House Report 104-750 - SMALL BUSINESS PROGRAMS IMPROVEMENT ACT OF 1996

[House Report 104-750]
[From the U.S. Government Publishing Office]

104th Congress Report
HOUSE OF REPRESENTATIVES

2d Session 104-750
_______________________________________________________________________

SMALL BUSINESS PROGRAMS IMPROVEMENT ACT OF 1996

_______

August 2, 1996.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed

_______

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

R E P O R T

together with

ADDITIONAL VIEWS

[To accompany H.R. 3719]

[Including cost estimate of the Congressional Budget Office]

The Committee on Small Business, to whom was referred the
bill (H.R. 3719) to amend the Small Business Act and Small
Business Investment Act of 1958, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) Short Title.--This Act may be cited as the ``Small Business
Programs Improvement Act of 1996''.
(b) Table of Contents.--

Sec. 1. Short title; table of contents.
Sec. 2. Administrator defined.
Sec. 3. Effective date.

TITLE I--AMENDMENTS TO SMALL BUSINESS ACT

Sec. 101. References.
Sec. 102. Risk management data base.
Sec. 103. Section 7(a) loan program.
Sec. 104. Disaster loan program.
Sec. 105. Microloan demonstration program.
Sec. 106. Small business development center program.
Sec. 107. Miscellaneous authorities to provide loans and other financial
assistance.
Sec. 108. Small business competitiveness demonstration program.
Sec. 109. Amendment to Small Business Guaranteed Credit Enhancement Act
of 1993.
Sec. 110. 1998 authorizations.
Sec. 111. Level of participation for export working capital loans.

TITLE II--AMENDMENTS TO SMALL BUSINESS INVESTMENT ACT

Sec. 201. References.
Sec. 202. Modifications to development company debenture program.
Sec. 203. Required actions upon default.
Sec. 204. Loan liquidation pilot program.
Sec. 205. Registration of certificates.
Sec. 206. Preferred surety bond guarantee program.

SEC. 2. ADMINISTRATOR DEFINED.

In this Act, the term ``Administrator'' means the Administrator of
the Small Business Administration.

SEC. 3. EFFECTIVE DATE.

Except as otherwise expressly provided, this Act and the amendments
made by this Act shall take effect on October 1, 1996.

TITLE I--AMENDMENTS TO SMALL BUSINESS ACT

SEC. 101. REFERENCES.

Except as otherwise expressly provided, whenever in this title an
amendment or repeal is expressed in terms of an amendment to, or repeal
of, a section or other provision, the reference shall be considered to
be made to a section or other provision of the Small Business Act (15
U.S.C. 631 et seq.).

SEC. 102. RISK MANAGEMENT DATA BASE.

Section 4(b) (15 U.S.C. 633) is amended by inserting after paragraph
(2) the following:
``(3) Risk management database.--
``(A) Establishment.--The Administration shall
establish, within the management system for the loan
programs authorized by subsections (a) and (b) of
section 7 of this Act and title V of the Small Business
Investment Act of 1958, a management information system
that will generate a database capable of providing
timely and accurate information in order to identify
loan underwriting, collections, recovery, and
liquidation problems.
``(B) Information to be maintained.--In addition to
such other information as the Administration considers
appropriate, the database established under
subparagraph (A) shall, with respect to each loan
program described in subparagraph (A), include
information relating to--
``(i) the identity of the institution making
the guaranteed loan or issuing the debenture;
``(ii) the identity of the borrower;
``(iii) the total dollar amount of the loan
or debenture;
``(iv) the total dollar amount of government
exposure in each loan;
``(v) the district of the Administration in
which the borrower has its principal office;
``(vi) the borrower's principal line of
business, as identified by Standard Industrial
Classification Code (or any successor to that
system);
``(vii) the delinquency rate for each program
(including number of instances and days
overdue);
``(viii) the number of defaults in each
program (including losses and recoveries);
``(ix) the number of deferrals or
forbearances in each program (including days
and number of instances); and
``(x) comparisons on the basis of loan
program, lender, Administration district and
region, for all the data elements maintained.
``(C) Deadline for operational capability.--The
database established under subparagraph (A) shall be
operational not later than March 31, 1997, and shall
capture data beginning on the first day of the first
quarter of fiscal year 1997 beginning after such date
and thereafter.''.

SEC. 103. SECTION 7(a) LOAN PROGRAM.

(a) Servicing and Liquidation of Loans by Preferred Lenders.--Section
7(a)(2)(C)(ii)(II) (15 U.S.C. 636(a)(2)(C)(ii)(II)) is amended to read
as follows:
``(II) complete authority to service
and liquidate such loans without
obtaining the prior specific approval
of the Administration for routine
servicing and liquidation activities,
but shall not take any actions creating
an actual or apparent conflict of
interest.''.
(b) Certified Lenders Program.--Section 7(a)(19) (15 U.S.C.
636(a)(19)) is amended to read as follows:
``(19)(A) Certified lenders program.--
``(i) Establishment.--In addition to the Preferred
Lenders Program authorized by the proviso in section
5(b)(7), the Administration is authorized to establish
a Certified Lenders Program for lenders who establish
their knowledge of Administration laws and regulations
concerning the guaranteed loan program and their
proficiency in program requirements.
``(ii) Suspension and revocation.--The designation of
a lender as a certified lender shall be suspended or
revoked at any time that the Administration determines
that the lender is not adhering to its rules and
regulations or that the loss experience of the lender
is excessive as compared to other lenders, but such
suspension or revocation shall not affect any
outstanding guarantee.
``(B) Uniform and simplified loan forms.--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 develop and allow
participating lenders to solely utilize a uniform and
simplified loan form for such loans.
``(C) Low documentation loan program.--The Administrator may
carry out the low documentation loan program for loans of
$100,000 or less only through Preferred Lenders and Certified
Lenders, or lenders with significant experience making small
business loans. The Administration shall give special
consideration to lenders who have made loans under the
authority of this section. The Administrator shall promulgate
regulations defining the experience necessary for lenders other
than Preferred or Certified Lenders for participation as a
lender in the low documentation loan program no later than 90
days after the date of enactment of this subsection.
``(D) Authority liquidate loans.--
``(i) In general.--Lenders participating in the
Certified Lenders Program shall have authority to
liquidate loans made with a guarantee from the
Administration.
``(ii) Approval.--The Administrator has the authority
to require a certified lender to request approval of a
routine liquidation activity, and if the Administrator
does not approve or deny a request made by a certified
lender within a period of 3 business days, such request
shall be deemed to be approved.
``(E) Low documentation loan program subsidy rate.--The
Administrator shall with the assistance of the Director of the
Office of Management and Budget establish and monitor, on an
annual basis, the subsidy rate for the low documentation loan
program, independently of other loans authorized by this
section.''.
(c) Limitation on Conducting Pilot Projects.--Section 7(a) (15 U.S.C.
636(a)) is amended by adding at the end the following new paragraph:
``(25) Limitation on conducting pilot projects.--
``(A) In general.--Not more than 10 percent of the
total number of loans guaranteed in any fiscal year
under this subsection may be awarded as part of a pilot
program which is commenced by the Administrator on or
after October 1, 1996.
``(B) Pilot program defined.--In this paragraph, the
term `pilot program' means any lending program
initiative, project, innovation, or other activity not
specifically authorized by law.''.
(d) Securitization of Unguaranteed Portions of SBA Loans.--Section
5(f)(3) (15 U.S.C. 634(f)(3)) is amended by adding at the end the
following: ``The Administration may not prohibit a lender from
securitizing the nonguaranteed portion of any loan made under section
7(a). In order to reduce the risk of loss to the government in the
event of default, the Administration shall require all lenders
securitizing, or requesting Administration approval for the
securitization of the nonguaranteed portion of any loan after August 1,
1996, to retain exposure of up to 10 percent of the amount of the loan,
which percentage shall be applicable uniformly to both depository
institutions and other lenders.''.
(e) Conditions on Purchase of Loans.--
(1) Servicing fee.--Section 5(g)(5) (15 U.S.C. 634(g)(5)) is
amended by adding at the end the following:
``(C) In the event the Administration pays a claim under a guarantee
issued under this Act, the servicing fees paid to the lender from the
earliest date of default to the date of payment of the claim shall be
no more than the agreed upon rate, minus one percent.''.
(2) Payment of accrued interest.--Section 7(a)(17) is
amended--
(A) by striking ``(17) The Administration'' and
inserting ``(17)(A) The Administration''; and
(B) by adding at the end the following:
``(B) Any bank or other lending institution making a claim
for payment on the guaranteed portion of a loan made under this
subsection shall be paid the accrued interest due on the loan
from the earliest date of default to the date of payment of the
claim at a rate not to exceed the rate of interest on the loan
on the date of default, minus one percent.''.
(f) Plan for Transfer of Loan Servicing Functions to Centralized
Centers.--
(1) Implementation plan required.--The Administrator of the
Small Business Administration shall submit a detailed plan for
consolidating, in one or more centralized centers, the
performance of the various functions relating to the servicing
of loans directly made or guaranteed by the Administration
pursuant to the Small Business Act, addressing the matters
described in paragraph (2) by the deadline specified in
paragraph (3).
(2) Contents of plan.--In addition to such other matters as
the Administrator may deem appropriate, the plan required by
paragraph (1) shall include--
(A) the proposed number and location of such
centralized loan processing centers;
(B) the proposed workload (identified by type and
numbers of loans and their geographic origin by the
Small Business Administration district office) and
staffing of each such center;
(C) a detailed, time-phased plan for the transfer of
the identified loan servicing functions to each
proposed center; and
(D) any identified impediments to the timely
execution of the proposed plan (including adequacy of
available financial resources, availability of needed
personnel, facilities, and related equipment) and the
Administrator's recommendations for addressing such
impediments.
(3) Deadline for submission.--The plan required by paragraph
(1) shall be submitted to the Committees on the Small Business
of the House of Representatives and Senate not later than
February 28, 1997.
(g) Preferred Lender Standard Review Program.--Not later than 60 days
after the date of enactment of this Act, the Administrator shall issue
a request for proposals regarding the standard review program for the
Preferred Lender Program established by section 5(b)(7) of the Small
Business Act (15 U.S.C. 634(b)(7)). The Administrator shall require
such standard review for each new entrant to the Preferred Lender
Program.
(h) Independent Study of Loan Programs.--
(1) Study required.--The Administrator shall conduct a
comprehensive assessment of the performance of the loan
programs authorized by section 7(a) of the Small Business Act
(15 U.S.C. 636(a)) and title V of the Small Business Investment
Act of 1958 (15 U.S.C. 661) addressing the matters described in
paragraph (2) and resulting in a report to Congress pursuant to
paragraph (5).
(2) Matters to be assessed.--In addition to such other
matters as the Administrator considers appropriate, the
assessment required by paragraph (1) shall address, with
respect to each loan program described in paragraph (1) for
each of the fiscal years described in paragraph (3)--
(A) the number and frequency of deferrals and
defaults;
(B) default rates;
(C) comparative loss rates, by--
(i) type of lender (separately addressing
preferred lenders, certified lenders, and
general participation lenders);
(ii) term of the loan; and
(iii) dollar value of the loan at
disbursement; and
(D) the economic models used by the Office of
Management and Budget to calculate the credit subsidy
rate applicable to the loan programs.
(3) Period of assessment.--The assessments undertaken
pursuant to paragraph (2) shall address data for the period
beginning with the first full fiscal year of the implementation
of each loan program described in paragraph (1) through fiscal
year 1995.
(4) Performance by the private sector.--
(A) Contractor performance.--A private sector
contractor shall be used by the Administrator to
conduct the assessment required by paragraph (1) and to
prepare the report to Congress required by paragraph
(3).
(B) Solicitation and award.--The contract shall be
awarded pursuant to a solicitation issued not later
than 60 days after the date of the enactment of this
Act, which shall provide for full and open competition.
The Administrator shall make every reasonable effort to
award the contract not later than 60 days after the
date specified in the solicitation for receipt of
proposals.
(C) Access to information.--The Administrator shall
provide to the contractor access to any information
collected by or available to the Administration with
regard to the loan programs being assessed. The
contractor shall preserve the confidentiality of any
information for which confidentiality is protected by
law or properly asserted by the person submitting such
information.
(D) Contract funding.--The Administrator shall fund
the cost of the contract from the amounts appropriated
for the salaries and expenses of the Administration for
fiscal year 1997.
(5) Report to congress.--
(A) Contents.--The contractor shall submit a report
of--
(i) its analyses of the matters to be
assessed pursuant to paragraph (2); and
(ii) its independent recommendations, with
respect to each loan program, regarding--
(I) improving the Administration's
timely collection and subsequent
management of data to measure the
performance of each loan program
described in paragraph (1); and
(II) reducing loss rates for each
such loan program.
(B) Submission by contractor.--The contractor shall
submit the report required by subparagraph (A) not
later than 6 months after the date of the contract
award.
(C) Submission to congress.--The Administrator shall
submit the report received from the contractor pursuant
to subparagraph (B) to the Committees on Small Business
of the House of Representatives and the Senate within
30 days of receipt of the report. The Administrator
shall append his comments, and those of the Office of
Management and Budget, if any, to the report.
(i) General Accounting Office Study.--
(1) In general.--The General Accounting Office shall conduct
a comparison of the cost of liquidation for--
(A) loans guaranteed under the Preferred Lenders
Program that are authorized by section 7(a) of the
Small Business Act (15 U.S.C. 636(a)) and liquidated by
the Preferred Lenders;
(B) loans made and liquidated by, Preferred Lenders,
but not guaranteed under the authority in section 7(a);
and
(C) loans guaranteed by the Small Business
Administration under the authority in section 7(a) and
liquidated by the Administration, taking into account
all of the related costs incurred by the Federal
Government.
(2) Report.--Not later than 9 months after the date of
enactment of this Act the General Accounting Office shall
deliver the results of the study to the Committees on Small
Business of the House and Senate.

SEC. 104. DISASTER LOAN PROGRAM.

(a) Interest Rate.--Section 7(c) (15 U.S.C. 636(c)) is amended by
redesignating paragraphs (6) and (7) as paragraphs (8) and (9),
respectively, and by inserting after paragraph (5) the following:
``(6) Disasters commencing after october 1, 1996.--
Notwithstanding any other provision of law, the interest rate
on the Federal share of any loan made under subsection (b)(1)
and (b)(2) on account of a disaster commencing on or after
October 1, 1996, shall be in the case of a homeowner, or
business, or other concern, including agricultural
cooperatives, unable to obtain credit elsewhere, at the rate
prescribed by the Administration but not more than \3/4\ of the
rate determined by the Secretary of the Treasury, taking into
consideration the current average market yield on outstanding
marketable obligations of the United States with remaining
periods to maturity comparable to the average maturities of
such loans plus an additional charge of not to exceed 1 percent
per annum as determined by the Administrator, and adjusted to
the nearest \1/8\ of 1 percent.
``(7) Liability.--Whoever wrongfully misapplies the proceeds
of a loan under subsection (b) shall be liable to the
Administrator in an amount equal to 1\1/2\ times the original
principal amount of the loan.''.
(b) Private Sector Loan Servicing Demonstration Program.--
(1)(A) Demonstration program required.--The Administration
shall conduct a demonstration program, within the parameters
described in paragraph (2), to evaluate the comparative costs
and benefits of having the Administration's portfolio of
disaster loans serviced under contract rather than directly by
employees of the Administration.
(B) Initiation date.--Not later than 90 days after the date
of enactment of this Act, the Administration shall issue a
request for proposals for the program parameters described in
paragraph (2).
(2) Demonstration program parameters.--
(A) Loan sample.--The sample of loans for the
demonstration program shall be randomly drawn from the
Administration's portfolio of loans made pursuant to
section 7(b) of the Small Business Act and include
20,000 loans for residential properties and 5,000 loans
for commercial properties.
(B) Contract and options.--The Administration shall
solicit and competitively award one or more contracts
to service the loans included in the sample of loans
described in subparagraph (A) for a term of 2 years
with 5 2-year options, each to be awarded subject to
subparagraph (C).
(C) Assessments of performance.--Prior to award of
any contract option, the Administration shall assess
the costs and performance of each contractor and
compare such costs and such performance to the costs
and performance of servicing disaster loans by
employees of the Administration. The Administrator
shall not exercise a contract option if the cost of
performance of the loan servicing by the contractor
exceeds the cost of performance of the loan servicing
by employees of the Administration. The Administrator
may terminate the contract during its initial term (or
any subsequent option period), based upon performance
and cost criteria specified in the solicitation and
included in the contract.
(D) Disposition of government furnished property.--
The contract shall require the contractor to--
(i) maintain the confidentiality of the loan
files furnished by the Administration; and
(ii) return such loan files and other
Government-furnished property within a
specified period after expiration (or
termination) of the contract.
(3) Term of demonstration program.--
(A) In general.--The demonstration program required
by paragraph (1) shall commence on the first day of the
first fiscal year quarter after the award of the
contract and continue through the last day of the
fiscal year quarter at the expiration of the 2-year
contract period or any subsequent contract option.
(B) Early termination.--If the Administrator
terminates each contract pursuant to paragraph (2)(C),
the demonstration program shall end on the effective
date of such termination.
(4) Reports.--
(A) Interim reports.--The Administrator shall submit
to the Committees on Small Business of the House of
Representatives and Senate interim reports on the
conduct of the demonstration program not later than 60
days prior to the expiration of the initial 2-year
contract performance period, each subsequent option
period, or termination of a contract. The contractor
shall be afforded a reasonable opportunity to attach
comments to each such report.
(B) Final report.--The Administrator shall submit to
the Committees on Small Business of the House of
Representatives and Senate a final report within 120
days of the termination of the demonstration program.
(c) Definition of Disaster.--(1) Section 3(k) (15 U.S.C. 632(k)) is
amended by striking ``ocean conditions'' and inserting ``ocean
conditions, or government action (regulatory or otherwise)''.
(2) For the purposes of this Act this amendment shall be considered
effective with respect to any disaster occurring on or after March 1,
1994.

SEC. 105. MICROLOAN DEMONSTRATION PROGRAM.

(a) Technical Assistance Grant Requirements.--Section 7(m)(4) (15
U.S.C. 636(m)(4)) is amended--
(1) in subparagraph (A) by striking ``25 percent'' and
inserting ``20 percent''; and
(2) in subparagraph (B) by striking ``25 percent'' and
inserting ``35 percent''.
(b) Implementation of Guaranteed Microloan Pilot Program.--
(1) Action required.--The Administrator shall implement or
submit a detailed report explaining the impediments to the
implementation of a Guaranteed Microloan Pilot Program pursuant
to section 7(m)(12) (15 U.S.C. 636(m)(12)) addressing the
matters described in paragraph (2) by the deadline specified in
paragraph (3).
(2) Contents of implementation report.--In addition to such
other matters as the Administrator may deem appropriate, the
plan required by paragraph (1) shall include any identified
impediments to implementation of a Guaranteed Microloan Pilot
Program that, in the opinion of the Administrator, require
amendments to the program's authorizing legislation, and if
such impediments are identified, includes recommendations for
such statutory changes.
(3) Deadline for submission.--The plan required by paragraph
(2) shall be submitted to the Committees on Small Business of
the House of Representatives and Senate not later than December
1, 1996.
(c) Limitation on Funding.--In the event that the Administrator shall
fail to submit the report required by subsection (b)(1) by the deadline
specified in subsection (b)(3), none of the amounts appropriated to
carry out the Microloan Program authorized by section 7(m)(12) of the
Small Business Act (15 U.S.C. 636(m)(12)) during fiscal year 1997 may
be expended until such time as the pilot program is implemented or the
report is submitted.

SEC. 106. SMALL BUSINESS DEVELOPMENT CENTER PROGRAM.

(a) Associate Administrator for Small Business Development Centers.--
(1) Duties.--Section 21(h) (15 U.S.C. 648(h)) is amended to
read as follows:
``(h) Associate Administrator for Small Business Development
Centers.--
``(1) Appointment and compensation.--The Administrator shall
appoint an Associate Administrator for Small Business
Development Centers who shall report to an official who is not
more than one level below the Office of the Administrator and
who shall serve without regard to the provisions of title 5
governing appointments in the competitive service, and without
regard to chapter 51, and subchapter III of chapter 53 of such
title relating to classification and General Schedule pay
rates, but at a rate not less than the rate of GS-17 of the
General Schedule.
``(2) Duties.--
``(A) In general.--The sole responsibility of the
Associate Administrator for Small Business Development
Centers shall be to administer the small business
development center program. Duties of the position
shall include, but are not limited to, recommending the
annual program budget, reviewing the annual budgets
submitted by each applicant, establishing appropriate
funding levels therefore, selecting applicants to
participate in this program, implementing the
provisions of this section, maintaining a clearinghouse
to provide for the dissemination and exchange of
information between small business development centers
and conducting audits of recipients of grants under
this section.
``(B) Consultation requirements.--In carrying out the
duties described in this subsection, the Associate
Administrator shall confer with and seek the advice of
the Board established by subsection (i) and
Administration officials in areas served by the small
business development centers; however, the Associate
Administrator shall be responsible for the management
and administration of the program and shall not be
subject to the approval or concurrence of such
Administration officials.''.
(2) References to associate administrator.--Section 21 (15
U.S.C. 648) is amended--
(A) in subsection (c)(7) by striking ``Deputy
Associate Administrator of the Small Business
Development Center program'' and inserting ``Associate
Administrator for Small Business Development Centers'';
and
(B) in subsection (i)(2) by striking ``Deputy
Associate Administrator for Management Assistance'' and
inserting ``Associate Administrator for Small Business
Development Centers''.
(b) Extension or Renewal of Cooperative Agreements.--Section 21(k)(3)
(15 U.S.C. 648(k)(3)) is amended to read as follows:
``(3) Extension or renewal of cooperative agreements.--
``(A) In general.--In extending or renewing a
cooperative agreement of a small business development
center, the Administration shall consider the results
of the examination and certification program conducted
pursuant to paragraphs (1) and (2).
``(B) Certification requirement.--After September 30,
2000, the Administration may not renew or extend any
cooperative agreement with a small business development
center unless the center has been approved under the
certification program conducted pursuant to this
subsection; except that the Associate Administrator for
Small Business Development Centers may waive such
certification requirement, in the discretion of the
Associate Administrator, upon a showing that the center
is making a good faith effort to obtain
certification.''.
(c) Technical Correction.--Section 21(l) (15 U.S.C. 648(l)) is
amended to read as follows:
``(l) Contract Authority.--The authority to enter into contracts
shall be in effect for each fiscal year only to the extent and in the
amounts as are provided in advance in appropriations Acts. After the
administration has entered a contract, either as a grant or a
cooperative agreement, with any applicant under this section, it shall
not suspend, terminate, or fail to renew or extend any such contract
unless the Administration provides the applicant with written
notification setting forth the reasons therefore and affording the
applicant an opportunity for a hearing, appeal, or other administrative
proceeding under the provisions of chapter 5 of title 5, United States
Code.''.

SEC. 107. MISCELLANEOUS AUTHORITIES TO PROVIDE LOANS AND OTHER
FINANCIAL ASSISTANCE.

(a) Funding Limitation; Seminars.--Section 7(d) (15 U.S.C. 636(d)) is
amended--
(1) by striking ``(d)(1)'' and inserting ``(d)''; and
(2) by striking paragraph (2).
(b) Trade Adjustment Loans.--Section 7(e) (15 U.S.C. 636(e)) is
amended to read as follows:
``(e) [RESERVED].''.
(c) Waiver of Credit Elsewhere Test for Colleges and Universities.--
Section 7(f) (15 U.S.C. 636(f)) is amended to read as follows:
``(f) [RESERVED].''.
(d) Loans to Small Business Concerns for Solar Energy and Energy
Conservation Measures.--Section 7(l) (15 U.S.C. 636(l)) is amended to
read as follows:
``(l) [RESERVED].''.

SEC. 108. SMALL BUSINESS COMPETITIVENESS DEMONSTRATION PROGRAM.

(a) Extension of Demonstration Program.--Section 711(c) of the Small
Business Competitiveness Demonstration Program Act of 1988 (15 U.S.C.
644 note; 102 Stat. 3890) is amended by striking ``September 30, 1996''
and inserting ``September 30, 2000''.
(b) Reporting of Subcontract Participation in Contracts for
Architectural and Engineering Services.--Section 714(b)(5) of the Small
Business Competitiveness Demonstration Program Act of 1988 (15 U.S.C.
644 note; 102 Stat. 3892) is amended to read as follows:
``(5) Duration.--The system described in subsection (a) shall
be established not later than October 1, 1996 (or as soon as
practicable thereafter on the first day of a subsequent quarter
of fiscal year 1997), and shall terminate on September 30,
2000.''.
(c) References to Architectural and Engineering Services.--
(1) In general.--The Small Business Competitiveness
Demonstration Program Act of 1988 (15 U.S.C. 644 note; 102
Stat. 3889 et seq.) is amended in subsections (a)(3) and (d) by
striking ``surveying and mapping'' and inserting ``surveying,
mapping, and landscape architecture''.
(2) Designated industry groups.--Section 717(d) of the Small
Business Competitiveness Demonstration Program Act of 1988 (15
U.S.C. 644 note; 102 Stat. 3894) is amended by inserting
``standard industrial classification codes 0781 (if identified
as pertaining to architecture services),'' after ``(if
identified as pertaining to mapping services),''.
(d) Reports to Congress.--
(1) In general.--Section 716 of the Small Business
Competitiveness Demonstration Program Act of 1988 (15 U.S.C.
644 note; 102 Stat. 3893) is amended--
(A) in subsection (a), by striking ``fiscal year 1991
and 1995'' and inserting ``each of fiscal years 1991
through 1999'';
(B) in subsection (a), by striking ``results'' and
inserting ``cumulative results''; and
(C) in subsection (c), by striking ``1996'' and
inserting ``1999''.
(2) Cumulative report through fiscal year 1995.--A cumulative
report of the results of the Small Business Competitiveness
Demonstration Program for fiscal years 1991 through 1995 shall
be submitted not later than 60 days after the date of the
enactment of this Act pursuant to section 716(a) of the Small
Business Competitiveness Demonstration Program Act of 1988 (15
U.S.C. 644 note; 102 Stat. 3893), as amended by paragraph (1)
of this subsection.

SEC. 109. AMENDMENT TO SMALL BUSINESS GUARANTEED CREDIT ENHANCEMENT ACT
OF 1993.

(a) Section 7 of the Small Business Guaranteed Credit Enhancement Act
of 1993 (Public Law 103-81; 15 U.S.C. 634 note) is repealed effective
September 29, 1996.
(b) Clerical Amendment.--The table of contents for the Small Business
Guaranteed Credit Enhancement Act of 1993 (Public Law 103-81; 15 U.S.C.
631 note) is amended by striking the item relating to section 7.

SEC. 110. 1998 AUTHORIZATIONS.

Section 20 (15 U.S.C. 631 note) is amended--
(1) in subsection (p), by striking ``authorized for fiscal
year 1997'' and inserting ``authorized for each of fiscal years
1997 and 1998'';
(2) by striking subsection (p)(3)(B) and by inserting the
following:
``(B) $268,000,000 in guarantees of debentures;
and'';
(3) in subsection (q)(1) by striking ``fiscal year 1997'' and
inserting ``each of fiscal years 1997 and 1998''; and
(4) in subsection (q)(2) by striking ``year 1997'' and
inserting ``years 1997 and 1998''.

SEC. 111. LEVEL OF PARTICIPATION FOR EXPORT WORKING CAPITAL LOANS.

Section 7(a)(2) (15 U.S.C. 636(a)(2)) is amended by adding at the end
the following:
``(D) Participation under export working capital
program.--Notwithstanding subparagraph (A), in an
agreement to participate in a loan on a deferred basis
under the Export Working Capital Program established
pursuant to paragraph (14)(A), such participation by
the Administration shall be equal to the rate specified
under this paragraph as in effect on the day before the
date of the enactment of the Small Business Lending
Enhancement Act of 1995.''.

TITLE II--AMENDMENTS TO SMALL BUSINESS INVESTMENT ACT

SEC. 201. REFERENCES.

SEC. 202. MODIFICATIONS TO DEVELOPMENT COMPANY DEBENTURE PROGRAM.

(a) Decreased Loan to Value Ratios.--Section 502(3) (15 U.S.C.
696(3)) is amended to read as follows:
``(3) Criteria for assistance.--
``(A) In general.--Any development company assisted
under this section or section 503 of this title must
meet the criteria established by the Administration,
including the extent of participation to be required or
amount of paid-in capital to be used in each instance
as is determined to be reasonable by the
Administration.
``(B) Community injection funds.--
``(i) Sources of funds.--Community injection
funds may be derived, in whole or in part,
from--
``(I) State or local governments;
``(II) banks or other financial
institutions;
``(III) foundations or other not-for-
profit institutions; or
``(IV) the small business concern (or
its owners, stockholders, or
affiliates) receiving assistance
through a body authorized by this
title.
``(ii) Funding from institutions.--Not less
than 50 percent of the total cost of any
project financed pursuant to clauses (i), (ii),
or (iii) of subparagraph (C) shall come from
the institutions described in subclauses (I),
(II), and (III) of clause (i).
``(C) Funding from a small business concern.--The
small business concern (or its owners, stockholders, or
affiliates) receiving assistance through a body
authorized by this title shall provide--
``(i) at least 15 percent of the total cost
of the project financed, if the small business
concern has been in operation for a period of 2
years or less;
``(ii) at least 15 percent of the total cost
of the project financed if the project involves
the construction of a limited or single purpose
building or structure;
``(iii) at least 20 percent of the total cost
of the project financed if the project involves
both of the conditions set forth in clauses (i)
and (ii); or
``(iv) at least 10 percent of the total cost
of the project financed, in all other
circumstances, at the discretion of the
development company.''.
(b) Guarantee Fee for Development Company Debentures.--Section
503(b)(7)(A) (15 U.S.C. 697(b)(7)(A)) is amended by striking ``0.125
percent'' and inserting ``0.8125 percent''.
(c) Fees To Offset Subsidy Cost.--Section 503(d) (15 U.S.C. 697(d))
is amended to read as follows:
``(d) Charges for Administration Expenses.--
``(1) Level of charges.--The Administration may impose an
additional charge for administrative expenses with respect to
each debenture for which payment of principal and interest is
guaranteed under subsection (a).
``(2) Participation fee.--The Administration shall also
impose a one-time fee of 50 basis points on the total
participation in any project of any institution described in
subclause (I), (II), or (III) of section 502(3)(B)(i). Such fee
shall be imposed only when the participation of the institution
will occupy a senior credit position to that of the development
company. Such fee shall be collected by the development
company, forwarded to the Administration, and used to offset
the cost (as such term is defined in section 502 of the Credit
Reform Act of 1990) to the Administration of making guarantees
under subsection (a).
``(3) Development company fee.--The Administration shall
collect annually from each development company a fee of 0.125
percent of the outstanding principal balance of any guaranteed
debenture authorized by the Administration after September 30,
1996. Such fee shall be derived from the servicing fees
collected by the development company pursuant to regulation,
and shall not be derived from any additional fees imposed on
small business concerns. All proceeds of the fee shall be used
to offset the cost (as such term is defined in section 502 of
the Credit Reform Act of 1990) to the Administration of making
guarantees under subsection (a).''.
(d) Effective Date.--Section 503 (15 U.S.C. 697) is amended by adding
at the end the following:
``(f) Effective Date.--The fees authorized by subsections (b) and (c)
shall apply to financings approved by the Administration on or after
October 1, 1996, but shall not apply to financings approved by the
Administration on or after October 1, 1997.''.

SEC. 203. REQUIRED ACTIONS UPON DEFAULT.

Section 503 (15 U.S.C. 697) is amended by adding at the end the
following:
``(g) Required Actions Upon Default.--
``(1) Deadlines.--
``(A) Initial actions.--Not later than the 45th day
after the date on which a payment on a loan funded
through a debenture guaranteed under this section is
due and not received, the Administration shall--
``(i) take all necessary steps to bring such
a loan current; or
``(ii) implement a formal written deferral
agreement.
``(B) Purchase or acceleration of debenture.--Not
later than the 65th day after the date on which a
payment on a loan described in subparagraph (A) is due
and not received, and absent a formal written deferral
agreement, the Administration shall take all necessary
steps to purchase or accelerate the debenture.
``(2) Prepayment penalties.--The Administration shall, with
respect to the portion of any project derived from funds set
forth in section 502(3)--
``(A) negotiate the elimination of any prepayment
penalties or late fees on defaulted loans made prior to
September 30, 1996;
``(B) decline to pay any prepayment penalty or late
fee on the default based purchase of loans issued after
September 30, 1996; and
``(C) for any project financed after September 30,
1996, decline to pay any default interest rate higher
than the interest rate on the note prior to the date of
default.''

SEC. 204. LOAN LIQUIDATION PILOT PROGRAM.

(a) In General.--The Administrator shall carry out a loan liquidation
pilot program (in this section referred to as the `pilot program') in
accordance with the requirements of this section.
(b) Selection of Development Companies.--Not later than 90 days after
the date of the enactment of this Act, the Administrator shall allow
not less than 15 development companies authorized to make loans and
issue debentures under title V of the Small Business Investment Act of
1958 to participate in the pilot program. The development companies
admitted shall agree not to take any action that would create a
potential conflict of interest involving the development company, the
third party lender, or an associate of the third party lender. In order
to qualify to participate in the pilot, each development company
shall--
(1) have a minimum of 6 years experience in the program
established by such title V;
(2) have made, during the last 6 fiscal years, an average of
10 loans per year through the program established by such title
V; and
(3) have a minimum of 2 years experience, either
independently or through an agent, in liquidating loans under
the authority of a Federal, State, or other lending program.
(c) Authority of Development Companies.--The development companies
selected under subsection (b) shall, for all loans in their portfolio
of loans made through debentures guaranteed under title V of the Small
Business Investment Act of 1958 that are in default after the date of
enactment of this Act, be authorized to--
(1) perform all liquidation and foreclosure functions,
including the acceleration or purchase of community injection
funds; and
(2) liquidate such loans in a reasonable and sound manner and
according to commercially accepted practices.
(d) Authority of the Administrator.--In carrying out the pilot
program, the Administrator shall--
(1) have full authority to deny participation in the pilot
program or rescind the authority granted any development
company under this section upon a 10 day written notice stating
the reasons for the denial or rescission; and
(2) implement the pilot program no later than 90 days after
the admission of the development companies specified in
subsection (b).
(e) Report.--
(1) In general.--The Administrator shall issue a report on
the results of the pilot program to the Committees on Small
Business of the House of Representatives and the Senate. The
report shall include information relating to--
(A) the total dollar amount of each loan and project
liquidated;
(B) the total dollar amount guaranteed by the
Administration;
(C) total dollar losses;
(D) total recoveries both as percentage of the amount
guaranteed and the total cost of the project; and
(E) a comparison of the pilot program information
with the same information for liquidation conducted
outside the pilot program over the period of time.
(2) Reporting period.--The report shall be based on data
from, and issued not later than 90 days after the close of, the
first eight 8 fiscal quarters of the pilot program's operation
after the date of implementation.

SEC. 205. REGISTRATION OF CERTIFICATES.

(a) Certificates Sold Pursuant to Small Business Act.--Section 5(h)
of the Small Business Act (15 U.S.C. 634(h)) is amended--
(1) by redesignating paragraphs (1) through (4) as
subparagraphs (A) through (D);
(2) by striking ``(h)'' and inserting ``(h)(1)'';
(3) by striking subparagraph (A), as redesignated by
paragraph (1) of this subsection, and inserting the following:
``(A) provide for a central registration of all loans and
trust certificates sold pursuant to subsections (f) and (g) of
this section;''; and
(4) by adding at the end the following:
``(2) Nothing in this subsection shall prohibit the utilization of a
book entry or other electronic form of registration for trust
certificates. The Administration may, with the consent of the Secretary
of the Treasury, use the book-entry system of the Federal Reserve
System.''.
(b) Certificates Sold Pursuant to Small Business Investment Company
Program.--Section 321(f) (15 U.S.C. 6871(f)) is amended--
(1) in paragraph (1) by striking ``Such central registration
shall include'' and all that follows through the period at the
end of the paragraph; and
(2) by adding at the end the following:
``(5) Nothing in this subsection shall prohibit the use of a book-
entry or other electronic form of registration for trust
certificates.''.
(c) Certificates Sold Pursuant to Development Company Program.--
Section 505(f) (15 U.S.C. 697b(f)) is amended--
(1) by redesignating paragraphs (1) through (4) as
subparagraphs (A) through (D);
(2) by striking ``(f)'' and inserting ``(f)(1)'';
(3) by striking subparagraph (A), as redesignated by
paragraph (1) of this subsection, and inserting the following:
``(A) provide for a central registration of all trust
certificates sold pursuant to this section;'' and
(4) by adding at the end the following:
``(2) Nothing in this subsection shall prohibit the utilization of a
book entry or other electronic form of registration for trust
certificates.''.

SEC. 206. PREFERRED SURETY BOND GUARANTEE PROGRAM.

(a) Admissions of Additional Program Participants.--Section 411(a)
(15 U.S.C. 694(a)) is amended by adding a new paragraph (5), as
follows:
``(5)(A) The Administration shall promptly act upon an application
from a surety to participate in the Preferred Surety Bond Guarantee
Program, authorized by paragraph (3), in accordance with criteria and
procedures established in regulations pursuant to subsection (d).
``(B) The Administration is authorized to reduce the allotment of
bond guarantee authority or terminate the participation of a surety in
the Preferred Surety Bond Guarantee Program based on the rate of
participation of such surety during the 4 most recent fiscal year
quarters compared to the median rate of participation by the other
sureties in the program.''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply with respect to applications received (or pending substantive
evaluation) on or after October 1, 1995.

Purpose of the Bill

The primary purpose of the bill is to reform 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., in order to reduce the subsidy rates of
these programs and to strengthen the underwriting of loans
guaranteed through the Small Business Administration (SBA).
The bill reduces the substantial subsidy rate for the
disaster assistance loan program by slightly increasing the
interest rate in that program.
Finally, the bill makes reforms to a number of other
programs at the Small Business Administration, and removes
various obsolete provisions and programs in the Small Business
Act. The bill also requires a number of improvements in, and
reports and studies on, the Small Business Administration's
management practices and systems.

Need for Legislation

in general

In October of 1995, the President signed into law P.L.
104-36, the Small Business Lending Enhancement Act of 1995.
This law was designed to lower the subsidy rate of the 7(a) and
504 programs to reduce substantially the cost of the programs
to the taxpayer. The subsidy rate for the 7(a) program was
decreased by approximately 60 percent, from 2.74 percent to
1.06 percent. The subsidy rate for the 504 program was reduced
to zero, effectively making it a self-financed program. The
legislation was drafted and passed relying on estimates and
information provided by the Office of Management and Budget and
the Small Business Administration.
Under P.L. 10-436, the Small Business Administration was
to be able to operate its loan programs at a significantly
reduced cost. As a result, fewer funds were appropriated for
the 7(a) program in 1996, and no funds were appropriated for
the 504 program. Congress appropriated $114.5 million to fund
the 7(a) program at a lending level of $11 billion. Currently,
program demand for fiscal year 1996 is estimated to be
approximately $8.75 billion in lending authority. At the
assumed subsidy rate of 1.06 percent, this would cost $92
million, allowing a carryover of approximately $22.5 million.
Unfortunately, in March of 1996, on the eve of the release
of the President's Budget for fiscal year 1997, the Committee
learned for the first time that the subsidy rates for the 7(a)
and 504 programs had been recalculated and had increased
significantly. This recalculation was the result of a Small
Business Administration and Office of Management and Budget
study of portfolio performance in the programs over the past 13
years. The result was an estimated subsidy rate for the 7(a)
lending program of 2.68 percent, almost the same rate as that
used prior to the enactment of P.L. 10-436. In the case of the
504 program, the increase was more than twelvefold, from the
fiscal year 1996 estimated rate of 0.57 (prior to enactment of
P.L. 104-36) to the fiscal year 1997 estimated rate of 6.85
percent.
This information provoked a strong response from the
Committee. Despite repeated Committee inquiries to the
Administration for information on ``rumored'' increases in the
subsidy rates, the SBA refused to come forward with this
information, even though it was available for months prior to
the release of the President's Budget. Compared to the previous
subsidy rate of 1.06 percent, the newly assigned subsidy rate
of 2.68 percent would require $234 million to accomplish the
same amount of small business lending in fiscal year 1997, more
than twice the fiscal year 1996 appropriation. For the 504
program to continue at all would require an appropriation of
approximately $112 million, all of it new money. Further
compounding this disturbing lack of cooperation by the Agency
was the Administration's response to this problem.
The Administration's ``solution'' to this fiscal crisis,
as embodied in the President's Budget, was simply to request
more money and deny any responsibility for creating or
contributing to this dilemma. To cover the projected shortfall
in the 7(a) program, and assuming an increased program level of
$12 billion, the Administration requested an additional $180
million for the program. This represents an increase of 160
percent over the previous year's appropriations. While the
Committee recognizes the value of the program in providing
long-term financing to small businesses, the Administration's
response is remarkably insufficient considering current fiscal
realities and the President's commitment to help Congress
balance the budget by the year 2002.
The Administration also proposed turning the 504 program
into a direct financing program. Converting 504 to a direct
lending program would wipe out the private market partnership
that has developed in this program over the past ten years. In
addition, it would be very difficult, and perhaps impossible,
to bring the private market back into financing the 504 program
if it were so abruptly removed now as a short-term fix for the
subsidy rate. Furthermore, the Committee strongly rejected this
notion as a budget ``loophole'' in which guaranteed lending
with a substantial subsidy rate is suddenly scored with a zero
subsidy when branded a ``direct loan'' program. Such a proposal
suggests that the best response to the failures in collections
and defaults is to hide the problem by containing it within the
Federal bureaucracy.
The Committee's approach was substantially different from
that proposed by the Administration, in that the Committee took
a determined view that the causes of these subsidy rate
fluctuations should be identified, and that legislation should
address these causes, rather than ``patch'' the problem with
higher fees for a temporary drop in the subsidy rate. New fees
have been added to the 7(a) program over the past three years,
only to have the subsidy rate return to its ``pre-fee'' state.
The Committee believes that the point may have already been
reached where additional fees render the 7(a) program
undesirable, for borrowers and lenders, as the demand for 7(a)
loans for fiscal year 1996 is running much lower than the
anticipated $10 billion lending level. Legislation that
provides long-term solutions to the problems plaguing the loan
programs is important for stability and long-term viability of
the loan programs.
After reviewing the President's Budget for fiscal year
1997, and testimony presented before the Committee regarding
the SBA Budget for fiscal year 1997, the Committee began a
series of meetings with the SBA, OMB, and with various private-
sector lending partners. The purpose of these meetings was to
try to identify the problems, and the causes of these problems,
that are contributing to the dramatic increases in the subsidy
rates for the major SBA programs. One problem that was clearly
identified was a need for better data collection. The Agency
must be able to conduct more detailed portfolio analyses on an
ongoing basis to identify potential problems at an early date.
Another significant management problem is SBA's liquidation
practices. Recovery rates are down substantially in nearly
every major loan program. Perhaps more than any other factor,
the recovery rate is a key component of the subsidy rate
calculation. The tremendous time lag for conducting
liquidations, exacerbated by a lack of adequate field staff
designated for this purpose, is certainly one reason for lower
recoveries. Finally, the Committee continues to be puzzled by
the subsidy rate calculations of OMB. While the default and
recovery rates are clearly major components of the
calculations, OMB analysts also factor in other ``intangible''
items. These items, which are not disclosed to the Committee,
can change from day to day, calculation to calculation, in such
a way that the Committee has come to question the objectivity
and accuracy of these subsidy rate calculations.

changes to the 7(a) program

The changes in this bill will strengthen the 7(a) program
by moving more functions to the private sector and relying on
the SBA's most experienced lending partners to carry out these
functions. The bill provides that Preferred Lenders (PLPs) will
be allowed to have full loan liquidation authority, free from
unnecessary delays that now occur due to the Administration's
insistence upon a lengthy review and approval process for each
individual step taken in the course of a liquidation. Anecdotal
evidence presented to the Committee indicates that the SBA is
micro-managing the PLP liquidation process so as to render it
virtually useless as a tool for achieving program efficiencies.
The Committee intends to restore that tool. The
Administration's stubborn resistance to change in the
liquidation arena is very troubling to the Committee,
particularly as it appears to be a common thread of dysfunction
running through the loan programs. Therefore, the Committee
intends to monitor closely the Administration's adoption and
acceptance of these mandated changes in liquidation practices.
The Committee also places a restriction on the use of the
Low-Doc program. This program will henceforth be available only
to the Preferred and Certified Lending institutions, or to
lenders with significant small business lending experience. The
Committee believes that this is a prudent step, given the rapid
growth of this Administration-inspired pilot program, and is
based upon the Administration's own guidelines for the Low-Doc
program, which state that Low-Doc is for use by the SBA's most
experienced lending partners. Currently, the noncurrency rate
for Low-Doc is higher than for the non-Low-Doc portfolio. This
points to possible underwriting problems, problems that may be
attributable, in part, to the dramatic number of lenders using
Low-Doc who have not previously participated in SBA lending
programs.
The purpose of the Low-Doc program is to provide a
simplified loan application process for the borrower, not to
alleviate underwriting and due diligence requirements for
lenders seeking entry into the 7(a) program. The 7(a) program
remains open to any lender, rural or urban, small or large,
through the general lending program. The Committee is
concerned, however, that the Low-Doc program, coupled with
District Office lending goals for minority and women borrowers,
is a potentially dangerous situation in which Low-Doc may be
evolving into a ``quota lending'' program. It is only in the
past few months that the Committee has confirmed the existence
of these lending goals. The Committee learned, and the Agency
confirmed, that it prepares, using census data for the
geographic area covered by a District Office, a specific goal
for the number of loans each District Office must make to small
business owners of certain ethnic backgrounds, such as African
Americans, Hispanic Americans, and Native Americans, and to
women. Meeting these goals is a critical factor in the
performance evaluation of each District Director. However, the
Committee notes that the Agency does not set such stringent
goals for portfolio performance for the District Offices.
Quantity lending goals without quality goals with equal weight
in the performance evaluations is a recipe for disaster. The
Committee expects the Agency to remedy this situation
immediately by either eliminating lending goals for the
District Offices, as these goals may place undue pressure on
SBA personnel to approve loans for reasons other than the
borrower's creditworthy status, or by implementing strong goals
for portfolio quality, such as high currency rates.
Finally, the Committee seeks to establish some discipline
in the granting of the Federal guarantee through the imposition
of reductions in the interest rates and servicing fees paid to
borrowers on defaulted loans. The Committee reasons that a
lender who has committed the Small Business Administration to a
loan that defaults is not entitled to a full servicing fee or
the full interest rate on that loan from the time of default to
the time it is paid off by the Administration. The Committee
believes that rather than producing a hesitancy in lenders to
aid small business under this program, it will instead
encourage more cooperation and assistance from the lender in
order to aid the small business to succeed. The incentives are
clear: aiding a small business borrower generates a grateful
and successful future client.
These changes are necessary to instill a sense of
commitment in all parties to this program. The Administration
is asked to relinquish some control in order to gain willing
and strong lending partners. The lending community, in turn is
asked to exercise its powers to ensure the continued viability
of the program by aiding its partners, the small business
borrowers, and by working to gain experience and knowledge of
the program in order to gain its full benefits.

changes to the 504 program

As stated above, the Congress relied on information from
the Small Business Administration and the Office of Management
and Budget in order to set additional fees that would reduce
the subsidy rate in the 504 program to zero, creating an
essentially self-funded program. Unfortunately, the OMB review
again revealed the actual subsidy rate would be far higher.
Because no funds were appropriated for this program in
fiscal year 1996, all the costs from the mistaken subsidy rate
will be added to the deficit. As a result, the Small Business
Administration is obligated for funds well in excess of the
amounts appropriated. This means that the taxpayers could
ultimately face millions of additional dollars added directly
to the Federal deficit when the shortfall comes due in the
future.
The Committee believes that a better solution exists than
the Administration's proposal of converting the 504 program to
a direct-lending program. This solution is to increase fees
temporarily in the 504 program, distributing this burden among
the borrower, the first mortgage holder, and the certified
development company. In addition, the Committee requires
changes to the underwriting and management of this loan program
in the belief that such improvements though not be reflected
immediately in the subsidy rate will eventually bring defaults
down and increase recoveries. The most experienced certified
development companies will be allowed to perform, on a pilot
basis, liquidation and collection functions. The Committee
expects the SBA to make a genuine, good faith effort to
facilitate this pilot and cooperate fully with those
development companies in the pilot program. The Committee
believes that the certified development companies may be more
efficient in liquidating than the SBA, and they certainly have
a vested interest in seeing increased recovery rates, as it is
a central component of the subsidy rate.
The Committee also notes that, despite the evidence of
losses far in excess of those anticipated, and despite evidence
that information on these losses was neither collected nor
collated in a fashion designed to inform the management of the
impending problems, no actions have been taken to discipline
the career staff responsible. In fact, the Administration's
proposed liquidation improvement does not clearly address the
lack of careful data collection required to monitor this
program. The Committee believes that the management information
system required in this bill will address this oversight.

Changes to the Disaster Assistance Program

The Administration originally requested that the interest
rate for disaster assistance loans be increased from the
current one-half of the Treasury rate for securities of similar
duration to the full Treasury rate. While this provision was
originally included in the bill, the Committee felt that such a
large increase in the interest rate may force an undue hardship
on disaster victims without credit available elsewhere.
Consequently, the bill, by bipartisan agreement, increases the
rate to three-fourths of the Treasury rate. The Committee
recognizes the balance that must be achieved between fiscal
responsibility and the desire to aid our citizens in need. The
Committee also agrees that despite the ongoing arguments
regarding the proper role of government in the lives of our
citizens, disaster assistance is one of the few clear cut areas
in which the government should act. The Committee, therefore,
declines to push the interest rate higher, despite the
Administration's proposal.
The Committee also initiates a pilot program for the
servicing and liquidation of disaster assistance loans. The
Committee believes it is appropriate to begin privatizing this
function in light of the character of the portfolio. Most of
the disaster assistance loans made by the SBA are for repair
and replacement of homes, and the terms of the loans often
stretch twenty to thirty years. This is, in essence, mortgage
lending, an industry that is heavily modernized and efficiently
operated by the private sector. The Committee, therefore,
believes it is appropriate to explore the potential for private
sector servicing of the disaster loan portfolio.

Changes to the Microloan Program

The Committee has become aware of actions taken by the
Administration to spread access to technical assistance grant
funds more equitably within the microlending community. It is
apparent that the microlenders who apply for grants early in
the year are given the full apportionment of grant funds
permitted under the statute. Unfortunately, this often means
that intermediaries that apply for grants later in the year are
left with only minimal funds due to shortfalls. The timing of
eligibility for applications is based on the date of acceptance
of an intermediary. This results in intermediaries being forced
into applying late in the fiscal year due to no fault of their
own. The Committee, therefore, proposes changes allowing for a
more equitable distribution of these funds to all
intermediaries. By lowering the maximum amount available to
all, the Committee hopes to prevent unfairness to some.
The Committee also notes the lack of effort made by the SBA
on the Microloan Guarantee Pilot Program and is surprised that
the SBA should so readily ignore both the statutory mandate and
the recommendations of the National Performance Review. The
Committee has yet to receive any formal explanation of the lack
of progress in this pilot program. As a result, this bill
requests that the Administration either implement the pilot
program or report on its inability to implement.

Small Business Development Centers

The Administration proposed in the reinvention proposal of
March, 1995, to consolidate the Small Business Development
Center (SBDC) Program with the Women's Demonstration and
Minority-Owned Business Technical Assistance Programs. The
SBA's plan would include placing primary responsibility for
management and oversight of the SBDCs with the District
Offices, and gradually increasing the state and local fund
match from the current $1 dollar for every $1 dollar in federal
grant, to a 3 to 1 formula, reducing the federal contribution.
These changes, which SBA planned to implement at the beginning
of fiscal year 1997, also would provide authority for SBDCs to
charge fees for counseling and other services.
The Committee rejects the SBA's plan to move oversight
authority over the SBDCs to the District Offices, and
statutorily creates the Office of Associate Administrator for
Small Business Development Centers who shall be solely
responsible for administering the program. The Associate
Administrator is required to consult Administration officials
in the areas served by SBDCs; however, the management and
administration of the program shall not be subject to the
approval or concurrence of these officials. While the Committee
understands the importance of having local input to ensure the
SBDC networks serve the communities in which they are located,
problems have arisen under the current policy in which district
office personnel must concur with the directives of the
Associate Administrator. Issues requiring timely action have
sometimes taken months, and in some cases years, to resolve.
The Committee believes these delays threaten the quality of the
SBDC program and the services it provides to small businesses,
thus prompting this provision.

Small Business Competitiveness Demonstration Program

The Small Business Competitiveness Demonstration Program
(SBCDP) was initially authorized by Title VII of P.L. 100-656,
the Business Development Opportunity Reform Act. The purpose of
the SBCDP was to assess the ability of small businesses in four
small business-dominated industry groups to compete
successfully for Federal prime contract opportunities without
the use of small business ``set-asides'' (competitions
restricted to small firms). The four designated industry groups
are: construction (other than dredging); architectural-
engineering services (including surveying, mapping, and
landscape architecture); refuse systems and related services;
and non-nuclear ship repair. Under the program, contracting
opportunities for these services are solicited and awarded
through full and open competition as long as the rate of small
business participation remains at or above 40 percent. The 40-
percent threshold was selected because it represents twice the
statutory goal for small business participation required by
Section 15(g) of the Small Business Act. To provide protection
to small firms in the Designated Industry Groups, the program
requires the re-imposition of small business set-aside
competitions if the small business participation rate falls
below the threshold and they are continued until the 40 percent
participation rate is again attained. Changes in competition
practices, as appropriate, are made on a quarterly basis.
The SBCDP requires participation by those ten Departments
or agencies that are the largest buyers in the Federal
procurement system. Currently, the ten are: the Departments of
Agriculture, Defense, Energy, Health and Human Services,
Transportation, and Veterans Affairs, as well as the General
Services Administration, the National Aeronautics and Space
Administration, and the Environmental Protection Agency. In the
aggregate, the procurement programs of these departments and
agencies account for more than 90 percent of all procurement
dollars spent annually. The statute authorized the
Administrator for Federal Procurement Policy to specify
additional Executive agencies as part of the published test
plan for the program. None was so designated.
As an integral component of the SBCDP, participating
agencies were directed to re-focus their small business
advocacy resources to other industry groups that have
historically had relatively low rates of small business
participation in Federal contracting opportunities, despite
substantial small business capacity in the private sector.
Under the program, participating agencies are required to
designate 10 such Targeted Industry Groups, and fashion
programs to expand small business participation in them. Such
programs to expand participation within the Targeted Industry
Groups are developed by each participating agency, tailored to
its procurement activities. SBA assists and reviews the
individual programs proposed by the participating agencies.
The SBCDP was previously extended for a four-year period by
Section 201 of P.L. 102-366, the Small Business Credit and
Business Opportunity Enhancement Act of 1992. This action was
taken based on the comprehensive program report received from
the Office of Federal Procurement Policy in December 1993,
which covered the period January 1, 1989 through September 30,
1992. That report demonstrated strong small business
participation through full and open competition with respect to
three of the four Designated Industry Groups. Severe reporting
problems were identified regarding architectural and
engineering services (A-E services). These reporting problems
tended to obscure the program's performance with respect to A-E
Services, but even the incomplete data showed a positive trend.
The same report showed very little progress with respect to
expanding small business participation within the various
Targeted Industry Groups. Additional experience was clearly
called for with respect to this important element of the SBCDP.
Since the cumulative and comprehensive report received in
December 1993, the Committee has received only preliminary data
regarding fiscal years 1993, 1994, and 1995. That data seems to
suggest that small business competitiveness remains strong
within the four Designated Industry Groups, with A-E services
showing the most difficulties in meeting the 40 percent small
business participation rates. Small business set-aside
competitions have been re-imposed when appropriate to protect
small business participation.
The bill provides for an additional four-year extension of
the SBCDP from is current expiration on September 30, 1996 to
September 30, 2000. The Committee believes that this extension
will provide additional time for the participating agencies to
be more creative regarding expanding small business
participation within the Targeted Industry Groups and to
measure, on a long-term basis, the ability of small firms in
the Designated Industry Groups to succeed in the Government
prime contract market without the use of set-aside
competitions. It will also provide additional time to obtain
clearer data regarding the competitiveness of firms providing
A-E services.
The 1992 reauthorization of the program directed the
conduct of a data collection effort to capture the full range
of small business subcontracting in the Designated Industry
Group of A-E services. Unfortunately, it still has not been
implemented. The bill again directs such an addition to the
overall SBCDP.
The objectives and intended implementation of this enhanced
subcontracting reporting system were described in the section-
by-section analysis accompanying the Section 202(d) of P.L.
102-366. Subsection 202(h) of P.L. 102-366 also sought to
encourage the implementation of the subcontract reporting
system required by subsection (d) of that Act (as well as the
improved data collection with respect to A-E services required
by subsection (g) of that Act), by adjusting the threshold
relating to A-E services. The threshold for A-E services would
be 35 percent until these directed program management
improvements were implemented. The Committee finds that the
adjusted 35 percent threshold with respect to A-E services
remains in effect.
The bill makes other amendments to the SBCDP that can be
fairly characterized as technical in nature. For example, the
bill adds a reference to landscape architecture to the SBCDP's
definition of ``architectural and engineering services'' and
the related citations to A-E services throughout the program's
authorizing statute. This amendment is intended to recognize
changes being made to the Standard Industrial Classification
(SIC) Code system as it changes to its proposed successor, the
North American Industrial Classification System.
Committee deliberations on the SBCDP were hampered by lack
of data on the recent performance of the program. Reporting
obligations under the program were transferred to the SBA by
the Office of Federal Procurement Policy (OFPP). Due to the
restructuring of the entire Office of Management and Budget
(OMB) under ``OMB 2000,'' the personnel resources of OFPP were
reduced by approximately 50 percent. OFPP no longer possessed
the professional staff to undertake the labor-intensive task of
compiling and analyzing the data collected under the program.
The data is collected from the participating agencies as part
of the routine reporting of their procurement activities
through the Federal Procurement Data System (FPDS).
The bill also amends the SBCDP's reporting requirements to
assure cumulative reporting is available in the future. This
will assist Congress and industry in reaching judgments about
the program.
Finally, the bill requires the submission of a cumulative
report regarding the program's performance through fiscal year
1995 within 60 days after the date of enactment. Under the 1992
reauthorization legislation, a report was due to the Congress
180 days after the availability of FPDS data for fiscal year
1995, or approximately June 30, 1996.

Preferred Surety Bond Guarantee Program

The Preferred Surety Bond Guarantee (SBG) Program was
authorized by Title II of P.L. 100-590, the Small Business
Administration Reauthorization and Amendment Act of 1988. The
fundamental objective of the Preferred SBG Program is to
encourage the renewed participation of the large, so-called
``standard'' surety firms in the SBA SBG Program. A Preferred
Surety, unlike a participant in the basic Prior-Approval SBG
Program, is authorized to issue a bond with a Federal
Government guarantee without obtaining SBA's prior-approval for
each bond. Prior to designation as a Preferred Surety, SBA
reviews the surety's basic business procedures regarding
underwriting and administration of surety bonds that it
provides in its general course of surety business. A Preferred
Surety is required to use these same procedures in the
underwriting of surety bonds with a Federal Government
guarantee. In exchange for the freedom to issue government-
guaranteed bonds using the firm's standard procedures, the
government-guarantee percentage applicable to a bond issued by
a Preferred Surety is limited to 70 percent (rather than the 90
percent maximum guarantee available in the Prior-Approval
Program).
In order to preserve the role of the so-called ``specialty
sureties'' that are the mainstay of the SBA SBG Program,
bonding authority has been allocated between the two programs
on approximately 60-40 split, with the larger share going to
the specialty sureties in the Prior-Approval SBG Program.
Because of this allocation, no additional participants have
been admitted to the Preferred SBG Program, despite pending
applications from several firms urging that they will be active
participants. Despite having several persistently inactive
Preferred Sureties, SBA program staff maintains that they
currently lack statutory or regulatory authority to terminate a
Preferred Surety simply on the basis of low (or no)
participation. The bill provides that authority.
The Committee expects the SBA to amend the SBG Program's
implementing regulations and standard operating procedures as
soon as practicable. The Committee further directs that such
amendments make explicit that SBA will generally approve (or
disapprove) a complete application within 30 days. If the SBA
is unable to take action within such 30-day period, the
applicant will be notified in writing, specifying a date
certain for action on the application and the reason why
additional time is needed by the Administration. The Committee
recognizes that under current regulations for the Preferred SBG
Program, designation as a Preferred Surety is not effective
until a mutually agreeable Preferred Surety Bonding Agreement
is negotiated between the surety and SBA.
The Committee emphasizes that the authority granted by new
Section 411(a)(5)(B) of the Small Business Investment Act of
1958, added by Section 206(a) of the bill is permissive and not
mandatory. Specifically, the Committee directs that SBA
implementation of this new statutory authority not be
implemented in a manner that gradually eliminates all but the
most active Preferred Sureties through a purely mechanistic
application of the new statutory standard.
The bill establishes the effective date of the amendment,
making it applicable to applications pending on or after
October 1, 1995. The Committee notes that the SBA has a number
of applications pending, upon which no action has been taken.

Committee Action

Two days after receipt of the President's Budget the
Committee convened a hearing to discuss the implications of the
increase in the subsidy rates and their effect upon the future
of the 7(a) and 504 programs. At the hearing, SBA Administrator
Philip Lader described the findings of the subsidy rate study
that the Agency undertook ``* * * as a practice of
conservative, responsible management,'' and that these
findings, ``require that these programs'' subsidy rates be
raised.'' The Administrator went on to describe the portfolio
study, in which more than 600,000 loans and 25 million
transactions were analyzed, as the most comprehensive loan
portfolio study done by any major credit agency. The new
subsidy rates, calculated from the results of the portfolio
study, represented, ``a correction in the course set in 1991
when SBA's first subsidy study was conducted,'' the
Administrator commented. The Administrator further noted that
``given the likely better performance of loans made in more
recent years, the subsidy rate can probably be reduced over
time.''
Other witnesses presenting testimony before the Committee
at the March 21, 1996 hearing, however, expressed concern,
frustration, and a sense of ``deja vu'' over OMB's
calculations, and the assumptions used in this calculation
which seem to change from year to year. Mr. Anthony Wilkinson,
President of the National Association of Government Guaranteed
Lenders (NAGGL), testified that in months prior to the release
of the President's Budget for fiscal year 1997, individual 7(a)
lenders were told by OMB that the portfolio analysis indicated
that the program's performance was slightly better than
estimates and that the subsidy rate would decline slightly.
This information was confirmed to Mr. Wilkinson by SBA
officials in February 1996, only to have the 7(a) subsidy rate
increase by 153 percent when the President's fiscal year 1997
Budget was finally released on March 19, 1996.
Mr. Ken Lueckenotte, testifying for the National
Association of Development Companies (NADCO), echoed Mr.
Wilkinson's frustration over these new subsidy rates, as
NADCO's own analysis of the debenture portfolio revealed
substantially different results from OMB's calculations. As Mr.
Lueckenotte stated before the Committee, ``* * * the 504
portfolio is performing up to market and commercial standards,
both from the point of view of the institutional investors who
purchase our securities in the private market each month, and
in comparison to comparable commerical lending experience. If
the quality of the portfolio measures up to market and
commerical standards, how could OMB's calculations paint such a
different picture?''
The industry representatives for the 7(a) and 504 program
were also united in their opposition to ``status quo''
operation of these loan programs. Both NAGGL and NADCO
expressed a desire to get to the root of the problems in the
loan programs that are causing continued upward spikes in the
subsidy rates, and that action be taken to address the causes,
not appropriate more money or create new fees that mask any
management or underwriting failings in the programs''
operations.
In the months following the March 21, 1996 hearing,
Committee staff (both minority and majority) met with Small
Business Administration officials and members of the lending
community in order to identify program weaknesses and problems
and to discuss possible options for addressing these problems.
A large number of these options were presented to the SBA for
analyses and preliminary scoring. While the SBA did not express
support for many of these options, the discussions were
essential to the crafting of the provisions included in the
Small Business Programs Improvement Act of 1996, which was
introduced on June 26, 1996 as H.R. 3719.
The Committee met on July 10, 1996 to begin consideration
of H.R. 3719. After opening statements, the Chair offered an
amendment in the nature of a substitute that corrected
technical and drafting errors and removed certain provisions
that had the potential to violate certain provisions of the
Credit Reform Act. The Chair and the Members began a discussion
and consideration of the various provisions of the amendment in
the nature of a substitute.
During the discussion both Mr. LaFalce and Mr. Manzullo
expressed concerns regarding the section in both the introduced
bill and the substitute on non-judicial foreclosure. This
provision was added by the Chair at the request of the
Administration, and was provided by the Department of Justice.
Unfortunately, the provision was drafted in a fashion that
presented grave problems concerning rights of redemption,
unfunded mandates, and an overall question of the wisdom of
overriding the public policy of nearly half the states in the
Union. Consequently, the Chair, by unanimous consent, struck
the provision.
The discussion and explanation of the bill's provisions
concluded, at which time the Chair recessed the meeting. The
meeting reconvened on Thursday July 18, 1996 and the amendment
in the nature of a substitute was considered for amendment. Mr.
LaFalce offered an en bloc amendment containing a number of
changes that were reached with bipartisan agreement. The
changes included modifications to the qualifications for Low-
Doc lenders, clarifications of the terms of the centralized
loan center provision, implementation of the PLP Review
program, the Disaster Loan Servicing pilot program, the
Development Company Loan pilot program, and the interest rate
provision for Disaster Loans. The en bloc amendment also
contained language striking the provision regarding the Women's
Demonstration Program. The compromise amendment was accepted by
voice vote.
Mr. Hefley then offered an amendment extending the ability
to liquidate and service guaranteed loans to Certified Lenders.
During discussion of the amendment Mr. LaFalce asked for
clarification of the amendment's language. Mr. Hefley agreed to
change the language to clarify the Administrator's ability to
approve such authority. The change was incorporated without
objection, at which point the amendment was put to a vote. Mr.
Hefley's amendment passed by voice vote.
Mr. Torkildsen then offered an amendment to direct the
Administrator to, with assistance of the Office of Management
and Budget, separately track the subsidy rate of the Low
Documentation loan program. The amendment was passed by a voice
vote.
Mr. LaFalce then offered another compromise amendment on
behalf of himself and Chair Meyers regarding the securitization
of the non-guaranteed portion of guaranteed loans. After
discussion between Mr. Bentsen and Mr. LaFalce concerning the
possible negative effect of the amendment in its current form
on existing participants, Mr. LaFalce agreed to change the
amendment to reflect the ability of the Administration to
require a loss reserve of up to ten percent when circumstances
required, rather than the flat ten percent originally proposed.
The amendment clarifies that SBA has the authority, if
necessary, to require lenders securitizing the non-guaranteed
portion of SBA 7(a) loans to retain some level of exposure in
the security, not to exceed 10 percent of the amount of the
loan. In addition, the amendment states that reserve
requirements should not be determined solely by an
institution's status as a depository institution or a non-bank
lender. Rather, it is the Committee's intent that any exposure
or reserve requirement be determined on a lender-by-lender
basis, based upon the lender's experience and the nature of the
securitization. Further, it is not the Committee's intent that
SBA regulations impair existing securitization structures that
have proven effective in expanding capital availability, while
ensuring an appropriate level of risk retention by the issuing
lender. The change was made by unanimous consent and the
amendment was agreed to by a voice vote.
Mr. Torkildsen then offered an amendment to Section 104 to
change the definition of a disaster to include government
action, regulatory or otherwise, in the clause regarding the
closure of customary fishing waters. The amendment was debated
and several Members expressed concern over the possible return
to the prior (pre-1986) practice of granting ``economic injury
disaster loans.'' Mr. Torkildsen rejoined that his amendment
was both specific and carefully thought out. The conditions he
sought to alleviate are the result of both government action
and changes in natural environment exacerbated by government
action. The amendment was put to a vote and was passed with 21
votes in favor, 8 opposed.
Mrs. Kelly offered two amendments to Section 106. The first
eliminated a provision that would have removed a prohibition on
institutions other than colleges and universities competing for
Small Business Development Company lead center status. Mrs.
Kelly expressed concern that local government entities would be
encouraged to enter the program, possibly injecting politics
into the process. In addition, it was her opinion that since
SBDCs were primarily educational in their function, they
belonged at educational institutions. The amendment was agreed
to by voice vote.
The second amendment eliminated a provision that would have
allowed Small Business Development Centers to charge reasonable
fees and prohibited the SBA from mandating such fees. Mrs.
Kelly expressed her belief that the provision was detrimental
because it raised the possibility of the withdrawal of
assistance of matching funds from state and local partners. She
also was concerned that such fees might serve to keep the
smallest of entrepreneurs from coming to the centers,
regardless of the optional nature of the fees. This amendment
was also passed by voice vote.
Mr. Jackson then offered an amendment to take out the
repeal of the provisions for the handicapped assistance loan
program and the low income areas loan program. During the
debate Mr. Jackson expressed his belief that despite the fact
that the Administration had not requested or received funding
for these programs in recent years, a real need for them might
exist in the future. Mr. LaFalce also spoke on behalf of the
amendment, in particular the handicapped assistance loan
program. Chair Meyers expressed her belief that the lack of
funding made these programs obsolete and her concern that
direct lending programs in general represent a drain of
resources, which could also be met through guaranteed lending.
Provisions similar to both these programs do exist under the
7(a) program but are little used. The amendment was put to vote
and was passed with 16 votes in favor, 10 opposed.
Mr. LaFalce then offered an amendment to increase the
annual fee charged to 7(a) lenders by one-twelfth of one
percent. The Chair expressed concerns over the addition of more
fees to the program. The amendment failed by a voice vote.
Mr. Baldacci then offered an amendment to restore the
guarantee percentage for Export Working Capital Loans to 90
percent from the current rate of 75 to 80 percent. Mr. Baldacci
expressed his concern that this rate was necessary in order to
encourage bank participation in small business export lending.
Mr. Manzullo expressed his concern that such lending did not
appear to declining as a result of the lower guarantee
percentage, and his disbelief that the large scale loans at the
Export-Import Bank of the United States (Ex-Im Bank) are
guaranteed at the 90 percent rate. The amendment was passed by
a voice vote.
Mr. LaFalce then offered an amendment with the support of
the Chair to extend the authorization for SBA's programs
through fiscal year 1998 at the fiscal year 1997 authorization
levels. The amendment was agreed to by a voice vote.
Mr. LaFalce then offered an amendment to increase the fees
on the 7(a) loan program. The Chair expressed concerns and Mr.
LaFalce withdrew the amendment.
The Committee then moved to Title 2 of the bill. Mr.
LaFalce offered a compromise amendment on behalf of himself and
the Chair regarding the terms of the Development Company pilot
liquidation program. Mr. Hefley expressed his concerns that the
changes might encourage the SBA to limit participation in the
program arbitrarily. The Chair echoed his concerns and
expressed her intent that the program be implemented fully and
seriously. The amendment was then passed by a voice vote.
Having completed consideration of amendments the Committee
then voted on the amendment in the nature of a substitute, as
amended. The amendment was accepted by voice vote. The Chair
then ascertained that a sufficient number of members were
present, and the Committee voted to report the bill as amended
by a unanimous voice vote.

Section-by-Section Analysis and Committee Views

Section 1 provides that this bill be known as The Small
Business Programs Improvement Act of 1996 and gives a table of
contents. Section 2 defines the term ``Administrator'' as used
in the bill to refer to the Administrator of the Small Business
Administration. Section 3 establishes that, unless noted
otherwise in the bill, all provisions of H.R. 3719 take effect
on October 1, 1996.

SECTION 101. REFERENCES

Provides that unless expressly stated otherwise, all
references in title one are to the Small Business Act (15
U.S.C. Sec. 631, et seq.).

SECTION 102. RISK MANAGEMENT DATABASE

This section instructs the SBA to set up a comprehensive
and fully integrated computer database to track the performance
of the 7(a), 504, and disaster assistance loan programs, and
stratify and identify loan underwriting problems. It requires
that information be collected, in a single system, on:
defaults, losses, recoveries, lenders, and borrowers. This
database shall also be able to compare data regarding defaults
and losses in the 7(a) program by SBA region, district,
Standard Industrial Classification (SIC) code, and loan size.
This data shall be collected solely for information purposes
and to assist the Administration in its overall program
management goals. The information is currently collected by the
SBA but is not collated in a format that the Committee believes
adequately serves the needs of the agency.

SECTION 103. SECTION 7(a) LOAN PROGRAM

(a) Servicing and liquidation by preferred lenders

This section amends Section 7(a)(2)(C) of the Small
Business Act to specify that Preferred Lenders shall have full
authority to collect on, and liquidate loans that they made
without prior written approval of SBA for routine activities.
The Committee desires that Preferred Lenders be afforded every
opportunity to exercise the discretion they normally have in
their lending liquidation activities. The Administration has
regularly expressed in testimony before the Committee that this
is the case, and the Committee seeks to be ensure that result.
At the Administration's request, language was added in the en
bloc amendment prohibiting lenders from engaging in conflicts
of interest.

(b) Certified lenders program

This section clarifies Section 7(a)(19) of the Small
Business Act regarding the Certified Lender Program. It also
institutes new authority for Certified Lenders to begin
performing liquidation of SBA guaranteed loans subject to the
approval of the Administration. This provision will essentially
give Certified Lenders the authority that Preferred Lenders had
prior to this Act.
The low-documentation program
This section also amends the Small Business Act to require
that the Administration's low documentation loan program (Low-
Doc) loans be made only through Certified and Preferred
Lenders, or lenders with significant small business lending
experience. The bill requires the Administration to define such
experience. The Committee adds this language to ensure that the
Small Business Administration is living up to the guidelines it
has promulgated for the Low-Doc program. These guidelines
specifically state that the program shall be used only by the
SBA's experienced lending partners. The section also requires
that the SBA begin to track the subsidy rate for Low-Doc
separately, a change the Committee finds to be prudent due to
Low-Doc's substantial presence in the loan portfolio.

This section amends Section 7(a) to provide that SBA may
not establish a pilot program or initiative in the 7(a) program
that in any one fiscal year exceeds ten percent of the total
number of loans guaranteed in the entire 7(a) program. The
Committee adds this language as a safeguard and a firewall from
possible unintended consequences. The Committee appreciates the
concern expressed by the Administration regarding the
restriction that this may place on their ability to move
forward with innovations. However, the Committee wishes to make
clear that nothing prevents the SBA from implementing a pilot
program and then asking the Committee to approve such an idea
through simple legislative action. Any pilot program that would
affect approximately $800 million of Federal guarantees is
deserving of Congressional consideration.

(d) Securitization of unguaranteed loan portion

This Section amends Section 5(f) of the Small Business Act
to allow banks, as well as non-banks to securitize (i.e., sell
in the secondary market) the non-guaranteed portion of SBA
loans. Currently, only non-bank lenders may securitize the non-
guaranteed portion of their SBA guaranteed 7(a) loan portfolio.
There are stringent regulations governing this practice, and
non-bank lenders must apply individually and receive permission
from the Agency to engage in this practice. H.R. 3719 removes
the prohibition that prevents bank (depository institution)
lenders from securitizing their non-guaranteed portion of their
7(a) portfolio. The bill also makes clear that the SBA shall
require each lender participating in this program to keep a
sufficient reserve (up to ten percent) to safeguard the
Administration's interest.

(e) Conditions on purchase of loans

This section amends Sections 5(g) and 7(a) to establish
procedures requiring the SBA to reduce the servicing fees or
accrued interest paid to a lender for the period of time
between the default of a loan and the payment on the guarantee.
Both the fee and the interest rate would be reduced by one
percent for that period. Currently, lenders are paid a fee for
servicing loans that are sold on the secondary market. This
provision would lower that payment for the period of time
between the default on the loan and the payment on the
guarantee. Similarly, the interest payable to a lending
institution for that period would also be reduced.
The Committee institutes this provision for two reasons:
first, as a discipline fee to encourage lenders to improve the
quality of the loans made, and to insure careful and serious
monitoring of the health of the small business borrower;
second, as a means of reducing, however slightly, the subsidy
rate for the 7(a) program.

(f) Transfer of servicing functions

This provision requires SBA to report to the Committee on
its progress with centralizing loan servicing functions. The
SBA has been transferring its loan servicing functions from the
SBA District offices to the centralized loan servicing centers.
Approximately half of the District offices have completed this
transfer, and lenders have found the centralized servicing
centers to be very efficient. However, the SBA has not
completed the transfer of the remaining District office files
to the centralized centers. The Committee bill directs the SBA
to report on the status of this effort and any possible
impediments within 90 days of enactment.

(g) Preferred lender review

This provision requires the SBA to issue a Request for
Proposals to implement its standard review program for Section
7(a) Preferred Lenders. The program parameters are now ready
but the program has yet to go forward. This review is a vital
tool for the monitoring of SBA's largest lending partners, and
the Committee intends that implementation go forward without
further unnecessary delay.

(h) Independent study of loan programs

Within two months of enactment of this legislation, the
Administrator shall issue a solicitation and award a contract,
through full and open competition, for an independent study and
comprehensive report on the status of the 7(a) and 504 loan
programs. This report shall contain detailed historical
information and data on the losses incurred by the programs,
the default rate for each year's lending cohort (i.e., loans
made during that year), the number and frequency of defaults
and deferrals for each year's cohort, and an analysis of the
prospective loan losses for the program based on such data.
The report shall also contain information comparing the
relative loss rates of the loans provided by preferred lenders,
certified lenders, or general participation lenders; a
comparison of the loss rates of loans based upon their
maturity; and a comparison of the loss rate of loans based on
their dollar amount at disbursement. The report shall compare
such information with the subsidy model for the program as
prepared by OMB and report on the accuracy and validity of the
OMB subsidy model and its assumptions.
Finally, the report will provide recommendations for
improving the information management and data collection
activities of the Administration with regards to the 7(a) and
504 programs. This report shall be delivered to the Small
Business Administration which will have 30 days to append its
comments, and those of the Office of Management and Budget,
before presenting the report to the House and Senate Committees
on Small Business.
The Committee institutes this report because of a mounting
frustration with the response received from both the SBA and
the Office of Management and Budget. The Committee believes
that it is imperative to obtain an impartial and objective
accounting as to the health of the loan programs and their
subsidy cost. This information is vital to the functioning of
the SBA and the efficient operation of the legislative process.
Finally, the Committee urges the Administrator to make every
effort to draft the request for proposals for this report in a
fashion that provides the maximum opportunity for small
business to compete for this contract.

(i) General Accounting Office study

This section requests a study by the General Accounting
Office (GAO) to compare the costs of liquidating loans both
privately and through the SBA. Currently, the Committee is
informed that the costs of Preferred Lender Liquidation is
higher than the cost of SBA liquidations. This statistic,
however, belies the fact that the costs of SBA employees and
other Federal employees are not counted towards the subsidy
cost of the program. The Committee believes that this unfairly
prejudices the accounting and masks the true cost of the 7(a)
program. Consequently, the Committee requests that GAO study
and compare the full costs on both sides of the equation,
including indirect costs such as those of SBA personnel and
U.S. Attorneys involved in the liquidations.
In addition, as a control group, the Committee asks that
GAO compare these costs with non-guaranteed loans made by
Preferred Lenders to show any possible hidden costs not
accounted for by the Committee. The Committee does not impose
this as a condition upon Preferred Lenders, but hopes they will
be cooperative with the GAO in their efforts.

section 104. disaster loan program

(a) Interest rate

This section amends Section 7(c) of the Small Business Act
to change the interest rate on disaster assistance loans to a
rate equal to three-fourths of the rate for a Treasury
instrument of a similar duration. This means that disaster
loans will still be made at a rate below the cost of money to
the Federal Government. Originally, the Administration had
proposed raising the rate further to the full cost of money.
While this would have saved the government additional funds,
the Committee was not comfortable with that significant an
increase in the interest rate for disaster victims.

(b) Servicing and liquidation pilot

This section provides for a pilot project to be conducted
by the Administration. The Administration will solicit and
award, on a competitive basis, a contract to one or more
private sector entities to service and liquidate a total of
25,000 randomly chosen disaster loans (20,000 residential loans
and 5,000 commercial loans). The pilot contract term will be
two-years with options for five additional two-year terms. The
SBA is required to report on the results of this pilot and
compared the costs with the costs of SBA based liquidation.
The Committee institutes this pilot program with the view
towards the possibility of eventual privatization of disaster
loan servicing and liquidation. The Committee has heard good
reports regarding such efforts at other agencies and believes
that, because the majority of disaster loans are long-term home
loans, they can be serviced efficiently by private sector
entities familiar with mortgage servicing.

This provision amends Section 3(k) of the Small Business
Act to expand the definition of disaster to include the closure
of customary fishing waters by government action either
regulatory or otherwise. Currently, the definition excludes
closures of fisheries that are imposed by government fiat. This
provision will include situations in which the government
through law, regulation or malfeasance causes or orders the
suspension of fishing.

Section 105. microloan demonstration program

(a) Technical assistance grant requirements.

This provision amends Section 7(m) of the Small Business
Act to decrease the maximum amount that an intermediary may
receive through the technical assistance grant component of the
microloan program. It will be reduced by 5 percent, from 25
percent to 20 percent, of the loan fund amount. The matching
funds requirement will also be increased from 25 percent to 35
percent.

(b) Requiring implementation of fiscal year 1995 program

The bill requires the SBA to either implement the Microloan
Guarantee Pilot Program established in Section 7(m)(12) of the
Small Business Act or issue a report on why they are unable to
implement the Microloan Guarantee Pilot Program. The bill
specifies that failure to perform one of these options by
December 1, 1996 will result in a freeze in the authorization
for the program as a whole.
In Section 201 of P.L. 103-403, the reauthorization bill
adopted in 1994, the House and Senate Committees on Small
Business directed the agency to pilot a guaranteed loan program
for microloans. Currently, all microloan intermediaries get
their loan funds on a direct lending basis from the SBA. The
1994 legislation authorized providing a guarantee of up to 100
percent to banks making the same type of loan to the
intermediaries who use it to relend in small amounts to
entrepreneurs. The microloan is one of the few direct loan
program still in existence at the Agency, and moving the
program to a guaranteed basis would result in savings to the
Federal Government. This approach was, in fact, recommended by
the National Performance Review. Appropriations have been
provided since fiscal year 1995 to implement this microloan
guarantee pilot. However, the Agency has yet to do so.

SECTION 106. SMALL BUSINESS DEVELOPMENT CENTER PROGRAM

The bill amends Section 21 of the Small Business Act to
provide for clear authority for the Associate Administrator for
Small Business Development Centers to establish a comprehensive
certification and eligibility review program for Small Business
Development Centers. These changes clarify the management
structure of the program and provide for enhanced oversight of
grants and cooperative agreements.

SECTION 107. MISCELLANEOUS AUTHORITIES

This section eliminates several provisions for programs
that are either redundant or are no longer being funded or
implemented. These include Trade Assistance Loans and Solar
Energy Loans, both programs that are unfunded and whose
purposes are currently satisfied by other programs such as the
7(a) loan program.

SECTION 108. SMALL BUSINESS COMPETITIVENESS PROGRAM

This section will extend the Small Business Competitiveness
Demonstration Program, which is due to expire at the end of
fiscal year 1996, by four years, or through fiscal year 2000.
This program suspends small business procurement set-asides for
four industrial categories, promoting full and open competition
in those categories. No small business set-aside will exist for
these categories under the pilot, as long as the number of
small businesses competing and winning awards in these
categories meets and exceeds twice the 20 percent small
business goal.
In addition, the bill requires the SBA to submit a detailed
cumulative report on the program, complete with the procurement
statistics on the program from 1992 through 1995, within 60
days of enactment. This section also restates the reporting
requirement for information on small business subcontracting in
the Architecture and Engineering category, information that has
yet to be provided despite existing requirements. The bill also
provides technical clarification of the small businesses
eligible under the pilot program. The clarifications are
necessary due to changes in the Standard Industrial
Classification code system.

SECTION 109. AMENDMENT TO P.L. 103-81

This section repeals Section 7 of the Small Business
Guaranteed Credit Enhancement Act of 1993 and eliminates the
sunset of a fee on the sale of guaranteed loans on the
secondary market.

SECTION 110. EXPORT WORKING CAPITAL LOAN PROGRAM LEVEL

This section restores the 90 percent guarantee level for
Export Working Capital Loans. The guarantee was reduced to a
maximum of 75 percent (80 percent for loans under $100,000) in
P.L. 104-36. While this change represents a return to the
``harmonization'' with Ex-Im Bank loans, which are also
guaranteed at 90 percent, the Committee continues to be
concerned about the need to guarantee any loan at such a high
rate.
In addition, there is a continuing lack of interest in
small business lending at the Ex-Im Bank. It seems absurd to
this Committee that the Ex-Im Bank and the Administration
continue to push assistance for Ex-Im Bank's large business
clientele while Ex-Im Bank ignores its charter and treats small
business lending as a poor relation. ``Harmonization'' appears
to be no more than an opportunity for Ex-Im Bank to continue to
evade its responsibility to the small business exporting
community. The Committee is pleased that SBA steps up to the
plate but is concerned with Ex-Im Bank's continuing failure.

SECTION 111. 1998 AUTHORIZATIONS

This section amends Section 20 of the Small Business Act to
reauthorize the Small Business Administration and its programs
through fiscal year 1998. This provision is at the same
authorization level as fiscal year 1997, representing neither a
cut nor an increase in the authorization. The authorization
also eliminates the earmark for debentures for the Specialized
Small Business Investment Company (SSBIC) debentures. The
heavily subsidized SSBIC program has proven an undue burden on
the program's finances and consequently the specific earmark is
removed. It is the Committee's intent that no more of these
debentures be funded.

SECTION 201. REFERENCES

This section provides that unless expressly stated
otherwise, all references in Title 2 are to the Small Business
Investment Act of 1958 (15 U.S.C. Sec. 661, et seq.).

SECTION 202. MODIFICATIONS TO THE 504 PROGRAM

(a) Loan to value ratio

This provision amends Section 502 of the Small Business
Investment Act by modifying the amount of contribution required
from a small business for participation in a 504 loan package.
Start-up small businesses (i.e., those in business two years or
less) and borrowers seeking financing for a special purpose
building (i.e., a building with a specific use, such as a hotel
or carwash), must put a minimum of 15 percent down, instead of
the minimum of 10 percent as required under current law. This
additional 5 percent down will reduce the SBA's portion of the
project from 40 percent to 35 percent, resulting in a 15-50-35
split--borrower, first mortgage holder, and SBA debenture
financing, respectively, for the project.
Furthermore, these requirements are additive, so that a
start-up small business seeking financing for a special purpose
building must put 20 percent down (i.e., an additional 5
percent for being a start-up small business and 5 percent for
financing a special purpose building). This will effectively
lower the SBA's financing for the project to 30 percent. These
new requirements are designed to help mitigate the risk to the
portfolio as evidenced by a much higher default rate for start-
up small businesses and the liquidation problems presented by
special purpose buildings.

(b) Guarantee fee for development company debentures

This provision amends Section 503(b)(7)(A) of the small
Business Investment Act to increase the one-eighth of 1 percent
fee that the borrower is currently required to pay on the
annual outstanding balance of the principal on the SBA portion
of the project (pursuant to P.L. 104-36) to thirteen-sixteenths
of one percent. The Committee is not pleased that the increase
in fees is required, but as outlined elsewhere in this report,
finds it has little alternative.

This provision amends Section 503(d) to include two new
fees for this program. The participation fee is a one-time, up-
front fee of one-half of one percent on the total cost of the
project. It will be levied on the first mortgage holder. This
is typically a local bank that funds 50 percent of the project.
This fee will be passed through to the SBA to offset the
subsidy rate.
Under the development company servicing fee, one-eighth of
one percent of the annual servicing fee collected by
Development Companies will be passed-through to the SBA to
offset the subsidy rate. Certified Development Companies
currently receive a total of between 0.5 percent and 1.5
percent from the borrower in loan servicing fees.

SECTION 203. REQUIRED ACTIONS UPON DEFAULT

(a) Deadlines

This section amends Section 503 of the Small Business
Investment Act by instructing SBA to take action on defaulted
loans within a certain time frame in order to speed recoveries
and liquidations. Within 45 days of a missed payment, the SBA
must act to bring the loan current or enter into a deferral
agreement. Within 65 days of a missed payment and absent a
deferral, the SBA must start to accelerate (i.e., foreclose) on
the loan. This provision is added to ensure that prompt action
is taken by the SBA. It is a bromide in the financial services
industry that time is money. Any time that the SBA allows to go
by on a defaulted loan without definitive action increase the
risk of loss to the government. The Committee believes that
this provision will encourage decisive action by the SBA and
thereby improve the monitoring and performance of the loan
portfolio.

(b) Prepayment penalties and late fees

This provision prohibits the SBA from paying late fees or
prepayment penalties on defaulted loans. It also prohibits the
SBA from paying any ``default interest rate'' on a defaulted
loan. This language is designed to cure a problem that occurs
when the SBA purchases the first mortgage position from banks
that participate in Development Company loans. The SBA is often
obliged to pay ``prepayment'' penalties on loans that have gone
into default. Prepayment penalties are more commonly, and
appropriately, charged only when a borrower pays off a loan
early.
This provision put a stop to that practice and requires
that the local banks, Development Companies, and the SBA work
out loan terms that reflect the real partnership occurring in
this program.
This section contains similar language regarding late fees
paid by the SBA in the same circumstances. The Committee
believes that the SBA's purchase of the first mortgage position
negates any need to pay a ``late fee''. Like a prepayment
penalty this charge is not appropriate for a defaulted, rather
than delinquent, loan.

SECTION 204. LOAN LIQUIDATION PILOT PROGRAM

This provision requires SBA, working cooperatively with
the Certified Development Companies, to develop and implement a
pilot program in which CDCs will have complete authority to
liquidate their own loans. This responsibility will be
delegated only to a select number of the most experienced and
active CDCs, namely those with six years of program experience
and an average of ten loans per year, and liquidation
experience sufficient to carry out this function. SBA will be
charged with the responsibility of overseeing the
implementation and functioning of this pilot program and will
issue a report on the effectiveness of the pilot program at the
end of two years.
While it is the intent of the Committee to allow the
Administrator discretion in the admission of Development
Companies to the pilot program within the bounds of the program
parameters, the Committee expects the Administration to deny
admission only in circumstances in which it is apparent that
the Development Company cannot carry out the responsibilities
required under the pilot program.

SECTION 205. REGISTRATION OF CERTIFICATES

This section amends Section 5 of the Small Business Act
and Section 321 of the Small Business Investment Act to allow
SBIC and 504 development company debentures and securities to
be filed electronically. Currently, the law requires a number
of unnecessary disclaimers and statements on these securities,
which prevent the instruments from being electronically
registered. This section removes those restrictions.

SECTION 206. PREFERRED SURETY BOND GUARANTEE PROGRAM

This section amends Section 411 of the Small Business
Investment Act to provide new applicants with expeditious
responses to their applications. It also requires that the SBA
police the use of the program to ensure that participant
companies are using their bonding authority and authorizes the
removal of program participants who do not use their authority
adequately. The Committee adds this provision in response to
concerns over insufficient participation by some program
participants. The Committee intends that the Administration
will take action with regard applications pending on or after
October 1, 1995.

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. 3719, 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 2, 1996.
Hon. Jan Meyers,
Chair, 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. 3719, the Small
Business Programs Improvement Act of 1996.
Enactment of H.R. 3719 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. 3719.
2. Bill title: Small Business Programs Improvement Act of
1996.
3. Bill status: As ordered reported by the House Committee
on Small Business on July 18, 1996.
4. Bill purpose: H.R. 3719 would amend the Small Business
Act and the Small Business Investment Act to modify a number
programs administered by the Small Business Administration
(SBA) and would reauthorize certain SBA programs for fiscal
year 1998.
Section 7(a) of the Small Business Act authorizes the SBA
to guarantee business loans for certain purposes. Title I of
H.R. 3719 would modify the 7(a) program by:
Allowing certain SBA-licensed private sector lenders
to liquidate and service SBA 7(a) loans without
specific prior approval from the SBA,
Reducing the payments made by the SBA to private-
sector lenders upon default of a SBA-guaranteed loan,
Allowing a lender to sell the non-guaranteed portion
of any 7(a) loan, provided the lender meets certain
requirements, and;
Requiring the SBA to establish a separate subsidy
rate for the 7(a) loans made under the low
documentation program.
In addition, the bill would require the SBA to establish a
data base for the purpose of tracking the performance of the
7(a) and disaster loans and would require a number of studies
by the SBA and General Accounting Office (GAO).
Title I would modify the disaster loan program to increase
the interest rate on disaster loans, subject to the discretion
of the Administrator of the SBA, but would set a new cap on the
interest rate. That cap would be equal to three-quarters of the
rate on Treasury securities with comparable maturities plus 1
percent. In addition, the bill would change the SBA definition
of ``disaster'' to include government action that results in
the closure of customary fishing waters. The provision would
thus allow those adversely affected by the Government closure
of a fishery to apply for SBA disaster loans.
Title I also would terminate a number of small loan
programs and would extend the Small Business Competitiveness
Demonstration Program through the end of fiscal year 2000. The
title also would authorize appropriations for fiscal year 1998
of about $150 million for SBA disaster programs and about $1.3
billion for SBA business programs.
The Small Business Investment Act authorizes the SBA to
guarantee debentures issued by development companies who, in
cooperation with banks or other lending institutions, assist
small businesses with plant acquisition or construction
projects. Title II of the bill would increase the annual fee
that is charged to the small businesses and would establish a
participation fee and a development company fee to be paid by
the lending institution and the development company,
respectively. Proceeds from the fees would be used to offset
the cost of making the guarantees. In certain cases, the bill
also would increase the amount of participation in the project
by the small business. Finally, Title II would authorize the
SBA to terminate the participation of certain companies in the
Preferred Surety Bond Program.
5. Estimated cost to the Federal Government: Assuming
appropriation of the authorized amounts, CBO estimates that
enacting H.R. 3719 would result in new discretionary spending
of about $1.3 billion over the 1997-2002 period, primarily for
SBA expenditures. CBO's estimate of new discretionary spending
includes amounts authorized in H.R. 3719 for several SBA
programs that did not receive an appropriation in fiscal year
1996. Outlays estimates are based on historical spending rates
for the authorized programs and assume that appropriations will
be provided before the start of each fiscal year.
Fiscal year 1996 appropriations totaled $817 million for
the SBA. In fiscal year 1997, current law authorizes an
appropriation of about $1.7 billion for the agency. H.R. 3719
would modify or terminate several loan programs currently
authorized for fiscal year 1997 resulting in a decrease in the
amount of appropriations needed to fund the authorized level of
loans in that year. The following table summarizes the
budgetary impact of this bill.

[By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------

SPENDING SUBJECT TO APPROPRIATION

Spending Under Current Law:
Estimated Authorization Level ^{1.............. 817 1,669 ....... ....... ....... ....... .......
Estimated Outlays............................ 1,058 1,483 574 94 ....... ....... .......
Proposed Changes:
Estimated Authorization Level................ ....... -230 1,594 1 1 ....... .......
Estimated Outlays............................ ....... -141 954 453 97 ....... .......
Spending Under H.R. 3719:
Estimated Authorization Level ^{1.............. 817 1,439 1,594 1 1 ....... .......
Estimated Outlays............................ 1,058 1,342 1,528 547 97 ....... .......
----------------------------------------------------------------------------------------------------------------
^{1 The 1996 level is the amount appropriated for that year.

The costs of this bill fall within budget functions 370 and
450.
6. Basis of estimate: CBO estimates that the bill would
reduce existing authorization amounts for fiscal year 1997 by
$230 million. Based on the loan levels specified in H.R. 3719,
CBO estimates that the bill would provide an authorization
level of about $1,590 million for fiscal year 1998. We estimate
that extending the competitiveness demonstration program would
cost about $1 million a year for each of fiscal years 1997
through 2000.
Modifications to the 7(a) loan program.--H.R. 3719 would
make a number of changes to the 7(a) loan program. The bill
would allow certain SBA lenders to liquidate and service 7(a)
loans without prior specific approval from the agency.
Currently, lenders that liquidate the SBA-guaranteed loans
deduct their administrative costs from the amounts recovered
and forward the remaining money to the government. Enacting
this provision would likely cause a slight increase in cost of
the 7(a) program because the SBA would not be above to halt or
renegotiate the terms of a loan recovery if the lending
institution's administrative costs are too high. This cost
would likely be offset by the reduction in payments made by the
SBA upon the default of a guaranteed loan. CBO estimates that
there would be at most a negligible effect of these two
provisions on the subsidy rate.
H.R. 3715 would require the SBA to promulgate regulations
defining the experience necessary for lenders to participate in
the 7(a) low documentation program. Based on information from
the SBA, CBO estimates that the cost of the rulemaking would be
less than $100,000. CBO would not expect the other provisions
modifying the 7(a) program to have any budgetary impact.
Modifications to the disaster loan program.--H.R. 3719
would modify the disaster loan program to increase the interest
rate on disaster loans from no more than 4 percent to no more
than three-quarters of the rate on Treasury securities with
comparable maturities plus 1 percent. Under current law, the
SBA is authorized to loan $1.7 billion in disaster loans in
fiscal year 1996 and such sums as necessary in fiscal year
1997. (For the purpose of this estimate, CBO assumes that
fiscal year 1997 appropriations will provide the same loan
level for 1997 as for 1996.) CBO estimates that the subsidy
rate for fiscal year 1997 for the disaster loan program would
be about 16.5 percent under current law.
Enacting H.R. 3719 could reduce the estimated subsidy rate
for the program because the bill would likely require borrowers
to repay the loans at a higher interest rate. Assuming that the
Administrator of the SBA chooses to increase the interest rate
to the maximum rate that the bill would allow, CBO estimates
that the average subsidy rate for the disaster loan program
would fall from approximately 16.5 percent to 12.3 percent in
fiscal year 1997. The reduction in the subsidy rate would
decrease the amount of appropriations needed to subsidize the
disaster loans in fiscal year 1997 at the authorized level from
an estimated $213 million to $159 million. Assuming that the
SBA would be authorized to make the same amount of loans in
fiscal year 1998 as in fiscal year 1996, we estimate that the
amount of appropriations needed to subsidize the loan level
would be $153 million. In addition to the subsidy costs, CBO
estimates that expenses for administering the loans would total
about $130 million in each of fiscal years 1997 and 1998.
In addition, H.R. 3719 would expand the disaster loan
program to allow individuals and small businesses adversely
affected by the government closure of a fishery to receive SBA
disaster loans. Based on information provided by the National
Oceanic and Atmospheric Administration and the Massachusetts
Office of Development, CBO predicts that those affected by the
closure of the New England groundfish fishery would be most
likely to apply for loans, but other fisheries are or may be
closed, and those working in and around those fisheries would
be eligible as well. Of those affected by the closure of the
groundfish, CBO estimates that loan demand would total between
$20 million and $30 million, resulting in a subsidy cost of
about $3 million over fiscal years 1997 and 1998, assuming
appropriation of the estimated amounts.
Modifications to the 504 loan program.--Under current law,
SBA is authorized to guarantee $3.25 billion in 504 loans for
fiscal year 1997. Fiscal year 1996 appropriations provided for
$2.5 billion in SBA-guaranteed 504 loans. CBO estimates that
under current law the subsidy rate for the 504 loans would be
about 6.8 percent in fiscal year 1997 and that the amount of
appropriations needed to subsidize the 504 guarantees at the
authorized level would be about $221 million. CBO estimates
that enacting H.R. 3719 would reduce the average subsidy rate
for the 504 program 1.5 percent in fiscal year 1997. The
reduction in the subsidy rate would decrease the amount of
appropriations needed to subsidize 504 loans at the authorized
level to $49 million in fiscal year 1997.
Enacting H.R. 3719 would reduce the subsidy rate for the
504 program because the bill would authorize the SBA to impose
additional fees on program participants for fiscal year 1997
and would modify other aspects of the 504 program. The
imposition of the additional fees accounts for most of the
reduction in the subsidy rate. Other changes in the program
also would reduce the subsidy slightly. CBO assumes, however,
that the decrease in the subsidy rate due to the additional
fees would be partially offset by an increase in the default
rate because some of the more qualified small businesses would
seek less expensive financing elsewhere.
H.R. 3719 also would authorize the SBA to guarantee $3.25
billion in 504 loan program for fiscal year 1998. Because the
bill would authorize the SBA to collect the additional fees to
offset the cost of the 504 program in fiscal year 1997, CBO
would estimate the average subsidy cost of the loans would
increase from 1.5 percent to 6.6 percent in that year.
Small Business Competitive Demonstration Program.--H.R.
3719 would extend this program from the end of fiscal year 1996
to the end of fiscal year 2000 and would require the Department
of Commerce to participate in the program. Based on information
from the participating agencies, CBO estimates that extending
the program would cost each of the 11 participating agencies
and the SBA less than $100,000 a year to report and compile the
required data, assuming appropriation of the necessary amounts.
Hence, we estimate a total annual cost of about $1 million for
each year that the program is extended.
Other provisions.--A small portion of the estimated
reduction in the authorization level for 1997 is attributable
to a shift from one small business investment company program
to another. The bill also would require the SBA to conduct a
comprehensive study of several loan programs. Based on
information from the SBA, CBO estimates that the study would
cost about $1 million in fiscal year 1997, assuming
appropriation of the necessary amounts. Title I would require
the GAO to study the cost of liquidating certain SBA-guaranteed
loans. Based on information from the GAO and assuming
appropriation of the necessary amounts, CBO estimates that the
study would cost about $350,000 in fiscal year 1997. Finally,
Title I of H.R. 3719 would require the SBA to establish a data
base to track the performance of the 7(a) loans and disaster
loans. Because the SBA has already established this data base,
CBO estimates that this provision would result in no additional
cost to the government.
7. Pay-as-you-go considerations: None.
8. Estimated impact on State, local, and tribal
governments: H.R. 3719 contains no intergovernmental mandates
as defined in the Unfunded Mandates Reform Act of 1995 (Public
Law 104-4). The bill would impose a fee (for fiscal year 1997
only) on state or local governments that choose to take a
senior credit position in a project funded through the
Development Company Debenture program. (The senior credit
position belongs to the institution or organization lending the
most funds for the project.) Based on information from SBA, CBO
estimates that the total cost to state and local governments
would be negligible because they rarely take such a credit
position.
9. Estimated impact on the private sector: This bill would
impose no new private-sector mandates as defined in Public Law
104-4.
10. Previous CBO estimate: None.
11. Estimated prepared by: Federal Cost Estimate: Rachel
Forward and Rachel Robertson. Impact on State, Local, Tribal
Governments: Marc Nicole. Impact on the Private Sector: Patrice
Gordon.
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. 3719 will
have no inflationary impact on prices and costs in the
operation of the national economy.

Unfunded Mandates Estimate

Pursuant to the provisions of P.L. 104-4 (109 Stat. 48, et
seq.), the Unfunded Mandates Reform Act of 1995, the Committee
estimates that H.R. 3719 will not impose unfunded mandates as
defined in that Act.

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. 3719.
In accordance with clause 2(l)(3)(A) of rule I 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. 3719 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 italics, existing law in which no change is proposed
is shown in roman):

SMALL BUSINESS ACT

* * * * * * *
Sec. 3. (a) * * *
* * * * * * *
(k) For the purposes of this Act, the term ``disaster'' means
a sudden event which causes severe damage including, but not
limited to, floods, hurricanes, tornadoes, earthquakes, fires,
explosions, volcanoes, windstorms, landslides or mudslides,
tidal waves, [ocean conditions] ocean conditions, or government
action (regulatory or otherwise) resulting in the closure of
customary fishing waters, riots, civil disorders or other
catastrophes, except it does not include economic dislocations.
* * * * * * *
Sec. 4. (a) * * *
(b)(1) * * *
* * * * * * *
(3) Risk management database.--
(A) Establishment.--The Administration shall
establish, within the management system for the loan
programs authorized by subsections (a) and (b) of
section 7 of this Act and title V of the Small Business
Investment Act of 1958, a management information system
that will generate a database capable of providing
timely and accurate information in order to identify
loan underwriting, collections, recovery, and
liquidation problems.
(B) Information to be maintained.--In addition to
such other information as the Administration considers
appropriate, the database established under
subparagraph (A) shall, with respect to each loan
program described in subparagraph (A), include
information relating to--
(i) the identity of the institution making
the guaranteed loan or issuing the debenture;
(ii) the identity of the borrower;
(iii) the total dollar amount of the loan or
debenture;
(iv) the total dollar amount of government
exposure in each loan;
(v) the district of the Administration in
which the borrower has its principal office;
(vi) the borrower's principal line of
business, as identified by Standard Industrial
Classification Code (or any successor to that
system);
(vii) the delinquency rate for each program
(including number of instances and days
overdue);
(viii) the number of defaults in each program
(including losses and recoveries);
(ix) the number of deferrals or forbearances
in each program (including days and number of
instances); and
(x) comparisons on the basis of loan program,
lender, Administration district and region, for
all the data elements maintained.
(C) Deadline for operational capability.--The
database established under subparagraph (A) shall be
operational not later than March 31, 1997, and shall
capture data beginning on the first day of the first
quarter of fiscal year 1997 beginning after such date
and thereafter.
* * * * * * *
Sec. 5. (a) * * *
* * * * * * *
(f)(1) * * *
* * * * * * *
(3) The Administration shall develop such procedures as are
necessary for the facilitation, administration, and promotion
of secondary market operations, and for assessing the increase
of small business access to capital at reasonable rates and
terms as a result of secondary market operations. The
Administration may not prohibit a lender from securitizing the
nonguaranteed portion of any loan made under section 7(a). In
order to reduce the risk of loss to the government in the event
of default, the Administration shall require all lenders
securitizing, or requesting Administration approval for the
securitization of the nonguaranteed portion of any loan after
August 1, 1996, to retain exposure of up to 10 percent of the
amount of the loan, which percentage shall be applicable
uniformly to both depository institutions and other lenders.
* * * * * * *
(g)(1) * * *
* * * * * * *
(5)(A) In the event the Administration pays a claim under a
guarantee issued under this subsection, it shall be subrogated
fully to the rights satisfied by such payment.
* * * * * * *
(C) In the event the Administration pays a claim under a
guarantee issued under this Act, the servicing fees paid to the
lender from the earliest date of default to the date of payment
of the claim shall be no more than the agreed upon rate, minus
one percent.
(h)(1) Upon the adoption of final rules and regulations, the
Administration shall--
[(1) provide for a central registration of all loans
and trust certificates sold pursuant to subsections (f)
and (g) of this section. Such central registration
shall include, with respect to each sale, an
identification of each lender who has sold the loan;
the interest rate paid by the borrower to the lender;
the lender's servicing fee; whether the loan is for a
fixed rate or variable rate; an identification of each
purchaser of the loan or trust certificate; the price
paid by the purchaser for the loan or trust
certificate; the interest rate paid on the loan or
trust certificate; the fees of an agent for carrying
out the functions described in paragraph (2) below; and
such other information as the Administration deems
appropriate;]
(A) provide for a central registration of all loans
and trust certificates sold pursuant to subsections (f)
and (g) of this section;
[(2)] (B) contract with an agent to carry out on
behalf of the Administration the central registration
functions of this section and the issuance of trust
certificates to facilitate pooling. Such agent shall
provide a fidelity bond or insurance in such amounts as
the Administration determines to be necessary to fully
protect the interest of the Government;
[(3)] (C) prior to any sale, require the seller to
disclose to a purchaser of the guaranteed portion of a
loan guaranteed under this Act and to the purchaser of
a trust certificate issued pursuant to subsection (g),
information on the terms, conditions, and yield of such
instrument. As used in this paragraph, if the
instrument being sold is a loan, the term ``seller''
does not include (A) an entity which made the loan or
(B) any individual or entity which sells three or fewer
guaranteed loans per year; and
[(4)] (D) have the authority to regulate brokers and
dealers in guaranteed loans and trust certificates sold
pursuant to subsection (f) and (g) of this section.
(2) Nothing in this subsection shall prohibit the utilization
of a book entry or other electronic form of registration for
trust certificates. The Administration may, with the consent of
the Secretary of the Treasury, use the book-entry system of the
Federal Reserve System.
* * * * * * *
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) Level of participation in guaranteed loans.--
(A) * * *
* * * * * * *
(C) Interest rate under preferred lenders
program.--
(i) In general.--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,
applicable to other loans guaranteed
under this subsection.
(ii) Preferred lenders program
defined.--For purposes of this
subparagraph, the term ``Preferred
Lenders Program'' means any program
established by the Administrator, as
authorized under the proviso in section
5(b)(7), 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.]
(II) complete authority to
service and liquidate such
loans without obtaining the
prior specific approval of the
Administration for routine
servicing and liquidation
activities, but shall not take
any actions creating an actual
or apparent conflict of
interest.
(D) Participation under export working
capital program.--Notwithstanding subparagraph
(A), in an agreement to participate in a loan
on a deferred basis under the Export Working
Capital Program established pursuant to
paragraph (14)(A), such participation by the
Administration shall be equal to the rate
specified under this paragraph as in effect on
the day before the date of the enactment of the
Small Business Lending Enhancement Act of 1995.
* * * * * * *
(17)(A) The Administration shall authorize lending
institutions and other entities in addition to banks to
make loans authorized under this subsection.
(B) Any bank or other lending institution making a
claim for payment on the guaranteed portion of a loan
made under this subsection shall be paid the accrued
interest due on the loan from the earliest date of
default to the date of payment of the claim at a rate
not to exceed the rate of interest on the loan on the
date of default, minus one percent.
* * * * * * *
[(19)(A) In addition to the Preferred Lenders Program
authorized by the proviso in section 5(b)(7), the
Administration is authorized to establish a Certified
Lenders Program for lenders who establish their
knowledge of Administration laws and regulations
concerning the guaranteed loan program and their
proficiency in program requirements. The designation of
a lender as a certified lender shall be suspended or
revoked at any time that the Administration determines
that the lender is not adhering to its rules and
regulations or that the loss experience of the lender
is excessive as compared to other lenders, but such
suspension or revocation shall not affect any
outstanding guarantee.
[(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 develop and allow
participating lenders to solely utilize a uniform and
simplified loan form for such loans.]
(19)(A) Certified lenders program.--
(i) Establishment.--In addition to the
Preferred Lenders Program authorized by the
proviso in section 5(b)(7), the Administration
is authorized to establish a Certified Lenders
Program for lenders who establish their
knowledge of Administration laws and
regulations concerning the guaranteed loan
program and their proficiency in program
requirements.
(ii) Suspension and revocation.--The
designation of a lender as a certified lender
shall be suspended or revoked at any time that
the Administration determines that the lender
is not adhering to its rules and regulations or
that the loss experience of the lender is
excessive as compared to other lenders, but
such suspension or revocation shall not affect
any outstanding guarantee.
(B) Uniform and simplified loan forms.--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 develop and allow participating
lenders to solely utilize a uniform and simplified loan
form for such loans.
(C) Low documentation loan program.--The
Administrator may carry out the low documentation loan
program for loans of $100,000 or less only through
Preferred Lenders and Certified Lenders, or lenders
with significant experience making small business
loans. The Administration shall give special
consideration to lenders who have made loans under the
authority of this section. The Administrator shall
promulgate regulations defining the experience
necessary for lenders other than Preferred or Certified
Lenders for participation as a lender in the low
documentation loan program no later than 90 days after
the date of enactment of this subsection.
(D) Authority liquidate loans.--
(i) In general.--Lenders participating in the
Certified Lenders Program shall have authority
to liquidate loans made with a guarantee from
the Administration.
(ii) Approval.--The Administrator has the
authority to require a certified lender to
request approval of a routine liquidation
activity, and if the Administrator does not
approve or deny a request made by a certified
lender within a period of 3 business days, such
request shall be deemed to be approved.
(E) Low documentation loan program subsidy rate.--The
Administrator shall with the assistance of the Director
of the Office of Management and Budget establish and
monitor, on an annual basis, the subsidy rate for the
low documentation loan program, independently of other
loans authorized by this section.
* * * * * * *
(25) Limitation on conducting pilot projects.--
(A) In general.--Not more than 10 percent of
the total number of loans guaranteed in any
fiscal year under this subsection may be
awarded as part of a pilot program which is
commenced by the Administrator on or after
October 1, 1996.
(B) Pilot program defined.--In this
paragraph, the term ``pilot program'' means any
lending program initiative, project,
innovation, or other activity not specifically
authorized by law.
* * * * * * *
(c)(1) The Administration may further extend the maturity of
or renew any loan made pursuant to this section, or any loan
transferred to the Administration pursuant to Reorganization
Plan Numbered 2 of 1954, or Reorganization Plan Numbered 1 of
1957, for additional periods not to exceed ten years beyond the
period stated therein, if such extension or renewal will aid in
the orderly liquidation of such loan.
* * * * * * *
(6) Disasters commencing after october 1, 1996.--
Notwithstanding any other provision of law, the
interest rate on the Federal share of any loan made
under subsection (b)(1) and (b)(2) on account of a
disaster commencing on or after October 1, 1996, shall
be in the case of a homeowner, or business, or other
concern, including agricultural cooperatives, unable to
obtain credit elsewhere, at the rate prescribed by the
Administration but not more than \3/4\ of the rate
determined by the Secretary of the Treasury, taking
into consideration the current average market yield on
outstanding marketable obligations of the United States
with remaining periods to maturity comparable to the
average maturities of such loans plus an additional
charge of not to exceed 1 percent per annum as
determined by the Administrator, and adjusted to the
nearest \1/8\ of 1 percent.
(7) Liability.--Whoever wrongfully misapplies the
proceeds of a loan under subsection (b) shall be liable
to the Administrator in an amount equal to 1\1/2\ times
the original principal amount of the loan.
[(6)] (8) Notwithstanding the provisions of any other
law, such loans, subject to the reductions required by
subparagraphs (A) and (B) of paragraph 7(b)(1), shall
be in amounts equal to 100 per centum of loss. The
interest rate for loans made under paragraphs 7(b)(1)
and (2), as determined pursuant to paragraph (5), shall
be the rate of interest which is in effect on the date
of the disaster commenced: Provided, That no loan under
paragraphs 7(b) (1) and (2) shall be made, either
directly or in cooperation with banks or other lending
institutions through agreements to participate on an
immediate or deferred (guaranteed) basis, if the total
amount outstanding and committed to the borrower under
subsection 7(b) would exceed $500,000 for each disaster
unless an applicant constitutes a major source of
employment in an area suffering a disaster, in which
case the Administration, in its discretion, may waive
the $500,000 limitation: Provided further, That the
Administration, subject to the reductions required by
subparagraphs (A) and (B) of paragraph 7(b)(1), shall
not reduce the amount of eligibility for any homeowner
on account of loss of real estate to less than $100,000
for each disaster nor for any homeowner or lessee on
account of loss of personal property to less than
$20,000 for each disaster, such sums being in addition
to any eligible refinancing: Provided further, That the
Administration shall not require collateral for loans
of $10,000 or less which are made under paragraph (1)
of subsection (b). Employees of concerns sharing a
common business premises shall be aggregated in
determining ``major source of employment'' status for
nonprofit applicants owning such premises.
With respect to any loan which is outstanding on the date of
enactment of this paragraph and which was made on account of a
disaster commencing on or after October 1, 1982, the
Administrator shall make such change in the interest rate on
the balance of such loan as is required herein effective as of
the date of enactment.
[(7)] (9) The Administration shall not withhold disaster
assistance pursuant to this paragraph to nurseries who are
victims of drought disasters. As used in section 7(b)(2) the
term ``an area affected by a disaster'' includes any county, or
county contiguous thereto, determined to be a disaster by the
President, the Secretary of Agriculture or the Administrator of
the Small Business Administration.
(d)[(1)] The Administration shall not fund any Small Business
Development Center or any variation thereof, except as
authorized in section 21 of this Act.
[(2) The Administration is authorized to hold seminars
throughout the Nation to make potential applicants aware of the
opportunities available under this subsection and related
government energy programs, and to make grants to qualified
organizations to provide training seminars for small business
concerns regarding practical and easily implemented methods for
design, manufacture, installation, and servicing of equipment
and for providing services listed in paragraph (1) of this
subsection, except that recipients of loans made pursuant to
this subsection shall not subsequently be eligible for such
grants.]
[(e) The Administration also is empowered to make loans
(either directly or in cooperation with banks or other lenders
through agreements to participate on an immediate or deferred
basis) to assist any firm to adjust to changed economic
conditions resulting from increased competition from imported
articles, but only if (1) an adjustment proposal of such firm
has been certified by the Secretary of Commerce pursuant to the
Trade Expansion Act of 1962, (2) the Secretary has referred
such proposal to the Administration under that Act and the loan
would provide part or all of the financial assistance necessary
to carry out such proposal, and (3) the Secretary's
certification is in force at the time the Administration makes
the loan. With respect to loans made under this subsection the
Administration shall apply the provisions of sections 314, 315,
316, 318, 319, and 320 of the Trade Expansion Act of 1962 as
though such loans had been made under section 314 of that Act.]
[(f) In the administration of the disaster loan program under
subsection (b)(1) of this section, the case of property loss or
damage as a result of a disaster which is a ``major disaster''
as defined in section 102(2) of the Disaster Relief and
Emergency Assistance Act, the Small Business Administration, to
the extent such loss or damage is not compensated for by
insurance or otherwise, may lend to a privately owned college
or university without regard to whether the required financial
assistance is otherwise available from private sources, and may
waive interest payments and defer principal payments on such a
loan for the first three years of the term of the loan.]
(e) [RESERVED].
(f) [RESERVED].
* * * * * * *
[(l)(1) The Administration also is empowered to make loans
(either directly or in cooperation with banks or other lending
institutions through agreements to participate on an immediate
or deferred basis) as the Administrator may determine to be
necessary or appropriate to assist any small business concern
in financing plant construction, conversion, expansion
(including acquisition of land for such a plant), or startup,
and the acquisition of equipment, facilities, machinery,
supplies, or materials to enable such concern to design
architecturally or engineer, manufacture, distribute, market,
install, or service any of the following energy measures:
[(A) Solar thermal energy equipment which is either
of the active type based upon mechanically forced
energy transfer or of the passive type based on
convective, conductive, or radiant energy transfer or
some combination of these types.
[(B) Photovoltaic cells and related equipment.
[(C) A product or service the primary purpose of
which is conservation of energy through devices or
techniques which increase the energy efficiency of
existing equipment, methods of operation, or systems
which use fossil fuels, and which is on the Energy
Conservation Measures List of the Secretary of Energy
or which the Administrator determines to be consistent
with the intent of this subsection.
[(D) Equipment the primary purpose of which is
production of energy from wood, biological waste,
grain, or other biomass source of energy.
[(E) Equipment the primary purpose of which is
industrial cogeneration of energy, district heating, or
production of energy from industrial waste.
[(F) Hydroelectric power equipment.
[(G) Wind energy conversion equipment.
[(H) Engineering, architectural, consulting, or other
professional services which are necessary or
appropriate to aid citizens in using any of the
measures described in subparagraphs (A) through (C).
Proceeds of loans under this subsection shall not be used
primarily for research and development.
[(2) No loan shall be made under this subsection if the total
amount outstanding and committed (by participation or
otherwise) to the borrower from the business loan and
investment fund established by this Act would exceed $500,000.
No loan made or effected under this subsection directly or in
cooperation with banks or other lending institution through
agreements to participate on an immediate basis shall exceed
$350,000.
[(3) No financial assistance, shall be extended pursuant to
this subsection unless the financial assistance applied for is
not otherwise available on reasonable terms from non-Federal
sources.
[(4) No immediate participation may be purchased unless it is
shown that a deferred participation is not available; and no
loan may be made unless it is shown that a participation is not
available.
[(5) In agreements to participate in loans on a deferred
basis under this subsection, the Administration's participation
shall not be in excess of 90 per centum of the balance of the
loan outstanding at the time of disbursement.
[(6) The Administration's share of any loan made under this
subsection shall bear interest at the same rate as loans made
under subsection (a) of this section. The maximum terms of any
such loan, including extensions and renewals, may not exceed
fifteen years.
[(7) All loans made under this subsection shall be of such
sound value as reasonably to assure repayment, recognizing that
greater risk may be associated with loans made to business
concerns in this field: Provided, That factors in determining
``sound value'' shall include, but not be limited to, quality
of the product or services; technical qualifications of the
applicant or his employees; sales projections; and the
financial status of the business concern: Provided further,
That such status need not be as sound as that required for
loans under subsection (a) of this section.
[(8)(A) The Administration, after consultation with the
Department of Energy and other Federal departments and agencies
as the Administrator deems appropriate, shall publish in the
Federal Register for public comment not later than sixty days
after the date of enactment of this subsection proposed
regulations to carry out the provisions of this subsection. The
Administration shall make all reasonable efforts to solicit
comments from small businesses and shall take into
consideration comments submitted regarding such proposed
regulations.
[(B) The administration shall publish final regulations under
this subsection not later than one hundred and eighty days
after the date of enactment of this subsection.
[(9) It is the intent of Congress that the paperwork burden
and regulatory impact on applicants under this subsection shall
be minimized, and that to the maximum extent practicable, the
Administrator may rely upon consultation with the Department of
Energy and other agencies, upon paid consultants, and upon
voluntary public submissions of information to obtain market
data, industry sales projections, energy savings, and other
economic information needed to carry out the provisions of
section 7(l)(1) (D) and (E). Noting in this subsection shall be
construed as precluding the Administrator from using any of his
lawful powers to obtain information from applicants.]
(l)(1) [RESERVED].
* * * * * * *
(m) Microloan Demonstration Program.--
(1) * * *
* * * * * * *
(4) Marketing, management and technical assistance
grants to intermediaries.--Grants made in accordance
with subparagraph (B)(ii) of paragraph (1) shall be
subject to the following requirements:
(A) Grant amounts.--Except as otherwise
provided in subparagraph (C) and subject to
subparagraph (B), each intermediary that
receives a loan under subparagraph (B)(i) of
paragraph (1) shall be eligible to receive a
grant to provide marketing, management, and
technical assistance to small business concerns
that are borrowers under this subsection.
Except as provided in subparagraph (C), each
intermediary meeting the requirements of
subparagraph (B) may receive a grant of not
more than [25] 20 percent of the total
outstanding balance of loans made to it under
this subsection.
(B) Contribution.--As a condition of any
grant made under subparagraph (A), except for a
grant made to an intermediary that provides not
less than 50 percent of its loans to small
business concerns located in or owned by one or
more residents of an economically distressed
area, the Administration shall require the
intermediary to contribute an amount equal to
[25] 35 percent of the amount of the grant,
obtained solely from non-Federal sources. In
addition to cash or other direct funding, the
contribution may include indirect costs or in-
kind contributions paid for under non-Federal
programs.
* * * * * * *
Sec. 20. (a) * * *
* * * * * * *
(p) The following program levels are [authorized for fiscal
year 1997] authorized for each of fiscal years 1997 and 1998:
(1) * * *
* * * * * * *
(3) For the programs authorized by title III of the
Small Business Investment Act of 1958, the
Administration is authorized to make--
(A) $25,000,000 in purchases of preferred
securities;
[(B) $268,000,000 in guarantees of
debentures, of which $48,000,000 is authorized
in guarantees of debentures from companies
operating pursuant to section 301(d) of such
Act; and]
(B) $268,000,000 in guarantees of debentures;
and
(C) $900,000,000 in guarantees of
participating securities.
* * * * * * *
(q)(1) There are authorized to be appropriated to the
Administration for [fiscal year 1997] each of fiscal years 1997
and 1998 such sums as may be necessary to carry out the
provisions of this Act, including administrative expenses and
necessary loan capital for disaster loans pursuant to section
7(b), and to carry out the provisions of the Small Business
Investment Act of 1958, including salaries and expenses of the
Administration.
(2) Notwithstanding paragraph (1), for fiscal [year 1997]
years 1997 and 1998--
(A) * * *
* * * * * * *
Sec. 21. (a) * * *
* * * * * * *
(c)(1) * * *
* * * * * * *
(7) The [Deputy Associate Administrator of the Small
Business Development Center program] Associate Administrator
for Small Business Development Centers, in consultation with
the Small Business Development Centers, shall develop and
implement an information sharing system. Subject to amounts
approved in advance in appropriations Acts, the Administration
may make grants or enter cooperative agreements with one or
more centers to carry out the provisions of this paragraph.
Said grants or cooperative agreements shall be awarded for
periods of no more than five years duration. The matching funds
provisions of subsection (a) shall not be applicable to grants
or cooperative agreements under this paragraph. The system
shall--
(A) * * *
* * * * * * *
[(h)(1) The Administrator shall appoint a Deputy Associate
Administrator for Management Assistance who shall report to the
Associate Administrator for Management Assistance and who shall
serve without regard to the provisions of title 5, United
States Code, governing appointments in the competitive service,
and without regard to chapter 51, and subchapter III of chapter
53 of such title relating to classification and General
Schedule pay rates, but at a rate not less than the rate of GS-
17 of the General Schedule.
[(2) The sole responsibility of the Deputy Associate
Administrator for Management Assistance shall be to administer
the small business development center program. Duties of the
position shall include, but are not limited to, recommending
the annual program budget, reviewing the annual budgets
submitted by each applicant, establishing appropriate funding
levels therefore, selecting applicants to participate in this
program, implementing the provisions of this section,
maintaining a clearinghouse to provide for the dissemination
and exchange of information between small business development
centers and conducting audits of recipients of grants under
this section. The Deputy Associate Administrator for Management
Assistance shall confer with the seek the advice and counsel of
the Board in carrying out the responsibilities described in
this subsection.]
(h) Associate Administrator for Small Business Development
Centers.--
(1) Appointment and compensation.--The Administrator
shall appoint an Associate Administrator for Small
Business Development Centers who shall report to an
official who is not more than one level below the
Office of the Administrator and who shall serve without
regard to the provisions of title 5 governing
appointments in the competitive service, and without
regard to chapter 51, and subchapter III of chapter 53
of such title relating to classification and General
Schedule pay rates, but at a rate not less than the
rate of GS-17 of the General Schedule.
(2) Duties.--
(A) In general.--The sole responsibility of
the Associate Administrator for Small Business
Development Centers shall be to administer the
small business development center program.
Duties of the position shall include, but are
not limited to, recommending the annual program
budget, reviewing the annual budgets submitted
by each applicant, establishing appropriate
funding levels therefore, selecting applicants
to participate in this program, implementing
the provisions of this section, maintaining a
clearinghouse to provide for the dissemination
and exchange of information between small
business development centers and conducting
audits of recipients of grants under this
section.
(B) Consultation requirements.--In carrying
out the duties described in this subsection,
the Associate Administrator shall confer with
and seek the advice of the Board established by
subsection (i) and Administration officials in
areas served by the small business development
centers; however, the Associate Administrator
shall be responsible for the management and
administration of the program and shall not be
subject to the approval or concurrence of such
Administration officials.
(i)(1) There is established a National Small Business
Development Center Advisory Board (herein referred to as
``Board'') which shall consist of nine members appointed from
civilian life by the Administrator and who shall be persons of
outstanding qualifications known to be familiar and sympathetic
with small business needs and problems. No more than three
members shall be from universities or their affiliates and six
shall be from small businesses or associations representing
small businesses. At the time of the appointment of the Board,
the Administrator shall designate one-third of the members and
at least one from each category whose term shall end in two
years from the date of appointment, a second third whose term
shall end in three years from the date of appointment, and the
final third whose term shall end in four years from the date of
appointment. Succeeding Boards shall have three-year terms,
with one-third of the Board changing each year.
(2) The Board shall elect a Chairman and advise, counsel, and
confer with the [Deputy Associate Administrator for Management
Assistance] Associate Administrator for Small Business
Development Centers in carrying out the duties described in
this section. The Board shall meet at least semiannually and at
the call of the Chairman of the Board. Each member of the Board
shall be entitled to be compensated at the rate not in excess
of the per diem equivalent of the highest rate of pay for
individuals occupying the position under GS-18 of the General
Schedule for each day engaged in activities of the Board and
shall be entitled to be reimbursed for expenses as a member of
the Board.
* * * * * * *
(k) Program Examination and Certification.--
(1) * * *
* * * * * * *
[(3) Extension or renewal of cooperative
agreements.--In extending or renewing a cooperative
agreement of a small business development center, the
Administration shall consider the results of the
examination and certification program conducted
pursuant to paragraphs (1) and (2).]
(3) Extension or renewal of cooperative agreements.--
(A) In general.--In extending or renewing a
cooperative agreement of a small business
development center, the Administration shall
consider the results of the examination and
certification program conducted pursuant to
paragraphs (1) and (2).
(B) Certification requirement.--After
September 30, 2000, the Administration may not
renew or extend any cooperative agreement with
a small business development center unless the
center has been approved under the
certification program conducted pursuant to
this subsection; except that the Associate
Administrator for Small Business Development
Centers may waive such certification
requirement, in the discretion of the Associate
Administrator, upon a showing that the center
is making a good faith effort to obtain
certification.
[(l) The authority to enter into contracts shall be in effect
for each fiscal year only to the extent or in the amounts as
are provided in advance in appropriations Acts.]
(l) Contract Authority.--The authority to enter into
contracts shall be in effect for each fiscal year only to the
extent and in the amounts as are provided in advance in
appropriations Acts. After the administration has entered a
contract, either as a grant or a cooperative agreement, with
any applicant under this section, it shall not suspend,
terminate, or fail to renew or extend any such contract unless
the Administration provides the applicant with written
notification setting forth the reasons therefore and affording
the applicant an opportunity for a hearing, appeal, or other
administrative proceeding under the provisions of chapter 5 of
title 5, United States Code.
* * * * * * *
----------

SMALL BUSINESS COMPETITIVENESS DEMONSTRATION PROGRAM ACT OF 1988

* * * * * * *

TITLE VII--SMALL BUSINESS COMPETITIVENESS DEMONSTRATION PROGRAM

* * * * * * *

Part B--Demonstration Program

SEC. 711. SMALL BUSINESS COMPETITIVENESS DEMONSTRATION PROGRAM.

(a) * * *
* * * * * * *
(c) Program Term.--The Program shall be conducted over a
period of 4 years, beginning on January 1, 1989, and ending on
September 30, [1996] 2000.
* * * * * * *

SEC. 714. REPORTING.

(a) * * *
* * * * * * *
(b) Subcontracting Activity.--The Administrator for Federal
Procurement Policy shall devise and implement, during the term
of the Program, a simplified system to test the collection,
reporting, and monitoring of data on subcontract awards to
small business concerns and small business concerns owned and
controlled by socially and economically disadvantaged
individuals for--
(1) * * *
* * * * * * *
[(5) Duration.--The system described in subsection
(a) shall be established not later than October 1, 1992
(or as soon as practicable thereafter on the first day
of a subsequent quarter of fiscal year 1993), and shall
terminate on September 30, 1993.]
(5) Duration.--The system described in subsection (a)
shall be established not later than October 1, 1996 (or
as soon as practicable thereafter on the first day of a
subsequent quarter of fiscal year 1997), and shall
terminate on September 30, 2000.
* * * * * * *

SEC. 716. REPORT TO CONGRESS.

(a) In General.--Within 180 days after data for [fiscal year
1991 and 1995] each of fiscal years 1991 through 1999 are
available from the Federal Procurement Data Center, the
Administrator for Federal Procurement Policy shall report the
cumulative results of the Small Business Competitiveness
Demonstration Program to the Committees on Small Business of
the Senate and House of Representatives, to the Committee on
Governmental Affairs of the Senate, and to the Committee on
Government Operations of the House of Representatives. The
views of the Administrator of the Small Business Administration
shall be included in the report.
* * * * * * *
(c) Recommendations.--To the extent the results of the
Program demonstrate sufficiently high small business
participation based on unrestricted contract competition in the
designated industry groups, the report to be submitted during
calendar year [1996] 1999 shall include recommendations (if
appropriate) for changes in legislation or modifications of
procurement regulations aimed at increasing reliance on
unrestricted competition if high rates of small business
participation in the Federal procurement market can be
maintained.

SEC. 717. DESIGNATED INDUSTRY GROUPS.

(a) In General.--For the purposes of participation in this
Program, the designated industry groups are--
(1) construction (excluding dredging);
(2) refuse systems and related services;
(3) [architectural and engineering services
(including surveying and mapping)] architectural and
engineering services (including surveying, mapping, and
landscape architecture); and
(4) non-nuclear ship repair.
(b) Construction.--Construction shall include contract awards
assigned one of the standard industrial classification codes
that comprise--
(1) Major Group 15 (Building Construction--General
Contractors and Operative Builders),
(2) Major Group 16 (Construction Other Than Building
Construction--General Contractors and Dredging), and
(3) Major Group 17 (Construction--Special Trade
Contractors).
(c) Refuse.--Refuse systems and related services shall
include contract awards assigned to standard industrial
classification code 4212 or 4953.
(d) Architectural and Engineering.--[Architectural and
engineering services (including surveying and mapping)]
Architectural and engineering services (including surveying,
mapping, and landscape architecture) shall include contract
awards assigned to standard industrial classification code 7389
(if identified as pertaining to mapping services), standard
industrial classification codes 0781 (if identified as
pertaining to architecture services), 8711, 8712, or 8713.
* * * * * * *
----------

SMALL BUSINESS GUARANTEED CREDIT ENHANCEMENT ACT OF 1993

SECTION 1. SHORT TITLE; TABLE OF CONTENTS.

(a) Short Title.--This Act may be cited as the ``Small
Business Guaranteed Credit Enhancement Act of 1993''.
(b) Table of Contents.--The table of contents for this Act is
as follows:

Sec. 1. Short title; table of contents.
* * * * * * *
[Sec. 7. Repealer.]
* * * * * * *

[SEC. 7. REPEALER.

[Sections 3 and 5 of this Act are hereby repealed on
September 30, 1996.]
----------

SMALL BUSINESS INVESTMENT ACT OF 1958

* * * * * * *

TITLE III--SMALL BUSINESS INVESTMENT COMPANIES

* * * * * * *

SEC. 321. ISSUANCE AND GUARANTEE OF TRUST CERTIFICATES.

(a) * * *
* * * * * * *
(f)(1) The Administration shall provide for a central
registration of all trust certificates sold pursuant to this
section. [Such central registration shall include with respect
to each sale--
[(A) identification of each small business investment
company;
[(B) the interest rate or prioritized payment rate
paid by the small business investment company;
[(C) commissions, fees, or discounts paid to brokers
and dealers in trust certificates;
[(D) identification of each purchaser of the trust
certificate;
[(E) the price paid by the purchaser for the trust
certificate;
[(F) the interest rate on the trust certificate;
[(G) the fee of any agent for carrying out the
functions described in paragraph (2); and
[(H) such other information as the Administration
deems appropriate.]
* * * * * * *
(5) Nothing in this subsection shall prohibit the use of a
book-entry or other electronic form of registration for trust
certificates.
* * * * * * *

TITLE IV--LEASE GUARANTEES

* * * * * * *

Part B--Surety Bond Guarantees

Sec. 411. (a)(1) The Administration may, upon such terms and
conditions as it may prescribe, guarantee and enter into
commitments to guarantee any surety against loss resulting from
a breach of the terms of a bid bond, payment bond, performance
bond, or bonds ancillary thereto, by a principal on any
contract up to $1,250,000.
* * * * * * *
(5)(A) The Administration shall promptly act upon an
application from a surety to participate in the Preferred
Surety Bond Guarantee Program, authorized by paragraph (3), in
accordance with criteria and procedures established in
regulations pursuant to subsection (d).
(B) The Administration is authorized to reduce the allotment
of bond guarantee authority or terminate the participation of a
surety in the Preferred Surety Bond Guarantee Program based on
the rate of participation of such surety during the 4 most
recent fiscal year quarters compared to the median rate of
participation by the other sureties in the program.
* * * * * * *

TITLE V--LOANS TO STATES AND LOCAL DEVELOPMENT COMPANIES

* * * * * * *

LOANS FOR PLANT ACQUISITION, CONSTRUCTION, CONVERSION, AND EXPANSION

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) * * *
* * * * * * *
[(3) Any development company assisted under this
section must meet criteria established by the
Administration, including the extent of participation
to be required or amount of paid-in capital to be used
in each instance as is determined to be reasonable by
the Administration, Community injection funds may be
derived, in whole or in part, from--
[(A) State or local governments;
[(B) banks or other financial institutions;
[(C) foundations or other not-for-profit
institutions; or
[(D) a small business concern (or its owners,
stockholders, or affiliates) receiving
assistance through bodies authorized under this
title.]
(3) Criteria for assistance.--
(A) In general.--Any development company
assisted under this section or section 503 of
this title must meet the criteria established
by the Administration, including the extent of
participation to be required or amount of paid-
in capital to be used in each instance as is
determined to be reasonable by the
Administration.
(B) Community injection funds.--
(i) Sources of funds.--Community
injection funds may be derived, in
whole or in part, from--
(I) State or local
governments;
(II) banks or other financial
institutions;
(III) foundations or other
not-for-profit institutions; or
(IV) the small business
concern (or its owners,
stockholders, or affiliates)
receiving assistance through a
body authorized by this title.
(ii) Funding from institutions.--Not
less than 50 percent of the total cost
of any project financed pursuant to
clauses (i), (ii), or (iii) of
subparagraph (C) shall come from the
institutions described in subclauses
(I), (II), and (III) of clause (i).
(C) Funding from a small business concern.--
The small business concern (or its owners,
stockholders, or affiliates) receiving
assistance through a body authorized by this
title shall provide--
(i) at least 15 percent of the total
cost of the project financed, if the
small business concern has been in
operation for a period of 2 years or
less;
(ii) at least 15 percent of the total
cost of the project financed if the
project involves the construction of a
limited or single purpose building or
structure;
(iii) at least 20 percent of the
total cost of the project financed if
the project involves both of the
conditions set forth in clauses (i) and
(ii); or
(iv) at least 10 percent of the total
cost of the project financed, in all
other circumstances, at the discretion
of the development company.
* * * * * * *

development company debentures

Sec. 503. (a) * * *
(b) No guarantee may be made with respect to any debenture
under subsection (a) unless--
(1) * * *
* * * * * * *
(7) with respect to each loan made from the proceeds
of such debenture, the Administration--
(A) assesses and collects a fee, which shall
be payable by the borrower, in an amount equal
to [0.125] 0.8125 percent per year of the
outstanding balance of the loan; and
(B) uses the proceeds of such fee to offset
the cost (as such term is defined in section
502 of the Federal Credit Reform Act of 1990)
to the Administration of making guarantees
under subsection (a).
* * * * * * *
(d) Charges for Administration Expenses.--
(1) Level of charges.--The Administration may impose
an additional charge for administrative expenses with
respect to each debenture for which payment of
principal and interest is guaranteed under subsection
(a).
(2) Participation fee.--The Administration shall also
impose a one-time fee of 50 basis points on the total
participation in any project of any institution
described in subclause (I), (II), or (III) of section
502(3)(B)(i). Such fee shall be imposed only when the
participation of the institution will occupy a senior
credit position to that of the development company.
Such fee shall be collected by the development company,
forwarded to the Administration, and used to offset the
cost (as such term is defined in section 502 of the
Credit Reform Act of 1990) to the Administration of
making guarantees under subsection (a).
(3) Development company fee.--The Administration
shall collect annually from each development company a
fee of 0.125 percent of the outstanding principal
balance of any guaranteed debenture authorized by the
Administration after September 30, 1996. Such fee shall
be derived from the servicing fees collected by the
development company pursuant to regulation, and shall
not be derived from any additional fees imposed on
small business concerns. All proceeds of the fee shall
be used to offset the cost (as such term is defined in
section 502 of the Credit Reform Act of 1990) to the
Administration of making guarantees under subsection
(a).
* * * * * * *
(f) Effective Date.--The fees authorized by subsections (b)
and (c) shall apply to financings approved by the
Administration on or after October 1, 1996, but shall not apply
to financings approved by the Administration on or after
October 1, 1997.
(g) Required Actions Upon Default.--
(1) Deadlines.--
(A) Initial actions.--Not later than the 45th
day after the date on which a payment on a loan
funded through a debenture guaranteed under
this section is due and not received, the
Administration shall--
(i) take all necessary steps to bring
such a loan current; or
(ii) implement a formal written
deferral agreement.
(B) Purchase or acceleration of debenture.--
Not later than the 65th day after the date on
which a payment on a loan described in
subparagraph (A) is due and not received, and
absent a formal written deferral agreement, the
Administration shall take all necessary steps
to purchase or accelerate the debenture.
(2) Prepayment penalties.--The Administration shall,
with respect to the portion of any project derived from
funds set forth in section 502(3)--
(A) negotiate the elimination of any
prepayment penalties or late fees on defaulted
loans made prior to September 30, 1996;
(B) decline to pay any prepayment penalty or
late fee on the default based purchase of loans
issued after September 30, 1996; and
(C) for any project financed after September
30, 1996, decline to pay any default interest
rate higher than the interest rate on the note
prior to the date of default.
* * * * * * *

pooling of debentures

Sec. 505. (a) * * *
* * * * * * *
(f)(1) The Administration shall--
[(1) provide for a central registration of all trust
certificates sold pursuant to this section; such central
registration shall include with respect to each sale,
identification of each development company; the interest rate
paid by the development company; commissions, fees, or
discounts paid to brokers and dealers in trust certificates;
identification of each purchaser of the trust certificate; the
price paid by the purchaser for the trust certificate; the
interest rate paid on the trust certificate; the fees of any
agent for carrying out the functions described in paragraph
(2); and such other information as the Administration deems
appropriate;]
(A) provide for a central registration of all trust
certificates sold pursuant to this section;
[(2)] (B) contract with an agent to carry out on
behalf of the Administration the central registration
functions of this section and the issuance of trust
certificates to facilitate poolings; such agent shall
provide a fidelity bond or insurance in such amounts as
the Administration determines to be necessary to fully
protect the interests of the Government;
[(3)] (C) prior to any sale, require the seller to
disclose to a purchaser of a trust certificate issued
pursuant to this section, information on the terms,
conditions, and yield of such instrument; and
[(4)] (D) have the authority to regulate brokers and
dealers in trust certificates sold pursuant to this
section.
(2) Nothing in this subsection shall prohibit the utilization
of a book entry or other electronic form of registration for
trust certificates.
* * * * * * *
ADDITIONAL VIEWS OF JOHN J. LaFALCE

I am generally supportive of the provisions of this bill,
the Small Business Programs Improvement Act of 1996. It has
been improved considerably during the Committee's
consideration, and I appreciate the consideration of the
Committee, and its Chair, Mrs. Meyers, in examining the matters
raised by me and other Members of the Minority.
There remain, however, three matters which are
particularly troubling. It is my hope that they will be
subsequently addressed by the House.
The first is the amount of 7(a) loan guarantees which will
be made available in fiscal year 1997; the second is the amount
of certified development company debentures which will be made
available in fiscal year 1997; and the third is the extent to
which the Small Business Administration is required to delegate
its authority to liquidate SBA guaranteed financings in the
event such action is necessary.

7(a) loan guarantees

The primary financial assistance program operated by the
Small Business Administration is the 7(a) loan guarantee
program. Under this program, SBA guarantees to reimburse a
lender for between 75% and 80% of any loss sustained by the
lender on a loan made to a small business.
The cost of the program is partially paid by the
appropriation of Federal money. The balance is from fees paid
by both the borrower and the lender.
Legislation enacted last year increased the amount of fees
to be paid by the borrower. Except on loans of less than
$80,000, borrowers now pay between 3% and 3.875%, depending
upon the size of the loan. In addition, the lender must pay,
and absorb as part of its cost of doing business, an annual fee
of .5% or one-half of one percent.
During the current fiscal year, 1996, the Office of
Management and Budget, determined that operation of the 7(a)
program, including these fees, would result in a subsidy rate
of 1.06%. This rate determines the amount which must be
appropriated in order to operate the program.
As a result of a major study of the 7(a) program, OMB
determined that this rate would increase substantially for
fiscal year 1997 to 2.68%. And the President proposed full
funding at the new higher rate, even though it necessitated the
budgeting of an additional $170 million.
The Republican majority on the Appropriations' Committee
rejected this proposal. Instead, it provided a slight
additional amount of funding above the 1996 level. It is my
understanding that the proposed Federal funding, when added to
funds expected to be unused this year, will result in a 7(a)
program level next year of $6.5 billion.
On the other hand, demand is expected to be approximately
$8.5 billion, a shortfall of $2 billion.
I believe that it is our responsibility to address this
problem; we cannot simply sit back and argue that the
Appropriations Committee did not provide enough money.
I would hope that as the 1997 appropriations bill moves
through the Congress additional monies could be provided--about
an additional $50 million would allow the program to fund an
additional $2 billion in guarantees. But I do not believe that
we can rely upon this hope.
This program was underfunded in 1995. The result was
chaos. The loan window opened and closed. Finally, OMB dictated
the result: stretch the available money by reducing the maximum
loan per borrower. SBA then made the necessary reduction and
refused any loan in excess of one-half of the statutory maximum
of $750,000.
I believe it would be unconscionable to allow this
situation to repeat itself.
I reluctantly supported the fees legislated last year. It
seemed to me to be a choice between imposing the fees and
denying small businesses access to a Federally guaranteed loan
program.
I believe that we are confronted with the same problem
this year, although on a much smaller scale. It is my
understanding that an increase of \1/12\ of 1% in the annual
lender fee would generate sufficient income to restore
approximately $2 billion in guarantees.
This minute increase would amount to less than $100 per
year on the average loan, and it would decrease each year as
the fee is applied to the outstanding balance of the loan which
is being reduced each year.
I urge my colleagues to reconsider this very meager fee
increase which was rejected by the Republican majority on the
Committee.

development company loans

Small businesses in need of long term financing for plant
and equipment needs frequently utilize the development company
loan program or 504 program.
Under this program, the small business borrower puts up at
least 10%, a bank provides 50% and receives a first lien
position, and a private investor provides the other 40% by
purchasing a debenture issued by a certified development
company which is guaranteed by the SBA.
During the current fiscal year, it has been assumed that
program participants were fully paying the cost of the program;
the OMB approved subsidy rate was set at zero, and no
appropriation of funds was necessary to support the program.
This subsidy rate will increase from zero to 6.85% for
1997, again as a result of the recently completed study of the
losses in this program.
The President's budget addressed this need for Federal
funding by requesting a change in the nature of the program
funding--reverting to direct Treasury funding instead of the
more costly use of the debenture guarantee process. This change
would be accompanied by the imposition of a fee equal to the
administrative cost of selling the debentures to private
investors, thus resulting in no increase in total cost to
borrowers, but reducing the subsidy rate to zero.
The majority Members of both the Appropriations Committee
and the Small Business Committee rejected this proposed return
to direct Treasury funding. And I must admit I have very
serious qualms about the proposal as I see it as a temporary
solution--the current use of the private markets is the long
range solution and ultimately we would seek to return to it.
But when the Appropriations Committee refused to
appropriate any money for the 504 program, there appeared to be
only one immediate answer: impose fees, at least for one year.
I agree with the majority on most of the fee provisions--a
fee of \1/8\ of 1% to be paid by the certified development
company as part of its cost of doing business; and a fee of
one-half of one percent to be paid by the lender who was taking
a first lien position on its one- half of the project cost.
The disagreement is over the amount of the fee to be paid
by the borrower. Initially, based upon information received
from SBA, I believed that an annual fee of \13/16\ of 1%, when
added to the other fees, would be sufficient to reduce the
subsidy rate to zero and allow the program to operate without
the appropriation of any Federal funds to pay losses.
Reluctantly, Mrs. Meyers and I agreed to impose a fee of
this amount. Minutes before the Committee mark-up, however,
representatives of OMB suddenly decreed that this amount would
not be sufficient. Another \2/16\ would be needed to reach
zero.
I saw no other solution. The Appropriations' Committee was
not appropriating any money. Either we would have to increase
the borrower's fee to \15/16\ or there would be no program. The
result would not be a reduced program; the total absence of
Federal funding would mean no program whatsoever, unless fee
income reduced the cost to zero to equate with the complete
absence of Federal dollars.
Due to Republican opposition, I withdrew the amendment. The
net result: unless we appropriate Federal money, about $21
million, or we impose further fee increases to yield the same
amount, there will be no program next year. That result, to me,
is completely unacceptable.

Loan Liquidation

Under current practice, when an SBA financing defaults and
there does not appear to be any other recourse, SBA begins a
liquidation process and attempts to recover some of what it is
owed. For the most part, this process is carried out by SBA
employees, with additional support from U.S. attorneys if
judicial action is required.
As part of the loan approval process, SBA stratifies its
lenders. Some 7,900 lenders submit guarantee requests under the
7(a) program annually.
Of these 7,900, however, some 1,500 have demonstrated their
knowledge of SBA requirements and have been designated by SBA
as ``certified lenders''. This designation moves their loan
guarantee requests to the front of the processing line and they
receive expedited consideration.
Another 440 have reached the top plateau: designation as a
preferred lender which receives delegated authority to approve
a government guarantee on behalf of the Agency. This
designation, however, involves lender acceptance of additional
responsibility. The lender, subject to SBA approval, must
liquidate its defaulted loans.
It is believed that part of the increase in the subsidy
rate for 1997 for both the 7(a) and 504 programs is
attributable to a decline in amounts recovered by SBA during
the liquidation process. Particularly in view of repeated
reductions in SBA staff, it is not likely that additional SBA
personnel can be made available to assist in this effort.
One alternative would be the delegation of more liquidation
authority to those lenders who originated the financing. The
bill moves in this direction, but I am concerned that we do so
in a prudent manner.
On the one hand, I am convinced that government employees
probably liquidate loans at less cost than would be involved in
reimbursing a lender to employ private attorneys. On the other
hand, private attorneys would probably liquidate assets more
promptly and thus arguably improve the government's recovery,
even if they do cost more.
The key issue is whether improved recoveries will exceed
the anticipated higher costs.
These assumptions should be tested on a pilot basis. If
they are wrong, the subsidy rate will go even higher. And, in
addition, not every lender should be allowed to liquidate,
particularly those with no liquidation experience.
Among the related provisions of this bill are three tests
of the delegation of this liquidation authority.
The first is the complete delegation of this authority to
preferred lenders. Since these are supposedly the best lenders,
they probably are the most competent to perform liquidations,
and they have agreed to do so. Thus I believe it reasonable to
eliminate the need for them to obtain any SBA approval of
specific actions they propose to take.
The second is the establishment of a pilot program to test
liquidation by some certified development companies or CDCs.
Under the bill, about 40 of the largest CDCs would be allowed
to test their ability to liquidate failed loans, unless SBA
determines on a case by case basis that a particular CDC should
not participate.
Again, I am supportive of this test, although I would
stress that it is a test and involves CDCs in a process in
which they have never participated on behalf of SBA. I do not
believe that it is necessary to involve so many companies in
order to test the concept, and thus I hope SBA will keep the
participation level closer to the minimum number of 15 which is
prescribed in the bill.
Third and finally is the involvement of certified lenders,
a provision which was added by amendment in committee.
I believe that there is a limit to the number of new
initiatives which SBA should be directed to undertake
simultaneously, particularly when we are also directing it to
cut employment and thus do more with less.
I believe this bill more than reaches this limit. It
exceeds it. I do not believe that it is reasonable to mandate
SBA to add another 1,500 lenders to those to whom it will
delegate liquidation authority. It becomes even more impossible
when it is done under a mandate to the Agency to either
disapprove a proposal by a certified lender within 3 days or be
deemed to have approved it.
Testing of proposals to delegate authority to the private
sector appears to be a reasonable response to the reduction in
Federal employment. But, the private sector does not always do
best in each and every instance and thus unbridled delegation
to untested participants could result in test failures and an
increase in Federal loan losses.
I would urge deliberative reconsideration.

John J. LaFalce.
ADDITIONAL VIEWS OF JAMES M. TALENT

Last year, in response to strong loan demand and tight
fiscal constraints, Congress lowered loan guarantees and raised
fees on borrowers and lenders participating in SBA's Section
7(a) loan program. As a result of these actions, the cost of
the 7(a) program to taxpayers was reduced dramatically,
allowing Congress to fund a 50% increase in small business
lending. These changes involved a delicate balancing of the
interest of borrowers, lenders and the long term health of the
7(a) loan portfolio. At that time, it was believed that those
program changes could place the 7(a) program on a sound
foundation that would permit future loan availability and
growth despite tightening funding constraints.
Unfortunately, the Administration's 1997 budget revealed
yet another surprise hike in the 7(a) subsidy. OMB and SBA
explained that, although default trends continued to improve,
the 7(a) portfolio had slightly underperformed previous
historical estimates. Under the new subsidy rate of 2.68%--more
than two-and-one-half times the FY96 rate--it would require a
$180 million increase in the subsidy appropriation just to keep
the 7(a) program at its current loan volume of $11 billion.
Such an increase in spending in the current fiscal environment
is impossible, and severely complicates Congressional efforts
to meet small business demand for the type of long-term credit
the 7(a) program was designed to provide. Although I have many
questions concerning the calculations that lie behind the OMB
and SBA's dramatic hike in the 7(a) subsidy, one think it
clearly reveals is that this program requires tight supervision
and major improvements in its own risk management.
I commend the Committee's legislation as it takes needed
steps to reform the 7(a) program. In the future, we may need to
consider changes to the SBA that reduce our reliance on SBA
employees to perform basic loan transaction activity, such as
loan processing, servicing liquidation. These activities can be
performed more efficiently and effectively by private lenders.
Such a change will free up SBA staff to perform regular lender
examinations and to improve SBA's oversight of its loan
portfolios. For example, I would like to see us place far more
emphasis on the preferred lender program, which has already
proven itself to be a very effective way to reduce SBA losses.
Additionally, some further reductions in the guarantee
percentages may also be necessary to keep the program funded to
meet current demand.
We need to recognize that the SBA has failed to maintain an
organization capable of effectively delivering its programs. In
recent years, we have listened to SBA officials describe plans
to streamline the agency, highlighted by its centralized loan
servicing centers, its centralized loan processing centers, and
its PLP examination center. While these initiatives sound good,
implementation has either halted or it never began. For
example, last fall SBA received the necessary reprogramming
authorization from the House and Senate Appropriations
Committees to open two pilot LowDoc Processing Centers. Now,
almost one year later, neither center has been opened nor have
sites even been announced.
With respect to particular provisions contained in the
present legislation, as passed by the Committee, I have a
number of observations. With respect to the issue of
securitization and the ability of both bank and non-bank
lenders to benefit from access to the secondary market, I have
continuing concerns with the approach which was ultimately
adopted by the Committee. First of all, I believe it may be
necessary for Congress to give the SBA further direction on
this issue, as it seems somewhat incongruous to call for parity
between banks and non-banks and at the same time permit SBA to
regulate in this area on a lender-by-lender basis. While these
may not be mutually exclusive goals, they do leave room for
some mischief by the agency. I think a possible way to approach
this would be to clarify that securitizations that are granted
an investment-grade rating by nationally recognized bond rating
firms, such as Moodys and Standard and Poor, should be granted
something in the way of a ``safe harbor'' from SBA hold-back
for those securitization that are unrated. This approach would
(1) clearly not discriminate between banks and non-banks, (2)
take advantage of the investment-grade rating status to
minimize the amount of SBA administrative time spent reviewing
securitization, and (3) still allow the issuance of unrated
securitization. Nevertheless, I appreciate the changes made
during the Committee's mark-up, and look forward to working on
this issue in the future.
With respect to disaster loan serving, the Committee's
approach to utilizing private servicing for loans directly held
by the SBA is commendable. I would have preferred to have
chosen a percentage of the portfolio to ensure that there are a
number of qualified private vendors who can justify
establishing a loan servicing infrastructure specific to these
SBA loans. And I believe the Committee may want to consider
expanding private servicing in the near future. I also believe
the Committee should work to ensure that the comparable
analysis of the contracts are credible. This will only happen
if conducted by third parties (e.g., GAO). Clearly, an SBA in-
house analysis can not be the final word. Additionally, care
should be taken to give the selected contractors two years of
performance after the successful transfer of servicing data
before any performance comparison is conducted. The possibly
complex process of transferring not only the payment
information but underlying details on loan collateral status
and location should not be underestimated.

James M. Talent.}}}