[House Report 106-12]
[From the U.S. Government Publishing Office]
106th Congress Report
1st Session HOUSE OF REPRESENTATIVES 106-12
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TECHNICAL CORRECTIONS TO MICROLOAN PROGRAM
_______
February 8, 1999.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Talent, from the Committee on Small Business, submitted the
following
R E P O R T
[To accompany H.R. 440]
[Including cost estimate of the Congressional Budget Office]
The Committee on Small Business, to whom was referred the
bill (H.R. 440) to make technical corrections to the Microloan
Program, having considered the same, report favorably thereon
without amendment and recommend that the bill do pass.
Purpose
The purpose of H.R. 440 is to make certain technical
corrections to the microloan program at the Small Business
Administration and to improve the loan loss reserve requirement
established for intermediaries operating under that program.
The microloan program was established as a pilot program in
1991 and was made permanent in 1997. The microloan program
provides small loans, under $25,000, to the nation's smallest
entrepreneurs. These loans are made through intermediaries, SBA
certified and approved non-profit lending and business
development organizations. These intermediaries borrow funds
from the SBA and, in turn, lend those funds to small
businesses. In order to protect taxpayer assets the
intermediaries are required to maintain a loss reserve based on
the amount of microloans they have outstanding.
Need for Legislation
The microloan program was made permanent on December 2,
1997 as a provision of P.L. 105-135, the Small Business
Reauthorization Act of 1997. At that time, changes were also
implemented to modify the loan loss reserve for microloan
intermediaries. The loan loss reserve language in P.L. 105-135
specified that microloan borrowers were required to maintain a
loss reserve of 15 percent of their outstanding microloans for
the first five years of their participation in the program.
After that, intermediaries were to be required to maintain a
loss reserve equal to 10 percent of their outstanding loans or
twice their loss rate, whichever was greater.
Unfortunately, this provision was interpreted by the SBA to
mean an amount equal to twice an intermediary's aggregate
losses. For example: If an intermediary had average annual
losses of five percent over five years the SBA would not impose
a loss reserve of ten percent (twice the annual rate) as
intended by the Congress. They would instead impose a loss
reserve of fifty percent (twice the aggregate annual losses
over five years).
This interpretation created an immense burden on microloan
intermediaries. As a result, at the end of the 105th Congress,
the Senate Committee on Small Business added language similar
to H.R. 440 to H.R. 3412 to remedy the situation.
Unfortunately, this language, as part of the larger bill,
failed to pass the Congress before adjournment.
Shortly thereafter, the Chairmen of the House and Senate
Committees on Small Business, Representative James M. Talent
and Senator Christopher Bond, and their colleagues,
Representative Nydia Velazquez and Senator John Kerry, the
Ranking Democratic members of the Committees, wrote to SBA
Administrator Aida Alvarez requesting her forbearance in
applying the loan loss regulations. (A copy of that letter is
attached as an Appendix.)
H.R. 440 will correct this interpretation and clearly
establish that the loan loss reserve will be fifteen percent
for the first five years for all intermediaries, and that
intermediaries may apply for a reduction of the reserve to
reflect their actual annual average loss rate, but no less than
ten percent.
The loan loss reserve reduction is to be based on the
actual annual average loss rate over a five year period. The
Committee expects that intermediaries will request suchreviews
no more than annually, and that such reviews will not affect the SBA's
ability to conduct further reviews for oversight and management
purposes.
H.R. 440 also replaces the cap on the amount of microloan
funds that can be made available to intermediaries in any one
State. This cap was originally imposed to ensure that microloan
funds would not be used disproportionately in those States with
more aggressive microloan programs. As the program has matured,
however, this restriction has become unnecessary. The Committee
now finds that it would be more useful to establish a limited
guarantee of the availability of funds for all States. The
availability of these funds is subject to their availability
through appropriations, and the approval of the SBA of the
request for funding. In addition, the Committee expects any
reserve established by the SBA to be held for no more than the
first half of the fiscal year.
Committee Action
During the 105th Congress the Committee on Small Business
passed H.R. 3412, a bill to make technical corrections to the
Small Business Investment Company Program. This bill passed the
House of Representatives on March 24, 1998. When it passed the
Senate, on September 30, 1998, it included language
substantially similar to H.R. 440. Unfortunately, H.R. 3412 was
not taken up again by the House during the 105th Congress due
to time constraints.
H.R. 440 was introduced on February 2, 1999. On February 3,
1999, the Committee on Small Business met for purpose of
marking up and reporting H.R. 439 and H.R. 440. H.R. 440 was
introduced, considered as read, and opened for amendment. No
amendments were offered. Chairman Talent then moved to pass
H.R. 440 and report it to the House. At 2:50 p.m., by a
unanimous voice vote, a quorum being present, the Committee
passed the bill, H.R. 440, and ordered it reported.
Section-by-Section Analysis
Section 1. Short Title
This act may be cited as the ``Microloan Program Technical
Corrections Act of 1999''.
Section 2. Technical Corrections
This section eliminates the language in paragraph
7(m)(7)(B) restricting the amount of loan funds made available
to any single state, and replaces it with language requiring
SBA to maintain a minimum amount ($800,000) of funding
available each year for each State's intermediaries. This
amount is subject to available appropriations and the approval
of the Small Business Administration. Any funds that are
reserved by the SBA for the purposes of this provision may be
released at the beginning of the third fiscal quarter.
This section also inserts language requiring SBA to not
only select and approve intermediaries but also make sure that
some funding is available to them.
SECTION 3. LOAN LOSS RESERVES
This section changes the loan loss reserve required to be
established by microloan intermediaries. The loss reserve
provides a hedge for the SBA against the failure of an
intermediary.
Under the new language all intermediaries will be required
to have a 15 percent loss reserve for their first five years.
After five years intermediaries may request a review by the
SBA. Existing intermediaries may request a review based on the
most recent five year period. If an intermediary's five year
average annual loss rate is lower than 15 percent then the SBA
may reduce the loss reserve requirement for the intermediary,
but no lower than 10 percent. The request for a review is to be
an annual review. However, this review is not to be interpreted
to preclude any reviews initiated by the SBA for the purposes
of program oversight.
Congressional Budget Office Cost Estimate
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 4, 1999.
Hon. James M. Talent,
Chairman, Committee on Small Business,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 440, the Microloan
Program Technical Corrections Act of 1999.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Mark Hadley.
Sincerely,
------ ------
(For Dan L. Crippen, Director).
Enclosure.
H.R. 440--Microloan Program Technical Corrections Act of 1999
CBO estimates that enacting this bill would not have a
significant effect on the federal budget. Assuming the
availability of appropriated funds, we estimate the Small
Business Administration (SBA) would spend less than $500,000 to
review the requirements for loan loss reserves of microloan
intermediaries. Because enactment of this bill would not affect
direct spending or receipts, pay-as-you-go procedures would not
apply.
Under the microloan program, SBA provides grants, loans,
and loan guarantees to nonprofit organizations, which act as
intermediaries and use the funds to provide small businesses
with technical assistance and loans ranging from $100 to
$25,000. The bill would eliminate a provision of current law
that limits the amount of loan funds that intermediaries within
a single state can receive under the microloan program. H.R.
440 also would clarify the requirements for loan loss reserves
of intermediaries. Current law requires intermediaries to
maintain loan loss reserves equal to 15 percent of their notes
receivable. The bill would permit SBA to reduce the
requirements for loan loss reserves for those intermediaries
with historical loss rates of less than 15 percent during the
previous five years. Finally, H.R. 440 would set the
requirement for loan loss reserves to be no less than 10
percent and no more than 15 percent. Changing the requirement
for loan loss reserves could affect the subsidy rate for the
microloan program, but any such effect would be negligible.
H.R. 440 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not have a significant impact on the budgets of state,
local, or tribal governments.
The CBO staff contact is Mark Hadley. This estimate was
approved by Robert A. Sunshine, Deputy Assistant Director for
Budget Analysis.
Committee Estimate of Costs
Pursuant to the Congressional Budget Act of 1974, the
Committee estimates that the amendments to Small Business Act
in H.R. 440 will not increase appropriations over the next five
fiscal years. Furthermore, pursuant to clause 3(d)(2)(A) of
rule XIII of the Rules of the House of Representatives, the
Committee estimates that implementation of H.R. 440 will not
significantly increase administrative costs. This concurs with
the estimate of the Congressional Budget Office.
Oversight Findings
In accordance with clause 4(c)(2) of rule X of the Rules of
the House of Representatives, the Committee states that no
oversight findings or recommendations have been made by the
Committee on Government Reform with respect to the subject
matter contained in H.R. 440.
In accordance with clause 2(b)(1) of rule X of the Rules of
the House of Representatives, the oversight findings and
recommendations of the Committee on Small Business with respect
to the subject matter contained in H.R. 440 are incorporated
into the descriptive portions of this report.
Statement of Constitutional Authority
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds the authority for
this legislation in Article I, Section 8, Clause 18 of the
Constitution of the United States.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (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):
SECTION 7 OF THE SMALL BUSINESS ACT
Sec. 7. (a) * * *
* * * * * * *
(m) Microloan Program.--
(1) * * *
* * * * * * *
(3) Loans to intermediaries.--
(A) * * *
* * * * * * *
[(D) Loan loss reserve fund.--The
Administration shall, by regulation, require
each intermediary to establish a loan loss
reserve fund, and to maintain such reserve fund
until all obligations owed to the
Administration under this subsection are
repaid. The Administration shall require the
loan loss reserve fund to be maintained--
[(i) during the initial 5 years of
the intermediary's participation in the
program under this subsection, at a
level equal to not more than 15 percent
of the outstanding balance of the notes
receivable owed to the intermediary;
and
[(ii) in each year of participation
thereafter, at a level equal to not
more than the greater of--
[(I) 2 times an amount
reflecting the total losses of
the intermediary as a result of
participation in the program
under this subsection, as
determined by the Administrator
on a case-by-case basis; or
[(II) 10 percent of the
outstanding balance of the
notes receivable owed to the
intermediary.]
(D)(i) In general.--The Administrator shall,
by regulation, require each intermediary to
establish a loan loss reserve fund, and to
maintain such reserve fund until all
obligations owed to the Administration under
this subsection are repaid.
(ii) Level of loan loss reserve fund.--
(I) Subject to subclause (III), the
Administration shall require the loan
loss reserve fund of an intermediary to
be maintained at a level equal to 15
percent of the outstanding balance of
the notes receivable owed to the
intermediary.
(II) Review of loan loss.--After the
initial 5 years of each intermediary's
participation in the program authorized
by this subsection, the Administrator
shall, at the request of the
intermediary, conduct a review of the
annual loss rate of each intermediary.
Any intermediary in operation under
this subsection prior to October 1,
1994 that requests a reduction in its
loan loss reserve shall be reviewed
based on the most recent five year
period preceding the request.
(III) Reduction of the loan loss
reserve.--Subject to the requirements
of this subclause the Administrator may
reduce the annual loan loss reserve
requirement to reflect the actual
average loan loss rate for the
intermediary during the preceding five
year period, except that in no case
shall the loan loss reserve be reduced
to less than 10 percent of the
outstanding balance of the notes
receivable owed to the intermediary.
A reduction may be allowed only if
the intermediary demonstrates to the
satisfaction of the Administrator
that--
(aa) the average annual loss
rate for the intermediary
during the preceding 5 year
period is less than 15 percent;
and
(bb) that no other factors
exist that may impair the
ability of the intermediary to
repay all obligations owed to
the Administration under this
subsection.
* * * * * * *
(7) Program funding for microloans.--
(A) * * *
[(B) State limitations.--During any fiscal
year, a State shall not receive new loan funds
from the Administration that exceed 125 percent
of the State's pro rata share of the microloan
program authorization during such fiscal year,
such share to be based on the population of the
State, as compared to the total population of
the United States. If, however, at the
beginning of the fourth quarter of a fiscal
year the Administration determines that a
portion of appropriated microloan funds are
unlikely to be awarded during that year, the
Administration may make additional funds
available to a State in excess of 125 percent
of the pro rata share of that State.]
(B) Availability of funds.--Subject to
appropriations, the Administration shall ensure
that at least $800,000 of new loan funds are
available for each State in any fiscal year.
All funds are to be made available subject to
approval of the Administration. If, at the
beginning of the third quarter of a fiscal
year, the Administration determines that the
funds necessary to comply with this provision
are unlikely to be awarded that year, the
Administration may make those funds available
to any State or intermediary.
(8) Equitable distribution of intermediaries.--In
approving microloan program applicants and providing
funding to intermediaries under this subsection, the
Administration shall select and provide funding to such
intermediaries as will ensure appropriate availability
of loans for small businesses in all industries located
throughout each State, particularly those located in
urban and in rural areas.
* * * * * * *
A P P E N D I X
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Congress of the United States,
Washington, DC, December 4, 1998.
Re microloan loan loss reserve.
Hon. Aida Alvarez,
Administrator, U.S. Small Business Administration,
Washington, DC.
Dear Administrator Alvarez: Last year the Senate Committee
on Small Business held a hearing on SBA's Microloan program,
which was in the last year of its pilot status. As a result of
that hearing, and the program's success during its pilot stage,
the Committee, and eventually the entire Congress, passed
legislation to make the program permanent, to increase
substantially the authorized funding levels for loans and
technical assistance, and to restructure the loan loss reserve
requirement. The purpose of restructuring the loan loss reserve
requirement was to enable microloan intermediaries with
successful loan portfolios and low loss histories to maintain
lower loss reserves and have the ability to use that capital
for additional microloans or technical assistance.
Unfortunately, the language as passed was not interpreted
in a way that would achieve that purpose. As part of the Senate
version of H.R. 3412, the Senate passed a clarification of the
1997 loan loss reserve language, which the Administration
supported, but there was insufficient time remaining in the
session to consider the clarifying changes and act on them.
Therefore, we ask that SBA refrain from implementing the
restructured reserve requirement until both houses of Congress
have an opportunity to consider the issue and act on it. We
expect such action to occur early in the next session.
Thank you for your cooperation in this matter.
Sincerely,
Christopher S. Bond,
Chairman, Committee on Small
Business, U.S. Senate.
James M. Talent,
Chairman, Committee on Small
Business, U.S. House of
Representatives.
John F. Kerry,
Ranking Democrat, Committee
on Small Business, U.S.
Senate.
Nydia M. Velazquez,
Ranking Democrat, Committee
on Small Business, U.S.
House of
Representatives.