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S. 2992 (114th): Small Business Lending Oversight Act of 2016

The text of the bill below is as of Jun 9, 2016 (Reported by Senate Committee).


II

Calendar No. 512

114th CONGRESS

2d Session

S. 2992

IN THE SENATE OF THE UNITED STATES

May 25, 2016

(for himself, Mrs. Shaheen, Mr. Risch, Ms. Ayotte, Mr. Peters, and Mr. Enzi) introduced the following bill; which was read twice and referred to the Committee on Small Business and Entrepreneurship

June 9, 2016

Reported by , with an amendment

Strike out all after the enacting clause and insert the part printed in italic

A BILL

To amend the Small Business Act to strengthen the Office of Credit Risk Management of the Small Business Administration, and for other purposes.

1.

Short title

This Act may be cited as the Small Business Lending Oversight Act of 2016.

2.

Office of Credit Risk Management; stress analyses

The Small Business Act (15 U.S.C. 631 et seq.) is amended—

(1)

by redesignating section 47 as section 49; and

(2)

by inserting after section 46 the following:

47.

Office of Credit Risk Management

(a)

In general

There is within the Administration the Office of Credit Risk Management (in this section referred to as the Office).

(b)

Director

The Office is headed by the Director of the Office of Credit Risk Management (in this section referred to as the Director).

(c)

Supervision

(1)

Final reports

The Director shall issue any final report relating to a review of any entity authorized to issue a loan or loan guarantee under section 7 or under title V of the Small Business Investment Act of 1958 (15 U.S.C. 695 et seq.).

(2)

Reviews

An employee of the Office shall be present for and supervise any full review conducted by a contractor of the Administration.

(d)

Enforcement authority of the Director

(1)

In general

In addition to other enforcement actions authorized under regulations promulgated by the Administration, the Director shall impose penalties on any lender that finances loans under section 7(a) if the lender knowingly and repeatedly—

(A)

fails to properly determine and document that a loan is eligible for financing under this Act and regulations promulgated under this Act, including a failure to document that a loan is eligible for financing under section 7(a) because the applicant is unable to obtain credit elsewhere;

(B)

sells the guaranteed portion of a loan under section 5(f) when the proceeds of the loan have not been fully disbursed in accordance with program requirements;

(C)

imposes on an applicant for a loan under section 7(a) a fee that the Administration has not specifically authorized; or

(D)

re-amortizes a loan solely to make the loan appear current.

(2)

Penalties

In addition to the authority of the Administrator to deny liability for a loan, the Director may impose a penalty on a lender that knowingly and repeatedly violates the requirements of section 7(a) and the regulations promulgated under that section, including by committing violations described in paragraph (1), which—

(A)

shall be based on—

(i)

the severity of the violations; and

(ii)

the frequency with which the lender fails to comply with the requirements; and

(B)

may include—

(i)

issuing the lender a warning and an order to comply;

(ii)

if the lender is a participant in the Preferred Lenders Program (in this subsection referred to as the program), as defined in section 7(a)(2)(C)(iii), suspending the lender from participating in the program for a period of not less than 90 days and not more than 1 year, which shall include the right of the lender to appeal the decision of the Director to the Office of Hearings and Appeals;

(iii)

prohibiting the lender from issuing loans under section 7(a) under processes determined by the Administrator through regulation, which shall include the right of the lender to appeal the decision of the Director to the Office of Hearings and Appeals;

(iv)

assessing a civil monetary penalty against the lender in an amount that is not less than $5,000 and not greater than $250,000, which shall include the right of the lender to appeal the decision of the Director to the Office of Hearings and Appeals;

(v)

prohibiting a lender from selling in the secondary market, under section 5(f), the guaranteed portion of any loan made by the lender; and

(vi)

any other penalty that the Director determines to be appropriate after considering the severity and the frequency of the violations of the lender.

(3)

Regulations

With respect to the penalties described in clauses (ii), (iii), and (iv) of paragraph (2)(B), the Administrator shall—

(A)

not later than 180 days after the date of enactment of this section, propose amendments to any regulations in effect on the date of enactment of this section; and

(B)

not later than 1 year after the date of enactment of this section, publish a final regulation.

(4)

Servicing and liquidation responsibilities

During any period in which a lender is suspended from participating in the program, or if a lender is prohibited from issuing loans under section 7(a), the lender shall remain obligated to maintain all servicing and liquidation activities delegated to the lender by the Administrator.

(e)

Report to Congress

Not later than December 31 of each year, the Office shall submit to Congress a report detailing the subject matter and frequency of actions taken by the Office during the year preceding the submission of the report.

48.

Portfolio risk analyses

(a)

In general

The Administrator shall annually conduct a risk analysis of the portfolio of the Administration with respect to all loans issued under section 7(a).

(b)

Report

(1)

In general

Beginning on April 1, 2018, and annually thereafter, the Director of the Office of Credit Risk Management shall submit to Congress a report containing the results of each portfolio risk analysis conducted under subsection (a).

(2)

Contents

A report submitted under paragraph (1) shall include—

(A)

an analysis of overall program risk;

(B)

an analysis of program risk—

(i)

by industry concentration;

(ii)

by geography; and

(iii)

by program loan interest rates;

(C)

without identifying individual lenders by name, a consolidated analysis of the risk created by the individual lenders responsible for not less than 1 percent of the gross loan approvals for the year covered by the report; and

(D)

a summary of the steps taken by the Administration to mitigate the risks identified in subparagraphs (A), (B), and (C).

.

3.

Credit elsewhere

The Small Business Act (15 U.S.C. 631 et seq.) is amended—

(1)

by striking section 3(h) (15 U.S.C. 632(h)) and inserting the following:

(h)

The term credit elsewhere means—

(1)

for the purposes of this Act, except for section 7(b), the availability of credit to the individual loan applicant on reasonable terms and conditions from non-Federal, non-State, or non-local government sources, taking into consideration factors associated with conventional lending practices, including but not limited to—

(A)

the business industry in which the loan applicant operates;

(B)

whether the loan applicant is an enterprise that has been in operation for a period of less than 2 years;

(C)

the adequacy of the collateral available to secure the requested loan; and

(D)

the loan term necessary to reasonably assure the ability of the loan applicant to repay the debt from the actual or projected cash flow of the business; and

(2)

for the purposes of section 7(b), the availability of credit from non-Federal sources on reasonable terms and conditions taking into consideration the prevailing rates and terms in the community in or near where the concern transacts business, or the homeowner resides, for similar purposes and periods of time.

; and

(2)

by striking section 18(b) (15 U.S.C. 647(b)) and inserting the following:

(b)

As used in this Act, the term agricultural enterprises means those businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries.

.

4.

Oversight fees

(a)

Fees for the operation of the Office of Credit Risk Management

Section 7(a)(23) of the Small Business Act (15 U.S.C. 636(a)(23)) is amended—

(1)

in subparagraph (A)—

(A)

by striking With respect to and inserting the following:

(i)

Reduction of Administration costs

With respect to

; and

(B)

by adding at the end the following:

(ii)

Office of Credit Risk Management

The Administration shall assess and collect a fee equal to 0.03 percent per year of the outstanding balance of the deferred participation share of each loan approved under this subsection, the proceeds of which shall be used solely to support the operations of the Office of Credit Risk Management.

; and

(2)

in subparagraph (B), by striking fee assessed and inserting fees assessed.

(b)

Secondary market sales

Section 5(g)(4)(A) of the Small Business Act (15 U.S.C. 634(g)(4)(A)) is amended by striking the first sentence and inserting The Administrator shall collect a fee for any loan guarantee sold into the secondary market under subsection (f) in an amount equal to 50 percent of the portion of the sale price that exceeds 108 percent of the outstanding principal amount of the portion of the loan guaranteed by the Administration..

5.

Reduction of risk

(a)

Lender concentration

Section 7(a)(1) of the Small Business Act (15 U.S.C. 636(a)(1)) is amended by adding at the end the following:

(D)

Portfolio concentrations

(i)

Concentration of loans made with no equity contribution

(I)

In general

Not later than December 31 of each year, the Administrator shall calculate, as of September 30 of the year in which the calculation is made and for each lender that issues loans under this section, the percentage of loans in the portfolio of the lender that were made without a contribution of equity by the borrower when the purpose of the loan was to establish a new small business concern, to effectuate a change of ownership of a small business concern, or to purchase real estate.

(II)

Approval

If, after making the calculation required under subclause (I), the Administrator determines that more than 15 percent of the loans of a lender are as described in that subclause, any loan application submitted to the lender that would provide financing without a contribution of equity by the borrower and for one of the purposes described in that subclause may not be approved under the authority delegated to a lender as a participant in the Preferred Lenders Program, as defined in paragraph (2)(C)(iii) and if applicable.

(III)

Exemptions

Subclause (II) shall not apply to any lender that originates loans under section 7(a), the aggregate amount of which equals less than 1 percent of the annual total program authorization, based upon gross loan approvals for the fiscal year preceding the year in which the calculation is made under subclause (I).

(ii)

Industry concentration

(I)

In general

Not later than December 31 of each year, the Administrator shall calculate, as of September 30 of the year in which the calculation is made, for each lender that issues loans under this section, and using the applicable 6-digit classification code under the North American Industry Classification System, industry concentrations for each lender.

(II)

Approval

If, after making the calculation required under subclause (I), the Administrator determines that more than 20 percent of the loans of a lender are concentrated in a single industry, any loan application submitted to the lender from a small business concern operating in that industry may not be approved under the authority delegated to the lender as a participant in the Preferred Lenders Program, as defined in paragraph (2)(C)(iii) and if applicable.

(III)

Exemptions

Subclause (II) shall not apply to any lender that originates loans under section 7(a), the aggregate amount of which equals less than 1 percent of the annual total program authorization, based upon gross loan approvals for the fiscal year preceding the year in which the calculation is made under subclause (I).

(E)

Financing in excess of 100 percent

The Administrator may not approve a loan under subparagraph (D) if the loan provides financing in an amount that is more than 100 percent of the project costs.

.

(b)

Regulations

(1)

In general

The Administrator of the Small Business Administration shall—

(A)

not later than 180 days after the date of enactment of this Act, issue proposed regulations to implement this section and the amendments made by this section; and

(B)

not later than 1 year after the date of enactment of this Act, publish final regulations implementing this section and the amendments made by this section.

(2)

Content

The regulations described in subparagraphs (A) and (B) of paragraph (1) shall include factors, such as the balance sheet equity of a borrower, that a lender may consider when determining whether and how much equity will be required to ensure that a loan is creditworthy.

6.

Issues with respect to loans to small business concerns

Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) is amended by adding at the end the following:

(35)

Accuracy requirement

Any lender that is required to report information to the Administration with respect to a loan guaranteed under this subsection on Form 1502, or any successor form that contains the information in Form 1502 as in effect on January 1, 2016, and has been approved by the Director of the Office of Management and Budget under section 3507 of title 44, United States Code, shall ensure that the information on such form is complete and accurate.

(36)

Use of outside agents

(A)

In general

For a loan made under this subsection, a lender may use an outside agent or lender service provider to assist in identifying potential applicants and with processing, disbursing, servicing, and liquidating the loan, except that the lender, and not any agent, shall be wholly responsible for—

(i)

the accuracy of all information submitted with respect to the loan;

(ii)

all decisions with respect to the eligibility and creditworthiness of the loan applicant; and

(iii)

any actions taken with respect to the loan.

(B)

Enforcement authority of the Administration

Nothing in subparagraph (A) shall be construed to limit the authority of the Administrator that was in effect on the day before the date of enactment of this paragraph to bring an enforcement action against an outside agent or a lender service provider.

(37)

Retaining ownership

With respect to a loan made under this subsection, a lender may not sell or pledge an amount that is more than the greater of—

(A)

85 percent of the loan; or

(B)

the percentage of the loan that is guaranteed by the Administration.

.

7.

Regulations

In addition to the regulations required under section 5(b), the Administrator of the Small Business Administration shall—

(1)

not later than 180 days after the date of enactment of this Act, issue proposed regulations that—

(A)

implement all other provisions of this Act and the amendments made by this Act; and

(B)

provide definitions and requirements with respect to the concepts of—

(i)

equity injections; and

(ii)

loans that are 100 percent financed; and

(2)

not later than 1 year after the date of enactment of this Act, publish final versions of the regulations described in paragraph (1).

1.

Short title

This Act may be cited as the Small Business Lending Oversight Act of 2016.

2.

Office of Credit Risk Management; stress analyses

The Small Business Act (15 U.S.C. 631 et seq.) is amended—

(1)

by redesignating section 47 as section 49; and

(2)

by inserting after section 46 the following:

47.

Office of Credit Risk Management

(a)

In general

There is within the Administration the Office of Credit Risk Management (in this section referred to as the Office).

(b)

Director

The Office is headed by the Director of the Office of Credit Risk Management (in this section referred to as the Director).

(c)

Supervision

(1)

Final reports

The Director shall be responsible for any final report relating to a review of any entity authorized to issue a loan or loan guarantee under section 7 or under title V of the Small Business Investment Act of 1958 (15 U.S.C. 695 et seq.).

(2)

Reviews

An employee of the Office shall be present for and supervise any review conducted on the premises of a lender.

(d)

Enforcement authority of the Director

(1)

In general

The Director shall impose not less than 1 penalty under paragraph (2) on any lender that makes loans under section 7(a) if the lender knowingly and repeatedly—

(A)

fails to properly determine and document that a loan is eligible for financing under this Act or regulations promulgated under this Act, including a failure to document that a loan is eligible for financing under section 7(a) because the applicant is unable to obtain credit elsewhere;

(B)

sells the guaranteed portion of a loan under section 5(f) when the proceeds of the loan have not been fully disbursed in accordance with program requirements;

(C)

imposes on an applicant for a loan under section 7(a) a fee that the Administration has not specifically authorized; or

(D)

re-amortizes a loan solely to make the loan appear current.

(2)

Penalties

In addition to other actions, including enforcement actions, authorized under regulations promulgated by the Administrator, the Director may impose a penalty on a lender that knowingly and repeatedly violates the requirements of this Act or the regulations promulgated under this Act, including by committing violations described in paragraph (1), which—

(A)

shall be based on—

(i)

the severity of the violations; and

(ii)

the frequency with which the lender fails to comply with the requirements; and

(B)

may include—

(i)

issuing the lender a warning and an order to comply;

(ii)

if the lender is a participant in the Preferred Lenders Program (in this subsection referred to as the program), as defined in section 7(a)(2)(C)(iii), suspending the lender from participating in the program for a period of not less than 90 days and not more than 1 year, which shall include the right of the lender to appeal the decision of the Director to the Office of Hearings and Appeals;

(iii)

prohibiting the lender from issuing loans under section 7(a), which shall include the right of the lender to appeal the decision of the Director to the Office of Hearings and Appeals;

(iv)

assessing a civil monetary penalty against the lender in an amount that is not less than $5,000 and not greater than $250,000, which shall include the right of the lender to appeal the decision of the Director to the Office of Hearings and Appeals;

(v)

prohibiting a lender from selling in the secondary market, under section 5(f), the guaranteed portion of any loan made by the lender; and

(vi)

any other penalty that the Director determines to be appropriate after considering the severity and the frequency of the violations of the lender.

(3)

Regulations

With respect to the penalties described in clauses (ii), (iii), and (iv) of paragraph (2)(B), the Administrator shall—

(A)

not later than 180 days after the date of enactment of this section, propose amendments to any regulations in effect on the date of enactment of this section; and

(B)

not later than 1 year after the date of enactment of this section, publish a final regulation.

(4)

Servicing and liquidation responsibilities

During any period in which a lender is suspended from participating in the program, or if a lender is prohibited from issuing loans under section 7(a), the lender shall remain obligated to maintain all servicing and liquidation activities delegated to the lender by the Administrator unless the Director specifies otherwise.

(5)

Use of penalties

Any monetary penalties collected under paragraph (2) shall be used solely to lower the subsidy rate of loans made under section 7(a).

(6)

Applicability to lenders supervised by the Administration

The authority of the Director under this section shall be exercised with respect to a small business lending company or a non-Federally regulated lender without regard to the requirements of section 23.

(e)

Report to Congress

Not later than December 31, 2017, and each year thereafter, the Office shall submit to Congress a report detailing the subject matter and frequency of actions by lenders that led the Office to impose penalties under subsection (d)(2) during the fiscal year preceding the submission of the report.

48.

Portfolio risk analyses

(a)

In general

The Administrator shall annually conduct a risk analysis of the portfolio of the Administration with respect to all loans guaranteed under section 7(a).

(b)

Report

(1)

In general

Beginning on April 1, 2018, and annually thereafter, the Director of the Office of Credit Risk Management shall submit to Congress a report containing the results of each portfolio risk analysis conducted under subsection (a) during the fiscal year preceding the submission of the report.

(2)

Contents

A report submitted under paragraph (1) shall include—

(A)

an analysis of overall program risk;

(B)

an analysis of program risk—

(i)

by industry concentration; and

(ii)

by geography;

(C)

without identifying individual lenders by name, a consolidated analysis of the risk created by the individual lenders responsible for not less than 1 percent of the gross loan approvals for the year covered by the report; and

(D)

a summary of the steps taken by the Administration to mitigate the risks identified in subparagraphs (A), (B), and (C).

.

3.

Credit elsewhere

The Small Business Act (15 U.S.C. 631 et seq.) is amended—

(1)

by striking section 3(h) (15 U.S.C. 632(h)) and inserting the following:

(h)

The term credit elsewhere means—

(1)

for the purposes of this Act, except for section 7(b), the availability of credit to the individual loan applicant on reasonable terms and conditions from non-Federal, non-State, or non-local government sources, taking into consideration factors associated with conventional lending practices, including but not limited to—

(A)

the business industry in which the loan applicant operates;

(B)

whether the loan applicant is an enterprise that has been in operation for a period of less than 2 years;

(C)

the adequacy of the collateral available to secure the requested loan; and

(D)

the loan term necessary to reasonably assure the ability of the loan applicant to repay the debt from the actual or projected cash flow of the business; and

(2)

for the purposes of section 7(b), the availability of credit from non-Federal sources on reasonable terms and conditions taking into consideration the prevailing rates and terms in the community in or near where the concern transacts business, or the homeowner resides, for similar purposes and periods of time.

; and

(2)

by striking section 18(b) (15 U.S.C. 647(b)) and inserting the following:

(b)

As used in this Act, the term agricultural enterprises means those businesses engaged in the production of food and fiber, ranching, and raising of livestock, aquaculture, and all other farming and agricultural related industries.

.

4.

Oversight and other fees

(a)

Fees for the operation of the Office of Credit Risk Management

Section 7(a)(23) of the Small Business Act (15 U.S.C. 636(a)(23)) is amended—

(1)

in subparagraph (A)—

(A)

by striking With respect to and inserting the following:

(i)

Reduction of Administration costs

With respect to

; and

(B)

by adding at the end the following:

(ii)

Office of Credit Risk Management

Beginning on October 1, 2016 or the date that is 30 days after the date of enactment of this clause, whichever is later, the Administration shall assess, collect, and retain a fee in an amount that is not greater than 0.03 percent per year of the outstanding balance of the deferred participation share of each loan approved under this subsection, the proceeds of which shall be used solely to support the operations of the Office of Credit Risk Management.

; and

(2)

in subparagraph (B), by striking fee assessed and inserting fees assessed.

(b)

Secondary market sales

(1)

In general

Section 5(g)(4)(A) of the Small Business Act (15 U.S.C. 634(g)(4)(A)) is amended by striking the first sentence and inserting The Administrator shall collect a fee for any loan guarantee sold into the secondary market under subsection (f) in an amount equal to 50 percent of the portion of the sale price that exceeds 108 percent of the outstanding principal amount of the portion of the loan guaranteed by the Administration..

(2)

Effective date

The amendment made by paragraph (1) shall take effect on October 1, 2017.

5.

Reduction of risk

(a)

Lender concentration

Section 7(a)(1) of the Small Business Act (15 U.S.C. 636(a)(1)) is amended by adding at the end the following:

(D)

Portfolio concentrations

(i)

Concentration of loans made with no equity contribution

(I)

In general

Except as provided in clause (iii), not later than December 31, 2017, and each year thereafter, the Administrator shall calculate, as of September 30 of the year in which the calculation is made and for each lender that makes loans under this section under the authority delegated to the lender as a participant in the Preferred Lenders Program (in this subparagraph referred to as the program), as defined in paragraph (2)(C)(iii), the percentage of loans in the portfolio of the lender that were made without a contribution of equity by the borrower when the purpose of the loan was to establish a new small business concern or to effectuate a change of ownership of a small business concern.

(II)

Approval

If, after making the calculation required under subclause (I), the Administrator determines that more than 15 percent of the loans of a lender are as described in that subclause, any loan application submitted to the lender that would provide financing without a contribution of equity by the borrower and for one of the purposes described in that subclause may not be approved under the authority delegated to a lender as a participant in the program.

(ii)

Industry concentration

(I)

In general

Except as provided in clause (iii), not later than December 31, 2017, and each year thereafter, the Administrator shall calculate, as of September 30 of the year in which the calculation is made, for each lender that makes loans under this section under the authority delegated to the lender as a participant in the program, and using the applicable 6-digit classification code under the North American Industry Classification System, industry concentrations for each lender.

(II)

Approval

If, after making the calculation required under subclause (I), the Administrator determines that more than 20 percent of the loans of a lender are concentrated in a single industry, any loan application submitted to the lender from a small business concern operating in that industry may not be approved under the authority delegated to the lender as a participant in the program.

(iii)

Exemptions

Clauses (i) and (ii) shall not apply to any lender that originates loans under section 7(a) if the aggregate amount of the originations of the lender made during the fiscal year preceding the year in which the calculation would otherwise be made under clauses (i)(I) and (ii)(I) equals less than 1 percent of the annual total program authorization for that fiscal year.

(E)

Financing in excess of 100 percent

The Administrator may not approve a loan under subparagraph (D) if the loan provides financing in an amount that is more than 100 percent of the project costs.

.

(b)

Regulations

(1)

In general

The Administrator of the Small Business Administration shall—

(A)

not later than 180 days after the date of enactment of this Act, issue proposed regulations to implement this section and the amendments made by this section; and

(B)

not later than 1 year after the date of enactment of this Act, publish final regulations implementing this section and the amendments made by this section.

(2)

Content

The regulations described in subparagraphs (A) and (B) of paragraph (1) shall provide definitions and requirements with respect to the concepts of equity contributions and loans that are 100 percent financed.

6.

Issues with respect to loans to small business concerns

Section 7(a) of the Small Business Act (15 U.S.C. 636(a)) is amended by adding at the end the following:

(35)

Use of outside agents

(A)

In general

For a loan made under this subsection, a lender may use an outside agent or lender service provider to assist in identifying potential applicants and with processing, disbursing, servicing, and liquidating the loan, provided that the lender, and not any agent, shall be wholly responsible for—

(i)

the accuracy of all information submitted with respect to the loan;

(ii)

all decisions with respect to the eligibility and creditworthiness of the loan applicant; and

(iii)

any actions taken with respect to the loan.

(B)

Enforcement authority of the Administration

Nothing in subparagraph (A) shall be construed to limit the authority of the Administrator to bring an action against an outside agent or a lender service provider.

(36)

Retaining ownership

With respect to a loan made under this subsection beginning on October 1 of the first fiscal year after the date of enactment of this paragraph, a lender may not, unless the lender has obtained the approval of the Administrator, sell an amount that is more than the greater of—

(A)

85 percent of the loan; or

(B)

the percentage of the loan that is guaranteed by the Administration.

.

7.

Regulations

In addition to the regulations required under section 5(b), the Administrator of the Small Business Administration shall—

(1)

not later than 180 days after the date of enactment of this Act, issue proposed regulations that the Administrator deems necessary to implement all other provisions of this Act and the amendments made by this Act; and

(2)

not later than 1 year after the date of enactment of this Act, publish final versions of the regulations described in paragraph (1).

June 9, 2016

Reported with an amendment