[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.

                                  
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