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25–400 2017

SBA’S 7(A) LOAN PROGRAM: A DETAILED REVIEW 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MAY 17, 2017 

Small Business Committee Document Number 115–020 

Available via the GPO Website: www.fdsys.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

TRENT KELLY, Mississippi 

ROD BLUM, Iowa 

JAMES COMER, Kentucky 

JENNIFFER GONZA ́ LEZ-COLO ́ N, Puerto Rico 

DON BACON, Nebraska 

BRIAN FITZPATRICK, Pennsylvania 

ROGER MARSHALL, Kansas 

RON ESTES, Kansas 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

DWIGHT EVANS, Pennsylvania 

STEPHANIE MURPHY, Florida 

AL LAWSON, JR., Florida 

YVETTE CLARK, New York 

JUDY CHU, California 

ALMA ADAMS, North Carolina 

ADRIANO ESPAILLAT, New York 

BRAD SCHNEIDER, Illinois 

VACANT 

KEVIN FITZPATRICK, Majority Staff Director 

JAN OLIVER, Majority Deputy Staff Director and Chief Counsel 

ADAM MINEHARDT, Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Steve Chabot ................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

WITNESSES 

Ms. Linda Rusche, Director, Office of Credit Risk Management, Office of 

Capital Access, United States Small Business Administration, Washington, 

DC .......................................................................................................................... 3 

Mr. William Manger, Associate Administrator, Office of Capital Access, 

United States Small Business Administration, Washington, DC .................... 5 

APPENDIX 

Prepared Statements: 

Ms. Linda Rusche, Director, Office of Credit Risk Management, Office 

of Capital Access, United States Small Business Administration, Washington, DC ..................................................................................................... 23 

Mr. William Manger, Associate Administrator, Office of Capital Access, 

United States Small Business Administration, Washington, DC ............. 27 

Questions and Answers for the Record: 

Question from Hon. Blaine Luetkemeyer to Mr. William Manger ............... 31 

Additional Material for the Record: 

CUNA - Credit Union National Association ................................................... 33 

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(1) 

SBA’S 7(A) LOAN PROGRAM: A DETAILED 

REVIEW 

WEDNESDAY, MAY 17, 2017 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 11:00 a.m., in Room 

2360, Rayburn House Office Building, Hon. Steve Chabot [chairman of the Committee] presiding. 

Present: Representatives Chabot, Luetkemeyer, Brat, 

Radewagen, Knight, Kelly, Blum, Gonza ́lez-Colo ́n, Fitzpatrick, 

Estes, Vela ́zquez, Evans, Clarke, Espaillat, and Schneider. 

Chairman CHABOT. The Committee will come to order. 

I want to thank everyone for being here today. 

Around here we use the term ‘‘access to capital’’ a lot. It is an 

issue as old as entrepreneurship itself, coming up with the funds 

to get started. Even if we had a perfect economic environment with 

growth beyond our wildest dreams and overregulation a thing of 

the past, finding willing partners to finance a risk is one of the 

most significant hurdles a new small business must cross. The Nation’s entrepreneurs and small businesses continue to experience a 

difficult lending environment, which is, at best, stagnant. Getting 

a loan to actually grow a business and create new jobs can be very 

challenging. 

With limited options, small businesses are turning to the Small 

Business Administration 7(a) Loan Program in record numbers for 

their financial needs. The 7(a) Loan Program is the SBA’s flagship 

program, whereby the SBA partners with financial institutions and 

guarantees the repayment of loans to small businesses that cannot 

obtain capital through conventional lending. The guarantee percentage ranges from 75 to 85 percent based on the size of the loan, 

which is capped at $5 million. 

The SBA collects lender fees to run the program, which over the 

past 4 years have covered the cost and resulted in zero expense to 

the American taxpayer. As the 7(a) program grows in terms of loan 

volume, loan amount, and the congressionally authorized loan 

limit, we owe it to the taxpayers and the small businesses involved 

to conduct vigilant oversight. We have to make sure that American 

small businesses who are creditworthy, but cannot obtain capital 

elsewhere remain the priority. 

In March, Chairman Trent Kelly and the Subcommittee on Investigations, Oversight, and Regulations, kicked off the conversation on oversight of the 7(a) Loan Program. In that discussion, 

SBREP-219A with DISTILLER

2 

their Subcommittee heard from lenders and financial institutions 

directly involved in the loan program. 

We are building on that conversation today by examining the 

program from the SBA’s perspective. Over the years, improvements 

have been made by the SBA when it comes to lender oversight. 

However, concerns need to be addressed to safeguard the American 

taxpayer dollar. 

Today, I hope we can hear more about the resources available at 

the SBA and the Office of the Credit Risk Management to conduct 

lender oversight. We look forward to hearing about the risk-based 

models, monitoring systems, and the lender portals that help the 

SBA keep a close watch on the program. The conversation today 

will help guide us as we continue to examine the SBA’s lending 

programs and how they may be improved. 

We appreciate the witnesses for being here today. We look forward to your testimony, and I would now like to yield to the ranking member, Ms. Vela ́zquez, for her opening remarks. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. And welcome to 

the witnesses. Thank you for being here. 

Access to capital is critical to the success of small businesses. If, 

as the saying goes, small businesses are the economy’s backbone, 

then the flow of capital is the lifeblood. However, obtaining conventional credit remains a challenge for many small businesses. 

Startups, in particular, are still considered a risky bet by many 

lenders. 

Through the 7(a) program, the SBA helps fill in the gaps in the 

capital markets, mitigating some of the risk to lenders by guaranteeing that these loans will be repaid. In turn, small businesses 

keep their inventory stocked, their employees paid, and their doors 

open. 

In recent years, 7(a) loans have experienced unprecedented growth. In fiscal year 2016, over 64,000 loans totaling $24 billion 

were supported. With the prolific growth of the 7(a) program, it is 

critical that this initiative functions efficiently and effectively. For 

example, though SBA remains under its 7(a) lending authorization 

last year, it is crucial that SBA closely monitor loan volume and 

communicate to Congress in a timely manner concerns regarding 

reaching the cap. 

In addition, while the overall number of 7(a) loans has increased, 

the percentage going to minority and women-owned firms has remained fairly consistent since 2010, and is lower than before or 

during the recession. This disparity is troubling. It must be addressed to enable creation and economic growth, particularly in traditionally underserved communities. 

Other concerns have been raised by both borrowers and lenders 

alike related to the effectiveness of SBA’s existing technology to facilitate lending. Technology is only helpful if we ensure it works efficiently for lending purposes. Recent OAG and GAO reports disclosing weaknesses in SBA lenders’ oversight raised other concerns. 

Their analyses raised questions about whether the agency has adequate tools to manage the program. 

It is the responsibility of this committee, and one we take seriously, to examine the internal controls of SBA lending programs. 

Absent adequate oversight, I am concerned that the program reSBREP-219A with DISTILLER

3 

sources may be unnecessarily strained, potentially depriving other 

entrepreneurs of needed credit. 

Overall, this committee seeks to ensure that the 7(a) program 

works for small business borrowers. I look forward to hearing from 

our witness today and gaining their insights on how we can improve the SBA flagship loan program. 

I yield back, Mr. Chairman. 

Chairman CHABOT. Thank you very much. The gentlelady 

yields back. 

And if Committee members have opening statements, we would 

ask that they be submitted for the record. 

And I would now like to take just a moment to explain our lighting system to the witnesses. I think you are probably already familiar with it, but we operate under the 5-minute rule. Each of you 

gets 5 minutes to testify, and then we will ask questions. And we 

will limit ourselves to 5 minutes, and it goes back and forth between a Republican and a Democrat up here. 

And then there is a lighting system to assist you. The green light 

will be on for 4 minutes and then the yellow light will come on and 

let you know you have got a minute to wrap up. And then when 

the red light comes on, if you could wrap up as close to that as possible we would appreciate it. 

And now I would like to introduce our distinguished panel here 

this morning. 

Our first witness will be Linda Rusche. Ms. Rusche is the director of the Office of Credit Risk Management, which oversees the 

7(a) Loan Program within the Office of Capital Access at the SBA, 

the Small Business Administration. She joined as a director in 

2015, and previously served in numerous roles at the SBA, including as branch manager of the Kansas City Review Branch for 

OCRM, along with the assistant regional administrator for Finance 

and Investment in Region 7. And we appreciate you being here 

today. 

And our second witness will be William Manger. Mr. Manger is 

the associate administrator for the Office of Capital Access at the 

SBA. Before his appointment, Mr. Manger served as the managing 

director at Brock Capital Group and Investment Bank in New York 

City. Prior to his time with Brock Capital, he served as associate 

administrator for field operations at the SBA from 2007 through 

2009. And we also welcome you here today. 

And Ms. Rusche, you are recognized for 5 minutes. 

STATEMENTS OF LINDA RUSCHE, DIRECTOR, OFFICE OF 

CREDIT RISK MANAGEMENT, OFFICE OF CAPITAL ACCESS, 

UNITED STATES SMALL BUSINESS ADMINISTRATION; WILLIAM MANGER, ASSOCIATE ADMINISTRATOR, OFFICE OF 

CAPITAL ACCESS, UNITED STATES SMALL BUSINESS ADMINISTRATION 

STATEMENT OF LINDA RUSCHE 

Ms. RUSCHE. Good morning. And thank you, Chairman Chabot 

and Ranking Member Vela ́zquez. Thank you for the opportunity to 

come and speak with you today and to testify before the entire 

Committee on the Office of Credit Risk Management of the Small 

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4 

Business Administration. As director of OCRM, I am responsible 

for the oversight and the risk management of SBA’s lending programs and the guaranteed loan portfolios delivered by our 7(a) and 

504 lending partners. 

SBA’s administrator, Linda McMahon, has demonstrated leadership in championing small business lending while maintaining prudent lending standards. SBA is particularly interested in balancing 

the growing credit needs of America’s small businesses with prudent lending, always ensuring that we are meeting the requirements of our mission, as authorized by the Small Business Act. The 

Office of Credit Risk Management is to effectively manage program 

risk, monitor lender performance, and enforce loan program requirements. In short, to maintain the integrity and the viability of 

the programs. 

How does OCRM manage all 7(a) lenders and certified develop- ment companies and over $1 billion in credit? Our first step is 

through use of our loan and lender monitoring system which tracks 

monthly performance of every loans, assigns a quarterly credit 

score for each loan, and then rolls that into a quarterly purchase 

rating for each lender based on those loans. This provides an initial 

risk profile for each lender and CDC and allows OCRM to bucket 

higher risk lenders and CDCs for additional monitoring. 

Next, OCRM uses our composite risk measurement methodology 

that we call PARRiS for 7(a) lenders, SMART for CDCs, to further 

diagnose our higher risk lenders. Benchmarks of historical and projected performance have been developed for PARRiS and SMART 

and provide relative measures of individual lenders’ financial risk. 

Third, OCRM conducts approximately 300 focused, risk-based 

exams and reviews every year using these protocols. OCRM also 

conducts over 1,200 assessments each year before renewing delegated authority status for those lenders and CDCs which have been 

granted enhanced authority by SBA. And we also conduct quarterly 

financial and capital assessments of our SBA supervised lenders, 

since SBA is generally their sole Federal financial regulator. 

OCRM has been at the forefront of identifying emerging risks, 

one of which involves the ongoing discussion of which businesses 

are in need of SBA financing. The Small Business Act, as amended, 

states that small business loan guarantees are to be provided only 

to those borrowers who cannot obtain needed credit on reasonable 

terms from other Federal sources—I am sorry, other non-Federal 

sources. With recent robust growth of the 7(a) program, OCRM has 

paid particular attention in its reviews to a lender’s documented 

credit elsewhere reasons. We have identified some instances of lack 

of understanding on the part of lenders and occasionally poor internal controls within lender operations which contribute to some noncompliance. OCRM requires those lenders which demonstrating 

noncompliance to correct individual file deficiencies, and as needed, 

to alter policies, procedures, or internal controls to ensure full compliance. OCRM will continue to focus on this on this area in our 

upcoming reviews to ensure the mission of the agency is met in 

providing small businesses financing they cannot obtain elsewhere 

on reasonable terms. 

Thank you for the opportunity to share this information. I will 

be happy to respond to your questions. 

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5 

Chairman CHABOT. Thank you very much. 

And Mr. Manger, you are recognized for 5 minutes. It is with a 

hard G, I understand, Manger? Okay. 

Mr. MANGER. Correct. Thank you. 

STATEMENT OF WILLIAM MANGER 

Mr. MANGER. I would like to thank Chairman Chabot, Ranking 

Member Vela ́zquez, and the entire House Small Business Committee for the opportunity to testify before you today. I had a great 

meeting in April with some of your staff and look forward to building a strong and open relationship with all of you moving forward. 

It is an honor for me to be here and to have been appointed Associate Administrator for the SBA’s Office of Capital Access by Administrator Linda McMahon. It has been 8 years since I last 

worked at the SBA as associate administrator for the Office of 

Field Operations in Washington, and prior to that I served as 

SBA’s Regional Administrator in Region 2 in New York. From the 

very beginning of my time at the SBA, I was able to witness the 

positive impact our programs have on communities across the country. I can definitely say that I am very excited to have the ability 

to improve the services we provide and help small business owners 

and entrepreneurs grow to their full potential. 

As Associate Administrator, I oversee the SBA’s flagship 7(a) and 

504 loan programs, as well as our Microloan and Surety Bond programs. The role that the SBA and the Office of Capital Access 

plays in our credit markets fills an important gap in the lending 

marketplace. Our agency aims to help small businesses obtain 

credit which is otherwise unavailable through conventional lending. 

As many of you know, oftentimes entrepreneurs have the will and 

drive to succeed but access to capital, unfortunately, proves to be 

an unsurmountable hurdle. That is where we come in. Our programs have been helping small businesses get on their feet and 

grow for decades, but as we all know, there is always room for improvement. 

Administrator Linda McMahon has placed an emphasis on making sure our entire agency, and our Office of Capital Access, is running as efficiently and effectively as possible. That is exactly what 

I intend to do as Associate Administrator. 

The Office of Capital Access is streamlining our standard operating procedures and plans to repeal unnecessary regulations that 

do not benefit small businesses aiming to start or expand. We will 

also place an emphasis on SBA loan center efficiency, which will 

decrease the time it takes for lenders to process, service, and collect 

SBA guaranteed loans. 

As we work to recruit more lenders for our programs, we have 

stressed to our lending partners that we want to see more small 

dollar loans being made to entrepreneurs. Our focus will remain on 

helping those who need capital most before anyone else. That includes our veterans, women-owned businesses, minority-owned 

businesses, and rural communities. 

In addition, the Office of Capital Access sees our 7(a) program in 

particular as a powerful tool for helping create and retain jobs for 

American workers. It is of paramount importance to me and our 

agency that our 7(a) and 504 flagship programs continue to operate 

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6 

at zero subsidy and remain a great deal for taxpayers. Having been 

serving as Associate Administrator for just less than 2 months 

now, I can assure you that our office is placing an incredible 

amount of emphasis on oversight to make sure our programs are 

being administrated properly. Linda Rusche plans a crucial role in 

that as director of our Office of Credit Risk Management. 

The Office of Capital Access and the Office of Chief Financial Officer are also constantly monitoring our program level limits and 

SBA thanks the Committee for its assistance in raising the 7(a) 

program level to $27.5 billion in Fiscal Year 2017 from $26.5 billion 

Fiscal Year 2016. 

While SBA is witnessing increased demand by the small business 

community this year, we are not currently in jeopardy of exceeding 

our capacity to meet such demands. However, to ensure that America’s small businesses can fully benefit from the tools and resources 

provided by the SBA and that the support continues through the 

year uninterrupted, the administrator supports proposed legislation 

that would grant circumstantial authority to the Administrator to 

increase 7(a) lending authority by 15 percent when program subsidy is zero and appropriate notice is provided to Congress. The 

flexibility offered by the proposed statutory provision would offer 

greater certainty to our 7(a) lending partners and make additional 

assistance available to small businesses at no additional subsidy 

cost to the taxpayer. 

While we continue to see job creation and responsible growth 

from all of our programs, I cannot stress enough how committed we 

are to proper oversight. I look forward to a transparent and collaborative relationship with this Committee to ensure we are fulfilling all aspects of our agency’s mandate. 

In conclusion, please know that in me you have someone that 

shares our administrator’s vision of a stronger small business community in America and is committed to administering our programs both properly and in the best interest of the American taxpayer. Thank you. 

Chairman CHABOT. Thank you. And I will now recognize myself 

to begin the questioning for 5 minutes. 

My first question, we tape these Committee hearings and there 

are small business folks out there across the country who could be 

watching, you know, either now or down the road because the tapes 

are available online, and we put out, you know, what goes on in 

these meetings, so it gets out there. So let me ask both of you this. 

Let us say I am a small business person and I am listening to the 

testimony and I am thinking, well, do I qualify for a loan, a 7(a) 

loan which is the largest loan program that we have? Am I going 

to qualify? I heard them say something that I do not qualify for 

this, you know, if I am too qualified, unless if I can get a loan elsewhere then I am not supposed to go to them, but how do I know 

if I am not so qualified that I am overqualified to get a loan? And 

I do not necessarily want to make myself look too unqualified that 

they turn me down at the SBA and then I am really out because 

I do not qualify anywhere else and I am underqualified for the 

SBA, so I either cannot start my business in the first place or I 

cannot expand it. So what would you have to say to those folks that 

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7 

might be wondering about how qualified do they actually have to 

be or unqualified do they have to be? 

So, Ms. Rusche, you were smiling a lot. I will let you go first. 

Ms. RUSCHE. Thank you so much, Chairman Chabot. 

Having been a loan officer in the field, that question gets asked 

a lot. And it is a perfect question. We appreciate the opportunity 

to elaborate on credit elsewhere. 

Small businesses walk into lenders, into banks, to look for a loan. 

Often they do not recognize that it may become an SBA loan. There 

are challenges to receiving a loan when you are a small business, 

particularly if you are a startup, a small service firm, limited collateral. Those are the types of circumstances that are difficult for 

lenders to lend to without some additional enhancement or protection. Our SBA guarantee provides that benefit, so often it is the 

lender who steers the customer towards the SBA, as opposed to a 

customer walking in and saying, oh, I want an SBA loan. They just 

want a loan. They want the credit. And our credit elsewhere test 

requires the lender to consider first, can I make this loan in my 

current policies? And if I cannot, then I can turn to the SBA and 

document in the file why I need that guarantee from the SBA, and 

the loan is then made. 

Chairman CHABOT. Thank you. That was a very good answer. 

Mr. Manger, I do not know if you wanted to add anything to it. 

Mr. MANGER. I would just like to add a little bit. As the former 

Associate Administrator for Field Operations, I would like to put 

in a plug for the 68 district offices that exist across the country. 

Certainly, any aspiring small business owner and entrepreneur can 

go into any of those district offices, contact them electronically or 

by phone, and ask them specifically those questions—do you think 

my business would qualify for an SBA loan? 

I would also put in a plug for our entrepreneurial development 

partners: SCORE, the women’s business centers, the small business development centers. All of those will see any aspiring entrepreneur free of charge, and they can go in there and ask these 

questions. For example, is my business plan formulated enough? 

Do I have enough projections in here? Will the bank accept these? 

I think, again, we offer other services aside from just the loan programs that are very, very beneficial to small business owners. 

You know, somebody that needs a longer term loan, that is an 

excellent entrepreneur for the 7(a) program. The average term of 

a 7(a) loan is 13 years. Most conventional loans made by a bank 

are only 3 to 5 years. So that business that needs a longer term 

in order to return payment on that loan really would benefit from 

the SBA 7(a) program. You know, and certainly any business that 

needs to make an acquisition, that is something usually that lenders are hesitant about making those loans, but with a 7(a) guarantee they are able to make that acquisition. 

Chairman CHABOT. Thank you. I have got time for about one 

more question here before my time expires. 

We hear from a lot of small businesses, everybody that is a member of this Committee, and one of the complaints that we hear from 

small business folks who try to get a loan through the SBA is how 

what a paperwork-intensive process it can be. And I have heard 

SBREP-219A with DISTILLER

8 

stories that sometimes during the course of the process that they 

kind of give up, unfortunately. 

Now, in your testimony, Ms. Rusche, and I will quote, ‘‘We have 

plans to appeal unnecessary regulations that do not benefit small 

businesses aiming to start or expand.’’ So what specific regulations 

do you have in mind to make the process less burdensome than it 

is, and what regulations can we get rid of that will help small business folks? 

Ms. RUSCHE. Thank you for that question. I am actually the 

regulatory overseer of most of the lenders who deliver the program 

and, therefore, we believe we have reasonably adequate regulations. We do not have any plans to repeal any specific ones related 

to lender oversight; however, we are looking very thoroughly at the 

regulations for applying for the loan, and that is another jurisdiction within the Office of Capital Access. I would like to invite my 

boss, Bill Manger, to speak to that comment. 

Chairman CHABOT. Yeah, we would welcome him, but keep it 

to a minute if you would so we do not go over. 

Mr. MANGER. Sure. Yes. So one of the first things I did, Mr. 

Chairman, when I came in as the Associate Administrator for Capital Access, was speak to all my directors and say we need to simplify our processes to make it easier for borrowers and lenders to 

access the capital that we are providing. To do that, I have instructed the directors to look at all of the SOPs, especially the one 

that concerns the loan processes, and we are streamlining those 

SOPs to make it as simple as possible, but also for the clarity so 

that a lender knows exactly what is required of them in order to 

get the benefit of the SBA guarantee. We are also looking at some 

of the regulations, as Ms. Rusche said, in the Office of Capital Access, to determine which of those we can eliminate in some cases 

just to make it easier for, again, our borrowers to access the lending programs. 

Chairman CHABOT. Thank you very much. Thank you. We appreciate that. 

And I will now recognize the ranking member, Ms. Vela ́zquez, for 

5 minutes. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Manger, I am pleased to hear that you are emphasizing to 

lenders that they need to make smaller loans. When we look at the 

portfolio of the 7(a) Lending program, we found that in 2015, the 

average 7(a) loan was $371,000. In fiscal year 2016, it was 

$376,000. Yet the maximum size of the 7(a) loan has increased to 

$5 million. My question to you is what is SBA doing to promote 

small dollar loans? 

Mr. MANGER. Thank you very much for that question. 

As you said, I am working very diligently with our lending partners. In fact, I met with many of them last week to encourage them 

to make those smaller dollar loans available. 

Ms. VELA ́ ZQUEZ. Okay. So what are you doing, or the agency, 

to implement the lender mission rating from the January 4, 2017, 

policy notice? 

Mr. MANGER. I can actually ask Linda Rusche to help answer 

that. 

Ms. VELA ́ ZQUEZ. Sure. 

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Mr. MANGER. We are still reviewing that, though. 

Ms. RUSCHE. The mission rating that we have developed for 

7(a) lenders is built upon information that we receive from applications. Nothing additional needs to be prepared by a lender or a borrower. It is part of the basic information we receive. We have published that document. We have not yet fully implemented the protocol within our electronic system and we are working to do that, 

but also evaluating the data upon which it is based. Some of that 

data is voluntarily submitted as opposed to being mandatorily required, and we want to ensure we have a good rating that is well 

constructed and valid before we implement it fully. 

Ms. VELA ́ ZQUEZ. And how long do you think this process is 

going to take? Let me just share with you the frustration that we 

face on this committee because I have seen so many administrators 

come in here to testify and we raise the issue of smaller loans, and 

when we look at the 7(a) portfolio, there is a need for smaller loans. 

How long will it take for you to get the data you need in order to 

implement the policy? 

Ms. RUSCHE. Thank you for allowing me to clarify that. We 

have the data but we are ensuring that it is fully accurate before 

we publish that rating. That rating will actually be given to each 

individual lender. It is not a list of mission-rated lenders that we 

would publish. It is based on confidential information provided to 

us, but the lenders will each know where they stand in that system. And we have been reviewing it literally the last couple of 

weeks. 

Ms. VELA ́ ZQUEZ. Okay. Thank you. 

Mr. Manger, again, many congressional hearings and we constantly hear from women, minority firms, rural America, the fact 

that on average, it is very difficult for them to get the lending they 

need. When we look at the 7(a) program, pre-recession levels was 

$17 billion; today it is $27 billion. Yet, lending for women, minority, and rural America, has seen a decrease compared to pre-recession levels. What are you doing to address that issue? 

Mr. MANGER. That is an excellent question, and I would just 

like to say that our Express program, which is for loans under 

$350,000, 46 percent of our units are done by Express under 

$350,000. And we also have a segment of the 7(a) program that is 

known as Community Advantage. It is still in a pilot, but this is 

for loans under $250,000, with an average of $130,000. So we do 

have programs that are being effective, and actually, those programs are increasing. 

Ms. VELA ́ ZQUEZ. What are you doing to encourage more lenders to take seriously their responsibility to provide assistance to 

underserved communities? 

Chairman CHABOT. The gentlelady’s time is expired, but you 

can answer the question. 

Mr. MANGER. Yeah. No, again, Congresswoman, it is a very 

good question. We are doing as much outreach to our lending partners because the lenders are the ones that are making the loans. 

We are guaranteeing them, but we need to work with our lending 

partners. I am glad to see that we have a couple of people from 

NAGGL here so they hear me loud and clear that we are looking 

to see more loans to women, minorities, veterans, and rural comSBREP-219A with DISTILLER

10 

munities, and we are working very vigorously in order to achieve 

that goals. 

Ms. VELA ́ ZQUEZ. Thank you. 

Chairman CHABOT. Thank you. The gentlelady’s time is expired. 

The gentleman from Missouri, Mr. Luetkemeyer, who is the vice 

chairman of this Committee, is recognized for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. And welcome 

to our guests today. 

The National Federation of Independent Business has a recent 

study out that shows that a lot of large banks and large businesses 

are doing well. But it also shows that a lot of small banks and 

small businesses are not, from the standpoint that it is more difficult for them to do business, their capital is strained, and as a 

result we have got basically what they call a two-speed economy 

going on, where part of the economy is going well, part of it is not. 

So it is interesting to hear, and I am glad to hear, Ms. Rusche, 

that you made the comment that we have robust growth in the 701 

program, so I think it begs the question, why are we experiencing 

a growth there? Are we changing lending standards or is there a 

demand for the banks? Are the banks becoming more engaged? 

Small business becoming more engaged? Why are we suddenly seeing this interest in the 701 program and the growth? 

Ms. RUSCHE. Thank you for the opportunity to share that. We 

are pleased that there is robust growth in the program. There is 

growth in both the large and the small loans involved, and a wide 

breadth of all lender varieties that are applying for the guarantees 

in our program. 

We are seeing the economy improve as well, and we find that to 

also be of assistance in our growth of the 7(a) program. But again, 

it is the lenders who come to us as opposed to us telling the lender. 

The lender must know what applicant needs that they have. 

Mr. LUETKEMEYER. Okay. But one of the key points that I am 

trying to get to here is there is no loosening of lending standards 

to get more growth. 

Ms. RUSCHE. Thank you for that clarification. And no, there are 

no loosening of lending standards. 

Mr. LUETKEMEYER. But just more of a demand? 

Ms. RUSCHE. But we are seeing more of a demand. 

Mr. LUETKEMEYER. Okay. 

Ms. RUSCHE. And may I—— 

Mr. LUETKEMEYER. Okay. You made the comment about prudent lending standards as a way to provide some oversight. Can 

you define what prudent lending standards would be in your mind? 

What are you looking for when you go in and you look at something? I mean, because are you not approving the loan anyway? I 

mean, the bank gives you the loan and you are looking at it. So 

why would you be looking at prudent loan lender standards. That, 

to me, would be a standard operating procedure. 

Ms. RUSCHE. Prudent lending standards are an operating procedure. That would require consideration of the equity investment 

of the customer, the projections proposing for repayment ability, 

cashflow needs of the business while that repayment ability is met, 

SBREP-219A with DISTILLER

11 

and strong management of the business to ensure that there is 

good management. 

Mr. LUETKEMEYER. Okay. So there is nothing beyond the normal way that you look at a loan from a standard point of those important criteria that make up the loan that you are trying to make 

and why you approve it or disapprove it? 

Ms. RUSCHE. I am unclear of the question. 

Mr. LUETKEMEYER. Well, I am kind of a concerned about 

when you say ‘‘prudent loan standards.’’ Is there something there 

that is a red flag that you are looking at that somebody is not looking at? Because whenever you are looking at a bank making the 

loan and then you are guaranteeing it, it seems to me like it would 

be kind of cookie cutter. You have got a basic way of application 

to you. He has to have certain documents, and so it has to adhere 

to certain stands. So why would you have to look then at prudent 

loan standards? I would think that would be an inherent part of 

what you are doing already. 

Ms. RUSCHE. Prudent lending standards are an inherent part 

of what we do. 

Mr. LUETKEMEYER. Okay. 

Ms. RUSCHE. We look at loan files to ensure it has been individually and then we have our robust metrics to ensure that on a portfolio-wide basis we retain that good performance. 

Mr. LUETKEMEYER. Okay. 

Mr. Manger, this is kind of a specific question, but we have had 

an entity come to us with regards to a franchisee. And you have 

issued some sort of an addendum that you ask the franchisor to 

sign in order for the franchisee to qualify for an SBA loan. And it 

is becoming very cumbersome for the franchisor in certain situations. Can you elaborate on that? Are you aware of what I am talking about? 

Mr. MANGER. Yes. 

Mr. LUETKEMEYER. Okay. 

Mr. MANGER. That did happen prior to my coming aboard, 

again, at the SBA, but yes. The lenders actually asked us to try 

and simplify the process for borrowers that wanted loans for the 

acquisition of a franchise, the startup of a franchise. So in our office, they put together basically a one-page form that had to be 

completed in order to make sure that the franchise would be eligible for an SBA guarantee. Actually, I would say that the program 

was more cumbersome prior to that for the majority of franchises 

because it took a lot of time from when it was submitted to the Office of Capital Access, to go through our Office of General Counsel, 

and to get a response as to whether that franchise was eligible or 

not. 

Now, that being said, there are many franchises that had prearranged agreements with SBA from prior to January and we are 

maintaining those. So any franchise that had an agreement with 

SBA prior to January can continue to use that. It really is new 

franchises that want to be eligible for an SBA loan that are to comply with the addendum, but we did that at the lenders’ request because they thought that it was a simpler way to do it and it would 

save a lot of time in actually getting the loan to the borrower for 

the franchise. 

SBREP-219A with DISTILLER

12 

Chairman CHABOT. The gentleman’s time is expired. 

Mr. LUETKEMEYER. Thank you very much for your response. 

Chairman CHABOT. Thank you. 

The gentleman from Illinois, Mr. Schneider, who is the ranking 

member of the Subcommittee on Agriculture, Energy, and Trade, is 

recognized for 5 minutes. 

Mr. SCHNEIDER. Thank you. And I want to thank both Mr. 

Manger and Ms. Rusche for being here, for making your time available, but also for all you are doing to try to help promote small 

business in our country. 

As you know better than most, it is small business that drives 

our economy and it is these entrepreneurs and people who are looking for capital to grow that will allow us to create the jobs we need. 

Mr. Manger, I appreciate very much your testimony. You laid out 

a clear vision and a number of goals for what you are hoping to 

accomplish in your tenure in this position. I would like to take it 

a step further from goals to actually strategy for achieving these 

goals and the steps you are planning to take, in particular as it relates to increasing lending to underserved populations as you have 

talked about: minorities, women, veterans, rural. Do you have specific actions you are planning to take to try to grow their numbers? 

Mr. MANGER. Yes. And thank you, Congressman, for the question. 

What we are doing is we are working with our not-for-profit partners who make the smallest loans. For example, our Microloan program, which is, again, loans under $50,000, the average size of 

those loans is $13,000. It is a much better option for a borrower 

than to, say, put that on several credit cards where they would be 

paying a much higher rate. The Community Advantage program, 

while it is still in pilot until 2020, we will be reviewing this in the 

next year to determine whether we should make that program permanent. Again, that is loans $250,000 or less, average size 

$130,000. Both of those programs are made available to different 

constituencies through our not-for-profit partners. When I have 

looked at lists of cities across the country that show where we are 

very effective, we are very effective in Philadelphia, New York, St. 

Louis. The reason for our effectiveness is the strength of the notfor-profit partner in that city. Cities where we are not doing as well 

are ones where the not-for-profit partner is not as vibrant. 

So we are going to be targeting not-for-profits in different cities 

across the country to come on board with the program to increase 

our Microloan and Community Advantage programs, especially to 

focus on minorities, veterans, and women-owned businesses. I 

think with, again, reinvigorating the partners, the not-for-profit 

partners that must be part of the equation, we will be able to get 

more loans out and penetrate those markets. 

Mr. SCHNEIDER. Are there specific profiles of a successful notfor-profit partner? What do they look like? What are they doing in 

particular that makes them stand out? 

Mr. MANGER. That is a very good question. 

So in Missouri, we work with Justine Peterson. Justine Peterson 

is really an exemplary not-for-profit. What they do is they help entrepreneurs build a credit-risk profile by making money available 

to them first on a very small basis, you know, several hundred dolSBREP-219A with DISTILLER

13 

lars. And when they show that they repay that, they increase the 

loan a little bit more. This is building a credit history for that aspiring entrepreneur, small business owner, and they can continue 

them up the continuum to a larger and larger loan. 

And we have seen them do amazing work out in Missouri, St. 

Louis, Ferguson. It is incredible what they have been able to do. 

And so we would actually like that model to be replicated by other 

not-for-profits in other cities because we think that is really a very 

powerful model and really works. We have seen people actually 

graduate from the Microloan program to the Community Advantage program because they have been able to build a stronger and 

stronger credit history. 

Mr. SCHNEIDER. Let me take back the time. I would love to 

talk more about that offline. 

But it is not just in the Microloan area. How do we expand the 

reach to these underserved populations in the larger loans, cultivating an environment or a culture of entrepreneurship, helping 

them getting the skills and attributes they need to have businesses 

of size that are going to have a $200,000 or $500,000 loan? 

Mr. MANGER. Again, a lot of it has to do with financial literacy. 

We want to make sure that these aspiring entrepreneurs have the 

tools at their disposal and the knowledge of how to build a sound 

business that is going to be successful. We do that through our entrepreneurial development partners. The SBDCs again are offering 

counseling free of charge. Our women’s business centers are doing 

that. The SCORE partners are doing that, and our district offices. 

We do many, many outreach events trying to explain to them what 

is necessary really to build a strong business and what foundation 

is necessary, what type of business plan, what type of projections 

are necessary so that they have a successful business. 

Mr. SCHNEIDER. Great. Well, thank you. I am out of time. I 

will just again emphasize I appreciate the vision, grateful for the 

goals. Goals have to have numbers behind the goals and we need 

strategies and actions. I look forward to working together to try to 

achieve these. Thank you. 

Chairman CHABOT. Thank you. The gentleman’s time has expired. 

The gentleman from Mississippi, Mr. Kelly, who is the chairman 

of the Subcommittee on Investigations, Oversight, and Regulations, 

is recognized for 5 minutes. 

Mr. KELLY. Thank you, Mr. Chairman. And thank both of you 

for being here today and testifying. 

As Chairman Chabot said, we kicked off this conversation in 

March with lenders that provide 7(a) loans. During that hearing we 

discussed the credit elsewhere test. I want to follow up with you 

today on that. Can you both describe the credit elsewhere test? And 

can you define it and how lenders specifically administer it? 

Ms. RUSCHE. Thank you for the question and the opportunity 

to elaborate on our credit elsewhere test. This is from the Small 

Business Act as it is periodically amended that requires that we 

provide guarantees to customers who cannot otherwise obtain credit without the guarantee applied to the loan. As I earlier mentioned, in most cases the borrower comes to the lender and requests a loan, but the lender sees some credit weakness that genSBREP-219A with DISTILLER

14 

erally things like they need a longer term for cashflow, collateral 

is insufficient, it is a startup business, it is a change of ownership 

and there is new management, and the lender requires that that 

additional enhancement be placed on the loan because they otherwise would not make it. And that is the key piece. The guarantee 

allows the lender to make a loan that otherwise would not be available to the customer. 

Mr. MANGER. Yeah. I would just add again that many times it 

has to do with the sector or the industry sector that the small business is in. For example, we all know that the restaurant business 

is a risky business. Many lenders are not willing to make a loan 

to somebody who wants to start up a restaurant, but with an SBA 

guarantee, it mitigates their risk and they are willing to make that 

capital available so that someone can start a restaurant or a business again that has a riskier profile. 

Mr. KELLY. Thank you. And to follow up, are lenders, to your 

knowledge, running afoul of this credit elsewhere test? 

Ms. RUSCHE. If I could take the opportunity to answer that one. 

We review lenders periodically. I have mentioned the onsite reviews that we conduct where we look at the files and identify what 

the reasons are that are fully documented. We could always do a 

better job of educating or lender population as to the requirements, 

and we do that in our oversight reviews, as well as through our 

regular policies. And improving our streamlining processes in the 

SOP. We are mindful of that and continually work to identify any 

deficiencies we have in educating our lenders, but generally speaking, the lenders understand this test and conform to it appropriately. 

Mr. KELLY. And this program at its core runs on behalf of the 

small businesses and not the lenders’ bottom line, so are there 

small businesses that have the ability to obtain conventional lending utilizing the 7(a) program and what is SBA specifically doing 

about this? So not from the lenders’ standpoint, but small businesses’. You know, it is for the small businesses. So what are you 

doing to ensure that small businesses are not getting into the SBA 

program when they should be conventional lending? 

Ms. RUSCHE. We carefully review every loan file that we look 

at in our review processes to ensure that that is not happening, 

and when we see any indication that there might be confusion 

about that we provide direction and guidance to require the lender 

to correct any mistakes in that area. 

Mr. KELLY. And Mr. Manger, do you have anything to add? 

Mr. MANGER. You know, I would just say that the SOP rewrite 

that we are going through right now will clarify to a great extent, 

I think, the credit elsewhere test. And I would also just add that 

certainly if we have a loan that needs to be purchased by the SBA, 

unfortunately, and we find that that loan did not meet the credit 

elsewhere test, that we will not be paying out the guaranteed portion of that loan. So there is a risk, obviously, to any lender that 

does not properly document the credit elsewhere memo. 

Mr. KELLY. And just going back very briefly, and this is just a 

comment, but I would like both of you, especially you, Mr. Manger, 

going back to the chairman’s comment to start the hearing, it is 

imperative that we make this process simple enough that people 

SBREP-219A with DISTILLER

15 

can use it and get through it and get the credit that they need and 

deserve and not tied up with all these regulations and paperwork 

and additional addendums and all those things. I closed loans a 

long, long time ago as a lawyer, and people did not know what they 

were signing and there was no way to explain it. So you add all 

this, but it does not add any benefit to the person who is receiving 

that loan. They need to understand what they are signing, what 

they are doing, so simplify it as much as you can. 

And with that, I yield back, Mr. Chairman. 

Chairman CHABOT. Thank you very much. The gentleman 

yields back. 

And the gentleman from Pennsylvania, Mr. Evans, who is the 

ranking member of the Subcommittee on Economic Growth, Tax, 

and Capital Access, is recognized for 5 minutes. 

Mr. EVANS. Thank you, Mr. Chairman. 

Mr. Manger, thanks to the chairman and our ranking member, 

a great deal of discussion has been around the access of capital, 

and I heard you mention Philadelphia. And I am from the city of 

Philadelphia. I represent the Philadelphia Montgomery County. 

I am very much interested in a very specific way about access of 

people of color taking advantage of these opportunities as well as 

newly upstart. Because we start about growth for the economy. It 

is always talked about the aspect of women, African American, Hispanics, and others getting into the marketplace. Talk to me a little 

bit about people understanding, taking advantage of this opportunity, because I heard you mention, you know—— 

Mr. MANGER. Yes. And I did mention Philadelphia. And really 

because we have some not-for-profit partners in Philadelphia who 

have—— 

Mr. EVANS. Such as? 

Mr. MANGER. You know, I will have to get you those names, 

Congressman. I will get those for you. 

Mr. EVANS. Okay. 

Mr. MANGER. But the results have been really quite amazing 

in Philadelphia among all of our American cities. And it really is 

because those not-for-profits that work in the inner city are making 

those available to women-owned businesses, businesses of color. 

You know, your congressional district this year up until April 30th 

has had 59 loans made for about $11.5 million. That is a little bit 

down from last year, but last year the full year there were 116 

loans made for just over $30 million. So we are getting money out 

into your specific district. And again, we are going to continue to 

work to do that across the country. 

The dollars that actually were getting out to women this year as 

a whole on the 7(a) program is up 7.2 percent. The dollar amount 

to African Americans is actually up 22.2 percent in the 7(a) program. And actually, we are seeing upticks in all of those areas except for veterans, but the good news on veterans is that for loans 

under $150,000 in the 7(a) program, the dollar amount to veterans 

is up 10.3 percent. 

Mr. EVANS. So, one, I would greatly appreciate if you would provide the information of who the organizations are, because I am interested and the question is the strategies. Because in the same 

district we have a poverty number of about 28.1 percent. Translate 

SBREP-219A with DISTILLER

16 

that in numbers, about 195,000 people. And to me, the number one 

issue is the growth of businesses and jobs. So that is why I asked 

you that question in terms of growth and development. I heard you 

mention a little bit about the difficulty of restaurants. Do you also 

see that with supermarkets, retail in general? 

Mr. MANGER. Congressman, I do not have the specific statistics 

on those other businesses. We can certainly get those for you, but, 

you know, there are definitely certain businesses that lenders realize have a higher risk profile and they are more hesitant to make 

that capital available to somebody who wants to start one of those 

businesses and that is really where the SBA comes in. We are able 

to, with a government guarantee on that loan, be able to make the 

bank see that the risk is mitigated to a level that is agreeable to 

them so that they can actually make that loan available. 

And you are absolutely right. We are wanting to see more capital 

out to all segments of the American society because we understand 

obviously that that is really one of the biggest creators of job 

growth. I mean, there is a correlation between access to capital and 

the hiring of more employees. That has clearly been shown in several studies and we want to make sure that capital is accessible to 

all because we realize that that is again where we are going to create more jobs. As you know, two out of three net new jobs are created by a small business, and so we want to continue to increase 

that as much as possible. 

Mr. EVANS. And that is kind of why I am spending all of my 

time asking you that question because since I have been on this 

Committee, you know, everybody talks about the access of capital 

as the number one issue and that is what I hear constantly. So I 

just wanted to be clear, are you and your particular agency doing 

all it needs to do in terms of outreach to make that happen? 

Mr. MANGER. Congressman, we can always do a better job, and 

we are looking to improve ways in which we deliver our services 

and programs to everybody in the country. And I can assure you 

that while I am here as Associate Administrator, that will be our 

goal and our mission and we will continue that. 

Mr. EVANS. I thank the chairman and yield back the balance of 

my time. 

Chairman CHABOT. Thank you. The gentleman yields back. 

The gentleman from Iowa, Mr. Blum, who is the chairman of the 

Subcommittee on Agriculture, Energy, and Trade, is recognized for 

5 minutes. 

Mr. BLUM. Thank you, Chairman Chabot. 

The loan portfolio, 7(a) loan portfolio, how large today in billions? 

Mr. MANGER. Today, the 7(a) program total loan portfolio is $80 

billion. 

Mr. BLUM. And the default rate on that? 

Mr. MANGER. Is just under—2 percent is the loss purchase rate. 

Mr. BLUM. So if I can do my math correctly that is a big number 

every year. 

Mr. MANGER. And it is being supported by the zero subsidy on 

which the program is running. The fees that pay for the program 

are paying for those losses. 

Mr. BLUM. Which is great. That is unusual. 

SBREP-219A with DISTILLER

17 

Mr. MANGER. We really like the zero subsidy and we will do everything to maintain the zero subsidy for the program. 

Mr. BLUM. We would hope so. 

Mr. MANGER. Yes. 

Mr. BLUM. What happens when somebody defaults vis-a-vis 

asset recovery? 

Mr. MANGER. So first, the lender works as hard as they can to 

make sure that they can recoup as much from the borrower as possible. If at the end of the day it has to be purchased by the SBA, 

which is a last resort, that loan is sent to our office in Herndon, 

Virginia, where we do all of the loan processing for the purchases, 

and again, it is reviewed, and if everything is in accordance with 

SBA policy, we make good on the guaranteed portion. Now, at the 

end of that, if there is anything further that can be done, we are 

required to send that loan over to the Department of the Treasury 

for any final collections that could occur by them, but that is the 

process. 

Mr. BLUM. What percentage of the loans that default do we get 

some type of asset recovery on? 

Mr. MANGER. You know, I do not have that exact number, but 

I do know that we are recouping obviously a good portion, but I do 

not have that exact number. I will get it for you. 

Mr. BLUM. I think someone said in previous testimony here 

today that the loans are reviewed quarterly. Is that correct? Or is 

it the lenders that are reviewed quarterly? 

Ms. RUSCHE. What I mentioned was that we have a quarterly 

purchase rating. That is an analytic rating that we establish for 

every lender that is based upon their existing loan portfolio that 

helps us bucket them into degrees of risk based on the performance 

of their loans so that we can attend to the higher risk lenders. 

Mr. BLUM. Buckets of risk, that was it. I was on a bank board 

for 18 years, in charge of the board of directors’ commercial credit 

review. We would have what we would call suspect loans based on 

the review of those loans. Do you have something similar to that? 

Do you know how many loans currently are at risk or suspect of 

not paying back or of default? 

Ms. RUSCHE. We would actually expect our lenders to manage 

the individual loan credits in their portfolios, and if they come to 

the point where a purchase or an honoring of the guarantee is necessary, that is when it comes into the SBA space. But we have 

lending partners and those partners are the ones who actually 

work with the customers through payment issues and payment 

problems. Our analytics do help those lenders identify their individual loans by buckets of risk as well and we share that with 

those lenders to help them improve that process. 

Mr. BLUM. Okay. So our lenders, the SBA lenders are only organizations that are reviewed by outside organizations such as a 

State banking association or the Federal Reserve, is that correct? 

Ms. RUSCHE. We have several groups of lenders. One group of 

those is lenders that are regulated by entities such as FDIC, OCC, 

or the Fed. We have another population of lenders that are primarily regulated by the Small Business Administration, and we 

tailor our review processes to those facts. So we are a little more 

extensive on our examination reviews and oversight of the lenders 

SBREP-219A with DISTILLER

18 

for which there is no other entity. We do not want to duplicate 

what already exists. 

Mr. BLUM. And I have one last question here and a minute. In 

2015, GAO did a report and they said lender oversight is a ‘‘longstanding management challenge’’ of the SBA. I am sure—I do not 

have the report in front of me—they offered recommendations. How 

are we doing on those recommendations? Have they been accomplished? What percentage of them have not been addressed? Because we are sitting here 2-1/2 years later. 

Ms. RUSCHE. Thank you very much for that question. I have 

been the director of OCRM for 2 years and we have closed all but 

one of the recommendations and we are working actively on it. 

Mr. BLUM. Very good. I appreciate you being here for your testimony today, and I yield back 15 seconds of my time, Mr. Chairman. 

Chairman CHABOT. All right. The gentleman yields back. 

Thank you very much. And we will go to a second round quickly 

here, and we will recognize the ranking member for up to 5 minutes. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Mr. Manger, I come back to you because, when you leave this 

hearing, I want you to understand my concern regarding the gap 

in financing loans below $360,000 in the 7(a) program. The fact of 

the matter is that while the overall number of 7(a) loans has increased, the percentage going to minority and women-owned firms 

has been fairly consistent to the levels of 2010. 

So my question is, why is it that minority lending and women 

lending has not rebounded as well as the rest of the 7(a) portfolio? 

I do not want to hear your answer; I just want to see the numbers 

the next time around and I am going to be paying attention to that. 

I have a question regarding lenders closely monitoring the 7(a) 

authorization cap because emergency supplemental authority was 

required in fiscal year 2014 and 2015. So could giving SBA flexibility to increase the 7(a) lending authority beyond the congressionally authorized cap provide assistance in this situation? 

Mr. MANGER. Yes. I would like to answer that, Congresswoman. 

We want to make sure, and the Administrator, Linda McMahon, 

made it very clear to me when I first came into the agency, she 

said, ‘‘The last thing I want to have happen is the program shut 

down.’’ And I pledged to her that we will watch it on a daily basis 

to make sure that at the first instance that we think that there is 

a problem that we are going to hit that authorization level, that 

we will notify OMB and Congress immediately so that we can rectify that situation because we do not want the program to shut 

down. 

And with that I would also say that, as you know, Linda 

McMahon has asked Congress to give her the ability to increase 

the cap by 15 percent if it does not affect the zero subsidy, no effect 

to the budget, so that we could increase that cap upon notification 

of Congress if we think again we are getting close to that level. It 

would give our lending partners a little breathing room so they 

know that there would be no issue with the cap being reached and, 

again, the program having to shut down. So we would really like, 

and Linda McMahon stressed to me this morning before I came up 

SBREP-219A with DISTILLER

19 

here, she said, please make sure you mention to them that we are 

asking for that relief. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. I yield back. 

Chairman CHABOT. Thank you. And I will recognize myself. 

First of all, Mr. Manger, I will go to you if I can. Some lenders— 

Manger, I am sorry—some lenders utilize the secondary market 

with the 7(a) loans. Would you describe the process of a lender 

using the secondary market? 

Mr. MANGER. Sure. And I think Ms. Rusche could help with 

this as well. But basically, when a loan is made, we do allow some 

lenders to be able to sell that loan into the secondary market. Now, 

the thing that is most important to remember, though, they can 

only sell the guaranteed portion of the loan. The originating lender 

must maintain on average 25 percent of the value of that loan on 

their books. So they still have skin in the game, as they say. So 

we allow that. It is something that our lenders appreciate, but they 

realize that they do maintain skin in the game. They are only selling the guaranteed portion that is guaranteed by the SBA. 

Chairman CHABOT. Thank you. 

Ms. Rusche, to follow up on our previous discussion about the enforcement measures, are there enforcement actions that are available to the Office of Credit Risk Management? Are they strong 

enough to protect lender noncompliance? 

Ms. RUSCHE. We have strong protocols in place. We have a 

Lender Oversight Committee, a collection of officials from the SBA, 

who assist OCRM in ensuring that we have sufficient resources, 

and when we need to take action, they have a say in taking that 

action so it is done appropriately. We would certainly enjoy working with your Committee to review additional possible authorities 

that we may want to consider, but we do think we have strong protocols in place at the present time. 

Chairman CHABOT. Okay. Thank you. 

And back to you, Mr. Manger. Ms. Rusche’s testimony earlier 

states that staff is supplemented by support contractors for reviews 

and exams and enforcement activities. Can you talk about that? 

Are we hiring outside contractors for these roles or just how does 

that work? 

Mr. MANGER. Yes. So in the Office of Credit Risk Management 

under the Office of Capital Access we have 27 full-time equivalents 

working on lender oversight. We augment that with contracts. For 

example, we do have a large contract with Dun and Bradstreet. 

Dun and Bradstreet supplies us amazing metrics on the lenders in 

our program. In fact, I believe Linda Rusche has one of the pages 

that they supply to us, and it really is broken down to a fantastic 

degree so that we get a clear picture of exactly what is going on 

with that lender. That would be very difficult to get some of that 

information that D&B provides us without having that contract. So 

we are very happy to have that contract. They provide us a great 

amount of information. And then again, those 27 FTEs in the office 

do the work onsite that we need to have done. 

Chairman CHABOT. Okay. Thank you. 

And then my final question, and I would invite either one of you 

that would like to take this to do it, you know, we have talked 

about the 7(a) Loan Program here today in some considerable deSBREP-219A with DISTILLER

20 

tail, but that is not the only loan program obviously the SBA has. 

We have the 8(a) Loan Program, the Microloan program, the 504 

Loan Program. For those, again, who might be out there wondering 

what they might qualify, could you sort of just give us a one or two 

or three-sentence idea of what the various programs are and how 

they fit in? Who would they appeal to? 

Mr. MANGER. Sure. And that is a great question, and I hope 

people are listening out there because this would be very helpful 

to them. 

So the 7(a) program is really our flagship program. It is our largest program; $80 billion is in the total portfolio size. That loan can 

be used for anything, including working capital. It is a great loan 

for a startup. It really is the program that we most use and I am 

happy to report that the increase this year in the usage of that program is up 9.7 percent. So it is being used. But what is even more 

interesting, Congressmen, and I think you will find this interesting, Mr. Chairman, is that the 504 program, which is for fixed 

asset acquisition, so any types of bricks and mortar, land, buildings, equipment, heavy equipment for a business, the 504 program 

has actually increased this year by 13.8 percent. And there are 

really two reasons for that. 

One, with the 504 program you are guaranteed a fixed rate for 

a long term, 20 years, for example, on a 504 loan. In a rising interest rate environment, which we have today, there are many people 

that are interested in being able to acquire those fixed assets at a 

fixed rate. Certainly, with the economy doing as well as it is recently, we also find many small businesses are willing to go out 

and make that expensive equipment purchase. The 504 Loan Program is perfect for that type of small business owner that needs 

to acquire a big piece of equipment, fixed assets. The size of that 

loan goes up to $5.5 million, and again, we are seeing an increase 

in that program greater than 7(a) this year, 13.8 percent. 

The Community Advantage program is actually a subset, a pilot 

subset of the 7(a) program, and that was started in 2011 for loans 

under $250,000. Again, average size $130,000, and that program is 

up 19 percent this year. So that is a subset of 7(a), but it is doing 

extremely well and we will be looking at that to possibly make that 

permanent in the future. The pilot runs through 2020. 

And finally, the Microloan program. Again, this is something 

that is done in conjunction with our not-for-profit lending partners, 

lending intermediaries, and those loans are under $50,000, average 

size $13,000. They have great impact for that person that only 

needs a small amount of money, and that program has seen an increase even greater than the 7(a) program this year. In fact, demand for Microloans has gone up since the election. That is up 10.3 

percent this year. 

Chairman CHABOT. Thank you very much. My time is expired. 

The gentlelady from Puerto Rico, Ms. Gonza ́lez-Colo ́n, is recognized for 5 minutes. 

Ms. GONZA ́ LEZ-COLO ́ N. Thank you, Mr. Chairman. I just want 

to make just one question. And it is going to be does the SBA encourage the banks to operate in the secondary market? 

Ms. RUSCHE. Thank you very much for that question. 

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I think encourage is probably not the correct word we would use. 

We allow under our protocols for a lender to participate in selling 

the guaranteed portions of loans in a secondary market. It is the 

lender’s choice. 

Ms. GONZA ́ LEZ-COLO ́ N. So it is going to be a choice. It is not 

that you are encouraged to do that? 

Ms. RUSCHE. No, we are neutral on it. 

Ms. GONZA ́ LEZ-COLO ́ N. And what is the premium paid to acquire a guaranteed loan in the 7(a)? 

Mr. MANGER. Are you asking about what the interest rate is? 

Ms. GONZA ́ LEZ-COLO ́ N. Mm-hmm. 

Mr. MANGER. It is 2-3/4 above prime for the regular 7(a) program. 

Ms. GONZA ́ LEZ-COLO ́ N. Thank you, sir. I yield back. 

Chairman CHABOT. Okay. The gentlelady yields back. We want 

to thank our—oh, she does? Okay. Thank you very much. 

All right. The gentlelady from American-Samoa, Ms. Radewagen, 

who is the chairman of the Subcommittee on Health and Technology, is recognized for 5 minutes. 

Mrs. RADEWAGEN. Thank you, Mr. Chairman. And I want to 

add my welcome to the panel today. 

The Microloan program that was mentioned, I have been really 

very fascinated with that. That tends to work for us out in American Samoa, and perhaps my staff can work with your staff to find 

out more about it because they do not even need under 50K loans. 

You are talking about $1,000 or $2,000. It makes a whole difference and they build these little businesses and they are just burgeoning all over the islands, and I wanted to just mention that. 

So thank you, Mr. Chairman, I yield back. 

Chairman CHABOT. Thank you. The gentlelady yields back. And 

on that point that the gentlelady raised, if somebody out in American Samoa or in Cincinnati, Ohio, or anywhere else wanted to 

know more about these programs, would you suggest they go to 

your website and they would find information there on these 

things? 

Mr. MANGER. Certainly. Our website has a lot of information. 

Chairman CHABOT. And what would that website be? 

Mr. MANGER. SBA.gov. 

Chairman CHABOT. SBA.gov. 

Mr. MANGER. You got it. But, you know, I would also encourage 

those to reach out to our district offices. They are really on the 

frontlines throughout the United States and the territories, and 

they provide a great service and I would also point anyone to them 

as well. 

I would also just like to mention, though, the LINC program. I 

am not sure if we have spoken about LINC here today, but LINC 

was a setup a few years ago at the SBA to pair up lenders with 

particular borrowers. And LINC to date has generated over 200 

emails from borrows looking for financing at SBA-participating 

lenders. And to date as a result, we have had 70,000 unique borrowers receive a match from a lender and they are proceeding with 

financing. There are over 1,200 participating lenders on LINC. 

And Mr. Chairman, I would just like to mention that we are actually enhancing LINC right now. And within the next month we 

SBREP-219A with DISTILLER

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are going to be relaunching it under the new name Lender Match. 

And certainly, if you and your staff would be interested, we would 

like to show you a preview of that before it is launched. 

Chairman CHABOT. Excellent. We would be very interested in 

that. 

We want to thank our witnesses for their testimony here today. 

As the economy continues to recover and as access to capital continues to be a roadblock for the Nation’s small businesses, it is imperative that this program that we have been discussing here this 

morning, the 7(a) Loan Program, is run in as efficient a manner 

as possible while, of course, safeguarding the American taxpayer 

dollars. And with the program experiencing such significant growth 

in recent years, we have a lot on the line, and so we want to thank 

you for what you do about this important program and making 

sure that it is run as efficiently as possible, and obviously follow 

up with the things. The ranking member asked for some additional 

information and we would urge you to provide that. 

I would ask unanimous consent that members have 5 legislative 

days—— 

Ms. GONZA ́ LEZ-COLO ́ N. Mr. Chairman? 

Chairman CHABOT. Yes? 

Ms. GONZA ́ LEZ-COLO ́ N. Can I make just one more question? 

Chairman CHABOT. Absolutely. The gentlelady is recognized. 

Ms. GONZA ́ LEZ-COLO ́ N. Thank you, Mr. Chairman. 

I understand that over 30 percent of the total amount of (7)a 

loans each year are made only for owner-occupied commercial real 

estate transactions. Is that true? 

Mr. MANGER. I do not have that exactly number with me. I will 

have to get that for you. 

Ms. GONZA ́ LEZ-COLO ́ N. Can you check that information? 

Mr. MANGER. Yes. 

Ms. GONZA ́ LEZ-COLO ́ N. And if that is true, can you tell us 

what percentage of those loans are used for business acquisition, 

partners’ bios, working capital, debt consolidation startup capital, 

equipment financing, or real estate financing when you search for 

that information? 

Ms. RUSCHE. We will review our analytics and develop that information and provide it. 

I yield back. 

Chairman CHABOT. So I would unanimous consent that members have 5 legislative days to submit statements and supporting 

materials for the record. 

Without objection, so ordered. And if there is no further business 

to come before the Committee, we are adjourned. Thank you very 

much. 

[Whereupon, at 12:15 p.m., the Committee was adjourned.] 

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A P P E N D I X 

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\.. BfJs1 

. . '> 

....... ,~J ... ~"''.' 

U.S. Small Business Administration 

TESTIMONY of 

LINDA RUSCHE 

Director, Office of Credit Risk Management 

Office of Capital Access 

U.S. Small Business Administration 

House Small Business Committee 

Wednesday, May 17, 2017 
24 

Good morning, Chairman Chabot and Ranking Member Velazquez, and thank you for the opportunity to testify before this Committee on the Office of Credit Risk Management (‘‘OCRM’’) of the 

U.S. Small Business Administration (‘‘SBA’’). As Director of OCRM, 

I am responsible for the oversight and risk management of SBA’s 

lenders and their SBA-guaranteed loan portfolios for the 7(a) and 

504 Loan Programs. I have spent the last two decades involved in 

lender oversight and loan program risk management at SBA and 

I have been the Director of OCRM since 2015. 

SBA’s Administrator Linda McMahon has demonstrated leadership in championing small business lending while maintaining prudent lending standards in our loan programs. SBA is particularly 

interested in balancing the growing credit needs of America’s small 

businesses with prudent lending, always ensuring that we are 

meeting the requirements of our mission as authorized by the 

Small Business Act and the Small Business Investment Act. 

SBA’s role is to fill an unmet need in the market place—to help 

creditworthy small businesses access credit when credit is not 

available elsewhere—generally due to lack of collateral, start-up 

business status, industry type, or other issues. SBA is critical in 

providing credit to underserved markets, in a commercially prudent and reasonable manner. 

The Office of Credit Risk Management mission, and therefore my 

mission as its Director, is to effectively manage program credit 

risk, monitor lender performance, and enforce loan program requirements. In short, our mission is to maintain the integrity and 

viability of the 7(a) and 504 Loan Programs. 

As of March 31, 2017, OCRM monitored a portfolio of 3,654 lenders that provide 7(a) guaranty financing in excess of $82.3 billion 

and 228 Certified Development Companies (‘‘CDCs’’) responsible for 

approximately $26.8 billion in 504 debenture guarantees. This includes supervision of 14 Small Business Lending Companies 

(‘‘SBLCs’’), 27 Non-Federally Regulated Lenders (‘‘NFRLs’’) and 

over 100 Community Advantage Lenders. 

How does the Office of Credit Risk Management monitor all SBA 

7(a) Lenders and CDCs and over $100 billion in credit? Our first 

step is through use of our Loan and Lender Monitoring System (‘‘L/ 

LMS’’), the bedrock of our lender performance monitoring, which 

tracks the monthly performance of all 7(a) and 504 loans and assigns a quarterly credit score for each loan. A quarterly purchase 

rating for each lender is also generated using this L/LMS data. 

This provides an initial risk profile for each lender and CDC and 

allows OCRM to ‘‘bucket’’ higher risk lenders and CDCs for additional monitoring. 

Next, OCRM uses our composite risk measurement methodologies and scoring guides, ‘‘PARRiS’’ for 7(a) Lenders and ‘‘SMART’’ 

for CDCs, to further diagnose higher risk lenders. PARRiS is an acronym for five components that focus our attention on Portfolio 

Performance, Asset Management, Regulatory Compliance, Risk 

Management, and Special Items. The 504 program SMART components cover the following areas: Solvency and Financial Condition, 

SBREP-219A with DISTILLER

25 

Management and Board Governance, Asset Quality and Servicing, 

Regulatory Compliance, and Technical Issues and Mission. 

Benchmarks of historical and projected performance have been 

developed for the PARRiS and SMART methodologies, and provide 

relative measures of lenders’ financial risk specific to each program. These were most recently refreshed with updated performance information in early 2017. By using both predictive and historic performance metrics in the PARRiS and SMART methodologies, OCRM obtains a holistic picture of lender risk, upon which to 

consider additional oversight activities. 

Third, OCRM conducts approximately 300 focused risk-based reviews and examinations using these protocols each year. These consist of multiple types including Analytical Reviews, Full Reviews, 

Targeted Reviews, and Safety and Soundness Examinations. 

OCRM also conducts over 1,200 assessments each year before renewing delegated lending status for those lenders and CDCs which 

have been granted enhanced authority by SBA. We also conduct 

quarterly financial and capital assessments of our SBA Supervised 

Lenders, since SBA is generally their sole federal financial regulator. Also, we conduct reviews of CDC annual reports to determine 

whether CDCs have the financial ability to operate and are in compliance with loan program requirements. 

In addition to its lender monitoring and supervision activities, 

OCRM has been at the forefront of identifying emerging risks, one 

of which involves the ongoing discussion of which businesses are in 

need of SBA financing. The Small Business Act, as amended, states 

that small business loan guarantees are to be provided to only 

those borrowers who cannot obtain the needed credit on reasonable 

terms from other non-federal sources. Over the years SBA has promulgated regulations and developed policy to assist lenders in 

making this determination and fully documenting it for each 7(a) 

loan approved. 

With recent robust growth in the 7(a) program, OCRM has paid 

particular attention in its reviews to a lender’s documented ‘‘credit 

elsewhere’’ reasons. We have identified some instances of lack of 

understanding on the part of lenders, and occasionally poor internal controls within lenders’ operations, that contribute to their noncompliance with this requirement. OCRM requires lenders which 

demonstrate non-compliance to correct individual file deficiencies, 

and as needed, to alter policies, procedures or internal controls to 

ensure full compliance with the Act and all other applicable regulations and procedures. OCRM will continue to focus on this area in 

our upcoming reviews, to ensure the mission of the Agency is met 

in providing small businesses with financing they cannot obtain 

elsewhere on reasonable terms and conditions. 

To accomplish our responsibilities, OCRM operates with a staff 

of 27 supplemented by support contracts for reviews, exams and 

enforcement activities. OCRM continuously assesses our internal 

operation to ensure we deliver our critical monitoring, supervision 

and enforcement activities with the most effective and efficient mix 

of these resources. We also continuously assess the functions of our 

SBREP-219A with DISTILLER

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contracts in the same manner, working continuously to improve 

consistency through retention of well-trained leaders. 

In fiscal year 2017 and beyond, OCRM will continue to conduct 

a portfolio diagnostic of every lender using historical performance, 

the predictive credit scores for all 7(a) or 504 loans, and the PARRiS and SMART methodologies to evaluate the relationship of each 

lender’s metrics to benchmarks. OCRM will also continue to monitor lenders through programmatic risk-based reviews, using PARRiS and SMART to target existing and emerging risks, as identified. 

SBA also continues in active discussions with primary federal 

regulators on such topics as information sharing and vendor management. Through exchange of information we can bring improved 

oversight and monitoring to our activities and theirs, minimizing 

duplication and burden. 

Thank you for the opportunity to share this information today regarding how OCRM supports SBA’s role of providing access to capital for small business owners of this great country. I will be happy 

to respond to your questions. 

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~ 

U.S. Small Business 

~ Administration 

TESTIMONY of 

WILLIAM MANGER 

Associate Administrator, Office of Capital Access 

U.S. Small Business Administration 

House Small Business Committee 

Wednesday, May 17,2017 
28 

I’d like to thank Chairman Chabot, Ranking Member Velazquez 

and the entire House Small Business Committee for the opportunity to testify before you today. I had a great meeting in April 

with some of your staff and look forward to building a strong and 

open relationship with all of you moving forward. 

It is an honor for me to be here and to have been appointed Associate Administrator for the SBA’s Office of Capital Access by Administrator Linda McMahon. It’s been eight years since I last 

worked at the SBA as Associate Administrator for the Office of 

Field Operations in Washington and prior to that, I was also fortunate enough to serve as SBA’s Regional Administrator for Region 

2, based out of New York. From the very beginning of my time at 

the SBA I was able to witness the positive impact our programs 

have on communities across the country. I can definitely say that 

I am very excited to have the ability to improve the services we 

provide and help small business owners and entrepreneurs grow to 

their full potential. 

As Associate Administrator, I oversee the SBA’s flagship 7(a) and 

504 loan programs, as well as our Microloan and Surety Bond programs. Just a couple of weeks ago this Administration had our first 

opportunity to take part in National Small Business Week. It was 

a tremendous success and showcased so many incredible entrepreneurs that have successfully utilized these programs and created jobs for American Workers. 

National Small Business Week serves as a reminder of how crucial small enterprises are to our economy and it is a great time for 

our nation’s leaders to reflect on how to better serve the small business community. I am very optimistic about this Administrations 

agenda in that regard. Recently, there has been a tremendous 

amount of optimism and confidence in our economy and our talented team of program directors and I will be working tirelessly to 

help deliver on the high expectations set by this Administration. 

The role that the SBA and the Office of Capital Access plays in 

our credit markets fills an important gap in the lending marketplace. Our agency aims to help small businesses obtain credit 

which is otherwise unavailable through conventional lending. As 

many of you know, often time’s entrepreneurs have the will and 

drive to succeed, but access to capital unfortunately proves to be 

an insurmountable hurdle. That is where we come in. Our programs have been helping small businesses get on their feet and 

grow for decades, but as we all know there is always room for improvement. 

Administrator Linda McMahon has placed an emphasis on making sure our entire agency and our Office of Capital Access is running as efficiently and effectively as possible and that is exactly 

what I intend to do as Associate Administrator. 

The Office of Capital Access is streamlining our Standard Operating Procedures (SOP’s) and plans to repeal unnecessary regulations that don’t benefit small businesses aiming to start or expand. 

As our SBA One system continues to be a success, we are in the 

process of modernizing the 504 lending system and bringing it up 

to speed technologically. 

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We will also place an emphasis on SBA loan center efficiency, 

which will decrease the time it takes for lenders to process, service 

and collect SBA guaranteed loans. 

As we work to recruit more lenders for our programs, we have 

stressed to our lending partners that we want to see more smalldollar loans being made to entrepreneurs. Our focus will remain on 

helping those who need capital most before anyone else—that includes our veterans, women-owned businesses, minority-owned 

businesses, rural communities and all of our emerging markets. In 

addition, the Office of Capital Access sees our 7(a) program in particular, as a powerful tool for helping create and retain jobs for 

American workers. 

It is of paramount importance to me and our agency that our 7(a) 

and 504 flagship programs continue to operate at zero subsidy and 

remain a great deal for taxpayers. As we look to refine the programs within the Office of Capital Access—the continued zero subsidy status of our programs will absolutely be a major priority for 

this Administration. 

Having been serving as Associate Administrator for just under 

two months now I can assure you that our office is placing an incredible amount of emphasis on oversight to make sure our programs are being administered properly and appropriately. Linda 

Rusche plays a crucial role in that as Director of our Office of Credit Risk Management. 

The Office of Capital Access and the Office of Chief Financial Officer are also constantly monitoring our program level limits, and 

SBA thanks the Committee for its assistance in raising the 7(a) 

program level to $27.5 billion in FY 2017 from $26.5 billion in FY 

2016. While SBA is witnessing increased demand by the small 

business community this year, we are not currently in jeopardy of 

exceeding our capacity to meet such needs. The Office of Capital 

Access works closely with the SBA Lending community to communicate that the agency is in good financial position with sufficient 

resources through the end of this fiscal year. 

However, to ensure that America’s small businesses can fully 

benefit from the tools and resources provided by the SBA and that 

this support continues through the year uninterrupted, the Administrator supports proposed legislation that would grant circumstantial authority to the Administrator to increase 7(a) lending authority by 15 percent when program subsidy is zero and appropriate 

notice is provided to Congress. The flexibility offered by the proposed statutory provision would offer greater certainty to our 7(a) 

lending partners and make additional assistance available to small 

businesses at no additional subsidy cost to the taxpayer. 

While we continue to see job creation and responsible growth 

from all of our programs I cannot stress enough how committed we 

are to proper oversight—to date our 7(a) program lending is up 

10% over last year. 

I am glad to have the opportunity to testify before this committee 

today and demonstrate the work we are doing to help America’s entrepreneurs attain the American dream. Under the leadership of 

SBREP-219A with DISTILLER

30 

Administrator McMahon, the SBA is more dynamic and forward 

looking than ever before. Likewise, this committee’s partnership is 

something our office views as invaluable to improving the sustainability of our programs. 

I look forward to a transparent and collaborative relationship 

with this committee to ensure we are fulfilling all aspects of our 

agency’s mandate. 

Please know that in me you have someone that shares our Administrator’s vision of a stronger small business community in 

America and is committed to administering our programs both 

properly and in the best interest of the American taxpayer. 

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Question for the Record 

Committee on Small Business 

SBA’s 7(a) Loan Program: A Detailed Review 

May 17, 2017 

Responses by William Manger, Associate Administrator for Capital 

Access, SBA 

Rep. Luetkemeyer to Mr. William Manger 

• At our hearing you discussed the franchisee lending process 

and how it was changed with the intent to simplify and streamline 

lending. Notwithstanding these best intentions, my understanding 

is that the narrow scope of this rule is significantly hindering access to loans for small businesses and that some franchisors who 

previously had agreements are unwilling to sign the new addendum. In addition, I’m hearing that the new process is hurting the 

ability to access loans for some small business owners who are not 

franchisees, but may have an independent contractor relationship 

with another entity selling or distributing their products. Can you 

tell me what steps you’ve taken or plan to take to provide additional flexibility in the process and ensure that legitimate small 

businessmen and women can have access to lending in these franchise and non-franchise situations? 

SBA Response: 

Franchisees represent a significant portion of SBA’s loan portfolio—in FY2016, loans approved to franchisees represented $4.68 

Billion, or 16.2% of SBA’s lending. For many entrepreneurs getting 

started in business, the purchase of a franchise can be the fulfillment of a lifelong dream to own and operate a business. Without 

the benefit of an SBA guarantee, and the financing it unlocks, 

many of those dreams might go unrealized. 

SBA’s franchise lending processes are designed to ensure that legitimate small businesses, whether franchisees or non-franchisees, 

have access to the capital that is not available elsewhere that they 

need to start, expand and grow the business. As you know, Congress has authorized SBA to provide financial assistance through 

its business loan programs only to independently owned and operated small businesses. Therefore, when SBA considers the size of 

an applicant for SBA financial assistance, it takes into consideration the size of the business together with all of its affiliated entities. A business’s affiliated entities are those entities that control, 

are controlled by, or are under common control with the business. 

Affiliates may be identified through ownership, management, hiring practices or other similar means of control. 

For franchisees seeking SBA financing, SBA has generally determined whether a franchisee is affiliated with its franchisor by reviewing the franchise agreement to ensure that the agreement is 

SBREP-219A with DISTILLER

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not so controlling as to create affiliation between the franchisor 

and the franchisee. If the franchisor and franchisee are affiliated, 

their size is aggregated to determine whether the application is 

‘‘small’’ under the current SBA size regulations. 

In the past, agreements were reviewed on a case by case basis. 

Effective January 1, 2017, however, SBA revised its franchise review process to provide for a more streamlined approach. The two 

main changes to the process were as follows: 

1. Adopt the Federal Trade Commission (FTC) definition of 

a franchise. The intent was to reduce the number and types of 

agreements that SBA would consider franchises under its regulation. 

2. Create a Standard Form Addendum to be used with all 

agreements that meet the FTC definition of a franchise. The 

intent was to reduce the required review of each franchise 

agreement to determine if there was affiliation between the 

franchisor and the applicant small business. 

While the new process was embraced by some franchisors, SBA 

found that there were a number of franchisors that were unwilling 

to execute the SBA Standard Form Addendum. In order to address 

this problem, SBA amended its process in February 2017 to allow 

for the use of a previously negotiated addendum to be used in place 

of the Standard Form Addendum. This revised process allows a 

franchisor that had worked with SBA on a negotiated addendum 

in either 2015 or 2016, to use that addendum with any of their 

franchise agreements, in place of the required SBA Standard Form 

Addendum. This more flexible approach gives the franchisor a 

choice and as a result has improved the process, allowing many 

more small business franchisees the ability to access SBA financial 

assistance. 

But we are not satisfied that we have adequately addressed the 

challenges in franchise lending to independently owned and operated small businesses, and we are not finished. A dedicated mailbox has been set up to receive comments and concerns from 

franchisors and lenders regarding the new process. A team of SBA 

employees from the Office of Capital Access and the Office of General Counsel responds to any queries and issues that are sent into 

the box. Through this and other means, we are gaining a better understanding of the issues and challenges that still exist in the SBA 

franchise lending area. We have seen that there is some confusion 

and uncertainty among SBA lenders about the FTC’s definition of 

a franchise, particularly with respect to its applicability to certain 

independent contractor relationships. SBA has provided guidance 

to lenders and businesses as to whether these agreements meet the 

FTC definition of a franchise. SBA will continue to provide this 

type of assistance, and is considering the possibility of creating a 

national listing of reviewed agreements so lenders, franchisors and 

small business franchisees will know which agreements meet the 

FTC definition of a franchise. In addition, SBA will continue to provide training sessions to lenders to ensure that they understand 

the new process and can provide the correct guidance to their small 

business clients. 

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