[Senate Report 106-5]
[From the U.S. Government Publishing Office]





                                                        Calendar No. 18

106th Congress                                                   Report
  1st Session                    SENATE                           106-5

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



 
                 SMALL BUSINESS YEAR 2000 READINESS ACT

                                _______
                                

               February 23, 1999.--Ordered to be printed

                                _______


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

                              R E P O R T

                         [To accompany S. 314]

    The Committee on Small Business, to which was referred the 
bill (S. 314) to provide for a loan guarantee program to 
address the Year 2000 computer problems of small business 
concerns, and for other purposes, having considered the same, 
reports favorably thereon without amendment and recommends that 
the bill do pass.
    The Committee on Small Business reported S. 314, a special 
program to provide loans to small business concerns to repair 
or replace their computer systems in preparation for the Year 
2000 (Y2K) and to provide relief from economic injury incurred 
by small business concerns as a result of direct and indirect 
Y2K computer problems.

                            I. Introduction

    The Small Business Year 2000 Readiness Act (S. 314) is a 
bill that addresses the Y2K computer problems that are 
confronting small business concerns. On February 5, 1999, the 
Committee on Small Business conducted a mark-up of bills 
pending before the Committee. The Committee voted by unanimous 
consent to report favorably S. 314.
    The Committee is concerned that most small businesses are 
not adequately prepared for the problems they may face from Y2K 
computer problems. The Y2K problem is the result of programmers 
over the years writing computer code that used only two digits 
to represent years. This means that certain computers and 
processors in automated systems will fail because such systems 
will not recognized the Year 2000 in date-dependent data.
    This legislation draws on testimony given before the 
Committee over the past year, from reports received by the 
Committee and from meetings held with small business owners, 
financial institutions, consultants, the Small Business 
Administration (SBA) and other persons with an interest in the 
small business community's compliance with the Y2K computer 
problem. On June 2, 1998, the Committee held a hearing on the 
impact of the Y2K computer problem on small businesses. The 
testimony of the witnesses was alarming. The Committee received 
testimony that the companies most at risk from Y2K failures are 
small and medium-sized firms, not larger companies. Witnesses 
testified that this anomaly is caused by two factors. First, 
many small companies have yet to realize the extent the Y2K 
computer problem affects their businesses. Second, many small 
companies may not have the access to capital to cure such 
problems before they cause disastrous results.
    A study entitled ``Small Business and the Y2K Problem,'' 
sponsored by Wells Fargo Bank and conducted by the National 
Federation of Independent Businesses found that an estimated 
four and three-quarter million small employers are exposed to 
the Y2K problem. While many small businesses are likely to be 
affected by the problem, relatively few have become compliant. 
The Gartner Group, an international information technology 
consulting firm in Connecticut, has estimated that only 5% 
percent of small companies had remediated their Y2K computer 
problems as of the third quarter of 1998 and that between 50% 
and 60% of small companies would experience at least one 
mission critical failure as a result of Y2K computer problems.
    One of the major obstacles to small businesses becoming Y2K 
compliant is their difficulty obtaining the necessary capital 
to upgrade their information technology and other automated 
systems. The Committee has received information indicating that 
many small businesses will face large expenditures to remediate 
their Y2K problems. A recent survey conducted by Arthur 
Andersen's Enterprise Group on behalf of a nationwide small 
business trade association, National Small Business United, 
found that to become Y2K compliant 29% of small businesses will 
need to purchase additional hardware, 24% will have to replace 
existing hardware and 17% will need to convert their entire 
computer system. When then asked about their most difficult 
challenge relating to their information technology, more than 
54% of the businesses surveyed cited ``affording the cost.''
    The Committee is very concerned about the impact that the 
Y2K computer problem may have on the economy and, in 
particular, on small business owners and their employers. In 
the 105th Congress, the Committee responded by approving the 
Year 2000 Readiness and Small Business Programs Restructuring 
and Reform Act of 1998 (H.R. 3412, 105th Cong., 2d Sess.) which 
would have established a similar loan program specifically 
designed to assist small businesses in becoming Y2K compliant. 
While that bill passed the Senate by unanimous consent on 
September 30, 1998, the House of Representatives did not adopt 
it prior to adjournment. So that a loan program established to 
assist small businesses would be available to as many small 
businesses as possible, the Committee approved S. 314 at the 
earliest practical date in the 106th Congress.

                      II. Description of the Bill

    S. 314 requires the SBA to establish a limited-term loan 
program (hereinafter referred to as the ``Y2K loan program'') 
pursuant to which the SBA would guarantee loans made by private 
lenders to assist small businesses in correcting Y2K computer 
problems. The bill permits a financial institution originating 
loans under the Y2K loan program to process the loans in 
accordance with the requirements of any existing loan program 
established under the SBA's 7(a) business loan program in which 
such lender is eligible to participate.
    Small businesses may only use loan proceeds for two 
purposes. First, a small business may use loan proceeds to 
correct the Y2K computer problems affecting its own information 
technology systems and other automated systems. For example, a 
small business is permitted to use loan proceeds to purchase or 
repair hardware or software or pay for consultant services to 
diagnose and remedy Y2K problems with such hardware or 
software. Second, a small business may use loan proceeds to 
provide relief from economic injuries suffered as a direct 
result of itsown Y2K computer problems or some other entity's 
Y2K computer problems. The Committee intends that the SBA use its 
existing rules and procedures for the Disaster Loan Program, as they 
relate to borrower eligibility and use of loan proceeds, as a model for 
its guidelines governing economic injury loans made under the Y2K loan 
program, except to the extent they would be inconsistent with the 
provisions of this bill.
    The legislation requires the SBA to establish specific 
guidelines governing the Y2K loan program within 30 days of 
enactment. So that the availability of economic injury loans 
does not serve as a disincentive to small businesses to fix 
their Y2K computer problems, the Committee believes that it is 
reasonable for the SBA to require in its guidelines that a 
borrower, as a condition of receiving loan funds, certify as to 
its knowledge about its Y2K problems and the efforts it 
undertook to correct such problems. The Committee intends that 
such certification would require the borrower to certify that 
it either took good faith efforts to identify and correct its 
Y2K computer problems or that it was not aware that its 
equipment contained Y2K problems. As applicable and except to 
the extent inconsistent with the legislation, the Committee 
further intends that existing SBA rules and procedures 
governing the 7(a) business loan program also govern the Y2K 
loan program.
    The bill also establishes three specific requirements for 
the Y2K loan program, relating to underwriting standards and 
the terms and conditions of loans, that differ from the 
existing 7(a) business loan program guidelines. First, the bill 
requires that the SBA provide maximum flexibility in the 
establishment of terms and conditions of loans under the loan 
program so that such loans may be structured in a manner that 
enhances the ability of the applicant to repay the debt. The 
primary consideration in SBA's loan making process is whether 
the borrower is able to repay the debt with available cash 
flow. Because many small businesses operate on a slim profit 
margin and the costs of making Y2K corrections may be 
unexpected and unbudgeted, the Committee believes that 
flexibility in the structuring of loans must be permitted to 
assure that those small businesses in need of financing are 
given every reasonable opportunity to obtain loans that meet 
their current and projected cash flows. To realize this goal, 
the Committee intends that the SBA permit financial 
institutions, when appropriate, to structure loans in a manner 
consistent with the borrower's ability to service the new debt. 
Such structures may include, but are not limited to, offering 
balloon features, providing for longer maturities than 
customary, and refinancing existing SBA loans over longer 
maturities. The Committee recognizes that the needs of each 
borrower will be different and, therefore, intends that 
financial institutions be permitted to examine each borrower's 
individual economic circumstances and structure individual 
loans in a manner that is reasonable and appropriate given the 
economic circumstances of each borrower. The goal of this 
legislation is to promote the continued economic health of 
small businesses dealing with Y2K problems, and loans under 
this program should be structured to that end. If a particular 
loan structure, such as a balloon feature or a longer maturity, 
is inconsistent with a borrower's individual long-term economic 
viability, it is not the intention of the Committee that such a 
structure be utilized.
    Second, the bill permits a financial institution to defer 
principal payments on a loan for up to one year beginning on 
the date of the origination of the loan, if appropriate to 
facilitate repayment. Third, the bill requires that reasonable 
doubts regarding an applicant's ability to service the debt be 
resolved in favor of the applicant. Similar statutory language 
exists for the SBA's Defense Economic Transition Assistance 
loan program in section 7(a)(21) of the Small Business Act. 
While the Committee intends that small businesses be provided 
the benefit of the doubt in underwriting decisions on loans 
originated under the Y2K loan program, the Committee also 
intends that SBA's guidelines require that small businesses 
still evidence an ability to repay such loans. As private 
financial institutions will retain risk on every loan and will 
initially determine whether or not financing is granted, the 
Committee believes that there are reasonable assurances that 
the program will not generate a substantial number of 
unwarranted loans.
    The bill further provides that each lender eligible to 
participate in the SBA's 7(a) loan program is eligible to 
participate in the Y2K loan program. This would include more 
than 6,000 lenders nationwide. The Y2K loan program would 
sunset after December 31, 2000, which is the last day that such 
loans could be approved for disbursement.
    The Committee intends that this bill will serve the dual 
purpose of providing small businesses with the means to 
continue operating successfully after January 1, 2000, and 
making financial institutions and small firms more aware of the 
dangers that lie ahead if Y2K problems are not addressed. The 
Committee believes that awareness by lenders of the 
availability of this loan program is of paramount importance. 
The Committee understands that, pursuant to the Year 2000 
Workprogram Phase II, the Federal Financial Institutions 
Examination Council has established procedures for federal 
regulators to use when examining federally supervised financial 
institutions for Y2K preparedness. These examination procedures 
include determining if financial institutions have evaluated 
the Year 2000 readiness of their borrowers and implemented 
controls to mitigate risk from the potential financial 
difficulties of such borrowers. The Committee believes that to 
comply with these examination procedures and to mitigate losses 
to their loan portfolios, financial institutions will contact 
their small business customers to ensure that they are 
compliant and to make them aware of the problems that may arise 
from noncompliance. The Committee has determined that the 
existence of a separate Y2K loan program will give financial 
institutions a specific aid to offer small companies that may 
not be eligible for additional private capital to fund Y2K 
corrections and will focus the attention of financial 
institutions and, in turn, their small business customers to 
the Y2K problem. Accordingly, the legislation requires SBA to 
market aggressively the availability of this program to all 
lenders eligible to participate.
    The Committee understands that some small businesses may 
have already remedied their Y2K computer problems and may have 
received SBA-backed financing under less favorable terms and 
conditions than those authorized under this legislation. 
Therefore, in cases where the borrower would benefit from the 
types of terms and conditions authorized by this legislation 
and seeks to do so, the Committee encourages SBA to restructure 
loans that were made to address Y2K problems which were 
approved after October 1, 1998. In cases where such loans have 
beensold in the secondary market and, therefore, cannot be 
restructured, SBA should permit refinancing of such loans only when the 
vast majority of loan proceeds were used to correct Y2K problems and 
when the small business borrower will receive a clear and substantial 
benefit from such refinancing. The Committee recognizes that 
refinancing has the effect of using 7(a) loan authority twice for the 
same loan purpose, so should be employed only when clearly warranted 
for the benefit of the borrower.

                          III. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following vote was recorded on February 5, 
1999.
    After a quorum was established pursuant to Committee rules, 
a motion by Senator Bond to adopt the Small Business Year 2000 
Readiness Act was approved by unanimous consent.

                  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, February 22, 1999.
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 S. 314, the Small 
Business Year 2000 Readiness Act.
    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.

               congressional budget office cost estimate

S. 314--Small Business Year 2000 Readiness Act

    Summary: Assuming appropriation of the necessary amounts, 
CBO estimates that implementing S. 314 would cost about $20 
million over the 2000-2001 period; however, the actual costs 
could be substantially higher or lower depending on the 
severity of economic injury associated with year 2000 computer 
problems.
    S. 314 would amend existing law to allow the Small Business 
Administration (SBA) to guarantee loans to small business to 
address costs associated with year 2000 computer problems. 
Small businesses would use those loans either to repair 
information technology or to provide relief for economic injury 
associated with such problems. The bill would allow SBA to 
relax credit standards for small businesses applying for year 
2000 loans.
    S. 314 would not affect direct spending or receipts; 
therefore, pay-as-you-go procedures would not apply. S. 314 
contains no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act and would not 
affect the budgets of state, local, or tribal governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 314 is shown in the following table. The 
costs of this legislation fall within budget function 370 
(commerce and housing credit).

                                    [By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                       2000     2001     2002     2003     2004
----------------------------------------------------------------------------------------------------------------
                                        SPENDING SUBJECT TO APPROPRIATION

Estimated authorization level......................................       16        4        0        0        0
Estimated outlays..................................................       10       10        0        0        0
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: S. 314 would allow SBA to guarantee 
loans under the 7(a) general business program for year 2000 
computer problems and associated economic injuries. Under 
current law, many small businesses that will be affected by 
such problems will be able to receive general business loans. 
The federal costs associated with S. 314 would result from 
guaranteeing loans to small businesses that would not qualify 
for loans under current law. CBO estimates that implementing S. 
314 would cost about $20 million over the 2000-2002 period for 
about $500 million in additional SBA guarantees at an average 
subsidy cost of about 4 percent of the guaranteed amounts.
    Loans under S. 314 would differ from regular 7(a) general 
business loans in five respects:
    S. 314 would require that any reasonable doubts regarding a 
small business' ability to repay a loan be resolved in favor of 
the borrower.
    Most small businesses can borrow no more than $750,000 
under the 7(a) general business program. Small businesses would 
be able to borrow up to $1 million under S. 314.
    Under the 7(a) general business program, SBA guarantees as 
much as 80 percent on loans of $100,000 or less and 75 percent 
on loans of more than $100,000. Under S. 314, SBA would 
guarantee as much as 90 percent on loans of $100,000 or less 
and 85 percent on loans of more than $100,000.
    S. 314 would require that SBA be as flexible as possible 
when establishing terms and conditions of loans.
    Finally, S. 314 would provide for a one-year moratorium on 
principal repayments.
    The first three factors would likely allow SBA to guarantee 
loans with higher risks of default than the agency would 
guarantee under current law. Resolving all reasonable doubts in 
favorof prospective borrowers would have such an effect. Also, 
historical default data from SBA show that larger loans are more likely 
to default than small or average size loans. Thus, increasing the 
maximum amount a small business could borrow would increase the risk of 
loss. Finally, by increasing the percentage of a loan that SBA would 
guarantee, S. 314 would decrease the risk that a bank must bear and 
increase the likelihood of higher-risk lending.
    CBO estimates that the default rate of borrowers that are 
approved under S. 314 but that would not receive approval under 
current law would be about 18 percent, which is 20 percent 
higher, on average, than the default rate for the 7(a) general 
business program. This higher rate is similar to the default 
rate that SBA expects for the defense loan and technical 
assistance program, which has loan conditions similar to those 
stipulated in S. 314. This rate also reflects the general risk 
that the effects of the year 2000 problems pose to all 
businesses.
    The last two of the five factors listed above could allow 
SBA to guarantee loans with lower chances of recovery from 
defaults. The one-year grace period on principal payments would 
allow virtually all businesses to delay defaults. Most small 
businesses have assets that quickly decline in value, and 
computer equipment declines in value more quickly than other 
assets. The one-year grace period on principal payments would 
delay the time when SBA begins liquidating loans, and thus may 
result in lower recoveries.
    The requirements for more flexible terms may make it 
possible for a small business to receive a loan with a balloon 
payment, so long as that structure does not increase the risk 
of default. CBO assumes that borrowers wish such loans that 
eventually default would generally be able to make their 
interest payments until balloon payments were nearly due. Thus, 
SBA would not begin liquidating defaulted loans for many years, 
reducing the probability of recovery. CBO estimates that 
recoveries from year 2000 loans with normal amortization 
schedules would be 25 percent lower than recoveries from 7(a) 
general business loans, and that recoveries from year 2000 
loans with balloon payments would be negligible.
    We expect that the fees SBA would collect on year 2000 
loans would be higher than those SBA would collect on 7(a) 
general business loans. The fees that SBA charges to originate 
a loan increase with loan size, and S. 314 would allow for 
larger loans than under current law. In addition, SBA charges a 
0.5 percent fee on the outstanding balance of general business 
loans. Year 2000 loans would generally have higher outstanding 
balances than normal 7(a) general business loans because of the 
grace period on principal payments and the possibility of 
balloon payments. This factor would partially offset the 
increased cost of the loans made under S. 314.
    On balance, CBO estimates that year 2000 loans would cost 
more to guarantee than 7(a) general business loans. The Federal 
Credit Reform Act of 1990 requires appropriation of the subsidy 
costs and administrative costs for credit programs. The subsidy 
cost if the estimated long-term cost to the government of a 
direct loan or loan guarantee, calculated on a net present-
value basis and excluding administrative costs. Based on 
information from SBA and the Office of Management and Budget, 
CBO estimates that the 7(a) general business program will have 
a subsidy rate around 1.2 percent in 2000 and that the loans 
guaranteed under S. 314 that would not be funded under current 
law would have a subsidy rate of around 4 percent.
    The total subsidy costs for implementing S. 314 largely 
depend on the demand for the year 2000 loans. Predictions of 
the impact of the year 2000 computer problem range from 1 
percent of all businesses failing to global economic crisis. 
CBO estimates that small businesses would require about $500 
million in SBA guarantees of year 2000 loans, assuming that 
small businesses will require about $1 billion in guarantees 
and that half of those businesses would not qualify for the 
7(a) general business program. Therefore, CBO estimates that S. 
314 would cost around $20 million over the 2000-2001 period, 
but the costs could be significantly higher or lower depending 
on the severity of the economic injuries associated with the 
year 2000 computer problem. CBO estimates that any impact on 
SBA's administrative costs would not be significant.
    Pay-as-you-go considerations: None.
    Intergovernmental and private-sector impact: This bill 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Mark Hadley.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

                           section by section

Section 1. Short title

    This section entitles the legislation the ``Small Business 
Year 2000 Readiness Act.''

Section 2. Findings

    This section sets forth Congressional findings on the 
affects the Y2K computer problem will likely have on small 
business concerns.

Section 3. Year 2000 computer problem loan guarantee program

    This section requires the Small Business Administration to 
establish a limited-term loan guarantee program under which the 
SBA would guarantee loans made by private lenders to assist 
small businesses in correcting problems related to Y2K computer 
problems. The Act provides that loan proceeds may be used by a 
small business either to correct its own Y2K computer problems 
or provide relief from economic injuries sustained as a result 
of its own or another entity's Y2K computer problems. Each 
lender that participates in the SBA's 7(a) business loan 
program is eligible to participate in the Y2K loan program.
    To ensure that the SBA can implement the loan program 
promptly, the Act permits a lender to process Y2K loans 
pursuant to any of the procedures that the SBA has already 
authorized for that lender under the 7(a) business loan 
program. The Act, however, mandates financing terms and 
underwriting standards for the Y2K loan program that are more 
flexible than the 7(a) loan program, so that small businesses 
are better able to repay the new debt with available cash flow.
    To assure that the loan program is made available to those 
small businesses that need it and to increase awareness of the 
Y2K problem among small businesses and financial institutions, 
the legislation requires SBA to market this program 
aggressively to all eligible lenders. The Act provides that the 
loan program will sunset on December 31, 2000.

                                
