[House Report 106-12]
[From the U.S. Government Publishing Office]





106th Congress                                                   Report
  1st Session           HOUSE OF REPRESENTATIVES                 106-12

=======================================================================


 
               TECHNICAL CORRECTIONS TO MICROLOAN PROGRAM

                                _______
                                

February 8, 1999.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______


    Mr. Talent, from the Committee on Small Business, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 440]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Small Business, to whom was referred the 
bill (H.R. 440) to make technical corrections to the Microloan 
Program, having considered the same, report favorably thereon 
without amendment and recommend that the bill do pass.

                                Purpose

    The purpose of H.R. 440 is to make certain technical 
corrections to the microloan program at the Small Business 
Administration and to improve the loan loss reserve requirement 
established for intermediaries operating under that program.
    The microloan program was established as a pilot program in 
1991 and was made permanent in 1997. The microloan program 
provides small loans, under $25,000, to the nation's smallest 
entrepreneurs. These loans are made through intermediaries, SBA 
certified and approved non-profit lending and business 
development organizations. These intermediaries borrow funds 
from the SBA and, in turn, lend those funds to small 
businesses. In order to protect taxpayer assets the 
intermediaries are required to maintain a loss reserve based on 
the amount of microloans they have outstanding.

                          Need for Legislation

    The microloan program was made permanent on December 2, 
1997 as a provision of P.L. 105-135, the Small Business 
Reauthorization Act of 1997. At that time, changes were also 
implemented to modify the loan loss reserve for microloan 
intermediaries. The loan loss reserve language in P.L. 105-135 
specified that microloan borrowers were required to maintain a 
loss reserve of 15 percent of their outstanding microloans for 
the first five years of their participation in the program. 
After that, intermediaries were to be required to maintain a 
loss reserve equal to 10 percent of their outstanding loans or 
twice their loss rate, whichever was greater.
    Unfortunately, this provision was interpreted by the SBA to 
mean an amount equal to twice an intermediary's aggregate 
losses. For example: If an intermediary had average annual 
losses of five percent over five years the SBA would not impose 
a loss reserve of ten percent (twice the annual rate) as 
intended by the Congress. They would instead impose a loss 
reserve of fifty percent (twice the aggregate annual losses 
over five years).
    This interpretation created an immense burden on microloan 
intermediaries. As a result, at the end of the 105th Congress, 
the Senate Committee on Small Business added language similar 
to H.R. 440 to H.R. 3412 to remedy the situation. 
Unfortunately, this language, as part of the larger bill, 
failed to pass the Congress before adjournment.
    Shortly thereafter, the Chairmen of the House and Senate 
Committees on Small Business, Representative James M. Talent 
and Senator Christopher Bond, and their colleagues, 
Representative Nydia Velazquez and Senator John Kerry, the 
Ranking Democratic members of the Committees, wrote to SBA 
Administrator Aida Alvarez requesting her forbearance in 
applying the loan loss regulations. (A copy of that letter is 
attached as an Appendix.)
    H.R. 440 will correct this interpretation and clearly 
establish that the loan loss reserve will be fifteen percent 
for the first five years for all intermediaries, and that 
intermediaries may apply for a reduction of the reserve to 
reflect their actual annual average loss rate, but no less than 
ten percent.
    The loan loss reserve reduction is to be based on the 
actual annual average loss rate over a five year period. The 
Committee expects that intermediaries will request suchreviews 
no more than annually, and that such reviews will not affect the SBA's 
ability to conduct further reviews for oversight and management 
purposes.
    H.R. 440 also replaces the cap on the amount of microloan 
funds that can be made available to intermediaries in any one 
State. This cap was originally imposed to ensure that microloan 
funds would not be used disproportionately in those States with 
more aggressive microloan programs. As the program has matured, 
however, this restriction has become unnecessary. The Committee 
now finds that it would be more useful to establish a limited 
guarantee of the availability of funds for all States. The 
availability of these funds is subject to their availability 
through appropriations, and the approval of the SBA of the 
request for funding. In addition, the Committee expects any 
reserve established by the SBA to be held for no more than the 
first half of the fiscal year.

                            Committee Action

    During the 105th Congress the Committee on Small Business 
passed H.R. 3412, a bill to make technical corrections to the 
Small Business Investment Company Program. This bill passed the 
House of Representatives on March 24, 1998. When it passed the 
Senate, on September 30, 1998, it included language 
substantially similar to H.R. 440. Unfortunately, H.R. 3412 was 
not taken up again by the House during the 105th Congress due 
to time constraints.
    H.R. 440 was introduced on February 2, 1999. On February 3, 
1999, the Committee on Small Business met for purpose of 
marking up and reporting H.R. 439 and H.R. 440. H.R. 440 was 
introduced, considered as read, and opened for amendment. No 
amendments were offered. Chairman Talent then moved to pass 
H.R. 440 and report it to the House. At 2:50 p.m., by a 
unanimous voice vote, a quorum being present, the Committee 
passed the bill, H.R. 440, and ordered it reported.

                      Section-by-Section Analysis

                         Section 1. Short Title

    This act may be cited as the ``Microloan Program Technical 
Corrections Act of 1999''.

                    Section 2. Technical Corrections

    This section eliminates the language in paragraph 
7(m)(7)(B) restricting the amount of loan funds made available 
to any single state, and replaces it with language requiring 
SBA to maintain a minimum amount ($800,000) of funding 
available each year for each State's intermediaries. This 
amount is subject to available appropriations and the approval 
of the Small Business Administration. Any funds that are 
reserved by the SBA for the purposes of this provision may be 
released at the beginning of the third fiscal quarter.
    This section also inserts language requiring SBA to not 
only select and approve intermediaries but also make sure that 
some funding is available to them.

                     SECTION 3. LOAN LOSS RESERVES

    This section changes the loan loss reserve required to be 
established by microloan intermediaries. The loss reserve 
provides a hedge for the SBA against the failure of an 
intermediary.
    Under the new language all intermediaries will be required 
to have a 15 percent loss reserve for their first five years. 
After five years intermediaries may request a review by the 
SBA. Existing intermediaries may request a review based on the 
most recent five year period. If an intermediary's five year 
average annual loss rate is lower than 15 percent then the SBA 
may reduce the loss reserve requirement for the intermediary, 
but no lower than 10 percent. The request for a review is to be 
an annual review. However, this review is not to be interpreted 
to preclude any reviews initiated by the SBA for the purposes 
of program oversight.

               Congressional Budget Office Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, February 4, 1999.
Hon. James M. Talent,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 440, the Microloan 
Program Technical Corrections Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Mark Hadley.
            Sincerely,
                                              ------ ------
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 440--Microloan Program Technical Corrections Act of 1999

    CBO estimates that enacting this bill would not have a 
significant effect on the federal budget. Assuming the 
availability of appropriated funds, we estimate the Small 
Business Administration (SBA) would spend less than $500,000 to 
review the requirements for loan loss reserves of microloan 
intermediaries. Because enactment of this bill would not affect 
direct spending or receipts, pay-as-you-go procedures would not 
apply.
    Under the microloan program, SBA provides grants, loans, 
and loan guarantees to nonprofit organizations, which act as 
intermediaries and use the funds to provide small businesses 
with technical assistance and loans ranging from $100 to 
$25,000. The bill would eliminate a provision of current law 
that limits the amount of loan funds that intermediaries within 
a single state can receive under the microloan program. H.R. 
440 also would clarify the requirements for loan loss reserves 
of intermediaries. Current law requires intermediaries to 
maintain loan loss reserves equal to 15 percent of their notes 
receivable. The bill would permit SBA to reduce the 
requirements for loan loss reserves for those intermediaries 
with historical loss rates of less than 15 percent during the 
previous five years. Finally, H.R. 440 would set the 
requirement for loan loss reserves to be no less than 10 
percent and no more than 15 percent. Changing the requirement 
for loan loss reserves could affect the subsidy rate for the 
microloan program, but any such effect would be negligible.
    H.R. 440 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not have a significant impact on the budgets of state, 
local, or tribal governments.
    The CBO staff contact is Mark Hadley. This estimate was 
approved by Robert A. Sunshine, Deputy Assistant Director for 
Budget Analysis.

                      Committee Estimate of Costs

    Pursuant to the Congressional Budget Act of 1974, the 
Committee estimates that the amendments to Small Business Act 
in H.R. 440 will not increase appropriations over the next five 
fiscal years. Furthermore, pursuant to clause 3(d)(2)(A) of 
rule XIII of the Rules of the House of Representatives, the 
Committee estimates that implementation of H.R. 440 will not 
significantly increase administrative costs. This concurs with 
the estimate of the Congressional Budget Office.

                           Oversight Findings

    In accordance with clause 4(c)(2) of rule X of the Rules of 
the House of Representatives, the Committee states that no 
oversight findings or recommendations have been made by the 
Committee on Government Reform with respect to the subject 
matter contained in H.R. 440.
    In accordance with clause 2(b)(1) of rule X of the Rules 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. 440 are incorporated 
into the descriptive portions of this report.

                 Statement of Constitutional Authority

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds the authority for 
this legislation in Article I, Section 8, Clause 18 of the 
Constitution of the United States.

         Changes in Existing Law Made by the Bill, as Reported

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

                  SECTION 7 OF THE SMALL BUSINESS ACT

  Sec. 7. (a)  * * *

           *       *       *       *       *       *       *

  (m) Microloan Program.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Loans to intermediaries.--
                  (A)  * * *

           *       *       *       *       *       *       *

                  [(D) Loan loss reserve fund.--The 
                Administration shall, by regulation, require 
                each intermediary to establish a loan loss 
                reserve fund, and to maintain such reserve fund 
                until all obligations owed to the 
                Administration under this subsection are 
                repaid. The Administration shall require the 
                loan loss reserve fund to be maintained--
                          [(i) during the initial 5 years of 
                        the intermediary's participation in the 
                        program under this subsection, at a 
                        level equal to not more than 15 percent 
                        of the outstanding balance of the notes 
                        receivable owed to the intermediary; 
                        and
                          [(ii) in each year of participation 
                        thereafter, at a level equal to not 
                        more than the greater of--
                                  [(I) 2 times an amount 
                                reflecting the total losses of 
                                the intermediary as a result of 
                                participation in the program 
                                under this subsection, as 
                                determined by the Administrator 
                                on a case-by-case basis; or
                                  [(II) 10 percent of the 
                                outstanding balance of the 
                                notes receivable owed to the 
                                intermediary.]
                  (D)(i) In general.--The Administrator shall, 
                by regulation, require each intermediary to 
                establish a loan loss reserve fund, and to 
                maintain such reserve fund until all 
                obligations owed to the Administration under 
                this subsection are repaid.
                  (ii) Level of loan loss reserve fund.--
                          (I) Subject to subclause (III), the 
                        Administration shall require the loan 
                        loss reserve fund of an intermediary to 
                        be maintained at a level equal to 15 
                        percent of the outstanding balance of 
                        the notes receivable owed to the 
                        intermediary.
                          (II) Review of loan loss.--After the 
                        initial 5 years of each intermediary's 
                        participation in the program authorized 
                        by this subsection, the Administrator 
                        shall, at the request of the 
                        intermediary, conduct a review of the 
                        annual loss rate of each intermediary. 
                        Any intermediary in operation under 
                        this subsection prior to October 1, 
                        1994 that requests a reduction in its 
                        loan loss reserve shall be reviewed 
                        based on the most recent five year 
                        period preceding the request.
                          (III) Reduction of the loan loss 
                        reserve.--Subject to the requirements 
                        of this subclause the Administrator may 
                        reduce the annual loan loss reserve 
                        requirement to reflect the actual 
                        average loan loss rate for the 
                        intermediary during the preceding five 
                        year period, except that in no case 
                        shall the loan loss reserve be reduced 
                        to less than 10 percent of the 
                        outstanding balance of the notes 
                        receivable owed to the intermediary.
                          A reduction may be allowed only if 
                        the intermediary demonstrates to the 
                        satisfaction of the Administrator 
                        that--
                                  (aa) the average annual loss 
                                rate for the intermediary 
                                during the preceding 5 year 
                                period is less than 15 percent; 
                                and
                                  (bb) that no other factors 
                                exist that may impair the 
                                ability of the intermediary to 
                                repay all obligations owed to 
                                the Administration under this 
                                subsection.

           *       *       *       *       *       *       *

          (7) Program funding for microloans.--
                  (A) * * *
                  [(B) State limitations.--During any fiscal 
                year, a State shall not receive new loan funds 
                from the Administration that exceed 125 percent 
                of the State's pro rata share of the microloan 
                program authorization during such fiscal year, 
                such share to be based on the population of the 
                State, as compared to the total population of 
                the United States. If, however, at the 
                beginning of the fourth quarter of a fiscal 
                year the Administration determines that a 
                portion of appropriated microloan funds are 
                unlikely to be awarded during that year, the 
                Administration may make additional funds 
                available to a State in excess of 125 percent 
                of the pro rata share of that State.]
                  (B) Availability of funds.--Subject to 
                appropriations, the Administration shall ensure 
                that at least $800,000 of new loan funds are 
                available for each State in any fiscal year. 
                All funds are to be made available subject to 
                approval of the Administration. If, at the 
                beginning of the third quarter of a fiscal 
                year, the Administration determines that the 
                funds necessary to comply with this provision 
                are unlikely to be awarded that year, the 
                Administration may make those funds available 
                to any State or intermediary.
          (8) Equitable distribution of intermediaries.--In 
        approving microloan program applicants and providing 
        funding to intermediaries under this subsection, the 
        Administration shall select and provide funding to such 
        intermediaries as will ensure appropriate availability 
        of loans for small businesses in all industries located 
        throughout each State, particularly those located in 
        urban and in rural areas.

           *       *       *       *       *       *       *

                            A P P E N D I X

                              ----------                              

                             Congress of the United States,
                                  Washington, DC, December 4, 1998.
Re microloan loan loss reserve.
Hon. Aida Alvarez,
Administrator, U.S. Small Business Administration,
Washington, DC.
    Dear Administrator Alvarez: Last year the Senate Committee 
on Small Business held a hearing on SBA's Microloan program, 
which was in the last year of its pilot status. As a result of 
that hearing, and the program's success during its pilot stage, 
the Committee, and eventually the entire Congress, passed 
legislation to make the program permanent, to increase 
substantially the authorized funding levels for loans and 
technical assistance, and to restructure the loan loss reserve 
requirement. The purpose of restructuring the loan loss reserve 
requirement was to enable microloan intermediaries with 
successful loan portfolios and low loss histories to maintain 
lower loss reserves and have the ability to use that capital 
for additional microloans or technical assistance.
    Unfortunately, the language as passed was not interpreted 
in a way that would achieve that purpose. As part of the Senate 
version of H.R. 3412, the Senate passed a clarification of the 
1997 loan loss reserve language, which the Administration 
supported, but there was insufficient time remaining in the 
session to consider the clarifying changes and act on them. 
Therefore, we ask that SBA refrain from implementing the 
restructured reserve requirement until both houses of Congress 
have an opportunity to consider the issue and act on it. We 
expect such action to occur early in the next session.
    Thank you for your cooperation in this matter.
            Sincerely,
                                   Christopher S. Bond,
                                           Chairman, Committee on Small 
                                               Business, U.S. Senate.
                                   James M. Talent,
                                           Chairman, Committee on Small 
                                               Business, U.S. House of 
                                               Representatives.
                                   John F. Kerry,
                                           Ranking Democrat, Committee 
                                               on Small Business, U.S. 
                                               Senate.
                                   Nydia M. Velazquez,
                                           Ranking Democrat, Committee 
                                               on Small Business, U.S. 
                                               House of 
                                               Representatives.

                                
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