[Senate Report 107-18]
[From the U.S. Government Publishing Office]
Calendar No. 55
107th Congress Report
SENATE
1st Session 107-18
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MICROLOAN PROGRAM IMPROVEMENT ACT OF 2001
_______
June 1, 2001.--Ordered to be printed
Filed under authority of the order of the Senate of May 26, 2001
_______
Mr. Bond, from the Committee on Small Business, submitted the following
R E P O R T
[To accompany S. 174]
On February 28, 2001, the Senate Committee on Small
Business considered the bill (S. 174) to amend the Small
Business Act with respect to the Microloan Program, and for
other purposes. The bill amends the Small Business
Administration's Microloan Program to make it more flexible to
meet credit needs, more accessible to micro-entrepreneurs
across the nation, and more streamlined for leaders to make
loans and provide management assistance, and for other
purposes. Having considered S. 174, the Committee reports
favorably thereon without further amendment and recommends that
the bill do pass.
i. description of bill
This legislation complements programmatic and technical
changes made during the last Congress to the Small Business
Administration's Microloan Program. The Committee is very
supportive of this program and worked with industry and the SBA
to develop these changes.
Congress created the Microloan Program as a pilot in 1991
(Public Law 102-140) to reach very small businesses that were
not being served by traditional lenders of SBA's credit
programs. These microentrepreneurs, who are often minorities,
women, and low-income individuals, needed very little money to
launch a business. They could not get loans because they were
considered unreliable or risky borrowers by traditional credit
markets. Their weak or non-existent credit histories or limited
business experience caused traditional commercial lenders to
shy away from making such loans. To fill this credit need, the
Microloan Program was designed to provide loans to non-profit
intermediary lenders, who in turn provide fixed-rate loans of
not more than $25,000, and on average, loans less than $10,000,
to very small businesses. Last year, Congress approved
legislation increasing the maximum loan limit from $25,000 to
$35,000 (Section 210(a)(1) of P.L. 106-554); the average loan
size limit was increased from not more than $10,000 to not more
than $15,000 (Section (a)(5) of P.L. 106-554). In addition,
lending intermediaries receive an annual grant from the SBA to
provide on-going technical assistance to small businesses.
Technical assistance is a fundamental component of this program
because it helps support the microlenders who teach
microentrepreneurs how to manage a successful business and how
to run a successful business to insure loan repayment.
As industry experts and micro-borrowers have testified
numerous times, the link between financing and technical
assistance is critical to the success of micro enterprise, in
general, and the SBA Microloan Program in particular. Low
default rates of microloans are evidence of the tremendous
success of this program. Since the first SBA microloan was made
in 1992, the Federal government has had only one default of its
intermediary loan providers. To date, all losses incurred by
intermediaries have been fully covered by the mandatory loss
reserve that each intermediary must maintain. Because of this
successful track record, in 1997 Congress voted to transform
the Microloan Program from a demonstration program to permanent
part of the array of SBA credit assistance programs.
There are currently 163 intermediaries and 19 non-lending
technical assistance providers in the SBA Microloan Program. To
date, the lending intermediaries have made 11,800 loans worth
nearly $122 million. The SBA reports that for every microloan,
1.7 jobs are created. The average loan to a microentrepreneur
is about $10,500, with interest rates averaging 11 percent and
an average term of 39 months.
Microloan borrowers--A profile
Microentrepreneurs range from the single mother on public
assistance, who borrows a few hunred dollars to buy sewing
equipment and supplies to start her own alterations shop, to a
mechanic who borrows a few thousand dollars to buy tools to
start a repair shop.
Across the country, microloans and technical assistance are
working, assisting individuals with the tools to successfully
start and manage their own businesses. The SBA's Massachusetts
Small Business Person of the Year for 2000 more than proves
that. Lowell Gray of Lynn, Massachusetts, obtained a $25,000
SBA microloan when his business needed it most and turned a
small software company into Shore.net--an Internet service
provider--with 85 employees. He sold it last year for an
astounding $43 million. In Kansas City, Missouri, the Center
for Business Innovation (KC-CBI) is about to make its second
loan to a microentrepreneur who was in poverty when she applied
for her initial loan. Two years after her initial microloan,
her revenues have gone from less than $20,000 to $90,000 per
year, and she is ready to expand her business.
Since the microloan program was started in 1991, it has
grown from 35 to 163 intermediaries. Also, the market has
changed. Thus, as the Committee reviewed the program for
reauthorization, it worked with trade associations representing
microlenders, the Small Business Administration, and individual
microlenders to craft legislation that would meet market needs
and foster the success of the program.
According to Mary Mathews of the Association for Enterprise
Opportunity (AEO), who participated in a Committee Roundtable
entitled ``SBA's SBIC and Microloan Programs'' on May 12, 1999,
and represented the 500 members of AEO, Congress should raise
the maximum loan size of $25,000 because it is not worth as
much today as it was in 1991, when the amount was established.
In fact, according to an economist at the SBA's Office of
Advocacy, the value of $25,000 in 1991 has been reduced to
$20,200 in 2000. Said another way, if a borrower took out a
$25,000 loan in 1991 and wanted to have the same purchasing
power in 2000, he or she wouldneed to borrow $31,000 in 2001.
Separately, the National Association of SBA Microloan Intermediaries
(NASMI) has urged the Committee to increase the limit.
Subsequently, on December 21, 2000, The Small Business
Reauthorization Act of 2000 (P.L. 106-554) was enacted. It
included a number of important improvements to the Microloan
program legislation. Chief among those changes, in large part
to reflect inflation, was an increase in the maximum loan
amount and average loan sizes. The maximum loan amount was
increased from $25,000 to $35,000, the average loan size for
each intermediary's portfolio was increased from $10,000 to
$15,000. For speciality lenders, those making smaller loans and
receiving additional technical assistance to make them, the
legislation raised their average loan size from $7,500 to
$10,000.
This new law also raised the threshold for the comparable
credit test from $15,000 to $20,000. Since 1991, Microloan
intermediaries have been allowed to make loans of $15,000, but
not more unless the borrower demonstrated that it was unable to
get comparable credit, at comparable rates, from another area
lender.
Another program change in P.L. 106-554 addressed the need
for more non-lending technical assistance providers (TA
providers). Prior to this change, the law limited the number of
TA providers to 25 nationally, with a maximum of one per state.
In a 1996 Report to Congress, SBA provided data indicating that
for every dollar granted under the non-lending technical
assistance program, approximately five dollars were leveraged
from the private sector. At the request of the Administration,
the Committee agreed to increase the number of TA providers to
55 from 25 so that there can be one from each state and the
District of Columbia, Puerto Rico, the U.S. Virgin Islands,
Guam, and American Samoa. In addition, to reflect the impact of
inflation and increased costs, the Committee raised the maximum
grant amount to each TA provider from $125,000 to $200,000.
During a Committee field hearing on the Microloan Program
in Boston in 1998 and a Committee Roundtable in 1999, witnesses
underscored the need to make the program more accessible to
more borrowers across the country, whether they live in a rural
or urban area. Currently, there are 163 intermediaries out of
the 200 Congressionally authorized. Two states--Louisiana and
Wyoming--do not have any Microloan intermediaries, and an
effort is underway to find appropriate participants. While
inadequate appropriations for technical assistance are
partially to blame for the inability of the program to grow and
add intermediaries, the industry groups, local economic
development leaders and the SBA asked Congress to expand the
program. P.L. 106-554 not only increased the authorization
level for direct microloans and technical assistance for each
of the next three years to allow the program to expand, but it
also increased the number of intermediaries authorized.
Starting in FY2001, SBA is authorized to fund 300
intermediaries. The changes provide SBA with the tools to make
this program available nationwide.
The Microloan Program Improvement Act of 2001 (S. 174)
By approving the ``Microloan Program Improvement Act of
2001'' (S. 174), the Committee adopted a number of changes to
make the program more flexible. First, S. 174 would eliminate
the requirement that intermediaries make ``short-term'' loans.
This change will give intermediaries greater latitude to
develop microloan products by offering their borrowers
revolving lines of credit, such as for seasonal contract needs.
Second, S. 174 would broaden the eligibility criteria for
intermediaries. Instead of requiring intermediaries to have one
year of experience making microloans to startup, newly
established or growing small businesses and providing technical
assistance to its borrowers, this legislation would deem a
prospective intermediary eligible if it has ``equivalent
experience.'' SBA has nearly 10 years of experience running
this program, and we expect the Agency will adopt a reasonable
definition for ``equivalent experience.''
Third, S. 174 would eliminate the restriction on how much
technical assistance funding an intermediary can use for pre-
loan assistance. Currently, intermediaries are limited to using
25 percent of their technical assistance funds to assist
prospective borrowers. This change shifts the responsibility to
the lender to determine how to allocate technical assistance
appropriately.
Fourth, S. 174 would increase the percentage of technical
assistance grant funds that an intermediary can use for
subcontracting technical assistance. Currently, intermediaries
can only subcontract 25 percent, and the bill would raise the
threshold to 35 percent.
Lastly, as Congress expands the program and increases the
number of SBA lending intermediaries around the country, the
Committee wants to insure that new intermediaries benefit from
lessons learned by other more experienced lending
intermediaries. Due to the relative youth of the microlending
industry, few conventional training resources are available to
prospective and new intermediaries. According to the National
Association of SBA Microloan Intermediaries, experienced SBA
microlenders are called upon frequently to assist new
intermediaries in addressing issues with their loan fund. The
issues might range from financial management and marketing to
targeting loan funds effectively to a population or business
sector.
While these experienced intermediaries do their best to
respond to the needs of their colleagues, they lack the
resources to respond effectively and efficiently to the growing
needs of the field. S. 174 addresses that need and includes a
new provision sponsored by Senators Olympia Snowe and Kerry
that would establish a peer-to-peer mentoring program for SBA
intermediaries and organizations seeking to become SBA
microlending intermediaries. Specifically, SBA would be allowed
to use up to $1 million of its annual appropriations for
technical assistance grants to subcontract with one or more
national trade associations of SBA microlending intermediaries
or eligible entities knowledgeable about, and experienced in,
microlending and related technical assistance, to provide peer-
to-peer mentoring. The Committee supports this concept because
it will help make the program available nationwide,while
maintaining its high quality and low loss rates.
II. Committee Vote
In compliance with rule XXVI(7)(b) of the Standing Rules of
the Senate, the following vote was recorded on February 28,
2001. A motion by Senator Bond to adopt S. 174, the Microloan
Program Improvement Act of 2001 was approved by recorded vote,
18-0, with the following Senators voting in the affirmative:
Bond, Kerry, Burns, Bennett, Snowe, Enzi, Fitzgerald, Crapo,
Allen, Ensign, Levin, Harkin, Lieberman, Wellstone, Cleland,
Landrieu, Edwards, and Cantwell.
III. 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.
IV. 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.
V. 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 discussed in the
following letter from the Congressional Budget Office.
U.S. Congress,
Congressional Budget Office,
Washington, DC, March 16, 2001.
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. 174, the Microloan
Program Improvement Act of 2001.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Ken Johnson.
Sincerely,
Barry B. Anderson
(For Gen. Dan L. Crippen, Director).
Enclosure.
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
S. 174--Microloan Program Improvement Act of 2001
S. 174 would make certain changes to the microloan program
operated by the Small Business Administration (SBA). Under the
microloan program, the SBA provides grants, loans, and loan
guarantees to nonprofit organizations, which use the funds to
provide small businesses with technical assistance and loans.
The bill would amend certain restrictions in current law on how
the nonprofit organizations can spend the technical assistance
grants they receive under the microloan program. Also, the bill
would authorize the SBA to earmark up to $1 million for
subcontracts with national trade associations to offer peer
counseling for the nonprofit organizations.
Based on information from the SBA, CBO expects that the
bill would not have a significant effect on the amounts
authorized for technical assistance grants under the microloan
program or on the rate at which funds are spent. Therefore, we
estimate that S. 174 would not have a significant impact on the
federal budget. Because the bill would not affect direct
spending or receipts, pay-as-you-go procedures would not apply.
S. 174 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.
The CBO staff contact is Ken Johnson. This estimate was
approved by Peter H. Fontaine, Deputy Assistant Director for
Budget Analysis.
VI. Section-By-Section Analysis
Section 1. Sets for the title of the bill, the ``Microloan
Program Improvement Act of 2001.''
Section 2. Subsection (a)(1) would eliminate the
requirement that intermediaries make ``short-term'' loans. This
change would allow Microloan intermediaries greater latitude in
developing microloan products by offering their borrowers
revolving lines of credit, such as for seasonal contract needs.
Subsection (a)(2) would broaden the eligibility criteria
for Microloan intermediaries. Current law requires
intermediaries to have one year of experience making microloans
to startup, newly established or growing small businesses and
providing technical assistance to its borrowers. This provision
would deem a prospective intermediary eligible if it has
``equivalent'' experience, which would be defined by SBA.
Subsection (a)(3) would eliminate the restriction on how
much technical assistance funding an intermediary can use for
pre-loan assistance. Under current law, intermediaries are
limited to using 25 percent of the technical assistance to
assist prospective borrowers. This provision would allow an
intermediary to allocate as much of its technical assistance as
it deems appropriate.
This subsection would also increase the percentage of
technical assistance that an intermediary can use to contract
out technical assistance. Currently, intermediaries can only
contract out 25 percent; this provision would raise the limit
to 35 percent.
Subsection (a)(4) would establish a peer-to-peer mentoring
program for SBA Microloan intermediaries and organizations
seeking to become Microloan intermediaries. This provision
would allow SBA to use up to $1 million of its annual
appropriations for technical assistance grants to subcontract
with one or more national trade associations of SBA Mircoloan
intermediaries or other entities knowledgeable about, and
experienced in, microlending and related technical experience
to provide peer-to-peer mentoring.