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Authority of 3SA To 5.11 Disaster ad om-Dhiaanter Loans toFederal Finactsvq bank k.,-149685. Deceabtr S. 1976. 16 ;;.

Decision re: SaIl Busiuess Admiristratlaa; by Dutert F. Kel~er,Deputy comptroller Geaeral.

Contact: Office of the General Counsels General GovernmentIattlrs.

Organizstion Concerned: Federal Financing BankAuthority: Federal Financiag Seak Act of 1573 (I.L 93-2241 87

Stat. 937; 12 De5 C. 22811. Seall Basines_ XUwastmest Act of1958 (15 D.S.C. 661). Small Business Lct (15 0S.C. 63J4(bj15 U.S.C. 6361 Participation Sales Act (12 Is.U C. 171743).P.1. 93-135. P.L.e89-609. P.L. 95-69.79 Stat. 24. 9,1 stat.553. 44,Comp. GeaASf5. 45 Cop. Gea. 2753. 45 Coup. Gen.e370. 3-149605 (197i1. 3-140673 (19593.*.bpt. B9-134- J.Dept. 89-1057.,S. Dept. 95-184. 112 Coag. icc. 7311.

Clarification was requested cencerniug the ISialiBusiness lduaiistration'u (SBAIs) authority to isu3acertificate. to the Federal kinacing Eank (1133 evidencingownership of a group of Sal loans and to sell direct dismeterloans to FPS and guarantee payment of priaciqal and intereit ata rate which tay be in excess of the rate paid to SEA by theborrower. The S3 does kavo authority to lesse the certigioatespand the proposed financing arrame entsa as well as 8D1acurrent procedure of selling individual leans to nU tith'-recoure,, li similar to fimancing acrangemaits aeproved lanthepast. It is not authorized under ezistiag lagislatiza to selldirect diineter loans to FPi on a guaranteed basis eiiberindividually or coalectlvely ,Such action could result inestablihm'nt of unlimited contingent liability against 831without congressional restratntse and 3i's. proposal to sell thelcans with 100% guarantees is not coilaOtent uik& its statutoryauthority to guarantee a maximum of 90i of loans wade byparticipating lending institutions. (ffW3

g THU COMPINOLLEN UENENALDUCIU;ON '-.;* OF THE UNIT11O *-A-TEsa

FILE: B-1496l85 DATE: Dec trlnhr 5, 1978

MATTEq OF: Authority of SBA to sell disaster and non-disaster loans to Federal Financing Bank

DIGEBT: 1. Small Business Adminlatration (SEA) doeshaire authority to issue certificiate to FederalFinancing Bank (FFE) evidending ownership ofgroup of SA~loana. Proposed financingarkingementm, asH well as SEA's current pro-cedure of selling individual loans to FFE withrecourse, is sufficiently similar from legalstandpoint to financing arrangements ourOffice has-approved -in past. Also. SBA hassame authority to sell loans to 3??B withrecourse as it has to sell to other purchasers.

2. BAmis not authorized under existing legislationto sellfifrect disastet loa!ima to FFB on guaranteedbasis either iri'divldually'or collectively. Inabsence of specific statutory authority or clearexpression of congressional intent that SBA doeshave such authority'to sell direct disaster loansin this nanher, which, if allow@> could resultin eutakblifhmint yf ii;limited contingent liabilityagaii xt SBAwithbut any congressional lestraints.our Office cannot aipprove proposed procedbre.Moreover, SBA's 'ropO'sal to sell these leians*itli i00 percent guarantees is not consistentwith its statutory authority to guarantee maximumof 90 percent of loans made in first instance byparticipating lending institutions.

This! decision to theŽLAdxiiinietratcr'of the' Smell Businse Admin-istration (SBA) is lin'r6jsponse tolhis request forz our concurrence inSBA'u position concerning two separate, but relattd, queiatoa. The

fi'rt'q&~ton ii6Teu'Sakeautorijtoissue certificatis to, theFede'rallJFinancing'B~ik (FFEX^videnclng owriership of a groupofSEA ldans. The second~q'iestiol concerns SBA'B authority to selldirect disaster loans tu FNFB and to guarantee payment of principaland interest at a rate whbch may be in excess of the rate paid to SBAby the borrower.

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With respect to the first quoetion, SEA maintalna thatissuance of these certificates evidencing ownership of a groupof direct SBA loans merely represents a change of procedure to.accommodate FFB3' accounting. In past sales to FFB, SEAhas tiansferied title to individual loans and debentures, althoughthe actual loan documents have been held by SBA "acting asbailee for the purchaser. " If the proposed change of yrocedureis made, SBA would continue to hold and service the loans asis now being done.

The Federal Financing Bank was established pursuant to theFederal Financing Bank Act of 1973, approved December 29,1973, Pub. L. No.'93-224, 87 Stat. '937, 12 U.S.C. S$ 2281 etseg. (1976). As siated in section 2 of the Act, 12 U. S. C. 5 2781,

purpose of the legislation was to assure coordination ofFederal and federally assisted borrowing programs

"with th6':overall economic and fiscal policies of theGovernment, to reduce the cost of Federal and federal-ly aseisted borrowings from the public, and to assurethat such borrowings are financed in a manner leastdisruptive of private financial markets and institutions."

The authority of Federal agencies to finance their operationsthroukh FFB is set forth in section 6(a) of the Act, 12 U. S. C.S 2285(a) as follows:

"Any Federal agency which is authorized toissue, sell, or guarantee any obligation is authorizedto issue or sell such obligations directly to the Bank."

Also, section 18 of the Act, 12 U. S. C. 5 2296, specifically pro-vides that;

"Nothing in this chapter shall be construed asauthorizing an increase in the amnunts of obligationsissued, sold, or guaranteed by any Federal agencywiqich issues, sells, or guarantees obligations pur-chised by the Bank."

In accordance with these'provisions, the authority of SBA, as wellas other F6deral agencies, to issue, sell, or guarantee obligationspurchased by FFB is neither greater nor less than its authorityto issue, sell, or guarantee obligations to other purchasers.

As stated in SBA's submission, our Office has on severaloccasions upheld the authority of SBA to sell to private invGstors,

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with recourse, debt in trutents represunting loan SBA hadmade tOW.Uuill buiness lnvestment1 companies (SBICs) pursuantto the Small Business Investment Act' of 1958, 15 U.S. C. 556e51et!q. (1976). Thus, in 44 Comp. Gen. 549 (965).we upheldMEPI authority to sell loans originally iMad. directlxby SEA

to SBICs, with recourse, to private fin bcial institutions, pur-suant to what was f`1in section 303(b) of the Small Businessinvestment Act of 1858, 15 U S. C. S 83(b). Also see 45 Comp.Gen. 253 (1965), and 45 Comp. Gen. 370 (1965), in which weagain upheld and, to some extent, enlarged SBA's authority tosell SBIC debt Instruments to private investors, with SBA'sguarantee.

Our position in these decisions wan based on the broadauthority 'rantod to the Adminihrtratot in sections 5(b)(2) -and5Cb)(7) of the Shrill Busidezis-Act, 15 U.S- C. SS 34(b)(2) and(b)(7)(1976),' and made applfcable to fundtion' under the&SmallBusiness Invektmint 'Azt of 1955 by section 201 thereof, 15U S.C. 5693 (197), to Belfdebt 'truments on such termsand conditions as he d& ermines' to be reasonable. Pursuantto section 5(b)(2), the i.dministrator may:

"undet regulations prescribed by him, assignor sell It public or private sale, or odiewise'dis-posie oftfortcasb or credit,, in his discretion anidupon,suiih'term. and 'conditions' 'and forjwuch con-sideration as the Adrnisiatrator shall deter :ine tob.~e reasoiable,-'any evideice of debt,; contract,-claim, personal property, or 'security assigned toor held by him in connectibn with the'.payment ofloans granted under thui chapter, and to collector compromise all obligations assigned to or heldby him and all legal or equitable rights accruingto him in connection with the payment of such loans

'until such time as such obligations may be referredto the Attorney General for suit or collection."

Sertion 5(b)(7) further provides that the Administrator may:

{) *ini addition to any powers, fiictiris,privileges, and immunities otherwise vested in

-him, take any and all actions *** determinedby him to be necessary or desirable in maldng,servicing, compromising, modifying, liquidating,or otherwise, dealing with or realizing on loansmad- under the provisions of this chapter * * *."

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Again, on Larch 15, 1971, SBA requested o'tr approval ofits proposed sale of guaranteed SBIC debiinturern to a group ofundeiwriters for resale to private investors, The proposedplan involved SBA's purchase of $30 million of newly issueddebentures from SBICs pursuant to section 303Ob) of the SmallBusiness Investment Act, 15 U, S. C. I 683(b). The.. debentureswould be immediately sold, with SBA's guarantee of payment ofprincipal and interest according to the terms of the instrument,to 'private investors by means of an underwritten public offering.If any of these debentures either went into default or if SBAexperienced other difficulties in regulating the SBICs that hadissued the debentures, SBA was authorized to substitute anotherdebenture out of a pool of identical debentures, worth approxlmate-ly $25 rnillion, created by SBA specificafly for this purpose. Itwas, contemplated that debentures would be sold initially at facevalie to investors by a group of underwriters in denominationsof $10, 000 or multiples thereof. SEA's submission furtherexplained the proposed arrangement as follows:

"While. an actual sale of the guaranteed debentureswill occur and ownership of the debentures willvest in the purchasers, physical possession of thedebentures *411 be given to a custodian bank, act-ing onthe holders behalf under a bailment agree-mentl%' rsuant to which holders will hav'e the rightto withdraw debentures from bailment by demand-ing delivery thereof. The piurchasar will receivea certificates statijg'theSBAlguaranty. * ** SBAwill act as seri~cing agent for the holders andreceive payment from/thetSBIC's. SBA will remitto the holders the periodic interest payments (andthe final repayment of principal) in the amountsand on the dates specified on the debentures (whichwill be the same for all debentures, whetheroriginally sold or thereafter substituted.)

"In summary, the proposed sale is a salewith recourse against SBA of SBIC debentures,which is essentially the same as previously ap-proved guaranteed sales programs."

In our decision B-149685, March 25, 1971, we concluded that:

***** the propoSed sale and guarantee ofdebentures comes withi., the scope of 45 Comp.Gen. 370 and our earlier decisions and is withinthe statutory authority of the Small Business

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Administration, provided that It does not exceedany pertinent statutor- Uunltatloas nd the budgetedprogram levels. "

Our deciatona in the cases cited above only involved SBAloans made to SBICi under the Small Buaineuu Investment Act.* whereas the present queitidn presumably applies to loansmade under the Small Business Act as w;'11. However, theprecedentlestablished in thou e decisions is obviously applicableto the instant situation since our decisions in those cases werebased on the broad language in sect'ons 5(b)(2) and 5(b)(7) otthe Small Business Act, authorizing tie Administrator to selland otherwise deal with loane made tinder the Act in such amanner and on such terms and conditions as he determines tobe reasonable.

Based on the information available to'um conceiniiig this;~question. including SBA'. submission as Nyell as additional'in-..wrmation informally provided to us by SEAA's Office of General

oua-sel, it'appears that the proposed sale of these certificatesto FFB is in many, if not all, respects analogous to the pro-cedure we approved in our decision B-149685, March 25, 1971.

..First. ini both'tkie procedure ipproved in our decision ofMarch 25 :1971,- as'uieUll as thit.tzivolved hers, title to theindividual loans would be traisfei rred to the purchirir; clalthoughinl both 0intances' physical posasesion of the .debtxinstrumnients

l ..re. .. n with a baileetholdiiig the liisr imezts on behalfof the purchaser. Int.the Oriorkcase,, a desiated bank was tobe the biilee, while in'the instant prdpdi'al the SBA would bethe baile'. In'both cases certificates would be issued to thepurcharner indicating the transfer of title to the individual loansand setting forth SBA's guarantee assuring payment thereof,whichrgu rantee could be satisfied by cash payment or loansubstitution. Finally, in both situations, SBA would act asthe loan serviing agent for the purchaser and would receivepayments from,. the borrower and remit the appropriate amountsof principal and interest to the purchaser.

The prior decision in'olved SBA's authority to sell specificUidi4idi.Al loans, whereas here-SBA is proposin to sel cer-tifiJ~t3G; 'evidencing ownership of a group of SMa;BiisiassAdrzinistration loais. " However, it does not appear that thisdifference alone dictates a different result, provided that thecertificates refer to specific designated loans and ac.tuallyrepresent a passing of title thereto. Although SBA was unableto ft nish us with a sample certificate since, pending our

. -y

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decision, they have not yet been prepared, we were informallyadvised that these cerificates will in fact refer to specificloans and, when transferred to FFB, will represent a transferof ownership of the loans to FFB.

These certificates would thus be distinguishable from par-ticipation certificates issued pursuant to the Participation SalemAct, 12 U. S. C. 5 1717(c)(1976), which represent a beneficialinterest in an underlying pool of loans. In no real sense canit be said that a purchaser of a participation certificate issuedunder 12 U. S.C. S 1717(c) has gained title to any of 'the under-lying loans. This 'distinction has legal signifiuanee since,pursuant to the Participation Sales Act, SBA (as vell as othernamed agencies) can only issue participation certiflcates to theextent iuthorized in its ariiiual appropriation act. la2U. S. C.S 1717(c)(4). (If the transfer of ceitizicates herein proposedto be issued and sbld by SBA)could be conistrue6 to constituteborrowing rather than a. aale of assets, which, based on therecord before us, does nof appear to' be the case, SBA wouldrequire specific statutory budget authority in order to engagein such transactions, regardless of whether these certificatesare considered to be participation certificates.)

Essafitially, ,we agree with the position set forth in SbA'ssubmisdion that Ite proposed procedure is basically the samefrom a 1egal' standpoint as the arrangement that SBA is cur-riniiy;uing to sell loabns to FFB on' an individualbasis. Inaccordance with the foregoing, and since SBA has the sameitthority to sell debt instruments to FFB as it does to otherpurchasers, it is our view that, while the practice SBA isproposing here as well ad its present method may varytome-what from the types of financing arrangements we have upheldin the past, we do not believe that any such differences thatmay4 exist are so substantial from a legal standpoint as toprohibit implementation of the proposed financing arrangement.Naturally, the same Limitation expressed in our decisionB-149685, March 25, 1971, that the sale not exceed pertinentstatutory limitations and budgeted program levels, is 4jalic-able to the instant procedure.

Although we concur in SBA's.position that it does haveauthority under'icts existing legislation todimplement the pro-posed procedure. this is not to say that we in any way concurin or approve of the desirability from a policy standpoint, ofengaging in this type of financing arrangement. To the contrary,we believe that it would be preferable not to extend this arrange-ment that was originally established, by statute, for the Farmers

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Home Administration (Pub. L. No. 98-is5), to SBA. In ourview, the primary, if not only, reason, behind SBA's proposalis the reduction of the apparent size of the SEA budget. Webelieve that this action could hamper congressional budgetarycontrol over the program. In two of our'recent reports, wehave addressed these prsposed practices and set forth thepolicy of the General Accounting Office on this matter.

-In out report entitled "Revolving Funds: Full DisclosureNeeded for Better Congressional Cbntr'ol" (PAD-77-25 datedAugust 30, 1977), we noted on p. 59 (emphasis added):

"The effect of congressional control anfinancihg programsnu** depends onzwhat is meant'y congressional control. A broad interpretationOf the term includes the Congtess! ability to'effec-ti'el4ijdet&'nminie both on an aggregateosis and onan individual program basis, what budget levels*illibe for a 'fivnefiscalyear. CongressionaLcontrol also involves the congress' ability to ef-fectively monitor how far its dictates (as expressedIn authorizing legislation, appropriations acts, andassociated hearings or other aversight activities)are being crried out. Thus the term congressionalcontrol encompasses the closely related budget con-trol and oversight control.

' Congre'si6nal control is not an aisoiiuie. Forinstuince, a high degree 'bf it can be very useful ormay be unnecessary. It'may be exercised over theamount of budget authority a program is to receive,the amount of outlays it may have during a fiscalyear, program parameters, etc. The Congress mayor may not choose7 Wto exercise control over ipecificprogramns'for a number of reasons. Likewise, theCongress may choose a form of financing for a'pro-gram with'the possible result of obacurinig the pro-gram's financial imipact on the budget totals. Final-ly, the Congress may enact legislation, aimed atexerting strong control, only to have its intent dis-torted by administrative regulations."

On page 60 we stated:

"Programs over which the Congress has littlebudgetary control also tend to be programs overwhich the Congress has diminished oversight control.They do not need to justify past performance to

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continue receiving funds for operttions.. due to thenature of congressional operations, it is ikely thata pro*ram*** whose total level of activity islargeel hidden (by the netting process) woulalindto avoLd close annual committee overa^lsjET Toiwould not be if the program totally depended -on theCongress for annual financing and if the progiam'sfull financial impact were reflected in the budgettotals."

We concluded on page 88:

"The fundamental objective of the Coiigreu-sional Budget Act of 1974 was to establish a processthrouigh which the Congress could systemiticallyconsider the total Federal bludget and determinepriorities for alldocating budget resources. Webelieve this process achieves its maximum effec-tiveness when the budget represents as completeas possible a picture of the financial activities ofFederal agencies.

More specifically, in our reportentitlod "Government AgencyTransactions with the Federal Finanding Bank Sh6uld'be In-cluded on the Budget" (PAD-77-70, August 3, 1977), we ad-dresstd the sale of certificates of beneficial ownership to FFB.Certificates of beneficial ownership (CBOs) are very similar,if not identical, to the certificates referred to in SBA's sub-mission.

On page 11 of the report, we stated that CBOs should beconsidered agency borrowing:

"2. FFB purchase of Certificates of-Beneficial Ownership. Because CBOs are notpresently conslderedt agency debt, FFE's pur-chase of this paper raises the level of Federalindebtedness. We believe that CBOs shouldrbeconsidered agency borrowingtsince the originalloan remains in the hands of the agency. If oneadopts this view, the level of Federal indebted-ness is unchanged, but its composition is chang-ed. Agency debt is swapped for Treasury debt."

On page 19 we summarized the CBO Affect on outlaytotals:

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14. FiF3 purchae of CBOd. If currenttreatment of theme trasactions contunues, FFBpurebase of this paper would be reflected on thebudget as FFB loan outlay. If these securitieswere treated as agency opligations (as we believethey should be), they woAld be included in the out-lays of the agency sellln*t the paper when the pro-ceeds were loaneid out. Either-way, outlays wouldbe increased by the amount of agency lending."

On page 22 we addressed the need for full disclosure includ-ing CBOs.

"If the activitleai of lending agencies are notproperly reflected in individual program or func-tional accounts, it is diffiiuit to see bow the budgetprocess can properly alUckite Federal resourcesamong Federal credit'priograms, between creditprograms and direct expenditure programs, and,ultimately between the public and private sectorsof the economy.

"The way FFB affects the meaning of Federaloutlays and deficits isr not solely a function of itsoff-Sddget status. The problem with the wayFederal credit assistance goiuig through FFB isreflected in the budgetrresults from the combinedeffects of FFB's off-budget status <nd other devia-tions of actual from recommertded budget treat-ment of these activities.

"For example, FFB purchases of on-budgetagency obligations are properly reflected in thebudget now because of the way that borrowing isreflected in the budget and'because these agenciesare on the budget. 'If off-budget argencies whichcurrently engage in debt transactions (borrow)with FFB were placed on the budget, their lendingand direct expenditure actirity would be reflectedon the budget in their respective accounts, regard-less of the budget status of FFB.

"If CBOs were given the recommendedbudget treatment--namely, if sales of thesesecurities were treated as borrowing rather thanasset sales which reduce loan outlays--then FFBpurchase of these issues would be reflected in the

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accounts of the borrowing agencies, regardlessof the budget status of FPB.

"The combined effects of eliminating theoff-budget statis of agencies that borrow fromFFB to finance lending and of proper budgettreatment of CBOs would bring a considerableamount of lending and direct expenditures, cur-rently occurring outside of the budget, onto thebudget.

"Asset sales to FFB are currently proper-ly treated in the selling agency's account., Whenthese securities are sold to FFB, a problemarises because the Federal Governinent retainspossession of the loans and overall outlays areunderstated by the amount of FFB purchases.If F]FB remains off the budget, this pr6blem willcontinue to exist unleassthe Federal Government'scontinued ownership of the paper is reflected as anoutlay in the account of the agency selling the paper.It might be argued that since the Federal Govern-ment still retains possession of the asset, the bestplace to reflect this is in the agency account. Thistreatment wbuld increase the agency's outlays andwould technically be at variance with recommendedbudget practices.

And on page 25; we recommended that the Congressrequire that' "CBs be treated as agency obligations and, there-fort, be treated in the Federal budget as borrowing."

In summary it is our view that the SBA proposed practiceswould be contrary to the need for full disclosure and inclusionin the budget totals.

Moreover, although our prior decisions concerningproposed financing arrangements by SBA, particularly B-14965,.March 25, 1975, did not discuss this type Lf policy considera-tion, it appears that when individual loans are "sold" to FFBunder the current procedure, which was based on our decisionoi March 25, 1975, SBA'retains at all times actual possessionof the loan and all related documents, services the loan andmerely forwards to FFB the payments it receives from theborrower. Accordingly, since SBA's current procedurefor selling individual loans to FFB contains some of the sameflaws that were the concern of the criticism set forth in theabove-quoted audit reports, we believe that, to some extent,

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the current mannerin which SE3A is conoucting its "refinancing"activities -:oidd be the subject of similat criticism from apolicy standpoint.

SEA'. second question involves the agency's authority tosell-to FFB direct disaster loans rnmde by SEA pursua.t tothe provisions of section 7(b) of the Small Business Act, 15U. S. C. S 833(b)(1976), subject to a full SBA guarantee. Lnito submimsion, SBA says, in support of its position:

!Although there is Lo ceiling on ,toeEe loans, thedirect loans made under thir section are in fact,limited by the Agency's appropriation. Th*guaranty authority is not limited but, as apractical matter, very few lerders are willingto participate with thk Agency i. such loans.

"T1nhcpropoaed sale to FFB wo ld be made sabjectto the Agency's gderaxity. 'In prior discussionswith oBA perL!Srmel, members of your staff ex-pressed concern W'ith theifact that, in theory,such sales of disaster loans could result in sub-jecting the Agency to unliniftedlinbility, withoutCongressional restraints. In any sales of disasterloans, we will state in, our Budget Reqy fst thedollar amount of disaster loans4 ,to be sold andnote that we have reduc'y our appropriationreie'st accordingly. Thus, \ilimited liabilitycould not be created by such sales. Wr are'of

' &er&,inion that both5S 5 (b)(2) and 5(b)b' ) are'apnrcableeto thesa disaster loans, since thesesectideS refer to loans made 'under this Act,and 'under the provisions of this Act.'

Under subsections 7(b)(l)-(8) of the Small Business Act, SBAmakes various types of disaster loans. We have been advisedinformally'that SBA is here primarily concerned with its authorityto selnphysical and economic injuryjoans made pursuant to sub-sections 7(b,') and (2'. Pursuanut to these subsections, SBA isauthorized

"to make such loins (either directly or in cooperationwith banks or other lending iaasttutions throdigh agrpe-ments to participate on an immediate or deferredbasis) as the Administration may determine to benecessary or appropriatoe* **'

On the basis of language in section 7(a) of the Smxl BusinessAct, 15 U. S. C. S 535(a)(197J), identical to that 4qibted abovefrom section 7(b), our Office has upheld SBA's authority to

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carry out a loan -uarantee program. 51 Comp. Gen. 474(1972); B-140673, October 12, 1959. Accordingly, we are notquestioning SBA's authority to guarantee disaster loans madeto eligible borrowers by participating lending institutions.

The issue is whether this authority to guarantee disasterloans made by lendiiin institutions necessarily includes authorityto guarantee direct loanr.made by SBA in the first instance andthen sold to FFB, with recourse against SBA. There areseveral considerations.

tFirst, under section 7(b) of the Small Business Act,, 'SBA'sauthority to make Aisaster loans 'on a deferred basis. which isthe basis for its authlbrity to Eake guaranteed loans, is limitedl~y statute to a maxim"um of 99$percent of the~balk'nce of the loanoutstanding at the timew ofs disbursenxent. Thevefbrf, assumingthat SBA is authorized tose'll these direct disaster loans withitr~guarantee, it fdllows that tits'guarinteifaoiibilty in con-nection with such a sale is also limited to the 90 percentstatut6ry maximum. This would be true whether SBA wereselling a direct disaster loan to FFB or to some other pur-chaser, since the statute makes no distinction between piir-chasers. 'It is our understanding that SBA's proposal wduldinvolve a 100 percent guarantee of the full face amount of theobligations sold to FFB, whether the loans are mold individuallyor collectively by means of certificates of ownership. Thisfinancing arrangement would violate the 90 percent limitation,discussed above. (SBA is legally authorized to sell its SBICdebentures, with a 100 percent guarantee since there is nosimilar statutory limitation in the Small Business investmentAct of 1958 on the percentage SBA can guarantee.

In addition to the foregoing, there is another considerationwhich leads us to disapprove the proposed procedure. SBA.states in its submission that its guarantee authority undersection 7(b) is unlimited although, as a practical matter, veryfew lenders have been willing to participate with'SBA in makingsuch loans. Moreover, SEA states that while there is noceiling on its disaster loan authority, direct loans are in factlimited by the agency's appropriation.

If SBA's position is upheld by our Office, the consequencescould be very significant. SHA would be able to sell directdisaster loans to FFB with its guarantee and %hereby to re-plenish its disaster loan revolving fund so an to enable it tomake new disaster loans and repetd the process indefinitely.Notwithstanding SBA's argument that in its Budget Request it

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would 6tE'the dollar amount of disaatbr loans to be sold ainwould zote that it had reduced its appropriation request accord-ingly, thiis procedur'e, if allowed, could thebretically build upan uilimited 'contingent liability agaiist the United States, with-out any effective congressional restraitts. We do not believefor the reasons set out below, that in authorizing SBA toestablish a disaster loan program, Congress was aware ofor intended such a result.

We, agree with SBA that its authority to make physical andeconomic injury disaiste-loans under sections 7(b)(1) and (2)is not subject to any statutory ceiling. This ns hot to say, how-ever, that there 'are no limitations on its authority to sell directdisaster loans that would be fully guaranteed by SBA.

Cpilings werie established in Pub. L. No. 89-409,4, Stat.824, approvedMay 2, 1968,54on the ttal'amoooans,guariantees!,ahd6other obligatios'a or comrmntmnirn"e3,hichcoiildY 1e outstanding at any dne time for the'differ ent programsfunde'd out of thebusiness loa and investment irvolving fund.However, no celling was. established on the funding of thedisaster loan programn funded out di a separate disaster loanrevolving fund. The House and Senate Reports on the legisla-tion that was ultimately enacted as Pub. L. No. '89-409 ex-plained the basis for establishing the disaster loan fund tooperate in this manner as follows:

"In order to prevent the breakdown of SBA'sregular business loan program by the overridingneeds of the disaster loan program, E: separaterevolving fund for the physical disaster loan pro-grams has been provided in this bill.

"Since it is impossible to predict the extentof the need for funds to meet physical disasterrequirements no authorization ceiling has beenplaced on the disaster loan fund. For humanitarianreasons the Congress has always beun ready toprovide the necessary funds to meet disaster loanneeds.

"If a ceiling were placed on disaster loans,it in possible that the ceiling might be reached ata time when Congress was not in session. There-fore, even with funds Pvailable, loans could not bemade until Conpress ieturned to raise the ceiiing.

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"Fuinds for the use by1 SbA in its disasterloan program would stillbe iubjei-t tothe ietfric-tions placed on the progainmby the Bureau of theBudget and by the Apptdzpriations Committees of theCongress. ' Footnote o6iitted, emphasis added.H. R. Rep, No. 1348 and S. Rep. No. 1057, 89thCong., 2d Sess. 4, 5 QG96).

The foregrAfg.gexplanatibn reflects theA'leglaative'view thatdisaster loans would primaiily,' if not exclusively, be made, ona direct rather than guarand basis. Otherwi~sethe, statermentthat "even With funds available, Pl1wns could not be mbade dntilCongress .rturneid'tod raise the ceilinng would-have no meaningsince it is not legally necessary that funids bekvyilsable in oadertd guariiitee a loan made by a participating lending inatitutior.(We hive.informally' been advi b'SBAthat 0 t of thetotal air.6UntAof a gua arged agaiAstthe monies in itsrevolvingcfunds.) Likewise, the reference in the explinationto restrictions placed on the programnby the appropriationscominittees presumably means the amount of money appropri-ated to the disaster loan revolving fund which, with respect toloan guarantee authority, is of course no restriction at all.

It is not surprising that Congress held this view, since theprimary purpose of Pub. L. No. 89-409 was to provide for aseparate fund for disaster loan needs~in oader to avoid thetotal disruption that had previously ocdurred in SBA' a businessloan program because of the vast amount of money SBA haddiverted out of its revolving fund to make direct disaster loans.See H. R. Rep. No. 1348 and S. Rep. No. 1057, siura, 2, 3.A review of the debate on the legislation in th HeIouse of Repre-sentatives further supports the view that Congress did notexpect or intend that, with the passage of Pub. L. Nc.. f89-409.SBA wiould be involved to any significant extent in guaranteeingdisaster loans, whether made in the first instance by a par-ticipatihg Jending institution or directly by SBA, to be sub-sequently sold with SBA's full guarantee. See 112 Cong. Rec.7311-7329 (1966).

The Small Business Act was recently amended, with theenactment of Pab. L. No. 95-D9, 01 Stat,' 553, approvedAugust 4, 1977, to modify the approach previously used byCongress in budgeting for SBA. ThPt legislation authorizedfunding for SBA by establishing specific line item authoriza-tions for individual loan and guarantee programs for fiscalyears 1978 and 1979. Thnse line item authorizationsestabliahed maximum amiounts of direct loans, immediate

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participation loans, iaid guaranteed (or deferred participation)loans that SBA was authorized to make-in'fiscual years 1978 and1979. Although an overill ceiling was estiblished for disasterloans made pursuant to subsections 7(b)(3)-(8)-no similarceiling was placed on SBA's authority to make fiscal andeconomic injury disaster loans under sections 7(b)l) and (2).This was explained in S. Rep. No. 95-184, 4, 19 (1977) asfollow.:

'"Cellings w.ere not placed on physical andeconomic lnhiajurtdisaster loans since therryis nomethod possible to an~ticipate the leve dof demandfor these programs By leaving the authorija-tionspopen ended for these two j 6grims, therewil not be a need to legislate a supplementaryauthorization each time a disaster occurs.

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"The Committee bill does not prpovidefor aspecific dollar au*oriiitioi nfor the 7(b)(1) and7(b)(2) dis'aotel:-programs''llithat the loan demandfor theme programs cannot be accurately estimated.Instead such funds ax c-authorized totbe appio-priated as may be necessary to operate the 7(b)(1) and 7(b)(2) disaster programs."

"Certainly, as stated in SBA'a submisslon, "as a practicalnmatter very-few lenders are willing to participate with the agencyin such loans. " in fact, based 'orinformation contained in recenthearings bef6re the House Committee on Small Business, itappears that;as of June 30, 1975, in excess of 99 percentaofthe total amount of all disaster loan funds disbursed and out-atandlng had been made on a direct rather than guaranteed basis.See "Federal Natural Disaster Assistance Programs;" Hearingsbefore, the Subc6mmittee on SBA and SBIC Authority and GeneralSmall Business Problems of the House Committee on SmallBusiness, 95th Cong., 1st Sess. 503 (1977). Moreover, ourreview of the legialative history of Pub. L. No. 96-89 which,in essence. kdopted the same approach to the physical andeconomic injury disaster loan program as was established inPub. L. No. 89-409, did not reveal anything to indicate thatCongress intended that SBA be authorized to guarantee disasterloans without limitation.

In light of the very real possibility that SBA could, if itsauthority in upheld in this matter, establish an unlimited

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contiigent liability aii~nst the United States, without any con-gressional restraints whatsoever, our Office cannot approvethe proposed procedure in the absence of a specific statutoryauthorization or, at the very least, a clear indication thatCongress intended that SBA have such authority. Neither ispi esent here.

Moreover we do not believe tlit the situation would be dif-ferent in any significant respect whether SBA sells its directdisaster loans individualy or collectively by means of certfi-cates representing ownership of a group of SBA loans.

For these reasons, we cannot concur in SBA's opinionthat it is authorized to implement this proposal as now con-stituted to sell direct disaster loans to FFB with SBA's fullguarantee.

nienutyv Comptroller Generalof the United States