99–010

Calendar No. 558

107TH CONGRESS REPORT

2d Session " ! SENATE 107–249

INDIAN FINANCING AMENDMENTS ACT OF 2002

AUGUST 28, 2002.—Ordered to be printed

Mr. INOUYE, from the Committee on Indian Affairs,

submitted the following

R E P O R T

[To accompany S. 2017]

The Committee on Indian Affairs, to which was referred the bill

(S. 2017) to amend the Indian Financing Act of 1974 to improve the

effectiveness of the Indian loan guarantee and insurance program,

having considered the same, reports favorably thereon with an

amendment and recommends that the bill (as amended) do pass.

PURPOSE

The purpose of S. 2017 is to direct the Secretary of the Interior

(Secretary) to establish a secondary market for the Indian Loan

Guaranty Fund that is administered through the Bureau of Indian

Affairs.

BACKGROUND

Despite a national unemployment rate of 5.6%, the jobless rate

in Native American communities hovers around 50%, with some Indian economies experiencing unemployment rates near 80%. These

rates are nearly twice that of the national unemployment rate in

the Great Depression of the 1930’s.

Despite recent success with casino gaming, energy and natural

resource development, and other initiatives, most tribal communities still suffer a lack of jobs, high unemployment, intense poverty and a lack of physical infrastructure.

Given the near-complete absence of private sector enterprises in

reservation communities, nearly one in three American Indians and

Alaska Natives, or 31.2% lives in poverty. The earning capacity of

Native communities also lags behind that of other Americans. For

every $100 earned by the average American family, an Indian fam-
2

1See General Accounting Office (GAO) Report on Access to Capital (December 2001); see also

the Report of the ‘‘Native Lending Study’’, published by the Treasury Department’s Community

Development Financial Institutions Fund, November 2001. 2See General Accounting Office (GAO) Report on Economic Development: Federal Assistance

Programs for American Indians and Alaska Natives, December 2001.

ily earns $62. Additionally, the average annual per capita income

for Indians is $8,284, far less than that for other Americans.

The challenges to economic development in Native communities

are legion but one key component is a dearth of financial capital.

It is well documented that Native entrepreneurs lack access to capital for both home mortgages and commercial purposes.1

In the Community Development Banking and Financial Institutions Act of 1994, 12 U.S.C. 4701, Congress found that, ‘‘many of

the nation’s urban, rural and Native American communities face

critical social and economic problems arising in part from the lack

of economic growth, people living in poverty, and the lack of employment and other opportunities.’’

In response to these findings, the November, 2001, Community

Development Financial Institutions (CDFI) Report noted a key factor in Native American communities is the lack of a financial services sector. The CDFI Report found that 61% of Native American

respondents to the survey reported that business loans were rated

as ‘‘impossible’’ or ‘‘difficult’’ to obtain.

In addition, a recent study by the General Accounting Office

(GAO) noted that access to capital is difficult for both Indian tribes

and Native people because of, among other reasons, insufficient collateral. Consequently, Natives have difficulty making funds available to meet the matching fund requirements of many Federal economic development programs.2

In response to the need to increase economic development activity on Indian lands, Congress enacted the Indian Financing Act of

1974, Pub. L. 93–262; 25 U.S.C. 1451 et seq. which established the

Indian Loan Guaranty and Insurance Fund to provide Native

Americans access to private money sources that would otherwise be

unavailable.

The loan guaranty mechanism, of course, is not a new creation.

The financial community long ago developed a system to respond

to the need to encourage capital access. The system is that creation

of a secondary market for loans made by originating lenders. This

is the cornerstone for the nation’s private mortgage market and the

core function of the Federal National Mortgage Association (Fannie

Mae) and the Federal Home Loan Mortgage Corporation (Freddie

Mac). A secondary market is also an important part of commercial

lending.

The IFA’s Loan Guaranty and Insurance Fund program authorizes the Secretary of the Interior to guaranty or insure loans made

by private lenders to individual Indians and Indian tribes. The purpose of a Federal loan guaranty is to provide financial incentives

to the private lending community to engage clients and customers

that are traditionally under-served.

Under the current Indian Loan Guaranty and Insurance program, the investor is not guaranteed payment if the borrower defaults on a small business loan, with little incentive for a secondary

market investor to purchase these BIA-backed loans at the present

time. So while the originating lender may be protected up to 90%
3

of the loan value, the secondary market investor is not. The Secretary is authorized to guarantee not more than 90% on any loan.

The creation in the early 1970’s of the Government National

Mortgage Association (Ginnie Mae) made it possible to provide

credit support for Federal Housing Administration (FHA) and Veterans Administration (VA) mortgages. In turn, this made it possible for home mortgage lenders to sell loans into the secondary

market. Secondary market investors can purchase a number of

these loans, pool them and then auction off pieces of the pool. This

tends to spread and minimize the risk of default among a number

of investors. Secondary market activities have also grown in the

markets for a wide range of other traded securities. It is now common for lenders to sell car loans, credit card notes, lease contracts,

and intellectual property royalties.

Lenders report much difficulty in selling Native American small

business loans in a secondary market and having vital capital tied

up on existing Native American loans without the ability to liquidate them in order to make new loans.

S. 2017 establishes a procedure by which the ownership of portions of BIA loans are transferred from the original lender to the

secondary market. The rights and obligations of owning the loan,

including the liability for default, are transferred to any person

that wishes to pay for the entire loan. Persons who wish to pay

only up to 90% of the value of the loan do not incur liability for

default, which would continue to rest with the 10% value of the

original lender’s interest.

Once the loan is sold, the original lender would notify the BIA

of the sale of that loan. The lender would remain obligated under

the original guarantee agreement between the original lender and

the BIA. The original lender would continue to be responsible for

servicing the loan and would remain the secured creditor of record.

With every loan that is sold to a secondary investor, the full faith

and credit of the United States is provided and serves as a guaranty to the secondary market investor that if the borrower defaults

on the loan, the investor will continue to be paid.

SUMMARY OF SUBSTITUTE TO S. 2017

As introduced, S. 2017 establishes a secondary market for the Indian Loan Guaranty Fund authorized by the Indian Financing Act

of 1974. A section-by-section description of the changes contained

in the substitute amendment follows.

Section 1. Short title

This Act may be cited as the ‘‘Indian Financing Amendments Act

of 2002’’.

Section 2. Findings and purposes

This section states the findings and purposes of S.2 017 and

notes the reasons why there is a need to establish a secondary

market program for both the Indian Loan Guaranty Fund and the

Indian Loan Insurance Program.

Section 3. Amendments to the Indian Financing Act

This section sets forth the procedures necessary to establish a

secondary market for both the Indian Loan Guaranty Fund and the
4

Indian Loan Insurance Program. The Indian Loan Guaranty Fund

provides Federal guarantees for Indian small business loans by either an individual Indian (up to $1.5 million) or by an Indian tribe

or tribal entity (up to $5.5 million). The Indian Loan Insurance

Program provides Federal guarantees for Individual Indian small

business loans (up to $100,000).

The Indian Loan Insurance Program limitation on loan amounts

is changed from $100,000 to $250,000.

The full faith and credit clause to guarantee loans in both the

Loan Guaranty Fund and the Loan Insurance Program applies to

all future loans made under either program. Current loans existing

within the program will not fall under this legislation.

LEGISLATIVE HISTORY

The Indian Financing Amendments Act of 2002 (S. 2017) was introduced on March 14, 2002, by Senator Campbell, for himself, and

for Senator Inouye. Subsequent to March 14, Senators Domenici,

and Johnson were added as co-sponsors. S. 2017 was referred to

the Committee on Indian Affairs and a hearing was held on the bill

on April 24, 2002. On July 30, 2002, the Committee on Indian Affairs convened a business meeting to consider S. 2017 and other

measures that had been referred to it, and on that date, the Committee favorably reported a substitute amendment to S. 2017.

COMMITTEE RECOMMENDATION AND TABULATION OF VOTE

On July 30, 2002, the Committee on Indian Affairs, in an open

business session, adopted an amendment in the nature of a substitute to S. 2017 by voice vote and ordered the bill, as amended,

reported favorably to the Senate.

COST AND BUDGETARY CONSIDERATION

The cost estimate for S. 2017 as calculated by the Congressional

Budget Office, is set forth below:

U.S. CONGRESS,

CONGRESSIONAL BUDGET OFFICE,

Washington, DC, August 27, 2002.

Hon. DANIEL K. INOUYE,

Chairman, Committee on Indian Affairs,

U.S. Senate, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for S. 2017, the Indian Financing

Amendments Act of 2002.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Lanette J. Walker.

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

Enclosure.

S. 2017—Indian Financing Amendments Act of 2002

S. 2017 would allow lenders of any loans guaranteed or insured

under the Indian Financing Act of 1974 to sell such loans to the
5

secondary market. CBO estimates that implementing this bill

would have no significant budgetary impact. Because the legislation could affect direct spending, pay-as-you-go procedures would

apply, but CBO estimates that such effects would be insignificant.

Under this bill, loans transferred from lenders to secondary markets would continue to be guaranteed and insured by the federal

government. Based on information from the Department of the Interior (DOI), CBO estimates that the annual cost of administering

such transfers would be negligible over the 2003–2007 period. Any

costs incurred by DOI to administer the program would be subject

to the availability of appropriated funds.

S. 2017 also would authorize the Secretary of the Interior to collect a fee for any guaranteed or insured loan being transferred. Allowing the Secretary to impose fees on such transfers could reduce

the subsidy cost of the guarantees and insurance the DOI has provided for existing loans under the Indian Financing Act. Based on

information from DOI, CBO estimates that the change in direct

spending would be negligible, however, because it is unlikely that

the department would collect these fees.

S. 2017 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.

This estimate was approved by Peter H. Fontaine, Deputy Assistant Director for Budget Analysis. The CBO staff contact for this estimate is Lanette J. Walker.

REGULATORY IMPACT STATEMENT

Paragraph 11(b) of rule XXVI of the Standing Rules of the Senate requires that reach report accompanying a bill to evaluate the

regulatory paperwork impact that would be incurred in implementing the legislation. The Committee has concluded that enactment of S. 2017 will create only de minimis regulatory or paperwork burdens.

EXECUTIVE COMMUNICATIONS

The Committee has received no official communication from the

Administration on the provisions of the bill.

CHANGES IN EXISTING LAW

In compliance with subsection 12 of rule XXVI of the Standing

Rules of the Senate, the Committee states that the enactment of

S. 2017 will result in the following changes in 25 U.S.C. Sec. 1451

et seq., with existing language which is to be deleted in black

brackets and the new language to be added in italic:

Be it enacted by the Senate and House of Representative of the

United States of America in Congress assembled,

SHORT TITLE.—This Act may be cited at the ‘‘Indian Financing

Act Amendments of 2002’’.

FINDINGS AND PURPOSE.—***

(A) FINDINGS.—Congress finds that—

(i) the Indian Financing Act of 1974 (25 U.S.C. 1451

et seq.) was intended to provide Native American borrowers with access to commercial capital sources that,
6

but for that Act, would not be available through loans

guaranteed by the Secretary of the Interior;

(ii) although the Secretary of the Interior has made

loan guarantees available, acceptance of loan guarantees by lenders to benefit Native American business

owners has been limited;

(iii) 27 years after enactment of the Act, the promotion and development of Native American business

remains an essential foundation growth of economic

and social stability of Native Americans;

(iv) acceptance by lenders of the loan guarantees may

be limited by liquidity and other capital market-driven

concerns; and

(v) it is in the best interest of the guaranteed loan

program to—

i. encourage the orderly development and expansion of a secondary market for loans guaranteed by

the Secretary; and

ii. expand the number of lenders originating

loans under that Act.

(B) PURPOSE.—The purposes of this Act are—

(i) to stimulate the use by lenders of secondary market investors for loans guaranteed by the Secretary of

the interior;

(ii) to preserve the authority of the Secretary to administer the program and regulate lenders;

(iii) to clarify that a good faith investor in loans

guaranteed by the Secretary will receive appropriate

payments;

(iv) to provide for the appointment by the Secretary

of a qualified fiscal transfer agent to administer a system for the orderly transfer of the loans;

(v) to authorize the Secretary to—

i. promulgate regulations to encourage and expand a secondary market program for loans guaranteed by the Secretary; and

ii. allow the pooling of the loans as the secondary market develops; and

(vi) to authorize the Secretary to establish a schedule

for assessing lenders and investors for the necessary

costs of the fiscal transfer agent and system.

* * * * * * *

25 U.S.C. 1485

(a) IN GENERAL.—Any loan guaranteed under this subchapter,

including the security given for such loan, may be sold or assigned

by the lender to any persons.

(b) TRANSFER OF LOANS AND UNGUARANTEED PORTIONS OF

LOANS.—

(1) TRANSFER.—

(A) IN GENERAL.—The lender of a loan guaranteed under

this title may transfer to any person—
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(i) all of the rights and obligations of the lender

under the loan, or in an unguaranteed portion of the

loan; and

(ii) the security given for the loan or unguaranteed

portion.

(B) REGULATIONS.—A transfer under subparagraph (A)

shall be consistent with such regulations as the Secretary

shall promulgate under subsection (g).

(C) NOTICE.—A lender that completes a transfer under

subparagraph (a) shall give notice of the transfer to the

Secretary (or a designee of the Secretary).

(2) EFFECT OF TRANSFER.—On any transfer under this subsection, the transferee shall— (A) be considered to be the lender under this title;

(B) become the secured party of record; and

(C) be responsible for— (i) performing the duties of the lender; and

(ii) servicing the loan or portion of the loan, as appropriate, in accordance with the terms of guarantee of

the Secretary of the loan or portion of the loan.

(D) TRANSFER OF GUARANTEED PORTIONS OF LOANS.— (i) TRANSFER.— i. IN GENERAL.—The lender of a loan guaranteed

under this title, and any subsequent transferee of

all or part of the guaranteed portion of the loan,

may transfer to any person— (i) all or part of the guaranteed portion of the loan;

and

(ii) the security given for the guaranteed portion

transferred.

ii. REGULATIONS.—A transfer under subparagraph (A) shall be consistent with such regulations

as the Secretary shall promulgate under subsection

(g).

iii. NOTICE.—A lender that completes a transfer

under subparagraph (A) shall give notice of the

transfer to the Secretary (or a designee of the Secretary).

iv. ACKNOWLEDGEMENT.—On receipt of notice of

a transfer under subparagraph (C), the Secretary

(or a designee of the Secretary) shall issue to the

transferee the acknowledgement of the Secretary

of— (i) the transfer; and

(ii) the interest of the transferee in the guaranteed

portion of a loan that was transferred.

(ii) EFFECT.—Notwithstanding any other provision of

law, with respect to any transfer under this subsection,

the lender shall— i. remain obligated under the guarantee agreement between the lender and the Secretary;

ii. continue to be responsible for servicing the

loan in a manner consistent with the guarantee

agreement; and

iii. remain the secured creditor of record.
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(E) FULL FAITH AND CREDIT.—

(i) IN GENERAL.—The full faith and credit of the

United States is pledged to the payment of all loan

guarantees made under this title.

(ii) VALIDITY.—

i. IN GENERAL.—Except as provided in subparagraph (B), the validity of a guarantee of a loan

under this title shall be incontestable if the guarantee is held by a transferee of a guaranteed obligation whose interest in a guaranteed loan has

been acknowledged by the Secretary (or a designee

of the Secretary) under subsection (c)(1)(D).

ii. FRAUD OR MISREPRESENTATION.—Subparagraph (A) shall not apply in a case in which the

Secretary determines that a transferee of a loan or

a portion of a loan transferred under this section

has actual knowledge of fraud or misrepresentation, or participates in or condones fraud or misrepresentation, in connection with the loan.

(F) DAMAGES.—The Secretary may recover from a lender

any damages suffered by the Secretary as a result of a material breach of an obligation of the lender under the guarantee of the loan.

(G) FEE.—The Secretary may collect a fee for any loan or

guaranteed portion of a loan transferred in accordance

with subsection (b) or (c).

(H) REGULATIONS.—Not later than 180 days after the

date of enactment of this subsection, the Secretary shall

promulgate such regulations as are necessary to facilitate,

administer, and promote the transfer of loans and guaranteed portions of loans under this section.

(I) CENTRAL REGISTRATION.—On promulgation of final

regulations under subsection (g), the Secretary shall—

(i) provide for the central registration of all loans

transferred under this section; and

(ii) contract with a fiscal transfer agent—

i. to act as a designee of the Secretary; and

ii. on behalf of the Secretary—

(i) to carry out the central registration and paying

agent functions; and

(ii) to issue acknowledgements of the Secretary under

subsection (c)(1)(D).

(J) POOLING.—

(i) IN GENERAL.—Nothing in this title prohibits the

pooling of whole loans, or portions of loans, transferred

under this section.

(ii) REGULATIONS.The Secretary may promulgate regulations to effect orderly and efficient pooling procedures under this title.

* * * * * * *

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