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[Senate Report 115-265]
[From the U.S. Government Publishing Office]

                                                     Calendar No. 351
115th Congress     }                                    {      Report
                                 SENATE
 2d Session        }                                    {     115-265

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        SMALL BUSINESS 7(A) LENDING OVERSIGHT REFORM ACT OF 2018

                                _______
                                

                  June 5, 2018.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 2283]

     [Includiing lost estimate of the Congressional Budget Office]

    The Committee on Small Business and Entrepreneurship, 
having considered the bill (S. 2283) to amend the Small 
Business Act to strengthen the Office of Credit Risk Management 
within the Small Business Administration, and for other 
purposes, reports favorably thereon with amendment in the 
nature of a substitute and recommends that the bill, as 
amended, do pass.

                            I. INTRODUCTION

    The Act (S. 2283), was introduced by the Committee's 
Chairman Senator James Risch and the Committee's Ranking Member 
Jeanne Shaheen on January 9, 2018. Cosponsors include Senators 
Michael B. Enzi and Tammy Duckworth.
    The Small Business 7(a) Lending Oversight Reform Act of 
2018 amends the Small Business Act to codify the Small Business 
Administration (SBA)'s Office of Credit Risk Management (OCRM) 
and provide the office with the authority to impose specified 
monetary penalties on any 7(a) lender that violates the law, 
regulations or other requirements of the SBA's 7(a) loan 
guaranty program. The legislation also codifies the Lender 
Oversight Committee (LOC), which acts as an advisory body to 
OCRM and has a role in approving formal enforcement actions 
made by the director of OCRM. The bill also updates and defines 
the ``credit elsewhere'' test, and provides flexibility to the 
Administrator to increase the authorization cap of the program 
in circumstances where the congressionally authorized cap is 
going to be reached before the end of a fiscal year.

              II. HISTORY (PURPOSE & NEED FOR LEGISLATION)

    The lack of access to affordable capital limits the 
creation, growth, and expansion of small businesses and is the 
main contributing factor to their failure. Nearly a quarter of 
small businesses fail in their first year, and nearly half do 
not make it past their fifth year. During the 2008 recession, 
small and medium-sized businesses disproportionately 
experienced more layoffs and failure rates. This was primarily 
driven by contraction in credit markets and increased 
collateral requirements. Bank loans are the main source of 
capital for small businesses; however, banks have continued to 
reduce their small business lending. From 2008 to 2016, bank 
lending to small business decreased by 13.7 percent, while 
lending to larger firms increased by 48.9 percent.
    As part of their mission to promote and support small 
businesses, SBA manages multiple loan programs designed to 
provide small businesses with capital. The SBA's flagship loan 
program is the 7(a) Loan Guaranty Program, which was originally 
authorized by Section 7(a) of the Small Business Act of 1953. 
Loans originate from private-sector lenders and a portion of 
the loan--usually 75 to 85 percent, based on loan size--is 
guaranteed by the SBA. This program provides small business 
owners who are unable to obtain credit through conventional 
lending methods with the capital they need for a broad range of 
purposes, from working capital for payroll and inventory to 
financing for changes of ownership, and the purchase of 
buildings and equipment. The lengthier terms generally 
available under the 7(a) program reduce monthly payments for 
small businesses with a maximum loan size of $5 million, and a 
maximum loan term of 25 years. The program currently operates 
at zero cost to taxpayers, with costs covered by borrower and 
lender fees.
    Since 2007, the 7(a) loan program has seen growth of 78 
percent and the total value of approved 7(a) loans has risen 
from $17.86 billion in 2013 to $25.44 billion in 2017. This 
growth has required five authorization cap increases in the 
past four years. The exponential growth of the program and the 
need for several emergency increases in the authorization cap 
have raised congressional concerns about oversight of the 
program by OCRM, especially the credit elsewhere determination 
and whether it is being properly documented and verified by 
SBA, as well as the ability of the program to operate 
appropriately if the authorization cap proves insufficient 
before the end of a fiscal year.
    To address these concerns, the Committee favorably reported 
S. 2992 in the 114th Congress. This bill would have codified 
OCRM and provided the office with more authority for 
enforcement actions. During the markup of the bill, the Coons-
Risch amendment, was approved. The amendment allowed the 
Administrator to increase the 7(a) loan authorization cap by 10 
percent if the intent to increase the cap was submitted in 
writing to Senate and House appropriators 45 days in advance of 
taking action. The amendment was substantially similar to S. 
2496, the ``Help Small Business Access Affordable Credit Act,'' 
which was introduced on February 3, 2016 by Senators 
Christopher A. Coons, James Risch, and Jeanne Shaheen. Though 
the bill passed out of Committee, it did not receive 
consideration by the full Senate. The concerns this bill was 
meant to address remain, which led to the introduction of S. 
2283, the Small Business 7(a) Lending Oversight Reform Act of 
2018.

                      III. HEARINGS & ROUNDTABLES

114th Congress

    On May 26, 2016, the Senate Committee on Small Business & 
Entrepreneurship held a hearing entitled ``Oversight of the 
SBA's 7(a) Loan Guaranty Program.'' The Honorable Maria 
Contreras-Sweet, then Administrator of the SBA, served as the 
hearing's sole witness. The Committee examined whether 
taxpayers and small businesses would receive more adequate 
protection by reforming the 7(a) program to strengthen OCRM and 
authorizing graduated enforcement options that provide OCRM 
with greater flexibility. The Committee also recognized support 
for these types of reforms from the National Association of 
Government Guaranteed Lenders (NAGGL), the Independent 
Community Bankers of America (ICBA), and the American Bankers 
Association (ABA).

                        IV. DESCRIPTION OF BILL

    The primary goals of this bill are to strengthen the SBA's 
ability to conduct effective lending oversight, ensure the 
credit elsewhere test is being applied correctly by SBA and 
lenders and appropriately verified by SBA, provide flexibility 
to the Administrator to ensure the stability of the program, 
and to provide Congress with information regarding the SBA's 
oversight actions to ensure the longevity of the program as a 
critical source of capital for America's entrepreneurs and 
small business owners. S. 2283 achieves these objectives by 
codifying OCRM and bolstering its enforcement authority while 
requiring a budget justification to ensure transparency and 
effective funding of OCRM, codifying the LOC as an advisory 
body to OCRM, updating the definition of credit elsewhere, 
giving the Administrator flexibility to adjust the program 
authorization, and requiring an annual report to Congress on 
risk in the program.

                           V. COMMITTEE VOTE

    In compliance with rule XXVI (7)(b) of the Standing Rules 
of the Senate, the following vote was recorded on March 14, 
2018.
    A motion to adopt, S. 2283, the Small Business 7(a) Lending 
Oversight Reform Act of 2018, a bill to amend the Small 
Business Act to strengthen the Office of Credit Risk Management 
within the Small Business Administration, and for other 
purposes, was approved unanimously by a roll call vote as part 
of a manager's package. Senators Risch, Cardin, Rubio, Paul, 
Scott, Ernst, Inhofe, Young, Enzi, Rounds, Kennedy, Shaheen, 
Cantwell, Heitkamp, Markey, Booker, Coons, Hirono, and 
Duckworth voted for the bill.
    Chairman Risch filed a substitute amendment that included a 
number of technical changes and minor modifications. Senator 
Booker filed an amendment requiring the SBA to include 
information on their compliance with an SBA Inspector General 
(IG) report, Evaluation of SBA 7(a) Loans Made to Poultry 
Farmers (Report Number 18-13, published March 6, 2018), in 
their first annual portfolio risk analysis report to Congress. 
The Risch and Booker amendments were included in the manager's 
package.

                           VI. COST ESTIMATE

    In compliance with rule XXVI (11)(a)(1) of the Standing 
Rules of the Senate, the Committee estimates the cost of the 
legislation will be equal to the amounts discussed in the 
following letter from the Congressional Budget Office:

                                                      May 22, 2018.
Hon. James E. Risch,
Chairman, Committee on Small Business and Entrepreneurship,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2283, the Small 
Business 7(a) Lending Oversight Reform Act of 2018.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

S. 2283 Small Business 7(a) Lending Oversight Reform Act of 2018

    S. 2283 would direct the Small Business Administration 
(SBA) to establish the Office of Credit Risk Management (OCRM), 
which would supervise certain entities that issue loans 
guaranteed under the SBA's 7(a) loan program, develop risk 
analysis reports, and perform on-site reviews of those 
entities' operations. The bill also would direct the SBA to 
establish the Lender Oversight Committee, which would review 
the OCRM's recommendations for enforcement action and fulfill 
other responsibilities, The SBA's existing OCRM and Lender 
Oversight Committee perform functions similar to those required 
under S. 2283.
    S. 2283 would require the OCRM to conduct additional risk 
analyses for the SBA 7(a) loan program portfolio, allow that 
office to impose new sanctions and civil penalties on lenders 
for certain prohibited actions, and require the SBA to report 
on enforcement actions taken by the Lender Oversight Committee. 
Using information from the SBA, CBO estimates that implementing 
those provisions would require about 10 new employees (at an 
average annual cost of about $120,000) and cost $6 million over 
the 2019-2023 period for the agency to meet additional 
reporting and enforcement requirements and to revise and write 
new regulations. That spending would be subject to the 
availability of appropriated funds.
    S. 2283 also would require the SBA to supervise on-site 
reviews of 7(a) loan program lenders, using information from 
the SBA, CBO estimates that implementing that provision would 
require about 10 new employees and would have a gross cost of 
$5 million over the 2019-2023 period. However, the SBA has the 
authority to recover the examination and review costs of the 
7(a) loan program through fees imposed on lenders; therefore, 
CBO estimates that the net cost of those provisions would be 
negligible, assuming agency actions consistent with that 
authority. Enacting S. 2283 could increase revenues from new 
civil penalties; therefore, pay-as-you-go procedures apply. 
However, CBO estimates that those revenue increases would not 
be significant. Enacting the legislation would not affect 
direct spending.
    CBO estimates that enacting S. 2283 would not increase net 
direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2029.
    S. 2283 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act.
    On May 22, 2018, CBO transmitted a cost estimate for H.R. 
4743, the Small Business 7(a) Lending Oversight Reform Act of 
2018, as passed by the House of Representatives on May 8, 2018. 
The pieces of legislation are similar, and CBO's estimates of 
their budgetary effects are the same.
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was reviewed by H. Samuel Papenfuss, Deputy 
Assistant Director for Budget Analysis.

                  VII. EVALUATION OF REGULATORY IMPACT

    In compliance with rule XXVI (11)(b) of the Standing Rules 
of the Senate, it is the opinion of the Committee that there 
would be no regulatory impact created by the implementation of 
this bill.

                   VIII. SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    This section provides the short title for the Act, the 
``Small Business 7(a) Lending Oversight Reform Act of 2018''.

Sec. 2. Definitions

    This section defines the meaning of ``Administration'' and 
``Administrator''.

Sec. 3. Codification of the Office of Credit Risk Management

    This section creates two new sections within the Small 
Business Act by codifying the Office of Credit Risk Management 
(OCRM) and the Lender Oversight Committee (LOC), and their 
respective duties.

SEC. 47. OFFICE OF CREDIT RISK MANAGEMENT.

    This Office of Credit Risk Management (OCRM) within the 
Office of Capital Access (OCA) at SBA is charged with the 
oversight of the SBA lending programs, including the 7(a) 
program, the 504 program, and the microloan program, as well as 
lending partners categorized as small business lending 
companies or non-federally regulated lenders. While this bill 
provides guidance related to 7(a) compliance, the other 
oversight functions of OCRM are intended to continue. Though 
OCRM plays an integral role in the oversight of SBA's lending 
programs, OCRM's oversight responsibilities are outlined only 
in Standard Operating Procedure (SOP) 50 53 (A) and Agency 
Regulations, specifically 13 Code of CFR Sec. 120.1000-1600. To 
strengthen oversight of the SBA's loan programs and provide 
OCRM with additional enforcement authority, S. 2283 codifies 
OCRM and its oversight duties, specifies the director of OCRM 
must be a career appointee in a Senior Executive Service (SES) 
position, and provides a clear delineation of the informal and 
formal enforcement actions the director may take.
    One of the vital roles of OCRM is to conduct reviews of 
lenders to ensure participants are adhering to the requirements 
of the program. SBA conducts reviews in a number of ways, 
including onsite and virtual reviews, and largely utilizes 
third party contractors to conduct these reviews. Industry 
participants have reported a large number of instances in which 
the contractor conducting the review is not familiar with SBA 
programs. Knowledge of the programs is important to conduct a 
thorough review and ensure appropriate oversight; therefore, S. 
2283 requires an SBA full-time employee to lead every onsite 
and virtual review. This will ensure the integrity of the 
review process and provide quality feedback to the lender.
    Once a review is completed, the SBA does not currently have 
a timeline the lender can rely on to receive their review 
findings report. Industry participants have reported wait times 
as long as 18 months to receive their report. The long wait 
times for reviews create a number of problems, including the 
fact that the lender may need to take corrective action based 
on findings in the review, but are unable to do so until the 
report is received. To address this issue, the bill includes a 
timeline for the review process, which will take effect on 
January 1, 2019. This process requires the SBA to complete and 
submit its report within 60 days: it is the Committee's intent 
that the report be submitted within 60 days of the completion 
of the file review. If the SBA is not able to meet that 
timeline, the bill allows for the SBA to notify the lender, in 
writing, of the reason for the delay and the expected 
submission date of the report. This section is not intended to 
become an indefinite delay of the report by the SBA, but 
provide a concrete and timely date in whichthe lender will 
receive their report. In turn, if the SBA requires action or response 
from the lender, the bill specifies that the lender has 45 days to 
comply with the request and return the necessary documents to SBA.
    In codifying OCRM, S. 2283 outlines the informal and formal 
enforcement actions of the director. These actions are largely 
outlined in SOP 50 53 (A), with the exception of an enforcement 
action added in this bill: the use of a civil monetary penalty 
with the maximum penalty of $250,000. Any civil monetary 
penalty collected in the course of enforcement is intended to 
be returned to the United States Treasury Department as a 
``miscellaneous receipt'' used for general support of the 
government in a process similar to the manner in which the 
Federal Deposit Insurance Corporation (FDIC) and the Office of 
the Comptroller of the Currency (OCC) penalties are managed. 
The informal and formal enforcement actions of OCRM apply to 
all programs OCRM oversees, and not exclusively the 7(a) 
program.
    Informal enforcement actions are generally used when 
problems are narrow in scope and are correctible and SBA is 
confident of a lender's Board of Directors and management 
commitment and ability to correct the issue. The following are 
examples of informal enforcement actions: SBA supervisory 
letter, headquarters meeting, board resolution or commitment 
letter, voluntary actions (e.g., agreement not to sell loans 
into Secondary Market), or other voluntary agreements between 
SBA and the lending partner.
    Formal enforcement actions usually include, but are not 
limited to, the imposition of a portfolio guaranty dollar 
limit, suspension or revocation of secondary market sales or 
purchase authority, suspension or revocation of delegated 
authority, suspension or revocation from SBA program 
participation, agreement or Memorandum of Understanding (MOU) 
between SBA and the lending partner, debarment, all other 
actions available under SBA Loan Program Requirements, and all 
other actions available under law.
    The legislation also creates an appeals process for lending 
partners who receive an enforcement action from SBA by allowing 
lenders to challenge the action through the Office of Hearings 
and Appeals, or in federal court. The Committee believes that 
lenders should have an appeal option within SBA since 
litigation in federal court can be prohibitively expensive and 
time consuming.
    Additionally, because the SBA uses the Standard Operating 
Procedure (SOP) process often, the bill includes a specific 
requirement for SBA to go through the traditional rulemaking 
process to ensure the informal and formal enforcement actions 
are put into regulation in a timely manner.
    S. 2283 requires the SBA to conduct an annual analysis of 
the overall program risk of the 7(a) program and provide that 
information, and other data points, in an annual report to 
Congress. The Committee believes that the integrity of the 7(a) 
program and the protection of taxpayer's liability is an 
important part of the Committee's oversight mandate. An annual 
report issued by OCRM's Director will give a useful overview of 
the entire program and will include information that is 
currently available only on a decentralized and ad hoc basis. 
This report should include an analysis of the program's risk 
separately by industries, an analysis of the risk created by 
lenders who are responsible for lending one percent or more of 
the gross loan value of the total program, and the actions that 
the Administrator has taken to mitigate risk. Finally, the 
report will include the number of lenders, the gross and net 
number of loans and their values, the number and value of 
defaults and purchases and the total amount of recoveries made 
by SBA, the number and type of enforcement actions recommended 
by the Director, the number and type approved and disapproved 
by the LOC, and the number and value of all civil monetary 
penalties assessed. All of these requirements will greatly 
improve OCRM's transparency.
    Finally, it is crucial OCRM has the resources it needs to 
conduct meaningful oversight of SBA's lending programs. 
Transparency to Congress of OCRM's budget for salaries and 
expenses separate from the Office of Capital Access is 
appropriate to ensure OCRM has the resources it needs to 
operate effectively and independently. The bill requires a 
separate internal budget justification for OCRM be submitted to 
the Administrator. This justification must include salaries and 
expenses, as well as estimated lender oversight fees, and be 
kept on file at SBA for public review. This justification will 
allow Congress to ensure that appropriate resources are 
provided to oversight functions and these resources are 
appropriately accounted for.

SEC. 48. LENDER OVERSIGHT COMMITTEE.

    An SBA Delegation of Authority document created the Lender 
Oversight Committee in 2005. This document charged the LOC with 
reviewing reports on lender oversight activities, reviewing 
enforcement action recommendations, and voting to recommend or 
not recommend an action to the Administrator. The LOC's duties 
were further outlined in SOP 50 53 (A). The Committee believes 
that establishing the LOC in statute is important to codify 
their advisory role to OCRM and ensure a checks and balances is 
in place for enforcement actions. In addition, S. 2283 makes 
some modifications to the LOC and its operations, including 
requiring the LOC to meet at least quarterly and report to the 
Administrator the details of each meeting, including decisions 
made on enforcement actions.
    In order to maintain the current functions and references 
to OCRM and the LOC at SBA in regulation, Standard Operating 
Procedure, or other document, the bill includes language to 
transfer the functions of OCRM and LOC to Sections 47 and 48 of 
the Small Business Act. This section clarifies that though OCRM 
and LOC have not been previously included in statute, they will 
not be terminated and re-chartered.
    The SBA currently has the authority to adjust lender fees 
to provide for improved oversight, as designated in 13 CFR 
120.1070 and in 5(b)(14) of the Small Business Act. This 
authority allows SBA to amend their fee structure to adhere to 
the provisions in S. 2283. Congress intends for SBA to 
communicate with lending partners on changes to the fee 
structure to provide for enhanced oversight.

SEC. 4. Definition of credit elsewhere

    The credit elsewhere test is the entry point to the 7(a) 
program and as such, its determination and documentation is of 
utmost importance. It is essential to ensure that SBA is only 
guaranteeing loans that would not be made under conventional 
market standards. The test was last updated in statute in the 
1990s and since that time, SBA has released regulation and a 
Standard Operating Procedure (SOP 50 10) that offer more 
updated requirements for lenders. However, these differing 
requirements have caused confusion amongst lenders about what 
is required of them to properly comply with the credit 
elsewhere test.
    Therefore, S. 2283 updates the statute by codifying many of 
the provisions outlined in SOP 50 10 5 (J), and defines credit 
elsewhere as the availability of credit on reasonable terms and 
conditions from non-federal, non-state, or non-local government 
sources--an expansion of the definition, which currently 
precludes non-state or non-local government sources--and 
considering factors associated with conventional lending 
practices, including: the business industry of the applicant, 
whether the business has been in operation for less than two 
years, adequacy of collateral, the loan terms necessary to 
assure the repayment of the loan, and, any other factors that 
cannot be overcome without a federal loan guarantee under 
prudent lending standards. The other factors category is meant 
to ensure borrowers who would benefit from the program are able 
to access it if their inability to obtain credit elsewhere is 
not one of the four categories explicitly outlined in the 
legislation. SBA should consider guidance to lenders on the use 
of this category, as well as collect data to better understand 
borrower needs and lender use of this category.
    This section also clarifies in statute the necessity for 
the Administrator to verify the credit elsewhere determination 
of lenders. The Committee believes it is necessary to 
explicitly state that the Administrator has the statutory power 
to oversee the verification of credit elsewhere and therefore, 
should be verifying the documentation of the credit elsewhere 
test for every loan.

SEC. 5. Authority for the Administrator to increase amount for general 
        business loans

    The 7(a) authorization cap is the total volume of loans 
that SBA can guarantee each year. Appropriators set the 
authorization level each year with input from the Senate 
Committee on Small Business and Entrepreneurship, and the House 
Small Business Committee. As the program has experienced 
exponential growth, Congress has raised the authorization cap 
four times in the past four years. Those increases proved 
insufficient in 2014 and 2015, when the program reached its 
congressionally set authorization cap prior to the end of the 
fiscal year. In 2014, the authorization cap was forecasted to 
be reached and required swift legislative action to increase 
it. In 2015, the cap was reached months before the end of the 
fiscal year and the program was shut down for four days, which 
required Congress to pass emergency legislation to reinstate 
lending. Because this program is market driven, it is difficult 
to predict how much lending will be done in a fiscal year, in 
particular when these estimates are made 18 months in advance 
in order to be submitted in the President's annual budget 
request. When lending nears the cap, it can cause lenders to 
push loans through at a faster pace and has the effect of 
creating further uncertainty in the program. The intent of 
Congress is to create certainty for the program in the long 
term and prevent a shutdown of the program in the future.
    This section gives the Administrator the authority to 
increase the authorization cap for the 7(a) program by up to 15 
percent of the authorized cap if it is determined the cap will 
be reached before the end of a fiscal year. This authority may 
only be exercised once per fiscal year and requires 
notification and approval from the House and Senate Committees 
on Appropriations and the House Committee on Small Business and 
Senate Committee on Small Business and Entrepreneurship.
    The Office of Management and Budget (OMB) has requested 
this change in the last three Presidential budget requests.

SEC. 6. Disclosure of waivers

    This provision is intended to ensure a documentation 
process exists at SBA in which any waiver of regulation shall 
be in writing and kept on file at SBA, and is also accessible 
to Congress. This process could identify trends in waivers, and 
will provide transparency to Congress to better understand the 
types and frequency of these waivers. This section clarifies 
that this requirement applies only to the regulations under the 
Office of Capital Access at SBA and does not create any new 
waiver authority for the Administrator. Neither is this section 
intended to preclude SBA from working with lenders to waive 
regulations when prudent and on a case-by-case basis.

SEC. 7. Improved oversight of 7(a) Loans to Poultry Farmers

    This section requires OCRM's first portfolio risk analysis 
report to Congress to include information detailing how the 
Office of Capital Access complied with the recommendations from 
the SBA IG report, Evaluation of SBA 7(a) Loans Made to Poultry 
Farmers (Report Number 18-13, published March 6, 2018).

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