entity, a holder of 20 percent or more of 
the value of the certified development com-
pany’s stock. 
‘‘(7) CONTIGUOUS STATES.—For the purposes 
of this subsection, the States of Alaska and Hawaii 
and the territories of American Samoa and Guam 
shall be deemed to be contiguous to California, Or-
egon, and Washington. 
‘‘(8) LOCAL ECONOMIC AREA OPERATION.—A 
certified development company that is operating or 
applies for authority to operate in a local economic 
area (as defined in subsection (c)(2)) shall not be 
deemed to be conducting a multistate operation and 
shall not be subject to the eligibility criteria or oper-
ating requirements in this subsection.’’. 
(b) TEMPORARY GRANDFATHER CLAUSE.—An entity 
that, as of December 31, 2005, was certified by the Ad-
ministrator for purposes of title V of the Small Business 
Investment Act of 1958 shall continue to be treated as 
a certified development company for purposes of that Act 
until the 1-year period beginning with the date of the en-
actment of this Act expires. 
SEC. 214. CONFORMING AMENDMENTS. 
(a) TITLE HEADING.—The title heading for title V 
of the Small Business Investment Act of 1958 is amended 
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by striking ‘‘State and Local Development Companies’’ 
and inserting ‘‘Certified Development Companies’’. 
(b) SECTION 501.—Section 501 of such Act is 
amended— 
(1) in the section heading by striking ‘‘state de-
velopment companies’’ and inserting ‘‘certified devel-
opment companies’’; 
(2) in subsection (b) by striking ‘‘State develop-
ment companies’’ and inserting ‘‘certified develop-
ment companies’’; and 
(3) in subsection (c) by striking ‘‘State develop-
ment company’’ both places such term appears and 
inserting ‘‘certified development company’’. 
(c) SECTION 502.—Section 502 of such Act is 
amended in the first sentence by striking ‘‘State and local 
development companies’’ and inserting ‘‘certified develop-
ment companies’’. 
(d) SECTION 503.—Section 503 of such Act is 
amended— 
(1) in subsection (a)(1), by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; and 
(2) by striking subsection (e) and inserting the 
following: 
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‘‘(e) SECTION 7(a) LOANS.—The Administrator shall 
not prevent or in any manner impede a certified develop-
ment company from providing assistance to a business 
with respect to preparing applications for loans under sec-
tion 7(a) of the Small Business Act, or for servicing such 
loans so long as the fee that the certified development 
company charges the business for providing that assist-
ance or servicing is no more than reasonable. Nothing in 
this provision shall authorize a certified development com-
pany to issue loans pursuant to section 7(a) of the Small 
Business Act.’’. 
(e) SECTION 505.—Section 505 of such Act is 
amended in subsection (a) by striking ‘‘State or local de-
velopment companies’’ and inserting ‘‘certified develop-
ment companies’’. 
(f) SECTION 507.—Section 507 of such Act is amend-
ed— 
(1) in subsection (a) by striking ‘‘State and 
local development companies’’ and inserting ‘‘cer-
tified development companies’’; 
(2) in subsection (b) by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; 
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(3) in subsection (c) by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; 
(4) in subsection (d)(1) by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; and 
(5) by striking subsection (e). 
(g) SECTION 509.—Section 509 of such Act is 
amended in subsection (e)(1)(A) by striking ‘‘qualified 
State or local development company’’ and inserting ‘‘cer-
tified development company’’. 
(h) SECTION 510.—Section 510 of such Act is 
amended— 
(1) in subsection (a) by striking ‘‘qualified 
State or local development company (as defined in 
section 503(e))’’ and inserting ‘‘certified develop-
ment company’’; 
(2) in subsection (b)(1) by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; 
(3) in subsection (b)(1)(B)(i)(II) by striking 
‘‘qualified State and local development companies’’ 
and inserting ‘‘certified development companies’’; 
(4) in subsection (c)(1) in the matter preceding 
subparagraph (A) by striking ‘‘qualified State or 
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local development company’’ and inserting ‘‘certified 
development company’’; 
(5) in subsection (c)(1)(B)(i)(II) by striking 
‘‘qualified State or local development company’’ both 
places such term appears and inserting ‘‘certified de-
velopment company’’; 
(6) in subsection (c)(2)(A)(i), by striking 
‘‘qualified State or local development company’’ and 
inserting ‘‘certified development company’’; 
(7) in subsection (c)(2)(A)(iii), by striking 
‘‘qualified State or local development company’’ and 
inserting ‘‘certified development company’’; 
(8) in subsection (c)(2)(B)(i), by striking 
‘‘qualified State or local development company’’ and 
inserting ‘‘certified development company’’; 
(9) in subsection (c)(2)(C)(i), by striking 
‘‘qualified State or local development company’’ and 
inserting ‘‘certified development company’’; 
(10) in subsection (c)(2)(D), by striking ‘‘quali-
fied State or local development company’’ and in-
serting ‘‘certified development company’’; 
(11) in subsection (c)(3), by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; 
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(12) in subsection (d), by striking ‘‘qualified 
State or local development company’’ and inserting 
‘‘certified development company’’; 
(13) in subsection (e)(1), by striking ‘‘qualified 
State and local development companies’’ and insert-
ing ‘‘certified development companies’’; 
(14) in subsection (e)(2)(A), by striking ‘‘quali-
fied State or local development company’’ and in-
serting ‘‘certified development company’’; and 
(15) in subsection (e)(2)(B), by striking ‘‘quali-
fied State or local development company’’ and in-
serting ‘‘certified development company’’. 
SEC. 215. CLOSING COSTS. 
Section 503(b) of the Small Business Investment Act 
of 1958 (15 U.S.C. 697(b)) is amended by striking para-
graph (4) and inserting the following: 
‘‘(4) the aggregate amount of such debenture 
does not exceed the amount of the loans to be made 
from the proceeds of such debenture plus, at the 
election of the borrower, other amounts attributable 
to the administrative and closing costs of such loans, 
except for the attorney fees of the borrower;’’. 
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SEC. 216. DEFINITION OF RURAL. 
Section 501 of the Small Business Investment Act 
of 1958 (15 U.S.C. 695) is amended by adding at the end 
the following: 
‘‘(f) As used in this title, the terms ‘rural’ and ‘rural 
area’ have the meaning given such terms in section 
343(a)(13) of the Consolidated Farm and Rural Develop-
ment Act (7 U.S.C. 1991(a)(13)).’’. 
SEC. 217. REGULATIONS AND EFFECTIVE DATE. 
(a) IN GENERAL.—The Administrator shall, after no-
tice and comment, publish rules to implement this subtitle 
and the amendments made by this subtitle in final form. 
(b) CONSEQUENCE OF DELAY.—If the Administrator 
has not complied with subsection (a) as of the date that 
is 180 days after the enactment of this Act, any entity, 
then, from that date until the date on which the Adminis-
trator has complied with subsection (a), any entity that 
applies to be treated as a certified development company 
shall be treated as a certified development company. 
Subtitle B—Small Business 
Lending Improvement 
SEC. 221. SHORT TITLE. 
This subtitle may be cited as the ‘‘Small Business 
Lending Improvement Act’’. 
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SEC. 222. NATIONAL PREFERRED LENDERS PROGRAM. 
Section 7(a)(2) of the Small Business Act (15 U.S.C. 
636(a)(2)) is amended by adding at the end the following: 
‘‘(E) NATIONAL
PREFERRED
LENDERS 
PROGRAM.—The Administrator shall establish a 
National Preferred Lenders Program by regula-
tion or procedural notice. Any preferred lender 
authorized by the Administrator to operate as a 
preferred lender on a national basis prior to the 
date of the enactment of the Small Business 
Reauthorization Act of 2006 shall continue that 
status to the extent that the lender continues to 
meet the qualifications for preferred lender sta-
tus under this section. ’’. 
SEC. 223. MAXIMUM LOAN AMOUNT. 
Section 7(a)(3) of the Small Business Act (15 U.S.C. 
636(a)(3)(A)) is amended— 
(1) 
in 
subparagraph 
(A), 
by 
striking 
‘‘$1,500,000 (or if the gross loan amount would ex-
ceed $2,000,000)’’ and inserting ‘‘$2,250,000 (or if 
the gross loan amount would exceed $3,000,000)’’; 
and 
(2) 
in 
subparagraph 
(B), 
by 
striking 
‘‘$1,750,000, of which not more than $1,250,000’’ 
and inserting ‘‘$2,500,000, of which not more than 
$2,000,000’’. 
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SEC. 224. ALTERNATIVE SIZE STANDARD. 
Section 3(a)(3) of the Small Business Act (15 U.S.C. 
632(a)(3)) is amended— 
(1) by striking ‘‘When establishing’’ and insert-
ing the following: 
‘‘ESTABLISHMENT OF SIZE STANDARDS.— 
‘‘(A) IN GENERAL.—When establishing’’; and 
(2) by adding at the end the following: 
‘‘(B) ALTERNATIVE SIZE STANDARD.— 
‘‘(i) IN
GENERAL.—Not later than 180 
days after the date of enactment of this sub-
paragraph, the Administrator shall establish an 
alternative size standard under paragraph (2), 
that shall be applicable to loan applicants under 
section 7(a) or under title V of the Small Busi-
ness Investment Act of 1958 (15 U.S.C. 695 et 
seq.). 
‘‘(ii) 
CRITERIA.—The 
alternative 
size 
standard established under clause (i) shall uti-
lize the maximum net worth and maximum net 
income of the prospective borrower as an alter-
native to the use of industry standards. 
‘‘(iii) AFFILIATION.—In developing the size 
standard, the Administrator shall not take into 
account any affiliation between the prospective 
borrower and any other entity if the prospective 
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borrower has no legal recourse to an affiliate to 
repay the loan made pursuant to section 7(a). 
‘‘(iv) INTERIM RULE.—Until the Adminis-
trator establishes an alternative size standard 
under clause (i), the Administrator shall use the 
alternative size standard in section 121.301(b) 
of title 13, Code of Federal Regulations, for 
loan applicants under section 7(a) or under title 
V of the Small Business Investment Act of 
1958 (15 U.S.C. 695 et seq.).’’. 
SEC. 225. TIMELY PAYMENT OF 7(a) SECONDARY MARKET 
FEE. 
Section 5(g)(2) of the Small Business Act is amend-
ed— 
(1) by inserting ‘‘(A)’’ before ‘‘The Administra-
tion’’; and 
(2) by adding at the end the following: 
‘‘(B)(i) With respect to the Administration’s guar-
anty of the timely payment of the principal and interest 
on trust certificates issued under this subsection on or 
after October 1, 2007, the Administration may assess, col-
lect, and retain a fee in the amount and frequency, as es-
tablished annually by the Administration, as necessary to 
reduce to zero the cost (as defined in section 502 of the 
Federal Credit Reform Act of 1990) to the Administration 
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of making this guaranty. The Administration may con-
tract with an agent to carry out, on behalf of the Adminis-
tration, the assessment and collection of such fee. 
‘‘(ii) The fee specified in clause (i) shall be— 
‘‘(I) payable by the holders of such trust certifi-
cates; and 
‘‘(II) deducted from the amounts otherwise pay-
able to the holders of such trust certificates, until 
the fee is paid in full. 
‘‘(iii) The fee specified in clause (i) shall not be 
charged to any borrower whose loan is represented in the 
secondary market by a trust certificate authorized under 
subparagraph (A).’’. 
Subtitle C—Small Business 
Investment 
SEC. 241. PARTICIPATING SECURITY SMALL BUSINESS IN-
VESTMENT COMPANIES. 
Part A of title III of the Small Business Investment 
Act of 1958 (15 U.S.C. 681 et seq.) is amended by adding 
at the end the following: 
‘‘SEC. 321. PARTICIPATING SECURITY SMALL BUSINESS IN-
VESTMENT COMPANIES. 
‘‘(a) APPLICATION.—This section applies to compa-
nies licensed to use participating securities pursuant to 
this title after September 30, 2004. Except as provided 
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in this section, all other provisions of this title apply to 
companies licensed to use participating securities after 
September 30, 2004. 
‘‘(b) AUTHORITY TO GUARANTEE.— 
‘‘(1) IN GENERAL.— 
‘‘(A) In order to encourage small business 
investment companies to provide equity capital 
to small businesses, the Administrator is au-
thorized to guarantee the payment of the re-
demption price and prioritized payments on 
participating securities issued by such compa-
nies which are licensed pursuant to section 
301(c) of this Act, and a trust or a pool acting 
on behalf of the Administrator is authorized to 
purchase such securities. 
‘‘(B) Participating securities guaranteed 
under this section may not exceed 100 percent 
of the regulatory capital of the company as de-
fined by the Administrator. 
‘‘(2) TERMS AND CONDITIONS OF THE GUAR-
ANTEE.—Such guarantees and purchases shall be 
made on such terms and conditions as the Adminis-
trator shall establish by regulation. 
‘‘(c) RESTRICTIONS
ON
PARTICIPATING
SECURI-
TIES.—In addition to any limitations imposed by the Ad-
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ministrator that are not inconsistent with this section, 
participating securities guaranteed under this section shall 
be subject to the following restrictions and limitations: 
‘‘(1) OBLIGATIONS OF WITH RESPECT TO PAR-
TICIPATING
SECURITIES
AND
PRIORITIZED
PAY-
MENTS.— 
‘‘(A) IN
GENERAL.—Participating securi-
ties shall be redeemed not later than 10 years 
after their date of issuance for an amount equal 
to 100 percent of the original issue price plus 
the amount of any accrued prioritized payment. 
‘‘(B) OBLIGATION TO MAKE PRIORITIZED 
PAYMENTS AND REDEEM PARTICIPATING SECU-
RITIES.— 
‘‘(i) IN
GENERAL.—A company li-
censed under this section shall be obligated 
to pay accrued and unpaid prioritized pay-
ments and redeem its participating securi-
ties irrespective of the profitability of the 
company. 
‘‘(ii) LIMITATION
ON
IN-KIND
DIS-
TRIBUTIONS.—A company may not make 
any in-kind distributions unless all accrued 
prioritized payments and leverage out-
standing as of the date of distribution have 
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been paid in full by cash payment by the 
company. 
‘‘(2) PRIORITIZED PAYMENTS.— 
‘‘(A) IN GENERAL.—Prioritized payments 
on participating securities shall be preferred 
and cumulative and payable out of any gross re-
ceipts of the issuing company. 
‘‘(B) INTEREST RATE OF PRIORITY PAY-
MENTS.—Prioritized payments shall accrue at a 
rate determined by the Secretary of the Treas-
ury taking into consideration the current aver-
age market yield on outstanding marketable ob-
ligations of the United States with remaining 
periods to maturity comparable to the average 
maturities on such securities, adjusted to the 
nearest one-eighth of 1 percent, plus an addi-
tional charge, in an amount established annu-
ally by the Administrator, as necessary to re-
duce to zero the cost (as defined in section 502 
of the Federal Credit Reform Act of 1990 (2 
U.S.C. 661a)) to the Administrator of pur-
chasing and guaranteeing participating securi-
ties under this section, which amount may not 
exceed 1.5 percent per year, and which shall be 
paid to and retained by the Administrator. 
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‘‘(C) PAYMENT OF ACCRUED PRIORITIZED 
PAYMENTS.—Any 
accrued 
but 
unpaid 
prioritized payments shall be due and payable 
on the seventh anniversary of the date of 
issuance of the participating security to which 
they apply. Prioritized payments accruing after 
the seventh anniversary shall be paid semiannu-
ally thereafter until the participating security to 
which they apply has been redeemed. 
‘‘(3) SENIORITY
OF
PARTICIPATING
SECU-
RITY.—In the event of liquidation of the company, 
participating securities and accrued but unpaid 
prioritized payments shall be senior in priority for 
all purposes to all other equity interests in the 
issuing company, whenever created. 
‘‘(4) INVESTMENT
IN
EQUITY
CAPITAL.—Any 
company issuing a participating security under this 
section shall commit to invest or shall invest an 
amount equal to the outstanding face value of such 
security solely in equity capital. 
‘‘(5) LIMITATIONS
ON
OUTSIDE
DEBT.—The 
only debt other than leverage obtained in accordance 
with this title which any company issuing a partici-
pating security under this section may have out-
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standing shall be temporary debt in amounts limited 
to not more than 50 percent of private capital. 
‘‘(d) DISTRIBUTIONS BY LICENSEE.— 
‘‘(1) ORDER AND TYPES OF DISTRIBUTIONS.— 
‘‘(A) PAYMENT
OF
PRIORITIZED
PAY-
MENTS.—Accrued but unpaid prioritized pay-
ments shall be paid whenever a company has 
gross receipts on payment dates prescribed by 
the Administrator. If not previously paid in full, 
accrued but unpaid prioritized payments shall 
be paid upon the seventh anniversary of the 
issuance of the participating security to which 
they apply and semiannually thereafter until 
the participating security is redeemed in full. 
‘‘(B) TAX DISTRIBUTIONS.— 
‘‘(i) IN GENERAL.—If a company is 
operating as a limited partnership or as a 
subchapter S corporation or an equivalent 
pass-through entity for tax purposes and if 
there are no accumulated and unpaid 
prioritized payments, the company may 
make annual distributions to the partners, 
shareholders, or members in amounts not 
greater than each partner’s, shareholder’s, 
or member’s maximum tax liability attrib-
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utable to the operations of the company; 
provided, however, that such distributions 
shall not be permitted in any period in 
which distributions characterized as either 
return of capital or profit are sufficient to 
pay the liability calculated in accordance 
with this paragraph. 
‘‘(ii) INTERIM TAX DISTRIBUTIONS.— 
A company may also elect to make a dis-
tribution under this paragraph at any time 
during any calendar quarter based on an 
estimate of the maximum tax liability. If a 
company makes one or more interim dis-
tributions for a calendar year, and the ag-
gregate amount of those distributions ex-
ceeds the maximum amount that the com-
pany could have distributed based on a sin-
gle annual computation, any subsequent 
distribution by the company under this 
paragraph shall be reduced by an amount 
equal to the excess amount distributed. 
‘‘(C) PAYMENT OF OUTSTANDING LEVER-
AGE AND RETURN OF CAPITAL.—After making 
any distributions pursuant to subparagraphs 
(A) and (B), whenever a company with partici-
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pating securities outstanding has gross receipts 
it shall return capital to its investors, specifi-
cally including the Administrator. Any distribu-
tions made under this subparagraph shall be 
made to private investors and to the Adminis-
trator in the ratio of private capital to leverage 
as of the date of the distribution until leverage 
outstanding as of the date of distribution has 
been redeemed in full. 
‘‘(D) DISTRIBUTION
OF
PROFITS.—After 
making distributions pursuant to subpara-
graphs (A), (B), and (C), a company shall dis-
tribute any profits in excess reserves for reason-
ably anticipated expenses and other liabilities 
for the following 12 months to its investors and 
to the Administrator in accordance with the fol-
lowing: 
‘‘(i) To the Administrator, 50 percent 
of the leverage percent reduced by the 
weighted average of all prioritized payment 
rates paid by the company with respect to 
participating securities issued by the com-
pany to the date of distribution. 
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‘‘(ii) The balance to the company’s 
private investors in accordance with the 
company’s controlling documents. 
‘‘(iii) A company operating under this 
section shall be entitled to subtract from 
any calculation of profit management ex-
penses not more than 2.5 percent of the 
combined capital of the company plus an 
additional $125,000 if the combined cap-
ital 
of 
the 
company 
is 
less 
than 
$20,000,000. 
‘‘(E) IN-KIND PROFIT DISTRIBUTIONS.— 
‘‘(i) A licensee may elect to may make 
all or part of distribution under subpara-
graph (C), including any distribution to 
the Administrator, as an in-kind distribu-
tion only to the extent that such securities 
are publicly traded and marketable. 
‘‘(ii) In-kind distributions to the Ad-
ministrator shall be deposited with a trust-
ee designated by the Administrator that 
has substantial expertise and experience in 
the sale of thinly traded securities. Des-
ignation of the trustee must occur not 
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later than 180 days after the effective date 
of this section. 
‘‘(iii) If the Administrator receives in- 
kind distributions and upon sale of such 
securities realizes less than the value of 
such securities at the date of the distribu-
tion, the Administrator shall not be per-
mitted to seek from the licensee the dif-
ference between the value of such securi-
ties on the date of the in-kind distribution 
and the value on the date of sale by the 
Administrator. 
‘‘(iv) If the Administrator receives in- 
kind distributions and upon sale of such 
securities realizes more than the value of 
such securities at the date of distribution, 
the Administrator shall be entitled to re-
tain the difference between the value of 
such securities on the date of the in-kind 
distribution and the value on the date of 
sale by the Administrator. Any excess 
value received by the Administrator shall 
not reduce any liability of the company 
with respect to prioritized payments or re-
demption of participating securities. 
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‘‘(e) LEVERAGE FEES.— 
‘‘(1) IN
GENERAL.—The Administrator shall 
collect a fee of three percent of the face amount of 
any leverage granted to a licensee pursuant to this 
section. 
‘‘(2) TIMING OF FEE PAYMENT.— 
‘‘(A) One-third of such fee is payable upon 
the date at which the Administrator and li-
censee enter into a commitment for such lever-
age. 
‘‘(B) Two-thirds of such fee is payable 
upon the date such leverage is drawn. 
‘‘(C) If there is no commitment between 
the Administrator and the licensee under sub-
paragraph (A), all of such fee is due on the 
date on which the leverage is drawn by the li-
censee. 
‘‘(f) CALCULATION OF SUBSIDY RATE.—All fees, in-
terest, and profits received and retained by the Adminis-
trator under this section shall be included in the calcula-
tions made by the Director of the Office of Management 
and Budget to offset the cost (as that term is defined in 
section 502 of the Federal Credit Reform Act of 1990) 
to the Administrator of purchasing and guaranteeing de-
bentures and participating securities under this Act. 
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‘‘(g) DEFINITIONS.—In this section: 
‘‘(1) The term ‘participating security’ means a 
participating debt security issued to the Adminis-
trator that obligates the issuing company to pay 
prioritized payments and principal when due and a 
percentage of the profits, if any, of the company to 
the Administrator as provided in this section. 
‘‘(2) The term ‘prioritized payments’ means in-
terest payable on such participating securities in ac-
cordance with this section. 
‘‘(3) The term ‘gross receipts’ means any cash 
received by a small business investment company, in-
cluding investment proceeds (both return of capital 
and profit), interest, dividends, and fees, other than 
capital contributed by a partner, the proceeds of the 
issuance of participating securities, and other money 
(if any) borrowed by the small business investment 
company. 
‘‘(4) The term ‘equity capital’ means common 
or preferred stock or a similar instrument, including 
subordinated debt with equity features which is not 
amortized and which provides for interest payments 
from appropriate sources, as determined by the Ad-
ministrator. 
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‘‘(5) The term ‘combined capital’ means the ag-
gregate amount of private capital, outstanding lever-
age, and commitments of the Administrator held by 
the company. 
‘‘(6) The term ‘management expenses’ includes 
salaries, office expenses, travel, business develop-
ment, office and equipment rental, bookkeeping and 
the development, investigation and monitoring of in-
vestments, but does not include the cost of services 
provided by specialized outside consultants, outside 
lawyers, and outside auditors, who perform services 
not generally expected of a venture capital company, 
nor does such term include the cost of services pro-
vided by any affiliate of the company that are not 
part of the normal process of making and moni-
toring venture capital investments. 
‘‘(7) The term ‘leverage percent’ means the per-
cent calculated by dividing the aggregate amount of 
participating security leverage previously drawn by 
the company (including leverage previously repaid) 
by that same amount plus the aggregate amount of 
capital previously contributed to the company by its 
private investors (including capital previously re-
turned to those investors). 
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