[Senate Report 106-280]
[From the U.S. Government Publishing Office]



106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-280

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     CERTIFIED DEVELOPMENT COMPANY PROGRAM IMPROVEMENTS ACT OF 2000

                                _______
                                

                  May 9, 2000.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                        [To accompany H.R. 2614]

    The Committee on Small Business to which was referred the 
bill (H.R. 2614) to amend the Small Business Investment Act to 
make improvements to the certified program, and for other 
purposes, having considered the same, reports favorably thereon 
with an amendment and recommends that the bill as amended do 
pass.
    On March 21, 2000, the Committee on Small Business 
considered H.R. 2614, the Certified Development Company Program 
Improvements Act of 2000. The Committee adopted by a unanimous 
voice vote an amendment offered by Senator Paul Wellstone 
setting the programs levels for Fiscal Years 2001, 2002 and 
2003. As amended, H.R. 2614 would make permanent the Preferred 
Certified Lenders Program, expand and make permanent the Loan 
Liquidation Pilot Program, increase the loan guaranty limits, 
and establish the program authorization levels for the next 
three fiscal years. Having considered H.R. 2614, as amended, 
the Committee reports favorably thereon with technical and 
conforming amendments and recommends that the bill do pass.

                            I. Introduction

    The 504 Certified Development Company (CDC) Program was 
enacted to leverage private sector resources to fund larger 
projects for small businesses to acquire, construct or expand 
their facilities. Such loans create job opportunities and 
improve the economic health of communities.
    The 504 program is unlike any other SBA credit program. SBA 
guarantees 10- or 20-year debentures issued by CDCs, and the 
proceeds from these debentures are used to fund loans with 
similar terms to small businesses for plant acquisition, 
construction, expansion, and equipment. The SBA-guaranteed 
debenture cannot exceed 40% of the project cost. A conventional 
lender, such as a bank, usually provides financing for 50% of 
the project cost. The bank's loan is senior to the SBA-
guaranteed loan in the event of a default by the 504 borrower.
    Since the Committee approved the Small Business 
Reauthorization Act of 1997, it has followed the progress of 
the 504 Certified Development Company Program closely. The 
Committee has watched for any negative fall out on program 
demand resulting from the 1996 legislation mandating that the 
program be supported entirely by fees paid by the private 
sector. We are pleased to report that after an initial decline, 
program demand has steadily increased. At the same time, the 
credit subsidy estimate has steadily declined, reducing the 
fees paid by small business borrowers.
    The Committee has been particularly concerned about reports 
and testimony from the Small Business Administration (SBA) and 
the Office of Management and Budget (OMB) about low recoveries 
following a default by a borrower on a loan made under the 504 
program. In nearly all cases when a 504 program borrower 
defaults, it is SBA, not the CDC, that takes the required 
liquidation and foreclosure actions. The failure of SBA to take 
aggressive actions to recover the value of collateral held 
following a default significantly increases the costs to 
borrowers to obtain a loan under the 504 program.
    The recovery rate estimate utilized to determine the credit 
subsidy rate for the 504 loan program declined from 44 percent 
in 1997 to 34 percent in 1998 to 31 percent in 1999 and finally 
to 25 percent in 2000. The Committee is pleased to note the 
recovery rate estimate for Fiscal Year 2001 has been increased 
to 31 percent.

                        II. Description of Bill

504 loan

    Under the Small Business Investment Act of 1958, 504 
guaranteed loans for the following public policy goals are 
eligible for loans guarantees up to $1,000,000:
          Business district revitalization;
          Expansion of exports;
          Expansion of minority business development;
          Rural development;
          Enhanced economic competition;
          Changes necessitated by Federal budget cutbacks;
          Business restructuring arising from Federal mandated 
        standards or policies affecting the environment or the 
        safety and health of employees.
    The bill adds loans to women-owned small businesses to the 
current list of public policy goals specified under the Act. A 
similar provision offered by Senator Kerry in 1998 was approved 
by the Committee and the Senate; however, the bill was not 
taken up by the House of Representatives before the 105th 
Congress adjourned.
    In August 1988, Congress approved legislation (P.L. 100-
418) to increase the 504 loan guarantee ceiling to $750,000 
from $500,000, except for a limited number of loans meeting the 
special public policy purposes. In order to adjust this amount 
to reflect inflation, the loan guarantee ceiling would need to 
be increased to approximately $1,250,000. Therefore, the 
Committee agrees with the position taken by the House Committee 
on Small Business and approved an increase to $1,000,000. The 
Committee further agreed to increase the maximum guaranteed 
amount on loans made to meet the public policy purposes to 
$1,300,000 from $1,000,000.
    On April 27, 1999, the Committee conducted a public 
Roundtable on the 7(a) Guaranteed Business Loan Program and the 
504 program. The statements about the 504 program by industry 
representatives and government officials were encouraging, and 
the Committee urges SBA to continue its efforts to improve 
program performance while reducing the credit subsidy rate.

Program fees

    In 1995, at the urging of the SBA and the National 
Association of Development Companies (NADCO), the trade 
organization that represents the 504 lenders and Certified 
Development Companies (CDCs), the Committee agreed to 
legislation mandating that the 504 program be supported 
entirely by fees paid by the private sector. These new fees 
were imposed beginning in FY 1996. Subsequently, the SBA 
undertook an extensive review of the performance of the 504 
program, and the credit subsidy rate, which determines the 
amount of money that must be maintained in the loss reserve 
account for this program, was increased from 0.57% to 6.85%, an 
increase of 1200%. Since the 504 program was being funded only 
by fees paid by the private sector, the fees paid by the 
borrower in FY 1997 were increased from 0.125% to 0.875%, which 
placed a financial burden on 504 borrowers. The Committee is 
pleased to note that since FY 1997 the credit subsidy rate 
estimate has dropped resulting in a decrease in borrower fees 
from 0.875% to 0.472% for FY 2001. The bill authorizes SBA to 
collect these fees to offset the credit subsidy cost through 
September 30, 2003.

Premier certified lenders program

    In October 1994, Congress approved the Premier Certified 
Lenders Program on a pilot basis (P.L. 103-403). In December 
1997, this pilot program was extended by Congress, and the 
limitation on the number of CDCs that could participate in the 
PCLP was removed (P.L. 105-135). The Committee has noted the 
success of the program and has agreed with the House of 
Representatives to make the PCLP a permanent part of the 504 
program. In making the PCLP pilot a permanent part of the 504 
program, the Committee expects the SBA to continue its efforts 
to work with the CDC community to take complete advantage of 
the strengths of the most successful and well-run CDCs.

Asset sales

    In response to the plans by the SBA to undertake the sale 
of assets held by the Agency, the Committee approved a 
provision that requires the SBA to notify CDCs prior to 
including a 504 loan in an asset sale. The Committee adopted 
this section in order to insure there is an open dialogue and 
cooperation between the Agency and the relevant CDCs. For the 
past four years, the Committee has encouraged the SBA to move 
forward with its asset sales program; however, we do not 
believe this step forward should necessarily harm its lending 
partners.

Loan liquidation program

    In response to reports about low recoveries after the 
default of a 504 loan, the Committee approved legislation in 
1996 to establish the Loan Liquidation Pilot Program (P.L. 104-
208). The pilot liquidation program allowed up to 20 qualified 
CDCs to liquidate loans that they originated. It was 
implemented by the SBA in June 1997. The results to date for 
the pilot program are encouraging, and the Committee has 
concluded that it is in the best interest of the 504 program to 
allow additional CDCs to conduct their own liquidation and 
foreclosure activities. The Committee is pleased to note that 
the recovery estimate for FY 2001 has increased for the first 
time since 1995. The Administration's estimate for FY 2001 is 
31 percent, and the assumptions used by OMB and the SBA do not 
include an increase in recoveries that should result from 
making the Loan Liquidation Program permanent. The Committee 
urges the SBA to continue its efforts and to make maximum use 
of the Loan Liquidation Program so that the recovery level will 
increase further.
    A number of CDCs have demonstrated the ability through the 
pilot program and other lending programs in which they 
participate, to perform such activities, and have indicated a 
willingness to perform such functions to supplement SBA's 
activities in this area. Accordingly, the bill makes the pilot 
liquidation program permanent and requires SBA to permit 
certain CDCs to foreclose and liquidate defaulted loans that 
they have originated under the 504 loan program.
    In order to participate in the loan liquidation program, a 
CDC must have made at least 10 loans per year for the past 
three fiscal years, and it must have at least one employee with 
two years of liquidation experience or be a member of the 
Accredited Lenders Program with at least one employee with two 
years of liquidation experience. Representatives of either 
group must complete a training program developed by SBA. 
Participants in the pilot liquidation program and Premier 
Certified Lenders automatically qualify for the permanent 
liquidation program.
    CDCs eligible to participate in liquidation activities are 
required to perform all liquidation and foreclosure functions 
pursuant to a liquidation plan approved by SBA. The bill also 
authorizes CDCs to take other actions, in lieu of full 
liquidation or foreclosure, to mitigate loan losses pursuant to 
a workout plan. Prior to a CDC commencing liquidation or 
foreclosure activities and prior to engaging in other actions 
to mitigate loan losses, a CDC is required to provide the SBA 
with a liquidation plan or workout plan, as the case may be, 
for approval. The SBA has 15 days to approve a liquidation plan 
or a workout plan. The bill further permits CDCs to litigate 
matters relating to their liquidation activities subject to SBA 
monitoring of such litigation.
    The bill authorizes the SBA to suspend or revoke the 
authority of a CDC to liquidate loans if the CDC either does 
not meet the eligibility requirements or fails to comply with 
any statutory or regulatory requirement relating to the 
foreclosure or liquidation of loans or any other applicable 
provision of law. CDCs are also prohibited from taking any 
action that would result in an actual or apparent conflict of 
interest in connection with the liquidation of their loans.
    The bill requires the SBA to submit annually to Congress a 
report on the results of the delegation of authority to CDCs to 
liquidate and foreclose loans and a comparison of such results 
to SBA's liquidation performance.

Program authorization level

    During the Committee's consideration of the bill, Senator 
Wellstone offered an amendment to establish the following 504 
program authorization levels: $4,000,000,000 in Fiscal Years 
2001, $5,000,000,000 in Fiscal Year 2002, and $6,000,000,000 in 
Fiscal Year 2003. The Committeeapproved the amendment by a 
unanimous voice vote.

                          III. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following votes were recorded on March 21, 
2000. Senator Wellstone offered an amendment authorizing the 
program levels for the 504 program for Fiscal Years 2001, 2002 
and 2003. This amendment was approved by a voice vote. After a 
quorum was established pursuant to Committee rules, Senator 
Bond made a motion to adopt the Certified Development Company 
Program Improvements Act of 1999 as amended. The motion was 
approved by a unanimous 18-0 recorded vote, with the following 
Senators voting in the affirmative: Bond, Kerry, Burns, 
Coverdell, Bennett, Snowe, Enzi, Fitzgerald, Crapo, Voinovich, 
Abraham, Levin, Harkin, Lieberman, Wellstone, Cleland, 
Landrieu, and Edwards.

                  IV. Evaluation of Regulatory Impact

    In compliance with rule XXVI(11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that no 
significant additional regulatory impact will be incurred in 
carrying out the provisions of this legislation. There will be 
no additional impact on the personal privacy of companies or 
individuals who utilize the services provided.

                       V. Changes In Existing Law

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of section 12 of rule XXVI of the 
Standing Rules of the Senate in order to expedite the business 
of the Senate.

                           VI. Cost Estimate

    In compliance with rule XXVI(11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts indicated by the 
Congressional Budget Office in the following letter.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, March 30, 2000.
Hon. Christopher S. Bond,
Chairman, Committee on Small Business,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2614, the 
Certified Development Company Program Improvements 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,
                                         Barry B. Anderson,
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 2614--Certified Development Company Program Improvements Act of 
        1999

    H.R. 2614 would make numerous changes to two loan programs 
that the Small Business Administration (SBA) operates in 
cooperation with certified development companies (CDCs). Based 
on information from the SBA, CBO estimates that implementing 
H.R. 2614 would not have a significant impact on the federal 
budget. Because H.R. 2614 could affect direct spending, pay-as-
you-go procedures would apply, but we estimate that any such 
effect would not be significant. H.R. 2614 contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act and would impose no costs on 
state, local, or tribal governments.
    CDC loans, also known as section 503 and 504 loans, provide 
small businesses with long-term, fixed-rate financing for the 
purchase of land, buildings, and equipment. Under current law, 
the Administrator of SBA must adjust an annual fee on 504 loans 
to produce an estimated subsidy rate of zero at the time loans 
are guaranteed. Both the program and its fee authority expire 
at the end of fiscal year 2000. H.R. 2614 would extend the 
authority to make new loans and collect such fees through 
fiscal year 2003. The extension of the fee authority would 
maintain a zero subsidy rate for this program.
    The act would allow CDCs to litigate bankruptcies in place 
of SBA and would authorize qualified companies to liquidate 
loans in their portfolio that the SBA has purchased. (The act 
would make permanent the pilot program that allowed CDCs to 
liquidate such loans.) Finally, the act would increase the 
maximum amount that can be guaranteed from $750,000 to $1 
million in most cases, and from $1 million to $1.3 million if 
the loan would satisfy specific policy goals.
    If H.R. 2614 is enacted, the subsidy rates for previous 
cohorts of CDC loans or the administrative costs of SBA could 
be affected. (The former would affect direct spending.) 
However, it is unclear whether the average subsidy costs for 
SBA guarantees of existing loans would increase or decrease. 
The pilot program has not produced enough information to date 
to allow CBO to make any determination about the amount the 
government would recover on defaulted loans if those loans are 
liquidated by CDCs instead of by SBA. Inaddition, it is not 
clear how expenses associated with liquidation would be paid. The 
Federal Credit Reform Act stipulates that administrative expenses 
cannot be paid out of the subsidy for loan programs, but expenses to 
foreclose, maintain, or liquidate an asset can. Many of the expenses 
CDCs would incur would be to foreclose, maintain, or liquidate assets. 
It is not clear whether SBA would have the authority to reimburse CDCs 
for administrative expenses, including litigation costs.
    Liquidation activities under the act might cost less than 
under current law, thus lowering the subsidy costs on existing 
loan guarantees. But if litigation costs became part of the 
subsidy costs, those costs could increase. On balance, CBO 
expects that enacting H.R. 2614 would probably not lead to a 
significant net change in the subsidy cost for CDC loans or in 
SBA's administrative costs.
    The act would not affect the zero subsidy rate for future 
CDC loans. H.R. 2614 would increase the maximum size of the 
guarantee, which could increase the default risk of the 
program. But added costs for defaults on future loans would be 
offset by fees paid by borrowers.
    On August 2, 1999, CBO transmitted a cost estimate for H.R. 
2614, as ordered reported by the House Committee on Small 
Business on July 29, 1999. That act would not authorize SBA to 
make new loans.
    The CBO staff contact is Mark Hadley. This estimate was 
approved by Peter H. Fontaine, Deputy Assistant Director for 
Budget Analysis.

                    VII. SECTION-BY-SECTION ANALYSIS

Section 1. Short title

Section 2. Women-owned businesses

    Women-owned businesses are added to the list of concerns 
eligible for the larger guaranteed loan in order to meet 
selected public policy goals.

Section 3. Maximum debenture size

    The maximum loan guarantee size is increased from $750,000 
to $1,000,000 for regular 504 borrowers. The guarantee ceiling 
on loans that meet the public policy goals is increased from 
$1,000,000 to $1,300,000.

Section 4. Fees

    In order to fund the Financing Account (loss reserve) for 
the 504 program, it is necessary for the borrowers, CDCs, and 
the participating banks to pay fees to the Federal government. 
The participating bank pays a one-time fee, and the borrower 
and CDC pay annually a percentage of the outstanding balance of 
the 504 loan. The bill allows the fees to be collected through 
September 30, 2003.

Section 5. Premier Certified Lenders Program

    The Premier Certified Lenders Program demonstration program 
is granted permanent status. Under current law, the 
demonstration program will terminate on September 30, 2000.

Section 6. Sale of certain defaulted loans

    The bill requires SBA to give any CDC with contingent 
liability 90 days notice prior to including a defaulted loan in 
a bulk sale of loans. No loan may be sold without permitting 
prospective purchasers to examine SBA records on the loan.

Section 7. Loan liquidation

    The bill adds a new section 510 to the Small Business 
Investment Act of 1958 to create a permanent program permitting 
CDCs to carry out the liquidation of defaulted loans. This 
permanent program replaces the pilot program authorized by the 
Small Business Reauthorization Act of 1997 (P.L. 105-135).

Section 8. Funding levels for certain financings under the Small 
        Business Investment Act of 1958

    Establishes the following funds levels for the 504 program: 
$4,000,000,000 in Fiscal Year 2001, $5,000,000,000 in Fiscal 
Year 2002, and $6,000,000,000 in Fiscal Year 2003.

                                  
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