I

103D CONGRESS

1ST SESSION H. R. 1086

To increase the availability of credit to small businesses by eliminating impediments to securitization and facilitating the development of a secondary

market in small business loans, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 24, 1993

Mr. BAKER of Louisiana (Mr. LEACH, Mr. MCCOLLUM, Mr. SAM JOHNSON

of Texas, Mr. MCCANDLESS, Mr. KING, Mr. PRYCE, Mr. LINDER, Mr.

HUFFINGTON, Mr. NUSSLE, and Mr. GRAMS) introduced the following

bill; which was referred jointly to the Committees on Energy and Commerce, Banking and Finance, Ways and Means, and Education and

Labor

A BILL

To increase the availability of credit to small businesses

by eliminating impediments to securitization and facilitating the development of a secondary market in small

business loans, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Small Business Loan

5 Securitization and Secondary Market Enhancement Act of

6 1993’’.
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1 SEC. 2. SMALL BUSINESS RELATED SECURITY.

2 (a) DEFINITION.—Section 3(a) of the Securities Ex3 change Act of 1934 (15 U.S.C. 78c(a)) is amended by

4 adding at the end the following new paragraph:

5 ‘‘(53)(A) The term ‘small business related secu6 rity’ means a security that is rated in 1 of the 4

7 highest rating categories by at least 1 nationally rec8 ognized statistical rating organization, and either—

9 ‘‘(i) represents an interest in 1 or more

10 promissory notes evidencing the indebtedness of

11 a small business and originated by an insured

12 depository institution (as defined in section 3 of

13 the Federal Deposit Insurance Act), credit

14 union, insurance company, or similar institution

15 which is supervised and examined by a Federal

16 or State authority; or

17 ‘‘(ii) is secured by an interest in 1 or more

18 promissory notes (with or without recourse to

19 the issuer) and provides for payments of prin20 cipal in relation to payments, or reasonable pro21 jections of payments, on notes meeting the re22 quirements of subparagraph (A).

23 ‘‘(B) For purposes of this paragraph—

24 ‘‘(i) an interest in a promissory note in25 cludes ownership rights, certificates of interest

26 or participation in such notes, and rights de-
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1 signed to assure servicing of such notes, or the

2 receipt or timely receipt of amounts payable

3 under such notes; and

4 ‘‘(ii) a small business is a business that

5 meets the criteria for a ‘small business concern’

6 established under section 3(a) of the Small

7 Business Act.’’.

8 (b) CONFORMING AMENDMENT.—Section 3(a) of the

9 Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is

10 amended by redesignating paragraph (51) defining the

11 term ‘‘foreign financial regulatory authority’’ as para12 graph (52) and inserting such paragraph after paragraph

13 (51), defining the term ‘‘penny stocks’’.

14 SEC. 3. APPLICABILITY OF MARGIN REQUIREMENTS.

15 Section 7(g) of the Securities Exchange Act of 1934

16 (15 U.S.C. 78g(g)) is amended by inserting ‘‘or a small

17 business related security’’ after ‘‘mortgage related secu18 rity’’.

19 SEC. 4. BORROWING IN THE COURSE OF BUSINESS.

20 Section 8(a) of the Securities Exchange Act of 1934

21 (15 U.S.C. 78h(a)) is amended in the last sentence by in22 serting ‘‘or a small business related security’’ after ‘‘mort23 gage related security’’.
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1 SEC. 5. SMALL BUSINESS RELATED SECURITIES AS COL2 LATERAL.

3 Clause (ii) of section 11(d)(1) of the Securities Ex4 change Act of 1934 (15 U.S.C. 78k(d)(1)) is amended by

5 inserting ‘‘or any small business related security’’ after

6 ‘‘mortgage related security’’.

7 SEC. 6. INVESTMENT BY DEPOSITORY INSTITUTIONS.

8 (a) HOME OWNERS’ LOAN ACT AMENDMENT.—Sec9 tion 5(c)(1) of the Home Owners’ Loan Act (12 U.S.C.

10 1464(c)(1)) is amended by adding at the end the following

11 new subparagraph:

12 ‘‘(S) SMALL BUSINESS RELATED SECURI13 TIES.—Investments in small business related

14 securities (as defined in section 3(a)(53) of the

15 Securities Exchange Act of 1934), subject to

16 such regulations as the Director may prescribe,

17 including regulations concerning the minimum

18 size of the issue (at the time of the initial dis19 tribution) or minimum aggregate sales price, or

20 both.’’.

21 (b) CREDIT UNIONS.—Section 107(15) of the Fed22 eral Credit Union Act (12 U.S.C. 1757(15)) is amended—

23 (1) in subparagraph (A), by striking ‘‘or’’ at

24 the end;

25 (2) in subparagraph (B), by inserting ‘‘or’’ at

26 the end; and
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1 (3) by adding at the end the following new sub2 paragraph:

3 ‘‘(C) are small business related securities

4 (as defined in section 3(a)(53) of the Securities

5 Exchange Act of 1934), subject to such regula6 tions as the Board may prescribe, including

7 regulations prescribing the minimum size of the

8 issue (at the time of the initial distribution) or

9 minimum aggregate sales price, or both;’’.

10 (c) NATIONAL BANKING ASSOCIATIONS.—Section

11 5136 of the Revised Statutes (12 U.S.C. 24) is amended

12 in the last sentence in the first full paragraph of para13 graph Seventh by striking ‘‘or (B) are mortgage’’ and in14 serting the following: ‘‘(B) are small business related secu15 rities (as defined in section 3(a)(53) of the Securities Ex16 change Act of 1934); or (C) are mortgage’’.

17 SEC. 7. PREEMPTION OF STATE LAW.

18 (a) IN GENERAL.—Section 106(a)(1) of the Second19 ary Mortgage Market Enhancement Act of 1984 (15

20 U.S.C. 77r–1(a)(1)) is amended—

21 (1) by striking ‘‘or’’ at the end of subparagraph

22 (B);

23 (2) by redesignating subparagraph (C) as sub24 paragraph (D); and
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1 (3) by inserting after subparagraph (B) the fol2 lowing new subparagraph:

3 ‘‘(C) small business related securities (as

4 defined in section 3(a)(53) of the Securities Ex5 change Act of 1934), or’’.

6 (b) OBLIGATIONS OF THE UNITED STATES.—Section

7 106(a)(2) of the Secondary Mortgage Market Enhance8 ment Act of 1984 (15 U.S.C. 77r–1(a)(2)) is amended—

9 (1) by striking ‘‘or’’ at the end of subparagraph

10 (B);

11 (2) by redesignating subparagraph (C) as sub12 paragraph (D); and

13 (3) by inserting after subparagraph (B) the fol14 lowing new subparagraph:

15 ‘‘(C) small business related securities (as

16 defined in section 3(a)(53) of the Securities Ex17 change Act of 1934), or’’.

18 (c) PREEMPTION OF STATE LAWS.—Section 106(c)

19 of the Secondary Mortgage Market Enhancement Act of

20 1984 (15 U.S.C. 77r–1(c)) is amended—

21 (1) in the first sentence, by striking ‘‘or that’’

22 and inserting ‘‘, that’’;

23 (2) by inserting ‘‘, or that are small business

24 related securities (as defined in section 3(a)(53) of
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1 the Securities Exchange Act of 1934)’’ before ‘‘shall

2 be exempt’’; and

3 (3) by adding at the end the following new sub4 section:

5 ‘‘(d) IMPLEMENTATION.—

6 ‘‘(1) LIMITATION.—The provisions of sub7 sections (a) and (b) concerning small business relat8 ed securities shall not apply with respect to a par9 ticular person, trust, corporation, partnership, asso10 ciation, business trust, or business entity or class

11 thereof in any State that, prior to the expiration of

12 7 years after the date of enactment of this Act, en13 acts a statute that specifically refers to this section

14 and either prohibits or provides for a more limited

15 authority to purchase, hold, or invest in small busi16 ness related securities by any person, trust, corpora17 tion, partnership, association, business trust, or

18 business entity or class thereof than is provided in

19 such amendments. The enactment by any State of

20 any statute of the type described in the preceding

21 sentence shall not affect the validity of any contrac22 tual commitment to purchase, hold, or invest that

23 was made prior to such enactment, and shall not re24 quire the sale or other disposition of any small busi-
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1 ness related securities acquired prior to the date of

2 such enactment.

3 ‘‘(2) ENACTMENT OF STATE PROVISIONS.—Any

4 State may, not later than 7 years after the date of

5 enactment of this Act, enact a statute that specifi6 cally refers to this section and requires registration

7 or qualification of any small business related securi8 ties on terms that differ from those applicable to

9 any obligation issued by the United States.’’.

10 SEC. 8. INSURED DEPOSITORY INSTITUTION CAPITAL RE11 QUIREMENTS FOR TRANSFERS OF SMALL

12 BUSINESS LOANS AND INVESTMENTS IN

13 SMALL BUSINESS RELATED SECURITIES.

14 (a) ACCOUNTING PRINCIPLES.—The accounting prin15 ciples applicable to the transfer of a small business loan

16 with recourse contained in reports or statements required

17 to be filed with the appropriate Federal banking agencies

18 by all insured depository institutions shall be uniform and

19 consistent with generally accepted accounting principles.

20 (b) CAPITAL REQUIREMENTS.—The amount of cap21 ital required to be maintained by an insured depository

22 institution under applicable capital standards and other

23 capital measures with respect to the sale of a small busi24 ness loan with recourse, as reported under subsection (a),

25 shall not exceed an amount sufficient to meet the institu-
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1 tion’s reasonable estimated liability under the recourse ar2 rangement.

3 (c) INVESTMENTS IN SMALL BUSINESS RELATED SE4 CURITIES.—A small business related security shall be

5 treated as a similarly rated mortgage-backed security

6 under the risk-based capital requirement applicable to in7 sured depository institutions.

8 (d) REGULATIONS REQUIRED.—Not later than 180

9 days after the date of enactment of this Act, each appro10 priate Federal banking agency shall promulgate final reg11 ulations implementing this section not later than 180 days

12 after the date of enactment of this Act.

13 (e) DEFINITIONS.—For purposes of this section—

14 (1) the term ‘‘appropriate Federal banking

15 agency’’ has the same meaning as in section 3 of the

16 Federal Deposit Insurance Act;

17 (2) the term ‘‘capital standards’’ has the same

18 meaning as in section 38(c) of the Federal Deposit

19 Insurance Act;

20 (3) the term ‘‘insured depository institution’’

21 has the same meaning as in section 3 of the Federal

22 Deposit Insurance Act;

23 (4) the term ‘‘other capital measures’’ has the

24 same meaning as in section 38(c) of the Federal De25 posit Insurance Act;
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1 (5) the term ‘‘recourse’’ shall have the meaning

2 given such term under generally accepted accounting

3 principles;

4 (6) the term ‘‘small business’’ means a business

5 that meets the criteria for a small business concern

6 established under section 3(a) of the Small Business

7 Act; and

8 (7) the term ‘‘small business related security’’

9 has the same meaning as in section 3(a)(53) of the

10 Securities Exchange Act of 1934 (15 U.S.C.

11 78c(a)(53).

12 SEC. 9. TRANSACTIONS IN SMALL BUSINESS RELATED

13 SECURITIES BY EMPLOYEE BENEFIT PLANS.

14 (a) PROHIBITED TRANSACTION EXEMPTION.—The

15 Secretary of Labor, in consultation with the Secretary of

16 the Treasury, shall exempt transactions involving small

17 business related securities (as defined in section 3(a)(53)

18 of the Securities Exchange Act of 1934 (as added by sec19 tion 2 of this Act)), either unconditionally or on stated

20 terms and conditions, from the restrictions of sections 406

21 and 407 of the Employee Retirement Income Security Act

22 of 1974 (29 U.S.C. 1106, 1107) and the taxes imposed

23 under section 4975 of the Internal Revenue Code of 1986

24 (26 U.S.C. 4975).
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1 (b) CONDITIONS.—In providing for the exemption re2 quired under subsection (a) the Secretary of Labor shall

3 consider—

4 (1) the importance of facilitating transactions

5 in small business related securities; and

6 (2) the necessity of imposing any term or condi7 tion to protect the rights and interests of partici8 pants and beneficiaries of such plan.

9 (c) REGULATIONS.—Not later than 180 days after

10 the date of enactment of this Act, the Secretary of Labor

11 shall promulgate final regulations to carry out subsection

12 (a).

13 SEC. 10. TAXATION OF SMALL BUSINESS LOAN INVEST14 MENT CONDUITS.

15 (a) TAXATION SIMILAR TO REMIC.—The Secretary

16 of the Treasury shall promulgate regulations providing for

17 the taxation of a small business loan investment conduit

18 and the holder of an interest therein similar to the tax19 ation of a real estate mortgage investment conduit and

20 the holder of interests therein under the Internal Revenue

21 Code of 1986.

22 (b) ADJUSTMENT TO REMIC PROVISIONS.—In pro23 mulgating regulations under subsection (a), the Secretary

24 shall make any necessary adjustments to the real estate
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1 mortgage investment conduit provisions to take into con2 sideration—

3 (1) the purpose of facilitating the securitization

4 of small business loans through the use of small

5 business loan investment conduits and the develop6 ment of a secondary market in small business loans;

7 (2) differences in the nature of qualifying mort8 gages in a real estate mortgage investment conduit

9 and small business loans and obligations; and

10 (3) differences in the practices of participants

11 in the securitization of real estate mortgages in a

12 real estate mortgage investment conduit and the

13 securitization of other assets.

14 (c) SMALL BUSINESS LOAN INVESTMENT CONDUIT

15 DEFINED.—For purposes of this section, the term ‘‘small

16 business loan investment conduit’’ means—

17 (1) any entity substantially all of the assets of

18 which consist of any obligation (including any par19 ticipation or certificate of beneficial ownership there20 in) of a business that meets the criteria for a small

21 business concern established under section 3(a) of

22 the Small Business Act; and

23 (2) if such obligation was originated by an in24 sured depository institution (as defined in section 3

25 of the Federal Deposit Insurance Act), credit union,
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1 insurance company, or similar institution which is

2 supervised and examined by an appropriate Federal

3 or State authority.

Æ