[Senate Report 110-64]
[From the U.S. Government Publishing Office]
Calendar No. 139
110th Congress Report
SENATE
1st Session 110-64
======================================================================
SMALL BUSINESS DISASTER RESPONSE AND LOAN IMPROVEMENTS ACT OF 2007
_______
May 7, 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. 163]
The Committee on Small Business and Entrepreneurship, to
which was referred the bill (S. 163) to improve the disaster
loan program of the Small Business Administration, and for
other purposes, having considered the same, reports favorably
thereon with an amendment and recommends that the bill (as
amended) do pass.
I. INTRODUCTION
The Gulf Coast hurricanes of 2005 exposed many deficiencies
within the federal system for disaster response. The Small
Business Administration's (SBA) disaster loan program,
administered by the SBA Office of Disaster Assistance, is one
of the primary government resources available to help
homeowners and business owners rebuild their lives after a
disaster strikes.
By all accounts, the SBA failed in its mission to respond
quickly and effectively to victims' needs in the weeks and
months following the hurricanes. In some instances, disaster
victims waited three months or more for loans to be processed.
Although SBA Administrator Steven Preston has made significant
improvements to disaster loan processes, there are improvements
that require legislative action to ensure that the SBA is
prepared to handle future large-scale disasters. Many of the
important changes made by Administrator Preston need to be
written into law so this vital disaster response program does
not default to administrative discretion in the future. In the
20 months following Hurricane Katrina, the Committee has held
hearings and has offered numerous legislative proposals aimed
at providing legislative fixes.
Immediately after Hurricane Katrina, Senators Kerry and
Landrieu offered an amendment to the FY 2006 Commerce, Justice
and Science appropriations bill to address the needs of Gulf
Region small businesses and homeowners. This amendment was
adapted and a subsequent bipartisan amendment was offered by
then-Chair Snowe which passed the Senate by a vote of 96-0.
Although the Senate unanimously supported the amendment, it was
stripped out of the bill in Conference. Consequently, on
September 19, 2005, Senator Snowe introduced a stand-alone
bill, the ``Small Business, Homeowners, and Renters Disaster
Relief Act of 2005'' (S. 1724), which was identical to the
amendment.
On September 22, 2005, the Committee held the first of two
hearings on the Gulf Coast hurricanes, entitled ``The Impact of
Hurricane Katrina on Small Businesses.'' This hearing focused
on the impacts of the hurricanes on small businesses, and
provided the Committee with the opportunity to (1) receive a
briefing on how the SBA responded to the Hurricane; (2) analyze
the SBA's immediate and long-term response plans; (3) receive
feed-back on Hurricane Katrina-related small business
legislation; and (4) investigate how Congress and the SBA could
better assist victims of the Gulf Coast hurricanes and
displaced small businesses. Witnesses at this hearing included
representatives from the SBA, as well as several Gulf Coast
business owners, such as John Rowland, owner of Southern
Hospitality Systems, Inc. in Louisiana; Alta Baker, CEO of Safe
Haven Enterprises in Jennings, Louisiana; Michele Sutton, owner
of Fairway Ventures in Hammond, Louisiana; Richard Harris,
owner of Harris Homes in Ocean Springs, Mississippi; and
Timothy Swindall, Vice President of SWR, Inc. in Troy, Alabama.
Mary Lynn Wilkerson, State Director of the Louisiana Small
Business Development Center also testified.
The Committee held the second disaster hearing entitled,
``Strengthening Hurricane Recovery Efforts for Small
Businesses,'' on November 8, 2005. The Committee received an
update on the SBA's response to the 2005 hurricanes, analyzed
SBA's disaster response in the two months following the initial
disaster hearing, investigated the SBA's long-term disaster
response plans, and examined the Administration's policy
regarding prime and subcontracting opportunities for small
businesses. Witnesses at this hearing included representatives
from the SBA, the U.S. Army Corps of Engineers, the U.S.
Department of Homeland Security, the Government Accountability
Office, and the Office of the Governor of Louisiana. These
hearings provided insight into the immediate needs of affected
small businesses and laid a foundation for the Committee's SBA
disaster loan program reauthorization efforts. On September 30,
2005, Senators Snowe, Kerry, Landrieu, and Vitter introduced
the ``Small Business Hurricane Relief and Reconstruction Act of
2006'' (S. 1807). Although this bill represented a bipartisan,
comprehensive approach to hurricane relief, it stalled due to
the Administration's opposition. Many of the tools offered in
S. 1807 are reflected in this bill. In addition, several
provisions included in this bill originated from bills
introduced during the 109th Congress, such as Senator Kerry's
bill, the ``Small Business Disaster Loan Reauthorization and
Improvements Act of 2006'' (S. 3487), Senator Snowe and Senator
Vitter's bill, the ``Small Business Partners in Reconstruction
Act of 2006'' (S. 2608), and Senator Landrieu's bill, the
``Small Business Disaster Recovery Assistance Improvements Act
of 2006'' (S. 3664).
On August 2, 2006, the Committee unanimously passed a
comprehensive SBA reauthorization bill that included a title on
disaster response. This title, which represents the bipartisan
priorities for the Committee, became the foundation for
legislation introduced at the end of the 109th Congress,
entitled ``Small Business Disaster Response and Loan
Improvements Act of 2006'' (S. 4097). On January 4, 2007,
Chairman Kerry, Ranking Member Snowe, and Senators Landrieu and
Vitter introduced the ``Small Business Disaster Response and
Loan Improvements Act of 2007'' (S. 163).
On March 29, 2007, the Committee met in executive session
to consider an amendment offered by Chairman Kerry in the
nature of a substitute to S. 163. The substitute amendment
rearranged the provisions of the bill into four titles: (1)
Disaster Planning and Response; (2) Disaster Lending; (3)
Disaster Oversight; and (4) Energy Emergency Loans. The
amendment was adopted, as amended, and the Committee ordered
the bill to be reported.
II. DESCRIPTION OF BILL
Title I--Disaster planning and response
Under regulations normally in place, only homeowners,
renters, and for-profit businesses can apply for disaster
loans. The bill extends the eligibility to non-profit
institutions that was provided after the terrorist attacks of
September 11, 2001. This provision was included in the
Administration's legislative package for 2008.
The bill also increases the maximum size of an SBA disaster
loan from $1.5 million per loan to $2 million per loan.
Currently, when providing a disaster loan for uninsured damage
suffered by a disaster victim, the SBA can increase the loan
amount by up to 20 percent of the uninsured portion of the
borrower's losses, so the borrower can invest in disaster
mitigation technologies such as sea walls and storm shutters.
The bill increases the amount that a borrower can borrow to
spend on disaster mitigation. It would allow the SBA to
increase the loan amount to 20 percent of the borrower's total
losses, rather than just 20 percent of the uninsured portion.
This provision was suggested by the Administration in its
proposal to rebuild the Gulf Coast region.
After a disaster, the SBA usually provides additional staff
and funding to assist only the SBA's disaster loan program.
However, the Small Business Development Centers (SBDCs),
resource partners of the SBA, have played a critical role in
providing additional assistance and counseling to the victims
of disaster areas. To assist the SBDCs disaster recovery
efforts, the bill authorizes the Administrator to waive the
$100,000 maximum size for SBDC portability grants used for
disaster response. In addition, SBDCs will be authorized to
provide services to small businesses located outside the SBDC's
own home state if the small business concerns are located in a
disaster area. The Committee also believes that SBDCs should be
allowed to operate at disaster recovery sites, if permissible.
This bill also directs the SBA to create a contracting
outreach program for small businesses located in or having a
significant presence in designated disaster areas. Federal
contracts and subcontracts can provide critical assistance to
small businesses located in areas devastated by natural
disasters in the form of solid business opportunities and
prompt, steady pay. In addition, government procurement would
open doors for many local small businesses to participate in
the long-term reconstruction work necessary in these areas.
While many small businesses would benefit from other forms of
disaster assistance, many of them want to get back to work and
into business again as soon as possible. Technical assistance
and outreach through the SBA, the Procurement Technical
Assistance Centers, the Federal Offices of Small and
Disadvantaged Business Utilizations, and other organizations
could prove invaluable to these firms.
In its proposal to rebuild the Gulf Coast region, the
Administration proposed to increase the maximum size of SBA
surety bonds to $5 million, and provide the SBA with authority
to increase the maximum size to $10 million. Small businesses
vying for government contracts need an increase in bonds to
handle larger projects for disaster relief. The Committee
included this recommendation in the bill.
The Small Business Competitiveness Demonstration (Comp
Demo) Program denies protections established within the Small
Business Act known as set-asides to small businesses involved
in construction and specialty trade contracting, refuse systems
and related services, landscaping, pest control, non-nuclear
ship repair, and architectural and engineering services,
including surveying and mapping. Historically, small businesses
have been the backbone of these industries, and these
industries are in heavy demand for disaster recovery efforts.
The Comp Demo Program, ostensibly a test program, denies
federal agencies like the Department of Defense and nine other
agencies the ability to do small business set-asides.
Essentially, the Comp Demo Program reserves whole industries
for big business. The bill terminates the application of the
Small Business Comp Demo program.
Currently, the SBA cannot disburse disaster loans of more
than $10,000 without requiring collateral. This threshold is
not indexed to inflation, and has remained level at $10,000
since 1998. Prior to 1998, the amount was set at $5,000 since
the enactment of the Small Business Act in 1958. This bill
would raise the level to $14,000 to allow for homeowners and
businesses to access additional capital without the need for
collateral.
The federal response to Hurricane Katrina also demonstrated
the need for greater coordination among responding agencies.
Following the Gulf Coast hurricanes, the SBA staff and
volunteers found limited resources in terms of lodging in and
around the disaster areas. The difficulty in sharing records
between the IRS and the SBA resulted in extended delays in the
loan application process. Disaster assistance application
periods differed from agency to agency, making the application
process confusing and burdensome for victims.
This bill would enable FEMA, SBA, and other responding
agencies to coordinate efforts in the aftermath of a disaster
by making FEMA and SBA application periods consistent whenever
possible. SBA and FEMA would be required to notify Congress 10
days prior to the date of a deadline for assistance so that the
Committees may consider whether or not an extension is
necessary. The bill directs the Administrator to utilize radio,
television, print, and web-based outlets to communicate
information regarding available assistance under declared
disasters. FEMA and SBA are directed to enter into an agreement
that ensures adequate lodging and transportation for SBA
employees and contractors whenever possible during disaster
response. The bill also directs the SBA to develop a proactive
marketing plan to make the public aware of potential disaster
scenarios and what assistance is available through FEMA and
SBA.
Effective disaster response requires a clear set of
procedures to be followed. Inconsistencies in procedures can
lead to ineffective governance and breakdowns in response. In
the interest of ensuring that the SBA's regulations and
procedures are consistent, the Committee directs the
Administrator to conduct a study to determine whether the SBA's
standard operating procedures are consistent with the agency's
federal regulations for administering the disaster loan
program.
The Committee also recognizes that in the event of a large
scale disaster, the SBA needs resources in order to effectively
manage the volume of loan applications. The bill provides for
the SBA to contract with private contractors to process
disaster loans in the event of a large scale disaster. The SBA
is also authorized to contract with loss verification
professionals. The Administrator is directed to work to the
maximum extent practicable with the Commissioner of the
Internal Revenue Service to ensure that all relevant tax
records for disaster loan applicants are shared in an expedited
manner.
The Committee is concerned that the SBA did not have a
proactive, comprehensive disaster response plan in place in
August 2005. The Committee was pleased to learn that since May
2006, the SBA has been developing a comprehensive disaster
response plan and that the SBA provided a status report to the
Committee on this plan on July 14, 2006. Since this status
update, however, the SBA has not produced a comprehensive
response plan to date. The Committee expects the SBA to build
upon the lessons learned from its response to the 2005 Gulf
Coast hurricanes, and to ensure that the agency is better
prepared for future disasters.
The bill directs the SBA to submit to the Committee, along
with the House Small Business Committee, the comprehensive
disaster response plan of the Administration, along with a
report detailing any updates or modifications made to the
disaster response plan submitted July 14, 2006. To maintain
this plan and to plan and coordinate appropriate response
exercises, this bill creates a full-time disaster planning
specialist position in the Office of Disaster Assistance. The
plan shall include a description of how the Administrator
intends to utilize district office personnel; a description of
the disaster scalability model; a description of the structure
of the agency-wide Disaster Oversight Council; a description of
the Administrator's plans to coordinate disaster response with
state and local officials; recommendations on how the
Administrator can better coordinate response efforts with the
Departments of Commerce and Agriculture; any surge plans with
respect to loan processing and loss verification; the
Administrator's findings and recommendations based on a review
of the SBA response to the 2005 Gulf Coast hurricanes; and the
Adminstration's plan for providing accommodations and necessary
resources for disaster assistance personnel.
In this report, the Committee also expects the SBA to
provide information on how it plans to integrate and coordinate
the response to a disaster with the technical assistance
programs of the Administration, including the small business
development centers. Furthermore, in light of the GAO's report
entitled, ``Actions Needed to Provide More Timely Disaster
Assistance'' (GAO-06-860), which details why the SBA struggled
to provide timely assistance to homeowners affected by the Gulf
Coast hurricanes, the Committee directs the SBA to detail how
it plans to coordinate its efforts with the staff and resources
of the Federal Housing Administration in the U.S. Department of
Housing and Urban Development.
The SBA's centralized process for loan processing,
disbursement, and customer service provides no clear point of
access for disaster victims to communicate with SBA District
Offices regarding their loan applications. This bill creates a
disaster liaison to be staffed in each district office, who
will be charged with case management and outreach to disaster
victims as they proceed through the disaster loan process.
Additionally, the bill provides for district offices to have
the authority to process disaster loans in the event of a major
disaster declaration.
Title I also establishes floors for disaster reserve staff
as well as for full time disaster assistance staff. In
testimony before the Small Business Committee of the House of
Representatives, Administrator Preston expressed concern over
whether staff levels would dip below levels that are
appropriate during a period of fewer than average large scale
disasters. This provision would require the SBA to report to
the authorizing Committees whenever staffing levels dropped
below 800 for full time staff and 750 for the disaster reserve
corps, also referred to as disaster cadre.
Finally, Title I addresses the issue of the severe effects
of minimal snowfall on the tourism industry. The provision
requires the SBA to conduct a feasibility study on the ability
of the Administrator to provide Economic Injury Disaster Loans
to small businesses that depend on and are adversely affected
by a lack of snow. This is a critical issue for the northern
states across the country in areas where businesses rely on
heavy snowfall to flourish. Small businesses in the tourism
industry and those across the nation provide a significant
return on investment, bringing jobs and revenue to the
communities and states. It is critical that we think ahead, and
equip these small businesses with the knowledge and tools to
confront the challenges of tomorrow, so that they can create
jobs and continue to strengthen our economy.
Title II--Disaster lending
The federal response to the 2005 Gulf Coast hurricanes
demonstrated on a national stage the need for a reformed system
of disaster response. Victims were unable to access the capital
necessary to keep their businesses open in the aftermath, and
homeowners found the SBA's disaster loan application process
burdensome and slow. Six months after Katrina struck, 48
percent of all disaster loans still remained unprocessed. GAO
reported that as of May 27, 2006, the average length of time
for the SBA to process a disaster loan had reached 74 days,
well-above the Agency's stated goal of 21 days. Although
Administrator Preston has since taken demonstrable steps toward
improving the efficiency of this program, additional
legislative steps are necessary to improve and expand access to
capital for businesses and homeowners following a large scale
disaster.
Certain disasters impact businesses beyond the geographic
reach of a declared disaster area. Businesses across the Nation
can be affected by a large-scale disaster that disrupts a
region's economy. This was evident in the aftermath of the
terrorist attacks of September 11, 2001, and was again an issue
following the 2005 Gulf Coast hurricanes. As a result, this
bill creates a new declaration of disaster, a Catastrophic
National Disaster, that would be used to provide nationwide
economic injury disaster loans to businesses outside of a
disaster's geographic boundaries.
The Committee recognizes the need to provide affected
businesses with immediate access to capital and technical
assistance within the first 30 days following a disaster to
ensure their full recovery.
The Committee is also concerned that the SBA's Gulf
Opportunity (GO) Loan program, which was initiated in November
2005 to expedite small business financing to affected small
businesses, only provided 222 GO Loans totaling $19 million as
of May 2006, demonstrating that GO Loans were not an effective
tool for immediate, short term response.
For major disasters, State-administered bridge loan
programs have served as an effective means of providing
immediate capital to allow affected businesses to make repairs,
make payroll, and continue operations. The Committee is aware
of the problems the SBA faced in providing timely assistance to
businesses impacted by the 2005 hurricanes, as well as the
necessity for the SBA to have the ability to provide short-term
assistance. The success of state-administered bridge loan
programs are evidence that a short-term infusion of capital can
save businesses and jobs. As a result, the bill requires the
SBA to create an expedited disaster assistance business loan
program for future disasters. This program is designed to
provide businesses with expedited access to short-term loans
while they wait for other forms of long-term assistance.
The bill also creates a Private Disaster Loan (PDL) program
in which loans are made by private lenders who have applied for
eligibility. Under the program, eligible businesses must be
located in an area that was declared a disaster within the last
24 months. The business will not have to show a nexus between
its need for a loan, and the disaster that occurred.
The maximum loan size is set at $2 million. For businesses
applying for PDLs of more than $250,000, collateral is
required. Loans of less than $250,000 can be made without
collateral, so long as the borrower otherwise qualifies and is
approved by the bank The maximum term of the loan is set at 25
years if collateral is involved and 15 years for
uncollateralized loans.
The maximum guaranty of a PDL will be 85 percent, no matter
the size of the loan. In addition, the SBA guaranty fee, which
is 2 to 3.5 percent for regular 7(a) loans, will be zero. There
will be a loan origination fee of 15 basis points per loan paid
to lenders by the SBA using appropriated funds. The bill also
provides that the size standard used to determine a PDL
borrower's eligibility will be that which is currently used in
the 7(a) program or that which is used in the 504 loan program.
The acceptable uses of the loan proceeds are the same as those
applicable to current disaster loans approved under section
7(b).
The bill authorizes the program to receive federal
appropriations, and such appropriations will be used to reduce
the interest rate in the program by up to 3 percent. If
sufficient appropriations are provided, the interest rates
charged by banks will be subsidized so that they are reduced by
3 percent. If less appropriations are provided, the rates may
only be reduced by 2 percent, 1.5 percent, zero, etc.
For documenting each loan, lenders would be allowed to use
their own documents, subject to SBA approval, and applicants
would be permitted to use an internet or electronic application
process.
Title III--Disaster oversight
Included in this bill are provisions that direct the SBA to
provide monthly reports to the House and Senate Committees on
Small Business detailing disaster loan activity for the
previous month, as well as weekly accounting reports during
times of Presidentially-declared disasters. During the Gulf
Coast response efforts, the SBA nearly ran out of funding to
process loans. Congress had to step in twice to ensure
sufficient funding was available so that disaster loans could
continue to be processed and approved. The SBA has a
responsibility to inform its oversight committees in a timely
manner of any circumstances that may prevent the agency from
providing assistance to victims.
In addition to these reports, the SBA is required to
provide regular reports on the number of contracts that are
going to small businesses in federally-declared disaster areas,
as well as a report detailing the need for supplemental funding
when necessary.
Finally, the SBA is directed to conduct a study of how the
loan application process can be improved, including the
viability of using alternative methods for assessing ability to
repay a loan beyond a victim's credit rating. Too often,
victims who otherwise would be eligible for an SBA loan are
denied as a result of poor credit; however the process does not
take into account the extraordinary circumstances under which
the credit rating has gone down. The SBA's methods for
assessing ability to repay should take these circumstances into
account.
Title IV--Energy emergencies
This bill includes provisions which authorize the SBA
Administrator to make economic injury disaster loans to small
businesses that experience or are likely to experience economic
injury as a result of a significant increase in the price of
heating oil, natural gas, gasoline, propane, or kerosene. The
bill defines a significant increase as an increase of more than
40 percent of the average price from the previous two years,
taken over a period of ten days. The bill also authorizes the
Secretary of Agriculture to make similar loans to small farms
that are suffering similar economic injury. Both the
Administrator and the Secretary are required to report to
Congress on the effectiveness of the program.
This four-year pilot program will allow small businesses
and small farms to access the critical capital necessary to
sustain abnormally high energy prices. In addition, loans may
be used by borrowers to convert from the use of heating fuel to
a reusable or renewable energy source. The Committee believes
that energy economic injury disaster loans are necessary for
the sustainability of small, energy-dependent businesses and
farms during periods of increased cost, and that this program
will not only allow small businesses to remain open, but will
encourage them to seek alternative energy sources and to reduce
their dependence on conventional ones.
These provisions are from the Small Business and Farm
Energy Emergency Relief Act S. 269, introduced by Senator Kerry
in February of 2005. The bill has passed the Senate on two
separate occasions, as S. 295 in the 107th Congress and as an
amendment to the Energy Policy Act of 2005, although it was
later dropped in conference. The proposal has received
bipartisan support on both occasions.
III. COMMITTEE VOTE
In compliance with rule XXVI(7)(b) of the Standing Rules of
the Senate, the following votes were recorded on March 29,
2007.
A motion by Chairman Kerry to adopt the following
substitute amendment, as offered by Chairman Kerry, which
passed by voice vote.
Chairman Kerry's amendment reorganized S. 163 into four
titles: (1) Disaster Planning and Response; (2) Disaster
Lending; (3) Disaster Oversight; and (4) Energy Emergency
Loans. The amendment also made small changes to existing
provisions at the request of the Small Business Administration,
and added four additional sections (sections 113-116) to Title
I.
A motion by the Chair to adopt the Small Business Disaster
Response and Loan Improvements Act of 2007, as amended, was
approved by a voice vote.
IV. 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.
May 1, 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. 163, the Small
Business Disaster Response and Loan Improvements Act of 2007.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Daniel
Hoople.
Sincerely,
Peter R. Orszag.
Enclosure.
Summary: S. 163 would amend the existing disaster loan
program of the Small Business Administration (SBA), as well as
authorize several new loan programs for small businesses. The
bill would:
Make economic injury loans available to
nonprofit organizations;
Increase the maximum loan that can be made
for hazard mitigation purposes;
Authorize SBA to contract with private
entities to process loans and verify losses;
Establish an immediate assistance program;
and
Guarantee certain private loans made to
small businesses in response to a disaster.
Moreover, the bill would create two new direct loan
programs for small businesses and agricultural producers
suffering economic injury as a result of increased energy
prices. CBO estimates that implementing S. 163 would cost $265
million over the 2008-2012 period, subject to the appropriation
of the necessary funds. Enacting the bill would not affect
direct spending or revenues.
S. 163 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would impose no costs on State, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of the bill is shown in the following table.
The costs of this legislation fall within budget functions 350
(agriculture) and 450 (community and regional development).
------------------------------------------------------------------------
By fiscal year, in millions of
dollars--
---------------------------------------
2008 2009 2010 2011 2012
------------------------------------------------------------------------
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Disaster Loan Guarantees:
Estimated Authorization 34 35 35 37 38
Level......................
Estimated Outlays........... 20 31 35 36 37
Energy Emergency Loans to
Nonfarm Businesses:
Estimated Authorization 13 13 13 14 6
Level......................
Estimated Outlays........... 8 12 13 13 10
Disaster Loans to Private
Nonprofit Organizations:
Estimated Authorization 3 3 3 3 3
Level......................
Estimated Outlays........... 2 3 3 3 3
Agricultural Producer Emergency
Loans:
Estimated Authorization 3 3 3 3 0
Level......................
Estimated Outlays........... 2 3 3 3 1
Other Provisions Affecting SBA:
Estimated Authorization 6 5 5 5 5
Level......................
Estimated Outlays........... 4 5 5 5 5
Total Proposed Changes:
Estimated Authorization 59 59 59 62 52
Level..................
Estimated Outlays....... 36 54 59 60 56
------------------------------------------------------------------------
Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted before the end of fiscal year 2007, that
the necessary amounts will be appropriated for each year, and
that spending will follow historical patterns for current and
similar programs.
The budgetary impact of the bill on SBA's credit programs
is measured in terms of projected subsidy costs. Under the
Federal Credit Reform Act, such subsidy costs are estimated and
recorded on the budget on a present value basis. S. 163 does
not specify an explicit loan level authorization for either the
subsidy or the administrative costs for the amendments it would
make to SBA's disaster loan program or for the new direct loan
and loan guarantee programs authorized by the bill; CBO
estimated those amounts using historical information about the
demand for disaster loans and the past performance of SBA's
disaster loan program.
Disaster loan guarantees
Section 202 would establish a new loan guarantee program
for small businesses located in an area affected by a disaster.
Under the proposal, a small business could apply directly to a
qualified private lender for a disaster loan instead of
applying to SBA, as under current law. The limit on individual
loans would be $2 million and the federal government would
guarantee up to 85 percent of the loan. In addition, the
federal government would be authorized to pay a fee to the
lenders for each loan originated under the program and to
provide an interest rate subsidy of up to 3 percent.
CBO expects that demand for the new loan guarantee program
would come from businesses that could otherwise obtain a loan
from the private market. Assuming the maximum interest subsidy
allowable under the bill, such borrowers would likely receive
more favorable terms under the new loan guarantee program than
currently offered by SBA or a private lender. (Businesses
determined by SBA to be unable to obtain credit in the private
market, however, would continue to receive more favorable terms
under SBA's direct loan program and thus would not likely
participate in the new guarantee program.)
CBO estimates that the federal government would guarantee
about $100 million per year in loans under this new program.
Included in this estimate is $50 million in loans to businesses
that would otherwise borrow through SBA's direct loan program
under current law. As such, the cost of those loan guarantees
would be the marginal cost of subsidizing a loan guarantee
rather than a direct SBA loan. In addition, our estimate
includes about $50 million in loans to small businesses that
would not have elected to obtain financing through SBA under
current law. The additional cost for SBA to guarantee those
loans, therefore, would equal the full subsidy cost of the new
guarantees.
Assuming that SBA would guarantee 85 percent (the maximum
guarantee level authorized) of these loans and would subsidize
the interest rate at the maximum allowable level under the
bill, CBO estimates that the subsidy rate for this new loan
program would be 30 percent. As such, CBO estimates that
implementing this new loan guarantee program would cost $20
million in 2008 and about $160 million over the 2008-2012
period for subsidy costs and administration.
Energy emergency loans to nonfarm businesses
Section 402 would authorize the SBA to provide loans up to
$1.5 million to each small business that has suffered
substantial economic injury as the result of increases in the
price of heating fuel since October 2004. Small businesses
could use loan proceeds to convert heating systems from heating
fuel to renewable or alternative energy sources. Under the
bill, the authority to make such loans would expire after four
years.
The SBA disbursed an average of 1,300 Economic Injury
Disaster Loans (EIDLs) per year over the 2003-2005 period (2006
was excluded due to abnormalities resulting from loans made to
areas affected by Hurricanes Katrina, Rita, and Wilma), with
each loan averaging about $75,000. CBO estimates that demand
for the energy emergency loan program would increase the number
of EIDLs by 40 percent. In addition, CBO expects that loans
made to businesses with higher energy costs would be more risky
than loans made under the regular disaster program. As such,
CBO estimates that the subsidy rate associated with this
program would be 20 percent (the estimated subsidy rate for the
regular disaster program is 16 percent in 2008). Based on these
parameters, CBO estimates that implementing this loan program
would cost $8 million in 2008 and $56 million over the 2008-
2012 period for subsidy and administrative costs.
Disaster loans to private nonprofit organizations
Section 101 would expand SBA's EIDL program to include
private, nonprofit organizations. Under current law, nonprofits
may apply to SBA for physical damage disaster loans, but are
not eligible to apply for economic injury loans. Based on the
historical volume of physical disaster loans made to nonprofits
and of EIDLs made to small businesses, CBO estimates that
implementing this provision would cost $2 million in 2008 and
$14 million over the 2008-2012 period for the subsidy costs of
such loans and for administrative expenses.
Agricultural producer emergency loans
Section 403 would amend an existing credit program
administered by the Farm Service Agency of the USDA. The bill
would expand eligibility for the emergency loan program to
allow loans to producers with losses resulting from increased
energy costs for the next four years. The Administration
currently estimates that this program has a subsidy rate of 12
percent. In 2006, loan volume was $52 million. CBO estimates
the proposed legislation would increase the volume of lending
under the program by $25 million a year, with estimated subsidy
outlays of $12 million over the 2008-2012 period.
Business expedited disaster assistance program
Section 204 would direct SBA to establish a short-term loan
program for small businesses affected by a disaster. Loans made
under this new program would be for less than 180 days and
could be used to pay employees, make repairs, purchase
inventory, or cover other necessary costs until such time that
the business is able to obtain funding through insurance claims
or other federal assistance. Such loans would carry an interest
rate of up to one percent above the prime interest rate charged
by a private lender and could be refinanced using any
subsequent assistance provided by SBA. CBO expects that demand
for other SBA loans would not be significantly diminished by
this new authority, although additional risk would be incurred
for borrowers that receive a short-term loan and are later
denied a traditional disaster loan. SBA expects that because
that situation is not likely to occur often, CBO estimates that
this program would have a negligible cost over the next five
years.
Disaster mitigation loans
Section 102 would authorize SBA to make or guarantee loans
for disaster mitigation up to a maximum of 20 percent of the
assessed damage to a home or business. Currently, SBA offers
direct loans for disaster mitigation purposes up to a maximum
of 20 percent of an approved disaster loan. In some cases, SBA
will make a disaster loan for less than the assessed damage due
to factors such as reimbursements from other sources. Thus, S.
163 would increase the maximum amount of a disaster mitigation
loan by 20 percent of the difference between assessed damages
and the approved loan amount. The demand for such loans tends
to be relatively small, and CBO estimates that implementing
this provision would have a negligible effect on the federal
budget over the next five years.
Contracting for disaster loan processing and verification
Section 111 would authorize SBA to enter into agreements
with private contractors and lenders to process and verify
losses for disaster loans during major or catastrophic
disasters. For this work, SBA would pay a fee for each loan
processed or loss verified. Assuming a minimal difference in
the fee paid by SBA and the administrative expense that the
government would otherwise incur, CBO estimates that
implementing this provision would have a negligible effect on
the federal budget.
Catastrophic national disaster loan program
Section 201 would require the Department of Homeland
Security, the Federal Emergency Management Agency, and SBA to
establish a threshold for determining when an event would be
deemed a catastrophic national disaster. Upon such a
declaration, the SBA would be authorized under the bill to
offer economic injury loans to small businesses nationwide that
were adversely affected by the catastrophe. The terms of this
loan program would be identical to the terms of the EIDL
program under current law. SBA implemented a similar program
following the terrorist attacks of September 2001. More than
$500 million in economic injury loans were disbursed nationwide
at a subsidy rate of abut 25 percent. Nonetheless, CBO cannot
estimate the additional cost of this new loan program because
CBO cannot predict the timing and severity of future disasters,
nor what final criteria would be used to determine such an
event. Over the next five years, we expect that the program
would probably have a negligible cost because such disasters
are rare.
Other provisions affecting SBA
Based on information from SBA, CBO estimates that
implementing other provisions of S. 163 would require
appropriations totaling $26 million over the next five years.
That amount includes:
$15 million to hire a full-time disaster
planning specialist and other staff necessary to
maintain the levels specified in the bill and to
fulfill additional reporting requirements;
$5 million to increase the maximum surety
bond that SBA may guarantee for small businesses
performing recovery work following a disaster who
cannot obtain surety bonds in the private market;
$5 million to establish a contracting
outreach and technical assistance program for small
businesses located in disaster areas; and
$1 million to develop and execute simulation
exercises to test the effectiveness of the disaster
response plan.
Those estimates are based on information from SBA regarding
costs of existing or similar programs. Based on historical
spending patterns, CBO estimates that fully funding those
activities would cost $4 million in 2008 and $24 million over
the next five years, assuming appropriation of the necessary
amounts.
Intergovernmental and private-sector impact: S. 163
contains no intergovernmental or private-sector mandates as
defined in UMRA and would impose no costs on State, local, or
tribal governments.
Estimate prepared by: Federal costs: SBA--Daniel Hoople;
USDA--Greg Hitz. Impact on State, local, and tribal
governments: Melissa Merrell. Impact on the private sector:
Craig Cammarata.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
V. 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.