[Senate Report 110-154]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 352
110th Congress                                                   Report
                                 SENATE
 1st Session                                                    110-154

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



 
  SMALL BUSINESS LENDING REAUTHORIZATION AND IMPROVEMENTS ACT OF 2007

                                _______
                                

               September 12, 2007.--Ordered to be printed

                                _______
                                

 Mr. Kerry, from the Committee on Small Business and Entrepreneurship, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 1256]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill (S. 1256) to amend the Small 
Business Act to reauthorize loan programs under that Act, and 
for other purposes having considered the same, reports 
favorably thereon with an amendment in the nature of a 
substitute and recommends that the bill (as amended) do pass.

                            I. INTRODUCTION

    The Small Business Lending Reauthorization and Improvements 
Act of 2007 (S. 1256) was introduced by Senator John F. Kerry, 
for himself and Senators Snowe and Levin, on May 1, 2007. The 
bill reauthorizes the SBA's microloan programs, the 7(a) Loan 
Guaranty program, and the 504 Loan Guaranty program for Fiscal 
Years 2007, 2008, 2009, and 2010. In addition to making 
significant improvements to the SBA's lending programs, the 
bill also authorizes two new pilot program initiatives.
    During markup of the bill, the Committee unanimously 
adopted by voice vote, a bipartisan managers' substitute 
amendment, offered by Chairman Kerry for himself and Ranking 
Member Snowe, which incorporated modified versions of 
amendments filed by Senators Isakson, Bond, and Enzi regarding 
the reduction of 7(a) loan fees, the Child Care Lending Pilot 
Act, and the Microloan program. The bill was subsequently 
adopted as amended by a roll call vote of 19-0.
    The Small Business Lending Reauthorization and Improvements 
Act of 2007, S. 1256, is the product of a series of hearings, 
meetings and roundtables held in 2006 and 2007 that examined 
the capital needs of small businesses and sought to determine 
whether the SBA's loan programs were serving their purpose and 
whether legislative changes were needed. The bill incorporates 
virtually all of the lending provisions that were unanimously 
adopted by the Committee in the 109th Congress as part of the 
``Small Business Reauthorization and Improvements Act of 
2006,'' S. 3778, a comprehensive reauthorization bill developed 
under Senator Snowe, then the chair of the Committee. S. 1256 
builds on the Committee's work of the 109th Congress, making 
significant changes to the SBA's 7(a) Loan Guaranty program, 
the Agency's largest small-business loan program. The bill also 
institutes a rural outreach lending program designed to 
increase lending in rural areas, modifies the 504 Loan Guaranty 
program to provide incentives to increase business development 
in low-income communities, adopts versions of proposals by 
theAdministration to make uniform the real estate appraisal 
requirements for 7(a) and 504 loans, and establishes a semi-annual 
schedule for payment of principal and interest on 504 debentures.

                      II. HEARINGS AND ROUNDTABLES

    In the 109th Congress, under Senator Snowe, then chair of 
the Committee: On March 9, 2006, the Committee held a hearing 
to examine the SBA's Fiscal Year 2007 budget and the SBA's 
proposed legislative package for reauthorization. SBA 
Administrator Hector Barreto provided testimony on the SBA's 
achievements and its budgetary and programmatic proposals for 
Fiscal Year 2007. The Administration proposed a funding level 
of $624 million for the SBA, of which only $425 million was 
dedicated to the SBA's core programs, and continued the trend 
of SBA budget cuts. In context, since 2001, the FY 2007 budget 
request reduced the SBA's budget by 37 percent. During the 
hearing, the Committee questioned the rationale for the SBA's 
budget cuts and proposals for essential programs, such as 
elimination of all three microloan programs and the 
Administration's proposal to impose administrative fees on the 
small business participants through programs authorized in 
Section 7(a) of the Small Business Act, and Section 504 of 
Title III of the Small Business Investment Act regarding Small 
Business Investment Companies (SBIC). These proposals were 
controversial and were not adopted by the Committee.
    On April 26, 2006, the Committee held a hearing entitled, 
``Reauthorization of SBA Financing and Economic Development 
Programs.'' The Committee heard from lenders, small business 
stakeholders, and SBA representatives on the benefits of SBA's 
credit programs and evaluated reauthorization proposals to 
improve the broad range of finance programs which play a vital 
role in assisting America's entrepreneurs in obtaining 
operating and equity capital.
    In the 110th Congress, under the Chairmanship of Senator 
Kerry: On February 28, 2007, the Committee held a hearing to 
review the SBA's Fiscal Year 2008 budget. Stephen Preston, the 
new SBA Administrator, testified. He presented the 
Administration's budget request of $464 million for the Agency. 
Of concern to many on the Committee was the proposal to move 
the SBA's Microloan program to zero subsidy and to eliminate 
the technical assistance grants for counseling the borrowers. 
Since 2005, the Administration had proposed the elimination of 
the Microloan program, and moving to a subsidy model with no 
technical assistance was considered tantamount to elimination 
because many intermediaries considered the combination 
unworkable and therefore would have quit participating in the 
program. Consequently, the proposal was not well-received by 
most members of the Committee. The budget did propose fee 
reductions for SBIC debenture deals and 504 and 7(a) loans, but 
there was concern that the fee reduction for 7(a) loans would 
only benefit the lenders and not the borrowers. Also of concern 
was a recycled proposal to impose a new fee on 7(a) loans sold 
in the secondary market. The request is controversial because 
it is viewed as duplicative and premature given that the need 
is based on an estimate that the payments could run short in 
ten years, by 2017.
    On May 2, 2007, the Committee held a roundtable entitled, 
``SBA Reauthorization: Small Business Loan Programs.'' The 
purpose of the roundtable was to get feedback on the provisions 
in S. 3778, and to give members an opportunity to get feedback 
from the SBA, lending experts, and small business advocates 
concerning the bill. The roundtable expanded on the public 
record built as part of the capital reauthorization hearing 
held in 2006, but focused only on SBA microloans, 7(a) loans, 
504 loans, and two pilot programs. Of particular concern was 
the SBA's proposal to make the Microloan program zero-subsidy 
by raising the interest rate on lenders, to eliminate the 
Microloan technical assistance program, and to require the 
SBA's other counseling partners--Small Business Development 
Centers, Women's Business Centers, and SCORE--to serve 
microloan borrowers. For the 7(a) Loan Guaranty program, the 
debate centered on fees, specifically the authority to reduce 
fees when there are excess funds to cover the cost of the 
program, and the implementation of an oversight fee that was 
authorized as part of the 2005 Omnibus Appropriations Act. The 
fee reduction language generated debate because the 
Administration succeeded in making the 7(a) loan program zero 
subsidy in FY 2005, and the SBA, and certain members of the 
Committee, oppose any language that would make it possible for 
the 7(a) loan program to receive appropriations again. There 
was opposition to the Administration's implementation of the 
oversight fee because the industry felt that the fees were 
excessive and duplicative. There was also concern among 
Committee staff because the law and final rule went beyond what 
the Committee had intended and adopted when it considered a 
similar provision in 2005 as part of S. 1375, the ''Small 
Business Administration 50th Anniversary Reauthorization Act of 
2003.'' For the 504 loan program, the trade association for 504 
lenders/Certified Development Companies seconded the 7(a) 
industry's strong opposition to the imposition of new oversight 
fees. They also voiced absolute opposition to the SBA's 
proposal to move from a bi-annual to a monthly debenture 
payment schedule out of fear of scaring off investors. Last, 
the 504 loan representatives argued for raising the real estate 
appraisal requirement from $250,000 to $750,000. In spite of 
the SBA's past opposition to Senator Levin's Intermediary 
Lending Pilot program and Senator Kerry's Child Care Lending 
Pilot program, the roundtable generated positive discussion of 
the initiatives. There was also discussion of and support for 
the creation of an Office of Minority Small Business 
Development at the SBA to provide leadership within the agency 
to increase lending, venture capital, counseling, and 
contracting assistance from the SBA's programs to minority 
business owners.
    On May 22, 2007, the Committee held a hearing entitled, 
``Minority Entrepreneurship: Assessing the Effectiveness of 
SBA's Programs for the Minority Business Community.'' As part 
of reauthorization, the Committee has tried to address 
complaints from minority business owners, and organizations 
representing minorities, that SBA's programs do not effectively 
meet the needs of these entrepreneurs, and that we need to use 
these economic development tools to help close the wealth gap 
between whites and minorities. The Committee discussed the need 
to increase the share of loans to minorities, which has 
remained largely stagnant since 2001, to increase the SBIC 
investments in firms owned by minorities, and to increase the 
licenses of SBIC funds to minorities.

                        III. DESCRIPTION OF BILL

Authorization of programs

    The Small Business Lending Reauthorization and Improvements 
Act of 2007, S. 1256, reauthorizes the SBA's non-disaster loan 
programs for Fiscal Years 2007, 2008, 2009, and 2010, 
establishing maximum financing levels.
    The Microloan programs. The direct Microloan program is 
reauthorized to leverage $110 million in loans for each of FY 
2007, FY 2008, FY 2009, and FY 2010. The guaranty Microloan 
program is reauthorized to leverage $50 million for each of FY 
2007, FY 2008, FY 2009, and FY 2010. Microloan Technical 
Assistance grants to microloan intermediaries are authorized at 
the level of $80 million for each of FY 2007, FY 2008, FY 2009, 
and FY 2010. The Program for Investment in Microentrepreneurs 
(PRIME) is reauthorized for $15 million for each of FY 2007, FY 
2008, FY 2009, and FY 2010.
    The 7(a) Loan Guaranty program is reauthorized at levels of 
$18 billion for FY 2007, $19 billion for FY 2008, $20 billion 
for FY 2009, and $21 billion for FY 2010.
    The 504 Loan Guaranty program is reauthorized at levels of 
$8 billion for FY 2007, $8.5 billion for FY 2008, $9 billion 
for FY 2009, and $9.5 billion for FY 2010.

Title I--Microloan programs

    The SBA has three programs to support micro-entrepreneurs: 
the Microloan program, its partner Microloan Technical 
Assistance program, and the Program for Investment in 
Microentrepreneurs (PRIME). Under the Microloan program, the 
SBA makes loans and grants to intermediaries, who then re-loan 
their loan funds to small businesses, at a maximum $35,000. The 
lending intermediaries also receive grants from the SBA to 
provide both pre-loan and post-loan technical assistance to the 
small businesses and entrepreneurs they serve. This program has 
proven very effective at serving the needs of minority and 
women business owners and business owners in rural areas. For 
example, in FY 2006, the share of microloans to businesses 
owned by African Americans was 28 percent; by Hispanics was 19 
percent; by women was 46 percent; and in rural areas was 33 
percent. By comparison, the share of other SBA loans to 
businesses owned by African Americans ranged from 2 to 7 
percent; by Hispanics ranged from 8 to 11 percent; by women 
ranged from 16 to 23 percent; and in rural areas ranged from 21 
to 28 percent.
    Further, this program has an excellent track record. Since 
the first SBA microloan was made in 1992, there has only been 
one loss to the government. In spite of these facts, the 
Administration opposes these programs and has proposed 
eliminating them since FY 2005. The proposals have been 
rejected each year by Congress. In this year's budget and 
legislative package, the President modified his proposal. 
Instead of completely eliminating the Microloan program, he 
proposed making it zero subsidy by raising the interest rate 
paid by intermediaries. Specifically, the SBA's proposal sought 
to increase the interest rate it charges to a microlender for 
an SBA loan from 2 percent below the five-year Treasury rate to 
1.06 percent above the five-year Treasury rate (which would be 
5.99 percent in FY 2008). This would increase the interest rate 
charged to microentrepreneurs to approximately 12-13 percent 
for a loan from the current rate of approximately 10 percent. 
As such, many intermediaries reported that they would not be 
able to participate in the program because while the increase 
appeared modest, in practice it would be too expensive for the 
clients they serve. Further, because the five-year Treasury 
rate fluctuates, if it increased, so would the cost on the 
intermediaries and the borrowers, making the program even more 
expensive and therefore even less likely to work.
    The SBA also proposed eliminating the microloan technical 
assistance component and shifting the counseling of borrowers 
to SBA's other counseling partners, such as the Small Business 
Development Centers, the Women's Business Centers, and SCORE. 
The proposal was widely criticized at the SBA's budget hearing 
on February 28, 2007, and at the roundtable on May 2, 2007, on 
reauthorization of the SBA's loan programs. Participating in 
the roundtable were intermediaries from Massachusetts, Maine, 
and South Carolina. They carry out the program on a day-to-day 
basis and explained that the proposal was unworkable. They 
already work with very thin margins, and increased interest 
rates would make it impossible for many of their clients to 
afford the loans. They added that they would not make SBA 
microloans if they were not provided with the funding to 
provide technical assistance. The technical assistance to the 
borrower helps them succeed and therefore repay their loan to 
the intermediary, which makes it possible for the intermediary 
to repay the SBA. To protect against losses, the program 
requires each intermediary to put up to 15 percent of their 
loan funds in a loan loss reserve. It is not reasonable for the 
Administration to expect the intermediaries to put money into a 
reserve account and be on the hook for those loans if they are 
not providing the counseling to their borrowers. Further, the 
Administration's proposal was considered unreasonable because 
it would require the SBA's other partners to provide the 
counseling to the SBA microloan borrowers without providing 
them with extra funding; the SBA's FY 2008 budget provided no 
funding to compensate for the extra clientele, and even cut 
those programs.
    Three members of the Committee, Senators Isakson, Enzi, and 
Bond, opposed the microloan provisions in S. 1256 as introduced 
because it did not make the SBA Microloan program zero subsidy. 
While they acknowledged the need for the technical assistance 
to be provided by the intermediary making the loan, and 
supported continuing that component of the program, they felt 
the interest rate increase was modest. Consequently, they filed 
an amendment to the Chairman's mark, proposing a study by SBA 
of the Microloan program. However, there was concern about 
putting SBA in charge of a study to assess the program's 
effectiveness. Some feared that it would be biased given that 
the Agency had been trying to eliminate the program for the 
past four years. As a compromise, Chairman Kerry and Senators 
Isakson, Enzi, and Bond agreed to include in the Chairman's 
mark a modification of the amendment, requiring the study to be 
done by the Government Accountability Office (GAO) instead of 
the SBA.
    In addition to reauthorizing the Microloan program for 
three years, and rejecting the proposal to make it zero 
subsidy, the bill includes several provisions that had been 
adopted by the Committee in the 108th and 109th Congresses. The 
bill makes a conforming amendment to the Small Business Act to 
provide microloan intermediaries that have a microloan 
portfolio with an average loan size of not more than $10,000 
the ability to receive a lower interest rate compared to the 
normal rate extended by the SBA to intermediaries. The statute 
originally provided that an intermediary had to have an average 
loan size of not more than $7,500 to receive a reduced interest 
rate. This bill updates the average and conforms the sections 
of law that were not raised and should have been.
    The bill modifies the eligibility requirements so that an 
intermediary can qualify to participate in the program if it 
has an employee with at least three years of making microloans 
and at least one year of providing intensive marketing, 
management, and technical assistance providers. Currently, to 
be licensed as an intermediary, an entity must have at least 
one year of institutionalexperience in providing loans to small 
businesses and at least one year of institutional experience in 
providing technical assistance to small businesses. As stated when the 
provision was adopted as part of S. 1375 by the Committee in the 108th 
Congress, the provision is not intended to lower standards of quality 
of the entities but rather to permit access for entities that are new 
to the program and have employees with demonstrated ability and 
experience, thereby expanding access to the microloan program across 
the nation.
    The bill increases from 25 percent to 30 percent the amount 
of a technical assistance grant that a microloan intermediary 
can use to contract out technical assistance to a third party. 
One incentive that intermediaries have to perform their 
technical assistance functions well is that the intermediaries 
must repay their loans to the SBA. The quality of the technical 
assistance the intermediaries provide to a small business 
correlates to the success of the business, and a business's 
ability to repay their loan to an intermediary. Third-party 
technical assistance providers do not have this concern, as 
they do not receive direct loans from the SBA and therefore do 
not put up money in a loan loss reserve to cover losses to the 
government if a loan goes bad. In the 108th Congress, when the 
Committee last adopted this provision, there was concern that 
removing any ceiling on the percent of grant funds that an 
intermediary could contract out to a third-party provider could 
harm the program. Those concerned feared that quality of 
assistance would go down, and with it repayment rates by 
borrowers and intermediaries. However, the Committee 
recognized, and continues to recognize, that there is a need 
for certain technical assistance, like advice on legal, 
accounting or tax matters, or for specialized industries, which 
intermediaries are not able to provide directly. Accordingly, 
this bill provides additional flexibility for intermediaries to 
contract with third parties.
    The bill increases from 25 percent to 30 percent the amount 
of technical assistance grant funds that an SBA microloan 
intermediary can use to counsel potential borrowers, instead of 
actual borrowers. This gives the intermediaries more 
flexibility in allocating their technical assistance funds, 
while addressing previous concerns from the Committee that 
completely eliminating the limit could diminish assistance for 
those who have taken loans, started businesses, and need the 
on-going counseling to succeed.
    Last, the bill adds persons with disabilities as part of 
the target population being served by federal microenterprise 
programs. The Committee has received concerns from participants 
that although people with disabilities are not being excluded 
from microenterprise programs, neither are they being 
specifically targeted or explicitly mentioned as being eligible 
for receiving assistance. To date, there is no microloan 
intermediary, PRIME grantee, or Women's Business Center which 
specifically includes individuals with disabilities. This 
situation is the result of an unintentional oversight, and not 
one of purposeful exclusion. This section would raise awareness 
of this need among microenterprise programs and increase 
accessibility to such entrepreneurs, while not creating any new 
programs.
            PRIME reauthorization
    The Program for Investment in Microentrepreneurs (PRIME) 
was created in 1999 when the PRIME Act was incorporated and 
amended in the Gramm-Leach-Bliley Act as part of the U.S. 
Department of the Treasury's Community Development Financial 
Institutions Program. At that time, the conferees chose to have 
the program administered by the SBA. However, the statutory 
provisions were never moved to the Small Business Act.
    The bill reauthorizes PRIME and transfers the statutory 
language for PRIME to the Small Business Act. PRIME is a 
program to provide grants to intermediaries that use the funds 
to: (1) train other intermediaries to develop microenterprise 
training and services programs; (2) research microenterprise 
practices; or (3) provide training and technical assistance to 
disadvantaged entrepreneurs. This section adds a data 
collection provision and reauthorizes the program at $15 
million for Fiscal Years 2007, 2008, 2009, and 2010.
    Most of the provisions in this Title originated in the SBA 
Microenterprise Improvements Act (S. 138), introduced by 
Senator Kerry on January 24, 2005, and cosponsored by Senators 
Bingaman and Lieberman. The provisions were included in S. 1375 
in the 108th Congress as passed by the Senate, and in S. 3778 
in the 109th Congress, as adopted by the Committee.

Title II--Small Business Intermediary Lending Pilot Program

    The Committee included in the bill a proposal from Senator 
Levin to authorize a new three-year pilot program in which the 
SBA may make loans to local non-profit lending intermediaries, 
and the intermediaries can then re-loan the funds to small 
businesses. The program seeks to address the capital needs of 
start-up and expanding small businesses that require flexible 
capital but may not be eligible for private or public venture 
capital. The pilot program is aimed at businesses that desire 
larger loans than can be provided under the SBA's Microloan 
program and that, for a variety of reasons, including 
insufficient collateral, are unable to secure the credit with 
practicable terms through conventional lenders, even with the 
assistance of the 7(a) or 504 loan programs.
    Through this pilot program, the SBA is authorized to make 
loans, on a competitive basis, to up to 20 non-profit lending 
intermediaries around the country. The loans will carry an 
interest rate of 1 percent, have terms of 20 years, and be 
capped at a maximum amount of $1 million. Intermediaries will 
not pay any fees or provide any collateral for their loans. 
Each 20-year loan will capitalize a revolving loan fund through 
which the intermediary will make loans of between $35,000 and 
$200,000 to small businesses. These subordinated-debt loans 
will be more flexible in collateral and general underwriting 
requirements than the SBA's other lending programs. In 
addition, intermediaries will assist their borrowers in 
leveraging the SBA funds to obtain additional capital from 
other sources. The pilot will test the impact of this program 
on job creation in rural and urban areas, especially among 
under-employed individuals.
    Unlike the SBA Microloan Program, the intermediaries will 
receive no technical assistance grants. All administrative 
costs or technical support provided to small business borrowers 
will be covered by the interest-rate spread between the lending 
intermediary's 1 percent loan from the SBA and the interest 
rate on loans made to the small business borrowers, the rate 
for which will be set by the intermediary.
    The Small Business Intermediary Lending Pilot Program is 
modeled after a successful program administered by the U.S. 
Department of Agriculture (USDA) that has provided loans to 
non-profit lending intermediaries since 1985. Under that 
program, no intermediaries have defaulted on their loans from 
the USDA, which are made at interest rates of 1 percent and 
have terms of 30 years, and only 2 percent of the 
intermediaries are currently delinquent on their loans. Unlike 
the USDA's program, which is limited to rural areas, this pilot 
will serve both urban and rural regions.
    This pilot is designed to reach small businesses that 7(a) 
lenders will not reach due to the perceived higher risk of 
these businesses. Many states are fortunate to have a healthy 
network of community based, non-profit intermediary lenders 
that are experienced and successful in meeting the needs of 
small businesses. This pilot program will give them additional 
tools to stimulate the economy by creating jobs, including jobs 
for low-income individuals, and facilitate new lending and 
investing in businesses.
    This pilot was originally offered by Senator Levin in the 
108th Congress as an amendment to S. 1375. It was accepted by 
voice vote and passed by the full Senate. In the 109th 
Congress, it was introduced by Senator Levin as a free-standing 
bill, S. 416, and then adopted by the Committee as part of S. 
3778. In the 110th Congress, it was introduced as S. 985, and 
then adopted by the Committee as part of S. 1256.

Title III--7(a) loan program

    In assessing the 7(a) loan program for reauthorization, the 
Committee found the program is working well, but there were 
certain changes that could be adopted which would build on the 
Committee's reauthorization work of the 109th Congress. 
Therefore, this bill not only includes the provisions adopted 
as part of S. 3778, but adds several others. From the last 
Congress, the bill includes an expanded set of provisions for 
establishing a national ``Preferred Lender Program (PLP),'' 
rather than leaving it to the Administration to develop. The 
purpose of a national PLP program is to streamline the 
application process, thereby saving time and money for the SBA 
and lenders. The PLP program delegates the authority to 
process, approve, and liquidate loans to lenders that have 
knowledge of and proficiency in the 7(a) loan program. 
Currently, to operate nationwide, a lender must apply for PLP 
status in each of the SBA's 71 districts. Moreover, they must 
re-apply each year in each district. This is extremely 
inefficient and wasteful, and creates enormous unnecessary 
administrative costs.
    This provision would drastically reduce administrative 
costs and standardize the operation of the PLP program, thus 
eliminating the inefficiencies and costs associated with 
applying for PLP status in each district. Additionally, the 
Committee believes that these measures will improve small 
businesses' access to capital. While the Committee approves of 
streamlining the application process, it encourages the SBA to 
continue seeking input from the district directors as part of 
the approval process in order to try and improve lender 
oversight. Early in 2007, one of the SBA's largest 7(a) lenders 
was found by the U.S. Department of Justice to be involved in 
$76 million in fraudulent SBA loans, with $28 million in loan 
repurchases out of one district, all linked to one business 
development officer. By only looking at the lender's national 
performance, the Agency was unaware that the lender had high 
repurchases coming out of one district, and therefore was 
unable to mitigate losses. The Committee does not intend for 
one district director to have the power to deny or approve the 
national status, merely to be consulted in an effort to improve 
lender oversight. The legislative language creating the 
national PLP was originally included in S.1375, the ``Small 
Business Administration 50th Anniversary Reauthorization Act of 
2003,'' introduced in the 108th Congress by Senator Snowe and 
Senator Kerry, approved unanimously by the Senate in 2003. It 
was also adopted by the Committee as part of S. 3778 in the 
109th Congress.
    The bill increases the maximum size of a 7(a) loan to $3 
million from the current $2 million, and increases the maximum 
size of the accompanying guarantee to $2.25 million from the 
current $1.5 million. This would maintain the maximum current 
guarantee rate of 75 percent. With the escalating costs of real 
estate and new equipment, the Committee believes it is 
appropriate to respond to small businesses' financing needs by 
offering larger loans. Further, the Committee expects the SBA 
to make adjustments to the program's subsidy rate model to 
reflect the changes because these modifications should help 
reduce the cost of the program and therefore reduce fees on 
lenders and borrowers.
    To ensure that small firms have adequate capital for 
working capital purposes, as well as for financing fixed-
assets, such as buildings and equipment, the bill allows 
businesses to receive both the maximum 7(a) and 504 loans. Due 
to concerns about the risk of allowing maximum loans in both 
programs to one company, the bill requires the SBA to report 
annually on volume of loans and to track their specific 
performance, giving the Committee a tool to assess the 
effectiveness of the new authority.
    To increase interest in the 7(a) loan program of investors 
who buy loan guarantees sold on the secondary market, the bill 
gives the SBA flexibility when pooling the loans. Currently, 
the Agency must pool loans with similar interest rates. This 
provision will allow the Agency to pool the loans based on a 
weighted average.
    The bill requires the SBA to implement an ``alternative 
size standard'' for the 7(a) program, in addition to the 
program's current standard. The alternative size standard for 
the 7(a) program would be similar to the standard for the 504 
program, which considers a business's net worth and income. The 
7(a) program currently determines a small business's 
eligibility to receive a loan by reference to a complex, multi-
page chart that includes different size standards for every 
industry and focuses on the number of employees. The Committee 
believes this is cumbersome, especially for small lenders which 
do not make many 7(a) loans. In the 504 Program, however, 
lenders can use either the industry-specific standards or an 
``alternative size standard'' the SBA created, which simply 
says a small business is eligible for a loan if it has gross 
income of less than $7 million or net worth of less than $2 
million. The Committee believes that allowing 7(a) lenders to 
use this alternative standard, as an option to the industry-
specific size standard, would simplify the 7(a) lending process 
and provide small businesses with a streamlined procedure for 
determining loan eligibility. Therefore, this would conform the 
standards used by the 7(a) and 504 programs and would make the 
program far more accessible to small businesses and small 
lenders. This provision was included in S. 1375 during the 
108th Congress and S. 3778 during the 109th Congress.
    To try and achieve the lowest possible interest rate for 
borrowers, the bill allows the SBA to identify at least one 
other nationally recognized interest rate to determine the base 
interest rate for a borrower. Currently, the rates are 
prescribed as PRIME plus an interest rate of up to 6.5 percent 
for 7(a) loans. With PRIME up to 8.25 percent, which means an 
SBA 7(a) loan could have an interest rate as high as 14.75 
percent, the Committee encourages the SBA and lenders to 
identify other market rates which may be more affordable and 
attractive to small business borrowers.
    The bill also creates an Office of Minority Small Business 
Development to increase the share of small business loans to 
minorities. The Committee is concerned that African Americans, 
Hispanics, Asians, and women are receiving far fewer small 
business loans relative to their share of the population and 
that there has been no statistically significant improvement 
since FY 2001. The Office of Minority Small Business 
Development at the SBA will be similar to offices devoted to 
business development of veterans and women. In charge of the 
office will be the Assistant Administrator for Minority Small 
Business and Capital Ownership Development, under the new title 
of Associate Administrator for Minority Small Business 
Development, with expanded authority and an annual budget to 
carry out its mission. Currently, this position is limited to 
carrying out the policies and programs of the SBA's contracting 
programs under Sections 7(j) and 8(a) of the Small Business 
Act. To ensure that minorities receive a greater share of loan 
dollars, venture capital investments, counseling, and 
contracting, this bill expands the Office's authority and 
duties to work with and monitor the outcomes for programs under 
Capital Access, Entrepreneurial Development, and Government 
Contracting. S. 1256 also requires the head of the Office to 
work with SBA's partners, trade associations, and business 
groups to identify more effective ways to market to minority 
business owners, and to work with the head of the Office of 
Field Operations to ensure that the SBA's district offices have 
the requisite staff and resources to market to minorities.
    The Committee believes it is essential that small exporters 
nationwide have access to export financing. The bill would 
improve the current statute that inadvertently has the maximum 
loan guaranty amount and maximum loan amount working at cross 
purposes. To help small businesses trade internationally, and 
provide lenders with a little more incentive than regular SBA 
7(a) loans, the bill expands financing to small business 
exporters by increasing the maximum 7(a) trade loan guarantee 
amount from $1.75 million to $2.75 million and specifies that 
the loan cap is $3.67 million. Working capital would also be 
permitted as an eligible use of loan proceeds. The bill also 
makes international trade loans consistent with regular SBA 
7(a) loans by allowing the same collateral and refinancing 
terms. This provision originated in the 109th Congress from S. 
3663, the ``Small Business International Trade Enhancements Act 
of 2006,'' introduced by Senator Landrieu on July 14, 2006 and 
co-sponsored by Senators Bayh, Kerry, and Pryor.
    To address on-going complaints to the Committee regarding 
the Administration's elimination of the 7(a) Low-Doc program, 
and its harmful impact on lending in rural areas, the bill 
establishes the Rural Lending Outreach program. This section 
creates a new 7(a) loan to increase lending in rural areas. The 
maximum loan is $250,000 and provides incentives for lenders to 
participate, with an 85 percent guarantee and a requirement of 
the SBA to process loans within 36 hours. It streamlines 7(a) 
lending by requiring a short application and minimum 
documentation, and makes the eligibility requirements on the 
borrower more flexible. The provision replaces a study that was 
adopted by the Committee in the 109th Congress to assess 
whether the elimination of the Low-Doc program was reducing 
access to capital in rural areas. The Committee concluded that 
there is a need for an initiative to expand lending in rural 
areas.
    Finally, S. 1256 includes a provision to lower fees on 7(a) 
borrowers and lenders. The language was the most controversial 
aspect of this bill, despite the fact that a similar provision 
passed the full Senate as an amendment to the FY 2006 Commerce, 
Justice, Science appropriations bill and passed the Committee 
in July 2006 as part of S. 3778. The provision was intended to 
address on-going complaints about the Administration taking the 
program to zero subsidy in FY 2005, which shifted the cost to 
borrowers and lenders by imposing on them higher fees. The 
Administration justifies imposing higher fees as a ``savings'' 
to taxpayers, while the small business community considers the 
increase a ``tax.'' The small business community argued that 
this increase was unfair and unjustified given that the 
government had continually over-estimated the cost of the 
program, overcharging borrowers and lenders approximately $900 
million since 1992.\1\ In fact, since 1992 the government 
overcharged borrowers and lenders 13 out of 15 years.\2\ See 
chart. For this reason, many in Congress, on both sides of the 
aisle, opposed the elimination of funding for the program. The 
bill seeks to address overpayments by requiring the SBA to 
lower fees if borrowers and lenders pay more than is necessary 
to cover the program costs or if the Congress appropriates 
funds, which when combined with collected fees, are in excess 
of the funding necessary to cover the cost of the program.
---------------------------------------------------------------------------
    \1\GAO Report: ``Small Business Administration Section 7(a) General 
Business Loans Credit Subsidy Estimates,'' GAO-01-1095R, published 
August 21, 2001.
    \2\``Table 8.--LOAN GUARANTEES: SUBSIDY REESTIMATES,'' Page 58, 
Budget of the United States Government, FY 2008, Federal Credit 
Supplement.


    This language makes it possible to reduce fees for 
borrowers and lenders and corrects a drafting error. The 
original language adopted in the FY 2005 Omnibus Appropriations 
Act is deficient because it requires the fees to always be set 
at a level for zero subsidy. Even if Congress restored 
appropriations to the 7(a) loan program these funds could not 
be applied towards reducing the fees. This provision corrects 
this error. The language in S. 1256 is somewhat changed from 
the version adopted in the 109th Congress; it includes a 
limitation on the amount of appropriations that can be used to 
reduce the fees--to not more than the average of the over-
estimates of the three most recent years. This provision was 
added as a compromise between Chairman Kerry and Senators 
Isakson, Enzi, and Bond. Senators Isakson, Enzi, and Bond had 
filed an amendment to the chairman's mark that eliminated the 
reference to appropriations because they oppose any attempt to 
open the program back up to appropriations. Nevertheless, they 
agreed that it was important to try and reduce program fees 
when the government overcharges participants, as has happened 
routinely since 1992. The bill adopts a modified version of 
their amendment with that limitation.
    Many of the provisions in this Title were adopted as part 
of S. 3778 in the 109th Congress. They originated in the Small 
Business Lending Improvement Act (S. 1603), introduced by 
Senator Snowe in July 2005 and cosponsored by Senator Stevens, 
and in the 7(a) Loan Program Reauthorization Act of 2006 (S. 
2594), introduced by Senator Kerry in April 2006 and 
cosponsored by Senators Landrieu and Pryor.

Title IV--Certified development companies; 504 Loan program

    The purpose behind most of the 504 Loan Guaranty program 
changes was to address concerns that some certified development 
companies (CDCs) have started to act more like banks than non-
profits, seeking to expand wherever they see a deal without 
reinvesting the residual income from 504 loans back into the 
development of the relevant local community and economy.
    To more accurately reflect the purposes of the SBA's 504 
Loan Guaranty program, the bill changes the name of the program 
to the Local Development Business Loan Program (LDB Program). 
Materials already prepared using the name ``504 Program'' can 
continue to be used, so as to save money for the SBA and 
program participants.
    To provide more flexibility to the program, the bill 
provides that a CDC is not required to foreclose or liquidate 
its own defaulted loans, and may contract with a third party to 
process its foreclosures and liquidations. CDCs may also 
receive reimbursement from the SBA for foreclosure expenses 
that the SBA authorizes.
    To reduce costs on growing small businesses, the bill 
allows certain borrowers (start-ups or those using the proceeds 
for single purpose buildings) to contribute more equity/down-
payments to a project. This change makes it possible for the 
borrower to use their excess investment to reduce the amount of 
the private bank loan, thereby reducing their costs because the 
bank portion of a loan typically carries less favorable terms 
than the CDC portion of the loan.
    To make SBA's two largest loan programs more user friendly, 
the bill makes uniform the leasing policy for projects financed 
by 7(a) and 504 loans.
    To encourage businesses to locate in low-income areas, the 
bill adds several incentives to the 504 loan program. It 
provides that businesses in communities that would qualify for 
a New Markets Tax Credit can qualify as ``public policy goal'' 
loans in the 504 loan program are therefore eligible for larger 
loan guarantees of $4 million instead of the $2 million 
guarantee that is available for non-public policy goal loans. 
This would be similar to the special incentive for 
manufacturers, which allows for a maximum 504 loan of $4 
million maximum. As another incentive, this section would 
increase the SBA size standards issued by regulation to 
determine eligibility for a 504 loan in such areas. The amount 
of the proposed increase would be 25 percent and would apply to 
all standards, whether based upon the business' number of 
employees or annual sales. It would also apply to an 
alternative size standard for CDC financing, which is based 
upon the net income and net worth of the business. This change 
is similar to the special incentive used by the Department of 
Labor to encourage businesses in Labor Surplus Areas that 
increases size standards by 25 percent. Last, the section would 
increase the amount of personal liquidity or assets which an 
owner of a business may retain before being required to inject 
additional capital into a 504 project in order to reduce the 
amount needed from SBA. Theexemption would be increased by 25 
percent for loans in areas eligible for New Market Tax Credits.
    For the purposes of qualifying as a public policy goal 
loan, this bill allows businesses to qualify as ``minority 
owned'' if a majority of the business's ownership interests 
belong to one or more individuals who are minorities. 
Currently, the SBA interprets this rule such that two or more 
minorities cannot aggregate their interests (for example, two 
out of three owners) to qualify the business as minority owned.
    The bill permits a borrower to refinance a limited amount, 
based upon a formula, of the business's pre-existing debt, if 
that debt is already secured by a mortgage on the property 
being expanded by the new loan.
    The bill corrects a technical drafting error made in 
legislation enacted in 2004. That drafting error had 
inadvertently changed the meaning of the pre-existing Small 
Business Investment Act of 1958, which governs the 504 loan 
program.
    The repeal of the sunset provisions regarding reserve 
requirements for Premier Certified Lenders would make permanent 
a temporary statute that would otherwise have expired in the 
summer of 2006. This statute, enacted by Congress on a trial 
basis in 2004, allows CDCs qualified by the SBA as ``Premier 
Certified Lenders'' to amortize their reserve requirements and 
withdraw from the reserves the amount attributable to 
debentures as the debentures are re-paid. CDCs that choose to 
employ this new ability are thus able to make a greater number 
of loans in the program, rather than having needlessly large 
reserve accounts.
    The current Small Business Investment Act of 1958 (SBIA), 
which provides the legislative authority for the program, does 
not define a CDC; it is defined only in the SBA's regulations. 
To address that, the bill provides definitions of a 
``development company'' and a ``certified development 
company.'' It also provides a number of criteria to identify 
the types of entities that can qualify as CDCs and thus 
participate in the LDB Program. The standards in this Act are 
consistent with current regulations. In addition, the bill also 
imposes ethical requirements on CDCs, their employees, and 
banks participating in the program. It provides minimum 
requirements for CDCs regarding members, boards of directors, 
staffing and management expertise, and use of proceeds. The 
bill details requirements CDC loan review committees must meet 
in order to ensure that CDCs pursue local development goals, 
and allows CDCs operating in multiple states to elect to 
maintain their accounting on an aggregate basis.
    Responding to concerns that the changes which have allowed 
CDCs to expand operations into multiple states have had a 
significant impact on the 504 program, the Committee included 
provisions to preserve the local community and economic 
development intent and mission of the program and to provide 
increased accountability. There has been a growing demand for 
504 loans and many CDC operations have been expanding in 
response to this growth. The 504 program was not created for 
CDCs to merely generate revenue from one state to another. CDCs 
are more than lenders and should not act like for-profit banks. 
In order to further responsible CDC expansion, program growth, 
and increased access to capital for small business, while 
requiring that local communities continue to be the main focus 
of the program, the bill requires that the 25 members of the 
CDC board be residents of the area of operations. It also 
allows an individual to serve on the Board of Directors of two 
or more CDCs (but not serve as an officer of multiple CDCs), 
and removes regulatory barriers that have constrained CDC 
multi-state expansion. The bill allows borrowers the option to 
include loan and debenture closing costs in their loans.
    To simplify use of the 504 program and encourage CDCs to 
make loans to businesses in rural areas, the bill amends the 
definition of ``rural'' in the Small Business Investment Act of 
1958 to match the definition used by the U.S. Department of 
Agriculture. Specifically, it is defined as an area other than 
a city or town with a population greater than 50,000 
inhabitants, or the urbanized area contiguous and adjacent to 
such a city or town, would qualify. This will benefit the small 
businesses because development in a rural area qualifies as one 
of the public policy goals of the 504 program and allows such 
businesses to qualify for larger loans of $2 million, instead 
of $1.5 million.
    The bill includes a provision to lock in place the payment 
schedule for debentures at twice a year rather than monthly. 
The SBA proposed a monthly schedule at the roundtable on May 2, 
2007, and it received sharp criticism from the National 
Association of Development Companies. They feared it would 
scare off investors and drive up the cost of the program.
    The bill includes a provision to increase from $250,000 to 
$400,000 the trigger for mandating a real estate appraisal. The 
industry requested the cap be increased to $750,000, but the 
Administration thought this level would expose too much risk.
    The provisions in this subtitle originated in the Local 
Development Loan Program Act (S. 2162), introduced by Senator 
Snowe in December 2005, and in the 504 Loan Program 
Modernization Act of 2006 (S. 2595), introduced by Senator 
Kerry in April 2006, and co-sponsored by Senator Pryor. Most 
were adopted by the Committee as part of S. 3778 in the 109th 
Congress.
            Child Care Lending Pilot Program
    Title IV includes the creation of the Child Care Lending 
Pilot program to allow small non-profit child-care providers to 
receive 504 loans. This initiative is the product of work from 
the 107th, 108th, and 109th Congresses, including roundtables 
on May 1, 2003 and May 2, 2007.
    This pilot program responds to the shortage of affordable 
child care and the need for financing to expand and upgrade 
facilities by enabling lenders to make 504 loans to qualifying 
non-profit child-care providers. Currently, 504 loans can be 
made to for-profit child-care providers. The pilot program 
would be available through Fiscal Year 2010.
    During the roundtable on On May 1, 2003, Ms. Julie Cripe, 
President and CEO of Omnibank in Texas, and Ms. Ardith 
Wieworka, Commissioner of the Massachusetts Office of Child 
Care Services, explained why as a lending expert and as an 
expert on child care facilities, the Congress should allow non-
profit child care providers to be eligible for 504/CDC loans. 
It was noted that there is a shortage of affordable child care 
in the United States, with an estimated six million children 
left at home on a regular basis, according to the Census 
Bureau. During the roundtable on May 2, 2007, Ms. Joan Wasser 
Gish, Principal of Policy Progress in Massachusetts, 
presentedthe conclusions of a year-long Child Care Small Business 
Initiative lead by the office of Senator Kerry. The initiative included 
a statewide advisory committee, with a cross-section of stakeholders 
from the early education and child care industry, as well as, among 
others, representatives from the U.S. Small Business Administration's 
Massachusetts District, the Massachusetts Small Business Development 
Centers, SBA 504 lenders, the Center for Women and Enterprise, and SBA 
microlenders. The committee found that there is a ``dearth of lending 
and other financial resources available to nonprofit child care 
centers,'' and that the lack of child care had broader economic 
ramifications of ``inhibiting economic growth and productivity, 
community development, and work availability and productivity.'' Wasser 
Gish noted that the child care industry plays a vital role in 
supporting private enterprise and free competition: ``There are 5.8 
million small business that hire employees, and many of those hires are 
parents who are unable to work [because] of the availability of child 
care. . . . It is estimated that child care breakdowns leading to 
employee absences cost the United States businesses in excess of $3 
billion annually.'' She also cited a 2006 study from the State of Maine 
that found ``an urgent need'' for improving the quality of child care 
facilities, with more than 70 percent of the centers in Maine barred 
from getting accreditation because of their facilities. Wasser Gish 
emphasized the need for 504 loans to help these centers finance 
upgrades and expansion because child care providers are prohibited from 
using their child care development block grant funding for capital 
expenditures.
    While most of SBA's loan programs are not designed to serve 
non-profit entities, making SBA loans to non-profits is not 
unprecedented and many members of the Committee believe that 
non-profit child-care providers warrant special consideration 
because the shortage is so severe in many states and the 
industry is unique. For example, in order to qualify for 
certain types of Federal assistance for low income families, 
such as meal assistance, a child-care provider may be required 
to organize as a non-profit, rather than a for-profit, entity, 
which can have a negative impact on the entity's ability to 
obtain necessary capital. Whereas most service industries are 
made up of for-profit businesses, in many states a significant 
portion of child care is delivered through non-profits, and in 
the neediest communities non-profits are often the only child-
care providers. Further, entrepreneurs and employees, 
particularly women, often cite a lack of child care for their 
children as a substantial obstacle to their ability to be more 
actively involved in the small business sector of the economy.
    As referenced earlier, permitting non-profit child-care 
providers to participate in the 504 program is not completely 
unprecedented. The SBA's Microloan program has permitted loans 
to be made to non-profit child-care providers since 1997, and 
the SBA's physical disaster loan program makes loans to non-
profits, such as religious entities. Further, as part of the 
SBA's FY 2008 legislative package, the Administration proposed 
expanding lending to non-profits by seeking authority to make 
economic injury disaster loans to non-profits.
    The Committee stresses, however, that it does not intend to 
expand the SBA's loan programs to other types of non-profit 
entities in the future. The fundamental purpose of the SBA is 
to foster profitable small businesses and the entrepreneurs who 
start them. In order to ensure that this pilot program does not 
impede the ability of for-profit businesses to access capital 
through the 504 loan program, the bill limits the pilot program 
to 7 percent of the number of 504 loans guaranteed in any year. 
Currently, less than 2 percent of 504 loans are made to for-
profit child-care providers.
    As another protection, the bill requires collateral 
provided for a loan be owned directly by the child-care 
provider. This provision addresses a fear that, in some 
circumstances, 504 loans to certain non-profit child-care 
providers could be based on collateral that may be difficult 
for the lender to access. Going a step further, the bill 
requires the loan to be personally guaranteed and requires the 
borrower to have sufficient cash flow from its normal 
operations to both make its loan payments and pay for customary 
operating expenses. As an oversight protection, the bill 
directs the GAO to provide to Congress a comprehensive report 
analyzing the pilot program, as the program nears the end of 
its three-year pilot period.
    During the Committee's consideration of S. 1256, Senators 
Isakson, Enzi, and Bond filed an amendment to the Chairman's 
mark to eliminate the pilot and to instead mandate a study on 
the state of child care from the GAO. However, studies in 
Massachusetts and Maine, as noted earlier in this section, have 
already demonstrated a need for expanded and upgraded child 
care facilities and the lack of capital to help them finance 
the projects language. As a compromise, Chairman Kerry and 
Senators Isakson, Enzi, and Bond modified the amendment and 
agreed to limit the pilot to only 19 states, those of the 
members of the Committee. The amended pilot passed the 
Committee unanimously as part of the entire bill.
    The Child Care Lending pilot program was adopted by the 
Committee in the 108th and 109th Congresses and was voted out 
of the full Senate in the 108th. The pilot has many supporters, 
including the National Black Chamber of Commerce, the National 
Association of Development Companies, and representatives of 
child development in Maine and in Massachusetts.

                           IV. COMMITTEE VOTE

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following votes were recorded on May 16, 2007.
    A motion by Senator Kerry to adopt the managers' substitute 
amendment was passed by voice vote. The amendment included 
modified versions of three amendments filed by Senators 
Isakson, Enzi, and Bond regarding the reduction of 7(a) loan 
fees, the Child Care Lending Pilot program, and the Microloan 
program.
    A motion by the Chair to adopt the Small Business Lending 
Reauthorization and Improvements Act of 2007 as amended, to 
reauthorize the small business loan programs of the Small 
Business Administration and for other purposes, was approved by 
a unanimous 19-0 recorded vote with the following Senators 
voting in the affirmative: Kerry, Levin, Harkin, Lieberman, 
Landrieu, Cantwell, Bayh, Pryor, Cardin, Tester, Snowe, Bond, 
Coleman, Vitter, Dole, Thune, Corker, Enzi, and Isakson.

                            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.
                                                September 10, 2007.
Hon. John F. Kerry,
Chair, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
    Dear Mr. Chair: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1256, the Small 
Business Lending Reauthorization and Improvement Act of 2007.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                                   Peter R. Orszag.
    Enclosure.

S. 1256--Small Business Lending Reauthorization and Improvements Act of 
        2007

    Summary: S. 1256 would reauthorize the business and 
disaster loan programs of the Small Business Administration 
(SBA) through 2010. The bill also would make technical changes 
to the SBA's business loan programs, authorize two pilot loan 
programs, and reauthorize a grant program to support minority 
entrepreneurs. Finally, the bill would authorize SBA to use 
appropriated funds, with limits, in lieu of charging fees to 
cover the cost of 7(a) loan guarantees.
    Assuming appropriation of the necessary amounts, CBO 
estimates that implementing S. 1256 would cost $487 million in 
2008 and $3.4 billion over the 2008-2012 period. About $1.8 
billion of this amount is the estimated subsidy and 
administrative cost of continuing SBA's credit programs, and 
about $1.6 billion would be for SBA's noncredit programs and 
other activities authorized in the bill. CBO estimates that 
enacting the bill would not affect revenues and would have no 
significant effect on direct spending.
    S. 1256 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA). 
The bill would authorize grant funds that could benefit tribal 
governments. Any costs they might incur would result from 
complying with conditions of federal assistance.
    Major provisions: Title I would make technical changes to 
the microloan program, which provides funding to companies 
whose capital needs are too small to qualify for the larger SBA 
business loan programs. Title I also would reauthorize the 
Program for Investment in Microentrepreneurs (PRIME).
    Title II would create an Intermediary Lending Pilot 
Program, modeled after the microloan program, to provide 
midsize loans to small businesses. Under the pilot program, 
loans made to small businesses would range between $35,000 and 
$200,000.
    Title III would make a number of changes to the 7(a) loan 
guarantee program, including: creating a preferred lenders 
program, which would authorize certain lenders to make and 
service loans; increasing certain loan limits for 7(a) 
guarantees; and establishing a program to increase loans 
available in rural areas. This title also would authorize SBA 
to lower fees charged to borrowers and lenders for 7(a) loan 
guarantees under certain conditions and establish an Office of 
Minority Small Business Development.
    Title IV would make changes to SBA's 504 loan program, 
which provides loans through Certified Development Companies 
(CDCs) for investments in major fixed assets. S. 1256 would 
change the name of the program to the Local Development 
Business Loan Program, allow CDCs to contract with third 
parties to foreclose and liquidate defaulted loans, and adjust 
eligibility requirements to encourage investment in low-income 
areas. This title also would establish a pilot program that 
would authorize CDCs to make loans to nonprofit child care 
businesses in a limited number of states.
    S. 1256 also would set the maximum amount of loans and loan 
guarantees that could be funded by SBA for fiscal years 2008, 
2009, and 2010. In addition, it would provide specific 
authorizations of appropriations for the PRIME program and 
technical assistance grants for microloan recipients. Finally, 
the bill would authorize appropriations of such sums as may be 
necessary for salaries and expenses of the SBA, administrative 
expenses and loan capital for the disaster loan program, and 
administrative expenses and subsidy costs to carry out the 
Small Business Investment Act.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 1256 is shown in the following table. 
The costs of this legislation fall within budget functions 370 
(commerce and housing credit) and 450 (community and regional 
development).

                                 TABLE 1.--ESTIMATED BUDGETARY IMPACT OF S. 1256
----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                           -----------------------------------------------------
                                                              2007     2008     2009     2010     2011     2012
----------------------------------------------------------------------------------------------------------------
                                        SPENDING SUBJECT TO APPROPRIATION

SBA spending under current law:
    Budget authority\1\...................................      492        0        0        0        0        0
    Estimated outlays.....................................      357       95       23        5        0        0
Proposed changes:
    Loan programs:
        Estimated authorization level.....................        0      434      435      441      268      275
        Estimated outlays.................................        0      277      400      430      349      283
    Noncredit programs:
        Estimated authorization level.....................        0      386      394      402      310      318
        Estimated outlays.................................        0      210      310      368      382      365
    Total:
        Estimated authorization level.....................        0      820      829      843      578      593
        Estimated outlays.................................        0      487      710      798      731      648
SBA spending under S. 1256:
    Estimated authorization level\1\......................      492      820      829      843      578      593
    Estimated outlays.....................................      357      582      733      803      731     648
----------------------------------------------------------------------------------------------------------------
\1\The 2007 level is the amount appropriated for that year.

    Basis of estimate: For this estimate, CBO assumes that the 
bill will be enacted near the end of fiscal year 2007 and that 
the necessary amounts will be appropriated near the start of 
each year. We assume that spending will follow historical 
patterns for the various SBA loan and business assistance 
programs.
    The budgetary accounting for SBA's direct loan and loan 
guarantee programs is governed by the Federal Credit Reform Act 
(FCRA) of 1990, which requires an appropriation of subsidy and 
administrative costs associated with loan guarantees and loan 
operations. The subsidy cost is the estimated long-term cost to 
the government of a loan or loan guarantee, calculated on a 
net-present-value basis, excluding administrative costs. 
Administrative costs, recorded on a cash basis, include 
activities related to making, servicing, and liquidating loans 
as well as overseeing the performance of lenders.
    The effect of the changes S. 1256 would make to SBA's 
business and disaster loan programs is measured in terms of 
projected subsidy costs. The bill does not specify 
anauthorization level for either the subsidy or administrative costs, 
if any, that could be incurred as a result of implementing the 
amendments in the bill. CBO has estimated those amounts based on 
information from SBA regarding the historical demand for and costs of 
the agency's business and disaster loan programs. We assume that 
administrative activities related to those loans would continue beyond 
the 2008-2010 period.

Spending subject to appropriation

    S. 1256 would authorize SBA to continue its direct loan and 
loan guarantee programs as well as various technical assistance 
and support programs for fiscal years 2008 through 2010. Based 
on information from SBA and historical spending patterns for 
the agency's programs, CBO estimates that implementing those 
provisions would cost $3.4 billion over the 2008-2012 period, 
assuming appropriation of the necessary amounts.
    Table 2 shows the loan levels that would be authorized by 
the bill, the estimated subsidy and administrative costs for 
those loans, and the cost to continue certain grant programs 
and other activities authorized by the bill.
    Guaranteed and Direct Business Loan Programs. The following 
loan programs would be authorized by S. 1256:
     The 7(a) program, which provides limited 
guarantees on loans made by certain lending institutions to 
small businesses.
     The certified development company program (also 
known as section 504 loans), which provides guarantees on 
debentures issued by CDCs to provide funding to small 
businesses for major fixed assets such as land, structures, 
machinery, and equipment.
     The microloan program, which provides direct loans 
to nonprofit lenders which then offer loans to small businesses 
just starting up, whose capital needs are too small to qualify 
for the 7(a) program.
     The Small Business Investment Company (SBIC) 
debenture program, which provides funding to privately owned 
companies that provide venture capital to small businesses.

              TABLE 2.--ESTIMATED SUBSIDY, ADMINISTRATIVE, AND OTHER NONCREDIT COSTS UNDER S. 1256
----------------------------------------------------------------------------------------------------------------
                                                                     By fiscal year, in millions of dollars--
                                                                 -----------------------------------------------
                                                                    2008      2009      2010      2011     2012
----------------------------------------------------------------------------------------------------------------
Guaranteed and direct business loan subsidy and administration
 costs:
    Subsidy costs:
        Estimated authorization level...........................        13        13        13        0        0
        Estimated outlays.......................................         7        12        12        6        0
    Administration costs:
        Estimated authorization level...........................       127       131       135      138      142
        Estimated outlays.......................................        90       121       129      134      138
Lower 7(a) fees:
    Subsidy costs:
        Estimated authorization level...........................         8         2         0        0        0
        Estimated outlays.......................................         5         4         1        0        0
Small business intermediary lending program:
    Estimated authorization level...............................         3         3         3        0        0
    Estimated outlays...........................................         1         3         3        1        0
Disaster loan subsidy and administration costs:
    Subsidy costs:
        Estimated authorization level...........................       163       163       163        0        0
        Estimated outlays.......................................        82       146       163       82       16
    Administration costs:
        Estimated authorization level...........................       120       123       127      130      133
        Estimated outlays.......................................        92       114       122      126      129
Noncredit programs and costs PRIME program:
    Estimated authorization level...............................        17        17        17        0        0
    Estimated outlays...........................................         1         6        13       15       10
Other noncredit programs and costs:
    Estimated authorization level...............................       369       377       385      309      318
    Estimated outlays...........................................       209       304       355      367      355
Memorandum:
Authorized loan levels:
    Guaranteed and direct business loans........................    31,167    32,667    34,167        0        0
    Disaster loans..............................................     1,000     1,000     1,000        0        0
----------------------------------------------------------------------------------------------------------------

    The bill would authorize SBA to guarantee loans and to make 
direct loans to small businesses, with a total loan value up to 
$31 billion in 2008, $33 billion in 2009, and $34 billion in 
2010. By comparison, the authorized loan level for 2007 is 
about $28 billion. In 2006, the agency's authorized loan level 
was about $28 billion, and it funded direct and guaranteed 
loans worth about $20 billion in that year.
    The estimated subsidy rates for the business loan programs 
offered by SBA range from zero for 7(a) and section 504 
programs to about 10 percent for the microloan program. 
Incorporating the program amendments in the bill and using 
historical demand and default rates for those loan programs, 
CBO estimates that the subsidy costs for the authorized levels 
of guaranteed and direct business loans would be $7 million in 
2008 and about $37 million over the 2008-2012 period.
    As specified in FCRA, subsidy rates do not reflect the 
administrative costs to service loan programs. CBO estimates 
the administrative costs for the business loans authorized in 
the bill would be $90 million in fiscal year 2008 and $612 
million over the 2008-2012 period.
    Lowering 7(a) fees. S. 1256 would authorize SBA to use 
appropriated funds, if available and within limits, to lower 
certain fees charged to cover the estimated cost of loans 
guaranteed through the 7(a) program. The maximum annual fee 
reduction set by the bill would equal the average amount, over 
the previous three fiscal years, that fee collections have 
exceeded the cost of the underlying loan guarantees.
    Under current law, SBA develops a schedule of fees to be 
charged to both borrowers and lenders each fiscal year to 
produce an estimated subsidy rate of zero when the loans are 
guaranteed. In other words, each year SBA sets fees at the 
rate, in its estimation, that will generate collections equal 
to the estimated lifetime cost of providing the loan 
guarantees. Each year, SBA guarantees a growing number of 7(a) 
loans (over 90,000 in 2006); the net cost of those guarantees 
cannot be calculated until all the loans are closed out. At 
that point, SBA can determine if the fees charged were 
sufficient to cover the long-term cost of the guarantees--it is 
not until the loans are closed out that SBA can know whether 
fee collections were too high or too low.
    The projected subsidy cost for the 7(a) program in 2008, in 
the absence of fees, would be about 3.4 percent of the loan 
principal guaranteed, or about $305 million. Over the 2004-2006 
period, SBA reduced its estimate of the cost of 7(a) loan 
guarantees, indicating that in the early years of the loans, 
the cost of providing the guarantees was lower than SBA 
originally estimated. As those loans age, however, the 
guarantees could become more costly.
    Assuming appropriation of the maximum amount authorized by 
S. 1256 for reducing fees on the 7(a) program, CBO estimates 
that implementing this provision would cost $5 million in 2008. 
That estimate is the average amount of fees collected above the 
amounts SBA estimates would be necessary to fully offset the 
cost of guarantees over the fiscal year 2005-2006 period. We 
assume that SBA will set fees in subsequent years equal to the 
program's costs, thereby lowering the maximum amount available 
to reduce fees in each year. We estimate that this provision 
would cost $10 million over the 2008-2012 period.
    Small Business Intermediary Lending Program. The bill would 
authorize a three-year program to provide up to $20 million in 
loans, ranging in size from $35,000 to $200,000, to nonprofit 
lenders over the 2008-2010 period. The Small Business 
Intermediary Lending Pilot Program would make direct loans to 
nonprofit intermediaries that would, in turn, make loans to 
eligible small businesses. The program, modeled after the 
microloan program, would feature a 20-year loan term, an 
interest rate of 1 percent, and a two-year grace period before 
principal and interest payments would be first due. Based on 
information from the SBA, CBO estimates that the subsidy rate 
for the program would be about 38 percent, largely due to the 
difference between the government's borrowing rate and the rate 
SBA would charge the borrowers. We estimate that the subsidy 
cost for the authorized loan amounts would be $8 million over 
the 2008-2012 period.
    Disaster Loan Program. S. 1256 would reauthorize SBA's 
disaster loan program through 2010. This program provides 
direct loans to businesses and households in areas affected by 
a disaster for the costs of economic injury and repair. CBO 
expects that the demand for SBA disaster loans over the next 
several years would average about $1 billion per year. This 
assumption is based on the historical average of approved 
disaster loans over the 2000-2005 period, including an 
additional amount reflecting the probability that a catastrophe 
similar to Hurricane Katrina could strike in a given year.
    Based on historical experience, SBA estimates that the 
subsidy rate for those loans would be about 16 percent. Using 
that rate and assuming the appropriation of the necessary 
funds, CBO estimates that reauthorizing the disaster loan 
program through 2010 would cost $174 million in 2008 and about 
$1.1 billion over the 2008-2012 period. This estimate includes 
$489 million over the five-year period for the cost of 
subsidizing those loans and $583 million over the same period 
for loan service and administration.
    PRIME reauthorization. S. 1256 would authorize the Program 
for Investment in Microentrepreneurs (PRIME) through 2010. This 
program disburses grants to certain development organizations 
to provide very small businesses (microenterprises) with 
technical assistance, training, and capacity building services. 
Assuming appropriation of the specified amounts, CBO estimates 
that this provision would cost $45 million over the 2008-2012 
period.
    Other noncredit activities. S. 1256 would authorize 
specific amounts or such sums as necessary for the salaries and 
expenses of SBA and several programs to support certain types 
of small businesses. Based on information from SBA, CBO 
estimates that implementing those provisions of S. 1256 would 
cost $209 million in 2008 and about $1.6 billion over the 2008-
2012 period, assuming appropriation of the specified or 
necessary amounts.
    Specifically, the bill would authorize grants to nonprofit 
lenders participating in the microloan program to provide 
technical assistance to borrowers who receive loans under the 
program. Assuming appropriation of the specified amounts, CBO 
estimates this provision would cost $4 million in 2008 and $207 
million over the 2008-2012 period.
    The bill also would authorize $5 million per year over the 
2008-2010 period to establish the Office of Minority Small 
Business Development to increase the proportion of SBA loans, 
investments, training, and contracting opportunities directed 
toward minorities. Assuming appropriation of the specified 
amounts, CBO estimates this provision would cost $15 million 
over the 2008-2012 period.
    Salaries and expenses for SBA employees, other than those 
involved in the administration of direct loans and loan 
guarantees, make up the balance of the cost. CBO estimates that 
the cost to support grant administration, advocacy, and 
entrepreneurial programs would be about $200 million in 2008 
and $1.4 billion over the 2008-2012 period.

Direct spending

    SBA's Premier Certified Lenders Program gives a CDC 
participating in the 504 program the authority to review and 
approve loan requests and to foreclose, litigate, and liquidate 
loans made under the program. Under current law, CDCs 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 (that is, 1 percent of the total loan) in a 
reserve for the life of the loan.
    S. 1256 would reinstate a program that allows PCLs to 
maintain a lower loss reserve equal 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. This lower 
loss reserve option was previously authorized for two years; it 
expired in 2006. S. 1256 would reinstate the option 
permanently, which could affect the subsidy rate 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. Based on 
information from SBA, CBO estimates that this provision would 
not have a significant effect on the subsidy cost of 
outstanding loans.
    Intergovernmental and private-sector impact: S. 1256 
contains no intergovernmental or private-sector mandates as 
defined in UMRA. The bill would authorize grant funds that 
could benefit tribal governments. Any costs they might incur 
would result from complying with conditions of federal 
assistance.
    Previous CBO estimate: On April 19, 2007, CBO transmitted a 
cost estimate for H.R. 1332, the Small Business Lending 
Improvements Act of 2007, as ordered reported by the House 
Committee on Small Business on March 15, 2007. That bill 
contained many of the same technical changes to SBA's 7(a) and 
504 programs but did not provide maximum loan levels for the 
various business loan programs. H.R. 1332 also would authorize 
SBA to use appropriated funds rather than charging certain fees 
on loans guaranteed under the 7(a) program to cover the 
program's cost. CBO provided an estimate of the cost--$2.3 
billion over the 2008-2012 period--to fully replace such fees 
with appropriated funds.
    Estimate prepared by: Federal Costs: Susan Willie and 
Daniel Hoople; Impact on State, Local, and Tribal Governments: 
Elizabeth Cove; Impact on the Private Sector: Jacob Kuipers.
    Estimate approved by: Peter H. Fontaine, Assistant Director 
for Budget Analysis.

                  VI. 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.

                    VII. SECTION-BY-SECTION ANALYSIS

                      Title I--Microloan Programs


Sec. 101. Conforming technical change in average smaller loan size

    This section increases the average loan size from $7,500 to 
$10,000 in places in the Small Business Act where the size 
should have been changed as part of PL 106-554 but was not. 
Microloan intermediaries can receive additional technical 
assistance grants from the SBA for making microloans of smaller 
average sizes, loans that typically require more counseling and 
therefore are more expensive to service.

Sec. 102. Inclusion of persons with disabilities

    This section adds individuals with disabilities to the 
statutorily enumerated ``purposes'' of the program, clarifying 
that microloans can be made to such individuals. It does not 
change the implementation of the program.

Sec. 103. Microloan program improvements

    (a) Intermediary eligibility requirements. This subsection 
modifies the eligibility requirements so that an intermediary 
can qualify to participate if it has an employee with at least 
three years of experience making microloans and at least one 
year of experience providing intensive marketing, management 
and technical assistance to borrowers.
    (b) Limitation on third party technical assistance. This 
subsection increases from 25 to 30 percent the amount of 
technical assistance funds an intermediary may use to pay for 
hiring outside expertise to counsel borrowers, such as with 
taxes or specialists in a particular industry.
    (c) Increased flexibility for providing technical 
assistance to potential borrowers. This subsection increases 
from 25 to 30 percent the amount of technical assistance that 
intermediaries can provide to potential borrowers, versus those 
that get loans and need on-going counseling.

Sec. 104. PRIME reauthorization and transfer to the Small Business Act

    This subsection transfers the authorization of this program 
from the Riegle Act to the Small Business Act, clarifying that 
the program should be administered by the SBA, as defined in 
the original legislation that created the program. Of the money 
designated for this program, which provides technical 
assistance to micro-entrepreneurs, the section authorizes 
additional funds to serve Native Americans.

              Title II--Intermediary Lending Pilot Program


Sec. 201. Findings

Sec. 202. Small business intermediary lending pilot program

    This section creates a pilot program for the SBA to provide 
loans to intermediaries, which would then re-loan these funds 
to small businesses in loan amounts between $35,000 and 
$200,000. They would have terms of 20 years, at 1 percent 
interest rate. The intermediaries would not have to start 
paying back the loan for the first two years. The purpose of 
the pilot is to assist small businesses that need loans larger 
than those available through the Microloan program, but, for a 
variety of reasons, such as a lack of sufficient collateral, 
are unable to secure financing through conventional lenders, 
even with the assistance of the 7(a) Loan and 504 Loan Guaranty 
programs.

                      Title III--7(a) Loan Program


Sec. 301. Preferred lenders program

    This section establishes a program for proficient 7(a) 
lenders that delegates to them the authority to approve and 
liquidate 7(a) loans. This section also establishes a 
streamlined national preferred lender program, which allows 
lenders with a good track record to operate nationwide without 
having to seek approval from each of the SBA's district 
offices.

Sec. 302. Maximum loan amount

    This section increases the maximum loan to $3 million from 
$2 million, and increases the maximum accompanying guarantee 
from $1.5 million to $2.25 million.

Sec. 303. Maximum 504 and 7(a) loan eligibility

    This section permits a small business to obtain financing 
in the maximum amount permitted under the 504 program and also 
to obtain a 7(a) loan in the maximum amount permitted under 
that program.

Sec. 304. Loan pooling

    This section allows the SBA to pool loans with various 
interest rates, with the range determined by SBA. The interest 
rate on the certificates representing shares in the pool would 
be the weighted average rate. Currently SBA pools loans with 
the same interest rates to sell on the secondary market.

Sec. 305. Alternative size standard

    This section requires SBA to establish an optional size 
standard which is applicable to both 7(a) borrowers and 504 
borrowers, utilizing net worth and net income in lieu of 
industry standards,which are considered confusing and 
burdensome. In addition, it provides that until the Administrator does 
so, the alternative standard in the Code of Federal Regulations for 
504s (maximum net income of $7 million and maximum net worth of $2.5 
million) shall also apply to 7(a).

Sec. 306. Alternative variable interest rate

    This section directs the SBA to give lenders at least one 
alternative interest rate to the Wall Street prime rate. The 
provision is intended to reduce the variable interest rate 
charged on 7(a) loans to borrowers.

Sec. 307. Minority small business development

    This section creates an Office of Minority Business 
Development within the SBA. This provision expands the Office's 
authority and duties to work with and monitor the outcomes for 
programs under the SBA's Capital Access, Entrepreneurial 
Development, and Government Contracting programs. It also 
requires the head of the Office to work with SBA's partners, 
trade associations, and business groups to identify more 
effective ways to market to minority business owners, and to 
work with the head of Field Operations to ensure that district 
offices have staff and resources to market to minorities.

Sec. 308. Lowering of fees

    This section revises the current statute so that, if SBA 
receives appropriations for the 7(a) Loan Guaranty program, or 
the government overcharges borrowers and lenders and there is 
excess funding to run the program, the Administration will 
lower fees on borrowers and lenders. The current statute only 
allows fees to be lowered on borrowers. The section also limits 
the amount of appropriations that can be applied to reducing 
fees--the average of the three most recent years for which 
there were re-estimates.

Sec. 309. International trade loans

    This section increases the maximum loan guarantee amount to 
$2.75 million and specifies that the loan cap for International 
Trade Loans is $3.67 million, as well as sets out that working 
capital is an eligible use for loan proceeds. The bill also 
makes international trade loans consistent with regular SBA 
7(a) loans in terms of allowing the same collateral and 
refinancing terms as with regular 7(a) loans.

Sec. 310. Rural Lending Outreach Program

    This section creates a new 7(a) loan to increase lending in 
rural areas. The maximum loan is $250,000 and provides 
incentives to lenders to participate, with an 85 percent 
guarantee and a requirement of the SBA to process loans within 
36 hours. It streamlines 7(a) lending by requiring a short 
application and minimum documentation, and makes the 
eligibility requirements on the borrower more flexible.

      Title IV--Certified Development Companies; 504 Loan Program


Sec. 401. Development company loan programs

    This section renames the 504 Loan program as the Local 
Development Business Loan Program (LDB program)

Sec. 402. Loan liquidations

    This section provides that a certified development company 
(CDC) can elect not to foreclose or liquidate its own defaulted 
loans, and can instead contract with a third party to carry out 
the foreclosures and liquidations. CDCs can receive 
reimbursement from the SBA for foreclosure expenses that the 
SBA authorizes.

Sec. 403. Additional equity injections

    This section makes it possible for any equity provided by 
the borrower, beyond the minimum injection (down-payment) 
required, to be used to reduce the contribution amounts from 
the non-CDC portion of the loan deal. The purpose of the 
section is to help the borrower save money by buying down the 
other portions of the loan which often have less favorable 
terms or interest rates than the CDC portion of the loan.

Sec. 404. Uniform leasing policy

    This section makes uniform the leasing policy between 7(a) 
and 504 loans, by setting a common standard that allows 50 
percent of a facility to be leased on a new or existing 
building. This eliminates the current distinction between new 
and existing construction.

Sec. 405. Businesses in low-income communities

    This section provides incentives for businesses to locate 
in low-income communities. It allows for businesses in low-
income communities that would qualify for a New Markets Tax 
Credit to qualify as ``public policy goal'' loans in the 504 
loan program. It Increases the loan limit from $2 million to $4 
million. It also adds two incentives, including a provision to 
increase the size standard limitation on a business by 25 
percent, and another provision to decrease the additional 
personal liquidity down payment of a business owner by 25 
percent.

Sec. 406. Combinations of certain goals

    This section allows businesses to qualify as ``minority 
owned'' for purposes of qualifying as a public policy goal loan 
if a majority of the business's ownership interests belong to 
one or more individuals who are minorities.

Sec. 407. Refinancing under the local development business loan program

    This section permits a borrower to refinance a limited 
amount, based on a formula, of the business's pre-existing 
debt, if that debt is already secured by a mortgage on the 
property being expanded by the new loan.

Sec. 408. Technical correction

    This section corrects a technical drafting error made in 
legislation enacted in 2004, specifically to Section 501(e)(2) 
of the Small Business Investment Act of 1958.

Sec. 409. Definitions for the Small Business Investment Act of 1958

    This section defines a development company and a certified 
development company.

Sec. 410. Repeal of sunset on reserve requirements for premier 
        certified lenders

    This section would make permanent a temporary statute that 
allows CDCs qualified by the SBA as ``Premier Certified 
Lenders'' to amortize their reserve requirements and withdraw 
from the reserves the amount attributable to debentures as the 
debentures are repaid. The statute was set to expire in the 
summer of 2006 but has been temporarily extended until a three-
year reauthorization bill can be enacted.

Sec. 411. Certified development companies

    This section provides criteria to identify the types of 
entities that can qualify as certified development companies 
(CDCs) and thus participate in the 504 Loan program. The 
provision also imposes ethical requirements on CDCs, their 
employees, and banks participating in the program. This section 
provides minimum requirements for CDCs regarding members, 
boards of directors, staffing and management expertise, and use 
of proceeds. The section details requirements CDC loan review 
committees must meet in order to ensure that CDCs pursue local 
development goals, and allows CDCs operating in multiple states 
to elect to maintain their accounting on an aggregate basis. 
This section also allows CDC board members to assist other CDCs 
by serving on one other CDC Board.

Sec. 412. Conforming amendments

Sec. 413. Closing costs

    This section provides borrowers with the option to include 
loan and debenture closing costs in their loans.

Sec. 414. Definition of rural

    This section conforms the SBA's definition of a `rural 
area' in the 504 program, for the purposes of eligibility for a 
larger loan supporting a `public policy' goal, to the 
definition used by the Department of Agriculture.

Sec. 415. Regulations and effective date

    This section authorizes and directs the SBA to publish 
proposed regulations to implement this Act within 120 days of 
the date of enactment and to publish final regulations within 
an additional 120 days.

Sec. 416. Limitation on time for final approval of companies

    This section establishes a limitation of two years for 
final approval of companies.

Sec. 417. Child Care Lending Pilot Program

    This section creates a three-year pilot, allowing 504 loans 
to be made to non-profit child care businesses. Currently, only 
for-profit child care businesses are eligible for 504 loans. 
The bill requires the same underwriting standards for for-
profits as non-profits, with added protections to address the 
difference between a for-profit with owners and a non-profit 
without owners. It prohibits more than 7 percent of the total 
number of 504 loans in any fiscal year to be made for these 
purposes. The pilot is limited to the 19 states of Committee 
members.

Sec. 418. Debenture repayment

    This section would require that any debenture (or long term 
bond) issued to provide capital for a development company loan 
guaranteed by SBA shall provide for the payment of principal 
and interest on a semiannual basis.

Sec. 419. Real estate appraisals

    This section would increase the value of commercial real 
property given as collateral for a 7(a) or 504 loan on which an 
appraisal is required. On property valued at more than 
$400,000, an appraisal would be required (now required on 
property valued at more than $250,000); and on property valued 
at less than $400,000 (now $250,000) an appraisal may be 
required if SBA determines that an appraisal is necessary for 
the determination of creditworthiness of the borrower. 
Elimination of unneeded appraisals would reduce loan costs to 
borrowers by possibly $3,000 to $5,000.

                                  
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