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   104th Congress 1st            SENATE
         Session
_______________________________________________________________________



                                     

                                                       CALENDAR No. 166

                                                        REPORT
                                                       104-129
 
             SMALL BUSINESS LENDING ENHANCEMENT ACT OF 1995

                               __________



Mr. Bond, from the Committee on Small Business, submitted the following

                              R E P O R T

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                          UNITED STATES SENATE

                              to accompany

                                 S. 895



                             together with



                            ADDITIONAL VIEWS




   August 5 (legislative day, July 10), 1995.--Ordered to be printed
                      COMMITTEE ON SMALL BUSINESS

  CHRISTOPHER S. BOND, Missouri, 
             Chairman
                                     LARRY PRESSLER, South Dakota
                                     CONRAD R. BURNS, Montana
                                     PAUL COVERDELL, Georgia
                                     DIRK KEMPTHORNE, Idaho
                                     ROBERT F. BENNETT, Utah
                                     KAY BAILEY HUTCHISON, Texas
                                     JOHN WARNER, Virginia
                                     WILLIAM H. FRIST, Tennessee
DALE BUMPERS, Arkansas               OLYMPIA J. SNOWE, Maine
SAM NUNN, Georgia
CARL LEVIN, Michigan
TOM HARKIN, Iowa
JOHN F. KERRY, Massachusetts
JOSEPH I. LIEBERMAN, Connecticut
PAUL D. WELLSTONE, Minnesota
HOWELL HEFLIN, Alabama
FRANK R. LAUTENBERG, New Jersey
 Louis Taylor, Staff Director and 
           Chief Counsel
John W. Ball III, Democratic Staff 
    Director and Chief Counsel
                                CONTENTS

                                                                   Page
  I. Summary of the Bill..............................................1
 II. Background and Need for Legislation..............................2
III. Committee Action.................................................4
          7(a) Loan Program......................................     4
          LowDoc Program.........................................     5
          504 Loan Program.......................................     5
          Federal Credit Reform Act of 1990......................     5
 IV. Committee Vote...................................................6
  V. Cost Estimate....................................................6
 VI. Evaluation of Regulatory Impact..................................8
VII. Section-by-Section Analysis......................................8
VIII.
     Additional Views................................................11
 IX. Changes in Existing Law.........................................13
                                                       Calendar No. 166
104th Congress                                                   Report
                                 SENATE

 1st Session                                                    104-129
_______________________________________________________________________



             SMALL BUSINESS LENDING ENHANCEMENT ACT OF 1995

                                _______


   August 5 (legislative day, July 10), 1995.--Ordered to be printed

_______________________________________________________________________


Mr. Bond, from the Committee on Small Business, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 895]
    The Committee on Small Business, to which was referred to 
bill (S. 895) to amend the Small Business Act of 1953 to reduce 
the level of participation by the Small Business Administration 
in certain business loans guaranteed by the federal government, 
having considered the same, reports favorably thereon with an 
amendment in the nature of a substitute and recommends that the 
bill do pass.

                         I. Summary of the Bill

    The Small Business Lending Enhancement Act of 1995 reduces 
the level of participation by the Small Business Administration 
in certain business loans guaranteed by the federal government. 
This small business loan guarantee program originally was 
authorized by section 7(a) of the Small Business Act of 1953, 
and it has been amended on numerous occasions since enactment.
    S. 895, as reported, will reduce the credit subsidy rate 
for the 7(a) loan program from 2.74 percent to 1.29 percent. In 
fiscal year 1995, an appropriation of $214 million was needed 
to support a loan program of $7.8 billion. Under S. 895, in 
fiscal year 1996, an appropriation of $133 million will support 
a program of $10.5 billion in loans. Thus, S. 895 will permit 
the appropriation to be reduced by approximately 39 percent, 
with a corresponding 35 percent increase in available 7(a) loan 
volume.
    In addition, S. 895 will reduce the credit subsidy rate for 
the 504 Program from 0.57 percent to 0.33 percent. In fiscal 
year 1995, Congress appropriated $10 million to guarantee $1.75 
billion in 504 loans. Under S. 895, the 504 Program will be 
able to grow to its authorized maximum, $2.65 billion, with a 
decreased appropriation of $8.7 million.
                II. Background and Need for Legislation

    The Small Business Administration was established in 1953 
to serve and represent small businesses. From its inception, it 
has provided financial assistance to small businesses. SBA's 
major financial activity--the 7(a) Loan Guarantee Program--
permits SBA to guarantee repayment of specified percentages of 
certain loans made by qualifying lending institutions to small 
businesses.
    Small businesses' problems obtaining long-term debt 
financing date back as far as 60 years ago. During the period 
from 1935 until the early 1950's, several independent studies 
concluded that small and medium size businesses' access to 
equity and bond markets was limited, and that banks generally 
were reluctant to lend them money on a long-term basis.
    An early study on the small business financing needs of 
manufacturers employing between 21 and 250 employees was made 
in 1935 by the Department of Commerce. This study concluded 
that 50 percent of all smaller manufacturers could not obtain 
long-term funds from any source whatsoever. Following World War 
II, the Committee for Economic Development, created to study 
small business credit needs, reported that more adequate long-
term credit was the fundamental need of small business. In 
1952, the Federal Reserve Board submitted a report to Congress 
stating that long-term credit for small businesses had 
diminished over the prior 20 to 30 years.
    When Congress created the Small Business Administration in 
1953, it authorized SBA to make direct loans, or to guarantee 
loans made by private lenders, to small businesses that cannot 
otherwise obtain reasonable financing. The 7(a) guaranteed loan 
program offers repayment terms and collateral requirements that 
better fit the borrower's needs than might be obtainable under 
usual bank policies, and transfers a portion of the risk of 
borrower default from the private lender to SBA.
    In 1992, Price Waterhouse conducted an extensive evaluation 
of SBA's 7(a) Guaranteed Business Loan Program and made the 
following conclusions:
          The 7(a) program ``appears to play a strong role in 
        start-up financing'' for small businesses, while 
        commercial business loans without a government 
        guarantee were not available for start-up businesses.
          7(a) loans have an average term of 12 years, and SBA 
        supplies long-term financing that is not available from 
        normal lending sources.
          Small businesses that obtain 7(a) loans tend to be 
        more aggressive firms with greater capital requirements 
        and higher rates of growth in revenues and employment.
    Without the 7(a) loan program, long term credit would be as 
elusive today for small businesses as it was prior to the 
creation of SBA in 1953. Borrowers under the 7(a) program 
likely would not have obtained a loan without the government 
guarantee, or they might have been required to accept more 
onerous loan terms and conditions that could have jeopardized 
the potential success of their enterprises.
    Today, our nation's 20 million small businesses make an 
important contribution to the economy by employing 54 percent 
of the country's work force and generating 50 percent of the 
gross domestic product. Most importantly, SBA's 7(a) loan 
guarantee program helps many small businesses sustain and 
expand operations and enables entrepreneurs to compete and gain 
entry into the economic mainstream.
    As the needs of the 7(a) loan program have grown 
significantly during the past five years, Congress has 
appropriated funds to support the program as required by the 
Federal Credit Reform Act of 1990. This 1990 Act changed the 
budget treatment of credit programs so that the full cost of 
credit programs must be reflected in the budget year when the 
loans are made. Prior to 1990, an appropriation for a loan 
guarantee was required only in the event of a loan default that 
required a cash outlay.
    The Credit Reform Act now requires that the discounted cost 
of new 7(a) loan guarantees be computed in the year the Federal 
government makes the commitment. Thus, when the Federal 
government guarantees a loan made by a bank or SBA licensed 
non-bank lender, funds must be appropriated to account for any 
cost to the government that might arise from the loan 
guarantee. This appropriation is the amount of federal subsidy 
for the guarantee.
    Nearly 7,000 banks and non-banks lenders participate in 
SBA's 7(a) loan guaranty program, and 56,000 loans totaling 
$7.8 billion will be guaranteed under SBA's 7(a) business loan 
program during fiscal year 1995. At the beginning of Fiscal 
Year 1995 it was generally understood by SBA officials and the 
lending community that the 7(a) program was under-funded and 
would not be able to meet loan demand from the small business 
borrowing community. In spite of this funding constraint, SBA 
introduced new program features and special incentives that 
increased demand even further at the same time it was forced to 
take administrative steps to reduce loan making authority.
    Early in fiscal year 1995, SBA decided to lower the maximum 
guaranteed amount on 7(a) loans from its existing level of 
$750,000 in order to dampen small business borrower demand. 
Under the reduced limit, SBA now guarantees no loans larger 
than $500,000, effectively reducing guarantee coverage to as 
low as $350,000 for some lenders. Even with the reduced 
guarantee limit, however, increased demand from the small 
business community led SBA later in the year to throttle back 
the program a second time. This time SBA imposed a prohibition 
on 7(a) guarantee availability for refinancing existing loans.
    In a June 28, 1995 letter, the SBA Administrator informed 
the Committee of his belief that, in the absence of passage of 
S. 895 or similar legislation, the 7(a) loan program would run 
out of funds ``on or about September 1.''
                         III. Committee Action

                           7(a) loan program

    In addition to Committee field hearings held at several 
locations earlier in the year, the Committee held a hearing on 
the 7(a) loan program in Washington on May 18, 1995. Testimony 
from the Administrator of SBA, the lending community and small 
business borrowers stressed the importance of expanding the 
7(a) program to enable it to meet borrower demand.
    The SBA Administrator testified in support of an 
Administration proposal, announced in March 1995, that would 
increase interest rates and fees sufficiently to reduce the 
7(a) credit subsidy rate to zero. After consideration of this 
proposal, the Committee concluded that the increases sought by 
the Administration to achieve this credit subsidy rate 
reduction were too large to impose at this time without 
threatening the continued viability of the program.
    Following the Committee hearing, on June 8 Senator Bond 
introduced S. 895, the Small Business Lending Enhancement Act 
of 1995. As originally introduced, the bill proposed lowering 
the credit subsidy rate for the 7(a) loan program from 2.74 
percent to 1.07 percent through a combination of fee increases 
and changes in guarantee percentages.
    On July 13, 1995, during the Committee mark-up of S. 895, 
Senator Bond offered, on behalf of himself and Senators 
Bumpers, Burns, Snowe, and Wellstone, an amendment to the bill. 
This amendment reduces the credit subsidy rate to 1.29 percent, 
and gives the Administrator of SBA the discretion to lower the 
credit subsidy rate to 1.09 percent by adding up to an 
additional \3/8\ of 1 percent to the guarantee fee charged to 
lenders. The amended version of S. 895 was ordered reported by 
a vote of 18-0.
    There are five primary structural differences between S. 
895, as reported by the Committee, and the Administration's 
proposal:
    1. SBA's plan would have increased the maximum interest 
rate that the lender can charge by \1/2\ of 1 percent and 
required that this interest rate increase paid by the borrower 
be passed through to SBA. S. 895 has no similar provision.
    2. SBA's plan would have charged its up front guarantee fee 
against the gross amount of the loan. S. 895 applies its 
guarantee fee against the guaranteed amount of the loan only.
    3. S. 895 increases the maximum guaranteed amount of a loan 
originated under the Preferred Lenders Program to 75 percent 
from 70 percent. The SBA plan would not have increased this 
percentage.
    4. S. 895 decreases the maximum guaranteed amount of a loan 
originated under the LowDoc program from 90 percent to 80 
percent. SBA's plan would have reduced this percentage to 85 
percent.
    5. SBA's plan would have given a 10 basis point discount 
from the annual fee for lenders participating in the Preferred 
Lenders Program. S. 895 has no similar provision.
    The Committee recognizes the need to encourage use of SBA's 
Preferred Lender Program (PLP). Currently, fewer than 10 
percent of all 7(a) loans are made through the PLP, under which 
SBA delegates underwriting decisions and other administrative 
responsibilities to lenders with strong lending records. The 
Program minimizes agency involvement in individual loan 
approvals and relieves SBA from involvement in the asset 
disposition business.
    The Committee believes increasing the guaranty percentage 
on loans submitted through the PLP from the current 70 percent 
to 75 percent under S. 895 will encourage lender participation 
in this program. It is the intent of the Committee that PLP 
usage be monitored carefully. The Chairman and other members of 
the Committee believe further reliance on lenders is necessary 
to reduce future SBA overhead and exposure under its business 
loan guarantee programs. Additional measures may be considered, 
if necessary, to increase further the percentage of 7(a) loans 
originated and administered with the type of substantial lender 
involvement required under PLP. The Committee expects SBA will 
continue to maintain strict quality control over PLP and 
carefully monitor the default, loss and recovery rates of PLP 
lenders.

                          lowdoc loan program

    Under the LowDoc loan program, lenders may make 7(a) loans 
of $100,000 or less after SBA approves a one page form from the 
lender. The current guarantee rate under the LowDoc program is 
90 percent of the loan amount. SBA estimates that more than 50 
percent of the 7(a) loans made in fiscal year 1995 will be 
LowDoc loans.
    The Committee is concerned about the impact the large 
volume of LowDoc loans could have on the long term soundness of 
the 7(a) loan portfolio. Testimony before the Committee has 
pointed out that a lender has little exposure when it makes a 
LowDoc loan, since the government has guaranteed 90 percent of 
the loan and many lenders immediately sell the loan at a 
premium on the secondary market. Therefore, S. 895 lowers the 
guarantee rate on LowDoc loans to 80 percent from 90 percent. 
The Committee believes increasing the exposure of lenders who 
make LowDoc loans will encourage them to continue to make sound 
credit decisions. The Committee expects SBA will continue to 
maintain strict quality control over LowDoc and carefully 
monitor the default, loss and recovery rates of LowDoc lenders.
    In order to keep LowDoc loans available and affordable to 
start ups and other businesses with limited cash flow, S. 895 
does not increase the guarantee fee for LowDoc loans above its 
current rate of 2 percent.
                            504 Loan Program

    In its March proposal, the Administration recommended that 
the credit subsidy rate for the 504 Certified Development 
Program be reduced to zero. The Committee has some concern that 
taking the credit subsidy rate to zero might threaten the 
viability of the 504 Program. Therefore, S. 895 includes a 
section that imposes a modest fee increase to reduce the credit 
subsidy rate for the 504 Program from 0.57 percent to 0.33 
percent.

                   federal credit reform act of 1990

    The Committee in concerned about the calculation of the 
credit subsidy rate that determines the level of appropriation 
required to support the 7(a) guaranteed loan program. Although 
SBA and CBO make credit subsidy estimates, OMB has the final 
say in determining the operative credit subsidy rate. Critical 
assumptions about the future performance of the 7(a) loan 
portfolio and SBA's liquidation recovery effort are made, 
frequently without prior explanation to the Committee, that 
have a dramatic impact on the credit subsidy rate and the cost 
of the 7(a) program.
    For example, the Committee was informed by SBA that the 
credit subsidy rate for Fiscal Year 1996, absent any changes to 
the Small Business Act, will be 2.76 percent. SBA also told the 
Committee, however, that achieving a zero subsidy rate and 
eliminating the need for a subsidy appropriation would require 
fee increases and other program changes sufficient to reduce 
the subsidy rate by 3.66 percent. This 90 basis point increase 
was described by SBA as either a ``hedge'' against increased 
losses from borrowers paying higher fees to the government or a 
reduction in the estimated recovery rate by SBA from its 
liquidation portfolio. To date, only informal and anecdotal 
explanations have been presented to the Committee to support 
this latest description of the credit subsidy rate calculation.
    While the Committee has accepted the present credit subsidy 
rate calculation for the purposes of determining borrower and 
lender fees under S. 895, careful study of this matter will be 
required as the Committee considers additional long term 
reforms for the SBA's small business finance programs.

                           IV. Committee Vote

    In compliance with rule XXVI(7)(b) of the Standing Rules of 
the Senate, the following vote was recorded on July 13, 1995.
    A motion by Senator Bond to adopt S. 895, as amended by an 
amendment in the nature of the substitute, to reduce the level 
of participation by the Small Business Administration in 
certain loans guaranteed by the Administration, was approved 
18-0, with the following Senators voting in the affirmative: 
Bond, Bumpers, Pressler, Burns, Coverdell, Kempthorne, Bennett, 
Hutchinson, Warner, Frist, Snowe, Levin, Harkin, Kerry, 
Liebermann, Wellstone, Heflin and Lautenberg.

                            V. 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 indicated by the 
Congressional Budget Office in the following letter.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, August 3, 1995.
Hon. Christopher S. Bond,
Chairman, Committee on Small Business,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 895, the Small 
Business Lending Enhancement Act of 1995.
    Enactment of S. 895 would not affect direct spending or 
receipts. Therefore, pay-as-you-go procedures would not apply 
to the bill.
    If you wish further details on this estimate, we will be 
pleased to provide them.
            Sincerely,
                                              James L. Blum
                                    (For June E. O'Neil, Director).
    Enclosure.

               congressional budget office cost estimate

    1. Bill number: S. 895.
    2. Bill title: Small Business Lending Enhancement Act of 
1995.
    3. Bill status: As ordered reported by the Senate Committee 
on Small Business on July 13, 1995.
    4. Bill purpose: S. 895 would amend the general business 
loan guaranty program administered by the Small Business 
Administration (SBA) to reduce the percentage of loans that the 
government guarantees. Lenders of guaranteed business loans 
would be able to request a further reduction in the level of 
SBA participation.
    S. 895 would provide for new fees and increases in fees on 
loans guaranteed by SBA under sections 7(a) and 504 of the 
Small Business Act. The bill would authorize SBA to raise 
existing guarantee fees for the loans made under the 7(a) 
program, and to establish an annual fee charged to the lenders. 
The guarantee fees would be payable by the lenders but could be 
charged to the borrowers, but the new annual fee would not be 
passed on to the borrowers. The bill also would permit SBA to 
increase the guarantee fee for the 7(a) program by a specified 
amount at the Administrator's discretion during the first 90 
days of any fiscal year.
    Finally, S. 895 also would authorize SBA to assess and 
collect an annual fee for the 504 loan program. The fee would 
be charged to the borrower on the outstanding balance of the 
loan and the proceeds would be used to offset the cost of 
making the guarantees.
    5. Estimated cost to the Federal Government: This estimate 
assumes that S. 895 would be enacted by the beginning of fiscal 
year 1996, and that the estimated authorization amounts would 
be appropriated for fiscal years 1996 and 1997. Based on 
information from the SBA, CBO estimates that enacting S. 895 
would reduce authorization levels by $242 million for loans to 
be guaranteed in 1996 and 1997. The following table summarizes 
the estimated budgetary impact of S. 895.

----------------------------------------------------------------------------------------------------------------
                                                   1995       1996       1997       1998       1999       2000  
----------------------------------------------------------------------------------------------------------------
Spending Under Current Law:                                                                                     
    Authorization level \1\...................        202        225        280          0          0          0
    Estimated outlays.........................        208        212        255        100         15          0
Proposed Changes:                                                                                               
    Estimated authorization level.............          0       -198       -134          0          0          0
    Estimated outlays.........................          0        -67       -117        -49         -7          0
Projected Spending Under S. 895:                                                                                
    Authorization level \1\...................        202        117        146          0          0          0
    Estimated outlays.........................        208        145        138         51          8          0
----------------------------------------------------------------------------------------------------------------
\1\ The 1995 level is the amount appropriated for that year                                                     

    The costs of this bill fall within budget function 370.
    6. Basis of estimate: Under current law SBA is authorized 
to guarantee $13 billion in loans for 1996 and $16.1 billion in 
1997 for both the section 7(a) program and the section 504 
program. (Fiscal year 1995 appropriations provide for $11.4 
billion in guaranteed loans.) CBO estimates that reducing the 
percentage of SBA participation in guaranteed loans would have 
no significant budgetary impact because the bill would not 
change the amount of loans SBA is authorized to guarantee and 
the percentage of SBA participation in guaranteed loans would 
not change significantly. Based on information from SBA, we 
expect that the reduction in SBA participation would enable SBA 
to slightly increase the number of loans guaranteed but would 
not significantly increase administrative costs.
    Enacting S. 895, however, would reduce the average subsidy 
for loans guaranteed by SBA because the bill would result in 
additional fees paid to the federal government. CBO estimates 
that the increased fees on new loan guarantees would reduce the 
average subsidy rate from approximately 2 percent to 1.1 
percent for the 7(a) program, and from approximately 0.6 
percent to about 0.2 percent for the 504 program. The reduction 
in subsidy rates would reduce the amount of appropriations 
needed to subsidize SBA loan guarantees from an estimated $225 
million to $117 million in 1996, and from $280 million to $146 
million in 1997, assuming that appropriations are sufficient to 
fund the amounts of loan guarantees authorized for those years. 
The 7(a) and 504 programs have not been authorized beyond 1997.
    The above estimate assumes that SBA would exercise the 
bill's discretionary authority to raise guarantee fees for the 
7(a) program. If SBA chose not to exercise this authority, the 
subsidy rate for 7(a) guarantees would fall from 2 percent to 
1.3 percent and the estimated savings would be smaller.
    7. Pay-as-you-go considerations: None.
    8. Estimated cost to state and local governments: None
    9. Estimate comparison: None.
    10. Previous CBO estimate: None.
    11. Estimate prepared by: Rachel Forward.
    12. Estimate approved by: Robert A. Sunshine, (for Paul N. 
Van de Water, Assistant Director for Budget Analysis).
                  VI. 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.

                    VII. Section-by-Section Analysis

                               Section 1

    This section entitles the Act the ``Small Business Lending 
Enhancement Act of 1995.''

                               Section 2

    In general, this section both amends and reorganizes 
section 7(a)(2) of the Small Business Act and reduces the 
percentage of a loan that can be guaranteed under SBA's 7(a) 
program.
    As amended, section 7(a)(2)(A) ensures that Preferred 
Lenders are granted a level of government participation 
equivalent to that available to all other lenders. This 
provision also reduces the maximum percentage of a federal 
guarantee to 75 percent of the loan balance on any loan 
exceeding $100,000. For loans of less than or equal to $100,000 
(i.e., LowDoc loans), the guaranteed participation level is 
reduced to 80 percent.
    As amended, section 7(a)(2)(B) gives individual lenders the 
discretion to accept lower level of government participation 
but prohibits the Administration from prioritizing or ranking 
lenders based on guarantee percentages.
    Section 7(a)(2)(C) prohibits Preferred Lenders from 
charging an interest rate that exceeds the maximum interest 
rate established by SBA. This subsection also defines the 
``Preferred Lender Program'' and authorizes such lenders to 
make and close guaranteed loans without prior Administration 
approval and enables them to serve and liquidate loans.

                               Section 3

    Subsection (a) amends section 7(a)(18) of the Small 
Business Act. Section 7(a)(18)(A) revises the up-front 
guarantee fees on 7(a) loans. The fee charged on the guaranteed 
amount between $0 and $250,000 is increased to 2.5 percent. The 
fee on guaranteed amounts of $250,001 to $500,000 grows to 3.0 
percent. The fee on guaranteed amounts of $500,001 to $750,000 
becomes 3.5 percent.
    Section 7(a)(18)(B) provides a special ``carve out'' for 
LowDoc loans. These loans, whose guaranteed portion does not 
exceed $80,000, are assessed a guarantee fee of 2.0 percent of 
the guaranteed amount.
    Section 7(a)(18)(C) gives SBA discretion to implement a 
one-time, across-the-board increase of up to 0.375 percent to 
the guarantee fee within 90 days after the beginning of the 
Fiscal Year if necessary to meet projected demand under the 
7(a) program. SBA must give the Committees on Small Business of 
the Senate and House of Representatives 15 days advance notice 
of the action.
    Subsection (b) repeals the option for banks to retain 50 
percent of the guaranty fee for small and rural loans.

                               Section 4

    Subsection (a) adds a new section 7(a)(23) to the Small 
Business Act. Section 7(a)(23)(A) requires the Administration 
to collect, from the lender, a fee of up to .50 percent of the 
outstanding balance of the guaranteed amount of a 7(a) loan.
    Section 7(a)(23)(B) clarifies that the annual fee mentioned 
above must be paid by the lender and not charged directly to 
the borrower.
    Subsection (b) restates existing law authorizing SBA to 
collect a fee, for any guaranteed loan sold into the secondary 
market, in an amount not to exceed 50 percent of the portion of 
the sale price that is in excess of 110 percent of the 
outstanding principal amount of the guaranteed loan.

                               Section 5

    This section adds a new section 7(a)(24) to the Small 
Business Act, requiring SBA to notify the Committees on Small 
Business of the Senate and the House of Representatives at 
least 15 days prior to making any significant policy or 
administrative change in the 7(a) program.

                               Section 6

    This section amends section 503(b) of the Small Business 
Investment Act of 1958 to authorize SBA to collect an annual 
fee equal to 0.0625 percent of the outstanding balance of 504 
program loans, to be used to offset SBA's 504 program costs.
               VIII. ADDITIONAL VIEWS OF SENATOR BUMPERS

    I write separately only to emphasize recent history and 
experience in the SBA 7(a) loan program which speak to the need 
for S. 895's swift completion.
    As the Committee report indicates, SBA has been in the 
business of helping small borrowers find adequate and 
affordable financing since its inception in 1953. In the early 
years, most loans were direct loans funded entirely with 
appropriated dollars. Over the years, the emphasis shifted to 
loan guarantees rather than direct loans because guarantees 
cost substantially less. This was true both before and after 
the Credit Reform Act of 1990. Until 1987, SBA borrowers paid a 
guaranty fee of one per cent of the amount guaranteed which 
helped to offset the cost of the program. This fee was doubled 
to two per cent in 1987, resulting in a substantial savings in 
the appropriated cost of 7(a) loans.
    For most of the 1980's, the 7(a) program provided less than 
$3 billion annually in small business loan guarantees. During 
the Bush Administration, however, demand for the program began 
to escalate very dramatically due to several factors. First was 
the infamous ``credit crunch'' which was produced largely by 
financial industry reforms instituted after the calamitous 
Savings and Loan debacle. Banks and other lenders tightened 
small business lending criteria while the Federal Reserve 
maintained a relatively tight money supply and high interest 
rates. These factors encouraged more lenders to demand that 
borrowers seek an SBA guaranty before extending the kind of 
long-term credit which many borrowers needed for expansion or 
even for regular operating capital. The already conservative 
banking mind-set toward small business was tightened almost to 
the breaking point.
    No doubt, the credit crunch helped in no small way to drive 
the economy into the recession of 1991-92. That recession, 
however, drove even more small borrowers to seek help from SBA 
because of generally poor economic performance. In the process, 
more bankers and borrowers during 1989-92 were becoming aware 
of the many advantages of the SBA 7(a) program. The Bush 
Administration recognized the counter-cyclical potential for 
the 7(a) program, and it supported large increases in the 
program to help encourage and sustain economic recovery. I also 
supported increases in 7(a) appropriations both as Chairman of 
the Small Business Committee and as a member of the 
Appropriations Committee.
    The 7(a) program grew during the Bush Administration from 
slightly over $3 billion to almost $6 billion. Congress during 
this time was hard-pressed to meet the ever increasing demand 
with concurrent program appropriations. The program during that 
time had a subsidy cost of slightly over 5%, meaning that $1 
billion in loan authority required $50 million in appropriated 
funds. In 1992, demand for the program was such that funding 
was exhausted and two supplemental appropriations measures were 
enacted and signed by President Bush.
    This trend continued in 1993, and by late spring 
appropriated funds were exhausted and the program closed down 
for several weeks. Congress has always recognized the economic 
importance of the 7(a) program, but it became clear that 
reliance on emergency supplemental funding and traumatic 
program shutdowns could not continue in the long run.
    Shortly after the Clinton Administration took office in 
1993, the Senate Small Business Committee undertook, with the 
Administration's full cooperation, sharply reducing the cost of 
SBA 7(a) loans to the Treasury, while at the same time meeting 
the demands of small business borrowers for affordable credit. 
In the summer of 1993, legislation was enacted and signed by 
the President which reduced the subsidy cost of 7(a) loans from 
5.4% to 2.2%, thus more than doubling the amount of loans which 
could be made with the same amount of appropriated dollars.
    The effect of this change was dramatic. In 1993, SBA made 
about $6 billion in 7(a) loans but required $342 million in 
appropriations to fund the program. In the current year, almost 
$8 billion in loans will be made with about $200 million in 
appropriations. I am extremely proud of these savings, but they 
are still not enough to keep this ever-growing program on a 
sound footing in this era of declining federal spending.
    Finally, a comment about S. 895 and the Chairman's work on 
this bill is in order. I did not elect to cosponsor this bill 
when it was introduced because I was concerned that the 
increases in fees charged to 7(a) borrowers were simply too 
steep, in my view, for the program to be workable. Those 
borrowers who are willing to take a loan at any price are not 
likely to be very good borrowers, and I felt we were moving 
dangerously close to that point. The same could be said of the 
Administration's `zero-subsidy' proposal which was considered 
and not adopted.
    The Chairman is to be commended for the flexibility and 
progressiveness he has demonstrated in preparing the Committee 
amendment which I was pleased to cosponsor at markup. The 
maximum, marginal guaranty fee for borrowers was reduced from 
the original 5% to 3.5%, with this number being applied only to 
borrowers seeking over $500,000 in financing. Moreover, the 
smallest borrowers--those using the ``low doc'' program for 
loans under $100,000--will face no increased guaranty fees at 
all. The present 2% guaranty fee will continue to be applied to 
low doc loans. Both of these steps represent common sense and 
fairness, two virtues which I wish were more abundant in this 
Congress.
                                                      Dale Bumpers.
                      IX. Changes in Existing Law

    In compliance with rule XXVI paragraph 12 of the Standing 
Rules of the Senate, the following provides a print of the 
statute or the part of section thereof to be amended or 
replaced (existing law proposed to be omitted is enclosed in 
black brackets, new matter is printed in italic, existing law 
in which no change is proposed is shown in roman):

                       SMALL BUSINESS ACT OF 1953

SEC. 636. ADDITIONAL POWERS.

    (a) Loans to small-business concerns; allowable purposes; 
qualified businesses; restrictions and limitations
          [(2) In agreements to participate in loans on a 
        deferred basis under the subsection, such participation 
        by the Administration, except as provided in paragraph 
        (6), shall be--
                  [(A) not less than 90 percent of the balance 
                of the financing outstanding at the time of 
                disbursement if such financing does not exceed 
                $155,000: Provided, That the percentage of 
                participation by the Administration may be 
                reduced below 90 percent upon request of the 
                participating lender; and
                  [(B) subject to the limitation in 
                participation (3)--
                          [(i) not less than 70 percent nor 
                        more than 85 percent of the financing 
                        outstanding at the time of disbursement 
                        if such financing exceeds $155,000: 
                        Provided, That the participation by the 
                        Administration may be reduced below 70 
                        percent upon request of the 
                        participating lender;
                          [(ii) not less than 75 percent of the 
                        financing outstanding at the time of 
                        disbursement, if such financing is more 
                        than $155,000 and the period of 
                        maturity of such financing is more than 
                        10 years, except that the participation 
                        by the Administration may be reduced 
                        below 75 percent upon request of the 
                        participating lender;
                          [(iii) not less than 85 percent of 
                        the financing outstanding at the time 
                        of disbursement, if such financing is 
                        more than $155,000 and the period of 
                        maturity of such financing is 10 years 
                        or less, except that the participation 
                        by the Administration may be reduced 
                        below 85 percent upon request of the 
                        participating lender; and
                          [(iv) not less than 85 percent nor 
                        more than 90 percent of the financing 
                        outstanding at the time of disbursement 
                        if such financing is a loan under 
                        paragraph (14) or (16).
The Administration shall not use the percent of guarantee 
requested as a criterion for establishing priorities in 
approving guarantee requests nor shall the Administration 
reduce the percent guaranteed to less than the above specified 
percentums other than by determination made on each 
application. Notwithstanding subparagraphs (A) and (B), the 
Administration's participation under the Preferred Lenders 
Program or any successor thereto shall be not less than 70 
percent, unless a lesser percent is required by clause (B)(ii) 
or upon the request of the participating lender. As used in 
this subsection, the term ``Preferred Lenders Program'' means a 
program under which a written agreement between the lender and 
the Administration delegates to the lender (l) complete 
authority to make and close loans with a guarantee from the 
Administration without obtaining the prior specific approval of 
the Administration, and (II) authority to service and liquidate 
such loans. The maximum interest rate for a loan guaranteed 
under the Preferred Lenders Program shall not exceed the 
maximum interest rate, as determined by the Administration, 
which is made applicable to other than guarantees under this 
subsection.]
          ``(2) Level of participation in guaranteed loans.--
                  ``(A) In general.--Except as provided in 
                subparagraph (B), in an agreement to 
                participate in a loan on a deferred basis under 
                this subsection (including a loan made under 
                the Preferred Lenders Program), such 
                participation by the Administration shall be 
                equal to--
                          ``(i) 75 percent of the balance of 
                        the financing outstanding at the time 
                        of disbursement of the loan, if such 
                        balance exceeds $100,000; or
                          ``(ii) 80 percent of the balance of 
                        the financing outstanding at the time 
                        of disbursement of the loan, if such 
                        balance is less than or equal to 
                        $100,000.
                  ``(B) Reduced participation upon request.--
                          ``(i) In general.--The guarantee 
                        percentage specified by subparagraph 
                        (A) for any loan under this subsection 
                        may be reduced upon the request of the 
                        participating lender.
                          ``(ii) Prohibition.--The 
                        Administration shall not use the 
                        guarantee percentage requested by a 
                        participating lender under clause (i) 
                        as a criterion for establishing 
                        priorities in approving loan guarantee 
                        requests under this subsection.
                  ``(C) Interest rate under preferred lenders 
                programs.--
                          ``(i) In general.--The maximum 
                        interest rate for a loan guaranteed 
                        under the Preferred Lenders Program 
                        shall not exceed the maximum interest 
                        rate, as determined by the 
                        Administration, applicable to other 
                        loans guaranteed under this subsection.
                          ``(ii) Preferred lenders program 
                        defined.--For purposes of this 
                        subparagraph, the term `Preferred 
                        Lenders Programs' means any program 
                        established by the Administrator, as 
                        authorized under the proviso in section 
                        5(b)(7), under which a written 
                        agreement between the lender and the 
                        Administration delegates to the 
                        lender--
                                  ``(I) complete authority to 
                                make and close loans with a 
                                guarantee from the 
                                Administration without 
                                obtaining the prior specific 
                                approval of the Administration; 
                                and
                                  ``(II) authority to service 
                                and liquidate such loans.''.
SEC. 636. ADDITIONAL POWERS.

    (a) Loans to small-business concerns; allowable purposes; 
qualified business; restrictions and limitations * * *
          * * * * * * *
          [(18) The Administration shall collect a guarantee 
        fee equal to two percent of the amount of the deferred 
        participation share of any loan under this subsection 
        other than a loan repayable in one year or less. The 
        fee shall be payable by the participating lending 
        institution and may be charged to the borrower.]
          ``(18) Guarantee Fees.--
                  ``(A) In general.--With respect to each loan 
                guaranteed under this subsection (other than a 
                loan that is repayable in 1 year or less), the 
                Administration shall collect a guarantee fee, 
                which shall be payable by the participating 
                lender and may be charged to the borrower, in 
                an amount equal to the sum of--
                          ``(i) 2.5 percent of the amount of 
                        the deferred participation share of the 
                        loan that is less than or equal to 
                        $250,000;
                          ``(ii) if the deferred participation 
                        share of the loan exceeds $250,000, 3 
                        percent of the difference between--
                                  ``(I) $500,000 or the total 
                                deferred participation share of 
                                the loan, whichever is less; 
                                and
                                  ``(II) $250,000; and
                          ``(iii) if the deferred participation 
                        share of the loan exceeds $500,000, 3.5 
                        percent of the difference between--
                                  ``(I) $750,000 or the total 
                                deferred participation share of 
                                the loan, whichever is less; 
                                and
                                  ``(II) $500,000.
                  ``(B) Exception for certain loans.--
                Notwithstanding subparagraph (A), if the total 
                deferred participation share of a loan 
                guaranteed under this subsection is less than 
                or equal to $80,000, the guarantee fee 
                collected under subparagraph (A) shall be in an 
                amount equal to 2 percent of the total deferred 
                participation share of the loan.
                  ``(C) Discretionary increase.--
                Notwithstanding subparagraphs (A) and (B), 
                during the 90-day period beginning on the first 
                day of any fiscal year, the Administration may 
                increase the guarantee fee collected under this 
                paragraph by an amount not to exceed 0.375 
                percent of the total deferred participation 
                share of the loan, if the Administration
                          ``(i) determines that such action is 
                        necessary to meet projected borrower 
                        demand for loans under this subsection 
                        during that fiscal year, based on the 
                        subsidy cost of the loan program under 
                        this subsection and amounts provided in 
                        advance for such program in 
                        appropriations Acts; and
                          ``(ii) not less than 15 days prior to 
                        imposing any such increase, notifies 
                        the Committees on Small Business of the 
                        Senate and the House of Representatives 
                        of the determination made under clause 
                        (i).''.
    (b) Repeal of Provisions Allowing Retention of Fees by 
Lenders.--Section 7(a)(19) of the Small Business Act (15 U.S.C. 
636(a)(19)) is amended--
          (1) in subparagraph (B)--
                  (A) by striking ``shall (i) develop'' and 
                inserting ``shall develop''; and
                  (B) by striking ``, and (ii)'' and all that 
                follows through the end of the subparagraph and 
                inserting a period; and
          (2) by striking subparagraph (C).
SEC. 636. ADDITIONAL POWERS.

    (a) Loans to small-business concerns; allowable purposes 
qualified business; restrictions and limitations * * *
          * * * * * * *
          ``(23) Annual fee.--
                  ``(A) In general.--With respect to each loan 
                guaranteed under this subsection, the 
                Administration shall, in accordance with such 
                terms and procedures as the Administration 
                shall establish by regulation, assess and 
                collect an annual fee in an amount equal to 0.5 
                percent of the outstanding balance of the 
                deferred participation share of the loan.
                  ``(B) Payer.--The annual fee assessed under 
                subparagraph (A) shall be payable by the 
                participating lender and shall not be charged 
                to the borrower.''.
          ``(24) Notification requirement.--The Administration 
        shall notify the Committees on Small Business of the 
        Senate and the House of Representatives not later than 
        15 days before making any significant policy or 
        administrative change affecting the operation of the 
        loan program under this subsection.''.
SEC. 634. GENERAL POWERS.

          * * * * * * *
    (g) Trust certificates; guarantee of timely payments of 
principal and interest; full faith and credit of United States; 
collection of fees; subrogation * * *
          * * * * * * *
          (4)(A) [The Administration may collect the following 
        fees for loan guarantees sold into the secondary market 
        pursuant to the provisions of subsection (f) of this 
        section: an amount equal to (A) not more than \4/10\ of 
        one percent per year of the outstanding principal 
        amount of the portion of such loan guaranteed by the 
        Administration, and (B) not more than 50 percent of the 
        portion of the sale price which is in excess of 110 
        percent of the outstanding principal amount of the 
        portion of such loan guaranteed by the Administration.] 
        The Administration may collect a fee for any loan 
        guarantee sold into the secondary market under 
        subsection (f) in an amount equal to not more than 50 
        percent of the portion of the sale price that exceeds 
        110 percent of the outstanding principal amount of the 
        portion of the loan guaranteed by the Administration. 
        Any such fee[s] imposed by the Administration shall be 
        collected by the Administration or by the agent which 
        carries out on behalf of the Administration the central 
        registration functions required by subsection (h) of 
        this section and shall be paid to the Administration 
        and used solely to reduce the subsidy on loans 
        guaranteed under section 636(a) of this title: 
        Provided, That such fee[s] shall not be charged to the 
        borrower whose loan is guaranteed: Provided further, 
        That nothing herein shall preclude any agent of the 
        Administration from collecting a fee approved by the 
        Administration for the functions described in 
        subsection (h)(2) of this section.

SEC. 697. DEVELOPMENT COMPANY DEBENTURES.

          * * * * * * *
    (b) Statutory Terms and Conditions.--No guarantee may be 
made with respect to any debenture under subsection (a) of this 
section unless--
          (1) such debenture is issued for the purpose of 
        making one or more loans to small business concerns, 
        the proceeds of which shall be used by such concern for 
        the purposes set forth in section 696 of this title;
          (2) necessary funds for making such loans are not 
        available to such company from private sources on 
        reasonable terms;
          (3) the interest rate on such debenture is not less 
        than the rate of interest determined by the Secretary 
        of the Treasury for purposes of section 683(b) of this 
        title;
          (4) the aggregate amount of such debenture does not 
        exceed the amount of loans to be made from the proceeds 
        of such debenture (other than any excess attributable 
        to the administrative costs of such loans);
          (5) the amount of any loan to be made from such 
        proceeds does not exceed an amount equal to 50 percent 
        of the cost of the project with respect to which such 
        loan is made; [and]
          (6) the Administration approves each loan to be made 
        from such proceeds[.]; and
          ``(7) with respect to each loan made from the 
        proceeds of such debenture, the Administration--
                  ``(A) assesses and collects a fee, which 
                shall be payable by the borrower, in an amount 
                equal to 0.0625 percent per year of the 
                outstanding balance of the loan; and
                  ``(B) uses the proceeds of such fee to offset 
                the cost (as such term is defined in section 
                502 of the Federal Credit Reform Act of 1990) 
                to the Administration of making guarantees 
                under subsection (a).''.