[Senate Report 107-18]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 55
107th Congress                                                   Report
                                 SENATE
 1st Session                                                     107-18

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



 
               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.

                                
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