[Senate Report 114-421]
[From the U.S. Government Publishing Office]


                                                      Calendar No. 512
114th Congress     }                                    {       Report
                                 SENATE
 2d Session        }                                    {      114-421

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



 
                  SMALL BUSINESS LENDING OVERSIGHT ACT

                                _______
                                

               December 20, 2016.--Ordered to be printed

   Filed, under authority of the order of the Senate of December 10 
                  (legislative day, December 9), 2016

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 2992]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill (S. 2992), to amend the Small 
Business Act to strengthen the Office of Credit Risk Management 
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 Act (S. 2992) was introduced by the Committee's 
Chairman, Senator David Vitter on May 25, 2016. Senator Vitter 
was joined by Senators Jeanne Shaheen, Kelly Ayotte, Gary 
Peters, James Risch, and Michael Enzi in introducing the bill.
    The Small Business Lending Oversight Act amends the Small 
Business Act to codify the Small Business Administration 
(SBA)'s Office of Credit Risk Management (OCRM) and provide the 
office with the authority to impose specified administrative 
penalties, including monetary penalties, on any 7(a) lender 
that knowingly and repeatedly violates the laws and regulations 
of the SBA's 7(a) loan guaranty program. The primary goal of 
this bill is to strengthen the SBA's ability to conduct 
effective lending oversight and to provide Congress with 
information regarding the SBA's oversight actions.
    During the markup of the bill, an amendment by Senator 
Coons, for himself and Senator Risch, was agreed to by roll 
call vote as part of a manager's package. The Coons-Risch 
amendment provides the SBA authority to increase the 7(a) loan 
program level by up to 10 percent, as long as the 
Administration submits notification to the Senate and House 
Appropriators 45 days in advance of exercising the increase, 
and receives written approval from the committees. The bill, as 
amended, was approved by roll call vote. Senators Vitter, 
Risch, Rubio, Paul, Scott, Fischer, Gardner, Ernst, Ayotte, 
Enzi, Shaheen, Cantwell, Heitkamp, Markey, Coons and Peters 
voted for the bill, while Senators Cardin, Booker and Hirono 
voted against it.

              II. HISTORY (PURPOSE & NEED FOR LEGISLATION)

    The lack of access to affordable capital limits the 
creation, growth, and expansion of small businesses, and it is 
the main contributing factor to their failure. Nearly a quarter 
of small businesses fail in their first year, and nearly half 
do not make it past their third year. During the 2008 
recession, small and medium-sized businesses disproportionately 
experienced more layoffs and failure rates. This was primarily 
driven by contraction in credit markets and heightened 
collateral requirements. The 7(a) program, through government 
guaranteed loans made by private-sector lenders, provides small 
businesses with the capital they need for a broad range of 
purposes, from working capital for payroll and inventory to 
financing for buildings and equipment. The maximum loan size is 
$5 million, and the maximum term is 25 years. The SBA's Office 
of Credit Risk Management (OCRM) oversees the program and the 
lenders, however, their only method of enforcing compliance is 
to completely bar a lender from participation in the program. 
To protect the integrity of the SBA's 7(a) program, this bill 
provides graduated options for enforcement, rather than the 
current nuclear option of enforcement. The graduated options 
include civil penalties, which are based on the frequency and 
severity of program violations. This legislation provides the 
OCRM more flexibility in addressing issues within the program.

                      III. HEARINGS & ROUNDTABLES

    In the 114th Congress:
    On May 26, 2016, the committee held a hearing entitled 
``Oversight of the SBA's 7(a) Loan Guaranty Program.'' The 
hearing's only witness was the Honorable Maria Contreras-Sweet, 
the Administrator of the U.S. Small Business Administration. 
The committee examined whether taxpayers and small businesses 
would receive adequate protection by reforming the 7(a) program 
to strengthen the Office of Credit Risk Management and by 
authorizing graduated enforcement options that provide 
regulators with greater flexibility. The committee also 
recognized the support for this reform from the American 
Bankers Association, the National Association of Government 
Guaranteed Lenders, and the Independent Community Bankers of 
America.

                        IV. DESCRIPTION OF BILL

    As part of their mission to promote and support small 
businesses, the Small Business Administration (SBA) manages 
multiple loan programs targeted at providing small business 
capital. SBA's flagship loan program, the 7(a) loan guaranty, 
provides an SBA guarantee on loans to small businesses for use 
in establishing a new business or to assist in the operation, 
acquisition, or expansion of an existing business. Since 2008, 
the program has seen growth of nearly 200%, with the annual 
growth rate from 2012 to 2016 averaging 15.9%. This growth has 
required 5 authorization cap increases in the past 3 years.
    The bill's primary goal is to strengthen SBA's ability to 
conduct effective lending oversight and to provide Congress 
with information regarding the SBA's oversight actions. It 
would achieve that objective by bolstering the enforcement 
authority of the Office of Credit Risk Management and its 
director to conduct oversight of lenders within the program; 
lowering the split fee cap on secondary market sales from 110 
percent to 108 percent; managing program risk, and redefining 
``credit elsewhere'' to focus on the borrower's ability to 
obtain credit as opposed to a lender's ability to provide it.
    Senators Coons and Risch put forward an amendment (see 
Section 7) designed to provide certainty in lending to small 
businesses that need financing through the SBA's largest loan 
program, known as the 7(a) Loan Guaranty program. The 7(a) 
program guarantees loans made by the private-sector to 
qualified small businesses ``that might not otherwise obtain 
financing on reasonable terms and conditions.'' The program is 
funded entirely through fees paid by borrowers and lenders and 
does not require taxpayer funding for the loans. However, the 
volume of lending each fiscal year is established by Congress 
and requires legislation to change. The demand for capital 
through 7(a) loans has exceeded estimates in recent years and 
required emergency action by Congress to increase the program 
level and prevent a long-term shutdown of the program. To 
provide flexibility in addressing rapid growth in the future, 
the Coons-Risch amendment would provide SBA with the authority 
to increase the 7(a) loan program level by up to 10 percent, as 
long as the Administration submits notification to the Senate 
and House Appropriators 45 days in advance of exercising the 
increase, and receives written approval from the committees. 
The U.S. Department of Agriculture has similar authority for 
its loan guaranty programs. The Coons-Risch amendment adopted 
in Committee is similar to S. 2496, the ``Help Small Business 
Access Affordable Credit Act,'' introduced on February 3, 2016, 
by Senators Coons, Risch and Shaheen.

                           V. COMMITTEE VOTE

    In compliance with rule XXVI (7)(b) of the Standing Rules 
of the Senate, the following vote was recorded on June 8, 2016.
    A motion to adopt S. 2992, the Small Business Lending 
Oversight Act, a bill to strengthen the Office of Credit Risk 
Management of the Small Business Administration and improve 
lender oversight, as amended by the Coons-Risch amendment, was 
approved by roll call vote as part of a manager's package. 
Senators Vitter, Risch, Rubio, Paul, Scott, Fischer, Gardner, 
Ernst, Ayotte, Enzi, Shaheen, Cantwell, Heitkamp, Markey, Coons 
and Peters voted for the bill, while Senators Cardin, Booker 
and Hirono voted against it.

                           VI. 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 19, 2016.
Hon. David Vitter,
Chairman, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2992, the Small 
Business Lending Oversight Act of 2016.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

S. 2992--Small Business Lending Oversight Act

    S. 2992 would direct the Small Business Administration 
(SBA) to establish an Office of Credit Risk Management to be 
responsible for reviewing certain entities that issue loans 
guaranteed by the SBA; developing risk analysis reports; and 
performing on-site reviews of such entities' operations. The 
SBA already has an Office of Credit Risk Management that 
performs similar functions. The bill would grant the office the 
authority to impose new sanctions and civil penalties against 
lenders for certain prohibited actions and would expand its 
reporting and review responsibilities. Based on an analysis of 
information from the SBA about the current activities of the 
office, CBO estimates that implementing this provision would 
require 17 new employees at an annual cost of about $120,000 
each to perform additional on-site reviews and to meet 
additional reporting and enforcement requirements. Total cost 
would amount to $10 million over the 2017-2021 period, CBO 
estimates.
    S. 2992 also would direct the SBA to conduct additional 
analyses of the loan portfolios of certain lenders and would 
restrict those lenders' ability to approve loans under certain 
conditions, such as if their portfolios contain loans that were 
concentrated in any one industry that exceeds thresholds in the 
bill. The SBA also would be required to conduct annual risk 
analyses of some of its loan portfolios and to issue an annual 
report on its findings, beginning in 2018. On the basis of 
information from the SBA, CBO estimates that implementing those 
provisions would cost $3 million over the 2017-2021 period for 
SBA to conduct additional analyses, issue reports to the 
Congress, and revise and write new regulations.
    Enacting S. 2992 could increase revenues from new civil 
penalties; therefore, pay-as-you-go procedures apply. However, 
CBO estimates that those revenue increases would not be 
significant. Enacting the bill would not affect direct 
spending.
    CBO estimates that enacting S. 2992 would not increase net 
direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2027.
    S. 2992 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was approved by H. Samuel Papenfuss, Deputy 
Assistant Director for Budget Analysis.

                  VII. 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.

                   VIII. SECTION-BY-SECTION ANALYSIS

Section 1. Title

Section 2.

    This bill amends the Small Business Act to establish within 
the Small Business Administration (SBA) an Office of Credit 
Risk Management (OCRM) to impose specified administrative 
penalties, including monetary penalties, on any loan-financing 
lender that knowingly and repeatedly:
           fails properly to determine and document 
        that a small business loan is eligible for financing, 
        including failure to document that a loan is eligible 
        because the applicant is unable to obtain credit 
        elsewhere (from non-federal, non-state, or non-local 
        government sources);
           sells the guaranteed portion of a loan when 
        the loan proceeds have not been fully disbursed in 
        accordance with program requirements;
           imposes on a loan applicant a fee that the 
        SBA has not specifically authorized; or
           re-amortizes a loan solely to make the loan 
        appear current.
    The SBA shall conduct annual risk analyses of its loan 
portfolio.

Section 3. The term ``credit elsewhere'' shall expand beyond non-
        federal sources to encompass credit to an individual loan 
        applicant on reasonable terms and conditions from non-state and 
        non-local government sources, including but not limited to:

           the business industry in which the loan 
        applicant operates;
           whether the applicant is an enterprise that 
        has been in operation for less than two years;
           the adequacy of the collateral available to 
        secure the requested loan; and
           the loan term necessary to reasonably assure 
        the applicant's ability to repay t he debt from the 
        actual or projected cash flow of the business.

Section 4. The SBA shall assess a separate fee of up to 0.03% per year 
        of the outstanding balance of the deferred participation share 
        of each approved loan, whose proceeds shall be used solely to 
        support OCRM operations.

    The SBA shall collect a fee (currently discretionary) for 
any loan guarantee sold into the secondary market in an amount 
equal to 50% of the portion of the sale price that exceeds 108% 
(currently 110%) of the outstanding principal amount of the 
portion of the loan guaranteed by the SBA.

Section 5. The SBA shall also, at the end of each year, calculate the 
        percentage of loans in a lender's portfolio made without a 
        contribution of borrower equity when the loan's purpose was to 
        establish a new small business concern, to effectuate a change 
        of small business ownership, or to purchase real estate. This 
        requirement applies only to a lender that makes loans under 
        authority delegated to the lender as a participant in the 
        Preferred Lenders Program. No new loan application without a 
        contribution of borrower equity, except in certain 
        circumstances, may be approved if more than 15% of the lender's 
        loan portfolio is without such a contribution.

    The SBA shall make end-of-year calculations, too, of 
industry concentrations for each such lender, using the 
applicable six-digit classification code under the North 
American Industry Classification System. No new loan 
application to a lender from a small business concern operating 
in a single industry, except in certain circumstances, may be 
approved if over 20% of the lender's loans are concentrated in 
that industry.
    The SBA may not approve any loan if its financing is more 
than 100% of project costs.

Section 6. A lender may use an outside agent or lender service provider 
        to assist in identifying potential applicants and with 
        processing, disbursing, servicing, and liquidating a loan.

    With respect to an SBA loan for plant acquisition, 
construction, conversion, or expansion, including the 
acquisition of land, material, supplies, equipment, and working 
capital, as well as a loan to any qualified small business 
concern, no lender may, without SBA approval, sell an amount 
higher than 85% of the loan, or the percentage guaranteed by 
the SBA, whichever is greater.

Section 7. General business loans

    This section amends the Small Business Act provide the SBA 
authority to increase the 7(a) loan program level by up to 10 
percent, as long as the Administration submits notification to 
the Senate and House Appropriators 45 days in advance of 
exercising the increase, and receives written approval from the 
committees.

                                  [all]