[House Report 104-239]
[From the U.S. Government Publishing Office]



104th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 1st Session                                                    104-239
_______________________________________________________________________


 
              SMALL BUSINESS CREDIT EFFICIENCY ACT OF 1995

                                _______


 September 6, 1995.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

_______________________________________________________________________


   Mrs. Meyers, from the Committee on Small Business, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 2150]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Small Business, to whom was referred the 
bill (H.R. 2150) to amend the Small Business Act and the Small 
Business Investment Act of 1958 to reduce the cost to the 
Federal Government of guaranteeing certain loans and 
debentures, and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.
    The amendment (stated in terms of the page and line numbers 
of the introduced bill) is as follows:
    Page 4, line 5, strike ``The'' and insert the following: 
``For any loan or financing made under this subsection other 
than a loan repayable in a period of one year or less, the''.

                                Purpose

    The primary purpose of the bill is to adjust the fees and 
guarantee levels of the loan programs found in Section 7(a) of 
the Small Business Act, P.L. 83-163, 15 U.S.C. Sec. 631, et 
seq. and Section 503 of the Small Business Investment Act of 
1958, P.L. 85-699, 15 U.S.C. Sec. 661, et seq. thereby lowering 
the credit subsidy rate of both programs.

                                Summary

    In brief, H.R. 2150 is intended to do four basic things:

A. Fees for loans sold on the secondary market

    Section 2 would amend Section 634(g)(4)(A) of Title 15 to 
increase the annual fee charged to lenders who sell the 
guaranteed portion of their loans on the secondary market. The 
fee would increase from 0.4 percent of the outstanding 
principal balance of the guaranteed portion to 0.5 percent.
    In addition, Section 3(b) will establish a 0.4 percent 
annual fee on the outstanding principal of all guaranteed loans 
that are not sold into the secondary market.

B. Reduced level of participation in guaranteed loans

    Section 3(a) of H.R. 2150 will reduce and simplify the 
level of guarantee offered through the 7(a) program. Section 
636(a)(2) of Title 15 is amended to change the guarantee 
percentage to no more than 80 percent of the total amount of 
loans up to $100,000 and no more than 75 percent of all loans 
above $100,000. This will alter the current system where loans 
under $155,000 are guaranteed up to 90 percent; loans over 
$155,000 are guaranteed up to 85 percent; and loans from 
Preferred Lenders are guaranteed at 70 percent.

C. Increase in guarantee fees

    Section 3(b) of H.R. 2150 increases the guarantee fees 
charged on guaranteed loans. The current fee is two percent of 
the guaranteed portion of all loans. Under H.R. 2150 the fees 
would increase to two percent of the gross amount of any loan 
below $250,000; 2.5 percent of any loan between $250,000 and 
$500,000; and three percent of any loan above $500,000.
    Section 3(c) of H.R. 2150 also ends the practice of 
allowing lenders to keep one half of the guarantee fees on 
loans under 50,000 dollars or loans under 75,000 dollars made 
in rural areas.

D. Increased fee and loan limit on development company loans

    Section 4(a) of H.R. 2150 amends Section 502(2) of The 
Small Business Investment Act of 1958 (15 U.S.C. Sec. 696(2)) 
by increasing the total loan amount available from $750,000 to 
$1,250,000.
    Section 4(b) of H.R. 2150 amends Section 697(b)(3) of Title 
15 by adding a one-eighth of one percent fee to cost of any 
loans made by a Certified Development Company under the 504 
loan program. This fee is to be passed on directly to the Small 
Business Administration and is to be used solely to offset the 
cost of the program.

                          Need for Legislation

What is the Section 7(a) Loan Program?

    The 7(a) General Business Loan Program was originally 
enacted as several categorical loan programs designed to aid 
small businesses in different economic sectors in gaining 
access to capital. In 1981 the program was entirely rewritten 
by Title XIX, Section 1902, of P.L. 97-35. This new 7(a) 
program consolidated the old program in order to harmonize the 
interest rates and terms of the loans under Section 7(a).
    The 7(a) program helps provide financing to small 
businesses that are unable to secure financing in the private 
sector on reasonable terms. Through the 7(a) program the Small 
Business Administration guarantees to pay part of any loss 
sustained by a bank or other financial institution on a 
qualified small business loan.
    These loans may be for a broad variety of purposes 
including the purchase of buildings or equipment, working 
capital, or the financing of commercial construction or 
rehabilitation. However, proceeds may not be used primarily for 
the acquisition of land.
    Section 7(a) general business loans cannot be made unless 
the financing sought is unavailable on reasonable terms from 
non-Federal sources. An SBA Section 7(a) general business loan 
must be of such sound value or so secured as to reasonably 
assure repayment.
    Currently SBA may guarantee up to $750,000 of a commercial 
loan. For loans under $155,000 in value the SBA guarantees up 
to 90 percent of the loan. For loans exceeding $155,000 the 
guarantee is limited to 85 percent unless the lender is a 
participant in the Preferred Lender program. The lenders in the 
Preferred Lender Program are granted expedited consideration of 
their loans in return for a lesser guarantee of 70 percent. The 
SBA guarantees loans up to 25 years in term; however, the 
average term for a working loan is usually 5-7 years.
    During the 103d Congress legislation was passed and signed 
into law that significantly lowered the credit subsidy rate of 
the 7(a) general business loan program. This legislation, P.L. 
103-81 was designed to reduce the subsidy rate from 5.73 
percent to 2.73 percent by the imposition of a 0.4 percent fee 
on all loans whose guaranteed portion was sold into the 
secondary market, a modification of the guarantee percentages 
on most loans, and a formula requiring lenders to give one-half 
of all premiums above 110 percent on loans sold into the 
secondary market to the Small Business Administration.

What is the 504 Loan Program?

    The Small Business Investment Act of 1958 allows The Small 
Business Administration, through financial intermediary local 
and state development companies, to finance the growth and 
expansion of small businesses through the purchase of plants 
and equipment.
    Originally, these development companies obtained small 
business financing funds directly from the Small Business 
Administration, or through SBA guarantees of their loans. 
Today, however, the majority of their lending is financed 
through SBA guaranteed debentures.
    Under Sections 503 and 504 of the Small Business Investment 
Act of 1958, development companies may obtain a charter from 
SBA designating them as ``certified'' development companies. 
These certified development companies may then issue debentures 
or long term debt instruments. These debentures or debt 
instruments are now sold to private investors backed by a 100 
percent SBA guarantee. Previously these debentures were sold to 
the Federal Financing Bank at the Department of the Treasury.
    The proceeds of the debenture or debt sales are used to 
finance the acquisition of equipment, building sites, and plant 
construction or renovation. The development company must show 
that the project to be funded is directed toward one of the 
following objectives:
          Job creation, preservation or retention within two 
        years of completion of the project;
          Stimulating, stabilizing or diversifying the local 
        economy; and
          Certain public policy goals including: business 
        district revitalization, export expansion, rural 
        development, enhancing competitiveness, defense 
        conversion, and restructuring due to federal mandates.
    The financing packages usually consist of 10 percent 
funding from the small business, 50 percent from a commercial 
lender backed by a first mortgage lien and 40 percent from the 
certified development company backed by a second mortgage lien.
    The interest rate on these financings is based on the rate 
set by the debenture or debt sales plus some servicing fees of 
between 0.5 and 1.5 percent and a 0.1 percent fee to the fiscal 
agent. In addition, there are 2.875 percent loan origination 
fees including a 0.5 percent fee for the SBA guarantee costs.
    The maximum financing available through the debentures is 
750,000 dollars, or 1 million dollars if it serves one of the 
enumerated public policy goals. The financing is also limited 
to no more than 50 percent of the total cost of the project. 
Furthermore, no financing may be made if financing is available 
elsewhere.

Why must the Section 7(a) and 504 Loan Programs be amended?

    The following charts show the growth in demand for small 
business credit assistance through the SBA's Section 7(a) 
general business loan and Section 504 development company loan 
programs since 1992.

                            7(a) LOAN PROGRAM                           
                         [Dollars in thousands]                         
------------------------------------------------------------------------
                                       Subsidy rate                     
       Year           Appropriation    (in percent)    Loans guaranteed 
------------------------------------------------------------------------
1995 (est.).......  215,081 (20,531)            2.74           7,849,000
1994..............  168,420 (38,950)            2.15           7,833,472
1993..............  333,956 (20,124)            5.21           6,409,913
1992..............  272,779                     4.85           5,624,313
------------------------------------------------------------------------
Amounts in parentheses are carried over from prior year.                


                            504 LOAN PROGRAM                            
                         [Dollars in thousands]                         
------------------------------------------------------------------------
                                       Subsidy rate                     
      Year           Appropriation     (in percent)    Loans guaranteed 
------------------------------------------------------------------------
1995 (est.).....               8.030            0.57           1,408,772
1994............               6,584            0.51           1,290,942
1993............               4,395            0.54             813,846
1992............               3,052            0.49             622,822
------------------------------------------------------------------------

    As the number of persons who enter our Nation's economy as 
small business owners increases the availability of small 
business credit continues to fall short of demand. Committee 
hearings have regularly pinpointed overregulation of the 
banking community as one of the root causes of this shortage. 
However, despite the Administration's attempts at reducing and 
easing banking regulation the demand for the services of the 
SBA's loan programs continue to rise.\1\
    \1\ Hearing Before the Committee on Small Business on the 
Administration's Program to Enhance Credit Availability, 103d Cong., 
1st Sess. (1993). Serial No. 103-45 and Hearing Before the Committee on 
Small Business on the Status of the Administration's Credit 
Availability Proposal, 103d Cong., 2d Sess. (1994) Serial No. 103-71.
---------------------------------------------------------------------------
    Over the years there have been numerous supplemental 
appropriations for the 7(a) and 504 business loan programs. The 
most recent occurred in 1993 when the SBA received an 
additional 175 million dollar appropriation under P.L. 103-50. 
This resulted in the near doubling of the fiscal year 1993 
appropriation for the 7(a) loan program.
    Despite these supplemental funds, and realizing the 
difficulty that chronic shortfalls have caused in the 
administration of the 7(a) program, the Committee on Small 
Business acted to reduce the credit subsidy rate of the 7(a) 
program from 5.21 percent to 2.15 percent. As a result of P.L. 
103-81, the Small Business Administration gained the ability to 
provide credit assistance to the small business community at a 
substantially lower rate. However, these savings proved 
ephemeral. The fee income obtained through requiring lenders 
who sold loans into the secondary market to share all premium 
income above 110 percent did not materialize. Consequently the 
credit subsidy rate for the 7(a) program rose to the current 
2.74 percent.

Recent developments which led to the current legislation

    As stated above, the credit subsidy rate of the Section 
7(a) loan program is now 2.74 percent. This allows the Small 
Business Administration to offer a total of 7.8 billion dollars 
of loan guarantees with appropriated funds of 215.1 million 
dollars. However, even before the 104th Congress convened the 
Committee on Small Business became aware that overwhelming 
demand was forcing the SBA to shift quarterly allocations 
forward in order to meet demand.
    In addition, the Administration drastically reduced the 
size of the loans it could guarantee, from 750,000 dollars to 
500,000 dollars, and imposed other administrative restrictions 
in order to continue to offer credit assistance to the small 
business community.
    On January 11, 1995 the Committee received the following 
letter from SBA Administrator Philip Lader explaining the 
rising demand and the administrative steps taken to deal with 
the situation:

                        U.S. Small Business Administration,
                                  Washington, DC, January 11, 1995.
Hon. Jan Meyers,
Chairwoman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Madam Chairwoman: Unprecedented demand for Small 
Business Administration (SBA) guaranteed loans under the 7(a) 
program recently persuaded us to adopt an administrative change 
which will allow SBA to keep the program running for the 
balance of FY 1995. I am writing to convey some background on 
our decision and to ask your support in exploring possible 
legislative changes which would improve our subsidy rate and 
help us meet growing small business credit needs.
    As you know, SBA's statutory ceiling for guaranties under 
the 7(a) program is $750,000, as provided in Section 7(a)(3)(A) 
of the Small Business Act. Given limited resources, we decided 
to use our administrative authority under the Small Business 
Act to ``cap'' 7(a) guaranteed loans at $500,000. We made this 
decision for three reasons: to ``stretch'' our authorization so 
that it would last the full fiscal year; to assist the greatest 
number of small businesses possible; and to focus on smaller 
businesses, which have the greatest difficulty obtaining 
capital and which are creating the preponderance of new jobs.
    Absent prompt administrative action, the demand for SBA 
loans this year would have exhausted our appropriation by July, 
1995. Indeed, our 1st quarter funds would have been depleted on 
December 16, 1994, had OMB not approved our request to transfer 
funds from our 4th quarter allocation. OMB's approval was 
conditioned on our presenting a plan to manage loan demand. The 
$500,000 cap became the central feature of that plan.
    In the 1st quarter, SBA's 7(a) loan approvals averaged $38 
million per day ($8.8 billion annualized), compared with $30 
million per day in the last fiscal year. This reflects, among 
other factors, SBA's reaching a greatly underserved segment of 
the small business community through the ``Low Doc'' simplified 
application introduced last June for loans under $100,000. 
Since demand traditionally increases in the second half of each 
year, applications for FY 1995 were likely to exceed $9.3 
billion, while our appropriation would support only $7.8 
billion in loans.
    SBA's reduction of the loan limit should make $900 million 
available for smaller loans, permitting us to serve nearly six 
times as many small businesses as we could have with the same 
money without the $500,000 cap. A relatively small percentage 
of SBA's customers will be affected; last year, only 10 percent 
of 7(a) borrowers received loans exceeding $500,000. Moreover, 
a cap reduction was the only administrative solution with a 
significant budgetary impact which could be accomplished in a 
timely manner, before the funds were depleted.
    Among the alternatives we examined were:
          Allocating funds by category or geography (though 
        this might be arbitrary);
          Limiting the refinancing of debt (though this has 
        little budgetary impact); and
          Reducing the maximum maturity on 7(a) loans (though 
        longer-term maturities are very valuable to small-
        business owners).
    As I suspect you would agree, the best course of action for 
our small business customers would be legislative action to 
improve our subsidy rate. This would enable us to meet demand 
which otherwise will not be satisfied by the private sector. We 
would greatly appreciate your guidance and support in this 
regard, and I welcome the opportunity to discuss this matter 
further with you at your earliest convenience.
    Best personal regards.
            Sincerely,
                                       Philip Lader, Administrator.

    On January 25, 1995 the Committee on Small Business held a 
hearing on the 7(a) loan program in order to clarify the 
reasons for the shortfall in program funds.\2\ SBA 
Administrator Philip Lader testified before the Committee and 
explained that an increase in demand at the end of fiscal year 
1994 had dramatically reduced the anticipated carry over for 
fiscal year 1995, and that therefore the fiscal year 1995 
appropriation would prove inadequate.
    \2\ Hearing Before the Committee on Small Business on the SBA's 
7(a) loan program, 104th Cong., 1st Sess. (1995). Serial No. 104-6.
---------------------------------------------------------------------------
    To compound the problem the Office of Management and Budget 
projected an increase in the credit subsidy rate of the 7(a) 
program from 2.74 to 2.76 percent. This increase would, of 
course, further reduce the cost effectiveness of the 7(a) 
program.
    On March 9, 1995 the Committee held a hearing regarding the 
Section 504 loan program.\3\ While the witnesses praised the 
program and its exemplary loss rate of 0.9 percent, concerns 
were raised regarding the funding of the program. Witnesses 
informed the Committee that they anticipated the need for 
either a supplemental appropriation or reprogramming of funds 
before the end of fiscal year 1995.
    \3\ Hearing Before the Committee on Small Business on the SBA's 
Section 504 Development Company Loan Program, 104th Cong., 1st Sess. 
(1995). Serial No. 104-17.
---------------------------------------------------------------------------
    The Committee recognizes that supplemental appropriations 
and liberal use of the taxpayer's dollars is a thing of the 
past. Fiscal responsibility dictates that the Committee further 
reduce the credit subsidy rate of the Section 7(a) program and 
the Section 504 program in order to enable the Small Business 
Administration to meet demand and operate at a minimal cost to 
the taxpayer.
    The President's 1996 Budget, released on February 1995, 
proposed changes in the 8(a) program consisting of a 0.3 
percent annualized fee on loans not sold into the secondary 
market, and the elimination of the fee split on small and rural 
loans. These changes would have lowered the credit subsidy rate 
to 2.01 percent. Combined with the requested funding level of 
189.8 million dollars, this would have provided a total of 9.4 
billion dollars in guaranteed loan availability.
    Later, on march 27, 1995, the Administration offered 
another legislative proposal known as REGO II. This proposal 
suggested among other things, reducing the credit subsidy rate 
of both the 7(a) and 504 loan programs to a zero credit subsidy 
rate. In the case of the 7(a) program this would have been 
accomplished by:
          Increasing the interest rate cap by one-half of one 
        percent and passing the increase through to the agency;
          Changing the guarantee fee to two percent of the 
        gross of the amount of the loan;
          A 0.3 percent annualized fee on all loans under 
        100,000 dollars or any loans made by Preferred Lenders;
          A 0.4 percent annualized fee on loans over 100,000 
        dollars; and
          Changing the guarantee percentage to 85 percent on 
        loans under 100,000 dollars, 75 percent on loans from 
        100,000 to 500,000 dollars and 50 percent for loans 
        from 500,000 dollars to one million dollars.
    For the 504 loan program the Administration proposed a one-
eighth of one percent fee. This would lower that program's 0.57 
percent credit subsidy rate to zero.
    There has been an increasing awareness in the Congress that 
the spending patterns of the past can no longer continue 
without jeopardizing the Nation's future. In that spirit the 
Committee on Small business is working to identify areas where 
the SBA's programs can be improved and there costs 
significantly reduced. Working with the Committee on 
Appropriations, the Committee on Small Business has proposed 
these changes as a beginning step in our effort to identify 
savings while continuing to meet the needs of the small 
business community.
    The changes proposed in H.R. 2150, as reported from the 
Committee, are estimated to lower the credit subsidy rate to 
1.06 percent. At the House passed 1996 appropriations level of 
104,500,000 dollars, the new subsidy rate will allow the Small 
Business Administration to guarantee 9.858 billion dollars in 
small business loans. This is an additional 2 billion dollars 
in loans guarantees for 110.6 million fewer dollars than fiscal 
year 1995, and 85.2 million dollars below the President's 
budget request.
    These changes represent a solution to the problem that 
recognizes that the Administration's proposals went either too 
far (the REGO II proposal) or not far enough (the President's 
1996 budget). In considering the REGO II proposal the Committee 
took into account the SBA Administrator's testimony on January 
25, 1995.
    Testifying before the Committee on Small Business Mr. Lader 
said:

          Care must be taken to assure that the fees charged to 
        borrowers do not make the program too expensive to be 
        financially practical and that the fees charged to the 
        lenders or reductions in the guaranty percentages are 
        not so great as to make use of the program commercially 
        impractical.'' \4\
    \4\ Hearing Before the Committee on Small Business on the SBA's 
7(a) Loan Program, 104th Cong., 1st Sess. (1995). Serial No. 104-6.

The Committee shares that view and also some concern over the 
mechanism inherent in a zero subsidy rate.
    Programs like the 7(a) and 504 loan programs that have a 
significant potential impact on the economy should not lie 
outside the normal checks and balances of our system of 
government. The Administration's REGO II proposal suggests 
eliminating not only the appropriation levels but also the 
authorization levels. The 7(a) program would then be limited 
only by the number of agency employees needed to monitor the 
loans. With the increasing use of Preferred Lenders (a 
situation encouraged by REGO II) fewer employees would be 
needed and the program could expand essentially unchecked.
    The Committee believes that this expanded government role 
would be detrimental. Small business lending would become 
increasingly dependent on government guarantees and lenders 
less likely to carry small business loans unguaranteed. In 
addition, regulators would have little incentive to ease their 
overly harsh assessment of the small business loans in lender's 
portfolios.
    The Committee is willing to lower the subsidy rate on the 
smaller 504 program while continuing to maintain its control 
over the authorization levels. This program already functions 
in a nearly privatized state and the Committee is ready to 
observe the effect this will have.

                            Committee Action

    In response to a looming shortfall, on January 25, 1995, 
the Committee on Small Business held a hearing concerning the 
Small Business Administration's Section 7(a) general business 
loan program.\5\
    \5\ Hearing Before the Committee on Small Business on the SBA's 
7(a) Loan Program, 104th Cong., 1st Sess. (1995). Serial No. 104-6.
---------------------------------------------------------------------------
    During the hearing the Committee received testimony 
regarding the efficacy and success of the 7(a) program. The 
Committee also heard testimony from Philip Lader, Administrator 
of the Small Business Administration, explaining the growing 
demand for the program's services. In his testimony, 
Administrator Lader suggested the need for changes in the 7(a) 
program in order to reduce the credit subsidy rate.
    On March 9, 1995 the Committee held a hearing on the 
Section 504 development company loan program.\6\ During this 
hearing, testimony was heard regarding the economic development 
potential of the program and its extremely low loss rate. At 
the hearing, representatives of the development companies that 
participate in the program expressed their support for changes 
in fees that would make the 504 program an essentially self-
funding program.
    \6\ Hearing Before the Committee on Small Business on the SBA's 
Section 504 Development Company Loan Program, 104th Cong., 1st Sess. 
(1995). Serial No. 104-17.
---------------------------------------------------------------------------
    During the months following the Committee's hearings 
involved much work by members and staff. Prior to the passage 
of the Budget Resolution and receipt of the Administration's 
original budget and later REGO II proposal the Committee had 
considered numerous changes in both the 7(a) and 504 programs 
in the interests of meeting budget targets.
    As a result of this work, H.R. 2150 was introduced on 
August 1, 1995 by Chairman Meyers. The bill contains the 
revisions and improvements explained elsewhere in this report, 
taking into consideration comments offered by witnesses at the 
hearings and suggestions proposed by other Members. As 
originally introduced the bill would have lowered the credit 
subsidy rate of the Section 7(a) loan program to 1.04 percent.
    On August 4, 1995, the Committee on Small Business reported 
H.R. 2150 by voice vote, after having adopted one amendment, 
also by voice vote. The amendment offered by Mr. LaFalce 
reinserted language allowing the Administration to reduce 
guarantee fees for loans of one year's duration or less. These 
loans of short duration are made for the purposes of financing 
small business export activities, and are generally known as 
Export Working Capital Loans. According to SBA and CBO 
estimates this amendment will result in an 0.02 percent 
increase in the credit subsidy rate for the Section 7(a) 
general business loan program.
    A second amendment was offered by Mr. LaFalce and later 
withdrawn. The amendment proposed leaving the guarantee 
percentage on loans of one year's duration or less at its 
current 90 percent, rather than lowering it to either 75 or 80 
percent as proposed. During discussion of the amendment, Mr. 
Torkildsen and Mr. Manzullo, respectively Chairmen of the 
Government Programs Subcommittee and the Procurement and 
Exports Subcommittee, volunteered to hold a joint hearing on 
the export loans that were the subject of the amendment.
    The Chairwoman also stated, in response to an inquiry from 
Mr. Skelton, that if a consensus of Committee members developed 
after the hearing, an amendment could be offered on the floor 
to retain the guarantee at the current percentage. After this 
discussion, Mr. LaFalce sought and obtained unanimous consent 
to withdraw the amendment.
    In addition, at the outset of the hearing, Mr. Talent 
voiced some concerns regarding the 0.1 percent difference 
between the annual fee charged to lenders for loans sold into 
the secondary market as compared to loans not sold into the 
secondary market. His concern centered on the possible inequity 
of any difference in these fees.

                      Section-by-Section Analysis

                         section 1--short title

    Section 1 provides that this bill be known as ``The Small 
Business Credit Efficiency Act of 1995''.

           section 2--fee for loans sold on secondary market.

    Section 2 amends Section 5(g)(4)(A) of the Small Business 
Act (15 U.S.C. Sec. 634(g)(4)(A)) by striking ``4/10 of one 
percent'' and inserting ``one-half of one percent''. This 
effectively increases the fee on the sales of the guaranteed 
portion of SBA guaranteed general business loans by one-tenth 
of one percent.

                   section 3--general business loans

    Section 3(a) amends the language of Section 7 of the Small 
Business Act (15 U.S.C. Sec. 636) by striking paragraph (a)(2) 
and inserting a new paragraph in its place. The new paragraph 
(a)(2) changes the guarantee percentages on general business 
loans to 80 percent for loans 100,000 dollars and under and 75 
percent for loans above 100,000 dollars. The new paragraph also 
separates and clarifies the definitions of the Preferred 
Lenders program and the language allowing lenders to seek lower 
guarantee percentages.
    Section 3(b) amends the language of Section 7 of the Small 
Business Act (15 U.S.C. Sec. 636) by striking paragraph (a)(18) 
and inserting a new paragraph (a)(18). The proposed new 
paragraph, in subparagraph (A) authorizes the Administration to 
charge a guarantee fee of two percent of the gross amount of 
any general business loan under 250,000 dollars. For loans of 
250,000 dollars or more but less than 500,000 dollars the fee 
guarantee fee shall be 2.5 percent of the gross amount of the 
loan. For all loans above 500,000 dollars the guarantee fee 
will be three percent of the gross amount of the loan. The 
guarantee fees will not apply to loans repayable in one year or 
less.
    The new subparagraph (B) of paragraph (a)(18) proposes 
establishing a new annual fee of 0.4 percent of the outstanding 
principal balance of the guaranteed portion of any general 
business loan not sold into the secondary market. This fee is 
to be used solely to offset the cost of the program as defined 
by the Congressional Budget Act of 1974 and is to be paid by 
the lender and not charged to the borrower.
    Section 3(c) amends Section 7(a)(19) of the Small Business 
Act of (15 U.S.C. Sec. 636(a)(19)) by striking subparagraph 
(B)(ii) and (C). This eliminates the ability of lenders to 
retain one-half of the guarantee fee under Section 7(a)(18) 
when making loans under 50,000 dollars or loans under 75,000 in 
rural areas.

   section 4--modifications to development company debenture program

    Section 4(a) amends Section 502(2) of the Small Business 
Investment Act of 1958 (15 U.S.C. Sec. 696(2)) by striking the 
existing paragraph and inserting a new paragraph which 
increases the limit for loans from 750,000 dollars, or 
1,000,000 dollars for loans meeting the policy goals of Section 
501(d)(3), to 1,250,000 dollars for all loans.
    Section 4(b) amends Section 503(b)(3) of the Small Business 
Investment Act of 1958 (15 U.S.C. Sec. 697(b)(3)) by inserting 
a sentence authorizing the Small Business Administration to 
charge an additional one-eighth of 1 percent fee on all 
financings to solely to offset the costs of the program.

               Congressional Budget Office Cost Estimate

    In compliance with clause 2(l)(3)(c) of rule XI of the 
House of Representatives, the Committee sets forth, with 
respect to H.R. 2150, the following statement received by the 
Director of the Congressional Budget Office under section 403 
of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                   Washington, DC, August 18, 1995.
Hon. Jan Meyers,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Madam Chair: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2150, the Small 
Business Credit Efficiency Act of 1995.
    Enacting H.R. 2150 would not affect direct spending or 
receipts. Therefore, pay-as-you-go procedures would not apply 
to the bill.
    If you wish further details on this estimate, we will be 
pleased to provide them.
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    1. Bill number: H.R. 2150.
    2. Bill title: Small Business Credit Efficiency Act of 
1995.
    3. Bill status: As ordered reported by the House Committee 
on Small Business on August 4, 1995.
    4. Bill purpose: H.R. 2150 would amend the section 7(a) 
general business loan guaranty program administered by the 
Small Business Administration (SBA) to reduce the percentage of 
loans that the government guarantees. Lenders of guaranteed 
business loans would be able to request a further reduction in 
the level of SBA participation.
    H.R. 2150 also would provide for new fees and increases in 
fees on loans guaranteed by SBA under sections 7(a) and 504 of 
the Small Business Act. The bill would authorize SBA to raise 
existing guarantee fees for the loans made under the section 
7(a) program, and to establish an annual fee charged to the 
lenders. The guarantee fees would be payable by the lenders but 
could be charged to the borrowers, but the new annual fee would 
not be passed on to the borrowers. The bill would authorize SBA 
to assess and collect an annual fee for the section 504 loan 
program; that fee would be charged to the borrowers and would 
be based on outstanding loan balances. The proceeds from the 
fees would be used to offset the cost of making the guarantees.
    5. Estimated cost to the Federal Government: This estimate 
assumes that H.R. 2150 would be enacted by the beginning of 
fiscal year 1996, and that the estimated authorization amounts 
would be appropriated for fiscal years 1996 and 1997. Based on 
information from the SBA, CBO estimates that enacting H.R. 2150 
would reduce authorization levels by $253 million for loans to 
be guaranteed in 1996 and 1997. The following table summarizes 
the estimated budgetary impact of H.R. 2150.

----------------------------------------------------------------------------------------------------------------
                                                        1995      1996      1997      1998      1999      2000  
----------------------------------------------------------------------------------------------------------------
Spending under current law:                                                                                     
    Authorization level\1\..........................       202       225       280         0         0         0
    Estimated outlays...............................       208       212       255       100        15         0
Proposed Changes:                                                                                               
    Estimated authorization level...................         0      -113      -140         0         0         0
    Estimated outlays...............................         0       -68      -121       -58        -8         0
Projected spending under H.R. 2150:                                                                             
    Authorization level\1\..........................       202       112       140         0         0         0
    Estimated outlays...............................       208       144       134        42         7         0
----------------------------------------------------------------------------------------------------------------
\1\ The 1995 level is the amount appropriated for that year.                                                    

    The costs of this bill fall within budget function 370.
    6. Basis of estimate: Under current law SBA is authorized 
to guarantee $13 billion in loans for 1996 and $16.1 billion in 
1997 for both the section 7(a) program and the section 504 
program. (Fiscal year 1995 appropriations provide for $11.4 
billion in guaranteed loans.) CBO estimates that reducing the 
percentage of SBA participation in guaranteed loans would have 
no significant budgetary impact because the bill would not 
change the amount of loans SBA is authorized to guarantee and 
the percentage of SBA participation in guaranteed loans would 
not change significantly. Based on information from SBA, we 
expect that the reduction in SBA participation would enable SBA 
to increase slightly the number of loans guaranteed but would 
not significantly increase administrative costs.
    Enacting H.R. 2150, however, would reduce the average 
subsidy for loans guaranteed by SBA because the bill would 
result in additional fees paid to the federal government. CBO 
estimates that the increased fees on new loan guarantees would 
reduce the average subsidy rate from approximately 2 percent to 
1.1 percent for the section 7(a) program, and from 
approximately 0.6 percent to zero for the section 504 program. 
Assuming that appropriations acts grant authority for SBA to 
guarantee the authorized level of loans, the reduction in 
subsidy rates would reduce the amount of appropriations needed 
to subsidize SBA loan guarantees from an estimated $225 million 
to $112 million in 1996, and from $280 million to $140 million 
in 1997. The programs have not been authorized beyond 1997.
    7. Pay-as-you-go considerations: None.
    8. Estimated cost to State and local governments: None.
    9. Estimate comparison: None.
    10. Previous CBO estimate: On August 3, 1995, CBO provided 
a cost estimate for S. 895, the Small Business Lending 
Enhancement Act of 1995, as ordered reported by the Senate 
Committee on Small Business on July 13, 1995. The two bills are 
similar, as are the two cost estimates. H.R. 3150 would reduce 
the need for subsidy appropriations by a slightly larger amount 
by reducing the estimated subsidy rate for section 504 loans to 
zero from 0.6 percent while S. 895 would reduce that subsidy 
rate to 0.2 percent. (We estimate that the two bills would have 
the same budgetary effect on section 7(a) loans.)
    11. Estimate prepared by: Rachel Forward.
    12. Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                     Inflationary Impact Statement

    Pursuant to clause 2(l) (4) of rule XI of the House of 
Representatives, the Committee estimates that H.R. 2150 will 
have no inflationary impact on prices and costs in the 
operation of the national economy.

                           Oversight Findings

    In accordance with clause (l)(3)(D) of rule XI of the House 
of Representatives, the Committee states that no oversight 
findings or recommendations have been made by the Committee on 
Government Reform and Oversight with respect to the subject 
matter contained in H.R. 2150.
    In accordance with clause 2(l)(3)(A) of rule XI and clause 
2(b)(1) of rule X of the House of Representatives, the 
oversight findings and recommendations of the Committee on 
Small Business with respect to the subject matter contained in 
H.R. 2150 are incorporated into the descriptive portions of 
this report.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3 of rule XIII of the Rules of the 
House of Representatives, changes in existing law made by the 
bill, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

                           SMALL BUSINESS ACT

          * * * * * * *
  Sec. 5. (a)  * * *
          * * * * * * *
  (g)(1)  * * *
          * * * * * * *
      (4)(A) The Administration may collect the following fees 
for loan guarantees sold into the secondary market pursuant to 
the provisions of subsection (f): an amount equal to (A) not 
more than [\4/10\ of one percent] one-half of 1 percent per 
year of the outstanding principal amount of the portion of such 
loan guaranteed by the Administration, and (B) not more than 50 
percent of the portion of the sale price which is in excess of 
110 percent of the outstanding principal amount of the portion 
of such loan guaranteed by the Administration. Any such fees 
imposed by the Administration shall be collected by the 
Administration or by the agent which carries out on behalf of 
the Administration the central registration functions required 
by subsection (h) of this section and shall be paid to the 
Administration and used solely to reduce the subsidy on loans 
guaranteed under section 7(a) of this Act: Provided, That such 
fees shall not be charged to the borrower whose loan is 
guaranteed: and, Provided further, That nothing herein shall 
preclude any agent of the Administration from collecting a fee 
approved by the Administration for the functions described in 
subsection (h)(2).
          * * * * * * *
  Sec. 7. (a) The Administration is empowered to the extent and 
in such amounts as provided in advance in appropriation Acts to 
make loans for plant acquisition, construction, conversion, or 
expansion, including the acquisition of land, material, 
supplies, equipment, and working capital, and to make loans to 
any qualified small business concern, including those owned by 
qualified Indian tribes, for purposes of this Act. Such 
financings may be made either directly or in cooperation with 
banks or other financial institutions through agreements to 
participate on an immediate or deferred (guaranteed) basis. 
These powers shall be subject, however, to the following 
restrictions, limitations, and provisions:
          (1)  * * *
          [(2) In agreements to participate in loans on a 
        deferred basis under this subsection, such 
        participation by the Administration, except as provided 
        in paragraph (6), shall be--
          [(A) not less than 90 percent of the balance of the 
        financing outstanding at the time of disbursement if 
        such financing does not exceed $155,000: Provided, That 
        the percentage of participation by the Administration 
        may be reduced below 90 percent upon request of the 
        participating lender; and
          [(B) subject to the limitation in paragraph (3)--
                  [(i) not less than 70 percent nor more than 
                85 percent of the financing outstanding at the 
                time of disbursement if such financing exceeds 
                $155,000: Provided, That the participation by 
                the Administration may be reduced below 70 
                percent upon request of the participating 
                lender;
                  [(ii) not less than 75 percent of the 
                financing outstanding at the time of 
                disbursement, if such financing is more than 
                $155,000 and the period of maturity of such 
                financing is more than 10 years, except that 
                the participation by the Administration may be 
                reduced below 75 percent upon request of the 
                participating lender;
                  [(iii) not less than 85 percent of the 
                financing outstanding at the time of 
                disbursement, if such financing is more than 
                $155,000 and the period of maturity of such 
                financing is 10 years or less, except that the 
                participation by the Administration may be 
                reduced below 85 percent upon request of the 
                participating lender; and
                  [(iv) not less than 85 percent nor more than 
                90 percent of the financing outstanding at the 
                time of disbursement if such financing is a 
                loan under paragraph (14) or (16).
The Administration shall not use the percent of guarantee 
requested as a criterion for establishing priorities in 
approving guarantee requests nor shall the Administration 
reduce the percent guaranteed to less than the above specified 
percentums other than by determination made on each 
application. Notwithstanding subparagraphs (A) and (B), the 
Administration's participation under the Preferred Lenders 
Program or any successor thereto shall be not less than 80 
percent, except upon request of the participating lender. The 
maximum interest rate for a loan guaranteed under the Preferred 
Lenders Program shall not exceed the maximum interest rate, as 
determined by the Administration, which is made applicable to 
other loan guarantees under section 7(a). As used in this 
subsection, the term ``Preferred Lenders Program'' means a 
program under which a written agreement between the lender and 
the Administration delegates to the lender (I) complete 
authority to make and close loans with a guarantee from the 
Administration without obtaining the prior specific approval of 
the Administration, and (II) authority to service and liquidate 
such loans.]
          (2) Level of participation in guaranteed loans.--
                  (A) In general.--In agreements to participate 
                in loans on a deferred basis under this 
                subsection, such participation by the 
                Administration shall be--
                          (i) equal to 80 percent of the 
                        balance of the financing outstanding at 
                        the time of disbursement if such 
                        financing is less than or equal to 
                        $100,000; and
                          (ii) equal to 75 percent of the 
                        balance of the financing outstanding at 
                        the time of disbursement if such 
                        financing is greater than $100,000.
                  (B) Reduced participation.--The guarantee 
                percentage specified by subparagraph (A) for 
                any loan may be reduced upon the request of the 
                participating lender. The Administration shall 
                not use the percent of guarantee requested as a 
                criterion for establishing priorities in 
                approving guarantee requests.
                  (C) Interest rate under preferred lenders 
                program.--The maximum interest rate for a loan 
                guaranteed under the Preferred Lenders Program 
                shall not exceed the maximum interest rate, as 
                determined by the Administration, which is made 
                applicable to other loan guarantees under this 
                subsection.
                  (D) Preferred lenders program defined.--In 
                this paragraph, the term ``Preferred Lenders 
                Program'' means a program under which a written 
                agreement between the lender and the 
                Administration delegates to the lender--
                          (i) complete authority to make and 
                        close loans with a guarantee from the 
                        Administration without obtaining the 
                        prior specific approval of the 
                        Administration; and
                          (ii) authority to service and 
                        liquidate such loans.
          * * * * * * *
          [(18) The Administration shall collect a guarantee 
        fee equal to two percent of the amount of the deferred 
        participation share of any loan under this subsection 
        other than a loan repayable in one year or less. The 
        fee shall be payable by the participating lending 
        institution and may be charged to the borrower.]
          (18) Guarantee fees.--
                  (A) General fee.--For any loan or finanacing 
                made under this subsection other than a loan 
                repayable in a period of one year or less, the 
                Administration shall collect a guarantee fee 
                equal to--
                          (i) 2 percent of the gross amount of 
                        any loan guaranteed under this 
                        subsection of an amount less than 
                        $250,000;
                          (ii) 2.5 percent of the gross amount 
                        of any loan guaranteed under this 
                        subsection of an amount equal to or 
                        greater than $250,000 and less than 
                        $500,000; or
                          (iii) 3 percent of the gross amount 
                        of any loan guaranteed under this 
                        subsection of an amount equal to or 
                        greater than $500,000.
                Such fee shall be payable by the participating 
                lending institution and may be charged to the 
                borrower.
                  (B) Additional fee to offset cost.--
                          (i) In general.--In addition to the 
                        guarantee fee to be collected under 
                        subparagraph (A), the Administration 
                        shall collect a fee for loans 
                        guaranteed under this subsection (other 
                        than loans for which a guarantee fee 
                        may be collected under section 
                        5(g)(4)(A)) in an amount equal to not 
                        more than four-tenths of 1 percent per 
                        year of the outstanding principal 
                        portion of such loan guaranteed by the 
                        Administration.
                          (ii) Use.--Fees collected under 
                        clause (i) shall be used solely to 
                        offset the cost (as defined by section 
                        502(5) of the Congressional Budget Act 
                        of 1974) of guaranteeing loans under 
                        this subsection.
                          (iii) Payment.--Fees collected under 
                        clause (i) shall be payable by the 
                        participating lending institution and 
                        shall not be charged to the borrower.
          (19)(A)  * * *
          (B) In order to encourage all lending institutions 
        and other entities making loans authorized under this 
        subsection to provide loans of $50,000 or less in 
        guarantees to eligible small business loan applicants, 
        the Administration [shall (i) develop] shall develop 
        and allow participating lenders to solely utilize a 
        uniform and simplified loan form for such loans[, and 
        (ii) allow such lenders to retain one-half of the fee 
        collected pursuant to section (7)(a)(18) on such loans. 
        A participating lender may not retain any fee pursuant 
        to this paragraph if the amount committed and 
        outstanding to the applicant would exceed $50,000 
        unless the amount in excess of $50,000 is an amount not 
        approved under the provisions of this paragraph].
          [(C) In order to encourage lending institutions and 
        other entities making loans authorized under this 
        subsection to provide loans to small business loan 
        applicants located in rural areas, such lenders shall 
        be permitted to retain one-half of the fee collected 
        pursuant to paragraph (18) on loans of less than 
        $75,000. A participating lender may not retain any fee 
        pursuant to this subparagraph if the amount committed 
        and outstanding to the applicant would exceed $75,000 
        unless the amount in excess of $75,000 is an amount not 
        approved under the provisions of this subparagraph. 
        This subparagraph shall cease to be effective on 
        October 1, 1995.]
          * * * * * * *
                              ----------                              


                 SMALL BUSINESS INVESTMENT ACT OF 1958

          * * * * * * *

        TITLE V--LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES

          * * * * * * *
  Sec. 502. The Administration may, in addition to its 
authority under section 501, make loans for plant acquisition, 
construction, conversion or expansion, including the 
acquisition of land, to State and local development companies, 
and such loans may be made or effected either directly or in 
cooperation with banks or other lending institutions through 
agreements to participate on an immediate or deferred basis: 
Provided, however, That the foregoing powers shall be subject 
to the following restrictions and limitations:
          (1)  * * *
          [(2) Loans made by the Administration under this 
        section shall be limited to $750,000 for each such 
        identifiable small-business concern, except loans 
        meeting the criteria specified in section 501(d)(3) 
        shall be limited to $1,000,000 for each such 
        identifiable small business concern.]
          (2) Loans made by the Administration under this 
        section shall be limited to $1,250,000 for each such 
        identifiable small business concern.
          * * * * * * *

                     development company debentures

  Sec. 503. (a)  * * *
  (b) No guarantee may be made with respect to any debenture 
under subsection (a) unless--
          (1)  * * *
          * * * * * * *
          (3) the interest rate on such debentures is not less 
        than the rate of interest determined by the Secretary 
        of the Treasury for purposes of section 303(b) and 
        includes a one-eighth of 1 percent fee which shall be 
        paid to the Administration and which shall be used 
        solely to offset the cost (as defined by section 502(5) 
        of the Congressional Budget Act of 1974) of 
        guaranteeing the debenture.;
          * * * * * * *