenders may obtain reimbursement of the upfront 
     fees mandated by Sec. 7(a)(18) of the Small Business Act from 
     borrowers but are prohibited from recovering from borrowers 
     the annual ongoing fee mandated by Sec. 7(a)(23) of the Small 
     Business Act. Since the ultimate beneficiary of the 
     combination financing as authorized by this section is the 
     bank making the commercial loan, the sponsors determined that 
     the lender should be prohibited from recovering that fee and 
     imposed the restriction set forth in Sec. 7(a)(23)(B) of the 
     Small Business Act on the payment of the commercial loan fee. 
     The cross-reference to the provision in Sec. 7(a)(23) ensures 
     that the lender will be unable to recoup the 0.7 percent from 
     the borrower.
       The Administrator had procedures in place for combination 
     financing (styled in the Standard Operating Procedures as 
     ``piggyback financing'') on October 1, 2003, and the 
     Administrator processed combination loan financings in the 
     normal course of business on October 1, 2003. To ensure that 
     the Administrator accept and process combination financing 
     loan applications, the sponsors imposed a requirement that 
     the Administrator must process those loan applications as 
     those loans were processed under the ``piggyback financing'' 
     procedures in effect on October 1, 2003.

[[Page 7502]]

       The sponsors did not believe that it would be prudent to 
     mandate the issuance of regulations to implement a temporary 
     program, which will sunset in about six months. In fact, the 
     sponsors were concerned that the promulgation process would 
     be sufficiently lengthy and the program would sunset before 
     any regulations were in place. The sponsors recognized that 
     the Administrator would be approving combination financings 
     under the rubric of ``piggyback financings'' in accordance 
     with already extant standard operating procedures. The 
     sponsors believe that these provisions are adequate for 
     immediate issuance of combination financing loans. The 
     sponsors therefore authorize the Administrator to use the 
     standards already in existence upon enactment without the 
     necessity of formal rulemaking. The provision has the 
     additional benefit that industry is well aware of the 
     procedures and standards for business eligibility in the 
     standard operating procedures.
       The sponsors recognize that additional standards may be 
     necessary to determine business loan eligibility under this 
     section. The sponsors authorize the Administrator to adopt 
     such additional standards as may be necessary (in order to 
     reduce risk to the government and increase transparency to 
     the private sector) so long as those standards do not 
     unreasonably restrict the availability of combination 
     financing as was available prior to the issuance of any 
     additional standards. Thus, the sponsors expect that the 
     Administrator will make reasonable decisions that may in some 
     ways restrict the availability of combination financing. 
     However, standards that prohibit or reduce by a significant 
     number the combination financings made after the adoption of 
     additional standards would not be within the intention of the 
     sponsors. The sponsors do not expect any new standards 
     adopted by the Administrator to impose significant 
     restrictions on combination financings. The 0.7 percent fee 
     sufficiently compensates the Administrator for the additional 
     risk. Any additional standards should focus on the procedures 
     for processing combination financings or resolving situations 
     that are not adequately addressed under current procedures 
     for ``piggyback financing.''
     Section 5. Loan Guarantee Fees
       In late December of 2003 and early January of 2004, the 
     Administrator, in part pursuant to the Anti-Deficiency Act, 
     temporarily ceased lending under the loan program established 
     pursuant to Sec. 7(a) of the Small Business Act. Shortly 
     after the Administrator halted lending, funds were 
     reallocated enabling the program, but with a mandatory loan 
     cap of $750,000.
       This restriction continues to impede the ability of small 
     businesses to obtain capital, expand their businesses, and 
     create jobs. The sponsors recognized the need to reopen the 
     program to its fully authorized levels ($2 million loan 
     maximum with a guarantee up to $1 million). Two options were 
     available for doing this. The first would require additional 
     appropriations. The second would be to raise fees associated 
     with the lending program authorized by Sec. 7(a) of the Small 
     Business Act. The sponsors were not sanguine about the 
     prospect of obtaining additional appropriations for fiscal 
     year 2004. So the sponsors reluctantly turned to the second 
     option.
       The approach adopted by the sponsors raise, through the end 
     of fiscal year 2004, the annual ongoing fee charged to 
     lenders. The reduction was reauthorized in Pub. L. No. 107-
     100. The statutory fee is currently set at a 0.5 percent but 
     was reduced temporarily, to encourage the creation of new 
     jobs, in the last reauthorization bill to 0.25 percent. 
     Section 5 raises that level from 0.25 percent to 0.36 
     percent. The sponsors also eliminate the authority of lenders 
     to retain 0.25 percent of the ongoing fee for loans of less 
     than $150,000. According to the Administrator and the Office 
     of Management and Budget, these fee changes, along with other 
     temporary modifications, raise sufficient funds to operate a 
     guaranteed loan program at a $12.55 billion level without any 
     restrictions on combination financing or caps on loan size.
     Section 6. Express Loan Provisions
       Section 7(a)(25)(B) authorizes the Administrator to create 
     pilot loan programs. In exercising that authority, the 
     Administrator created an ``Express Loan Pilot Program.'' The 
     program authorizes lenders to use their own forms in 
     submitting requests to the Administrator for the issuance of 
     guarantees. Two significant restrictions are imposed by the 
     ``Express Loan Pilot Program;'' the guarantee cannot exceed 
     50 percent of the loan and the maximum loan amount is 
     $250,000.
       According to the Administrator and the Office of Management 
     and Budget, expansion of the ``Express Loan Pilot Program'' 
     to authorize lenders to make loans up to the statutory 
     maximum of $2 million would contribute to a significant 
     reduction in the subsidy rate. The sponsors adopted this 
     concept to ensure that sufficient funds were made available 
     to reopen the program at expected loan volumes.
       Section 6 defines the term express lender as a lender 
     authorized to participate in the ``Express Loan Pilot 
     Program.'' The sponsors do not intend that the Administrator 
     need change any of the requirements for designation as an 
     express lender but is authorized to do so.
       Section 6 defines an ``Express Loan'' as one in which the 
     lender utilizes, to the maximum extent practicable, its own 
     analyses of credit and forms. The sponsors fully expect that 
     the conditions under which express loans are made will not 
     vary significantly from those conditions that currently exist 
     under the ``Express Loan Pilot Program.'' However, the 
     sponsors recognize that the Administrator may want to impose 
     some additional conditions on the use of forms or analyses 
     for larger express loans. Nothing in H.R. 4062 prohibits the 
     Administrator from imposing these additional requirements.
       Section 6 codifies the existing concept of the 
     Administrator's ``Express Loan Pilot Program.'' In other 
     words, the pilot program is one in which lenders utilize 
     their own forms and get a guarantee of no more than 50 
     percent.
       Subsection 6(b) restricts the program, including the 
     increased loan amount, to those lenders designated as express 
     lenders by the Administrator. Designation as an express 
     lender does not limit the lender to making express loans if 
     the lender has been authorized to make other types of loans 
     pursuant to Sec. 7(a) of the Small Business Act. Although a 
     lender may only seek status as an express lender, this 
     subsection was included to ensure that the Administrator not 
     limit the ability of an express lender to seek other lending 
     authority from the Administrator. Nor is the Administrator 
     permitted to change its standards for designating an express 
     lender in a manner that only authorizes the lender to make 
     express loans. To the extent that the lending institution 
     wishes to offer a full range of loan products authorized by 
     Sec.  7(a) and is otherwise qualified to do so, the 
     Administrator shall not restrict that ability on the lender's 
     status as an express lender.
       Subsection 6(c) prohibits the Administrator from revoking 
     the designation of any lender as an express lender that was 
     so designated at the time of enactment. This prohibition does 
     not apply if the Administrator finds the express lender to 
     have violated laws or regulations or the Administrator 
     modifies the requirements for designation in a way that the 
     express lender cannot meet those standards. The sponsors do 
     not expect that the Administrator will impose new 
     requirements for express lenders that prohibit them from 
     making loans under other loan programs authorized by the 
     Small Business Act for which they have approval from the 
     Administrator.
       Subsection 6(d) temporarily expands the Express Loan Pilot 
     Program to $2 million. After September 30, 2004, the sponsors 
     expect the Administrator to operate the Express Loan Pilot 
     Program according to the standards that were in effect prior 
     to the enactment. Since the Administrator had the authority 
     to modify or alter the pilot program prior to the enactment 
     of this Act, nothing in the Act restricts the Administrator 
     from taking appropriate regulatory action with respect to the 
     program after the authority vested in this Act terminates.
       The President's FY 2005 budget request for the Small 
     Business Administration did not include any funding for the 
     loan programs authorized by Sec. 7(a) of the Small Business 
     Act. Administrator Barreto testified at a full Committee 
     hearing that the loan programs should be self-funding with a 
     subsidy rate of zero and, as a result, the Sec. 7(a) lending 
     programs would be on the same footing as the CDC and SBIC 
     programs. Administrator Barreto's suggested mechanism for 
     achieving a zero subsidy rate was through a mandatory 
     expansion of the Express Loan Pilot Program to incorporate 
     almost all smaller loans (initially all loans under $250,000 
     but in subsequent years could increase if needed to maintain 
     a zero subsidy rate). The mandatory nature of the proposal 
     did not garner much acceptance among members of the House or 
     Senate Small Business Committees.
       Given Administrator Barreto's stated preference for 
     resolving the funding crisis associated with the Sec. 7(a) 
     lending programs through an expansion of express loans, the 
     sponsors are concerned that the Administrator will take 
     regulatory actions that unduly favor express lending over 
     other types of lending authorized by Sec. 7(a) of the Small 
     Business Act. As such, the sponsors determined that it was 
     appropriate to impose certain restrictions on the 
     Administrator's operation of the expanded Express Loan Pilot 
     Program in order to prevent actions that unnecessarily and 
     unduly favor express lending.
       Any significant policy change in the operation of the 
     lending programs authorized by Sec. 7(a) of the Small 
     Business Act requires notification to the House and Senate 
     Small Business Committees. Subsection 6(e) does not limit the 
     restrictions imposed on the Administrator's regulatory 
     discretion to those matters that would require notification 
     pursuant to Sec. 7(a)(24) of the Small Business Act.
       The most significant restriction is that the Administrator 
     cannot take any action that directly forces a lender to make 
     an express loan for any level. Thus, if a lender wishes to 
     make an express loan for $1.5 million dollars and is a 
     designated express lender, the lender may do so. If the same 
     lender is qualified to make other types of loans and wants to 
     make a $1.5 million dollar loan at a 75 percent guarantee, 
     the Administrator may take no action that forces the lender 
     to select the

[[Page 7503]]

     50 percent guarantee over the 75 percent guarantee.
       One mechanism for demonstrating favoritism is to impose 
     conditions on loan programs other than express loans that 
     have the effect of coercing lenders to make express loans. 
     Paragraph (2) of subsection 6(e) ensures that the 
     Administrator imposes like terms and conditions on both 
     express and other lending programs authorized by Sec. 7(a) of 
     the Small Business Act. The sponsors intend that this 
     requirement apply to all of the terms and conditions of loans 
     made pursuant to Sec. 7(a) of the Small Business Act, 
     including collateral and the likelihood of repayment 
     standards.
       Even if the terms and conditions on the loans are 
     identical, the Administrator has other mechanisms for 
     demonstrating favoritism of express lenders over other types 
     of Administrator-designated lenders. For example, the 
     Administrator could delay processing of 75 percent guarantee 
     loans, i.e., loans other than express loans, such that 
     lenders would, for all practical terms, be required to do 
     express loans. Thus, paragraph (3) of subsection 6(e) 
     prevents the Administrator from making any personnel changes 
     or altering the application of resources (be it personnel, 
     equipment, or funding) that increases the loan processing and 
     disbursement times for all loans authorized by Sec. 7(a) of 
     the Small Business Act as those were in effect on October l, 
     2003. For example, if the time for disbursement of an express 
     loan was five days and the time for disbursement of a 75 
     percent guaranteed loan was seven days, the Administrator may 
     take no action that increases the relative disparity between 
     the express loan and the 75 percent guarantee loan. Nothing 
     in this subsection shall be interpreted to prevent the 
     Administrator from improving the overall processing, 
     approval, or disbursement rates of all loans except that any 
     such improvements must affect all lenders and all lending 
     programs operating pursuant to Sec. 7(a) of the Small 
     Business Act in an identical manner.
       To ensure that the sponsors' intent is clear that the 
     expansion of the express loan is optional and the 
     Administrator shall take no action that has the practical 
     effect of making it mandatory, the sponsors incorporated a 
     catchall requirement that the Administrator not take action 
     to create incentives that would favor express loans over 
     other types of loans. The sponsors believe that the 
     determination of the appropriate nature of a loan should not 
     be made by regulatory fiat but by the sound judgment of 
     lenders, borrowers, and the Administrator's commercial loan 
     officers.
       The dramatic expansion of the express loan program, even on 
     a temporary basis, may shed dramatic light on the purposes 
     for which such loans are made. That information will be 
     critical in resolving, on a long-term basis, the funding 
     issues associated with the Sec. 7(a) lending programs. 
     Therefore, the sponsors requested, to the extent practicable, 
     monthly reports on the types and purposes for express loans 
     made in excess of the current pilot program cap of $250,000.
       Subsection 6(g) terminates the effectiveness of various 
     subsections after September 30, 2004. Subsection (d) has its 
     own internal sunset provision. No sunset is made on 
     subsection (a), as it simply codifies existing practice of 
     the Administrator with respect to definitions related to 
     express loans. Nothing in subsection (g) is intended by the 
     sponsors to constitute a permanent change in any program 
     authorized pursuant to Sec. 7(a) of the Small Business Act.
     Section 7. FY 2004 Deferred Participation Standards
       As already noted, the sponsors are concerned that 
     regulatory or other administrative changes in loan programs 
     could have the practical implication of forcing lenders to 
     make express loans. The sponsors determined that by freezing 
     all terms and conditions of loans as they existed on October 
     l, 2003 would be a sound means of deterring favoritism for 
     express lending. The sponsors intend this provision to 
     require, upon enactment, the lifting of the cap on loans made 
     pursuant to Sec. 7(a) of the Small Business Act that are 
     currently in place. Section (7) does permit the Administrator 
     to modify those terms and conditions if needed to ensure 
     continued operation of the program within the amounts 
     appropriated. Although the sponsors, based on assertions by 
     the Office of Management and Budget, believe that the 
     Administrator will have sufficient funds through the end of 
     the fiscal year to operate without any regulatory restraints, 
     the sponsors do not want to prevent the Administrator from 
     taking actions needed to prevent violations of the Anti-
     Deficiency Act. In other words, the sponsors fully expect the 
     terms and conditions of October 1, 2003 to apply unless 
     unusual and very unexpected consequences occur. Should such 
     changes be necessary, nothing in H.R. 4062 repeals, either 
     implicitly or explicitly, the notification requirements set 
     forth in Sec. 7(a)(24).
     Section 8. Temporary Increase in Loan Limit
       Access to capital is vital to the growth of small 
     businesses. Particularly for manufacturers and high 
     technology research and development businesses, typical 
     amounts of capital available under the loan programs 
     authorized by Sec. 7(a) of the Small Business Act often are 
     inadequate. If these manufacturers and high technology 
     companies are investing to increase their productivity, the 
     job creation requirements of Title V of the Small Business 
     Investment Act may make it difficult, if not impossible, to 
     obtain that type of financing. Therefore, the sponsors 
     determined that it would be appropriate to temporarily 
     increase the amount of the loan guarantee from $1 million to 
     $1.5 million. No additional changes were made in the overall 
     statutory cap of a gross $2 million loan. The sponsors did 
     not believe that was necessary because any additional gaps in 
     financing can be addressed using combination financing, under 
     the terms of this Act. Given the fact that borrowers are 
     getting an additional increment in loan guarantees, the 
     sponsors determined that it would be appropriate to require 
     an additional 0.25 percent fee for the amount of guarantee in 
     excess of $1 million. Thus, on the amount of the guarantee 
     between $1 million and $1.5 million, the upfront fee 
     authorized pursuant to Sec. 7(a)(18) of the Small Business 
     Act increases from 3.5 percent to 3.75 percent. This is 
     consistent with typical commercial lending practices of 
     charging fees that are commensurate with the lenders' 
     exposure to risk.

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