[House Report 108-153]
[From the U.S. Government Publishing Office]



108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    108-153

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



 
       PREMIER CERTIFIED LENDERS PROGRAM IMPROVEMENT ACT OF 2003

                                _______
                                

 June 12, 2003.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

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

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 923]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Small Business, to whom was referred the 
bill (H.R. 923) to amend the Small Business Investment Act of 
1958 to allow certain premier certified lenders to elect to 
maintain an alternative loss reserve, having considered the 
same, report favorably thereon with an amendment and recommend 
that the bill as amended do pass.

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Premier Certified Lenders Program 
Improvement Act of 2003''.

SEC. 2. LOSS RESERVES OF PREMIER CERTIFIED LENDERS TEMPORARILY 
                    DETERMINED ON THE BASIS OF OUTSTANDING BALANCE OF 
                    DEBENTURES.

  Paragraph (6) of section 508(c) of the Small Business Investment Act 
of 1958 (15 U.S.C. 697e(c)) is amended--
          (1) by striking ``The Administration'' and inserting the 
        following:
                  ``(A) In general.--The Administration''; and
          (2) by adding at the end the following new subparagraph:
                  ``(B) Temporary reduction based on outstanding 
                balance.--Notwithstanding subparagraph (A), during the 
                2-year period beginning on the date that is 90 days 
                after the date of the enactment of this subparagraph, 
                the Administration shall allow the certified 
                development company to withdraw from the loss reserve 
                such amounts as are in excess of 1 percent of the 
                aggregate outstanding balances of debentures to which 
                such loss reserve relates. The preceding sentence shall 
                not apply with respect to any debenture before 100 
                percent of the contribution described in paragraph (4) 
                with respect to such debenture has been made.''.

SEC. 3. ALTERNATIVE LOSS RESERVE PILOT PROGRAM FOR CERTAIN PREMIER 
                    CERTIFIED LENDERS.

  (a) In General.--Subsection (c) of section 508 of the Small Business 
Investment Act of 1958 (15 U.S.C. 697e) is amended by adding at the end 
the following new paragraphs:
          ``(7) Alternative loss reserve.--
                  ``(A) Election.--With respect to any eligible 
                calendar quarter, any qualified high loss reserve PCL 
                may elect to have the requirements of this paragraph 
                apply in lieu of the requirements of paragraphs (2) and 
                (4) for such quarter.
                  ``(B) Contributions.--
                          ``(i) Ordinary rules inapplicable.--Except as 
                        provided under clause (ii) and paragraph (5), a 
                        qualified high loss reserve PCL that makes the 
                        election described in subparagraph (A) with 
                        respect to a calendar quarter shall not be 
                        required to make contributions to its loss 
                        reserve during such quarter.
                          ``(ii) Based on loss.--A qualified high loss 
                        reserve PCL that makes the election described 
                        in subparagraph (A) with respect to any 
                        calendar quarter shall, before the last day of 
                        such quarter, make such contributions to its 
                        loss reserve as are necessary to ensure that 
                        the amount of the loss reserve of the PCL is--
                                  ``(I) not less than $100,000; and
                                  ``(II) sufficient, as determined by a 
                                qualified independent auditor, for the 
                                PCL to meet its obligations to protect 
                                the Federal Government from risk of 
                                loss.
                          ``(iii) Certification.--Before the end of any 
                        calendar quarter for which an election is in 
                        effect under subparagraph (A), the head of the 
                        PCL shall submit to the Administrator a 
                        certification that the loss reserve of the PCL 
                        is sufficient to meet such PCL's obligation to 
                        protect the Federal Government from risk of 
                        loss. Such certification shall be in such form 
                        and submitted in such manner as the 
                        Administrator may require and shall be signed 
                        by the head of such PCL and the auditor making 
                        the determination under clause (ii)(II).
                  ``(C) Disbursements.--
                          ``(i) Ordinary rule inapplicable.--Paragraph 
                        (6) shall not apply with respect to any 
                        qualified high loss reserve PCL for any 
                        calendar quarter for which an election is in 
                        effect under subparagraph (A).
                          ``(ii) Excess funds.--At the end of each 
                        calendar quarter for which an election is in 
                        effect under subparagraph (A), the 
                        Administration shall allow the qualified high 
                        loss reserve PCL to withdraw from its loss 
                        reserve the excess of--
                                  ``(I) the amount of the loss reserve, 
                                over
                                  ``(II) the greater of $100,000 or the 
                                amount which is determined under 
                                subparagraph (B)(ii) to be sufficient 
                                to meet the PCL's obligation to protect 
                                the Federal Government from risk of 
                                loss.
                  ``(D) Recontribution.--If the requirements of this 
                paragraph apply to a qualified high loss reserve PCL 
                for any calendar quarter and cease to apply to such PCL 
                for any subsequent calendar quarter, such PCL shall 
                make a contribution to its loss reserve in such amount 
                as the Administrator may determine provided that such 
                amount does not exceed the amount which would result in 
                the total amount in the loss reserve being equal to the 
                amount which would have been in such loss reserve had 
                this paragraph never applied to such PCL. The 
                Administrator may require that such payment be made as 
                a single payment or as a series of payments.
                  ``(E) Risk management.--If a qualified high loss 
                reserve PCL fails to meet the requirement of 
                subparagraph (F)(iii) during any period for which an 
                election is in effect under subparagraph (A) and such 
                failure continues for 180 days, the requirements of 
                paragraphs (2), (4), and (6) shall apply to such PCL as 
                of the end of such 180-day period and such PCL shall 
                make the contribution to its loss reserve described in 
                subparagraph (D). The Administrator may waive the 
                requirements of this subparagraph.
                  ``(F) Qualified high loss reserve pcl.--The term 
                `qualified high loss reserve PCL' means, with respect 
                to any calendar year, any premier certified lender 
                designated by the Administrator as a qualified high 
                loss reserve PCL for such year. The Administrator shall 
                not designate a company under the preceding sentence 
                unless the Administrator determines that--
                          ``(i) the amount of the loss reserve of the 
                        company is not less than $100,000;
                          ``(ii) the company has established and is 
                        utilizing an appropriate and effective process 
                        for analyzing the risk of loss associated with 
                        its portfolio of PCLP loans and for grading 
                        each PCLP loan made by the company on the basis 
                        of the risk of loss associated with such loan; 
                        and
                          ``(iii) the company meets or exceeds 4 or 
                        more of the specified risk management 
                        benchmarks as of the most recent assessment by 
                        the Administration or the Administration has 
                        issued a waiver with respect to the requirement 
                        of this clause.
                  ``(G) Specified risk management benchmarks.--For 
                purposes of this paragraph, the term `specified risk 
                management benchmarks' means the following rates, as 
                determined by the Administrator:
                          ``(i) Currency rate.
                          ``(ii) Delinquency rate.
                          ``(iii) Default rate.
                          ``(iv) Liquidation rate.
                          ``(v) Loss rate.
                  ``(H) Qualified independent auditor.--For purpose of 
                this paragraph, the term `qualified independent 
                auditor' means any auditor who--
                          ``(i) is compensated by the qualified high 
                        loss reserve PCL;
                          ``(ii) is independent of such PCL; and
                          ``(iii) has been approved by the 
                        Administrator during the preceding year.
                  ``(I) PCLP loan.--For purposes of this paragraph, the 
                term `PCLP loan' means any loan guaranteed under this 
                section.
                  ``(J) Eligible calendar quarter.--For purposes of 
                this paragraph, the term `eligible calendar quarter' 
                means--
                          ``(i) the first calendar quarter that begins 
                        after the end of the 90-day period beginning 
                        with the date of the enactment of this 
                        paragraph; and
                          ``(ii) the 7 succeeding calendar quarters.
                  ``(K) Calendar quarter.--For purposes of this 
                paragraph, the term `calendar quarter' means--
                          ``(i) the period which begins on January 1 
                        and ends on March 31 of each year;
                          ``(ii) the period which begins on April 1 and 
                        ends on June 30 of each year;
                          ``(iii) the period which begins on July 1 and 
                        ends on September 30 of each year; and
                          ``(iv) the period which begins on October 1 
                        and ends on December 31 of each year.
                  ``(L) Regulations.--Not later than 45 days after the 
                date of the enactment of this paragraph, the 
                Administrator shall publish in the Federal Register and 
                transmit to the Congress regulations to carry out this 
                paragraph. Such regulations shall include provisions 
                relating to--
                          ``(i) the approval of auditors under 
                        subparagraph (H); and
                          ``(ii) the designation of qualified high loss 
                        reserve PCLs under subparagraph (F), including 
                        the determination of whether a process for 
                        analyzing risk of loss is appropriate and 
                        effective for purposes of subparagraph (F)(ii).
          ``(8) Bureau of pclp oversight.--
                  ``(A) Establishment.--There is hereby established in 
                the Small Business Administration a bureau to be known 
                as the Bureau of PCLP Oversight.
                  ``(B) Purpose.--The Bureau of PCLP Oversight shall 
                carry out such functions of the Administration under 
                this subsection as the Administrator may designate.
                  ``(C) Deadline.--Not later than 90 days after the 
                date of the enactment of this Act--
                          ``(i) the Administrator shall ensure that the 
                        Bureau of PCLP Oversight is prepared to carry 
                        out any functions designated under subparagraph 
                        (B), and
                          ``(ii) the Office of the Inspector General of 
                        the Administration shall report to the Congress 
                        on the preparedness of the Bureau of PCLP 
                        Oversight to carry out such functions.''.
  (b) Increased Reimbursement for Losses Related to Debentures Issued 
During Election Period.--Subparagraph (C) of section 508(b)(2) of the 
Small Business Investment Act of 1958 (15 U.S.C. 697e(b)(2)) is amended 
by inserting ``(15 percent in the case of any such loss attributable to 
a debenture issued by the company during any period for which an 
election is in effect under subsection (c)(7) for such company)'' 
before ``; and''.
  (c) Conforming Amendments.--
          (1) Subparagraph (D) of section 508(b)(2) of the Small 
        Business Investment Act of 1958 (15 U.S.C. 697e(b)(2)) is 
        amended by striking ``subsection (c)(2)'' and inserting 
        ``subsection (c)''.
          (2) Paragraph (5) of section 508(c) of the Small Business 
        Investment Act of 1958 (15 U.S.C. 697e(c)) is amended by 
        striking ``10 percent''.
  (d) Study and Report.--
          (1) In general.--The Administrator shall enter into a 
        contract with a Federal agency experienced in community 
        development lending and financial regulation or with a member 
        of the Federal Financial Institutions Examinations Council to 
        study and prepare a report regarding--
                  (A) the extent to which statutory requirements have 
                caused overcapitalization in the loss reserves 
                maintained by certified development companies 
                participating in the Premier Certified Lenders Program 
                established under section 508 of the Small Business 
                Investment Act of 1958 (15 U.S.C. 697e); and
                  (B) alternatives for establishing and maintaining 
                loss reserves that are sufficient to protect the 
                Federal Government from the risk of loss associated 
                with loans guaranteed under such Program.
          (2) Transmission of report.--The report described in 
        paragraph (1) shall be transmitted to the Committee on Small 
        Business of the House of Representatives and the Committee on 
        Small Business and Entrepreneurship of the Senate not later 
        than 90 days after the date of the enactment of this Act.
          (3) Limitation.--The amount of the contract described in 
        paragraph (1) shall not exceed $75,000.

                         Purpose of Legislation

    The purpose of this legislation is to amend the Small 
Business Investment Act of 1958 to allow certain Premier 
Certified Lenders (PCL) under the Small Business 
Administration's (SBA) 504 Certified Development Company (CDC) 
Program, to elect to maintain an alternative loss reserve.

                  Background and Need for Legislation

    In the 1990's Congress made a variety of changes to SBA's 
504 CDC Program to lower the default rate and eliminate its 
annual appropriation so that it operates solely on user-fees. 
The 504 CDC Program provides small businesses with long-term, 
fixed-rate financing for the purchase of fixed assets such as 
land, buildings, and equipment generally for business expansion 
purposes. The loans are made by CDCs, usually non-profit 
corporations organized to contribute to the economic 
development of a particular community or region.
    Unlike the SBA's other main flagship access to credit 
program, the 7(a) general business loan guarantee program, 
there is a job-creation component to every CDC project before 
it is approved (usually, for every $35,000 guaranteed, one job 
has to be created or retained). The SBA guarantees debentures 
issued by a CDC for 40 percent of a project cost, up to $1 
million (or up to $1.3 million in certain cases if the project 
serves one of nine public policy goals). The debentures are 
sold on the market to private investors.
    To model a similar effort in the 7(a) program, Congress 
also established a Premier Certified Lender Program (PCLP) that 
gives discretion to certain qualified CDCs to approve 504 loans 
subject to the borrower being eligible and available loan 
authority. In return for this lower regulatory oversight, these 
PCLP CDCs must maintain a higher loss reserve (the amount of 
money set aside to cover bad loans) than regular CDCs.
    Some PCLP CDCs believe that this amount of reserves is well 
beyond what is prudently required because their vast experience 
in making 504 loans has caused them to become sophisticated in 
weeding out bad risks. Requiring PCLP CDCs to maintain 
unnecessarily large loss reserve accounts reduces their ability 
to serve additional small businesses and to attract new lenders 
to join the program.

                         Summary of Legislation

    The amendment in the nature of a substitute creates a two-
year Alternative Loss Reserve Pilot Program starting 90 days 
after enactment. The new program permits qualified CDCs that 
are a part of the PCLP to elect to use a risk-based approach to 
calculate their loan loss reserve requirements. It allows 
certain qualified PCLP CDCs to make withdrawals on a quarterly 
basis from their loan loss reserves in excess of the greater of 
$100,000 or the amount that is determined under the new program 
to be the proper loss reserve amount. PCLP CDCs not in the new 
pilot program may for a 2-year period withdraw from their loss 
reserves such amounts that are in excess of 1 percent of the 
total outstanding balances of debentures to which the loss 
reserve relates.
    In order to ensure that PCLP CDCs' loan loss reserves are 
sufficient to protect the Federal Government's interest, the 
substitute establishes a Bureau of PCLP Oversight within the 
Office of Lender Oversight. The substitute requires the SBA to 
draft rules for administration and oversight of the Alternative 
Loss Reserve Pilot Program. In addition, this substitute 
provides for a study to evaluate alternative loan loss reserve 
approaches.

                            Committee Action

    Representative John Doolittle (CA) introduced H.R. 923 in 
February with the purpose of allowing PCLP CDCs, like private 
sector banks, to use a risk-based management approach to 
calculate their loan loss reserve requirements. The bill was 
referred to the Committee. On March 22, 2003, the Committee 
held a hearingwith respect to SBA's financial programs that 
provided a forum for discussion of the 504 Loan Program and the 
provisions of H.R. 923. On Thursday, May 22, 2003, the Committee held a 
mark-up with respect to H.R. 923 at 9:30 a.m. in room 2360 of the 
Rayburn House Office Building. Mr. Manzullo, the Chairman of the 
Committee and Ms. Velazquez, the Ranking Democratic Member, offered an 
amendment in the nature of a substitute to H.R. 923. The amendment in 
the nature of a substitute was not further amended and H.R. 923, as so 
amended by the substitute, a quorum being present, was ordered 
favorably reported by voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the recorded 
votes on the motion to report legislation. There was no 
recorded vote taken in connection with ordering H.R. 923 
reported.

                      Committee Oversight Findings

    With respect to the requirements of clause 3(c)(1) of rule 
XIII of the Rules of the House of Representatives, the 
Committee's oversight findings are reflected in this report.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    With respect to the requirements of clause 3(c)(2) of rule 
XIII of the Rules of the House of Representatives, and section 
308(a) of the Congressional Budget Act of 1974, the Committee 
references the report of the Congressional Budget Office 
included below.

           Statement of Congressional Budget Office Estimate

    With respect to the requirements of clause 3(c)(3) of rule 
XIII of the Rules of the House of Representatives and section 
402 of the Congressional Budget Act of 1974, the Committee has 
received the cost estimate for H.R. 923 from the Director of 
the Congressional Budget Office as follows:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, June 5, 2003.
Hon. Donald Manzullo,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 923, the Premier 
Certified Lenders Program Improvement Act of 2003.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Melissa E. 
Zimmerman.
            Sincerely,
                                       Douglas Holtz-Eakin,
                                                          Director.
    Enclosure.

H.R. 923--Premier Certified Lenders Program Improvements Act of 2003

    H.R. 923 would make several changes to the loan program 
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. 923 would not have a significant impact on the federal 
budget. Enacting the bill would not affect revenues and would 
have no significant impact on direct spending. H.R. 923 
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. The Premier 
Certified Lenders Program allows a participating CDC the 
authority to review and approve loan requests and to foreclose, 
litigate, and liquidate loans made under the program. Under 
current law, CDC's can qualify as Premier Certified Lenders 
(PCLs) if, among other requirements, they agree to pay 10 
percent of SBA's potential loss on a defaulted 504 loan. A PCL 
must hold 10 percent of this potential loss (i.e., 1 percent of 
the total loan) in a reserve for the life of the loan.
    During a two-year pilot period, H.R. 923 would have two 
effects on the requirements for loss reserves under the PCLs 
Program. First, the bill would change the loss reserve 
requirement from 1 percent of the total value of the loan to 1 
percent of the total loan outstanding. PCLs would be allowed to 
withdraw any funds from their loss reserve in excess of this 
amount. Second, certain PCLs would have the option to maintain 
an alternate loss reserve level based on risk rather than a 
fixed percentage. The amount of the reserve would be determined 
by an independent, SBA-approved auditor. Under the bill, if a 
PCL chooses this option, it must pay 15 percent of SBA's total 
loss on defaulted CDC loans.
    Under current law, the Administrator of SBA must adjust an 
annual fee on CDC loans to produce an estimated subsidy rate of 
zero at the time the loans are guaranteed. Enacting H.R. 923 
could affect the subsidy rates for previous cohorts of CDC 
loans. Decreasing the loss reserve requirement for PCLs would 
cause SBA to collect a smaller amount of recoveries if a small 
business defaults on a loan and a PCL is unable to pay its 
portion of SBA's total loss. However, increasing the required 
loss coverage to 15 percent for PCLs who opt to maintain a loss 
reserve level based on risk would increase SBA's recoveries on 
default CDC loans. It is unclear if, taken together, those two 
effects would increase or decrease the average subsidy cost for 
previous CDC loans. However, CBO estimates that the net result 
of those two effects would not have a significant impact on the 
federal budget.
    H.R. 923 also would create a Bureau of PCL Program 
Oversight and require SBA to study and report to the Congress 
on the loss reserve requirements for PCLs. Based on information 
provided by SBA, CBO estimates that those provisions would cost 
less than $500,000, assuming appropriation of the necessary 
amounts.
    The CBO staff contact for this estimate is Melissa E. 
Zimmerman. This estimate was approved by Peter H. Fontaine, 
Deputy Assistant Director for Budget Analysis.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional authority for this legislation is provided in 
Article I, section 8 of the Constitution of the United States, 
which grants to Congress the power to enact this bill

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    The short title is the ``Premier Certified Lenders Program 
Improvement Act of 2003.''

Section 2. Loss reserves of Premier Certified Lenders temporarily 
        determined on the basis of outstanding balance of debentures

    Paragraph (6) of section 508(c) of the Small Business 
Investment Act of 1958 is amended by adding a new subparagraph 
(B) that permits the Administrator of the SBA to all PCLP CDCs 
to withdraw from loss reserves amounts that are in excess of 1 
percent of the total outstanding balance of the debentures to 
which the loss reserve is applicable. However, such withdrawal 
may not be made with respect to a debenture before 100 percent 
of the contributions (in cash or letters of credit) are made to 
the loss reserve attributable to that debenture. The reduction 
based on outstanding balance is temporary and is effective for 
a 2-year period beginning 90 days after enactment of the bill.

Section 3. Alternative Loss Reserve Pilot Program for certain Premier 
        Certified Lenders

    Subsection (c) of Section 508 of the Small Business 
Investment Act of 1958 is amended by adding a new paragraph (7) 
that creates a new alternative loss reserve which a qualified 
high loss reserve PCL may elect to implement with respect to 
any eligible calendar quarter. A qualified high loss reserve 
PCL that makes an election with respect to any calendar 
quarter, shall before the last day of such quarter, ensure that 
its loss reserve is no less than the greater of $100,000 or the 
loss reserve amount determined by an independent auditor to be 
sufficient to protect the Federal Government from risk of loss.
    Before the end of a calendar quarter for which an election 
is in effect, the head of the PCL and the auditor must certify 
to SBA that the loss reserve is sufficient to protect the 
Federal Government from risk of loss. The form and content of 
the certificate is to be established by the Administrator of 
the SBA. At the end of each calendar quarter for which an 
election is in effect, the Administrator may permit the 
qualified high loss reserve PCL to withdraw from the loss 
reserve any amounts in excess of the greater of $100,000 or the 
auditor certified loss reserve.
    In any subsequent quarter that the alternative loss reserve 
does not apply, the qualified high loss reserve PCL must make a 
contribution to its loss reserve as the Administrator shall 
determine, but not in excess of the loss reserve that would 
have been applicable had no election been made. The 
contributions may be in one lump sum or a series of payments, 
as the Administrator shall determine.
    To be designated by the Administrator as a ``qualified high 
loss reserve PCL,'' as defined in the Act, the PCL CDC must: 
(1) have a loss reserve that is not less than $100,000; (2) 
employ an established risk management system that analyses the 
risk of loss associated with its portfolio of loans and grades 
the risk of loss of each loan; and (3) meet or exceed 4 out of 
the 5 ``specified risk management benchmarks,'' as defined in 
the Act, i.e., currency rate, delinquency rate, default rate, 
liquidation rate, and loss rate. If the qualified high loss 
reserve PLC does not meet or exceed 4 out of 5 of the 
management benchmarks, and noncompliance lasts for 180 days, 
the PLC must make such payment(s) into the loss reserve to meet 
the usual loss reserve requirements. The Administrator may 
waive the requirement with respect to meeting the benchmarks.
    Also defined for purposes of the Alternative Loss Reserve 
Pilot Program are the terms ``qualified independent auditor,'' 
``PCLP loan,'' ``eligible calendar quarter,'' and ``calendar 
quarter.'' A ``qualified independent auditor'' means an auditor 
that is paid by the qualified high loss reserve PCL; is 
independent of such PCL; and has been approved by the 
Administrator during the preceding year. ``PCLP loan'' means 
any guaranteed 504 loan. ``Eligible calendar quarter'' means 
the first calendar quarter that begins after the end of the 90-
day period beginning with the date of enactment of the Act and 
ending 7 succeeding calendar quarters thereafter. The terms 
``calendar quarter'' means: (1) the period which begins on 
January 1 and ends on March 31 of each year; (2) the period 
that begins on April 1 and ends on June 30 of each year; (3) 
the period which begins on July 1 and ends on September 30 of 
each year; and (4) the period which begins on October 1 and 
ends on December 31 of each year.
    The Administrator has 45 days to issue and implement final 
regulations required to administer and perform oversight of the 
Alternative Loss Reserve Pilot Program. The regulations shall 
be published in the Federal Register and transmitted to 
Congress. The regulations shall provide for, but not be limited 
to, the requirements that auditors must meet to be approved and 
the terms upon which a PCL may qualify for admittance to the 
Program, including the effectiveness of the PCL's risk 
management system.
    The Act would create a bureau within SBA dedicated to 
oversight of the Alternative Loss Reserve Pilot Program. The 
``Bureau of PCLP Oversight'' is to be staffed by persons 
presently employed by SBA. The Committee intends that the 
persons assigned to the Bureau would have expertise in 
oversight of 504 lending and be properly trained to perform the 
functions required. No additional amounts are authorized to be 
appropriated for this purpose. The Bureau is to be fully 
operative 90 days after enactment. The SBA Office of Inspector 
General is required to report to Congress on the preparedness 
of the Bureau.
    A qualified high loss reserve PCL must reimburse the 
Federal Government for 15 percent (an increase from 10 percent) 
of any loss attributable to a debenture issued by the company 
during any period for which an election is in effect. A study 
of the Alternative Loss Reserve Pilot Program is to be 
performed by a Federal agency experienced in community 
development lending and financial regulation or with a member 
of the Federal Financial Institutions Examinations Council. 
Members of the Council include: the Board of Governors of the 
Federal Reserve System, the Federal Deposit Insurance 
Corporation, the National Credit Union Administration, the 
Office of the Comptroller of the Currency, and the Office of 
Thrift Supervision. The study is to examine the extent to which 
statutory requirements have caused overcapitalization in the 
loss reserves maintained by CDCs participating in the PCLP. 
Also to be studied are the alternatives for establishing and 
maintaining loss reserves sufficient to protect the Federal 
Government from losses associated with guaranteeing securities 
issued under the PCLP. The study and report are to be completed 
and transmitted to the Committee on Small Business of the House 
of Representatives and the Committee on Small Business and 
Entrepreneurship of the Senate within 90 days of enactment of 
this Act. An amount not to exceed $75,000 is authorized for the 
study and report.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

        SECTION 508 OF THE SMALL BUSINESS INVESTMENT ACT OF 1958


SEC. 508. PREMIER CERTIFIED LENDERS PROGRAM.

  (a)  * * *
  (b) Requirements.--
          (1)  * * *
          (2) Designation.--The Administration may designate a 
        certified development company as a premier certified 
        lender--
                  (A)  * * *

           *       *       *       *       *       *       *

                  (C) if the company agrees to assume and to 
                reimburse the Administration for 10 percent of 
                any loss sustained by the Administration as a 
                result of default by the company in the payment 
                of principal or interest on a debenture issued 
                by such company and guaranteed by the 
                Administration under this section (15 percent 
                in the case of any such loss attributable to a 
                debenture issued by the company during any 
                period for which an election is in effect under 
                subsection (c)(7) for such company); and
                  (D) the Administrator determines, with 
                respect to the company, that the loss reserve 
                established in accordance with [subsection 
                (c)(2)] subsection (c) is sufficient for the 
                company to meet its obligations to protect the 
                Federal Government from risk of loss.

           *       *       *       *       *       *       *

  (c) Loss Reserve.--
          (1)  * * *

           *       *       *       *       *       *       *

          (5) Replenishment.--If a loss has been sustained by 
        the Administration, any portion of the loss reserve, 
        and other funds provided by the premier company as 
        necessary, may be used to reimburse the Administration 
        for the premier company's [10 percent] share of the 
        loss as provided in subsection (b)(2)(C). If the 
        company utilizes the reserve, within 30 days it shall 
        replace an equivalent amount of funds.
          (6) Disbursements.--[The Administration]
                  (A) In general.--The Administration shall 
                allow the certified development company to 
                withdraw from the loss reserve amounts 
                attributable to any debenture that has been 
                repaid.
                  (B) Temporary reduction based on outstanding 
                balance.--Notwithstanding subparagraph (A), 
                during the 2-year period beginning on the date 
                that is 90 days after the date of the enactment 
                of this subparagraph, the Administration shall 
                allow the certified development company to 
                withdraw from the loss reserve such amounts as 
                are in excess of 1 percent of the aggregate 
                outstanding balances of debentures to which 
                such loss reserve relates. The preceding 
                sentence shall not apply with respect to any 
                debenture before 100 percent of the 
                contribution described in paragraph (4) with 
                respect to such debenture has been made.
          (7) Alternative loss reserve.--
                  (A) Election.--With respect to any eligible 
                calendar quarter, any qualified high loss 
                reserve PCL may elect to have the requirements 
                of this paragraph apply in lieu of the 
                requirements of paragraphs (2) and (4) for such 
                quarter.
                  (B) Contributions.--
                          (i) Ordinary rules inapplicable.--
                        Except as provided under clause (ii) 
                        and paragraph (5), a qualified high 
                        loss reserve PCL that makes the 
                        election described in subparagraph (A) 
                        with respect to a calendar quarter 
                        shall not be required to make 
                        contributions to its loss reserve 
                        during such quarter.
                          (ii) Based on loss.--A qualified high 
                        loss reserve PCL that makes the 
                        election described in subparagraph (A) 
                        with respect to any calendar quarter 
                        shall, before the last day of such 
                        quarter, make such contributions to its 
                        loss reserve as are necessary to ensure 
                        that the amount of the loss reserve of 
                        the PCL is--
                                  (I) not less than $100,000; 
                                and
                                  (II) sufficient, as 
                                determined by a qualified 
                                independent auditor, for the 
                                PCL to meet its obligations to 
                                protect the Federal Government 
                                from risk of loss.
                          (iii) Certification.--Before the end 
                        of any calendar quarter for which an 
                        election is in effect under 
                        subparagraph (A), the head of the PCL 
                        shall submit to the Administrator a 
                        certification that the loss reserve of 
                        the PCL is sufficient to meet such 
                        PCL's obligation to protect the Federal 
                        Government from risk of loss. Such 
                        certification shall be in such form and 
                        submitted in such manner as the 
                        Administrator may require and shall be 
                        signed by the head of such PCL and the 
                        auditor making the determination under 
                        clause (ii)(II).
                  (C) Disbursements.--
                          (i) Ordinary rule inapplicable.--
                        Paragraph (6) shall not apply with 
                        respect to any qualified high loss 
                        reserve PCL for any calendar quarter 
                        for which an election is in effect 
                        under subparagraph (A).
                          (ii) Excess funds.--At the end of 
                        each calendar quarter for which an 
                        election is in effect under 
                        subparagraph (A), the Administration 
                        shall allow the qualified high loss 
                        reserve PCL to withdraw from its loss 
                        reserve the excess of--
                                  (I) the amount of the loss 
                                reserve, over
                                  (II) the greater of $100,000 
                                or the amount which is 
                                determined under subparagraph 
                                (B)(ii) to be sufficient to 
                                meet the PCL's obligation to 
                                protect the Federal Government 
                                from risk of loss.
                  (D) Recontribution.--If the requirements of 
                this paragraph apply to a qualified high loss 
                reserve PCL for any calendar quarter and cease 
                to apply to such PCL for any subsequent 
                calendar quarter, such PCL shall make a 
                contribution to its loss reserve in such amount 
                as the Administrator may determine provided 
                that such amount does not exceed the amount 
                which would result in the total amount in the 
                loss reserve being equal to the amount which 
                would have been in such loss reserve had this 
                paragraph never applied to such PCL. The 
                Administrator may require that such payment be 
                made as a single payment or as a series of 
                payments.
                  (E) Risk management.--If a qualified high 
                loss reserve PCL fails to meet the requirement 
                of subparagraph (F)(iii) during any period for 
                which an election is in effect under 
                subparagraph (A) and such failure continues for 
                180 days, the requirements of paragraphs (2), 
                (4), and (6) shall apply to such PCL as of the 
                end of such 180-day period and such PCL shall 
                make the contribution to its loss reserve 
                described in subparagraph (D). The 
                Administrator may waive the requirements of 
                this subparagraph.
                  (F) Qualified high loss reserve pcl.--The 
                term ``qualified high loss reserve PCL'' means, 
                with respect to any calendar year, any premier 
                certified lender designated by the 
                Administrator as a qualified high loss reserve 
                PCL for such year. The Administrator shall not 
                designate a company under the preceding 
                sentence unless the Administrator determines 
                that--
                          (i) the amount of the loss reserve of 
                        the company is not less than $100,000;
                          (ii) the company has established and 
                        is utilizing an appropriate and 
                        effective process for analyzing the 
                        risk of loss associated with its 
                        portfolio of PCLP loans and for grading 
                        each PCLP loan made by the company on 
                        the basis of the risk of loss 
                        associated with such loan; and
                          (iii) the company meets or exceeds 4 
                        or more of the specified risk 
                        management benchmarks as of the most 
                        recent assessment by the Administration 
                        or the Administration has issued a 
                        waiver with respect to the requirement 
                        of this clause.
                  (G) Specified risk management benchmarks.--
                For purposes of this paragraph, the term 
                ``specified risk management benchmarks'' means 
                the following rates, as determined by the 
                Administrator:
                          (i) Currency rate.
                          (ii) Delinquency rate.
                          (iii) Default rate.
                          (iv) Liquidation rate.
                          (v) Loss rate.
                  (H) Qualified independent auditor.--For 
                purpose of this paragraph, the term ``qualified 
                independent auditor'' means any auditor who--
                          (i) is compensated by the qualified 
                        high loss reserve PCL;
                          (ii) is independent of such PCL; and
                          (iii) has been approved by the 
                        Administrator during the preceding 
                        year.
                  (I) PCLP loan.--For purposes of this 
                paragraph, the term ``PCLP loan'' means any 
                loan guaranteed under this section.
                  (J) Eligible calendar quarter.--For purposes 
                of this paragraph, the term ``eligible calendar 
                quarter'' means--
                          (i) the first calendar quarter that 
                        begins after the end of the 90-day 
                        period beginning with the date of the 
                        enactment of this paragraph; and
                          (ii) the 7 succeeding calendar 
                        quarters.
                  (K) Calendar quarter.--For purposes of this 
                paragraph, the term ``calendar quarter'' 
                means--
                          (i) the period which begins on 
                        January 1 and ends on March 31 of each 
                        year;
                          (ii) the period which begins on April 
                        1 and ends on June 30 of each year;
                          (iii) the period which begins on July 
                        1 and ends on September 30 of each 
                        year; and
                          (iv) the period which begins on 
                        October 1 and ends on December 31 of 
                        each year.
                  (L) Regulations.--Not later than 45 days 
                after the date of the enactment of this 
                paragraph, the Administrator shall publish in 
                the Federal Register and transmit to the 
                Congress regulations to carry out this 
                paragraph. Such regulations shall include 
                provisions relating to--
                          (i) the approval of auditors under 
                        subparagraph (H); and
                          (ii) the designation of qualified 
                        high loss reserve PCLs under 
                        subparagraph (F), including the 
                        determination of whether a process for 
                        analyzing risk of loss is appropriate 
                        and effective for purposes of 
                        subparagraph (F)(ii).
          (8) Bureau of pclp oversight.--
                  (A) Establishment.--There is hereby 
                established in the Small Business 
                Administration a bureau to be known as the 
                Bureau of PCLP Oversight.
                  (B) Purpose.--The Bureau of PCLP Oversight 
                shall carry out such functions of the 
                Administration under this subsection as the 
                Administrator may designate.
                  (C) Deadline.--Not later than 90 days after 
                the date of the enactment of this Act--
                          (i) the Administrator shall ensure 
                        that the Bureau of PCLP Oversight is 
                        prepared to carry out any functions 
                        designated under subparagraph (B), and
                          (ii) the Office of the Inspector 
                        General of the Administration shall 
                        report to the Congress on the 
                        preparedness of the Bureau of PCLP 
                        Oversight to carry out such functions.

           *       *       *       *       *       *       *


                            ADDITIONAL VIEWS

    The amendment in the nature of a substitute adopted by the 
Committee will increase the availability of capital to 
Certified Development Companies (CDCs), permitting CDCs to make 
more loans to small businesses, while safeguarding taxpayers' 
interests. This is not only sound public policy, but also a 
means to enhance the flow of capital to small businesses.
    While access to capital is vital to the success of small 
businesses, many find it difficult to get funding, especially 
given the current lending environment. SBA's lending programs 
address these difficulties by providing a critical stream of 
funding to small businesses. Last year, these programs supplied 
$21 billion in capital, accounting for 40 percent of all long-
term small business lending to this country's entrepreneurs.
    One of the SBA's most important loan programs is the 504 
CDC Loan Program. The 504 program is a low-cost, high-return 
economic stimulus initiative that contributes to overall 
economic growth in our communities. A typical 504 project is 
financed through a combination of a commercial loan and a 
financing component backed by government-guaranteed debentures. 
Given the weak state of our economy, the 504 program is 
especially important now because it promotes investment where 
we need it most--in the small business sector.
    While the 504 program does provide capital to hundreds of 
small businesses each year, problems with the program's 
administration prevent the program from realizing its full 
potential. One of the program's most significant problems is 
SBA's inability to consistently process 504 loan applications 
within a short time period. Since the SBA processing time for 
504 applications can frequently approach 30 days, borrowers and 
lenders are often deterred from participating.
    In response to these long processing delays, Congress 
created the Premier Certified Lender Program (PCLP). Through 
this public-private partnership, CDCs are permitted to process 
their 504 loans without SBA approval. In exchange for this 
autonomy, SBA requires CDCs to assume responsibility for some 
of the losses associated with the loans they make. In order to 
protect the government's interests, these CDCs (called Premier 
CDCs) are required to maintain loan loss reserves.
    Although some 25 to 30 CDCs have elected to join the PCLP, 
there are over 200 CDCs that have decided not to take advantage 
of the program. CDCs are deterred from participating in the 
PCLP because the current PCLP prevents CDCs from making 
withdrawals from their loan loss reserves until their 
debentures are fully repaid. As a result, CDCs often maintain 
loan loss reserves in excess of what is sufficient to protect 
the government's interests.
    In addition to deterring CDCs from joining the PCLP, the 
excessive loan loss reserve requirements prevent Premier CDCs 
from making more loans to small businesses. Funds maintained in 
excess of what is necessary to protect the government's 
interests could serve a much better purpose--such as financing 
for small businesses--the number one job creator in the U.S. 
Instead, these funds are not being used, helping no one at all.
    To address these issues, the amendment creates two pilot 
programs that give 504 program lenders the ability to reduce 
their loan loss reserves, while adequately protecting the 
government's interests. By creating a system that frees lenders 
from excessive loan loss reserve requirements, 504 program 
lenders will then be able to make more loans to small 
businesses, which is exactly what this nation needs in a time 
of such economic uncertainty. Economic recovery is only within 
reach if small businesses are able to start-up and grow. And 
this is impossible without capital.
    The first pilot program allows Premier CDCs to draw down 
their loan loss reserves based on the repayment of their 
outstanding 504 program debentures. This pilot program was 
created to ensure that a CDC's loan loss reserve does not 
maintain amounts that are in excess of those necessary to 
protect the government's interests. When the PCLP program was 
established, the statute did not recognize that the amount of 
SBA's risk of loss decreases as the debenture ages. debentures 
are issued for either a ten or twenty year term and are 
amortized over the duration of the term. As the borrower makes 
payments, the outstanding balance of the debenture is reduced. 
The amount of the CDC's loss reserve, however, does not 
decrease until the debenture is fully paid off, at which point 
the CDC is permitted to withdraw the amount in full. Thus, as 
the principal on the debenture decreases each year and the 
amount of the loss reserve remains constant, the loan loss 
reserve percentage actually increases.
    As a result of the enactment of the first pilot program, 
all Premier CDCs will be able to limit their loan loss reserve 
requirement to one percent of their outstanding debentures, 
which is equal to the initial requirement under existing 
statute. This will make more funds available to all Premier 
CDCs and, ultimately, to small businesses. At the same time, it 
will preserve sufficient loan loss reserves to adequately 
protect our taxpayers' investment.
    The second pilot program allows qualifying Premier CDCs to 
estimate their loan loss reserves using a risk-based approach. 
Due to the lack of portfolio diversification of CDC's loan 
portfolios, both in terms of region, industry, and asset size, 
the Committee had initial reservations about the applicability 
of a risk-based approach to the 504 program.
    In order to address these reservations, the amendment 
imposes requirements on those Premier CDCs electing to maintain 
risk-based loan loss reserves under the second pilot program. 
The amendment requires these Premier CDCs to meet or exceed 
specified SBA risk management standards, which include 
benchmarks for currency, delinquency, defaults, liquidations, 
and losses. By requiring that Premier CDCs meet or exceed these 
benchmarks, the SBA can reduce the likelihood that poorly 
performing CDCs will be able to qualify for the risk-based loan 
loss reserve pilot program.
    The amendment requires that Premier CDCs electing to use 
the risk-based approach hold a minimum of $100,000 in their 
loan loss reserves. By requiring these Premier CDCs to hold a 
minimum loan loss reserve of $100,000, the Committee seeks to 
provide the government with a minimum level of protection as 
well as to impose a not insignificant opportunity cost on the 
CDCs. It is the Committee's objective to align the incentives 
of the qualifying Premier CDCs with those of the government. By 
ensuring that CDCs are liable for significant costs under the 
504 program, the Committee believes that such CDCs will be more 
likely to behave in a manner that will limit the government's 
losses.
    The amendment also preserves the original legislation's 
requirement for the quarterly certification of Premier CDCs' 
risk-based loan loss reserves. Each quarter, qualifying Premier 
CDCs must submit a certification to SBA that their loan loss 
reserves are sufficient, as determined by an independent 
auditor, to protect the government's interests. Because the 
Committee wanted to ensure that CDCs practice corporate 
responsibility, the CEO, president, or equivalent senior 
executive of the qualifying Premier CDC must attest to this 
quarterly certification.
    Because the legislation provides certain CDCs with the 
authority to use a risk-based approach to determine their loan 
loss reserves, the amendment increases such CDCs' loss exposure 
under the 504 program. By increasing the loss exposure from 10 
percent to 15 percent for Premier CDCs using the risk-based 
approach, such Premier CDCs will be more likely to employ 
rigorous underwriting standards in approving 504 program loans 
and will be less likely to underestimate their loan loss 
reserves. This exchange of enhanced authority for increased 
loss exposure is consistent with the intent of the original 
PCLP, which provided CDCs with delegated loan approval 
authority in exchange for increased loss exposure.
    In order to ensure that the adoption of this new risk-based 
approach will not increase the government's risk, the amendment 
establishes the Bureau of PCLP Oversight. The Bureau will 
approve and monitor CDCs' risk-based loan loss reserve 
approaches to make certain that the government's interests are 
adequately safeguarded. This Bureau will draw on existing 
resources and will not require new funding. It is simply to 
ensure that SBA will properly oversee this pilot program.
    In the past, the SBA has been negligent in its 
responsibilities for developing and issuing regulations. Delays 
in issuing regulations, such as the lengthy periods of inaction 
following the enactment of the original PCLP program, only 
serve to hurt small businesses. The Committee believes that it 
is critical for the agency to take this responsibility 
seriously because the pilot programs are self-executing; 
Premier CDCs will be able to start using the pilot program 90 
days from the date of enactment, regardless of whether or not 
the SBA has issued regulations to implement the Bureau's 
operations. SBA must develop the capabilities to monitor the 
loan loss reserves of Premier CDCs to ensure that these CDCs 
are acting appropriately. The Committee expects the SBA to 
issue regulations in the Federal Register promulgating this 
legislation within 30 days of its enactment. The Committee 
expects the regulations to specify SBA's plans for overseeing 
the Premier CDCs risk-based approaches and quarterly 
certifications, certifying auditors under the pilot program, 
and monitoring the Premier CDCs increased loss exposure 
requirements.
    Finally, the amendment provides for a study of the level of 
overcapitalization of Premier CDCs' loan loss reserves and an 
analysis of alternative loan loss reserve approaches. This 
study will be the basis for further consideration of the loan 
loss reserve issue and is to be submitted to Congress within 90 
days. The Committee intend to use this study to determine 
whether a risk-based loan reserve approach is appropriate for 
the 504 program and whether a $100,000 minimum requirement is 
sufficient for those CDCs participating in a risk-based 
program. In addition, the Committee expects the study to 
discuss the benefits and drawbacks of alternative loan loss 
reserve approaches.
    The excessive PCLP loan loss reserve requirements restrict 
the ability of Premier CDCs to make capital available to the 
foundation of the American economy--small business. This 
legislation proves immediate relief to Premier CDCs that are 
excessively burdened by the PCLP's loan loss reserve 
requirements. The legislation, however, does not address the 
fundamental issue at hand--the extensive and unnecessary 
processing times of 504 loan applications. By reducing the 
PCLP's loan loss reserve requirements and introducing 
safeguards to protect taxpayers, the Committee is taking the 
first of several near-term steps to centralize, streamline, and 
modernize the 504 program so that it is better able to meet the 
needs of small business.

                                                Nydia M. Velazquez.

                                
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