B-149685, SEPTEMBER 4, 1962, 42 COMP. GEN. 146

B-149685, SEPTEMBER 4, 1962, 42 COMP. GEN. 146

LOANS - GOVERNMENT INSURED - AUTHORITY ALTHOUGH NOT SPECIFICALLY AUTHORIZED, THE "STANDBY" PROGRAM INITIATED BY THE SMALL BUSINESS ADMINISTRATION TO GUARANTEE LOANS BY PRIVATE FINANCING INSTITUTIONS TO SMALL BUSINESS INVESTMENT COMPANIES IN ORDER TO OBTAIN THEIR PARTICIPATION TO EFFECTUATE THE PURPOSE OF SECTION 303 (B) OF THE SMALL BUSINESS INVESTMENT ACT, AS AMENDED (15 U.S.C. 683), WHICH AUTHORIZES THE SMALL BUSINESS ADMINISTRATION TO LEND FUNDS TO SMALL BUSINESS INVESTMENT COMPANIES TO THE EXTENT FUNDS ARE UNAVAILABLE FROM PRIVATE SOURCES, IS NOT INCONSISTENT WITH THE INTENT OF THE SMALL BUSINESS INVESTMENT ACT, THE CONGRESS WITH KNOWLEDGE OF THE STANDBY PROGRAM WHEN SECTION 303 (B) WAS AMENDED HAVING NEITHER DEEMED AN EXPLICIT PROVISION OF LAW REQUIRED TO AUTHORIZE THE PROGRAM, NOR RECORDED DISAPPROVAL OF THE PROGRAM IN THE LEGISLATIVE HISTORY.

TO THE ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION, SEPTEMBER 4, 1962:

BY LETTER OF AUGUST 10, 1962, YOU REQUESTED OUR OPINION CONCERNING THE LEGAL PROPRIETY OF THE ,STANDBY" PROGRAM INITIATED BY THE SMALL BUSINESS ADMINISTRATION IN CONNECTION WITH CARRYING OUT THE FUNCTIONS AND RESPONSIBILITIES IMPOSED UNDER SECTION 303 OF THE SMALL BUSINESS INVESTMENT ACT OF 1958, AS AMENDED, 15 U.S.C. 683. SECTION 303 (B) AS AMENDED BY THE SMALL BUSINESS INVESTMENT ACT AMENDMENTS OF 1961, 75 STAT. 752, PROVIDES THAT:

683. BORROWING POWER; PURCHASE OF OBLIGATIONS BY ADMINISTRATION.

(B) TO ENCOURAGE THE FORMATION AND GROWTH OF SMALL BUSINESS INVESTMENT COMPANIES, THE ADMINISTRATION IS AUTHORIZED (BUT ONLY TO THE EXTENT THAT THE NECESSARY FUNDS ARE NOT AVAILABLE TO THE COMPANY INVOLVED FROM PRIVATE SOURCES ON REASONABLE TERMS) TO LEND FUNDS TO SUCH COMPANIES THROUGH THE PURCHASE OF THEIR OBLIGATIONS WHICH SHALL BEAR INTEREST AT SUCH RATE, AND CONTAIN SUCH OTHER TERMS, AS THE ADMINISTRATION MAY FIX. THE TOTAL AMOUNT OF OBLIGATIONS OF ANY ONE COMPANY WHICH MAY BE PURCHASED AND OUTSTANDING AT ANY ONE TIME BY THE ADMINISTRATION UNDER THIS SUBSECTION (INCLUDING COMMITMENTS TO PURCHASE SUCH OBLIGATION) SHALL NOT EXCEED 50 PERCENT OF THE PAID-IN CAPITAL AND SURPLUS OF SUCH COMPANY OR $4,000,000, WHICHEVER IS LESS. ALL LOANS MADE BY THE ADMINISTRATION UNDER THIS SUBSECTION SHALL BE OF SUCH SOUND VALUE AS REASONABLY TO ASSURE REPAYMENT. (1961 AMENDMENTS ITALICIZED.)

OPERATION OF THE STANDBY PROGRAM IS, QUOTING FROM YOUR LETTER, AS FOLLOWS:

WHEN A LICENSEE APPLIES FOR A DIRECT LOAN FROM SBA UNDER SECTION 303 (B) OF THE SBIA, SBA WILL NOT ISSUE ITS COMMITMENT TO PURCHASE THE LICENSEE'S OBLIGATIONS UNLESS THE LATTER CERTIFIES AS TO ITS INABILITY TO OBTAIN THE NEEDED FUNDS FROM PRIVATE SOURCES ALONE, AS WELL AS ITS INABILITY TO OBTAIN SUCH FUNDS FROM PRIVATE SOURCES UNDER THE STANDBY PROGRAM.

IF A PRIVATE FINANCIAL INSTITUTION IS WILLING TO PROVIDE THE LICENSEE WITH THE LOAN FUNDS UNDER AN SBA STANDBY ARRANGEMENT, SBA THEREUPON PROCESSES THE LOAN APPLICATION OF THE LICENSEE, INCLUDING THE OBTAINING OF EXECUTED LOAN DOCUMENTS AND RELATED INSTRUMENTS, IN THE SAME MANNER AND UNDER SUBSTANTIALLY THE SAME TERMS AS WHEN SBA ISSUES A LOAN COMMITMENT TO A LICENSEE AND PURCHASES THE OBLIGATION OF THE LICENSEE DIRECTLY. HOWEVER, WHERE THE STANDBY ARRANGEMENT IS INVOLVED, THE SBA COMMITMENT TO THE LICENSEE INDICATES THAT EITHER SBA OR THE PRIVATE SOURCE WILL DISBURSE THE LOAN FUNDS AND WILL HOLD THE NOTE.

SIMULTANEOUSLY WITH THE ISSUANCE BY SBA OF A LOAN COMMITMENT TO A LICENSEE UNDER THE STANDBY PROGRAM, SBA AND THE PRIVATE LENDING SOURCE (ORDINARILY A BANK) EXECUTE AN AGREEMENT UNDER WHICH:

(A) SBA ASSIGNS TO BANK THE EXECUTED NOTE OF THE LICENSEE AND BANK ASSUMES THE OBLIGATION UNDER THE SBA LOAN COMMITMENT TO DISBURSE FUNDS TO THE LICENSEE UNDER THE NOTE, BUT ONLY WHEN SO DIRECTED BY SBA.

(B) BANK MAY REASSIGN THE NOTE TO SBA AT ANY TIME AND SBA WILL THEREUPON PAY BANK THE OUTSTANDING PRINCIPAL UNDER THE NOTE. RECOVERIES OF UNPAID INTEREST BY SBA ARE PRORATED BETWEEN SBA AND BANK.

(C) SBA MAY AT ANY TIME REQUIRE BANK TO REASSIGN THE NOTE UPON PAYMENT TO BANK BY SBA OF THE OUTSTANDING PRINCIPAL THEREUNDER. IF AT THE TIME SBA EVER EXERCISES ITS RIGHT OF REASSIGNMENT, THERE IS NO DEFAULT UNDER THE NOTE IN PRINCIPAL OR INTEREST, SBA WILL PAY BANK, IN ADDITION TO OUTSTANDING PRINCIPAL, ANY ACCRUED INTEREST UNDER THE NOTE.

(D) THE COMMENCEMENT OF BANKRUPTCY OR SIMILAR PROCEEDINGS INVOLVING THE LICENSEE-BORROWER EFFECTUATES AN AUTOMATIC REASSIGNMENT OF THE NOTE FROM BANK TO SBA AND THE OBLIGATION OF SBA TO PAY BANK OUTSTANDING PRINCIPAL.

(E) BANK PAYS SBA A SERVICE AND COMMITMENT CHARGE OF 1 PERCENT PER ANNUM UPON OUTSTANDING PRINCIPAL UNDER THE NOTE WHILE HELD BY BANK.

YOU POINT OUT THAT FROM INCEPTION OF OPERATIONS UNDER THE SMALL BUSINESS INVESTMENT ACT UNTIL RECENTLY, THE SMALL BUSINESS ADMINISTRATION WAS UNABLE TO INDUCE BANKS, INSURANCE COMPANIES, AND OTHER FINANCIAL INSTITUTIONS TO PROVIDE LOAN FUNDS TO SMALL BUSINESS INVESTMENT COMPANIES LICENSED UNDER THE ACT AND THAT THE STANDBY PROGRAM WAS INSTITUTED AS A MEANS OF OBTAINING PARTICIPATION BY SUCH INSTITUTIONS IN THE INVESTMENT PROGRAM. THE PROGRAM WAS PUT INTO OPERATION IN OCTOBER 1961 ON A TEST BASIS AND PROVED SUCCESSFUL TO THE EXTENT OF 23 PARTICIPATING BANKS. CERTAIN ADDITIONAL BANKS DESIRE TO PARTICIPATE IN THE PROGRAM BUT HAVE REQUESTED ASSURANCES THAT THIS OFFICE WILL NOT INTERPOSE OBJECTION TO SMALL BUSINESS ADMINISTRATION DISBURSEMENTS WHICH MAY BE MADE THEREUNDER.

WHERE THE CONGRESS, IN CONNECTION WITH SMALL BUSINESS ADMINISTRATION ACTIVITIES, HAS INTENDED TO PROVIDE AUTHORITY FOR LOANS BY THE ADMINISTRATION IN PARTICIPATION OR DEFERRED PARTICIPATION WITH PRIVATE LENDING INSTITUTIONS, IT HAS DONE SO SPECIFICALLY. SEE SECTIONS 7 (A) AND (B) COVERING LOANS TO SMALL BUSINESS CONCERNS AND DISASTER LOANS UNDER THE SMALL BUSINESS ACT, AS AMENDED, 15 U.S.C. 636/A) AND (B); AND SECTION 502, COVERING LOANS TO STATE AND LOCAL DEVELOPMENT COMPANIES UNDER THE SMALL BUSINESS INVESTMENT ACT, AS AMENDED, 15 U.S.C. 696, FOR PLANT CONSTRUCTION, CONVERSION OR EXPANSION. EXCEPT FOR A GENERAL STATEMENT OF POLICY CONTAINED IN SECTION 102 OF THE INVESTMENT ACT, 15 U.S.C. 661, THAT THE SMALL BUSINESS INVESTMENT PROGRAM ,SHALL BE CARRIED OUT IN SUCH MANNER AS TO INSURE THE MAXIMUM PARTICIPATION OF PRIVATE FINANCING SOURCES," THERE IS NO INDICATION WHATEVER IN THE BASIC ACT OR ITS AMENDMENTS THAT CONGRESS INTENDED TO AUTHORIZE SUCH DEFERRED PARTICIPATION WITH PRIVATE LENDING INSTITUTIONS WITH RESPECT TO SECTION 303 (B) LOANS AS IS PROVIDED FOR UNDER THE STANDBY PROGRAM. MOREOVER, THE SPECIFIC AUTHORITY FOR PARTICIPATION LOANS GRANTED UNDER THE SMALL BUSINESS INVESTMENT ACT AS WELL AS UNDER THE SMALL BUSINESS ACT LIMITS THE PERMISSIBLE AMOUNT OF DEFERRED PARTICIPATION TO 90 PERCENT OF THE LOAN BALANCE OUTSTANDING AT TIME OF DISBURSEMENT.

ORDINARILY IT WOULD BE DIFFICULT TO RATIONALIZE THE PROPOSITION THAT THE GENERAL STATEMENT OF POLICY REFERRED TO MAY BE RELIED UPON AS AUTHORITY FOR MAKING 100 PERCENT DEFERRED PARTICIPATION LOANS WHEN SAME ACT INVOLVED SPECIFICALLY ENUMERATES A LIMITED CATEGORY OF LOANS WHICH MAY BE MADE ON A PARTICIPATION BASIS AND LIMITS SUCH PARTICIPATION ON A DEFERRED BASIS TO 90 PERCENT.

HOWEVER, THE LEGISLATIVE HISTORY OF THE 1961 AMENDMENTS TO SECTION 303 (B) CLEARLY SHOWS--- WHATEVER THE INTENTION OF CONGRESS MAY HAVE BEEN IN ENACTING THE SMALL BUSINESS INVESTMENT ACT IN 1958 SO FAR AS CONCERNS AUTHORITY TO MAKE SECTION 303 (B) LOANS UNDER THE STANDBY PROCEDURE--- THAT IT WAS THE INTENTION OF CONGRESS IN ENACTING THE 1961 AMENDMENTS FOR THE STANDBY PROGRAM TO BE CONTINUED. THE PROGRAM WAS DESCRIBED TO SUBCOMMITTEE NO. 2 OF THE COMMITTEE ON BANKING AND CURRENCY, HOUSE OF REPRESENTATIVES, IN HEARINGS ON H.R. 6672 COVERING THE SMALL BUSINESS INVESTMENT ACT AMENDMENTS OF 1961. SEE PAGE 121 OF THE TRANSCRIPT OF HEARINGS HELD AUGUST 1, 2, 3, AND 4, 1961. AT PAGE 4 OF SENATE REPORT NO. 801, AUGUST 28, 1961, ACCOMPANYING S. 902 (1961 SBIA AMENDMENTS) THE COMMITTEE ON BANKING AND CURRENCY STATED THAT IT APPRECIATED "THE IMAGINATION OF SBA IN DEVELOPING "STANDBY" PROVISIONS PUTTING SBA CREDIT BEHIND THE BORROWING (SMALL BUSINESS INVESTMENT COMPANY).' AND THE FLOOR MANAGER OF S. 902 AND CHAIRMAN OF THE SUBCOMMITTEE ON SMALL BUSINESS OF THE SENATE BANKING AND CURRENCY COMMITTEE STATED DURING DISCUSSION OF THE BILL ON THE SENATE FLOOR THAT:

SBA HAS INDICATED THAT ITS POLICY IS NOT TO GRANT LOANS UNDER SECTION 303 OF THE ACT UNLESS THEE ARE NO FUNDS AVAILABLE FROM PRIVATE SOURCES. ITS REGULATIONS, PUBLISHED IN THE FEDERAL REGISTER FOR AUGUST 31 OF THIS YEAR, THE SBA STATES THAT PRIVATE FUNDS ARE CONSIDERED UNAVAILABLE WHEN THE APPROPRIATE CERTIFICATE SUBMITTED TO SBA SO INDICATES. THE CERTIFICATE SUBMITTED BY AN SBIC INCLUDES A STATEMENT THAT THE MONEY SOUGHT WAS NOT OTHERWISE AVAILABLE. PERHAPS THIS MIGHT BE CLARIFIED TO INCLUDE THE STATEMENT THAT NO FUNDS WERE OTHERWISE AVAILABLE, EVEN ON AN SBA STANDBY TAKEOUT COMMITMENT. I KNOW THAT OTHER SENATORS AND I WERE IMPRESSED WITH THE DESCRIPTION OF SBA'S PROCEDURE FOR STANDBY TAKEOUT COMMITMENTS. IN ESSENCE, SBA STANDS READY TO LOAN MONEY TO AN SBIC WHEN THE LENDER OF PRIOR PRIVATELY LOANED MONEY CALLS IT IN. (SEE 107 CONG.REC. 17943 (1961) (

IN VIEW OF THE LEGISLATIVE RECORD ESTABLISHED, IT IS MANIFEST THAT LACK OF SPECIFIC AUTHORIZATION TO FOLLOW THE STANDBY PROCEDURES IN QUESTION IS DUE NOT TO THE LACK OF CONGRESSIONAL INTENT TO PROVIDE SUCH AUTHORITY BUT, RATHER, IS DUE TO THE FACT THAT BOTH YOUR ADMINISTRATION AND THE CONGRESS DID NOT DEEM THAT AN EXPLICIT PROVISION OF LAW WAS REQUIRED IN THE MATTER. ALTHOUGH WE CANNOT CLEARLY DISCERN AUTHORITY FOR THE PROGRAM IN QUESTION FROM THE LANGUAGE OF THE STATUTE ALONE, WE DO NOT BELIEVE WE WOULD BE JUSTIFIED IN DISREGARDING THE EVIDENCE OF CONGRESSIONAL INTENT IN THE MATTER. THE AMENDMENT OF SECTION 303 (B) WAS EFFECTED WITH KNOWLEDGE OF THE CONSTRUCTION--- SO FAR AS CONCERNS AUTHORITY FOR THE STANDBY PROGRAM--- PLACED UPON THE SECTION BY THE OFFICIAL CHARGED WITH ITS ADMINISTRATION. IF THE LEGISLATIVE BODY HAD CONSIDERED THE SMALL BUSINESS ADMINISTRATION INTERPRETATION ERRONEOUS IT DOUBTLESS WOULD HAVE AMENDED THE SECTION OR AT LEAST RECORDED DISAPPROVAL OF THE PROPOSED AGENCY ACTION. ITS FAILURE TO DO EITHER, TOGETHER WITH THE POSITIVE STATEMENTS OF APPROVAL APPEARING IN THE LEGISLATIVE HISTORY, REQUIRES THE CONCLUSION THAT THE STANDBY PROGRAM IS NOT INCONSISTENT WITH THE INTENT OF THE STATUTE. SEE MASSACHUSETTS MUTUAL LIFE INS. CO. V. UNITED STATES, 288 U.S. 269, 273 (1933).