[Senate Report 114-421]
[From the U.S. Government Publishing Office]
Calendar No. 512
114th Congress } { Report
SENATE
2d Session } { 114-421
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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.
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