February 11, 2002

The Honorable Hector V. Barreto
Administrator
Small Business Administration
409 Third Street, S.W.
Room 7000
Washington, DC 20416

Dear Administrator Barreto:

     On January 22, 2002, the Small Business Administrator (SBA) submitted a draft Interim Final Rule titled "Small Business Size Standards; Economic Injury Disaster Loan Program" to the Office of Management and Budget (OMB) for review under Executive Order No. 12866. This rule would expand the Small Business Economic Injury Disaster Loan (EIDL) Program to cover any business with fewer than 500 employees that experienced economic injury as a result of the September 11, 2001, terrorist attacks.

     This rule would be the third expansion of the program to assist businesses affected by September 11. The first, issued in October, expanded the program to cover small businesses outside of the directly affected counties and expanded coverage to include adverse impacts of Federal actions related to September 11, such as the closure of airports and border crossings. We agreed that there was a clear and immediate need and that the unique circumstances of the Federal response to the terrorist attacks justified offering assistance outside of the immediate geographic area.

     The second expansion, submitted for review in October and issued in late January, raised size standards to account for inflation since 1994. This rule was part of a previously-ongoing effort that mainly affected procurement set-aside programs, but was issued to expand retroactively the coverage of the expanded EIDL program. We agreed that these changes in the definitions of small businesses were consistent with SBA's practice of defining small business based on the unique characteristics of each industry. We concluded review once SBA had the statutory authorization to retroactively raise the size standards.

     For the draft rule currently under review, however, OMB is concerned that this proposed expansion of the EIDL program does not further SBA's mission of serving small businesses and sets a poor precedent. SBA traditionally defines a small business in the context of the business's industry and economic environment. Thus, not all businesses with fewer than 500 employees are truly small. Some may in fact be dominant in their industry. Expanding SBA's service to these larger businesses is not consistent with the original intent of the EIDL program and jeopardizes SBA's ability to fend off future attempts to make SBA a source of general business assistance.

     We are also concerned about your proposal to change the principle that a business must be small when a disaster occurs. Under current rules, a business must be "small" on the date the disaster commenced, in this case September 11, 2001. However, you propose to change this to the date SBA accepts the EIDL application. This change would significantly alter the purpose of the expanded EIDL program. As SBA states on its website, "a general decline in business since September 11 is not eligible for this program unless it is the direct result of the destruction of the World Trade Center, damage to the Pentagon, or related Federal actions. A decline in revenue due to public reaction in the wake of September 11th is not covered by this program." Changing the eligibility date, however, would expand coverage to include businesses that have decreased in size down to "small" since September 11 due to the recent economic downturn.

     Finally, we are concerned that the potential impact of this change has not been adequately assessed. SBA should undertake a rigorous analysis consistent with the principles outlined under the Federal Credit Reform Act of 1990 and OMB Circular A-129. Circular A-129 requires agencies to provide justification for program expansions and include information about why a credit subsidy is the most efficient means of providing assistance and why private sources of financing must be supplemented. I have attached the appropriate provisions from OMB Circular A-129 for your information.

     For these reasons, I am returning this rule to you for reconsideration. I hope that SBA will consider OMB's concerns before taking any further action on this rule.

Attachment

(Excerpted from OMB Circular A-129)

Checklist - Federal credit program justification should include the following elements:

1. Program title: _______________________
2. Form of Assistance (direct or guarantee): __________________
3. Federal objectives of this program: (II.1.a.)
4. Reasons why Federal credit assistance is the best means to achieve these objectives: (II.1.a.)
5. Explain reasons why private sources of financing and their terms and conditions must be supplemented and subsidized, including:

• to correct a defined capital market imperfection;

• to subsidize identified borrowers or other beneficiaries; and/or

• to encourage certain specified activities. (II.1.a.(1)).

6. State reasons why a federal credit subsidy is the most efficient way of providing assistance, how it provides assistance in overcoming market imperfections, and how it assists the identified borrowers or beneficiaries or encourages the identified activities. (II.1.b.)
7. Summarize briefly the benefits expected from the program. Can the value of these benefits (or some of these benefits) be estimated in dollar terms? If so, state the estimate of their value. Further information on conducting cost-benefit analysis can be found in OMB Circular No. A-94. (II.1.c.)
8. Describe any elements of program design which encourage and supplement private lending activity, such that private lending is displaced to the smallest degree possible by agency programs. (II.1.d.)
9. Estimate the expected subsidy rate (expected net loss over the life of the loan, including defaults and interest subsidy)(II.1.f.)