The Small Business Lending Fund

Robert Jay Dilger
Senior Specialist in American National Government

Congressional interest in small business access to capital reflects, in part, concerns about economic growth and unemployment. Small businesses, defined as having fewer than 500 employees, have played an important role in net employment growth during previous economic recoveries. However, recent data show that net employment growth at small businesses is not increasing at the same rate as in previous economic recoveries.

Some, including President Obama, have argued that current economic conditions make it imperative that the federal government provide additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small businesses and create jobs.

Several laws were enacted during the 111th Congress to enhance small business access to capital. For example, P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), provided the Small Business Administration (SBA) an additional $730 million, including funding to temporarily subsidize SBA fees and increase the 7(a) loan guaranty program’s maximum loan guaranty percentage to 90%. P.L. 111-240, the Small Business Jobs Act of 2010, authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) ($4.0 billion was issued) to encourage community banks with less than $10 billion in assets to increase their lending to small businesses, a $1.5 billion State Small Business Credit Initiative to provide funding to participating states with small business capital access programs, numerous changes to the SBA’s loan guaranty and contracting programs, funding to continue the SBA’s fee subsidies and the 7(a) program’s 90% maximum loan guaranty percentage through December 31, 2010, and about $12 billion in tax relief for small businesses. P.L. 111-322, the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue its fee subsidies and the 7(a) program’s 90% maximum loan guaranty percentage through March 4, 2011, or until available funding was exhausted, which occurred on January 3, 2011.

This report focuses on the SBLF. It opens with a discussion of the supply and demand for small business loans. The SBLF’s advocates argued that the SBLF was needed to enhance the supply of small business loans. The report then examines other arguments which were presented both for and against the program. Advocates argued that the SBLF would increase lending to small businesses and, in turn, create jobs. Opponents argued that the SBLF could lose money, lacked sufficient oversight provisions, did not require lenders to increase their lending to small businesses, could serve as a vehicle for TARP recipients to effectively refinance their TARP loans on more favorable terms with little or any resulting benefit for small businesses, and could encourage a failing lender to make even riskier loans to avoid higher dividend payments.

The report concludes with an examination of the program’s implementation and a discussion of bills introduced during the 112th Congress to amend the SBLF. For example, S. 681, the Greater Accountability in the Lending Fund Act of 2011, would limit the program’s authority to 15 years from enactment and prohibit TARP recipients from participating in the program. H.R. 2807, the Small Business Leg-Up Act of 2011, would transfer any unobligated and repaid funds from the SBLF to the Community Development Financial Institutions Fund “to increase the availability of credit for small businesses.” H.R. 3147, the Small Business Lending Extension Act, would extend the Treasury Department’s investment authority from one year to two years.


Date of Report: November 14, 2011
Number of Pages: 28
Order Number: R42045
Price: $29.95

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Remote Gaming and the Gambling Industry

Suzanne M. Kirchhoff
Analyst in Industrial Organization and Business

Gambling, once widely outlawed, is today a regulated, taxed activity that is legal in some form— bingo, card games, slot machines, state-run lotteries, casinos—in all but two states. State governments have the main responsibility for overseeing gambling, but Congress historically has played a significant role in shaping the industry, most recently by passing the Unlawful Internet Gambling Enforcement Act (UIGEA; P.L. 109-347) in 2006.

UIGEA, while preventing payments to illegal gambling-related businesses, does not outlaw any form of remote gaming. To the contrary, the law allows states and Indian tribes to offer remote gaming within their territory so long as certain conditions are met. Already a majority of states allow remote betting on horse racing, and a number use the web for lottery promotions. Several states are debating legislation to legalize online poker or other games. Indian tribes are using cutting-edge computer gambling technology at tribal casinos. U.S. gaming companies have created subsidiaries to focus on remote gaming and seem likely to expand rapidly if the legal issues are clarified.

While UIGEA did not outlaw remote gaming, it also did not clarify the scope of long-standing laws that the Department of Justice has used to prosecute illegal Internet gambling, such as the Wire Act, 18 U.S.C. 1084. In April 2011 the Justice Department announced it had indicted executives of three online poker websites that were located outside the United States, but accepted wagers from U.S. bettors, on charges of money laundering, fraud, and illegal gambling, citing the Wire Act and the UIGEA among other statutes. The Justice Department in August 2011 filed a civil suit accusing Full Tilt Poker, one of the targeted sites, of defrauding bettors. The cases, which remain pending, appear to have dampened U.S. betting in the for-profit online poker market, and have generated new interest in federal legislation to more precisely define what types of online gaming are legal.

During the 112th Congress, lawmakers have introduced legislation to allow, regulate, and tax online gaming—from narrow bills covering only poker, to broader bills that would allow a range of interstate online gaming. House and Senate committees have held hearings and roundtable discussions on the issue. Those in favor of allowing expanded online gaming cite potential federal revenue from taxing and registering online gambling operations, as well as the need for comprehensive regulation. Opponents question whether it is possible to have stringent regulation of online gambling, which they say holds the potential for increased fraud and money laundering. Among other issues Congress faces are the proper balance of federal and state regulation and the possible social costs of expanded gaming, including problem gambling.

Legalization of additional forms of remote gaming could pose a challenge to many existing types of gambling, from lotteries to casinos to racetracks with slot machines. The industry has been going through a difficult stretch, with receipts falling in 2009 for the first time in more than three decades, and many brick-and-mortar casinos and racetracks experiencing revenue declines. Revenues did begin to rebound in 2010, but were still below 2008 levels. Even if it leads to the growth of employment and gambling revenues at the national level, federal remote gaming legislation has the potential to affect particular locations, especially venues that cater to day trippers rather than vacationers. These effects are likely to depend upon the details of whatever legislation Congress passes and the specific actions taken by individual states in response.


Date of Report: November 16, 2011
Number of Pages: 29
Order Number: R41614
Price: $29.95

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Defining Small Business: A Historical Analysis of Contemporary Issues

Robert Jay Dilger
Senior Specialist in American National Government

Small business size standards are of congressional interest because the definition used determines eligibility for Small Business Administration (SBA) loans and management training assistance as well as federal contracting and tax preferences. Although there is bipartisan agreement that the nation’s small businesses play an important role in the American economy, there are differences of opinion concerning how to define them. The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA to establish size standards for determining eligibility for federal small business assistance. The SBA currently uses two size standards to determine program eligibility: industry-specific size standards and an alternative size standard based the applicant’s maximum tangible net worth and average net income after federal taxes.

The industry-specific size standards determine program eligibility for firms in 1,141 industrial classifications and 18 sub-industry activities described in the North American Industry Classification System (NAICS). They are based on one of the following four criteria: (1) number of employees; (2) average annual receipts in the previous three years; (3) asset size; or (4) for electrical power industries, the extent of power generation. Overall, the SBA currently classifies about 99.7% of all employer firms as small.

Since issuing its initial small business size standards in 1956, the SBA has based its industry size standards on economic analysis of each industry’s overall competitiveness and the competitiveness of firms within each industry. However, in the absence of precise statutory guidance and consensus on how to define small, the SBA’s size standards have often been challenged, typically by industry representatives advocating a broadening of the size standards to allow more firms in their industry to be eligible for assistance and by Members of Congress concerned that the size standards may not adequately target the SBA’s assistance to firms that they consider to be truly small.

P.L. 111-240, the Small Business Jobs Act of 2010, authorizes the most recent changes to the SBA’s size standards. The act authorizes the SBA to establish an alternative size standard using maximum tangible net worth and average net income after federal taxes for both the 7(a) and 504/CDC loan guaranty programs. The act also establishes, until the date on which the alternative size standard is established, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application. It also requires the SBA to conduct a detailed review of not less than one-third of the SBA’s industry size standards every 18 months beginning on the date of enactment (September 27, 2010).

This report provides a historical examination of the SBA’s size standards, assesses competing views concerning how to define a small business, and discusses how the alternative size standards adopted under the Small Business Jobs Act of 2010 might affect program eligibility. It also discusses H.R. 585, the Small Business Size Standard Flexibility Act of 2011, which would authorize the SBA’s Office of Chief Counsel for Advocacy to approve or disapprove a size standard proposed by a federal agency if it deviates from the SBA’s size standards. The SBA’s Administrator currently has that authority. Under current practice, the SBA’s Administrator, through the SBA’s Office of Size Standards, consults with the SBA’s Office of Advocacy prior to making a final decision concerning such requests.


Date of Report: November 18, 2011
Number of Pages: 33
Order Number: R40860
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Fannie Mae’s and Freddie Mac’s Financial Problems

N. Eric Weiss
Specialist in Financial Economics

The continuing conservatorship of Fannie Mae and Freddie Mac at a time of uncertainty in the housing, mortgage, and financial markets has raised doubts about the future of these enterprises, which are chartered by Congress as government-sponsored enterprises (GSEs) and whose debts are widely believed to be implicitly guaranteed by the federal government.

In 2008, the Federal Housing Finance Agency (FHFA) replaced the Office of Federal Housing Enterprise Oversight (OFHEO) as the GSEs’ safety and soundness regulator and took them into conservatorship. OFHEO had repeatedly assured investors that Fannie and Freddie had adequate capital, but as highly leveraged financial intermediaries, Fannie Mae and Freddie Mac had limited capital to cushion themselves against losses.

The Treasury agreed to buy mortgage-backed securities (MBSs) from the GSEs and to raise funds for them. Initially, each GSE gave Treasury $1 billion in senior preferred stock and warrants to acquire, at nominal cost, 80% of each GSE. When Treasury responds to the GSEs’ request for additional funds for the third quarter of 2011, it will hold nearly $186 billion of preferred stock in the two GSEs. Treasury has agreed to invest whatever is required to maintain GSE solvency through calendar year 2012. Now the formerly implicit guarantee is nearly explicit.

In addition to Treasury’s purchases of senior preferred stock, the Federal Reserve (Fed) has purchased GSE bonds and MBSs. According to FHFA, the Fed and Treasury together have purchased $1,356.7 billion in MBSs; these purchase programs terminated at the end of the first quarter of 2010. On September 21, 2011, the Fed decided to reinvest MBS principal repayments in new MBS.

Under terms of the federal government’s purchase of their preferred stock, the enterprises are required to pay the government dividends of nearly $19 billion annually (10% of the support). Housing, mortgage, and even general financial markets remain in an unprecedented situation.

Estimates of the total cost to the federal government use different baselines and vary widely. The FHFA estimates that Treasury is likely to purchase $220 billion-$311 billion of senior preferred stock by the end of 2014. The Congressional Budget Office estimates the budget cost for 2011- 2020 to be $53 billion. Standard & Poor’s has estimated the cost at $280 billion plus $405 billion to create a replacement system.

Once Treasury’s support for Fannie Mae and Freddie Mac ends, sometime after 2012, the GSEs will be challenged to pay the 10% annual cash dividend contained in their contracts. The enterprises could instead pay a 12% annual senior preferred stock dividend indefinitely.

In August 2011, Standard & Poor’s downgraded the debt of the federal government, Fannie Mae, and Freddie Mac. To date, there is no evidence that this has increased mortgage interest rates, but the impact may take longer to occur or to be detected.

The 112th Congress is likely to consider the future of the GSEs and ways to reduce the cost to the federal government.


Date of Report: November 17, 2011
Number of Pages: 27
Order Number: RL34661
Price: $29.95

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Offshoring (or Offshore Outsourcing) and Job Loss Among U.S. Workers

Linda Levine
Specialist in Labor Economics

Offshoring, also known as offshore outsourcing, is the term that came into use a decade ago to describe a practice among companies located in the United States of contracting with businesses beyond U.S. borders to perform services that would otherwise have been provided by in-house employees in white-collar occupations (e.g., computer systems designers). The term is equally applicable to U.S. firms offshoring the jobs of blue-collar workers on textile and auto assembly lines, for example, which has been taking place for many decades. The extension of offshoring from U.S. manufacturers to service providers has heightened public policy concerns about the extent of job loss and forgone employment opportunities among U.S. workers. This concern is especially pertinent to policymakers because of a national unemployment rate of 9% for much of 2011, despite the end of the 2007-2009 recession more than two years ago.

The outsourcing of service sector jobs within the United States was a response to the early 1980s recessions when employers narrowed their focus to the company’s core mission and contracted out peripheral activities (e.g., janitorial duties) to other U.S. businesses. The 2001 recession prompted employers to seek further efficiencies by tapping into the global supply of labor. U.S. businesses were able to outsource abroad the jobs of white-collar workers in some serviceproviding industries as a result of widely disseminated technological advancements that permit low cost, good quality, and high speed transmission of voice and data communications. Other developments, such as the educational systems of comparatively low-wage nations graduating large supplies of highly educated individuals, also took place in the intervening years which enhanced the ability of other countries (e.g., India and China) to export services to the United States.

U.S. workers reportedly have become more concerned about the security of their jobs due to increased global economic integration since the early 2000s. Offshore outsourcing, which is one manifestation of globalization, is reported to have adversely affected the employment situations of U.S. white-collar workers in information technology (IT) jobs (e.g., computer systems analysts and software engineers) and IT-enabled jobs (e.g., telemarketers and accounting clerks). Data from the U.S. Bureau of Labor Statistics’ Displaced Worker Survey (DWS) indicate that the risk of job loss has increased among white-collar workers, but the increase preceded the expansion of offshoring from jobs in manufacturing industries to jobs in professional and business services, administrative support services, and financial services industries. In addition, the DWS data that include the 2007-2009 recession suggest that macroeconomic conditions rather than offshoring have accounted for most of the rise in job losses in recent years.

Congress historically has tried to assist workers who lose jobs through no fault of their own, whether the job losses are caused by economy-wide downturns (i.e., cyclical unemployment) or by shifts in the industry composition of jobs performed in the United States (i.e., structural unemployment). Some observers have expressed concern that federal employment policies may not be up to the task of assisting unemployed workers who must adjust to the changing mix of U.S. jobs in order to obtain new jobs. The wide-ranging estimates that have been developed of the number of workers in jobs that are vulnerable to being offshored provide limited guidance to Congress in its deliberations about whether existing programs to assist displaced workers are sufficient or should be expanded.


Date of Report: November 15, 2011
Number of Pages: 20
Order Number: RL32292
Price: $29.95

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