Mr. FINE. The minimum defined in the statute is a capitalization of $300,000; $150,000 of that must come from private funds. The additional $150,000 can be Federal funds through the SBA purchasing subordinate debentures from the small business investment company. After these funds have been invested into small business, with a maximum of 20 percent of the $300,000 being put into any single business, then they may apply for an additional $150,000 from SBA. This ratio of 2 to 1

Mr. THOMAS. You mean the SBA charges them a flat 5 percent interest?

Mr. FINE. That is right. This ratio of 2 to 1 only holds true on a company which is minimum size, or $150,000 of private capital. If, for example, there is $500,000 of private capital invested in the small business investment company then they may borrow 50 cents for each dollar invested.

Mr. THOMAS. What rate of interest do they get when they make the loans?

Mr. FINE. The average across the country for all loans made is 7.97 percent; the average effective rate, that is including costs, servicing, managing

Mr. THOMAS. Is there a limitation

Mr. FINE (continuing). Is 8.35.

Mr. THOMAS. Is there a limit on the interest rate the corporation can charge?

Mr. FINE. The maximum that is legal to be charged within the State in which they are doing business or a maximum which is set forth in the original proposal, which is filed with the SBA

Mr. THOMAS. In Mr. Jonas' State you have a legal rate of 6 percent and they borrow money from the Government at 5 percent. They have got a 1-percent spread. How long will it take you to have a loss in the funds there?

Mr. FINE. We do not have a question there. You asked a question that was not answered as to how we know they do not pay us back out of our own funds. We receive semiannual reports from every small business investment company, audited by CPA's. We study and do analyses on these. On the whole, these companies as they get into business-it takes a good 90 days to get started after the licenseare doing very well. They are showing moderate profits, and as they learn how to operate because this is a new type of banking systemas they learn how to do business within this field they are able to make a fair return on their funds. Remember, they are given tax benefits, the right to have equity participations in companies

Mr. THOMAS. What tax benefits do they get?

Mr. FINE. If there is a loss to the company it is a loss chargeable against ordinary income. I am reducing it to its simplest form. If there is a profit it is a capital gain to the holder so if you bought stock

TOTAL AUTHORIZATION

Mr. THOMAS. What is the total amount authorized under the act for lending to small business corporations, $250 million?

Mr. FINE. Yes, for both investment and State and local development companies.

Mr. THOMAS. That includes the amount that is already spent.

Mr. FINE. We have committed $39 million for subordinated debentures and actually loaned $12.7 million of 303 funds which are based on 50 percent of capital of the SBIC.

We have a potential in 303 loans as of July 27 of an additional amount of $116.3 million, making the total of $129 million.

Mr. THOMAS. Your maturity date as far as the corporation is concerned is 10 years?

Mr. FINE. No, sir. On the 303 funds it is 5 years from the date of the loan and on the 302 funds, which are subordinate debentures, it is 20 years, with a 10-percent payoff per year beginning the 11th year. Mr. THOMAS. My first statement was about right, then, the 11th

year.

Mr. FINE. It is only 10 percent the 11th year.

Mr. THOMAS. Your loss would not begin to show up then. You would not know what shape you are in until the 11th year.

Mr. FINE. I would hope with the additional help we hope you will give us in personnel that we will be able to stay on top of these companies. If we see that one of them is showing a loss or showing an impairment of capital under our regulations we have the right to step in and call the loan at that point.

Mr. THOMAS. After they get the Federal funds is it mandatory they make any loans?

Mr. FINE. Yes, sir.

Mr. THOMAS. Suppose they do not make any loans?

Mr. HORNE. We call the money back. We can reclaim the charter. Do you want to explain that, Mr. Fine?

Mr. FINE. You would be interested to know that we made a survey

Mr. THOMAS. Suppose we give this group $300,000 and the corporation and the officers and directors of the corporation have a project that they are interested in.

They make a loan to themselves, in so many words, of half of that and keep the other half and do not make any loans.

Mr. FINE. They cannot do it under our regulations. We prohibit self deals in which a loan is made to a company in which any officer or stockholder or director has an interest, without our permission.

Mr. HORNE. For whatever interest it may have to you, Mr. Chairman, we have a regulation within our agency that none of our employees can own stock in these companies.

Mr. THOMAS. You follow the National Banking Act to some respect in that?

Mr. HORNE. Yes, sir. We have very strict regulations as far as our employees are concerned.

Mr. THOMAS. It is not your employees that will give you trouble; it is friends of the officers and directors, and I do not mean to say they will give you trouble.

Mr. HORNE. Also, in making our loans we define the type businesses in which they are to make loans.

We have been fairly liberal as far as size strictures are concerned. Mr. THOMAS. Mr. Kirwan?

Mr. KIRWAN, No questions.

Mr. THOMAS. Mr. Rooney?

INCREASE IN WORKLOAD

Mr. ROONEY. You stated the workload has increased a hundredfold since the last administration. You go back to when, January, for that comparison?

Mr. HORNE. Going back to the time that we have been in, compared with the 6 months or the year prior to them.

Mr. ROONEY. Do you have figures in this regard?

Mr. HORNE. We had figures in our testimony. Do you recall offhand, Mr. Fine?

Mr. FINE. On the small business investment company over 46 percent of the companies licensed have been licensed since February 1, 1961. As of the end of January, there were 181 licensees. There are as of today 340 licensees. This shows the growth within this period. In addition to that, in the local development company loan program-these are the local community groups that get together and help provide employment within the community-about 40 percent of the loans have been made since March 1, 1961. On the State development company loans, for example, we made one last week to the State of New York for $2 million-approximately 50 percent of those loans (in dollar value) have been made since March 1, 1961.

Mr. HORNE. This additional request for help, Congressman Rooney, applies not just to the small business investment company program but to the other two programs which Mr. Fine has briefly described. So far as the small business investment company program is concerned, Mr. Chairman, we feel that within a very few years it can be a completely self-sustaining program. I would not want to risk my neck on that statement, but I am confident that it can become so, the program is allowed to continue and if we are allowed to stay on top of it.

EXPLANATION OF INCOME FROM ACTIVITIES

if

Mr. FINE. I think it should be pointed out, sir, you asked a question before and I answered that there was income coming in from the program. The interest income which comes from the small business investment companies and on the loans made to the local development companies is deposited into the revolving fund of SBA but the charges are against the direct appropriation so the income which is coming from this investment company, the local development company, and the State development company program, goes in to reduce the deficit of SBA operations as a whole rather than as applied directly against the investment company program. A different bookkeeping system is used in this area.

Mr. THOMAS. In other words, you get a credit for the losses but none for the interest.

Mr. HORNE. Yes, sir.

I know the Federal Housing Administration program is selfsustaining. I believe the Federal Savings and Loan Insurance Corporation is self-sustaining. I believe this program in time will also be self-sustaining.

Mr. THOMAS. Mr. Rooney?

Mr. ROONEY. No further questions, Mr. Chairman.
Mr. THOMAS. Mr. Boland?

Mr. BOLAND. Speaking of the New England area, I think your regional office up there is a good one. The only information I have from people who have gone there indicates people have been treated very well.

Mr. HORNE. I appreciate that, Congressman. You know unfortunately the people who come to us and get help are not nearly so persnickety about it as the people who come and do not get help and so the Congressman hears from it and in turn the Administration. We hear from those who have attempted to get the help. In some cases a mistaken judgment has been made. In some you cannot possibly approve the loan with any assurance it will be repaid.

REDUCTION IN REGULAR BILL FOR 1962

Mr. BOLAND. How did the regular committee treat you with respect to the 1962 budget?

Mr. HORNE. We were reduced personnel wise by $200,000 which I believe ran to about 34 employees. These employees would have been working in the procurement and technical assistance program, in the management and research assistance program, and part of them in the investment program, which we are discussing so thoroughly this morning.

Mr. BOLAND. How many positions did the regular committee allow you above and beyond what you already had?

Mr. THOMAS. 232.

Mr. HANNA. The net increase authorized under the regular appropriation would be 167 positions; most of which are in the lending business, or business and disaster loaning operation.

Mr. HORNE. In this particular area of operations, our workload has just shot up completely beyond our estimate. I thought we were making a fairly liberal estimate of workload in my original budget.

Mr. THOMAS. Let me interrupt. Let us correct that figure. In 1960 you had 2,362 people. I am reading your figures. In 1962, you have 2,912. Does that include your 65?

Mr. HANNA. That includes the 65 from the supplemental.

Mr. THOMAS. What was the exact figure without the supplemental of 65 you seek?

Mr. HANNA. 2,847, I believe.

Mr. THOMAS. You had 2,680 in your regular 1961 bill if I remembered it correctly. It may include your 65. It is 232 increase over last year and without your 65 it is about 170.

Is that the figure you gave Mr. Boland?

Mr. HANNA. One hundred sixty-seven.
Mr. THOMAS. Thank you, sir.

Mr. BOLAND. You spoke of a $200,000 cut. Where did you take this? What particular area suffered?

Mr. HORNE. Seventeen of them would have been in procurement and technical assistance, Congressman; 5 of them would have been in management and research assistance, and 12 of them, counting the clerks and examiners, would have been for investment company activity. My supplemental is based on the assumption that we would have gotten the $200,000, which we did not get. It makes it more imperative so far as the supplemental is concerned and even with

the supplemental we still would not fill the deficit which the reduction in the original brought about in procurement and technical assistance and management and research assistance.

Mr. BOLAND. You speak of the immense increase in workload. This has occasioned considerable overtime work.

OVERTIME WORK

Referring to Mr. Fine's shop, how many people work overtime and at night?

Mr. FINE. Since I have been there I have not been in the building one night when there have not been at least five or six professional people working. In the processing of license applications and loan applications, I scarcely have a dozen people. We have a potential committed to this program today of over $800 million. There are very few people supervising this.

In the examination area, which is extremely important to the small business investment companies, since this is a formative period where the companies are getting started, if we do not give them supervision

Mr THOMAS. Can you not bring some of the 2,200 here?

Mr. FINE. No sir. It is a different thing. An investment analyst, for example, is extremely hard to come by.

You asked a question earlier as to the number of people we have in the field. Our field offices generally have only one man in the entire field handling local development companies, State development companies, and SBIC's.

When a man goes on vacation, as is happening now in Chicago, Boston, and Richmond, there is generally no one to cover that office. For a month we stop all activity.

If we send a man from Washington to cover him, we have lost, in effect, 10 percent or more of our work force here.

Mr. THOMAS. You cannot utilize some of the 2,200 people?

Mr. HORNE. We shift the people around from time to time depending on the workload in the respective areas but they are working overtime, also. In spite of the overtime, in spite of the fact we are turning out a bigger workload per man than the agency ever turned out, we still have the biggest backlog of loan applications the agency ever has had.

BACKLOG OF WORK

Mr. THOMAS. How big is the backlog?

Mr. HORNE. 1,500 loan applications now.

Mr. THOMAS. What is the average time from the filing of the application until there is a yes or no answer?

Mr. HORNE. About 6 weeks right now. That is a fairly correct estimate, I am sure.

Mr. FINE. On the investment companies the backlog was 92 in April, applications which never had even seen a man's hand. With every person, man and woman, working overtime in May, it was cut down to 73. As the backlog was being processed we received a number of new applications, it was up to 92 in June and today we have a backlog of 120.