[Senate Report 115-452]
[From the U.S. Government Publishing Office]


115th Congress}                                            { Report
                                 SENATE
  2d Session  }                                            { 115-452

======================================================================
 
                  MICROLOAN MODERNIZATION ACT OF 2018

                                _______
                                

               December 20, 2018.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 526]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Small Business and Entrepreneurship, to 
which was referred the bill (S. 526) to amend the Small 
Business Act to provide for expanded participation in the 
microloan program, and for other purposes, having considered 
the same, reports favorably thereon with an amendment in the 
nature of a substitute and recommends that the bill, as 
amended, do pass.

                            I. INTRODUCTION

    The Microloan Modernization Act of 2018 (S. 526), was 
introduced by Senator Deb Fischer for herself, Senator 
Christopher A. Coons, Senator Tim Scott, and Senator Kirsten E. 
Gillibrand on March 2, 2017. The bill's cosponsors include 
Senator Jeanne Shaheen, Senator Gary C. Peters, Senator Joe 
Donnelly, and Senator Tammy Duckworth.
    This bill, as introduced, increased the lending limit for 
microloan intermediaries from $5 million to $6 million, and 
repealed two rules regarding the use of technical assistance 
(TA) funding by microloan intermediaries. The ``25/75 Rule,'' 
which limits intermediary lenders to using not more than 25 
percent of their marketing, management, and technical 
assistance funds on prospective borrowers, and the ``third-
party rule,'' which limits intermediaries to using not more 
than 25 percent of their TA funds to contract with third 
parties to provide TA they cannot provide directly. The bill 
also directs the Small Business Administration (SBA) and 
Government Accountability Office (GAO) to issue reports to 
Congress on microenterprise participation in the program and 
microloan intermediary practices, respectively.
    For the markup of the bill, the Chairman filed a substitute 
amendment that modified full repeal of the 25/75 rule and the 
third-party provider rule to 50/50, thereby permitting 
intermediaries to use 50 percent of their TA funding for 
prospective borrowers and contract out up to 50 percent of 
their TA services with third parties. This amendment mirrors an 
amendment made to the House version of this bill, H.R. 2056, 
during markup of that legislation on July 12, 2017.
    The bill, as amended, was approved unanimously by a roll 
call vote as part of a manager's package.

              II. HISTORY (PURPOSE & NEED FOR LEGISLATION)

    The SBA Microloan Program provides credit for entrepreneurs 
who need small dollar loans and are unable to obtain such 
financing through conventional lending. The program operates 
through SBA-designated microloan intermediaries in which the 
SBA provides direct loans and grants to non-profit 
intermediaries, which in turn make loans of up to $50,000 to 
entrepreneurs and small business owners. Borrowers then repay 
the intermediaries who in turn repay the SBA. Intermediaries 
also provide technical assistance to borrowers, which may 
include management and marketing training.
    In fiscal year 2017, SBA loaned intermediaries $44 million, 
which the Microloan intermediaries re-loaned to help 5,000 
borrowers access nearly $69 million in credit and support 
18,500 jobs. More than 19,600 small businesses received 
counseling and training assistance. In FY 2018 women owned 
firms received nearly 48 percent of the number of microloans 
issued, African Americans received nearly 34 percent of 
microloans issued, and Hispanics received 17 percent of 
microloans issued. The average loan size was $14,071 with an 
average interest rate of 7.6 percent.
    The SBA began providing microloans through a pilot program 
in 1991 under the Departments of Commerce, Justice, and State, 
the Judiciary, and Related Agencies Appropriations Act of 1992 
(P.L. 102-140). The program was made permanent by Congress in 
the Small Business Reauthorization Act of 1997. In the 103rd 
Congress, the Small Business Administration Reauthorization and 
Amendments Act of 1994 first introduced a limit on the amount 
of funds that could be used for technical assistance. In the 
111th Congress, the Small Business Jobs Act of 2010 (P.L. 111-
240) increased the microloan program lending limit for 
intermediaries from $3.5 million to $5 million, which was the 
most recent increase of the lending limit, and increased the 
maximum loan size to borrowers from $35,000 to $50,000. In the 
114th Congress, the Microloan Program Modernization Act of 2016 
(S. 2850) was reported favorably by the Committee by a vote of 
18-1, but did not receive consideration by the full Senate. 
Also in the 114th Congress, similar language regarding the 
``25/75 rule'' was included in the Microloan Act of 2015 (S. 
1445). The bill never received consideration by the Committee 
or the full Senate. In the 115th Congress, the Microloan 
Modernization Act of 2017 (H.R. 2056), which is the companion 
bill to S. 526, passed the House Small Business Committee on 
July 12, 2017 and the House of Representatives on July 24, 
2017.

                      III. HEARINGS & ROUNDTABLES

    In the 111th Congress the Committee held a hearing on April 
15, 2010 entitled, ``Assessing Access: Obstacles and 
Opportunities for Minority Small Business Owners in Today's 
Capital Markets.'' During this hearing, Mr. Grady Hedgespeth, 
Director of the Office of Financial Assistance, Small Business 
Administration, noted that technical assistance was an 
important component of the microloan program that particularly 
helped small businesses located in underserved markets.

                        IV. DESCRIPTION OF BILL

    The microloan program at SBA provides access to capital to 
the smallest businesses and startups with a loan ceiling of 
$50,000 and an average loan size of $14,000.
    The Microloan Modernization Act of 2018, as introduced, 
amended the Small Business Act to increase the microloan 
intermediary lending limit from $5 million to $6 million and 
repealed the ``25/75'' rule that allowed only 25 percent of 
funds given to microloan intermediaries to be used for 
technical assistance to small businesses before they have 
received loans. The legislation also repealed the ``third-party 
rule,'' which limited intermediaries to using not more than 25 
percent of their TA funds to contract with third parties to 
provide TA they cannot provide directly. The Chairman's 
substitute amendment modified full repeal of the 25/75 rule and 
the third-party provider rule to 50/50, thereby permitting 
intermediaries to use 50 percent of their TA funding for 
prospective borrowers and contract out up to 50 percent of 
their TA services with third parties.
    This bill also directs the SBA to submit a report to the 
House and Senate authorizing committees, within one year, on 
the operations of intermediaries that participate in the 
program and those that are eligible for the program and do not 
participate, recommendations on ways to increase participation, 
and recommendations on how to decrease the costs of the program 
for eligible intermediaries. Finally, the legislation directs 
the GAO to submit a report to House and Senate authorizing 
committees, within one year, on the processes SBA uses to 
measure the compliance and performance of intermediary lenders.

                           V. COMMITTEE VOTE

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following vote was recorded on March 14, 2018.
    A motion to adopt the Microloan Modernization Act of 2018, 
a bill to amend the Small Business Act to provide for expanded 
participation in the microloan program, and for other purposes, 
was approved unanimously by a roll call vote as part of a 
manager's package. Senators Risch, Rubio, Paul, Scott, Ernst, 
Inhofe, Young, Enzi, Rounds, Kennedy, Cardin, Shaheen, 
Cantwell, Heitkamp, Markey, Booker, Coons, Hirono, and 
Duckworth voted for the bill.

                           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:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 12, 2018.
Hon. James E. Risch,
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. 526, the Microloan 
Modernization Act of 2018.
    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,
                                                          Director.
    Enclosure.

S. 526--Microloan Modernization Act of 2018

    S. 526 would make several changes to the Small Business 
Administration's (SBA) microloan program. CBO estimates that 
implementing S. 526 would have no significant effect on the 
federal budget.
    Under current law, the SBA operates a program that makes 
loans and grants to eligible nonprofit entities (known as 
intermediaries). Intermediaries use those funds to make 
microloans (small loans that are less than $50,000) to newly-
established or growing small businesses. Participating 
intermediaries use grant funds from the SBA to provide 
technical assistance to small businesses that receive a 
microloan or that are prospective borrowers. S. 526 would raise 
the amount the SBA may commit to an intermediary and raise the 
cap on the amount of grant funds that intermediaries can spend 
on pre-loan training and technical assistance for prospective 
borrowers. The bill also would direct the SBA to conduct a 
study of intermediaries to determine why some that are eligible 
to participate in the program fail to do so, and to recommend 
ways to increase participation and decrease costs.
    Using information from the SBA, CBO estimates that the 
costs to conduct the study and to update the SBA's microloan 
program rules would not be significant.
    S. 526 also would direct the Government Accountability 
Office (GAO) to evaluate the SBA's oversight of intermediaries 
and the microloan program. Based on the costs of similar 
reports conducted by GAO, CBO estimates that the costs to 
report on these activities would not be significant.
    Enacting the bill would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting S. 526 would not increase net 
direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2028.
    S. 526 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act.
    On June 27, 2017, CBO transmitted a cost estimate for H.R. 
2056, the Microloan Modernization Act of 2017, as ordered 
reported by the House Committee on Small Business on June 15, 
2017. The two pieces of legislation are similar and CBO's 
estimates of their budgetary effects are the same.

                  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.

                   VIII. SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    This section provides the short title of the Act, the 
``Microloan Modernization Act of 2018.''

Sec. 2. Definitions

    This section defines the meaning of ``intermediary'' and 
``microloan program.''

Sec. 3. Microloan intermediary lending limit increased

    This section increases the lending limit for microloan 
intermediaries from $5 million to $6 million.

Sec. 4. Elimination of 25/75 rule and the third-party rule

    This section eliminates a provision that restricts 
microloan intermediaries to spending only 25 percent of funds 
on technical assistance for small businesses that have not 
received a loan and only 25 percent of funds to contract with 
third parties to provide technical assistance they cannot 
provide directly. This section increases the percentage 
allowable for prospective borrower technical assistance and 
contracting technical assistance to third parties to 50 
percent.

Sec. 5. SBA study of microenterprise participation

    This section directs the SBA Administrator to conduct a 
study, within one year of enactment, on the operations of 
intermediaries participating in the microloan program and of 
eligible intermediaries not participating in the microloan 
program. The report will include the reason why intermediaries 
chose not to participate in the program, recommendations on how 
to encourage increased participation, and recommendations on 
decreasing the costs associated with participating in the 
program. This report will be submitted to the Senate Committee 
on Small Business and Entrepreneurship and the House Committee 
on Small Business.

Sec. 6. GAO study on microloan intermediary practices

    This section directs the GAO to conduct a study, within one 
year of enactment, on the SBA's oversight of the microloan 
program and the specific processes used to ensure compliance by 
microloan intermediaries and the overall performance of the 
program. This report will be submitted to the Senate Committee 
on Small Business and Entrepreneurship and the House Committee 
on Small Business.

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