[Senate Report 107-249]
[From the U.S. Government Publishing Office]
Calendar No. 558
107th Congress Report
SENATE
2d Session 107-249
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INDIAN FINANCING AMENDMENTS ACT OF 2002
_______
August 28, 2002.--Ordered to be printed
_______
Mr. Inouye, from the Committee on Indian Affairs, submitted the
following
R E P O R T
[To accompany S. 2017]
The Committee on Indian Affairs, to which was referred the
bill (S. 2017) to amend the Indian Financing Act of 1974 to
improve the effectiveness of the Indian loan guarantee and
insurance program, having considered the same, reports
favorably thereon with an amendment and recommends that the
bill (as amended) do pass.
Purpose
The purpose of S. 2017 is to direct the Secretary of the
Interior (Secretary) to establish a secondary market for the
Indian Loan Guaranty Fund that is administered through the
Bureau of Indian Affairs.
Background
Despite a national unemployment rate of 5.6%, the jobless
rate in Native American communities hovers around 50%, with
some Indian economies experiencing unemployment rates near 80%.
These rates are nearly twice that of the national unemployment
rate in the Great Depression of the 1930's.
Despite recent success with casino gaming, energy and
natural resource development, and other initiatives, most
tribal communities still suffer a lack of jobs, high
unemployment, intense poverty and a lack of physical
infrastructure.
Given the near-complete absence of private sector
enterprises in reservation communities, nearly one in three
American Indians and Alaska Natives, or 31.2% lives in poverty.
The earning capacity of Native communities also lags behind
that of other Americans. For every $100 earned by the average
American family, an Indian family earns $62. Additionally, the
average annual per capita income for Indians is $8,284, far
less than that for other Americans.
The challenges to economic development in Native
communities are legion but one key component is a dearth of
financial capital. It is well documented that Native
entrepreneurs lack access to capital for both home mortgages
and commercial purposes.\1\
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\1\ See General Accounting Office (GAO) Report on Access to Capital
(December 2001); see also the Report of the ``Native Lending Study'',
published by the Treasury Department's Community Development Financial
Institutions Fund, November 2001.
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In the Community Development Banking and Financial
Institutions Act of 1994, 12 U.S.C. 4701, Congress found that,
``many of the nation's urban, rural and Native American
communities face critical social and economic problems arising
in part from the lack of economic growth, people living in
poverty, and the lack of employment and other opportunities.''
In response to these findings, the November, 2001,
Community Development Financial Institutions (CDFI) Report
noted a key factor in Native American communities is the lack
of a financial services sector. The CDFI Report found that 61%
of Native American respondents to the survey reported that
business loans were rated as ``impossible'' or ``difficult'' to
obtain.
In addition, a recent study by the General Accounting
Office (GAO) noted that access to capital is difficult for both
Indian tribes and Native people because of, among other
reasons, insufficient collateral. Consequently, Natives have
difficulty making funds available to meet the matching fund
requirements of many Federal economic development programs.\2\
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\2\ See General Accounting Office (GAO) Report on Economic
Development: Federal Assistance Programs for American Indians and
Alaska Natives, December 2001.
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In response to the need to increase economic development
activity on Indian lands, Congress enacted the Indian Financing
Act of 1974, Pub. L. 93-262; 25 U.S.C. 1451 et seq. which
established the Indian Loan Guaranty and Insurance Fund to
provide Native Americans access to private money sources that
would otherwise be unavailable.
The loan guaranty mechanism, of course, is not a new
creation. The financial community long ago developed a system
to respond to the need to encourage capital access. The system
is that creation of a secondary market for loans made by
originating lenders. This is the cornerstone for the nation's
private mortgage market and the core function of the Federal
National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac). A secondary market is
also an important part of commercial lending.
The IFA's Loan Guaranty and Insurance Fund program
authorizes the Secretary of the Interior to guaranty or insure
loans made by private lenders to individual Indians and Indian
tribes. The purpose of a Federal loan guaranty is to provide
financial incentives to the private lending community to engage
clients and customers that are traditionally under-served.
Under the current Indian Loan Guaranty and Insurance
program, the investor is not guaranteed payment if the borrower
defaults on a small business loan, with little incentive for a
secondary market investor to purchase these BIA-backed loans at
the present time. So while the originating lender may be
protected up to 90% of the loan value, the secondary market
investor is not. The Secretary is authorized to guarantee not
more than 90% on any loan.
The creation in the early 1970's of the Government National
Mortgage Association (Ginnie Mae) made it possible to provide
credit support for Federal Housing Administration (FHA) and
Veterans Administration (VA) mortgages. In turn, this made it
possible for home mortgage lenders to sell loans into the
secondary market. Secondary market investors can purchase a
number of these loans, pool them and then auction off pieces of
the pool. This tends to spread and minimize the risk of default
among a number of investors. Secondary market activities have
also grown in the markets for a wide range of other traded
securities. It is now common for lenders to sell car loans,
credit card notes, lease contracts, and intellectual property
royalties.
Lenders report much difficulty in selling Native American
small business loans in a secondary market and having vital
capital tied up on existing Native American loans without the
ability to liquidate them in order to make new loans.
S. 2017 establishes a procedure by which the ownership of
portions of BIA loans are transferred from the original lender
to the secondary market. The rights and obligations of owning
the loan, including the liability for default, are transferred
to any person that wishes to pay for the entire loan. Persons
who wish to pay only up to 90% of the value of the loan do not
incur liability for default, which would continue to rest with
the 10% value of the original lender's interest.
Once the loan is sold, the original lender would notify the
BIA of the sale of that loan. The lender would remain obligated
under the original guarantee agreement between the original
lender and the BIA. The original lender would continue to be
responsible for servicing the loan and would remain the secured
creditor of record.
With every loan that is sold to a secondary investor, the
full faith and credit of the United States is provided and
serves as a guaranty to the secondary market investor that if
the borrower defaults on the loan, the investor will continue
to be paid.
Summary of Substitute to S. 2017
As introduced, S. 2017 establishes a secondary market for
the Indian Loan Guaranty Fund authorized by the Indian
Financing Act of 1974. A section-by-section description of the
changes contained in the substitute amendment follows.
Section 1. Short title
This Act may be cited as the ``Indian Financing Amendments
Act of 2002''.
Section 2. Findings and purposes
This section states the findings and purposes of S.2 017
and notes the reasons why there is a need to establish a
secondary market program for both the Indian Loan Guaranty Fund
and the Indian Loan Insurance Program.
Section 3. Amendments to the Indian Financing Act
This section sets forth the procedures necessary to
establish a secondary market for both the Indian Loan Guaranty
Fund and the Indian Loan Insurance Program. The Indian Loan
Guaranty Fund provides Federal guarantees for Indian small
business loans by either an individual Indian (up to $1.5
million) or by an Indian tribe or tribal entity (up to $5.5
million). The Indian Loan Insurance Program provides Federal
guarantees for Individual Indian small business loans (up to
$100,000).
The Indian Loan Insurance Program limitation on loan
amounts is changed from $100,000 to $250,000.
The full faith and credit clause to guarantee loans in both
the Loan Guaranty Fund and the Loan Insurance Program applies
to all future loans made under either program. Current loans
existing within the program will not fall under this
legislation.
Legislative History
The Indian Financing Amendments Act of 2002 (S. 2017) was
introduced on March 14, 2002, by Senator Campbell, for himself,
and for Senator Inouye. Subsequentto March 14, Senators
Domenici, and Johnson were added as co-sponsors. S. 2017 was referred
to the Committee on Indian Affairs and a hearing was held on the bill
on April 24, 2002. On July 30, 2002, the Committee on Indian Affairs
convened a business meeting to consider S. 2017 and other measures that
had been referred to it, and on that date, the Committee favorably
reported a substitute amendment to S. 2017.
Committee Recommendation and Tabulation of Vote
On July 30, 2002, the Committee on Indian Affairs, in an
open business session, adopted an amendment in the nature of a
substitute to S. 2017 by voice vote and ordered the bill, as
amended, reported favorably to the Senate.
Cost and Budgetary Consideration
The cost estimate for S. 2017 as calculated by the
Congressional Budget Office, is set forth below:
U.S. Congress,
Congressional Budget Office,
Washington, DC, August 27, 2002.
Hon. Daniel K. Inouye,
Chairman, Committee on Indian Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 2017, the Indian
Financing Amendments Act of 2002.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Lanette J.
Walker.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
S. 2017--Indian Financing Amendments Act of 2002
S. 2017 would allow lenders of any loans guaranteed or
insured under the Indian Financing Act of 1974 to sell such
loans to the secondary market. CBO estimates that implementing
this bill would have no significant budgetary impact. Because
the legislation could affect direct spending, pay-as-you-go
procedures would apply, but CBO estimates that such effects
would be insignificant.
Under this bill, loans transferred from lenders to
secondary markets would continue to be guaranteed and insured
by the federal government. Based on information from the
Department of the Interior (DOI), CBO estimates that the annual
cost of administering such transfers would be negligible over
the 2003-2007 period. Any costs incurred by DOI to administer
the program would be subject to the availability of
appropriated funds.
S. 2017 also would authorize the Secretary of the Interior
to collect a fee for any guaranteed or insured loan being
transferred. Allowing the Secretary to impose fees on such
transfers could reduce the subsidy cost of the guarantees and
insurance the DOI has provided for existing loans under the
Indian Financing Act. Based on information from DOI, CBO
estimates that the change in direct spending would be
negligible, however, because it is unlikely that the department
would collect these fees.
S. 2017 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.
This estimate was approved by Peter H. Fontaine, Deputy
Assistant Director for Budget Analysis. The CBO staff contact
for this estimate is Lanette J. Walker.
Regulatory Impact Statement
Paragraph 11(b) of rule XXVI of the Standing Rules of the
Senate requires that reach report accompanying a bill to
evaluate the regulatory paperwork impact that would be incurred
in implementing the legislation. The Committee has concluded
that enactment of S. 2017 will create only de minimis
regulatory or paperwork burdens.
Executive Communications
The Committee has received no official communication from
the Administration on the provisions of the bill.
Changes in Existing Law
In compliance with subsection 12 of rule XXVI of the
Standing Rules of the Senate, the Committee states that the
enactment of S. 2017 will result in the following changes in 25
U.S.C. Sec. 1451 et seq., with existing language which is to be
deleted in black brackets and the new language to be added in
italic:
Be it enacted by the Senate and House of Representative of
the United States of America in Congress assembled,
Short Title.--This Act may be cited at the ``Indian
Financing Act Amendments of 2002''.
Findings and Purpose.--* * *
(A) Findings.--Congress finds that--
(i) the Indian Financing Act of 1974
(25 U.S.C. 1451 et seq.) was intended
to provide Native American borrowers
with access to commercial capital
sources that, but for that Act, would
not be available through loans
guaranteed by the Secretary of the
Interior;
(ii) although the Secretary of the
Interior has made loan guarantees
available, acceptance of loan
guarantees by lenders to benefit Native
American business owners has been
limited;
(iii) 27 years after enactment of the
Act, the promotion and development of
Native American business remains an
essential foundation growth of economic
and social stability of Native
Americans;
(iv) acceptance by lenders of the
loan guarantees may be limited by
liquidity and other capital market-
driven concerns; and
(v) it is in the best interest of
the guaranteed loan program to--
i. encourage the orderly
development and expansion of a
secondary market for loans
guaranteed by the Secretary;
and
ii. expand the number of
lenders originating loans under
that Act.
(B) Purpose.--The purposes of this Act are--
(i) to stimulate the use by lenders
of secondary market investors for loans
guaranteed by the Secretary of the
interior;
(ii) to preserve the authority of the
Secretary to administer the program and
regulate lenders;
(iii) to clarify that a good faith
investor in loans guaranteed by the
Secretary will receive appropriate
payments;
(iv) to provide for the appointment
by the Secretary of a qualified fiscal
transfer agent to administer a system
for the orderly transfer of the loans;
(v) to authorize the Secretary to--
i. promulgate regulations to
encourage and expand a
secondary market program for
loans guaranteed by the
Secretary; and
ii. allow the pooling of the
loans as the secondary
marketdevelops; and
(vi) to authorize the Secretary to
establish a schedule for assessing
lenders and investors for the necessary
costs of the fiscal transfer agent and
system.
* * * * * * *
25 U.S.C. 1485
(a) In General.--Any loan guaranteed under this subchapter,
including the security given for such loan, may be sold or
assigned by the lender to any persons.
(b) Transfer of Loans and Unguaranteed Portions of Loans.--
(1) Transfer.--
(A) In general.--The lender of a loan
guaranteed under this title may transfer to any
person--
(i) all of the rights and obligations
of the lender under the loan, or in an
unguaranteed portion of the loan; and
(ii) the security given for the loan
or unguaranteed portion.
(B) Regulations.--A transfer under
subparagraph (A) shall be consistent with such
regulations as the Secretary shall promulgate
under subsection (g).
(C) Notice.--A lender that completes a
transfer under subparagraph (a) shall give
notice of the transfer to the Secretary (or a
designee of the Secretary).
(2) Effect of transfer.--On any transfer under this
subsection, the transferee shall--
(A) be considered to be the lender under this
title;
(B) become the secured party of record; and
(C) be responsible for--
(i) performing the duties of the
lender; and
(ii) servicing the loan or portion of
the loan, as appropriate, in accordance
with the terms of guarantee of the
Secretary of the loan or portion of the
loan.
(D) Transfer of guaranteed portions of
loans.--
(i) Transfer.--
i. In general.--The lender of
a loan guaranteed under this
title, and any subsequent
transferee of all or part of
the guaranteed portion of the
loan, may transfer to any
person--
(i) all or part of the guaranteed
portion of the loan; and
(ii) the security given for the
guaranteed portion transferred.
ii. Regulations.--A transfer
under subparagraph (A) shall be
consistent with such
regulations as the Secretary
shall promulgate under
subsection (g).
iii. Notice.--A lender that
completes a transfer under
subparagraph (A) shall give
notice of the transfer to the
Secretary (or a designee of the
Secretary).
iv. Acknowledgement.--On
receipt of notice of a transfer
under subparagraph (C), the
Secretary (or a designee of the
Secretary) shall issue to the
transferee the acknowledgement
of the Secretary of--
(i) the transfer; and
(ii) the interest of the transferee
in the guaranteed portion of a loan
that was transferred.
(ii) Effect.--Notwithstanding any
other provision of law, with respect to
any transfer under this subsection, the
lender shall--
i. remain obligated under the
guarantee agreement between the
lender and the Secretary;
ii. continue to be
responsible for servicing the
loan in a manner consistent
with the guarantee agreement;
and
iii. remain the secured
creditor of record.
(E) Full faith and credit.--
(i) In general.--The full faith and
credit of the United States is pledged
to the payment of all loan guarantees
made under this title.
(ii) Validity.--
i. In general.--Except as
provided in subparagraph (B),
the validity of a guarantee of
a loan under this title shall
be incontestable if the
guarantee is held by a
transferee of a guaranteed
obligation whose interest in a
guaranteed loan has been
acknowledged by the Secretary
(or a designee of the
Secretary) under subsection
(c)(1)(D).
ii. Fraud or
misrepresentation.--
Subparagraph (A) shall not
apply in a case in which the
Secretary determines that a
transferee of a loan or a
portion of a loan transferred
under this section has actual
knowledge of fraud
ormisrepresentation, or participates in or condones fraud or
misrepresentation, in connection with the loan.
(F) Damages.--The Secretary may recover from
a lender any damages suffered by the Secretary
as a result of a material breach of an
obligation of the lender under the guarantee of
the loan.
(G) Fee.--The Secretary may collect a fee for
any loan or guaranteed portion of a loan
transferred in accordance with subsection (b)
or (c).
(H) Regulations.--Not later than 180 days
after the date of enactment of this subsection,
the Secretary shall promulgate such regulations
as are necessary to facilitate, administer, and
promote the transfer of loans and guaranteed
portions of loans under this section.
(I) Central Registration.--On promulgation of
final regulations under subsection (g), the
Secretary shall--
(i) provide for the central
registration of all loans transferred
under this section; and
(ii) contract with a fiscal transfer
agent--
i. to act as a designee of
the Secretary; and
ii. on behalf of the
Secretary--
(i) to carry out the central
registration and paying agent
functions; and
(ii) to issue acknowledgements of the
Secretary under subsection (c)(1)(D).
(J) Pooling.--
(i) In general.--Nothing in this
title prohibits the pooling of whole
loans, or portions of loans,
transferred under this section.
(ii) Regulations.The Secretary may
promulgate regulations to effect
orderly and efficient pooling
procedures under this title.
* * * * * * *