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[Senate Report 107-249]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 558
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-249

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                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 family 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\
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    \1\ See 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.
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    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\
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    \2\ See General Accounting Office (GAO) Report on Economic 
Development: Federal Assistance Programs for American Indians and 
Alaska Natives, December 2001.
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    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% 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 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. Subsequentto 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 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, 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 
marketdevelops; 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--
                          (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.
                  (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 
ormisrepresentation, 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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