omy of the area. Such loans may be made without regard to the direct needs of small business and without limit as to amount. Under the authority of section 207 (a) of the Small Business Act of 1953, as amended, the Small Business Administration has made loans to local development corporations. I would like to submit for the record a list of the loans made to development corporations. However, these loans are made only where it is clear that the proceeds of the loan will be utilized to assist an ascertainable small business through the de velopment corporation. It appears that the amendments here under consideration would, in effect, establish a new program to provide financial assistance without limitation in amount to development corporations and without regard to the size of the businesses assisted. While this proposal may have merit, consideration should be given to establishing such a financial assistance program in the framework of an area assistance act, such as S. 1433, the Area Assistance Act of 1957. Turning now to S. 1789, this bill is essentially a reenactment of the Small Business Act of 1953, as amended. However, as I have noted above, it establishes the SBA as a permanent agency and clarifies the existing statute. I have submitted to this committee a section-by-section analysis of S. 1789, which, I believe, is self-explanatory. However, I would like to call to the attention of your committee certain differences between S. 1789 and the present Small Business Act. 1. In section 202 a specific reference has been added to maintenance, repair, and construction contracts to make it clear that the procurement activities of the Small Business Administration will include, in addition to the usual supply contracts, contracts for all types of maintenance and construction, including the construction of highways. 2. S. 1789 strengthens the Small Business Administration's disaster program in several respects. Recruitment of temporary personnel to serve in disaster areas is made easier by authorizing the payment of transportation expenses of such temporary personnel from their home to the disaster area and return. In connection with disaster loans made to small businesses located in drought areas, S. 1789 provides that such businesses adversely affected by the drought are eligible for disaster loans, even though the drought may have ended. 3. The present act authorizes certain loans in excess of $250,000 to corporations formed by groups of small business concerns for the purpose of securing raw materials and supplies. S. 1789, in section 207 (a) (4), has clarified this language by providing that such loans may be made to corporations established "for the purpose of obtaining for the use of such concerns raw materials, equipment, inventories or supplies, or for establishing facilities for such purposes." In addition, S. 1789 also clarifies the procedure for obtaining certain antitrust exemptions in connection with the activities of these corporations. 4. S. 1789 provides in section 208 (n) broad authority to SBA to make studies of matters materially affecting the competitive strength of small business. This provision will enable the Small Business Administration to make comprehensive reviews of small-business problems which will be helpful both to the smallbusiness community and to the Congress. 5. S. 1789 contains a provision whereby the Small Business Administration is authorized to borrow from the Treasury program funds necessary for its revolving fund in lieu of requesting direct appropriations. The annual budget submission will contain estimated annual borrowing requirements which will be justified to the Appropriation Committees, and passed upon by the Congress. Because requests for direct appropriations must be estimated as closely as possible to anticipated needs, there has been very little flexibility for handling unforeseeable business and disaster-loan program increases. On several occasions it became necessary to suspend the approval of loans until the Congress could appropriate additional funds. Under the borrowing system, however, we intend to request that the annual borrowing limitation be set at a level high enough to permit a reserve for handling unanticipated program increases. In this connection sums will be borrowed and placed to the credit of the fund only in such amounts as are necessary to meet current lending requirements. 6. You will note that S. 1789 establishes a uniform interest rate on the Small Business Administration's share of all business loans. Similarly, a uniform rate exists for all disaster loans. In the case of business loans, including pool loans, the interest rate is fixed at a maximum of 6 percent on SBA's share. That portion of section 207 (a) (4) of the Small Business Act of 1953, as amended, which states that any loans "shall bear interest at the rate prevailing in the area where the money is to be used" has been deleted. It is our opinion that in the case of business loans, interest is not established as a fixed rate in particular areas, but varies depending upon the circumstances of each particular case. The rates to be charged in business loans will depend on such things as financial condition of the borrower, his management ability, the liquidity of his assets, the term of the loan, the amount of servicing that would be required, and other factors. Under the proposed legislation the bank may still fix the rate of interest for the loan, which may be less than 6 percent, but in no event may the interest rate on SBA's share of the loan exceed 6 percent per annum. S. 1762 is, in many respects, similar to S. 1789. I would like to comment on some of the major differences. 1. S. 1789 continues the Loan Policy Board in its present form. S. 1762, on the other hand, eliminates the Loan Policy Board. As I have indicated in my previous comments on S. 545, I have found the Loan Policy Board to be of immeasurable assistance to me in the administration of the lending program of the Small Business Administration. Its deliberations and actions have been marked by a spirit of cooperation and harmony and I recommend that the Loan Policy Board be continued in its present form. 2. Section 206 (a) and (b) of S. 1789 establishes authority for the Small Business Administration to borrow funds from the Treasury to be used for business loans, disaster loans, and the prime-contract programs. Section 103 (b) of S. 1762 continues the present revolving fund procedures found in the Small Business Act of 1953. The overall program provisions in S. 1789 are $450 million for business loans, $125 million for disaster loans, and $25 million for the prime-contract program, totaling $600 million. S. 1762, on the other hand, provides for $500 million for business loans, $250 million for disaster loans, and $100 million for the prime-contract programs, totaling $850 million. Under the provisions of S. 1789 the SBA is authorized to borrow from the Treasury program funds necessary for its revolving fund in lieu of requesting direct appropriations. As I have already indicated this method of obtaining program funds provides necessary flexibility for handling unforeseeable business disaster loan increases which is not available under the appropriation procedure presently in use and provided for in S. 1762. In arriving at the estimate of the size of the revolving fund, which should be authorized by new legislation, we were guided largely by our past experience and as we anticipated it might be projected into the future. Our business-loan applications for the current year have averaged 569 per month. A projection of an application rate of 600 business-loan applications per month would require a revolving fund of about $375 million. Since the month of March reached a peak of 702, we also projected an average of 700 applications per month, with the resulting required total of $425 million. 3. In connection with the authority to make business loans, S. 1789 retains the language of the present Small Business Act. S. 1762, on the other hand, grants a broad authority "to make loans to insure a well-balanced national economy It would appear that the Sparkman bill (S. 1762) would eliminate present requirements that the lending activities of the Small Business Administration be confined to small concerns. If this is the intent, we do not recommend that the agency's activities be broadened in this fashion. 4. Section 105 (a) (4) of S. 1762 authorizes loans to be made up to $500,000. S. 1789 retains the present $250,000 limitation. In S. 1762, pool loans are authorized for corporations formed by small-business concerns "for the purpose of establishing facilities in and through such corporation to produce or secure raw materials or supplies ***." S. 1789 authorizes such pool loans to corporations formed by small-business concerns "for the purpose of obtaining for the use of such concerns raws materials, equipment, inventories or supplies, or for establishing facilities for such purposes.' Both bills provide for a limited antitrust exemption for the activities of these corporations under certain circumstances. 93527-57--23 So far as we can ascertain, the smaller companies do not require loans in excess of $250,000. The average SBA loan, in fact, is under $50,000. It would appear, therefore, that if SBA's loan limitation were doubled that Congress intended to broaden the activities of the agency and authorize it to render financial assistance to concerns that could not truly be classified as small. This extension of the lending program is not recommended. The present loan limitation of $250,000 should be retained. In connection with the pool-loan provision, I believe the language of S. 1789 is preferable since it makes specific the purposes for which such group corporations may be formed. Section 207 (a) (5) of S. 1789 authorizing certain antitrust exemptions is, I believe, an improvement over the present language of the Small Business Act and the language utilized in S. 1762. These changes eliminate certain ambiguities in the present legislation and therefore are recommended for enactment. 5. Section 208 (n) of S. 1789 and section 106 (o) of S. 1762 authorize the Small Business Administration to make studies of matters affecting small business. I believe the language of S. 1789 is broader and more flexible and therefore recommend this version. 6. Subsection 109 (d) of S. 1762 which is identical with subsection 217 (d) of the present Small Business Act and subsection 210 (d) of S. 1789 are generally similar in that they relate to the withdrawal of approvals of voluntary agreements of pooling programs. The language of S. 1789 is à clarification of the present language in the Small Business Act. Its enactment is therefore recommended. 7. Section 214 of S. 1789 which provides authority for the joint determination program and small-business set-aside program is identical to section 214 of the present Small Business Act. Section 107 (a) of S. 1762, on the other hand, authorizes the Small Business Administration to make unilateral determination without concurrence on the part of the contracting procurement agency that a contract shall be set aside for award to small business. S. 1762 provides that this unilateral determination may be made "to insure a well-balanced national economy." No similar provision is contained in S. 1789 relating to joint determinations. Provision is made in S. 1762 for an appellate procedure in the event that the procurement agency objects to the determination by SBA and SBA's determination may be overruled by the head of the procurement agency. And, finally, under S. 1762, SBA may delegate the authority to make unilateral determinations to the procurement agencies under certain circumstances. This proposal has merit and we would not object to it. However, comments of the procurement agencies should be obtained before the committee decides whether this procedure is workable. 8. Section 215 of S. 1789 states that it shall be the duty of the Administration to consult with Government agencies in the issuance of orders of policy affecting small business and that such agency shall consult with the Administration. Section 106 (e) of S. 1762 is similar but provides that insofar as consultation by the Administration with Government agencies is concerned no direction by the President is necessary. The Small Business Administration does not recommend the change embodied in S. 1762 because it tends to reduce the authority of the President. Title II of S. 1762 is similar to S. 720. Both these bills propose to make credit available to small businesses by establishing a system for insuring loans to qualified small firms. The bills provide that a loan extended by an approved lender would be insured up to the lesser of 90 percent of the unpaid balance of the loan or the lender's insurance reserve. The insurance reserve is computed at 10 percent of the total amount of the insured loans made by each lender, less any paid claims. We believe the reserve requirements, implicit in the proposed insurance system, contain at least two defects that will prevent accomplishment of the desired goals: First, the establishment of an adequate reserve, based on 10 percent of the total amount of the loan made by a lender less paid claims, necessitates the lender's making a large volume of loans before it can achieve adequate coverage. For example, in order to provide 90 percent insurance for a $150,000 loan, the lender must make loans in an aggregate amount of $1,350,000. To provide 90 percent insurance for a $250,000 loan, the maximum insurable under the bill, the lender must make loans in an aggregate amount of $2,250,000. In the event the lender is paid any claims, it must make additional loans aggregating nine times the amount of these claims before its reserves equal those which existed immediately prior to payment of the claim. The second defect lies in the fact that the lender's protection on any loan is not stable but subject to diminution or even elimination, as a result of a default on another of the lender's loans. Such fluctuating protection could scarcely be expected to induce lenders to make loans which they would not otherwise make. Moreover, we are of the opinion that title II of S. 1762 is unnecessary because of this Administration's deferred loan participation program. This deferred loan participation program is contemplated by all legislation that would continue the existence of this Administration. Under the deferred loan participation program this Administration agrees it will, on request of the lender, purchase a specified portion of a loan not to exceed 90 percent of the unpaid balance. SBA's charges for such participation are based on a sliding scale. The lender administers the loan without interference, subject only to compliance with the terms of the participation agreement. While this program is not, strictly speaking, an insurance system, it serves the same purpose and achieves the same end result, because it assures the lender that, in the event the loan is defaulted, this Administration can be requested to pay the agreed share of the defaulted loan. It is our opinion, for these reasons, that title II of S. 1762 is unnecessary and, therefore, we do not recommend its enactment. S. 2160, the National Investment Company Act of 1957 is a substitute for S. 719. It is designed to make equity capital more readily available to small business. This is done by authorizing the establishment of national investment companies by private parties under the supervision of the Federal Reserve Board and such Federal Reserve banks as may desire to join in this program. The Federal Reserve bank is authorized, but not directed, to invest in shares of the corporate stock of the investment companies within certain limits described in the bill. The investment companies have the authority to borrow money and issue debentures, notes, and other obligations under regulations set up by the Federal Reserve Board. National investment companies are authorized to make or acquire loans with or without security to business enterprises eligible under the bill. Such loans may be made directly or in cooperation with banks or other lending institutions. The companies are granted authority to acquire and resell to the issuer or others bonds or stocks or other capital shares of business enterprises. S. 2160 provides that the Federal Reserve Board, after consultation with the Secretary of Commerce, shall promulgate standards to determine which business enterprises shall be eligible for financing under the provisions of this bill. S. 2160 further provides that, for tax purposes, national investment companies shall qualify as regulated investment companies. The financial program contemplated under the National Investment Companies Act appears designed to fill a credit need that is separate and distinct from the financial assistance programs of SBA. The emphasis of this program, as we understand it, is on long-term capital and equity financing for small business. We, in SBA, are sympathetic to the approach utilized by this bill, and we believe that the Federal chartering of investment companies which establish financial institutions to serve the long-term capital needs of small business may supplement this agency's small-business programs. On the other hand, it is not clear to us that S. 2160 as it presently is written will accomplish these objects. First, the success of the program would be dependent upon action by the Federal Reserve Board, and I believe the Board has previously indicated that its present functions do not lend themselves to the program contemplated by S. 2160. Equally important, it is not clear that S. 2160 provides sufficient incentives for the establishment of national investment companies. Obviously, if private groups do not avail themselves of the programs offered under this proposed legislation, the program will not be a success. |