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106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    106-279

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



 
 IMPROVEMENTS TO SMALL BUSINESS ADMINISTRATION'S GENERAL BUSINESS LOAN 
                                PROGRAM

                                _______
                                

 August 2, 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

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 2615]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Small Business, to whom was referred the 
bill (H.R. 2615) to amend the Small Business Act to make 
improvements to the general business loan program, and for 
other purposes, having considered the same, report favorably 
thereon without amendment and recommend that the bill do pass.

                                Purpose

    The purpose of H.R. 2615 is to amend the general business 
loan program at the Small Business Administration, commonly 
known as the 7(a) loan program. H.R. 2615 contains a variety of 
technical and substantive changes to improve the program and 
correct problems brought to the Committee's attention through 
the oversight process.
    H.R. 2615 will increase the maximum guarantee amount of a 
7(a) loan to $1 million from the current limit of $750,000 in 
order to keep pace with inflation. The guarantee amount was 
last increased in 1988. It also institutes a cap prohibiting 
loans with a gross amount in excess of $2 million.
    The bill will also remove a provision which reduced SBA's 
liability for accrued interest on defaulted loans since the 
provision's intended savings failed to materialize.
    H.R. 2615 also includes three changes designed to encourage 
the making of smaller loans. The 80 percent guarantee rate will 
be expanded from loans under $100,000 to loans under $150,000. 
Likewise, the two percent guarantee fee will now apply to loans 
up to $150,000, which represents a significant savings for 
these small borrowers. Finally, for small loans, H.R. 2615 
includes a provision allowing lenders to retain one quarter of 
the guarantee fee on loans under $150,000 as an incentive to 
make these loans.
    The last part of H.R. 2615 modifies an SBA regulatory 
restriction which prohibit loans for passive investment. H.R. 
2615 will permit the financing of projects where no more than 
20% of a business location will be rented out provided the 
small business borrower in question occupies the remaining 
space.

                          Need for Legislation

    It has been ten years since the Committee acted to increase 
the maximum guarantee amount in the 7(a) program. To keep pace 
with inflation, the maximum guarantee amount should be 
increased to approximately $1,250,000. However, the Committee 
believes that a simple increase to $1,000,000 is sufficient. 
This allows room for the few larger loans made under the 7(a) 
program while not encouraging lending that may be better served 
through other avenues. The Committee also notes that there have 
been some large loans, above $2 million dollars, that have been 
made. The Committee believes that such loans, encompassing only 
a minimal guarantee, are perhaps inappropriate. As a result, 
the Committee also institutes a cap prohibiting loans with a 
gross amount of $2 million.
    The 7(a) program also faces a problem regarding early 
repayment of large loans, which jeopardizes the subsidy rate. 
H.R. 2615 will remedy this problem by assessing a fee to the 
borrower for prepayment within the first 3 years of a loan with 
a term in excess of 15 years. The committee believes this 
increase in prepayments is due to a variety of factors. There 
have been some instances of misuse of the program by businesses 
seeking bridge financing. There have been cases where, due to 
the strong economy, lenders have approached borrowers offering 
improved terms, effectively ``skimming'' loans and avoiding the 
need to process credit analyses. This effectively removes 
authorization dollars from the program which could have been 
used for other loans. The Committee believes that this is a 
disservice to both the small business borrowers and the 7(a) 
lenders. Both parties work to put financing packages together, 
at the cost of both time and money. The Committee also notes 
that such prepayment fees are a normal practice in the 
commercial lending sector.
    The Committee has, over the past several years, been 
concerned with the availability of loans at the lower end of 
the 7(a) spectrum. The Committee has in the past made changes 
in order to accommodate the making of such loans. As a result, 
since 1994, the number of loans made under $100,000 have 
increased significantly. In 1998 alone, 53% of the 7(a) loans 
made were under $100,000. This compares with only 37% in 1994. 
While this figure fluctuates, the general trend is most 
definitely upward. Consistent with previous efforts the 
Committee includes a number of provisions designed to encourage 
lenders to make these loans and to encourage small business 
borrowers to seek them.
    Finally, the Committee recognizes that current 7(a) program 
rules prohibit loans for passive investment. When Congress last 
reauthorized the 504 program, it modified a similar restriction 
in order to permit the financing of projects where less than 
20% of a business space will be rented out when the small 
business borrower in question will occupy the remaining space. 
The Committee believes that it is time that we provide similar 
options to 7(a) borrowers.

                            Committee Action


                    hearing on legislative proposals

    On June 24, 1999, at 9:30 a.m., the Committee on Small 
Business convened a hearing to discuss legislative proposals 
for the 7(a) and 504 programs. The Committee received testimony 
from four witnesses: Mr. Fred Hochberg, Deputy Administrator of 
the Small Business Administration; Mr. Anthony Wilkinson, 
President of the National Association of Government Guaranteed 
Lenders; Ms. Donna Faulk, Vice President for Mortgage Backed 
Securities of Prudential Securities; and Mr. John Geigel of the 
Wisconsin Business Development Finance Corporation. Mr. 
Geigel's testimony concerned the provisions affecting the 504 
program.
    Mr. Hochberg's testimony generally supported the provisions 
in the legislative proposal which later became H.R. 2615. He 
expressed the Administration's opposition to the proposed 
subsidy floor provision which was removed from the final 
version. However, the Committee believes this provision merits 
further examination. Mr. Hochberg also expressed reservations 
regarding increasing the guarantee amount; however, he stated 
that those concerns were based on the draft of the bill without 
any provisions to encourage smaller loans. Such provisions were 
later added.
    Mr. Wilkinson testified in support of the provisions 
proposed. He stated that the 7(a) lenders were particularly 
supportive of some form of prepayment penalty in order to add 
stability to the program. He stated that recent prepayments 
raised significant concern over the effect to the program as a 
whole. He also expressed support for the provisions raising the 
guarantee amounts, saying that such an increase was needed to 
provide some growth due to inflation. Mr. Wilkinson stated that 
he did not believe that the increases in average loan size were 
significant, and he noted that they fluctuated regularly.
    Ms. Faulk testified in support of the prepayment penalty 
provision. She testified that the commercial investors who 
purchase pools of SBA guaranteed loans have faced problems due 
to prepayments. Early prepayments require that loans be 
stripped from pools, with a corresponding loss in income. This 
results in a loss of investor confidence and interest in SBA 
backed pools and a loss in credit availability for small 
businesses.

                       consideration of h.r. 2615

    At 9:30 on July 29, 1999, the Committee on Small Business 
met to mark up and report H.R. 2615. The Chairman declared the 
bill open for amendment at any point, and the first action was 
consideration of an amendment to section two of H.R. 2615 
offered by Representative Manzullo. The amendment sought to 
remove the provision increasing the maximum guarantee amount 
for 7(a) loans. The current level is $750,000 and H.R. 2615 
raises that amount to $1,000,000.
    Mr. Manzullo maintained that the increase in the guarantee 
amount would have a negative effect on the availability of 
smaller loans. He expressed concern that a letter he had 
received from the SBA showed that 6,400 loans might not be 
available if the increase was passed. However, the letter also 
stated that it did not take into account any possible changes 
to the program that encourage smaller loans and thereby change 
that estimate. Mr. Manzullo also expressed his concern that SBA 
was departing from its mission in offering too much assistance 
through larger loans.
    Chairman Talent expressed his belief that both the changes 
to encourage small loans and the cap imposed on the overall 
loan size available through the 7(a) program would mitigate any 
possible negative impact on small loans. The Chairman also 
stated that he had seen no empirical evidence that the 
availability of small loans was, in fact, affected by changes 
in the maximum guarantee amount. The Chairman then distributed 
a chart showing clearly that average loan size and the number 
of loans made in the 7(a) program fluctuated widely.
    Chairman Talent also pointed out that the number of loans 
under $100,000 has clearly risen since 1994, evidence that the 
SBA was not adrift in its mission. They have risen from 30% of 
all loans in 1993 to 53% in 1998. Finally, he explained that 
large loans, which are still loans to small businesses, pay 
proportionately higher fees and consequently subsidize the 
smaller loans.
    Mr. Bartlett expressed his belief based on testimony 
received by his subcommittee, that larger loans were necessary 
but he questioned whether a ``carte blanche'' increase should 
be available. He stated that a waiver, to allow larger loans 
might be a better way to provide such financing.
    Chairman Talent responded that the existing language did 
offer the flexibility needed, and that the nature of the 
program was such that adding restrictions or waivers might 
actually hamper the ability of small businesses to receive 
assistance. He pointed to the clear rise in average loan size 
that occurred in the 7(a) program in 1992, 1993, and 1994. This 
was a result of the ``credit crunch'' that was affecting the 
economy at the time, and the need for larger small businesses 
to acquire 7(a) assistance which they would ordinarily forego 
in lieu of conventional financing.
    Ms. Velazquez also spoke in opposition to the amendment. 
She made clear that the increase was actually less than needed 
to adjust for inflation over the past ten years, and was a very 
modest increase. She also pointed out that the bill did far 
more to encourage the making of small loans than any possible 
increase in large loans. Ms. Velazquez also reiterated the 
Chairman's observation that, under the current subsidy system, 
larger loans tended to cross-subsidize smaller loans, and that 
artificial restrictions on large loans threatened to increase 
the subsidy cost of the 7(a) program.
    Mr. Pascrell spoke in opposition to the amendment, but 
expressed his concern over the making of small loans. He 
expressed his belief that small loans were less affected by 
programmatic changes than by other factors--economic and 
administrative. He expressed his hope that the Committee could 
have hearings in the near future to address the issue.
    Ms. Millender-McDonald and Mr. Davis also spoke in 
opposition to the amendment, and expressed their belief that 
the 7(a) program had been moving increasingly in favor of small 
borrowers and that the amendment was necessary.
    The amendment was voted on at 10:25 a.m. It was defeated by 
a roll call vote of four in favor, and twenty-four against. Mr. 
Manzullo, Mr. Bartlett, Mr. Toomey, and Mr. Chabot voted in 
favor of the amendment. Mr. Talent, Ms. Velazquez, Mr. 
LoBiondo, Ms. Millender-McDonald, Mrs. Kelly, Mr. Davis, Mrs. 
McCarthy, Mr. English, Mr. Pascrell, Mr. Pitts, Ms. Christian-
Christensen, Mr. Sweeney, Mr. Brady, Mr. DeMint, Mr. Udall 
(NM), Mr. Thune, Mr. Moore, Mrs. Bono, Mr. Gonzalez, Mr. 
Phelps, Ms. Napolitano, Mr. Baird, Mr. Udall (CO), and Ms. 
Berkley voted against the amendment.
    The Chairman then moved the bill be reported, and at 10:30 
a.m., by a voice vote, a quorum being present, the Committee 
passed H.R. 2615 and ordered it reported.

                      Section-by-Section Analysis


Section 1. Levels of participation

    Increases the guarantee percentage on loans of $150,000 or 
less to 80%. The 80% guarantee level currently extends only to 
loans of $100,000 or less. This guarantee increase is one of 
the changes proposed to encourage the availability of small 
loans.

Section 2. Loan amounts

    This provision will increase the maximum guarantee amount 
to 1 million dollars. The maximum gross loan amount will be 
capped at 2 million dollars. The language would prohibit SBA 
from placing a guarantee on any loan over 2 million dollars 
regardless of the guaranteed amount. Consequently, the largest 
loan available would be a 2 million dollar loan with a 50% 
guarantee. The largest loan available at the maximum guarantee 
rate of 75% would be $1,333,333. The cap on loans over 2 
million dollars will effectively remove a number of large loans 
that have been made with only a minimal guarantee, loans which 
use up loan authority at a disproportionate rate. In 1998, 
roughly thirty loans over 2 million dollars were made.

Section 3. Interest on defaulted loans

    This will remove the provision that reduced SBA's liability 
for accrued interest on defaulted loans. This provision was 
added to the program in 1996 as a method of reducing the 
subsidy cost of the program. It has come to the Committee's 
attention that the expected savings have not materialized.

Section 4. Prepayment of loans

    This provision will reduce the incentive for early 
prepayment of 7(a) loans. It will assess a fee to the borrower 
for early prepayment of any loan with a term in excess of 15 
years. Early prepayment will be defined as any prepayment 
within the first three years after disbursement. The prepayment 
fee will be determined by the date of the prepayment--5% in the 
first year, 3% in the second year, 1% in the third year. The 
fee will be based on ``excess prepayment'' which is defined as 
prepayment of more than 25% of the outstanding loan amount. In 
the event of an excess prepayment the fee would be assessed on 
the entire outstanding loan amount.

Section 5. Guarantee fees

    This section changes the guarantee fee for loans of 
$150,000 or less to 2%. Currently, the guarantee fee of 2% is 
only for loans under $100,000. Loans over $100,000 currently 
have a guarantee fee of 3%. The section also provides for an 
incentive for lenders to make smaller loans (under $150,000) by 
allowing them to retain \1/4\ of the guarantee fee.

Section 6. Lease terms

    Under existing 7(a) rules, loan proceeds may not be used 
for investment purposes. This includes purchase or construction 
of property to be leased to others. Currently, 7(a) loans may 
be used to construct property which will be used solely by the 
borrower.
    In 1997, Congress modified this rule for the 504 program to 
allow for projects where a small portion of a property might be 
rented out permanently, but the borrower's main focus was the 
construction of a permanent location. This provision would 
allow the same authority for 7(a) loans. Borrowers would be 
allowed to lease up to 20% of a property in which they will 
occupy the remaining 80%.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, August 2, 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. 2615, a bill to 
amend the Small Business Act to make improvements to the 
general business loan program, and for other purposes.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mark Hadley 
(for federal costs) and Shelley Finlayson (for the state and 
local impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

               congressional budget office cost estimate

H.R. 2615--A bill to amend the Small Business Act to make improvements 
        to the general business loan program, and for other purposes

    H.R. 2615 would make numerous changes to the general 
business loan program administered by the Small Business 
Administration (SBA). Based on information from the SBA, CBO 
estimates that implementing the bill would not have a 
significant impact on the federal budget. H.R. 2615 would not 
affect direct spending or receipts; therefore, pay-as-you-go 
procedures would not apply.
    H.R. 2615 would establish penalties for borrowers who 
choose to prepay their loans in the first three years if such 
loans have a contractual maturity of at least 15 years. The 
bill also would reduce certain fees paid by borrowers of loans 
between $80,000 and $150,000. Current law allows the SBA to 
pay, on defaulted loans, 1 percent less than the borrower's 
interest rate between the time of a default and the time the 
SBA purchases the loan. Section 3 would eliminate this 
provision of law for new loans guaranteed after fiscal year 
1999. Finally, the bill would make technical changes affecting 
the percent of a loan the agency would guarantee, the maximum 
loan size, and eligible uses for loan proceeds.
    The Federal Credit Reform Act of 1990 requires 
appropriation of the subsidy costs and administrative costs for 
credit programs. The subsidy cost is the estimated long-term 
cost to the government of a direct loan or loan guarantee, 
calculated on a net present value basis and excluding 
administrative costs. Based on the number of loans that would 
be affected by the prepayment penalty and the value of the fees 
that would be reduced by the bill, CBO estimates that the net 
effect of H.R. 2615 on the subsidy costs of general business 
loan guarantees would be negligible. Any changes in spending 
that would result would be subject to the availability of 
appropriated funds.
    H.R. 2615 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act. The 
bill would modify an existing small business loan program that 
includes tribal-owned small businesses as qualified recipients. 
Any costs or benefits to Indian tribes would be the result of 
voluntary participation in this program and are expected to be 
minimal. Less than 1 percent of the loans issued each fiscal 
year are to tribes, and the bills; changes would not 
significantly affect the overall costs or benefits of the 
program. State and local governments would not be affected.
    The CBO staff contacts are Mark Hadley (for federal costs), 
and Shelley Finlayson (for the state, local, and tribal impact. 
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 the Small Business 
Act contained in H.R. 2615 will not increase discretionary 
spending over the next five fiscal years. The Committee also 
estimates that H.R. 2615 will not affect direct spending. This 
estimate concurs with Congressional Budget Office (CBO) 
estimates.
    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. 2615 will not 
significantly increase other administrative costs.

                           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. 2615.
    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. 2615 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 Representative, 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) Loans to Small Business Concerns; Allowable 
Purposes; Qualified Business; Restrictions and Limitations.--
The Administration is empowered to the extent and in such 
amounts as provided in advance in appropriation Acts to make 
loans for plant acquisition, construction, conversion, or 
expansion, including the acquisition of land, material, 
supplies, equipment, and working capital, and to make loans to 
any qualified small business concern, including those owned by 
qualified Indian tribes, for purposes of this Act. Such 
financings may be made either directly or in cooperation with 
banks or other financial institutions through agreements to 
participate on an immediate or deferred (guaranteed) basis. 
These powers shall be subject, however, to the following 
restrictions, limitations, and provisions:
          (1) * * *

           *       *       *       *       *       *       *

          (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] $150,000; 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] $150,000.

           *       *       *       *       *       *       *

          (3) No loan shall be made under this subsection--
                  (A) if the total amount outstanding and 
                committed (by participation or otherwise) to 
                the borrower from the business loan and 
                investment fund established by this Act would 
                exceed [$750,000,] $1,000,000 (or if the gross 
                loan amount would exceed $2,000,000), except as 
                provided in subparagraph (B);

           *       *       *       *       *       *       *

          [(4) Interest rates and fees.--]
          (4) Interest rates and prepayment charges.--
                  (A) * * *
                  (B) Payment of accrued interest.--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iii) Applicability.--Clauses (i) and 
                        (ii) shall not apply to loans made on 
                        or after October 1, 1999.

           *       *       *       *       *       *       *

                  (C) Prepayment charges.--
                          (i) In general.--A borrower who 
                        prepays any loan guaranteed under this 
                        subsection shall remit to the 
                        Administration a subsidy recoupment fee 
                        calculated in accordance with clause 
                        (ii) if--
                                  (I) the loan is for a term of 
                                not less than 15 years;
                                  (II) the prepayment is 
                                voluntary;
                                  (III) the amount of 
                                prepayment in any calendar year 
                                is more than 25 percent of the 
                                outstanding balance of the 
                                loan; and
                                  (IV) the prepayment is made 
                                within the first 3 years after 
                                disbursement of the loan 
                                proceeds.
                          (ii) Subsidy recoupment fee.--The 
                        subsidy recoupment fee charged under 
                        clause (i) shall be--
                                  (I) 5% of the amount of 
                                prepayment, if the borrower 
                                prepays during the first year 
                                after disbursement;
                                  (II) 3% of the amount of 
                                prepayment, if the borrower 
                                prepays during the 2nd year 
                                after disbursement; and
                                  (III) 1% of the amount of 
                                prepayment, if the borrower 
                                prepays during the 3rd year 
                                after disbursement.

           *       *       *       *       *       *       *

          (18) Guarantee fees.--
                  (A)  * * *

           *       *       *       *       *       *       *

                  [(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.]
                  (B) Exception for certain loans.--
                          (i) In general.--Notwithstanding 
                        subparagraph (A), if the total deferred 
                        participation share of a loan 
                        guaranteed under this subsection is 
                        less than or equal to $120,000, 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.
                          (ii) Retention of fees.--Lenders 
                        participating in the programs 
                        established under this subsection may 
                        retain not more than 25 percent of the 
                        fee collected in accordance with this 
                        subparagraph with respect to any loan 
                        not exceeding $150,000 in gross loan 
                        amount.

           *       *       *       *       *       *       *

          (28) Leasing.--In addition to such other lease 
        arrangements as may be authorized by the 
        Administration, a borrower may permanently lease to 1 
        or more tenants not more than 20 percent of any 
        property constructed with the proceeds of a loan 
        guaranteed under this subsection, if the borrower 
        permanently occupies and uses not less than 60 percent 
        of the total business space in the property.

           *       *       *       *       *       *       *


                            ADDITIONAL VIEWS

    Democrats are strong supporters of the Small Business 
Administration's General Business Guaranty, or 7(a), program. 
This program is one of the most important small business loan 
programs administered by the Small Business Administration 
because it represents access to capital for America's small 
businesses, and an access to capital means access to 
opportunity.
    SBA administers numerous programs that provide financial 
and technical assistance to small firms, but the 7(a) program 
is the agency's flagship loan program. It is far and away the 
agency's largest and most important in terms of number of loans 
and program level supported.
    Under the 7(a) guaranty loan program, loan guarantees are 
provided to eligible small businesses that have been 
unsuccessful in obtaining private financing on reasonable terms 
and conditions, and the proceeds from a 7(a) loan may be used 
for virtually any business purpose. Since the program's 
inception, SBA has made or guaranteed more than 600,000 7(a) 
loans totaling approximately $80 billion.
    The 7(a) program addresses the financing needs of small 
firms that are often not met in the private capital markets 
because commercial lenders do not provide loans for the 
purposes, in the amounts, and with the terms required by small 
business borrowers.
    This program should be held out as an example of a program 
where taxpayers can see their dollars doing effective work. The 
legislation approved by the Committee, H.R. 2615, will update 
and improve the 7(a) loan program in a reasonable and 
thoughtful way, and will enable the program to continue in an 
effective manner. We strongly support this bill in its current 
form.
    One of the more important items in the legislation is the 
increase in the loan guaranty from $750,000 to $1 million. It 
has been over a decade since we increased the loan guaranty. In 
fact, if the current guaranty were indexed using the consumer 
price index, one would actually have a loan guaranty that is 
higher than what was included in the bill. The guaranty 
increase is reasonable and necessary if the program is to 
continue to serve our nation's small businesses.
    In the 7(a) program, the higher fees generated by larger 
loans allow the program to expand because they substantially 
lower the subsidy rate of the program. This, in turn, allows 
the program to make more small loans available to small 
businesses. Within the larger loans, the fees charged to 
smaller loans would be significantly higher. Thereby making 
7(a) loans inaccessible to those businesses who need them most.
    To safeguard against the risk that increasing the guaranty 
would harm those seeking smaller loans, we have capped the 
total loan amount that can be made under the 7(a) program at $2 
million. This, in combination with other provisions of the 
legislation will ensure that the 7(a) program will be available 
to all who need it.
    We would also like to indicate our strong support for the 
small loan provisions contained in the legislation. This is an 
important issue for the Democratic Members of the Committee. We 
are pleased that the Committee has made sure that small loans 
are still a priority by adopting such changes as reducing the 
guaranty fee to the borrower of loans of $150,000 or less from 
3% of the loan to 2%, ensuring that small businesses will keep 
more of their money.
    The Committee also creates incentives for lenders to 
continue to make small loans through an increasing guaranty 
from 75% to 80%, and a rebate that could be as high as $600 per 
loan. These proposals will ensure that the program continues 
its mission.
    All of these changes made to the 7(a) program through H.R. 
2615 will grow the program in a reasonable way, while ensuring 
that we continue our commitment to small lenders through the 
program. We support these changes and we support the overall 
bill.
    However, we are disappointed that the final version of the 
bill did not include a provision to ensure the accuracy of the 
subsidy rate floor. Under the leadership of Chairman Talent, 
the Committee has tried to better understand how the 7(a) 
subsidy rate is calculated and whether it, at any given point, 
is an accurate reflection of the program's cost to the 
government.
    Unfortunately, we have been unsuccessful, and year after 
year we find that the fees this Committee has authorized are 
too high. As the performance of the program has improved over 
the past few years, federal funding for the program has been 
reduced rather than lowering fees and costs to the program 
participants. Through the current fee-rate system we are over-
charging our borrowers and lenders for participating in the 
7(a) program. Since the inception of credit reform, we have 
over-charged program users by $800 million. We must develop a 
fee system that keeps the subsidy rate for the program low, 
while not over-charging the program participants.
    The subsidy rate floor provision was a creative attempt to 
do something about this issue. Here is how it would work: 
Current law imposes two types of fees--a one-time fee imposed 
on the borrower, the amount of which is determined by the size 
of the loan, and an annual fee of 0.5% of the outstanding 
amount of the loan which is paid by the lender for the life of 
the loan.
    In the event the subsidy rate for the 7(a) program were to 
drop below 1.25% this provision would have required the 
Administrator to adjust fees in the program to bring the 
subsidy rate back to 1.25%. This would be accomplished by 
reducing the fees charged to the 7(a) borrowers--with the fees 
on the smaller portions of the loans being the first affected. 
Only in the event of a serious subsidy drop, after the above 
changes were implemented, would the Administrator then be 
allowed to lower the 0.5% annual fee charged to the lenders.
    Without this or a similar provision, the subsidy rate could 
be at zero and the federal government could still be charging 
the borrowers too much to use the program. This is a very 
serious issue, and I hope the Committee will consider a subsidy 
rate floor in a subsequent bill.
    We are pleased that Chairman Talent acknowledged this issue 
during the mark up and indicated his willingness to hold 
hearings on this issue. It is our hope that we can hold these 
hearings very soon, with the possibility of including the 
subsidy rate floor provision in the final legislation.
    We look forward to working with the Chairman, the other 
Members of the Committee Majority, and the Small Business 
Administration to find a workable solution on this issue--one 
that balances out the interests of the program participants and 
the taxpayers, while maintaining a strong 7(a) loan program.

                                                Nydia M. Velazquez.