Hector V. Barreto
Small Business Administration
409 Third Street, S.W.
Washington, DC 20416
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.
John D. Graham
Office of Information and Regulatory Affairs
from OMB Circular A-129)
Federal credit program justification should include the following
- Form of
Assistance (direct or guarantee): __________________
objectives of this program: (II.1.a.)
why Federal credit assistance is the best means to achieve these
reasons why private sources of financing and their terms and conditions
must be supplemented and subsidized, including:
a defined capital market imperfection;
identified borrowers or other beneficiaries; and/or
certain specified activities. (II.1.a.(1)).
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.)
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.)
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.)
the expected subsidy rate (expected net loss over the life of
the loan, including defaults and interest subsidy)(II.1.f.)