Madam President, I come to speak on S. 415, the ``Small Business Disaster Reform Act of 2013.'' As Chair of the Senate Committee on Small Business and Entrepreneurship, as well as a senator from a…
Madam President, I come to speak on S. 415, the ``Small Business Disaster Reform Act of 2013.'' As Chair of the Senate Committee on Small Business and Entrepreneurship, as well as a senator from a state hard hit by disasters, I am proud that yesterday our committee reported out S. 415 favorably on a bipartisan basis. In particular, Section 2 of S. 415 modifies the SBA requirement that borrowers must use their personal home as collateral for business disaster loans less than $200,000. This is a very important provision for businesses impacted by natural and manmade disasters. For that reason, I want to provide additional information on the need to enact this provision.
In terms of the legislative history of Section 2, a similar provision passed the House of Representatives twice in 2009: on October 29, 2009 by a vote of 389-32 as Section 801 of H.R. 3854 and again by voice vote on November 6, 2009 as Section 2 of H.R. 3743. The same provision that is in S. 415 passed the Senate 62-32 on December 28, 2012 as Section 501 of H.R. 1, the Hurricane Sandy Supplemental. However, it was not included in H.R. 152, the House-passed ``Disaster Relief Appropriations Act'' that subsequently was enacted into law. Despite the setback earlier this year, I remind my colleagues that this provision has a history of bipartisan Congressional support and has previously passed both chambers of Congress.
This Congress, we also have significant bipartisan support. S. 415 has six cosponsors: Senators Thad Cochran, Roger Wicker, Heidi Heitkamp, Kirsten Gillibrand, Mark Pryor, and Ben Cardin. The House companion to S. 415, H.R. 1974, was introduced by Representative Patrick Murphy last month and has 11 cosponsors: Reps. Mick Mulvaney, Judy Chu, Mike Coffman, Ted Deutch, Peter King, Alan Nunnelee, Donald M. Payne, Jr., Cedric Richmond, Tom Cole, Trey Radel, and Frederica Wilson.
While I understand the need to secure the loans and minimize risk to the taxpayers; SBA has at its disposal multiple ways to secure these loans. If business owners have literally lost everything, requiring a $400,000 home as collateral for a $150,000 loan is maddening especially when other repayment options are available. One can understand that requirement for loans of $750,000 or $2 million. For the smaller disaster loans, however, it is a non-starter for many businesses we have heard from. The bill requires the SBA to seek other business assets--such as commercial real estate, equipment, or inventory--before requiring a primary residence be used as collateral.
I want to reiterate that Section 2 is very clear that these business assets should be of equal or greater value than the amount of the loan. Also, to ensure that this is a targeted improvement, the bill also includes additional language that this bill in no way requires SBA to reduce the amount or quality of collateral it seeks on these types of loans. I want to especially thank my former Ranking Member Olympia Snowe for working with me to improve upon previous legislation on this particular issue. The provision that I am re-introducing, as part of this disaster legislation, is a direct result of discussions with both her and other stakeholders late last year. I believe that this bill is better because of improvements that came out these productive discussions.
Furthermore, SBA has repeatedly said publicly and in testimony before my committee that it will not decline a borrower for a lack of collateral. According to a July 14, 2010 correspondence between SBA and my office, the agency notes that ``SBA is an aggressive lender and its credit thresholds are well below traditional bank standards . . . SBA does not decline loans for insufficient collateral.'' SBA's current practice of making loans is based upon an individual/business demonstrating the ability to repay and income. The agency declines borrowers for an inability to repay the loan. In regards to collateral, SBA follows traditional lending practices that seek the ``best available collateral.'' Collateral is required for physical loans over $14,000 and Economic Injury Disaster Loans, EIDL, loans over $5,000. SBA takes real estate as collateral when it is available, but as I stated, the agency will not decline a loan for lack of collateral. Instead it requires borrowers to pledge what is available. However, in practice, SBA is requiring borrowers to put up a personal residence worth $300,000 or $400,000 for a business loan of $200,000 or less when there are other assets available for SBA.
This provision does not substantively change SBA's current lending practices and it will not have a significant cost. I believe that this legislation would not trigger direct spending nor would it have a significant impact on the subsidy rate for SBA disaster loans. Currently for every $1 loaned out, it costs approximately 10 cents on the dollar. Most importantly, this bill will greatly improve the SBA disaster loan programs for businesses ahead of future disasters. If a business comes to the SBA for a loan of less than $200,000 to make immediate repairs or secure working capital, they can be assured that they will not have to put up their personal home if SBA determines that the business has other assets to go towards the loan. However, if businesses seek larger loans than $200,000 or if their business assets are not suitable collateral, then the current requirements will still apply. This ensures that very small businesses and businesses seeking smaller amounts of recovery loans are able to secure these loans without significant burdens on their personal property. For the business owners we have spoken to, this provides some badly needed clarity to one of the Federal government's primary tools for responding to disasters.
To be clear though, while I do not want to see SBA tie up too much of a business' collateral, I also believe that if a business is willing and able to put up business assets towards its disaster loan, SBA should consider that first before attempting to bring in personal residences. It is unreasonable for SBA to ask business owners operating in very different business environments post-disaster to jeopardize not just their business but also their home. Loans of $200,000 or less are also the loans most likely to be repaid by the business so personal homes should be collateral of last resort in instances where a business can demonstrate the ability to repay the loan and that it has other assets.
As I have mentioned, there are also safeguards in the provision that ensures that this provision will not reduce the quality of collateral required by SBA for these disaster loans nor will it reduce the quality of the SBA's general collateral requirements. These changes will assist the SBA in cutting down on waste, fraud and abuse of these legislative reforms. In order to further assist the SBA, I believe it is important to clarify what types of business assets we understand they should review. For example, I understand that SBA's current lending practices consider the following business assets as suitable collateral: commercial real estate; machinery and equipment; business inventory; and furniture and fixtures.
At our markup of S. 415 yesterday, there were concerns raised by some Minority members of our committee regarding the impact of this provision. One argument was that SBA has not seized many personal homes in the last five years. However, the SBA has been more aggressive since 2011 on foreclosures--sending out 113 foreclosure letters since then. This year alone they have seized 4 homes in Minnesota, Virginia, Illinois, and Texas. Furthermore, borrowers my office has spoken to are less concerned about a personal home being seized than they are about liens tying up personal property and the general roadblock this requirement
sets up in applying for SBA disaster assistance. This requirement is discouraging successful businesses from applying to SBA and causing current applicants to withdraw their applications. As of May 2013, 35 percent of Sandy business applications were withdrawn, most citing burdensome lending requirements like this as the main factor.
Also, it is my understanding that another concern that has been cited was that business equipment depreciates over time so this is a riskier asset for the Federal government than a personal home. This argument, however, is false. As it relates to equipment, the SBA factors in depreciation when considering collateral from potential borrowers. They value equipment or inventory significantly less than real estate, due to depreciation. If equipment is not deemed a suitable asset to collateralize the loan, SBA will not take it. Also, Section 2 still allows SBA to determine the appropriate business asset if not the home. It is not specific to equipment. Other assets the SBA could consider include commercial real estate; machinery and equipment; business inventory; and furniture and fixtures.
Yet another concern that was raised was that, in utilizing business assets instead of personal homes, this makes it tougher for SBA to recover funds in the event of a default. As I previously mentioned, the SBA factors in depreciation and potential recovery in the event of a default when considering collateral from potential borrowers. SBA will not make a loan if it deems the business assets being offered will be difficult to recover or that it does not have sufficient value to collateralize the loan. Also, again the bill does not prohibit homes outright nor require business assets as collateral. It strikes a delicate balance to instead require the SBA to review if suitable business assets are available before using a personal home. If business assets are sufficient, SBA can use them. If business assets are not sufficient and the borrower is unwilling to put up their home, the SBA will not make the loan.
Lastly, it was also put forward that that if Congress allows business assets to be used as collateral instead of homes, this increases the likelihood of defaults. Again, this argument is false. In an April 1, 2013 letter to my office, the SBA Inspector General confirmed that there are no findings relative to business assets increasing defaults. The Inspector General wrote that it has ``. . . conducted numerous reviews of key aspects of the SBA Disaster Assistance Program; however, there are no specific findings relative to the `type' of collateral secured relative to disaster assistance loans.'' Furthermore, the Inspector General also confirmed that the SBA is still required to secure the loans and Section 2 does not change that. The Inspector General wrote that ``. . . Section 2 does not remove SBA's policy for securing loans with collateral equivalent to 100 percent equity of the loan. Section 2 also explicitly provides that nothing in the Section can be construed to require the Administrator to reduce the amount of collateral required to secure the loan.'' Again, if the business does not have sufficient business assets or the SBA deems them risky, Section 2 does not change their ability to not make the loan.
In closing, I would like to note that Section 2 addresses a key issue that is serving as a roadblock to business owners interested in applying for smaller SBA disaster loans. After the multiple disasters that hit the Gulf Coast, my staff has consistently heard from business owners, discouraged from applying for SBA disaster loans. When we have inquired further on the main reasons behind this hesitation, the top concern related to SBA requiring business owners to put up their personal home as collateral for smaller SBA disaster loans for their business. So let me provide you with two examples of businesses impacted by this requirement.
The first example is LiemCo, a Long Island, NY specialty beverage repair service with 15 employees. Think of ``Starbucks"-type espresso machines in restaurants and coffee shops--LiemCo fixes them. The company is family-owned and the son of the owners, Dominic Chieco runs it. His parents are still partial owners and he pays them a quarterly draw which serves as their retirement income. Ownership is being gradually transferred to Dominic.
Prior to Hurricane Sandy, they did everything right. Dominic moved his vehicles to higher ground; loaded key inventory in the trucks-- inventory with high value or long delivery times; raised items to 6 feet above the floor; purchased extra gas; and withdrew $5,000 in cash in case electricity went out at the banks. According to their local Small Business Development Center, SBDC, they are well run and these preparations show that.
Despite that, Hurricane Sandy flooded his building about 4 to 5 feet. The water went down after a couple of days but power was out for 3 weeks. The day after it came back on, a Nor'easter snow storm knocked out power for another week and a half. This caused physical property damages of more than $250,000. Dominic kept employees on payroll--full time--throughout recovery. He could not give them the customary Christmas bonus but once they re-opened after Christmas, he gave 1 employee their bonus each week.
Dominic's biggest concern was the collateral requirement from SBA. His building is valued at $1.2 million and only carried a $150,000 mortgage. The parents are still partial owners, so notwithstanding the value of the building, SBA still wanted a lien against the parents' home for the guarantee for a $200,000 loan. This bothered them tremendously as it was their retirement security. Much of this would have been eliminated if the collateral position on the parents' home had not been required when sufficient collateral existed with the business.
Another business impacted by this burdensome requirement is Water Street Bistro in Madisonville, LA. Water Street Bistro is a small family-owned restaurant overlooking the sail boats on the Tchefuncte River just across the street. Tony Monroe and his wife Constance have owned their business for 9 years and have about 9 employees. Monroe started his culinary career at Cafe Sbisa in New Orleans and then went to Colorado before returning to the place he was born and raised.
Fortunately, after Hurricane Katrina, the Monroe's escaped damage to their restaurant and did not need to apply for SBA assistance. However, this was not the case following Hurricane Isaac. Hurricane Isaac brought 6 to 10 inches of water into their restaurant which caused them to close their business for 3 weeks. The Monroe's had to start all over and buy all new food and replace equipment, such as refrigerators, which cost around $30,000. In addition to the physical damage to their property, the Monroe's could not pay their staff during this time.
Mr. and Mrs. Monroe's biggest concern in applying to the SBA was the collateral requirement. SBA required them to pledge their family home for a loan of around $40,000 to $45,000. Once they found out the requirement for pledging primary residence was firm, the Monroe's decided not to pursue the loan. The Monroe's are in their 60's and could not imagine using their home--valued around $200,000 to $250,000--as collateral. They ended up doing all of the repairs, for the restaurant, on their own because they could not afford to pay for these services.
I thank the Chair and I ask unanimous consent that a copy of the April 1, 2013, letter from the SBA Inspector General and other letters of support for S. 415 be printed in the Record.
