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SUBCOMMITTEE ON INVESTIGATIONS AND 

OVERSIGHT FIELD HEARING IN PITTSBURGH, PA 

ON ACCESS TO CAPITAL FOR SMALL BUSINESSES 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

May 17, 2010 

Small Business Committee Document Number 111-068 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Altmire, Hon. Jason ................................................................................................. 1 

WITNESSES 

Zarnikow, Mr. Eric, Associate Administrator for the Office of Capital Access, 

U.S. Small Business Administration .................................................................. 3 

Leyh, Mr. Chuck, President, Enterprise Bank, Allison Park, PA ....................... 4 

Landis, Ms. Marilyn D., President and CEO, Basic Business Concepts, Pittsburgh, PA .............................................................................................................. 7 

Kaluhiokalani, Mr. Karl A., President, RRC Consulting Group, Inc., Pittsburgh, PA .............................................................................................................. 9 

APPENDIX 

Prepared Statements: 

Zarnikow, Mr. Eric, Associate Administrator for the Office of Capital Access, 

U.S. Small Business Administration .................................................................. 24 

Leyh, Mr. Chuck, President, Enterprise Bank, Allison Park, PA ....................... 27 

Landis, Ms. Marilyn D., President and CEO, Basic Business Concepts, Pittsburgh, PA .............................................................................................................. 31 

Kaluhiokalani, Mr. Karl A., President, RRC Consulting Group, Inc., Pittsburgh, PA .............................................................................................................. 37 

(V) 

(1) 

SUBCOMMITTEE ON INVESTIGATIONS AND 

OVERSIGHT FIELD HEARING IN 

PITTSBURGH, PA ON ACCESS TO CAPITAL 

FOR SMALL BUSINESSES 

MONDAY, MAY 17, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 2:00 p.m., at Ross 

Municipal Building, Council Chambers, 1000 Ross Municipal Drive, 

Pittsburgh, PA, Hon. Jason Altmire [Chairman of the Subcommittee] presiding. 

Members Present: Representative Altmire. 

Chairman ALTMIRE. Good afternoon. This hearing will come to 

order. In recent weeks, economists have pointed to a number of 

signs suggesting the economy is improving. The number of new 

jobs created in April was the highest in the past 4 years. April also 

marked the fourth consecutive month for positive job creation. Consumer spending is on the rise and the manufacturing sector is expanding. The first quarter of 2010 saw our Gross Domestic Product 

grow by 3.2 percent. Here in Pennsylvania, 22,000 new jobs were 

created between February and March of this year. 

These are all positive indicators, but we still have a long way to 

go. Despite what any economist says, the recession won’t truly be 

over until Americans seeking work can find jobs. And that is going 

to take a resurgence in the small business sector. Commentators 

often refer to small businesses as the backbone of our economy, but 

the fact is after every recession small business firms had led the 

way back to prosperity. However, if small businesses are the economy’s backbone, then capital is its lifeblood, and without access to 

capital, startups cannot launch and create new employment opportunities. Absent affordable credit, existing businesses cannot grow 

and bring on more workers. 

As Congress and the Administration work to improve the flow of 

capital to small businesses, Pittsburgh can offer some valuable lessons. Here in Western Pennsylvania, we have reinvented our local 

economy in recent years, developing new industries and becoming 

a magnet for innovative entrepreneurs. All of that happened because small firms had financing options to help them get off the 

ground, expand an create jobs. It is my hope that today we will 

hear which policies have worked, and how to go forward in helping 

more firms find affordable loans. 

2 

Congress has already taken some steps to get credit flowing to 

small businesses. Since being enacted last year, the American Recovery and Reinvestment Act has helped support $26 billion in 

small business loans. And here in Pittsburgh, we have seen a spike 

in the amount of money lent to small businesses through the SBA 

programs. For local firms, SBA loan volume is on track to almost 

double this fiscal year over fiscal year 2009, but we still need to 

do more. Toward that end, the Small Business Committee developed the Small Business Financing and Investment Act, which 

passed the House in October with widespread, bipartisan support. 

Once enacted, that bill will deliver $44 billion in lending and investment. 

By modernizing the SBA’s programs, that legislation will cut red 

tape, funnel more loans to entrepreneurs and build on the successes of the Recovery Act. And later this month, the House will 

vote on another proposal, which will be aimed at pushing smaller, 

community banks to start lending to small businesses again. Solving the small business credit crunch is nothing short of essential 

to our economy recovery, so we have to get this right. That means 

listening to and learning from the entrepreneurs who are driving 

our recovery forward. 

Today, we are fortunate to have with us some of Pittsburgh’s 

most innovative entrepreneurs, and our local lending community is 

represented as well. It is my hope that this discussion will provide 

insight as to what is happening here in western Pennsylvania from 

the perspective of both lenders and borrowers. We need to hear 

these important perspectives in order to craft effective policies that 

get credit flowing, businesses growing, and results in the jobs 

Americans need. I want to thank the witnesses for taking time 

away from their businesses to join us today to offer their perspectives and valuable expertise on this very important subject. 

[The statement of Mr. Altmire is included in the appendix.] 

Chairman ALTMIRE. With that, let me introduce our first witness. 

That is what my statement says, but let me just say before that 

what this is about. On the Small Business Committee, we are in 

the process of going through this exercise across the country having 

hearings in all parts of the continent to talk about what we can do 

better with regard to access to capital bringing together lenders 

and borrowers, small businesses to talk about the problems that we 

have had with access to capital and what we can do on the Small 

Business Committee and in the Congress to get it right because we 

have had some good news with the economy. The GDP growth has 

been strong for the last 3 quarters. The job growth has been strong 

in recent months. The stock market certainly is doing much better 

than it was a year ago. 

The problem is the last indicator that hasn’t improved as much 

as we would like is access to capital, and that is what this is about. 

So I am going to first introduce—we are going out of order here, 

so I am going to start with Eric Zarnikow. Am I pronouncing that 

correctly? Zarnikow. Mr. Eric Zarnikow is the Associate Administrator for the Office of Capital Access in the U.S. Small Business 

Administration. Mr. Zarnikow is responsible for the management 

and oversight of SBA’s lending and financing programs. Welcome, 

Mr. Zarnikow. 

3 

STATEMENT OF ERIC ZARNIKOW 

Mr. ZARNIKOW. Thank you, Chairman Altmire. I am honored to 

be here today. One of the missions of the Small Business Administration is to provide small business owners with access to much 

needed capital. We do that primarily by providing a partial government guarantee on loans made by banks and other lending partners. This guarantee helps provide access to capital for creditworthy small businesses that would otherwise be unable to get 

loans. To address disruptions in the credit markets, the Recovery 

Act temporarily raised the maximum available guarantee on some 

SBA loans to 90 percent, and allowed us to reduce or eliminate 

most of our fees. 

The raised guarantee provided an extra incentive for risk-averse 

banks to lend to small businesses, and the fee reductions made the 

loans more appealing to borrowers. As a result, SBA lending has 

increased by about 90 percent since the passage of the Recovery 

Act. We have turned about $600 million in taxpayer funds into support for $26.5 in loans to small business owners. This includes over 

$637 million in Pennsylvania, and over $40 million here in the 4th 

district. We know that times are still tough for small business owners. While SBA’s recovery loans are helping, it is clear that many 

small business owners are still having a hard time getting access 

to credit. Moreover, declines in home values have hurt small business owners because many entrepreneurs use home equity to help 

finance their business. We know that there is still much more work 

to do. 

At the SBA, we have examined how to use our programs to address demand for credit, availability of capital, and risk tolerance, 

and with the President we have proposed a jobs plan which targets 

gaps that still exist. There are 5 key components to this plan. First, 

to address the issue of banks that still have trouble taking risk, we 

have asked for a long-term extension of the increased 90 percent 

guarantee and the reduced fees. Second, for banks that don’t have 

the capital to lend, we have asked that Congress direct $30 billion 

to a small business lending fund to provide capital to community 

banks to allow them to lend more. This money would come with incentives to increase lending to small businesses. 

Third, many small businesses need bigger SBA loans to help 

them create jobs. This might be franchisees, manufacturers, exporters, and others, and we would like to increase the top loan limit 

in our program from $2 million up to $5 million. Fourth, for businesses that can’t find access to working capital, we would like to 

temporarily raise the SBA Express Loan limit from $350,000 up to 

$1 million. These loans will help businesses restock shelves and fill 

orders that they have coming in. 

Fifth, we know that many small businesses have conventional, 

owner-occupied commercial real estate mortgages that will need to 

be refinanced soon. As real estate values have declined, many 

banks will find that these businesses no longer qualify for conventional loans, regardless of the strength of the business. As a result, 

even small businesses that are performing well and making their 

payments on time can have a hard time refinancing these loans 

and may face foreclosure. So we want to open up SBA’s 504 loan 

program to commercial real estate refinancing for owner-occupied 

4 

commercial real estate. It is critically important that we prevent 

creditworthy firms here in Pennsylvania and across the country 

from facing unnecessary foreclosure and lost jobs. 504 refinancing 

will allow them to lock in stable, long-term financing, while freeing 

up banks to make even more small business loans. 

This plan is guided by basic principles: build on what works, 

maximize limited taxpayer dollars, and make targeted changes as 

quickly as possible. It addresses specific gaps in demand, availability of credit, and risk tolerance. SBA is confident that this will 

allow us to continue to help small businesses in this tough economic climate. 

SBA is committed to building on the success of the Recovery Act 

by expanding points of access and bringing more small businesses 

into a long-term banking relationship with an SBA lender. In addition, we will continue to work hard on behalf of small businesses 

everywhere. Our field staff and resource partners are standing by 

to help small business owners and entrepreneurs as they start and 

grow their business. Small business owners here in Pennsylvania 

have access to 2 district offices in Philadelphia and Pittsburgh, 17 

Small Business Development Centers throughout the state, 4 Women’s Business Centers and also a Veteran’s Business Center, and 

several chapters of SCORE, our retired executives mentoring service. 

I want to thank you for your support and leadership for small 

businesses, and for working with SBA to get them the support they 

need. And I am happy to discuss any of these proposals or answer 

any questions. Thank you. 

[The statement of Mr. Zarnikow is included in the appendix.] 

Chairman ALTMIRE. Thank you for being here, Mr. Zarnikow. 

Mr. Chuck Leyh is President and co-founder of Enterprise Bank in 

Allison Park, Pennsylvania. Mr. Leyh is also a CPA with over 30 

years of experience. Enterprise Bank assists small businesses and 

specializes in helping startups and distressed companies. Currently, Enterprise Bank is the largest dollar volume SBA lender in 

all of Western Pennsylvania. Welcome, Mr. Leyh. 

STATEMENT OF CHUCK LEYH 

Mr. LEYH. Thank you. On behalf of Enterprise Bank and the 

Pennsylvania Association of Community Bankers, I want to express 

my appreciation to Congressman Altmire for giving us an opportunity to speak to you. We prepared our written testimony, and I 

would like to take a minute to just on an impromptu basis discuss 

the 4 component parts that are in that written testimony. 

Chairman ALTMIRE. And your entire statement will appear in the 

record. 

Mr. LEYH. We are in agreement with the basic 5 provisions that 

are in the new law, the proposed new law that the SBA is pushing. 

The 90 percent guarantee has made a significant improvement, and 

we believe one of the strongest contributing improvements to lenders being involved with the SBA program. In the business of banking, risk mitigation is our lifeblood, and obviously when you take 

the risk off of the bank’s shoulders and put it onto the program’s 

shoulders, you motivate the banking community to be more active, 

so that is an incredibly important tool. What we would like to emVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
5 

phasize though are there are some other provisions that are more 

day-to-day operational or regulation structure changes that, in fact, 

inhibit some of these programs from being fully utilized, and they 

are outlined in our written testimony and broken into 4 component 

parts. 

The first is centralization. SBA went through years ago a centralization process for purposes of processing loans and guarantees, 

and we think it is a tremendous tool in making it a much more efficient operation. But any opportunity to centralize communications 

becomes a challenge, and, in fact, we see situations where the lack 

of a local presence of authority creates a problem when it comes 

to mitigating problems or correcting problems in the processing 

units. There are 3 examples that we gave here but we can give you 

multitudes of additional ones. 

It should be highlighted that it is both an efficiency concern with 

regard to processing when we find mistakes and we try to get them 

corrected. It takes too long without having a strong local presence 

that has the authority to do something, but it also has to do with 

saving dollars for the program. One of the examples that we included in here was a situation we just recently have gone through 

where in a collection process under the 504 program, we had a situation where we had approximately a lender that had about $5 

million in collateral, and we were in the first position with approximately $2 million, and the SBA was behind us in a second position 

for less than that amount, but significantly greater than a million 

dollars. 

When we went through this whole process, SBA did not get involved in court proceedings or cooperating with us, and as a result 

the bankruptcy judge did some things that, in effect, cost the government over a million dollars, which certainly there are tremendous values to centralization but without that lack of a local presence and mistakes like this being made there is a lot of expense 

that is being generated. 

The second major area that we wanted to discuss and highlight 

was the new lender rating system. This system basically evaluates 

a bank on a 1 to 5 scale and is discussed as an important parameter as to whether a bank is allowed to be in the preferred lender 

program, which is important to a large volume lender. In this situation, when you look at the component ratings, the losses, the credit scoring system, it is very hard for a bank to equate that system 

to the whole mission of the SBA and the eligibility concept involved 

in the SBA lending. 

Prior to this concept being put in place and having an enforcement provision associated with it, when you evaluated the loan, 

you look at the SBA eligibility requirements and you looked at it 

from a risk mitigation yourself where 25 percent of the loan you 

were at risk for, and the government, in effect, was at risk for 75 

percent (based upon the old percentages). And that risk is something you weighed in making your underwriting decision. Now you 

are looking at it from a different perspective. Now you are looking 

at it from this rating system perspective, and, in fact, in our particular bank’s situation, our rating has been lowered recently. So 

when it came time for Congress to implement the ARC program 

that was part of the assistance in this recession where the law enVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
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couraged us to make a loan for people to make their loan payments 

on troubled debt, our bank concluded not to participate in the program because we couldn’t afford to have losses show up in that 

lender rating portal analysis. 

When we have had discussions as to how do we reconcile this 

with the mission of the SBA the examiners that have come in to 

us have kind of looked at us and said you know what it takes to 

improve your losses, and, in fact, we do. It means higher risk lending we start to back away from. But does that really tie in to what 

the mission of the SBA is? What it equates to is it says don’t make 

restaurant loans in lower income areas. Don’t make loans that are 

higher risk, and, in particular, in our experiences low income areas 

have a higher risk associated with them. Prior to this rating, we 

paid no attention to where somebody was located, what level of income they had, the conventional underwriting concepts. We just 

looked at it and said do they have a good business plan? Does it 

look like they have thought through the program well? Now we 

look at it and say what is their scoring, what is their credit scoring, 

are they in a low income area, are they in a high risk business or 

area? And we ignore or minimize the typical eligibility standard in 

favor of more of a risk mitigation and underwriting concept. We 

think that Congress needs to look at the mission of the SBA and 

look at this lender rating system and give us specific guidance as 

to how to mirror the two and in what direction a lender is supposed 

to operate in. 

The third area is in new regulations where we think that Congress has to look at the regulations that are being put out by the 

SBA and again see and look through what the cause and effect is. 

For instance, now one of the changes that the SBA has put in 

place, it says when a loan is evaluated by an appraiser they want 

after the building has been built, they want the appraiser to come 

back and certify that it is what they did the original appraisal for, 

which is a good practice. But the regulation goes on to say the appraiser needs to verify that the building was built according to its 

original specs. Well, that is not the expertise of an appraiser. That 

is the expertise of an architect or an engineer. Now we have appraisers who won’t sign off on this documentation because they are 

concerned that this request is beyond their profession’s capacity. 

Those are the kind of things that we need to look at closely before 

we put regulations in place. 

And the last item we wanted to highlight was the guaranteed 

payment problems that are in the system. This has caused a lot of 

lenders to diminish their activity level or back out of the program, 

and those examples are highlighted in here but the basic solution 

there also is to have a local person that has authority to work 

through the problems as they are encountered. I appreciate the opportunity to speak, and I think I have more than used my 5 minutes. 

[The statement of Mr. Leyh is included in the appendix.] 

Chairman ALTMIRE. Thank you, Mr. Leyh. Now Ms. Marilyn 

Landis is President and CEO of Basic Business Concepts in Pittsburgh, Pennsylvania. Ms. Landis has over 30 years of experience 

in financial services. Basic Business Concepts provides an array of 

7 

services to small businesses and business brokerage services. Welcome, Ms. Landis. 

STATEMENT OF MARILYN LANDIS 

Ms. LANDIS. Thank you. Thank you. Just to mention and add a 

piece on to who I am, I have offices scattered throughout the 

United States, but I have a heavy concentration in Pennsylvania 

and in Ohio, so very versed on the economy as we are here. I am 

also the 2009 SBA National Financial Services Champion. And I 

would like to thank you, Chairman Altmire, for holding this very 

timely hearing and for inviting me to be part of it. Thank you. 

Prior to starting Basic Business Concepts, I spent 30 years working 

for and with commercial lenders, banks and small businesses. I 

worked for 3 of the largest U.S. small business lenders in the country, marketing, originating and underwriting SBA loans, and have 

continued working with my clients on securing SBA loans, as well 

as a myriad of other sources of capital. 

After 38 years of working with small business, the one thing I 

can tell you without hesitation is it is tough out there. Small business owners face many obstacles in trying to garner capital, obstacles that illustrate the very significant need for, and importance of, 

the SBA’s lending programs. Many small and startup businesses 

lack the assets necessary for a traditional bank loan. In 2010, these 

are the businesses who have burned through their savings, their 

reserves, and even their retirement accounts to meet their obligations. They have scaled down to the new reality, found new customers, shattered unprofitable lines, added new divisions with better sales, prospects, and margins. In short, we did all the right, responsible things. We are here receiving orders and unable to secure 

working capital. 

Smaller loans are generally less profitable for banks and typically have a higher default rate. The increased usage of personal 

credit ratings for business owners further exacerbates the problem. 

One of the biggest barriers to small business financing is debt secured by equity and fixed assets. Many small business owners do 

not have the kind of equity required by banks to acquire a sizable 

loan. This gap in debt equity financing primarily hinders both 

startup businesses and growing businesses. An entrepreneur wishing to open any business would face significant barriers to financing. The small business owner seeking to expand his or her business or hire additional employees faces the same equity challenges. 

The balance sheets for most small businesses especially in today’s economy are not composed of significant fixed assets especially significant in light of the emerging commercial real estate 

crisis. Even the fixed assets the business does own are likely devalued. A new capital issue has come to the forefront for small 

businesses, and that is the increased reliance on credit cards. Many 

small business owners were forced to turn to credit cards as their 

primary source of working capital in the early years of this decade 

when a multitude of banks tightened their lending standards. 

In December of 2009, 78 percent of the respondents to an NSBA 

survey reported that they had been impacted by the credit crunch 

causing 47 percent not to expand their business. Banking practices 

that restricted access to capital were a key catalyst in the creation 

8 

of the SBA’s flagship 7(a) loan program. As you can see, however, 

imperfections within the market still exist, and SBA loan programs 

are as important now as ever. Congress should be pleased the 

American Recovery and Reinvestment Act, while not a cure all for 

the credit crunch, the temporary elimination of the upfront borrower fees and the increased guarantee for SBA loans have been 

instrumental in a recent uptick in SBA lending. 

Given this tremendous success, it is vital that Congress immediately extend these provisions through all of 2010 on a reliable, 

sustainable basis that the lenders can build strong origination and 

compliance programs around. The fact that SBA volume has mirrored the availability of the program confirms the lenders need the 

increased liquidity it affords. SBA programs have served a key role 

in making capital available to small business. The use of the SBA 

programs have enabled lenders to meet the needs of their borrowers with the SBA guarantee to mitigate the reach outside of 

their normal criteria. 

The SBA has made changes to the standard operating procedures 

to meet both the need for increased credit quality and increased 

flexibility in order to meet current access to capital needs. There 

are necessary changes, however, that cannot be made solely 

through the SOP. These changes must be made legislatively. I 

would like to recommend the following changes. First, permit borrowers to pledge additional collateral for a refinance, for example, 

real estate, in order to secure a longer term lower payment in order 

to improve cash flow. Currently, the law does not permit calculating a SBA loan term based on the underlying collateral. Second, 

permit the SBA to work with lenders to support loans advanced 

against projected sales. This could be accomplished in more than 

one way. If the lender and the borrower agree, for example, to a 

projected sales plan that rebuilds the business the lender would receive a reduced SBA guarantee for the first year to ensure both 

lender and borrower are committed to the viability of the projections. 

If the borrower makes all payments for the first year the bank 

would receive an increase in the guarantee amount to the full 

amount available under the SBA program. The second way to support loans for projected sales is to raise the cap on the SBA 

CapLine program. These programs, which finance purchase orders 

and contracts, are by their nature more costly for the lender to 

offer. An increased rate cap would permit the lenders to participate 

in this program at an interest rate level that is commiserate with 

their requirements for profitability and still meet the borrowers 

need for affordable financing. A legislative change is also required 

in order to open the SBA’s very practical international line of credit 

program to domestic receivables. Currently this program can only 

be used for international sales. 

I also urge Congress and this Committee to address 2 additional 

aspects of the credit card industry that urgently need reform, the 

absence of explicit protections for small business cards, and, two, 

the secretive and unfair interchange fees. The Administration and 

Congress must fully support small businesses as the true centers 

of growth in U.S. economy. Congress must recognize that the majority of small businesses in today’s economy are not fixed asset inVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
9 

tensive and should take the lead ensuring the traditional financing 

practices and new credit card policies do not restrict small business 

growth. 

I urge Congress to examine the benefits of reforming the current 

limitations placed on banks and lending to small businesses and 

fully supporting and funding existing SBA loan programs. I thank 

you for your time, and welcome any questions you may have. 

[The statement of Ms. Landis is included in the appendix.] 

Chairman ALTMIRE. Thank you, Ms. Landis. Finally, Mr. Karl A. 

Kaluhiokalani is President of RRC Consulting Group in Pittsburgh, 

Pennsylvania. Mr. Kaluhiokalani has extensive experience in training, strategic planning and performance management. RRC Consulting Group provides engineering services for commercial, public 

and residential properties. Welcome, Mr. Kaluhiokalani. 

STATEMENT OF KARL A. KALUHIOKALANI 

Mr. KALUHIOKALANI. Thank you, Mr. Chairman, for inviting me 

to present testimony today. As a member of the small business 

community and participant in SBA programs what is discussed 

today has a major impact on my business, the same as other small 

businesses. In this period of economic stress, it become even more 

important to support small business through effective utilization 

and management of existing programs while correcting the chronic 

deficiencies identified and discussed by Congress many times in the 

past several years. Past budget, staff, and program cuts have hindered the ability of the SBA to properly manage programs, adjust 

to changes in technology, and meet additional demands of a growing small business population. 

According to the U.S. Census Bureau, between 2002 and 2006 

small businesses fewer than 100 employees have averaged an increase in employment of 24.8 percent while those businesses greater than 100 employees averaged only a 4.15 percent increase. As 

a point of information, the SBA defines a small business as having 

under 500 employees. According to the SBA in a report prepared 

in September of 2009 small businesses represent 99.7 percent of all 

employer firms, employed just over half of private sector employees, pay 44 percent of total U.S. private payroll, have generated 64 

percent of net new jobs over the past 15 years, create more than 

half of the non-farm private gross domestic product, and hire 40 

percent of high tech workers such as scientists, engineers, and computer programmers. 

Given the recognized importance of small businesses to our economy it becomes increasingly frustration when emphasis has been 

placed on big business. So far, billions of taxpayer dollars have 

gone to bail out financial institution and the auto industry while 

little effective effort has been made to save the small businesses 

that are failing every day. Without jobs, people can’t buy cars, save 

money or invest to make our economy stronger. Even though financial institutions received funds to ease the credit crunch, lending 

has only tightened forcing small businesses to close or go into 

bankruptcy. Credit lines have been cancelled, loans are not available, and interest rates have risen on current lines of credit making it almost impossible for small businesses to survive and service 

debt. 

10 

The recent changes in the SBA loan guarantee program are more 

beneficial to companies with over 100 employees and of little value 

to the mom and pop businesses typically with less than 10 employees. A borrower must comply with the lending policies of the institution providing the loan and without work or sales and a strong 

balance sheet a small business is unable to obtain a loan. Rather 

than securing loans, most small businesses are in need of additional work or sales to pay employees, service debt, and expand 

their business. Unfortunately, the federal government does not 

have the capacity to assist all small businesses in increasing sales 

revenue, however, through programs established by Congress has 

the ability to influence federal purchasing and procurement. 

Most of these programs are administered or overseen by the 

SBA. However, as indicated previously, the SBA has lost its effectiveness and many of the established programs are in need of review and revision to make them work as intended. These situations 

have been discussed by Congress many times and examples of 

these deficiencies continue to be a problem and are outlined in my 

written statement. In conclusion, I urge the members of Congress 

on behalf of myself and small businesses overall to address these 

issues with effective legislation to promote small business growth, 

create additional jobs, and move our economy forward at a greater 

pace. Thank you for your consideration. 

[The statement of Mr. Kaluhiokalani is included in the appendix.] 

Chairman ALTMIRE. Thank you. And thanks to all the witnesses, 

and I wanted to again take a moment to explain what this is about 

before we open it up for questions. As I indicated, the Committee 

is having field hearings all around the country to talk about this 

issue and meeting with the SBA regional offices and so forth, and 

I just wanted to make a point that we have the staff director for 

the U.S. House Small Business Committee, Mr. Michael Day, here 

in the back. He is the top guy on the Committee. He is here with 

us today. We, of course, have a stenographer from the Committee, 

and everything that you say is being recorded for the purposes of 

taking this information back to Capitol Hill, trying to figure out a 

way to make things better, and what you are going to say today 

is going to help us sort through these very important issues. 

And, Mr. Zarnikow, and members of the Committee, I would 

point out the 3 constituents that you have heard from today are 

certainly representative of my district and of the concerns I have 

heard from dozens of other business owners and lenders and people 

who have experienced some of the problems that we are talking 

about today. But I would say while there are 3 that are representative of my district, they are probably the 3 most articulate on these 

issues, and I think you have seen that today, and I really do appreciate each of you being here to join us, as well as you, Mr. 

Zarnikow. Thank you. 

For the first question, I did want to talk about the SBA in particular, and in fiscal year 2009 regarding the 7(a) loan program 

only 10 lenders made over 20 percent of all 7(a) programs, and I 

was wondering that at a time when the nation is struggling to recover from over concentration of risk in a few large banks, what is 

11 

the SBA doing to ensure that the SBA does not become dependent 

on only a few large banks to meet its capital access mission? 

Mr. ZARNIKOW. At SBA one of the things that we are very focused on is increasing the points of access for small businesses to 

the SBA program, so one of our high priority strategic goals is to 

increase the number of points of access. What we are working hard 

to do is to get additional lending partners into our programs, 

whether that is banks, credit unions, small business lending companies, and other non-depository lenders. In fiscal year 2009, we 

saw that the number of points of access when our fiscal year ended 

in September, was about 2,771 lenders. This means that about 

2,771 lenders made at least 1 SBA Loan. That was up about 15 

percent from the prior year. 

And currently we have over 4,500 different lenders who have at 

least 1 SBA loan in their portfolio. So we are very focused as an 

agency on increasing the points of access to capital and getting as 

many lending partners into our programs as possible. 

Chairman ALTMIRE. I appreciate that. With that said, it is my 

understanding that a vast majority of the lenders that were 

brought into the program in the past year made only 1 loan, and 

were attracted by the Recovery Act, which, of course, is set to expire after this year. So I was curious what you are going to do to 

retain these lenders and increase their participation after this year. 

Mr. ZARNIKOW. It is not necessarily atypical that a community 

bank, a smaller lender out in the country, would only make 1 or 

2 SBA loans a year. In some cases, they may only make an SBA 

loan every few years. For a smaller lender in their community, they 

really are lending programs focused on expanding access to capital, 

so if the lender can make the loan conventionally without needing 

the SBA guarantee, then that is what they do. They make the conventional loan without the SBA guarantee, so they really utilize 

our program to expand access to capital in situations where they 

need to reach a little bit further down the credit box. The loan 

doesn’t meet their conventional lending standards, so seeing that 

we have a lot of lenders who only make 1 or 2 loans a year is not 

at all atypical. 

We are very focused from an SBA perspective on customer service and being customer service friendly. That may sound odd coming from a government agency, but we really think of small businesses as being our customers. Our lending partners are the people 

that we utilize in reaching our customers. In essence, they are our 

distribution channel. So we have embarked on a lot of things to 

really be better partners with our lenders. An example of that is 

in our guaranteed purchase program. Part of centralization at 

times was a difficult process and getting it right and getting the 

right level of staffing in the centers, getting the processes correct, 

has taken some time. We have been very focused on a continuous 

improvement process. 

One of the things we have done is embark on what we call a 

′′brand promise′′ that deals with our 7(a) guaranteed purchase process. We have made a ′′brand promise′′ that if a lender submits a 

complete purchase package that we will make a decision on that 

package and get them paid within 45 days. We are currently seeing 

that about 60 percent of the loans that come into our Herndon cenVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
12 

ter on a 7(a) guaranteed purchase are meeting the brand promise 

where the lender provides a complete package when they submit 

it. Our decision these packages within the 45-day period, 1 example 

of how we are trying to be a better partner with our lending partners. 

Chairman ALTMIRE. Thank you. And a lot of the discussion that 

comes up, as you can imagine, is the balance that the SBA takes 

between the size of the loan versus the number of people who can 

access SBA lending opportunities. And we looked at a statistical 

projection of the agency’s loan distribution which indicates that 

even in the best of circumstances less than 50 loans would be made 

in the $5 million range through the SBA, and this follows the logic 

that business is emerging from an economic downturn. We want to 

be cautious, of course, and take on smaller amount of debt, no 

more. So why then is the SBA so focused on a proposal to increase 

loan size when it appears to the outside observer that it should be 

more concerned about smaller loan amounts? 

Mr. ZARNIKOW. At the agency we are concerned about loans of all 

dollar amounts, and what we have seen after spending a lot of time 

trying to understand what market gaps are is that there is a way 

for the SBA to appropriately balance that expanding access to capital while also appropriately managing risk. One of the gaps we 

have seen is that with the changes in the credit markets, changes 

in the economy, that somewhat large or small businesses have had 

a harder time accessing capital much like very small businesses 

have had at different times. And, therefore, increasing the loan 

limit would allow those somewhat smaller, but still small, businesses have greater access to capital. 

We find, too, that large or small businesses disproportionately 

are bigger job producers so we think it is important from a job production standpoint. And there are certain industries when you look 

at manufacturing industries, franchise industries, exporters, where 

we think the larger loan size is particularly important, but we don’t 

think that that comes at expense of the smaller loans. What we 

find is the larger loans in our portfolio typically perform better and 

actually help subsidize the cost of the smaller loans. 

Chairman ALTMIRE. Thank you. The last question for Mr. 

Zarnikow for now, later we will get to the others, but I want to 

focus specifically on the district that I represent, which you are 

right smack in the middle of right now. It is a 6-county district 

that has a mixture of high tech, high growth areas and heavy manufacturing, industrial areas that, of course, over the years have 

seen the loss of some of those manufacturing jobs, so it is a very 

good mix. I think it is instructive for the SBA to look at the recovery and how it affects a district like this. And SBA data shows that 

the number of loans made in the 4th district will likely remain constant this year and the dollar volume has already surpassed all of 

last year’s $2 million with a year to date total for 2010 expected 

to be $21 million. 

And this would suggest that lenders are making bigger loans instead of extending credit to a greater number of small businesses 

who in turn drive job growth, what we were just discussing. I was 

wondering if you see this to be the case in western Pennsylvania, 

and if you have it in this district in particular. 

13 

Mr. ZARNIKOW. The numbers you quoted would be consistent 

with what we have seen, and I think it is pretty consistent with 

what we have seen nationwide which is our average loan size has 

been increasing. Some of that is the smaller dollar loans or smaller 

businesses typically don’t have as much collateral or don’t have as 

much of a track record, and that makes it harder for lenders in the 

current environment to extend loans to them. So in the end businesses still need to be creditworthy. Our programs are loans. We, 

with partial government guarantee, help lender expand the credit 

box but in the end the small businesses still need to be creditworthy. 

I think that the current economic environment and the credit environment has probably been typically harder on a start-up type 

business where there isn’t a track record that a bank can look at 

where the business doesn’t—or where the business or person 

doesn’t have much in the way in collateral. But I would say that 

even given in the current environment we are still seeing that 

about 25 percent of SBA loans are going to start up businesses, so 

compared to the conventional market we still disproportionately 

support start-up businesses. 

Chairman ALTMIRE. Thank you. I am going to move to Marilyn 

Landis. Ms. Landis, I want to give you the opportunity to publicly 

voice concern about something that we have talked about many 

times, and that is the extent of the credit crunch facing small businesses demonstrates the problem with relying entirely upon the 

private sector for a solution, and I was wondering if you could talk 

about whether you think that banks alone will be able to meet the 

credit needs of small businesses or if it is time that we look for 

other solutions, and, if so, what you would propose. 

Ms. LANDIS. I think the banking industry has built a long tradition of managing credit risk very carefully looking at all the things 

that determine whether or not somebody is creditworthy. I spent 

a lot of years in that industry and I understand the scoring mechanism. Do we have appropriate collateral? Do we have sufficient liquidity? Do we have an increasing sales line? Do we have an increasing net profit line? What does the owner’s personal credit 

score look like? What is the debt ratio? All of those have built a 

body of evidence that the regulators use when they come in to look 

at the bank to determine if this loan is creditworthy or not. 

In today’s economy most of those things have been altered or 

completely blown away. Companies that are very strong from the 

credit model perspective may have reduced sales because they were 

smart enough to move away from a sale that is not productive and 

move into one that is. They may have taken slightly less profit 

margins because they were forced to but in turn made internal cuts 

in their system so they could survive. Business owners have loans 

through their own cash reserves so if you are looking at liquidity 

of a business it is not there. As a result, the model of a successful 

business has changed. Thirty-eight years ago when I started in 

banking, we knew how to do a projection loan and had a regulatory 

environment that permitted us to do projection loans without the 

collateral, without the historic cash flow, and what the misnomer 

is that all projection loans are startups. That is untrue. 

14 

In today’s economy the vast majority of businesses were here 

with their sales. They dropped to here with the economy and that 

curve is growth. They have got to go back on a projection loan to 

where they were before, which is where their sales would slightly 

extend beyond their ability to pay. The lending community is made 

up of a lot of very bright people and in time they will come up with 

new models. They will build the body of evidence that the regulators will accept so that they can follow that model and get the 

credit ratings that they need to get there, but that will take time. 

In the interim, there are private lenders who do not have to meet 

the same regulatory requirements who have personal capital at 

risk of their investors, their stockholders, their depositors that are 

willing to test some of these new models and that is happening, 

and it is exciting. 

I also think there is a role for the SBA to enable the banks to 

take some of those risks and set these new paradigms to make that 

possible because the reality is indeed the business that can afford 

a large commercial real estate loan probably is in a building that 

is too big for itself, and what the most valuable asset a business 

has today is its people, its patents, its process, its intellectual properties, none of which we have mastered a model to be able to lend 

against that will stand up against the rigors of the regulatory environment, so I think it is important to explore 2 things, one, lending 

opportunities outside the traditional banking structure to give the 

banking structure time to rebuild and to heal. Second, to enable individuals to expand their business so that they can go back to a 

traditional bank for the more traditional loans like real estate or 

heavy equipment. 

Chairman ALTMIRE. Thank you. Mr. Leyh, if we want to create 

new jobs, which, of course, is the priority, it is critically important 

to encourage creditworthy businesses, many of whom have remained on the sidelines, to enter the credit market, and to do so 

some have proposed giving small business loan deferrals for up to 

6 months or 0 percent interest for the first few years. In your opinion, would these types of incentives get small business customers 

to apply for loans, and, if not, what type of loan incentives would 

be needed? 

Mr. LEYH. When you reduce the cost of funds in any way, whether it is no interest, deferral of payment, you put an economic benefit in the hands of the requester, the borrower, and obviously it 

will make a very positive difference. The things you have to weigh 

are is it a short-term fix or is it a long-term fix and certainly a program like that would not be a long-term fix because it is not a longterm sustainable type of stimulus. 

But in the short term there certainly can be a value especially 

in regards to an existing operation that is attempting to come back 

from a tough economic time and giving it a lower cost of funds is 

going to be a plus. 

Chairman ALTMIRE. And, certainly, Mr. Leyh, you and I have 

discussed this next point many times, but I was wondering for the 

record if you could talk about the fact that some financial regulators and some of the banking industry have told me that the primary reason for the decline in small business lending is that firms 

aren’t applying for the loans in the first place. Has a decline in this 

15 

loan demand been something that you have seen in your business, 

and, if so, why do you think it is occurring? 

Mr. LEYH. In the discussions that I have had with other bank 

presidents being in my role in the executive committee for the 

Pennsylvania Association of Community Bankers many of the 

small banks either have a bad experience with SBA or listen to stories second hand and it scares them away from the program. There 

in the past was a strong push, and I know Karl does in this local 

district, have an attempt to get out and visit with the banks and 

try to overcome those issues. But when you hear stories, and I 

think if you look in my example we all know the liquor license, liquor story from Dollar Bank, and that scares away a lot of people. 

And so there has to be a better job. The SBA has to do a better 

job. And it is a much more challenging environment now with centralization. 

That is kind of why we push hard for that go to person in the 

local office because a local presence like Karl going out and talking 

to people and trying to get them in a program doesn’t really have 

the ability to succeed without the authority behind him to cut 

through the red tape and to get some things done. When somebody 

is new in the program, we are used to the program so things become second nature, and we still have challenges, but it is very 

hard to empathize with a startup bank getting into the program 

and running into a roadblock and having centralization. And if you 

put those factors together, it is very frustrating to be involved in 

a program. There needs to be a local presence. There needs to be 

an authority behind that local presence to break down the barriers. 

Any large organization, and SBA is a large organization, no matter how efficient it becomes, has to have a local touch with authority or it is going to become like the Wal-Marts or the K-Marts or 

Exxons where they lose some of their efficiencies just based upon 

their size. 

Chairman ALTMIRE. I want to give Mr. Kaluhiokalani a chance 

to talk about that issue, and then I will give Ms. Landis and then 

finally Mr. Zarnikow on this question a chance to weigh in. 

Mr. KALUHIOKALANI. Thank you, Mr. Chairman. I agree with Ms. 

Landis about the issues that are facing small businesses, and I can 

relate with my own experience. When I started my company, we 

were doing very well. I went to a bank, borrowed, actually established a line of credit as a cushion in the event that something 

would happen I would always have something available that I 

could fall back on to draw and to help with operating capital. In 

my business, the real estate market, I am very sensitive to the real 

estate market and when the economy started failing in that area, 

my business suffered dramatically. So, again, I started to rely on 

my line of credit to draw down and try to help me through some 

rough spots and try to continue to grow my business or replace the 

business that I was losing in the commercial markets. 

One of the things I did was turn to the government procurement 

trying to go through the certification process with the SBA. But my 

point is during that period my line of credit was cut off. I lost my 

line of credit. So I had to find alternative means of financing to try 

to keep my business going and I had to turn to the private sector 

and get an investor involved in my company and now shares ownVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
16 

ership with my company to keep me going. And I am not the only 

one that has a small business that is in this position. And what has 

happened, once you lose your ability or your revenue source or reduction the bank automatically did a credit check and they said because of the change in your credit score that is why we have cut 

off your line of credit. Well, you know, now what do I do, and now 

the situation snowballs and there is no way that my business, and 

I am just being very honest, could go to a bank today and get a 

loan. It is just not going to happen because of the policies that the 

lender has. 

And again I am not the only small business in that situation, 

and as I pointed out, a great percentage of businesses, small businesses, have less than 100 employees, and they are the ones that 

are really suffering with the lending policies that are out there 

now. Those with 400 or 500, you know, they have revenues, $50, 

$60, $70, $80 million a year. You know, they have a good balance 

sheet. Those small businesses under 100 employees don’t. 

Chairman ALTMIRE. Ms. Landis. 

Ms. LANDIS. You have heard me say this before. Small businesses 

are small not because we are too stupid to be big, so if we don’t 

think we have a realistic opportunity to either secure the loan or 

pay it back, we are not going to ask to borrow. I think the biggest 

thing that has prevented small businesses, as you mentioned, your 

line of credit being cut back. The biggest impact of a small business 

being both creditworthy under the traditional sense and the ability 

to reach out and borrow has been the variances of the credit card 

industry. It has become the wild west of finance. In many cases, 

small business owners have been impacted by the very fact that 

they were growing fast or as I relayed to you earlier paying down 

my debt. I paid down a major credit card I used to open my New 

England office, and I paid it down by two-thirds. 

The credit card company rewarded me by cutting my credit limit 

to the outstanding balance, so now instead of being 33 percent utilized, I am 100 percent utilized. That dropped my credit score 

which prompted 2 other credit cards to drop my credit limit which 

further dropped my score. Am I going to go to the bank and borrow 

when my credit score dropped? Even if it is still within acceptable 

standards psychologically I have been impacted that my credit 

score is bad. You add to that that another credit card company, 

and, again, I have made all my payments on time, tripled the 

amount of my payment each month. My health insurance has gone 

up significantly. As a result, I don’t have the money to pay back 

a traditional loan. I need longer terms. I need some flexibility here 

if I am going to do that. 

The other thing that impairs the small business owner are the 

gatekeepers. Many of the small banks, the individual is able to 

walk in and talk to a banker and get a feel for whether or not they 

can borrow. I have met with credit managers of very large banks 

who have no idea how many people are being turned away at the 

desk in their branches because of simple questions the borrower 

will ask. The people leave and somebody in credit says we don’t 

have the applications. We can’t lend the money because the people 

were turned away by the gatekeepers in the beginning who did not 

want to take the time to work with the credit. The industry has 

17 

changed significantly for small business lending in that lenders by 

and large are rewarded on the volume they do, so if there is an 

easier loan to do you can’t blame them for taking it and skipping 

the harder ones. 

Those folks never make it into the credit pipeline to get counted 

so the credit cards, the industry, the nature of small business, the 

gatekeeper says do you have collateral, and they say, well, no, I 

have got my people, I have got my accounts receivable. Well, I am 

sorry, we can’t help you, and they are not counted in your statistics. 

Chairman ALTMIRE. Thank you. On that point, Mr. Zarnikow, do 

you have anything to add? 

Mr. ZARNIKOW. I do think that information and data that we 

have seen at SBA is there has definitely been a pull back in the 

credit card industry, and obviously small businesses use a lot of 

different sources for financing. They use family and friends. They 

historically borrowed against their home either on a home equity 

line or using their home as collateral. They have used credit cards. 

They use traditional bank debt. So there are a lot of different 

sources of financing for small businesses, and a number of those 

have been impacted by the current credit environment. We do 

think that this is where SBA programs really play a critical role 

by providing the partial government guarantee. It does encourage 

banks or other lending partners to stretch the credit box. 

We believe the Recovery Act has really worked, that the fee relief 

from the higher guarantee has really driven a big increase in SBA 

lending volume up over 90 percent, and that long-term extension 

of the Recovery Act is really a critical thing to keep access to capital for small businesses going. 

Chairman ALTMIRE. Thank you. And with regard to default that 

takes place although rising defaults in the agency portfolio we believe were triggered by the recession these losses would not have 

occurred without overly permissive lending practices by lenders 

and a lack of oversight and risk management by the agency. I 

would ask if you agree with that or what your comment is about 

that and what you would do to try to correct those problems and 

extend any losses going forward? 

Mr. ZARNIKOW. Sure. At SBA, we work through lending partners 

so we provide the guarantee. We do delegate a lot of authority to 

the lending partners to make the credit decision and have a system 

of oversight where we monitor lenders both through on-site reviews 

and also an off-site monitoring tool that was actually referenced 

earlier in the testimony. What we have seen in the portfolio is 

there has been a rising level of defaults. The curve that we have 

seen in defaults is very consistent with what has been going on in 

the broader credit markets obviously because with the partial government guarantee the lending partner is taking additional risk 

versus conventional loans. The losses that we are seeing in the 

portfolio are higher than what a bank would see in its conventional 

portfolio which is exactly what you would expect. 

We have seen that, the change in the default curve has been very 

similar to what lenders are seeing, so we think that it is really a 

function primarily of what has been going on more broadly in the 

economy. Obviously, the increase in unemployment over 10 percent 

18 

has had a pretty significant impact on the economy, and a significant impact on small businesses’ ability to sustain sales and profitability, so what we have seen overall in the portfolio is pretty much 

what you would expect given the overall economic environment. I 

think we have seen a swinging pendulum in credit standards, 

which is not uncommon at all when you look at credit cycles where 

you see a loosening of credit and then there is a pendulum swing 

where you see a tightening of credit. 

One of the things we monitor is the Federal Reserve’s senior loan 

officer opinion survey where they actually survey loan officers on 

what is going on in their lending institution relative to credit 

standards, and what we have seen is that for the last number of 

quarters, I think it is 12 or 13 quarters in a row now, we have seen 

a tightening of credit standards. The most recent survey that came 

out showed that the credit standards were unchanged, which 

means we may be at the bottom of the tightening cycle. We have 

definitely gone through a very significant tightening of credit based 

upon the surveys that we see. 

Chairman ALTMIRE. Would you expect that trend to continue? 

You say you think we are at the bottom now. Do you expect an uptick? 

Mr. ZARNIKOW. What I would expect, I think what I was referencing was the tightening of the cycle, so the most recent one basically lenders weren’t continuing to tighten but they also hadn’t 

begun to loosen the credit cycle yet. My own expectation is that the 

worst is behind us as far as tightening of credit. It may be a while 

yet before we see a loosening of credit as banks rebuild their balance sheet and the small businesses have an opportunity to recover 

from the current economic climate. 

Chairman ALTMIRE. Thanks. I thought of something as Ms. Landis was talking a moment ago, many businesses that I have spoken 

with have expressed frustration that despite interest rates being 

near all time lows, near zero, heightened scrutiny from regulators 

has made banks unwilling to make more loans, so in the context 

of what we were just discussing a moment ago, I was wondering 

how you felt we could address that problem. 

Ms. LANDIS. The problem is not the interest rate. The frustration 

is that the interest rates are low but we can’t get at them. Many 

businesses are borrowing at 18 or 20 percent if they are using a 

factor of purchase order financing or contract financing from private lender and they are making a profit with those dollars. It is 

a matter of having access to the dollars. That was one of the reasons we talked about the rate cap increase. We can absorb some 

interest rate impact. The frustration is the difference when the 

headlines tell us that there are such low rates available. Obviously, 

if we could repay a loan at a lower rate, it would be much easier 

for us to pay it back. 

But if you based your business model on your cost of funding 

credit cards, for example, small businesses don’t use them because 

we aren’t smart. We use them because that is what we were given. 

Twice I applied for a line of credit. Both times I was approved. 

Then they sent me the credit card. I had not been improved for a 

line of credit. I had been approved for a credit card. That is true 

of small businesses across the board. As a result, they are now payVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
19 

ing 27, 29, and 30 percent interest rates and they are paying significant larger payments. Is it hurting them? Absolutely. And is it 

increasing defaults? Perhaps, because of that. But if your model is 

built around that higher rate, you can absorb some rate increase 

but the frustration is huge and it is not so much that I am paying 

27 percent and somebody else is paying 5 is that the only money 

I could get was at 30. 

And you have a feeling that the 5 percent was a giveaway. There 

is an over emphasis on purchase of a home. I am sorry. For a small 

business owner who would like to pay their employee enough to 

buy a home, that is more important, is payroll. 

Chairman ALTMIRE. I wonder if you and Mr. Kaluhiokalani could 

address as a business consultant if you could describe the role the 

technical assistance mentoring and other services can play in helping new entrepreneurs successfully borrow and build a sustainable 

business. 

Ms. LANDIS. We have had 20 plus years with a small business 

owner who wanted to borrow money could walk into a bank, flash 

their credit score, talk about the equity in the home and nobody 

read their business plan. As a result, we have fostered a generation 

or more of small business owners who never had to do the tough 

job of really building a good balance sheet and a good income statement and really knowing if they could afford that loan, that payback, that interest rate. I worked for a lender that is not at this 

table that will remain nameless, a national one, that the deal was 

there are certain professions, if they were breathing they could get 

a loan if they had the credit score and they had the equity in their 

home. 

These business owners are now for the first time facing the reality of having to produce a balance sheet and an income statement. That is the world I work with every day. These are bright 

business people, and when I show them how to use an income 

statement and a balance sheet, they get it. There are wonderful 

things that are happening to the way they can manage and run 

their business, but we raised a couple of generations of folks that 

never had to pass that test before and they need technical assistance to get there, absolutely. 

Mr. KALUHIOKALANI. I would agree that small businesses would 

find value in education, on the technical aspects of financial planning. Just going in up front knowing exactly what the risks are, 

how to mitigate that risks, what sources of financing are available, 

what happens if there is a shortfall there, and have a plan to recover. I mean obviously our situation with the economy if there is 

a dip in the economy how are you going to survive that. So a program established up front for the financial health of the company 

that is growing or someone planning on going in businesses, I think 

is a very valuable tool for them to succeed in the long term. Unfortunately, there aren’t enough programs available out there. Even 

your small business development centers are stretched to the limit 

and they only have a certain amount of capacity to assist a small 

business, but I think more emphasis needs to be placed in the up 

front planning of your business. 

Chairman ALTMIRE. Thank you. Since you have the mile there, 

Mr. Kaluhiokalani, let me address this to you. Some have proposed 

20 

to give small business owners a rainy day account. Under this proposal small businesses would have a special escrow account funded 

by the SBA set up at their lender’s bank to use if the businesses 

should need temporary payment relief. Knowing they had a cushion during the recovery, do you think this type of assistance would 

incentivize more small businesses to seek a loan? 

Mr. KALUHIOKALANI. It is a difficult question because, one, you 

have to know the terms, obviously. What am I going to have to 

repay and when do I have to start that repayment plan? What do 

I have to pledge up front in order to secure the loan? You know, 

what happens if the economy doesn’t recover as fast as we would 

like? I mean there is a lot of consideration in even taking on something like that. If there were favorable terms, if it was a long-term 

situation, you know, until there is a time when the economy 

reaches a certain point or your revenue increases, I would feel comfortable but I don’t think that is going to be the situation. A lender 

is not going to—even the SBA I don’t think is going to wait forever 

for that money to be repaid, so I just don’t see where it is going 

to have people running to the door to apply. 

Chairman ALTMIRE. Ms. Landis, did you want to comment? 

Ms. LANDIS. I did. What you just described was in the traditional 

banking sense a true work out. When a business ran into a hiccup, 

it could go in to its bank with a plan for recovery from that hiccup, 

whatever had caused it, fire, economic disaster, and truly have a 

workout plan whether it was a period of interest only, whether it 

was some additional funds because they saw the need to work 

through that. We have also had several decades where the bank 

didn’t work out, the bigger banks simply did not do a work out. 

They liquidated. As a result, there is not the skill set, particularly 

in the larger banks, to really understand. That is a good old-fashioned—I spent 4 years collecting delinquent loans, and I would sit 

down with the borrower and say, well, what can you afford and 

what can you do and what are you doing about it? 

And we built that reserve fund and, in some cases, lent money 

to a distressed company under special terms because we could see 

they were coming out the other side. That is good old-fashioned 

workout. That is what needs to come back. The banks need the 

flexibility to do that. 

Chairman ALTMIRE. Thank you. Mr. Leyh. 

Mr. LEYH. I can’t speak what happens at other banks. I can 

speak what happens to ours though. That principle is done now on 

a routine basis. SBA statistics are 2 out of 5 businesses, I think, 

fail in the first 5 years. We do almost all small business lending. 

We are probably in work out discussions and work with people constantly. About 20 percent of our actual lending base is in some 

form of work out, distress, or needs help. I can’t speak for everybody, and I certainly can’t speak for the larger banks but in our 

case that is what we do. We also have a small business research 

center that people can come in and help create a business plan. 

Selected professionals look at the pros and cons with different 

professionals, get help whether it is advertising, accounting, business plan, referrals to CDCs who have time available to work, and 

consultants. There are people out there that do that type of thing. 

When we make recommendations or think about empowering a priVerDate Aug 31 2005 16:40 Jul 09, 2010 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\56298.TXT DARIEN
21 

vate lender system versus the banking environment remember 

what we have. I mean we have a financial crisis because we have 

people outside the banking system who weren’t regulated who created the problem. That is what happens when you go to a line of 

business that is nor regulated. People will take advantage. I mean 

that is part of the capital society. 

And if you a weakened player, then you are going to be taken 

advantage of. The banking system on the other hand has regulations that prohibit that from taking place. The issue you have is 

unlike other industries a regulator can actually take your bank 

from you. I mean they have that kind of authority, which is not in 

other industries. So they have an incredibly strong influence. And 

so if you are going to want banks to do things, you are going to 

have to go to the regulators that are in the safety and soundness 

arena and say we want you to do these things. The same issue that 

we have in banking is the same issue that I talked about that we 

have with the SBA with the new lender rating system. 

On one hand, you want safety and soundness. On the other hand, 

you want aggressive lending when there is higher risk. You have 

to give a clear cut set of rules to all the players that says here is 

what you want. If you don’t send a clear message then people will 

get conservative or do what they need to do to protect themselves. 

So if you want more aggressive lending, you have got to go to the 

regulators and say give the banks a chance. In our case, the things 

that you are complaining about, I think are realistic in most banks. 

They aren’t in ours. The regulators have been very, very good with 

us allowing us to do work outs and work with people and probably 

give us the benefit of the doubt because we have had 10 years of 

doing what we said we could do, and when that occurs then they 

give you the benefit of the doubt. 

Other institutions have to do the same thing, so I don’t think 

going to private lending is going to be the end all of all because 

you will have then problems without there being regulation. You 

have an industry, it is a well capitalized industry in the banking 

environment, but you are not going to get them to do these things 

in the norm unless you get the regulators to work with them. You 

can’t have Congress saying lend and a bunch of regulators on the 

other side saying if you make that loan, you won’t have a bank 

anymore in really that simplistic terms. 

And you have to create the balance in between just as you do 

with SBA. You can’t go to me and say I want you to do ARC loans. 

I want you to go do more aggressive loans. And, by the way, if you 

have losses or when I credit score your businesses they are not 

high enough, well, then your lender ratings are going to go so low 

that we may tie your hands up and ask you to leave the program 

or reduce what lending we are going to allow you to do. You have 

to give us a clear cut set of rules to live by. Then everybody knows 

what the game plan is. 

Chairman ALTMIRE. Thank you. We have gone over it a little bit 

but I still wanted to finish up 1 more question with Mr. Zarnikow 

specific to the district again where you are right now. Pennsylvania’s 4th congressional district is on track to double the number of 

504 CDC loans and quadruple the dollar volume of those loans this 

year compared to FY 2009, and that is one area, of course, where 

22 

SBA lending has seen significant growth in the 4th district. However, there is some evidence, some experts believe, that the commercial real state market may be in for a collapse similar to that 

experienced in 2006 in the residential market, which it goes without saying, would bring significant losses to both the SBA and the 

taxpayers. So does the SBA have policies in place to mitigate some 

of these risks associated with commercial real estate in the 504 

CDC program if that were to occur? 

Mr. ZARNIKOW. Basically the 504 program is a program that is 

designed to help a business finance fixed assets. That could be machinery and equipment. It could be land and a building. It could 

be a combination. It provides a long-term fixed rate financing for 

that small business that is tied specifically to job creation and job 

retention. The structure of the program requires about a 50 percent 

loan to value first mortgage being done by a conventional lender. 

SBA does up to 40 percent with its second mortgage position debenture, and then the small business puts in at least 10 percent 

equity. In all cases in SBA lending, the primary source of repayment is the business being successful, the cash flow of the business, repaying the loan, and that is really the primary thing that 

we look at. 

Obviously, to pin down what happens in real estate cycles, real 

estate cycles go up and down, values go up and down. If the business is successful then the business repays the loan out of the cash 

flows of the business it generates. We are concerned at SBA about 

that there could be a coming commercial real estate refinancing 

issue in the conventional market. If you go back and look at the 

conventional small business or commercial real estate market a lot 

of the commercial real estate mortgages are done with a long amortization but a shorter term maturity where the loan may balloon 

in 5 years or 7 years or 3 years--unlike SBA that has long terms 

What we are concerned about is in marketplaces where there has 

been a significant decline in value that those loans may no longer 

qualify for conventional lending standards, and as a result the 

lender may not be able to or may be unwilling to roll over that 

loan. We have proposed as an administration to utilize on a temporary basis the existing SBA 504 program to allow refinancing of 

those loans. This would not be a situation where we are taking on 

risk of businesses that aren’t performing or that are bailing out the 

banks. It is really to try and address situations where the loan is 

performing. The small business is making its payments, but the 

loan no longer qualifies for conventional mortgage standards that 

would allow it to be rolled over in the conventional market. 

So we propose to basically do a 504 to allow refinancing of owneroccupied small business commercial real estate into the 504 program on a temporary basis to try and address that situation. 

Chairman ALTMIRE. Thank you. I will close by asking each of 

you, starting with Mr. Zarnikow, and then we will move from your 

right to left, is there anything that you wanted to make sure was 

in the record that you weren’t asked that you wish you were or any 

statement that you wanted to make that we overlooked in talking 

about this afternoon? 

Mr. ZARNIKOW. I would just like to thank you again for holding 

this hearing. I think it is very important to hear what is going on 

23 

out in the marketplace. We spend a lot of time talking with small 

businesses, talking with lending partners to try to and craft smart 

solutions to the existing problems. We do think that the proposals 

that the Administration have made, and particularly extending the 

Recovery Act, the 90 percent guarantee and the fee relief are critically important, increasing the loan sizes, and also allowing for the 

504 refinancing provisions, as well as the small business lending 

fund that is really a treasury program that would help provide capital to small banks to help them increase their small business lending. 

Chairman ALTMIRE. Thank you. 

Mr. ZARNIKOW. Thank you. 

Chairman ALTMIRE. Mr. Leyh, is there anything that we missed 

that you wanted to add? 

Mr. LEYH. No. I appreciate the opportunity and I think it has 

been all encompassing. 

Chairman ALTMIRE. Thank you. Ms. Landis. 

Ms. LANDIS. I just want to thank you that I gave the opportunity 

to address the fact that, as I said earlier, most of us don’t need another building right now. And I am seeing across the U.S., and I 

have clients—I have offices from California to New England, I am 

seeing small businesses taking a second breath. The first breath 

was I am here. The second one is I think I can go forward. And 

there are 78 percent that have growth plans for the coming years 

and of those about 57 percent have growth plans for this year. 

These are people who have survived and are moving forward. They 

need working capital, desperately need working capital. 

Mr. KALUHIOKALANI. I just want to thank you again for allowing 

me to testify today, but also I wanted to say that there needs to 

be a real emphasis on the SBA and its programs to continue to develop those programs and revise them as needed, not just only in 

the loan program but in other business development programs that 

the SBA is in charge of. The SBA traditionally has had a loss in 

budget, staffing, and they are so overworked right now to even 

have somebody communicate with you is a real challenge for a 

small business, so I believe that they really need some help internally and also from Congress in the form of funding, additional 

funding, for their programs. Thank you. 

Chairman ALTMIRE. Thank you. Thank you all. And I would say 

for the record once again that I would hope that the other members 

of this Committee would realize that these really are as expert a 

witness panel as we could possibly have come up with in western 

Pennsylvania. I think this has been a great discussion, and it is 

going to be very helpful to the Committee in moving forward to try 

to address these issues. So I would, therefore, ask unanimous consent that the record be open for 5 legislative days. Having heard 

no objection, so noted. This hearing of the Committee on Small 

Business, Subcommittee on Investigations and Oversight is now 

adjourned. Thank you. 

[Whereupon, at 3:18 p.m., the Subcommittee was adjourned.] 

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