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106th Congress Report
2d Session 106-280
CERTIFIED DEVELOPMENT COMPANY PROGRAM IMPROVEMENTS ACT OF 2000
May 9, 2000.--Ordered to be printed
Mr. Bond, from the Committee on Small Business, submitted the following
R E P O R T
[To accompany H.R. 2614]
The Committee on Small Business to which was referred the
bill (H.R. 2614) to amend the Small Business Investment Act to
make improvements to the certified program, and for other
purposes, having considered the same, reports favorably thereon
with an amendment and recommends that the bill as amended do
On March 21, 2000, the Committee on Small Business
considered H.R. 2614, the Certified Development Company Program
Improvements Act of 2000. The Committee adopted by a unanimous
voice vote an amendment offered by Senator Paul Wellstone
setting the programs levels for Fiscal Years 2001, 2002 and
2003. As amended, H.R. 2614 would make permanent the Preferred
Certified Lenders Program, expand and make permanent the Loan
Liquidation Pilot Program, increase the loan guaranty limits,
and establish the program authorization levels for the next
three fiscal years. Having considered H.R. 2614, as amended,
the Committee reports favorably thereon with technical and
conforming amendments and recommends that the bill do pass.
The 504 Certified Development Company (CDC) Program was
enacted to leverage private sector resources to fund larger
projects for small businesses to acquire, construct or expand
their facilities. Such loans create job opportunities and
improve the economic health of communities.
The 504 program is unlike any other SBA credit program. SBA
guarantees 10- or 20-year debentures issued by CDCs, and the
proceeds from these debentures are used to fund loans with
similar terms to small businesses for plant acquisition,
construction, expansion, and equipment. The SBA-guaranteed
debenture cannot exceed 40% of the project cost. A conventional
lender, such as a bank, usually provides financing for 50% of
the project cost. The bank's loan is senior to the SBA-
guaranteed loan in the event of a default by the 504 borrower.
Since the Committee approved the Small Business
Reauthorization Act of 1997, it has followed the progress of
the 504 Certified Development Company Program closely. The
Committee has watched for any negative fall out on program
demand resulting from the 1996 legislation mandating that the
program be supported entirely by fees paid by the private
sector. We are pleased to report that after an initial decline,
program demand has steadily increased. At the same time, the
credit subsidy estimate has steadily declined, reducing the
fees paid by small business borrowers.
The Committee has been particularly concerned about reports
and testimony from the Small Business Administration (SBA) and
the Office of Management and Budget (OMB) about low recoveries
following a default by a borrower on a loan made under the 504
program. In nearly all cases when a 504 program borrower
defaults, it is SBA, not the CDC, that takes the required
liquidation and foreclosure actions. The failure of SBA to take
aggressive actions to recover the value of collateral held
following a default significantly increases the costs to
borrowers to obtain a loan under the 504 program.
The recovery rate estimate utilized to determine the credit
subsidy rate for the 504 loan program declined from 44 percent
in 1997 to 34 percent in 1998 to 31 percent in 1999 and finally
to 25 percent in 2000. The Committee is pleased to note the
recovery rate estimate for Fiscal Year 2001 has been increased
to 31 percent.
II. Description of Bill
Under the Small Business Investment Act of 1958, 504
guaranteed loans for the following public policy goals are
eligible for loans guarantees up to $1,000,000:
Business district revitalization;
Expansion of exports;
Expansion of minority business development;
Enhanced economic competition;
Changes necessitated by Federal budget cutbacks;
Business restructuring arising from Federal mandated
standards or policies affecting the environment or the
safety and health of employees.
The bill adds loans to women-owned small businesses to the
current list of public policy goals specified under the Act. A
similar provision offered by Senator Kerry in 1998 was approved
by the Committee and the Senate; however, the bill was not
taken up by the House of Representatives before the 105th
In August 1988, Congress approved legislation (P.L. 100-
418) to increase the 504 loan guarantee ceiling to $750,000
from $500,000, except for a limited number of loans meeting the
special public policy purposes. In order to adjust this amount
to reflect inflation, the loan guarantee ceiling would need to
be increased to approximately $1,250,000. Therefore, the
Committee agrees with the position taken by the House Committee
on Small Business and approved an increase to $1,000,000. The
Committee further agreed to increase the maximum guaranteed
amount on loans made to meet the public policy purposes to
$1,300,000 from $1,000,000.
On April 27, 1999, the Committee conducted a public
Roundtable on the 7(a) Guaranteed Business Loan Program and the
504 program. The statements about the 504 program by industry
representatives and government officials were encouraging, and
the Committee urges SBA to continue its efforts to improve
program performance while reducing the credit subsidy rate.
In 1995, at the urging of the SBA and the National
Association of Development Companies (NADCO), the trade
organization that represents the 504 lenders and Certified
Development Companies (CDCs), the Committee agreed to
legislation mandating that the 504 program be supported
entirely by fees paid by the private sector. These new fees
were imposed beginning in FY 1996. Subsequently, the SBA
undertook an extensive review of the performance of the 504
program, and the credit subsidy rate, which determines the
amount of money that must be maintained in the loss reserve
account for this program, was increased from 0.57% to 6.85%, an
increase of 1200%. Since the 504 program was being funded only
by fees paid by the private sector, the fees paid by the
borrower in FY 1997 were increased from 0.125% to 0.875%, which
placed a financial burden on 504 borrowers. The Committee is
pleased to note that since FY 1997 the credit subsidy rate
estimate has dropped resulting in a decrease in borrower fees
from 0.875% to 0.472% for FY 2001. The bill authorizes SBA to
collect these fees to offset the credit subsidy cost through
September 30, 2003.
Premier certified lenders program
In October 1994, Congress approved the Premier Certified
Lenders Program on a pilot basis (P.L. 103-403). In December
1997, this pilot program was extended by Congress, and the
limitation on the number of CDCs that could participate in the
PCLP was removed (P.L. 105-135). The Committee has noted the
success of the program and has agreed with the House of
Representatives to make the PCLP a permanent part of the 504
program. In making the PCLP pilot a permanent part of the 504
program, the Committee expects the SBA to continue its efforts
to work with the CDC community to take complete advantage of
the strengths of the most successful and well-run CDCs.
In response to the plans by the SBA to undertake the sale
of assets held by the Agency, the Committee approved a
provision that requires the SBA to notify CDCs prior to
including a 504 loan in an asset sale. The Committee adopted
this section in order to insure there is an open dialogue and
cooperation between the Agency and the relevant CDCs. For the
past four years, the Committee has encouraged the SBA to move
forward with its asset sales program; however, we do not
believe this step forward should necessarily harm its lending
Loan liquidation program
In response to reports about low recoveries after the
default of a 504 loan, the Committee approved legislation in
1996 to establish the Loan Liquidation Pilot Program (P.L. 104-
208). The pilot liquidation program allowed up to 20 qualified
CDCs to liquidate loans that they originated. It was
implemented by the SBA in June 1997. The results to date for
the pilot program are encouraging, and the Committee has
concluded that it is in the best interest of the 504 program to
allow additional CDCs to conduct their own liquidation and
foreclosure activities. The Committee is pleased to note that
the recovery estimate for FY 2001 has increased for the first
time since 1995. The Administration's estimate for FY 2001 is
31 percent, and the assumptions used by OMB and the SBA do not
include an increase in recoveries that should result from
making the Loan Liquidation Program permanent. The Committee
urges the SBA to continue its efforts and to make maximum use
of the Loan Liquidation Program so that the recovery level will
A number of CDCs have demonstrated the ability through the
pilot program and other lending programs in which they
participate, to perform such activities, and have indicated a
willingness to perform such functions to supplement SBA's
activities in this area. Accordingly, the bill makes the pilot
liquidation program permanent and requires SBA to permit
certain CDCs to foreclose and liquidate defaulted loans that
they have originated under the 504 loan program.
In order to participate in the loan liquidation program, a
CDC must have made at least 10 loans per year for the past
three fiscal years, and it must have at least one employee with
two years of liquidation experience or be a member of the
Accredited Lenders Program with at least one employee with two
years of liquidation experience. Representatives of either
group must complete a training program developed by SBA.
Participants in the pilot liquidation program and Premier
Certified Lenders automatically qualify for the permanent
CDCs eligible to participate in liquidation activities are
required to perform all liquidation and foreclosure functions
pursuant to a liquidation plan approved by SBA. The bill also
authorizes CDCs to take other actions, in lieu of full
liquidation or foreclosure, to mitigate loan losses pursuant to
a workout plan. Prior to a CDC commencing liquidation or
foreclosure activities and prior to engaging in other actions
to mitigate loan losses, a CDC is required to provide the SBA
with a liquidation plan or workout plan, as the case may be,
for approval. The SBA has 15 days to approve a liquidation plan
or a workout plan. The bill further permits CDCs to litigate
matters relating to their liquidation activities subject to SBA
monitoring of such litigation.
The bill authorizes the SBA to suspend or revoke the
authority of a CDC to liquidate loans if the CDC either does
not meet the eligibility requirements or fails to comply with
any statutory or regulatory requirement relating to the
foreclosure or liquidation of loans or any other applicable
provision of law. CDCs are also prohibited from taking any
action that would result in an actual or apparent conflict of
interest in connection with the liquidation of their loans.
The bill requires the SBA to submit annually to Congress a
report on the results of the delegation of authority to CDCs to
liquidate and foreclose loans and a comparison of such results
to SBA's liquidation performance.
Program authorization level
During the Committee's consideration of the bill, Senator
Wellstone offered an amendment to establish the following 504
program authorization levels: $4,000,000,000 in Fiscal Years
2001, $5,000,000,000 in Fiscal Year 2002, and $6,000,000,000 in
Fiscal Year 2003. The Committeeapproved the amendment by a
unanimous voice vote.
III. Committee Vote
In compliance with rule XXVI(7)(b) of the Standing Rules of
the Senate, the following votes were recorded on March 21,
2000. Senator Wellstone offered an amendment authorizing the
program levels for the 504 program for Fiscal Years 2001, 2002
and 2003. This amendment was approved by a voice vote. After a
quorum was established pursuant to Committee rules, Senator
Bond made a motion to adopt the Certified Development Company
Program Improvements Act of 1999 as amended. The motion was
approved by a unanimous 18-0 recorded vote, with the following
Senators voting in the affirmative: Bond, Kerry, Burns,
Coverdell, Bennett, Snowe, Enzi, Fitzgerald, Crapo, Voinovich,
Abraham, Levin, Harkin, Lieberman, Wellstone, Cleland,
Landrieu, and Edwards.
IV. 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.
V. Changes In Existing Law
In the opinion of the Committee, it is necessary to
dispense with the requirement of section 12 of rule XXVI of the
Standing Rules of the Senate in order to expedite the business
of the Senate.
VI. Cost Estimate
In compliance with rule XXVI(11)(a)(1) of the Standing
Rules of the Senate, the Committee estimates the cost of the
legislation will be equal to the amounts indicated by the
Congressional Budget Office in the following letter.
Congressional Budget Office,
Washington, DC, March 30, 2000.
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 H.R. 2614, the
Certified Development Company Program Improvements 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.
Barry B. Anderson,
(For Dan L. Crippen, Director).
H.R. 2614--Certified Development Company Program Improvements Act of
H.R. 2614 would make numerous changes to two loan programs
that the Small Business Administration (SBA) operates in
cooperation with certified development companies (CDCs). Based
on information from the SBA, CBO estimates that implementing
H.R. 2614 would not have a significant impact on the federal
budget. Because H.R. 2614 could affect direct spending, pay-as-
you-go procedures would apply, but we estimate that any such
effect would not be significant. H.R. 2614 contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act and would impose no costs on
state, local, or tribal governments.
CDC loans, also known as section 503 and 504 loans, provide
small businesses with long-term, fixed-rate financing for the
purchase of land, buildings, and equipment. Under current law,
the Administrator of SBA must adjust an annual fee on 504 loans
to produce an estimated subsidy rate of zero at the time loans
are guaranteed. Both the program and its fee authority expire
at the end of fiscal year 2000. H.R. 2614 would extend the
authority to make new loans and collect such fees through
fiscal year 2003. The extension of the fee authority would
maintain a zero subsidy rate for this program.
The act would allow CDCs to litigate bankruptcies in place
of SBA and would authorize qualified companies to liquidate
loans in their portfolio that the SBA has purchased. (The act
would make permanent the pilot program that allowed CDCs to
liquidate such loans.) Finally, the act would increase the
maximum amount that can be guaranteed from $750,000 to $1
million in most cases, and from $1 million to $1.3 million if
the loan would satisfy specific policy goals.
If H.R. 2614 is enacted, the subsidy rates for previous
cohorts of CDC loans or the administrative costs of SBA could
be affected. (The former would affect direct spending.)
However, it is unclear whether the average subsidy costs for
SBA guarantees of existing loans would increase or decrease.
The pilot program has not produced enough information to date
to allow CBO to make any determination about the amount the
government would recover on defaulted loans if those loans are
liquidated by CDCs instead of by SBA. Inaddition, it is not
clear how expenses associated with liquidation would be paid. The
Federal Credit Reform Act stipulates that administrative expenses
cannot be paid out of the subsidy for loan programs, but expenses to
foreclose, maintain, or liquidate an asset can. Many of the expenses
CDCs would incur would be to foreclose, maintain, or liquidate assets.
It is not clear whether SBA would have the authority to reimburse CDCs
for administrative expenses, including litigation costs.
Liquidation activities under the act might cost less than
under current law, thus lowering the subsidy costs on existing
loan guarantees. But if litigation costs became part of the
subsidy costs, those costs could increase. On balance, CBO
expects that enacting H.R. 2614 would probably not lead to a
significant net change in the subsidy cost for CDC loans or in
SBA's administrative costs.
The act would not affect the zero subsidy rate for future
CDC loans. H.R. 2614 would increase the maximum size of the
guarantee, which could increase the default risk of the
program. But added costs for defaults on future loans would be
offset by fees paid by borrowers.
On August 2, 1999, CBO transmitted a cost estimate for H.R.
2614, as ordered reported by the House Committee on Small
Business on July 29, 1999. That act would not authorize SBA to
make new loans.
The CBO staff contact is Mark Hadley. This estimate was
approved by Peter H. Fontaine, Deputy Assistant Director for
VII. SECTION-BY-SECTION ANALYSIS
Section 1. Short title
Section 2. Women-owned businesses
Women-owned businesses are added to the list of concerns
eligible for the larger guaranteed loan in order to meet
selected public policy goals.
Section 3. Maximum debenture size
The maximum loan guarantee size is increased from $750,000
to $1,000,000 for regular 504 borrowers. The guarantee ceiling
on loans that meet the public policy goals is increased from
$1,000,000 to $1,300,000.
Section 4. Fees
In order to fund the Financing Account (loss reserve) for
the 504 program, it is necessary for the borrowers, CDCs, and
the participating banks to pay fees to the Federal government.
The participating bank pays a one-time fee, and the borrower
and CDC pay annually a percentage of the outstanding balance of
the 504 loan. The bill allows the fees to be collected through
September 30, 2003.
Section 5. Premier Certified Lenders Program
The Premier Certified Lenders Program demonstration program
is granted permanent status. Under current law, the
demonstration program will terminate on September 30, 2000.
Section 6. Sale of certain defaulted loans
The bill requires SBA to give any CDC with contingent
liability 90 days notice prior to including a defaulted loan in
a bulk sale of loans. No loan may be sold without permitting
prospective purchasers to examine SBA records on the loan.
Section 7. Loan liquidation
The bill adds a new section 510 to the Small Business
Investment Act of 1958 to create a permanent program permitting
CDCs to carry out the liquidation of defaulted loans. This
permanent program replaces the pilot program authorized by the
Small Business Reauthorization Act of 1997 (P.L. 105-135).
Section 8. Funding levels for certain financings under the Small
Business Investment Act of 1958
Establishes the following funds levels for the 504 program:
$4,000,000,000 in Fiscal Year 2001, $5,000,000,000 in Fiscal
Year 2002, and $6,000,000,000 in Fiscal Year 2003.