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[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]

              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

                               __________

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            Small Business Committee Document Number 115-020
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                   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 GONZALEZ-COLON, Puerto Rico
                          DON BACON, Nebraska
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                           RON ESTES, Kansas
               NYDIA VELAZQUEZ, 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
                            
                            
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Chabot................................................     1
Hon. Nydia Velazquez.............................................     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

 
               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, Gonzalez-Colon, Fitzpatrick, 
Estes, Velazquez, 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, 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. Velazquez, for her opening remarks.
    Ms. VELAZQUEZ. 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 resources 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 Velazquez. 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 
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 
development 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.
    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 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 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 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 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 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. Velazquez, 
for 5 minutes.
    Ms. VELAZQUEZ. 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. VELAZQUEZ. 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. VELAZQUEZ. Sure.
    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. VELAZQUEZ. 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. VELAZQUEZ. 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. VELAZQUEZ. 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 communities, and we are working very vigorously in 
order to achieve that goals.
    Ms. VELAZQUEZ. 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, 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.
    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 
not-for-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 
not-for-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 dollars. 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 generally 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 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 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.
    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 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. VELAZQUEZ. 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 here, she said, please make 
sure you mention to them that we are asking for that relief.
    Ms. VELAZQUEZ. 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 detail, 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. Gonzalez-Colon, is 
recognized for 5 minutes.
    Ms. GONZALEZ-COLON. 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.
    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. GONZALEZ-COLON. 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. GONZALEZ-COLON. 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. GONZALEZ-COLON. Mm-hmm.
    Mr. MANGER. It is 2-3/4 above prime for the regular 7(a) 
program.
    Ms. GONZALEZ-COLON. 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 
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. GONZALEZ-COLON. Mr. Chairman?
    Chairman CHABOT. Yes?
    Ms. GONZALEZ-COLON. Can I make just one more question?
    Chairman CHABOT. Absolutely. The gentlelady is recognized.
    Ms. GONZALEZ-COLON. 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. GONZALEZ-COLON. Can you check that information?
    Mr. MANGER. Yes.
    Ms. GONZALEZ-COLON. 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.]
                            A P P E N D I X

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    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, 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 non-compliance 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 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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    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.

    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, 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 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.
                    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 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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