U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

40–861 PDF 2008

SUBCOMMITTEE HEARING ON THE

EFFECT OF THE CREDIT CRUNCH

ON SMALL BUSINESS ACCESS TO

CAPITAL

SUBCOMMITTEE ON FINANCE AND TAX 

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 30, 2008

Serial Number 110-89

Printed for the use of the Committee on Small Business

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Bean, Hon. Melissa .................................................................................................. 1

Buchanan, Hon. Vern .............................................................................................. 2

WITNESSES

PANEL I: 

Eckstein, Mr. Scott, James Scott Custom Builders, Naperville, IL, On behalf 

of the National Association of Home Builders ................................................... 3

Schroeder, Mr. David G., President, American Enterprise Bank, Buffalo 

Grove, IL, On behalf of the Independent Community Bankers Association ... 5

Sorgatz, Mr. Carl, President, Hawthorne Credit Union, Naperville, IL, On 

behalf of the Credit Union National Association ............................................... 6

Hollingsworth, Ms. Lawrie, E.E., President, Asset Recovery Technologies, Inc., 

Annapolis, MD, On behalf of the U.S. Women’s Chamber of Commerce ........ 9

Baugh, Ms. Vanessa, President, Vanessa Fine Jewelry, Lakewood Ranch, 

FL .......................................................................................................................... 11

APPENDIX 

Prepared Statements: 

Bean, Hon. Melissa .................................................................................................. 26

Buchanan, Hon Vern ............................................................................................... 28

Eckstein, Mr. Scott, James Scott Custom Builders, Naperville, IL, On behalf 

of the National Association of Home Builders ................................................... 29

Schroeder, Mr. David G., President, American Enterprise Bank, Buffalo 

Grove, IL, On behalf of the Independent Community Bankers Association ... 39

Sorgatz, Mr. Carl, President, Hawthorne Credit Union, Naperville, IL, On 

behalf of the Credit Union National Association ............................................... 52

Hollingsworth, Ms. Lawrie, E.E., President, Asset Recovery Technologies, Inc., 

Annapolis, MD, On behalf of the U.S. Women’s Chamber of Commerce ........ 57

Baugh, Ms. Vanessa, President, Vanessa Fine Jewelry, Lakewood Ranch, 

FL .......................................................................................................................... 63

(III) 

(1)

SUBCOMMITTEE HEARING ON THE 

EFFECT OF THE CREDIT CRUNCH 

ON SMALL BUSINESS ACCESS TO 

CAPITAL 

Wednesday, April 30, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

1539 Longworth House Office Building, Hon. Melissa Bean [chairman of the Subcommittee] presiding. 

Present: Representatives Bean, Sestak, and Buchanan. 

OPENING STATEMENT OF CHAIRWOMAN BEAN 

Chairwoman BEAN. I call to order this meeting examining how 

current economic conditions are impacting small business access to 

capital. In August of last year, the U.S. financial markets experienced widespread losses stemming primarily from sub-prime mortgages. The impact spread throughout the lending market and is 

now being felt in other parts of our economy. That includes the nation’s small business sector which is our primary source of economic activity and historically led the way to financial recovery 

and job creation following downturns. 

As banks and other institutions struggle to recover from losses 

on Wall Street they are also pulling back from lending on Main 

Street. The result is that credit is now harder than ever for small 

businesses to access. Not surprisingly last month’s small business 

confidence gauge which is compiled by NFIB, the National Federation of Independent Business owners shows it lowest level since th 

survey was started in 1986. Furthermore, a joint survey conducted 

by Duke University and CFO Magazine notes that about one-third 

of small business owners are finding credit more costly, less available or both. 

As capital availability tightens, many small businesses are forced 

to delay important purchases, halt planned expansions or forgo the 

creation of new jobs. And all of these choices hinder their ability 

to fuel economic expansion. In such an environment, the SBA’s 

lending programs could play a pivotal role by bridging capital 

availability gaps. 

Unfortunately, the SBA’s largest lending program, the 7(a) Initiative, has not risen to that task. Instead in some ways it’s exacerbating contractions in the conventional credit markets. Through 

the first half of 2008, the number of 7(a) loans was down over 17 

2

percent in comparison to the same period last year. The gross dollar amount of loans was also declining. To make matters worse, 

new fees and program mismanagement are keeping financial institutions from even participating in the program. 

There are clear solutions the these challenges and last year the 

House took action to address many of them. We passed H.R. 1332, 

The Small Business Lending Improvements Act, which I authored. 

The Bill lowers borrower costs, expands lender participation and 

streamlines the 7(a) application process. This legislation would 

move us in t he right direction. However, the Senate has not taken 

action on it at this time. 

As Congress continues to address the current challenges facing 

the economy, we must be sure to explore every avenue of small 

business financing. After all, with credit availability narrowing, it 

is more important than ever to insure entrepreneurs have access 

to the tools they need to operate their businesses and grow the 

economy. I want to thank our witnesses in advance for joining us 

here today and for the valuable insights offered in their testimony 

and I now recognize a ranking member for his opening statement. 

OPENING STATEMENT OF MR. BUCHANAN 

Mr. BUCHANAN. Is that on? Okay. I want to thank the Chair for 

yielding and calling this important hearing on the effects of the 

credit crunch on small business access to capital. I’d also like to extend my thanks to our witnesses today because I know their busy 

with their schedules to provide testimony in today’s hearing. 

There’s no question in my mind that there’s nothing more personal 

than the entrepreneur having the American Dream. I’ve lived that 

dream and I know the risk and the rewards. I know its pains and 

successes. 

I’ve seen it from the bottom up starting a small business and 

from the top down as Chairman of the Florida Chamber. I also 

know for someone that’s done a lot of planning in my businesses 

over a lot of years that there’s certain internal factors we can control small business and external factors that we can’t control. And 

there’s a lot of these external factors that are effecting a lot of people. The other thing as the Chairman of the Florida Chamber, I 

also realize that 99 percent of businesses in Florida and probably 

the country, are small businesses which create 70, 80 percent of 

the jobs. 

And right now the view in terms of small business in Florida and 

I’m sure throughout the country is not pretty. Working families 

across the country are facing record foreclosures, rising gas prices, 

double digit layoffs and consumer confidence is at an all-time low. 

For small business their very survival is at stake. The inability to 

secure financing and credit can imperil their very existence. 

Today this Committee is not simply sitting on the sideline observing the challenge and I thank Madam Chairwoman to take this 

leadership. We’ll be hearing from people that are involved and effected by a capital meltdown, effecting lenders and borrowers as 

well. I hope to come together and find real solutions that can make 

it easier for small business to secure the financing they need at a 

price that makes sense. 

3

Also, being on bank boards for 20 years or so, I realize that a 

lot of these entities are heavily leveraged themselves, four or five 

percent capital, so what happens if you look back in ‘90, ‘92 when 

S&L banks were under crisis. Their capital gets under crisis and 

even good companies, good small businesses that have fairly good 

balance sheets and good income they can’t get loans. So that’s critical for someone that’s been there. 

As I was working on my way up, I never asked for a government 

handout. I only asked that we never by shut out. Owning a business was my dream and it’s a dream of millions of Americans as 

well. It’s my duty here in Congress to construct and maintain a 

system in which these entrepreneurs have the ability to start and 

run their business successfully. 

Again, I want to thank the Chairwoman for this hearing. I look 

forward to hearing the testimony from our witnesses today. Thank 

you for coming. I yield back. 

Chairwoman BEAN. Thank you for your comments. Now, we’d 

like to move to testimony from our witnesses. I’d like to thank you 

for taking your time and sharing your expertise with us today. Witnesses will have five minutes to deliver their prepared statements. 

The timer begins when the green light is illuminated. When one 

minute of time remains. The light will turn yellow. The red light 

will come on when time is up. 

And our first witness is Mr. Scott Eckstein, who is a home builder for James Scott Custom Builders in Naperville, Illinois where he 

also serves as President of the Home Builders Association. He’s testifying on behalf of the National Associations of Homebuilders, the 

trade association that helps promote the policies that make housing a national priority. Since 1942, NAHB has been serving its 

members, the housing industry, and the public at large. 

Thank you for being here. 

STATEMENTS OF MR. SCOTT ECKSTEIN, JAMES SCOTT CUSTOM BUILDERS, NAPERVILLE, IL, ON BEHALF OF THE NATIONAL ASSOCIATION OF HOMEBUILDERS 

Mr. ECKSTEIN. Thank you, Chairwoman Bean, Ranking Member 

Buchanan and distinguished members of the Committee. My name 

is Scott Eckstein. I am President of James Scott Custom Builders, 

member of the National Association of Homebuilders and the current President of the Homebuilders Association of Illinois. Thank 

you for the opportunity to be here today to talk about the impacts 

of the credit crunch on small builder businesses and potential solutions for Congress to consider. 

A pricing induced downturn that began in 2005 has been made 

worse by the credit crunch that started in mid-2007. This will continue to be the most significant factor effecting the homebuilding 

industry into the foreseeable future. That means depressed home 

prices, sharply reduce credit availability, and much tighter mortgage lending standards for those who can still qualify. 

Homebuilders all over the country are experienced a negative 

shift in terms of availability of residential construction loans. In 

addition, builders with outstanding construction loans are facing 

challenges as lenders receive appraisals reflecting lower values on 

lots and homes. In fact, declining valuations are sometimes at or 

4

below the cost of building a home or below the attainable market 

value. Lenders are asking builders to fully or partially pay down 

outstanding loans while in extreme cases denying requests for loan 

extensions. Most small homebuilding companies don’t have the resources to survive in such an environment for any extended period 

of time. My personal experience has been that banks are refusing 

to lend to builders on either pre-sold or spec homes in the current 

environment, regardless of credit worthiness. 

There is a current dislocation in the housing market where entry 

level home buyers cannot access mortgage credit to purchase a 

home. In turn homeowners higher up the ladder cannot sell their 

current home in order to make the next home purchase. Thus, the 

credit crunch shuts down the normal progression of home selling 

and home buying. When the credit markets break down in the 

midst of a housing dislocation, homebuilders’ financing is extremely 

difficult to maintain. For me and many homebuilders the housing 

market downturn began two years ago and the credit crunch we 

now experience is a significant additional problem. 

I have exhausted my company’s resources and am forced to take 

more extreme measures to keep afloat. Recently, I had to withdraw 

all my personal 401(k) funds receiving a benefit of less than 50 

cents on the dollar to help my struggling business. I paid a severe 

penalty and I’ve turned to Consumer Credit to provide operating 

capital to pay for my loans and make my payroll. Avoiding excessive regulatory restrictions on federally insured banks which are 

current the dominant source for construction loans is an urgent priority. However, the difficulty for builders in obtaining housing production financing during this time also vividly highlights the need 

to develop additional sources of construction credit. 

My written statement includes a number of specific recommendations for increasing the range of suppliers of housing production 

credit. Congress has taken several steps to ease the financial losses 

that homebuilders like many small businesses are facing during 

this economic downturn. I cannot overstate how important it is for 

the business owners to have the ability to claim and carry-back net 

operating losses for years when significant taxes were being paid. 

NAHB applauds Chairwoman Bean for her leadership in advancing the expended NOL carry-back as part of the GROW Act of 

2008. As Congress continues to look for additional ways to ease the 

credit crunch on small businesses, it should strongly consider policies that stimulate home purchases in the immediate future. A 

temporary home-buyer tax credit would reduce excess inventory 

and relieve pressure on falling home prices by ending the waiting 

strategy for some potential buyers. An effective home-buyer tax 

credit would restore confidence in the housing market for homeowners, home-buyers and financial institutions mitigating some of 

the factors responsible for the current credit crunch. 

NAHB appreciates the efforts of Congress to address the problems related to the small businesses and the credit crunch and we 

look forward to working with the legislators on the most effective 

way to help America’s small businesses during this time. Thank 

you for the opportunity to testify today. 

[The prepared statement of Mr. Eckstein may be found in the 

Appendix on page 29.]

5

Chairwoman BEAN. Thank you for your comments. 

Our next testimony is going to come from David Schroeder, who 

is the President of the American Enterprises Bank in 

Neighborville, Illinois. He’s testifying on behalf of Independence 

Community Bankers Association or ICBA, the leading association 

for community banks representing over 5,000 community banks of 

all sizes and charter types throughout the U.S. 

The ICBA is dedicated exclusively to representing the interests 

of the community banking industry and the communities and customers that they serve. Thank you for being here. 

STATEMENT OF MR. DAVID SCHROEDER, PRESIDENT, AMERICAN ENTERPRISE BANK, BUFFALO GROVE, IL, ON BEHALF 

OF THE INDEPENDENT COMMUNITY BANKERS ASSOCIATION 

Mr. SCHROEDER. Good morning. My name is David Schroeder. I 

am President of American Enterprise Bank in Buffalo Grove, Illinois. Chairwoman Bean and members of the Committee, I am 

pleased to be testifying today on the credit markets and small business access to capital. I am proud to testify on behalf of the Independent Community Bankers of American. ICBA represents 5,000 

community banks throughout the country with 301 community 

bank members in Illinois alone. 

American Enterprise is a locally owned community oriented bank 

with locations in Buffalo Grove, Highland Park and Schaumburg, 

Illinois. Since 1995 we have grown to more than $360 million in 

assets. We pride ourselves on small business relationship banking 

and actively participate in the SBA lending programs. In 2007 

American Enterprise Bank made 62.6 million in SBA 7(a) loans 

and 15.5 million in SBA 504 loans. 

Credit fuels our economy and the broad credit markets are still 

sorting out many problems. Some of the nation’s largest lenders 

and money center banks have tripped up on aggressive sub-prime 

lending and toxic investments. As a result many of the biggest financial institutions have been forced to pull in their lending, recognizing huge losses and rebuilding capital. The current turmoil in 

our economic and financial markets jeopardizes the availability of 

credit for small businesses. However, community banks remain 

common sense lenders and largely avoided the sub-prime debacle. 

We have solid capital positions and we have money to lend to small 

businesses. 

As Congress continues to address the problems in the housing 

and finance sectors, policymakers must also focus on the small 

business sector during this economic slow-down. At a time when 

the economy is faltering, a sharp decline in SBA loans is unacceptable. The SBA loan program should bolster small business credit 

in economic slow-downs. Instead, as Chairwoman Bean mentioned, 

the number of SBA loans being made is plummeting. 

In order to address the ongoing credit crunch and assure small 

business lenders and borrowers have an uninterrupted supply of 

capital, ICBA respectfully advanced several policy recommendations, including 1) strengthening the SBA loan programs by boosting the SBA budget, lowering steep fees on lenders and borrowers 

and reducing excessive regulation. 

6

2) Next, enacting the Small Business Lending Reauthorization 

Act introduced by Chairwoman Bean. 3) Also enact the ICBA stimulus plan recommendations included the first-time home-buyer’s 

tax credit and 4) enact the provisions of the Community First Act 

advanced by Chairwoman Nydia Vela ́zquez. The ICBA believes 

these measures would help small businesses better access credit, 

create jobs and boost our economy. Chairwoman Bean, community 

bankers represent the other side of the credit market story. The 

community bank model is based on relationship banking not relationship with investment banks and hedge funds. Community 

banks stick with their business customers in good times and in 

bad. Unfortunately, we see the missteps of several large financial 

players fostering costly new regulation on all financial institutions. 

This will likely cause banks to further tighten credit standards and 

only increase transaction costs. Therefore, I urge Congress to 

strongly avoid a one-size fits all regulatory approach. Increased 

regulatory burden should not be a wet blanket that smothers community banks that had little to do with the recent turmoil. 

ICBA also believes additional economic stimulus is needed. Notably 45 percent of small business loan outstandings are 

collateralized by some form of real estate. Therefore, the ongoing 

sharp decline in real estate values must be further addressed before stability can be achieved in the broad credit markets and the 

economy. The ICBA Economic Stimulus Plan recommends a $5,000.00 

first-time home buyer credit for one year in order to jump start 

home sales, reduce unsold inventories and stabilize home prices 

and foreclosures. We are pleased to see the home-buyer tax credit 

advancing in both the House and the Senate as part of a second 

stimulus effort. 

In conclusion small businesses are facing difficult economic times 

and small business credit needs should be front and center. Community Banks like American Enterprise are well-positioned and 

prepared to help. We believe strengthening the SBA programs, enacting the provisions of the Community First Act and ICBA stimulus recommendations would go a long way in helping small business. I truly appreciate the opportunity to testify today on behalf 

of the Independent Community Bankers of America. Thank you. 

[The prepared statement of Mr. Schroeder may be found in the 

Appendix on page 39.]

Chairwoman BEAN. Thank you for your testimony. 

Next, we’re going to be hearing from Mr. Carl Sorgatz, who is 

over 31 years of financial and operational experience and has 

served as the President of the Hawthorne Credit Union since 1987. 

Mr. Sorgatz is testifying on behalf of the Credit Union National Association or CUNA, the premier national trade association serving 

America’s credit unions. Thank you for being here today. 

STATEMENT OF MR. CARL SORGATZ, PRESIDENT, HAWTHORNE CREDIT UNION, NAPERVILLE, IL, ON BEHALF OF 

THE CREDIT UNION NATIONAL ASSOCIATION 

Mr. SORGATZ. Thank you, Chairwoman Bean, Ranking Member 

Buchanan and members of the Subcommittee, I am Carl Sorgatz, 

7

President of Hawthorne Credit Union in Naperville, Illinois. And I 

appreciate this opportunity to appear before the Committee on behalf of the Credit Union National Association, CUNA, and to express our support for increased access to capital for small businesses, particularly in light of the current credit crunch. 

CUNA is the largest credit union advocacy organization representing over 90 percent of our nation’s approximately 8400 state 

and federal credit unions, their state and credit union leagues and 

their nearly 90 million members. Hawthorne Credit Union has offices in Naperville, Bolingbrook and at Lucent Technologies and 

provides financial services to employees of over 125 companies and 

to people who live or work in Cook, DuPage, Will, Kane and Kendall Counties. 

Through our Credit Union Service Organization or CUSO, Hawthorne Credit Union provides member business loans to our members. Four of the Chicago area credit unions are also members of 

that CUSO. Small businesses are the life blood of the economy. For 

nearly a century, credit unions have been there to serve the business lending needs of their members. Our member business loans 

reflect the diverse background and expertise of our members and 

for example, in recent years, the credit unions in our CUSO were 

able to help their members achieve success with a landscaping 

business, a restaurant and sports bar, an environmental services 

company and a long-haul trucking business. 

Credit union member business loans are relatively small loans. In 2007, the average credit union MBO was $181,000.00. Nationally, credit union business lending represents less than one percent, .89 percent of the depository institution of business lending 

market and credit unions have about 28 billion in outstanding business loans compared to 3.1 trillion for banking institutions. 

In general, credit unions are not financing skyscrapers or sports 

arenas. Credit unions are making loans to credit union members 

who own and operate small businesses. And despite the apparent 

credit crunch with respect to small business and other lending. The 

chief obstacle for credit union business lending is not the availability of capital. Credit unions are, in general, very well capitalized. Rather the chief obstacle for credit unions is the arbitrary 

statutory lending limits imposed by Congress in 1998. 

Under the current law, credit unions are restricted from member 

business lending in excess of 12-1/4 percent of their total assets. 

This cap severely restricts the ability of credit unions to provide 

small loans for small businesses. This is at a time when small businesses are finding it increasingly difficult to obtain credit from 

other types of financial institutions, especially larger banks. The 

cap increasingly restricts credit unions engaging in business lending as they approach their limit. 

The cap also severely hampers credit unions who would like to 

enter the business lending market because of the start-up costs and 

the requirements. The most significant cost is hiring staff with 

business lending experience. Credit unions approaching the cap 

face the dilemma of having to turn away members who are unable 

to secure business loans from other financial institutions. 

Congress can help by enacting several bills currently pending 

that would help promote greater credit union participation in small 

8

business lending. Credit unions support the provisions of HR 1537, 

the Credit Union Regulatory Improvements Act, CURIA, which 

would increase the current limit on credit union MBLs from 12-1/

4 percent to 20 percent of total assets and permit the National 

Credit Union Administration to increase the threshold for defining 

a member business loan from 50,000 to $100,000.00. 

A second piece of legislation that would facilitate credit union 

participation in small business lending is HR 5519, the Credit 

Union Regulatory Relief Act which includes provisions that would 

clarify existing law that permits credit unions to participate in loan 

programs secured by the insurance guarantees or commitments of 

state and Federal Government. Exempt member business loans 

made in under-served communities from the MBL cap and exclude 

loans or loan participations by federal credit unions to not-for-profit 

religious organizations from the member business loan limits contained in the Federal Credit Union Act. 

Another helpful bill is the Credit Union Small Business Lending 

Act, HR 1849, introduced by Chairwoman Vela ́zquez. HR 1849 recognizes the need to enhance credit union business lending through 

SBA programs and is intended to improve small business lending 

and cooperation between the NCUA and SBA by excluding from the 

Federal Credit Union Acts definition of MBLs from any loan made 

in cooperation with the SBA under Section 7(a) of the Small Business Act. 

We also strongly support legislative initiatives that permit the 

SBA to reduce borrower and lender fees for the 7(a) lending program to the greatest extent possible. My written statement goes 

into further detail about what I’ve discussed today, Madam Chairwoman. In summary, I want to thank you and the Committee for 

providing CUNA with an opportunity to express its support for further access to capital, to small businesses. We urge Congress to enable credit unions to serve member business lending needs by enacting the important legislation discussed today. Thank you. 

[The prepared statement of Mr. Sorgatz may be found in the Appendix on page 52.]

Chairwoman BEAN. Thank you for your comments. 

And now we’re going to move to Ms. Lawrie Hollingsworth, who 

will provide her testimony as President of Asset Recovery Technologies, a disaster assistance and response business 

headquartered in Elk Grove Village. Ms. Hollingsworth has 30 

years of experiences in the electronic and computer industry. She’s 

also an author of a number of articles on disaster recovery planning and management. She testifies today on behalf of the U.S. 

Women’s Chamber of Commerce which provides political and legal 

advocacy as well as education assistance and outreach services for 

our nation’s women entrepreneurs. Thank you so much for being 

here. 

9

STATEMENT OF MS. LAWRIE HOLLINGSWORTH, E.E., PRESIDENT, ASSET RECOVERY TECHNOLOGIES, INC., ANNAPOLIS, 

MD, ON BEHALF OF THE U.S. WOMEN’S CHAMBER OF COMMERCE 

Ms. HOLLINGSWORTH. Good morning, Chairwoman Bean and 

Ranking Member Buchanan, staff. My name is Lawrie Hollingsworth and I am an electrical engineer and certified disaster recovery planner. I am the CEO and founder of two engineering firms, 

the Price Hollingsworth Company and Asset Recovery Technologies. We are headquartered in suburban Chicago area of Elk 

Grove Village and both firms work nationwide with insurance companies and businesses after a disaster or property insurance loss. 

PHC employees four people including three engineers and ART 

employs eight people. We have part time and temporary help as 

needed up to another 20 people. In addition, we have a certified 

pool of approximately 200 technicians nationwide. Both firms are 

100 percent owned and founded by me and are certified women’s 

business enterprises. I founded PHC in 1987 and ART in 1994. I’ve 

never asked for nor received government handouts. I started my 

businesses on a shoe string and funded them by reinvestment of 

profits and conventional bank loans. 

In addition to being a responder to 9/ll we were also active on 

the response — disaster response to Hurricane Katrina. Both businesses are typical small businesses. We utilize bank loans, line of 

credit loans and credit cards to fund out business. In addition to 

reinvestment of profits. My employees are very hard-working, decent, honest Americans with families to support. Like all small and 

large businesses, this credit crunch effects us substantially. Money 

is simply less available. When it is available it is at a new premium cost for less money and more restrictive lending covenants. 

In 2007 our sales declined by approximately 50 percent over 

2006. Most others in my industry, the disaster recovery industry, 

have reported similar dramatic drops across the board. While fluctuation is the norm in the disaster recovery business, in part due 

to weather patterns, I believe this drop in revenue was due in part 

to soaring interest rates and lack of credit. This is particularly likely as weather patterns for both years were similar. 

Something has to account for such a precipitous decline. When 

businesses are already operating on thin and vanishing profit margins, any sort of disaster will put them under. As will be discussed 

further in my testimony, businesses seeking working capital and 

equipment loans from a bank to rebuild after a disaster may simply find credit unavailable insufficient or just too expensive. 

Faced with looming business failures, most businesses opt to 

take the money and run and close their doors. They do not reinvest 

these insurance proceeds back into the business. This is one more 

sale of services I do not make and one more business failure in 

America. Alternately, businesses may have chosen to substantially 

under-insure themselves to save costs currently, a measure almost 

guaranteeing their eventual failure in the face of disaster, by the 

way. 

Thus there’s not enough money for rebuilding after disaster 

which requires hiring a firm like us and we also lose revenue. I 

also believe that the current credit crunch presents a significant 

10

drawback to available money for startups. We are focusing today 

on the impact of currently existing small business to some degree 

but I believe there’s a second substantial and somewhat obscured 

impact of the tightened credit market. This hidden danger is a lost 

opportunity for small business start-ups. 

Small business is the largest private sector employer in the U.S. 

The heart of small business and this is my opinion the American 

dream is the business start-up. For the mom and pop endeavors to 

the technology firms, these are the life blood of our nation. Startups are funded by savings, 401(k)s, gifts and loans from friends 

and relatives and the occasional governmental source. Home equity 

loans, equipment loans, collateral based working capital, bank 

loans and credit card debt. 

The statistics on small business failure in general are already severe. Failure rates of over 50 percent in the first two years are 

often cited. Already started on a shoe string and usually underfunded, these small businesses depend on debt and credit to open 

their doors and thrive. What is happening now is that debt funding 

for new ventures is simply disappearing. This is in no small part 

due to the sub-prime mortgage collapse. Lenders are very nervous 

about home equity lending, often substantially reducing available 

loan size. 

I’d like to touch quickly on a second disaster, I believe, that’s 

being exacerbated by the tight credit markets and that is rebuilding after any type of disaster, notably things like Hurricane 

Katrina. The U.S. Department of Labor estimates over 40 percent 

of businesses never reopen following a disaster. Of the remaining, 

25 percent will close their doors within 2 years. Over 60 percent 

of all businesses confronted by a major disaster will close within 

two years. 

How much will these statistics worsen? I believe this credit 

crunch is greatly impacting the ability of business to rebuild and 

re-establish themselves after Katrina. I’m a native Floridian and 

University of Florida graduate, so near and dear to my heart is the 

rebuilding of Florida businesses. I have seen many, many areas in 

disaster after hurricanes and so forth, and I believe the credit 

crunch is significantly impacting the ability for businesses to rebuild after Hurricane Katrina all impact areas such as Florida for 

small business to re-establish themselves. 

This concludes my testimony, thank you. 

[The prepared statement of Ms. Hollingsworth may be found in 

the Appendix on page 57.]

Chairwoman BEAN. Thank you so much for your testimony and 

now I’m going to defer to Ranking Member Buchanan who will introduce our next witness who also hails from the Sunshine State 

of Florida. 

[Off the record comments] 

Mr. BUCHANAN. I want to thank the Madam Chair. It’s a pleasure to have Vanessa Baugh with us today. She’s ran a successful 

jewelry business for a lot of years. She had a couple, three facilities, had to close one because of tight access to capital and also because of the tightening economy in our area. She also chairs, which 

I was Chairman for two years, the Sarasota Chamber of Commerce. 

11

We have about 2400 primarily small businesses in that area, but 

she chairs the Small Business Council for that organization, which 

has done an outstanding job. I appreciate your effort there. 

Thanks for taking the time out and coming today. We’re just glad 

to have you up on the Hill and hopefully we’ll get a chance to visit 

a little bit more later today. Thanks for coming. Thank you. 

STATEMENT OF MS. VANESSA BAUGH, PRESIDENT, VANESSA 

FINE JEWELRY, LAKEWOOD RANCH, FL 

Ms. BAUGH. Thank you, Congressman Buchanan and Madam 

Chair Bean thank you for having me here today. The effect of the 

credit crunch on small business is extremely difficult. As Congressman Buchanan said, I have a jewelry store. It’s been open for nine 

years. It’s in the heart of the County of Sarasota in southwest Florida. And I’m here today thanks to the Greater Sarasota Chamber 

of Commerce where I also serve on the Board of the Directors. 

Sarasota, Florida was named last month by the Fortune Small 

Business Magazine as one of the 100 best places in America to live 

and launch a small business. The Greater Sarasota Chamber of 

Commerce, which does represent 2400 businesses, 85 percent of 

those have 10 or fewer employees. It is one of the top local chambers in the state and nation and our healthcare and educational 

systems are among the finest and of course, we’re known for our 

pristine beaches. 

I, like many other small business owners, have been watching as 

the real estate market crashes. Just last week we were named as 

number 15th in the nation for foreclosures. We are losing jobs daily 

and many small businesses are closing their doors. Part of the 

problem is that many of us small businesses have what the call soft 

collateral. We cannot get bank loans like most small business. 

They will not loan us money generally, even when the money is 

good. Because of this, most small businesses have to rely on their 

equity in the real estate that they own. I am one of these people. 

We are accustomed to this. However, with the real estate market 

decreasing so dramatically, many of us have lost this ability because of no equity or because we cannot qualify for the home equity 

loan because our revenues are down. 

In other words, some of us have nowhere to turn for relief. So 

what do we do? Some of us can use our retirement plans but how 

many small business owners truly have a retirement plan. We can 

use our credit cards but either way it’s deadly for us. The crunch 

is especially painful in Sarasota which along with many other 

areas in Florida is facing an economic downturn because of its primary market real estate. 

In our residential real estate sector, we have an inventory in excess of 18 months and prices have dropped 25 percent from a year 

ago. Needless to say, jobs have plummeted. Sarasota itself overall 

has lost over 13,000 jobs in our immediate area. Our unemployment rate is far worse than the rest of the state and is approaching 

6 percent. Forecast call for Florida’s unemployment numbers to 

continue a downward trend through 2009. From all the indications 

Sarasota seems destined to continue to lead in this way until the 

tables turn. 

12

Another problem that small businesses have is that their vendors, who they get their inventory from, are also feeling the credit 

crunch. So their terms to us are not as good as they used to be. 

All the while our operating costs are going up, the cost of 

healthcare and just overall operating cost keep going up, up and 

up. In Florida, we have 45 business owners and employees that are 

now uninsured. They have no healthcare because they simply cannot afford the monthly fees involved. 

In Sarasota, another key industry is tourism. We are made up 

chiefly of small businesses with seasonal cash flow and credit 

needs. Our chamber works hard with other local players to try to 

attract visitors, domestic and international. So what do we want 

and need and expect from our representatives here in our nation’s 

capital to try and overcome these problems? 

Please give priority to meaningful tax reform and hold the line 

on tax increases in income, capital gains and estate taxes while the 

reform debate ensues to allow small business owners and opportunity to grow our businesses, and hopefully that will help stimulate our sluggish economy. At the same time, please enact business 

friendly incentives such as tax incentives for business who want 

physical and job expansion. SBA loans are important, but the program does not provide near the solution we need. 

Please consider tax incentives to banks to expedite small business loans to relieve the pressure on our free market economy. The 

revenue might be lost in creating such incentives but it would more 

be offset by positive impact that it would create that it would create in taxable income revenue generated by businesses who succeed 

rather than fail. 

Thank you for having me here today. 

[The prepared statement of Ms. Baugh may be found in the Appendix on page 63.]

Chairwoman BEAN. Thank you so much for your testimony, to 

you and to all of you today. I’m going to begin with a few questions 

and then invite other members to participate with their questions 

and then I may come back with a couple more. I guess I’ll start 

with, is it Ms. Baugh? Am I pronouncing that properly. 

Ms. BAUGH. That’s right. 

Chairwoman BEAN. I think you mentioned you’ve been in business for about 8 or 9 years. 

Ms. BAUGH. Nine years. 

Chairwoman BEAN. Okay, have you actually applied for a 7(a) 

loan at any time? 

Ms. BAUGH. I actually started in business with an SBA loan. 

Chairwoman BEAN. You did. 

Ms. BAUGH. Nine years ago. 

Chairwoman BEAN. And have you subsequently tried to get capital there and that has not been —

Ms. BAUGH. No, in all honesty, the reason that I’ve not looked 

at that is because it was quite an experience to go through that I’ve 

hoped, of course, over time to use other avenues. It took an awful 

long time to go through it. The paperwork was unbelievable. It was 

a difficult experience in all honesty but that was 9 years ago. 

13

Chairwoman BEAN. And subsequently, there was easier credit for 

some period of time maybe that you could have gotten but now as 

it’s tightened up, is it something —

Ms. BAUGH. I’ve tried over the past few years to get business 

loans to increase my business and open new stores. I’ve had to rely 

on my home equity to do that because I have what they call soft 

collateral. 

Chairwoman BEAN. Right, okay. And can I ask, what the structure of your company is? Are you incorporated or —

Ms. BAUGH. I’m incorporated. I have five employees including 

myself. 

Chairwoman BEAN. Okay, C Corp, S? 

Ms. BAUGH. Yes. 

Chairwoman BEAN. Okay. 

Ms. BAUGH. S Corp, I’m sorry. 

Chairwoman BEAN. S, okay. 

Ms. BAUGH. S. 

Chairwoman BEAN. One of the question I have and you may not 

know and then I would open this one up to the panel is, does that 

seem to be effecting the small businesses and their consideration 

as how they’re structured? I’ve had some people suggest that they 

think after they became a C Corp, because of the requirements that 

they have to provide as that entity they have more documentation 

to provide when they were pursuing loans. Is that relevant or not 

relevant from your experience? I’ll throw it out in general? 

Mr. SCHROEDER. As far as our bank is concerned, and we deal 

with sole proprietorships, partnerships, corporations. There is a set 

amount of paperwork that really does not differ very much from 

one form of organization, business organization, to the other. You 

obviously have very specific forms for these different forms of business but the paperwork is basically the same for all of them based 

on our experience. 

Chairwoman BEAN. And also one other question to layer this in 

your responses, too, do you see that those who are C Corps are 

more likely to get approved maybe just because they have more of 

that information available, not that you’re requiring more but because they have to do it already? I’m just curious. 

Mr. SCHROEDER. The fact that you have a C Corp versus a sole 

proprietorship in and of itself does not make a difference. What 

very well may happen is a C Corp may have audited financial 

statements. They may have monthly financial statements, budgets, 

but quite honestly, if the sole proprietorship has the exact same—

Chairwoman BEAN. Has the documentation? 

Mr. SCHROEDER. —then there is no difference as far as we’re concerned. 

Chairwoman BEAN. Mr. Sorgatz, did you want to comment? 

Mr. SORGATZ. Yeah, I would just concur with what Mr. Schroeder 

said. It really, in our case, too, doesn’t make—there’s no difference 

in terms of the application process from out standpoint. 

Chairwoman BEAN. Does anyone else want to weigh in on that? 

Ms. HOLLINGSWORTH. Just that I’ve always been S Corp with all 

four of my corporations and there are substantial tax breaks like 

a Section 179 recovery for capital investment, so I’m not sure why 

14

any small business would like to be a C Corp. They miss some very 

good tax breaks. 

Mr. ECKSTEIN. I guess I have to get a new accountant. I’m a C 

Corp, which is really unusual, but, you know, the carry-back would 

be substantial for me. You know, again, when I formed my corporation, I assumed I had 20 profitable years ahead of me and I fell 

short by 3. 

Chairwoman BEAN. Okay, all right. 

Mr. ECKSTEIN. But the paperwork has not been any more cumbersome, you know, in applications or loans. 

Chairwoman BEAN. All right, thank you. My other question for 

Ms. Baugh is, one of the things I don’t know if I actually heard you 

say it today but I think I had read that you mentioned was the possibility of accessing retirement funds—

Ms. BAUGH. Right. 

Chairwoman BEAN. —as a stop-gap measure. Can you share a 

little bit more about that challenge? We had done actually—in this 

Subcommittee we had done some hearings on pension parity/equity 

issues and that’s one that had not come up is in hardship being 

able to access those pension dollars. We did talk about some of the 

differences of employees of a larger corporation who have access to 

their tax deferred 401(k) dollars. Some cases small business who 

may have a SEP don’t have the same access to their own tax deferred dollars and so we were looking at that. I’m very curious to 

hear more about that. 

Ms. BAUGH. Well, I do have an IRA. The problem with that, of 

course, is when you take the money out, the tax consequences are 

terrible. I think for probably a small business owner, too, we don’t 

get to invest that much money into it as perhaps the larger companies because obviously, we’re using our money for operating expenses. 

The problem there is that once you take it out, and you lose almost 50 percent of it into taxes, you know, then are you ever going 

to be able to even put it back. So you’re looking at possibly extending, for me, my retirement probably 20 years. I’m 54. I don’t want 

to work until I’m 74. 

Chairwoman BEAN. Because what you had to do is you couldn’t 

withdraw from it for hardship purposes and then pay it back in 

the—

Ms. BAUGH. Exactly. 

Chairwoman BEAN. —way sometimes other can from 401(k)s but 

instead had to withdraw it and take it out. 

Ms. BAUGH. Exactly. I was one that opened my IRA many, many 

years ago and so for me to take the money out, it’s—you know, it’s 

a real problem. 

Chairwoman BEAN. Okay, thank you. I’d like to ask David 

Schroeder, if I might, confirming the recent downturn we’ve seen 

in the economy, the Fed Reserve survey recently showed weaker 

demand and tighter lending standards for all borrowers and all 

types of loans. In most situations credit tightens in response to 

some perceived risk associated with lending. Has that been the 

case with the current pull-back that we’ve seen? 

Mr. SCHROEDER. Well, I’m happy to say that community banks 

are alive and well and community banks are lending money. Now, 

15

having said that, the recent mortgage melt-down, the recent credit 

crunch and liquidity crisis have all had an impact on our economy, 

and that really has been the reason why there has been a negative 

impact on our bank and a negative impact on our customers. 

Chairwoman BEAN. Okay. And for Ms. Hollingsworth, from 2002 

to 2007 the average size of the 7(a) loan has decreased by over 65 

percent. Given the current economic situation and business costs 

increasing, does that make sense for you that the loans would be 

getting smaller? 

Ms. HOLLINGSWORTH. No, Congresswoman, it does not. I speak 

from time to time on funding small businesses for assorted groups 

and I think one of the strongest things that gives rise to these high 

statistics is small business failure in the first couple of years is 

they’re usually significantly under-funded. So further under-funding is sort of saying the death warrant ahead of time. 

Chairwoman BEAN. You mentioned in your testimony, you talked 

about how many of the firms you work with are under-capitalized 

and also under-insured which then doesn’t leave them with the facility to rebuild—

Ms. HOLLINGSWORTH. Right. 

Chairwoman BEAN. —when you come in. You also mentioned less 

companies are disaster recovery planning procedures in advance, 

certainly not best practices when it comes to risk management. 

And that’s also due to lack of funding. Typically, what size companies have you worked with historically and has that changed over 

the course of your business? 

Ms. HOLLINGSWORTH. Okay, our firm is primarily disaster recovery as opposed to planning, meaning we go in and clean up computers, manufactured equipment, et cetera. We work anywhere 

from Verizon to NASA to state and Federal Governments, down to 

mom and pop Insti-Prints or 7-11s and everything in between. 

Chairwoman BEAN. So you are in after the fact. You’re not —

Ms. HOLLINGSWORTH. We are the after the fact, but what I’m seeing very consistently, we’re headquartered in Chicago with offices 

around the country but a lot of the small manufacturing companies 

are in the Chicago area and when they have a significant disaster, 

they’re already struggling in the Rust Belt with the manufacturing 

and they face the choice of literally taking the insurance proceeds 

and running. And many, many of them are electing in larger numbers than ever to shut their doors. 

We just had a disaster in Chicago three weeks ago. A printed circuit board manufacturing company, he’s folding up, going out of 

business. 

Chairwoman BEAN. So in some ways in the same way that we’re 

seeing in the residential community of people who are finding 

themselves so up side down that they’re preferring to walk away 

than restructure their loans because the property values have 

dropped, you’re saying many small businesses are to a greater degree than what you had seen in the past, are finding themselves 

literally so under water than they’re not even going to try to recover. 

Ms. HOLLINGSWORTH. Yes, Congresswoman, and literally, as I 

was mentioning the Gulf Coast and communities in Florida and all 

along that area notably things they had had for collateral such as 

16

homes and so forth, they’re simply gone. They have an empty lot. 

There’s no more home equity. The mortgage may still be running. 

Their insurance did not cover for floods so they did not have insurance coverage, and you know, from the corner bakery to the Ace 

Hardware Store to Joe’s Bait Shop, there’s just no way for them to 

recover. 

Chairwoman BEAN. Okay, thank you for your testimony. And I’m 

going to let our Ranking Member Buchanan speak. 

Mr. BUCHANAN. Thank you, Madam Chair. Let me mention, and 

this is really for the whole panel, because I think this is important, 

I’m not sure everybody understands it up here but I want to get 

your thoughts and by the way, with a C Corp, I had a C Corp 25 

years ago, but most—a lot of accountants and stuff today are people I know and I’d be interested in the banks, and this leads into 

the question really, too, is most of them are Sub S, LLCs, partnerships or sole proprietorships because of the pass-through effect. 

Now, it’s a little different today maybe with the dividends or 

something but because it’s double taxations and if you’re primarily 

the 100 percent shareholder, a lot of people go to that. So my question really is, is that there’s a mind set in Washington, unfortunately, that you want to tax the people that make over 150 more 

aggressively but part of it is when you do that, you really tax small 

business because of the pass-through in a big way. My example, 

and just from friends and stuff, they make 500 but say, by the time 

they pay their taxes, a third, and then they’ve got a little extra inventory, they add a few extra employees, they — you know, and 

sometimes they — you know, write things off, but at the end of the 

day, they always figure out, where’s my cash. So if we increase 

taxes up here on individuals, aren’t we really effecting negatively 

hundred and hundreds or millions of small businesses and I open 

that up to the panel? 

Correct me if I’m wrong because you were both saying, especially 

the community bank and the credit union, and I’d ask any of the 

others, isn’t that your understanding, so if someone really makes—

what I’m saying is some of my show 500 at the bottom line they 

made 500, but when it gets down by the time they pay their taxes 

and other things, that they end up with very little liquid assets or 

cash at the end of the day, many times, and if you added another 

tax, it just squeezes them that much more. But that’s what I find 

but I want you to give me your sense of it. 

Mr. SCHROEDER. I would agree with you, Congressman Buchanan. I would say, looking at our business customers, the overwhelming majority fall into two camps, either sub-S or LLCs, some 

LLPs, very few sole proprietorships but primarily within those two 

camps and I would wholeheartedly agree that that pass—

Mr. BUCHANAN. Which just passes all the way through to their 

tax. 

Mr. SCHROEDER. Exactly, so I would wholeheartedly agree with 

you. 

Mr. SORGATZ. I would concur with that, too. With our — you 

know, we do a lot of sole proprietorships, partnerships but we do 

have some LLC’s also, so I would see that as a definite impact on 

the small business owner. 

17

Mr. BUCHANAN. So if you raise taxes, say 5 percent on individuals, really what you’re doing is you’re raising 5 percent on 99 percent of the small businesses in the country as well. So that needs 

to be taken in to fact, when you consider they create 70, 80 percent 

of the jobs, am I right on that? 

Mr. SORGATZ. Yes. 

Mr. BUCHANAN. Okay, anybody else, comment or question? 

Ms. HOLLINGSWORTH. Yes, I’d like to comment. In 2007 I showed 

enormous paper profits and generated enormous six-figure tax burden which I painfully wrote a check out on April 14th and saw very 

little of that actual profit in my pocket. Simply put, higher taxes 

on individuals is a higher tax on sub-S corps, period. 

Mr. BUCHANAN. I think that needs to be—I’m not sure everybody 

in Washington understand that but when we decide to go that way, 

they need to understand the impact that’s going to have on small 

business and I just — does anybody have a different experience 

than that? 

Mr. ECKSTEIN. Well, in my experience, I personally took my 

401(k) money out to help my company. Even though I’m a corporation, I transferred that money into my company thus showing a, 

you know, wonderful year for my income taxes and then had to pay 

that fee on top of everything else. So I’ve been extremely penalized 

and with no incentive to reinvest in the future and that’s something that I think really, we should be encouraging small business 

to reinvest—invest in themselves first when times are tough and 

then give them some benefit back when things are—

Mr. BUCHANAN. Yeah, I usually find people that end up with 

maybe 100,000 excess capital, they put it back in their businesses, 

they’re never putting it in their pocket. They’re constantly using it 

because they need it to grow their business. That’s been my experience over 30 years. 

Let me—did you have something, Ms. Baugh? 

Ms. BAUGH. Congressman Buchanan, I think you’re absolutely 

right. As a small business owner, if you raise taxes, I’m going to 

get hit, we all are and you’re right, we use any profit, not that 

we’re making any right now, but in the past we turn that over into 

the business. So, please, keep—no tax increases. Right now it 

would be terrible. 

Mr. BUCHANAN. Ms. Hollingsworth? 

Ms. HOLLINGSWORTH. And just very quickly, not only ordinary income tax but capital gains dividend distribution, this is an opportunity as a sub-S Corp that I can take income at a lower tax rate, 

so increasing those rates also hurt the sub-S owner. 

Mr. BUCHANAN. Okay. Let me just mention on the home building, obviously, Mr. Eckstein, you had mentioned that the impact 

it’s having on you in our area. We’ve got a lot of homebuilders, I 

hate to say it, but our businesses I’ve been in our down 10 percent 

of so, but homebuilders are down 70, 80 percent. You mentioned a 

couple of things that you thought would help on behalf of the 

homebuilders. Any other thing that comes to mind or I’d like to 

have you jot me any of your additional thoughts of what we might 

be able to do to help, because really that’s—you know, in Florida 

and all parts of the country, it’s a big issue and usually we’ve got 

too much inventory so—and I can tell you, I’ve got—and I can tell 

18

you, I’ve been involved in partnerships and homebuilding and the 

problem is, is selling the other house, even if you could sell this 

house. 

So I know you mentioned something about carry-back on taxes. 

You mentioned something about tax credit for home-buyers. Any 

other thoughts that you’ve come up or your association? 

Mr. ECKSTEIN. Well, the Association, I mean, I think we feel very 

strongly about some kind of incentive to either—whether it be firsttime home-buyers or home-buyers in general, for at least a shortterm basis that could begin definitively and soon because with conversation out there, it lingers and people just find more reasons to 

wait to take advantage of the interest rates that are better than 

ever. We’d like to see something happen soon that would encourage, you know, first-time home-buyers helps the ladder effect, you 

know by moving lower end inventory and then, you know, pushing 

it up the ladder. So anything to entice people to buy right now is 

what we’re—

Mr. BUCHANAN. What’s your thoughts on—I know in our area 

people are very environmentally sensitive. They want to cut energy 

costs. What about some incentive for homebuilders, small homebuilders that are building more energy efficient homes, is that 

something, again, incentive for—or would that make a difference in 

your area? Is that an area that people are sensitive about that or 

not really? 

Mr. ECKSTEIN. Well, it’s an emerging area. I mean, with the 

Green Movement and everything, it’s coming into homebuilding, 

but many of us are doing it already through the new adopted building codes. The latest version of the residential building code has 

great energy — you know, recovery benefits in it that naturally—

and they cost money. I mean, they’ll cost 10 to $15,000.00 more per 

unit to build but there should be some incentive to take advantage 

of these. People will save money in the long run. 

Mr. BUCHANAN. Yeah, I just find like in the auto industry, hybrids, a couple years ago, it was so funny, the government will give 

an incentive for a sports utility vehicle that weighs 5,000 pounds 

and they just flew off the lots but, you know, you’d think they 

would do something ideally with hybrids or energy efficiency 

homes, especially when we’ve got our energy crisis that’s going on. 

A lot of homebuilders have said they thought that that would be 

a good thing because there’s some people, even the hybrid costs 

more, they just want to, you know, contribute in a small way and 

I just think that’s something that can be helpful. 

Mr. SORGATZ. Just in community banks, I wanted to get back, 

this housing crisis that we’re in, I mean, my sense of it is not to 

pick on Wall Street but it’s something that was sub-prime lending 

they claim was about 20 percent, mortgages today are sub-prime 

lending. They came up with a creative process and Wall Street or 

whatever, sold off a lot of these products and probably a lot of lenders might not have done from a conventional standpoint, sold them 

off, bundled the up and now they’re international investors compared if they had, you know, someone’s got a problem with a community banker, he can go down the street and talk to the banker 

and maybe you guys could work with him a little bit. Is that your 

19

mind set what’s created a lot of these issues nationally from your 

standpoint or—

Mr. SCHROEDER. Very definitely, and the point I would like to 

make very clearly is that community banks and community bankers do not put people in homes they can’t afford and in loans that 

they can’t afford. And the problem right now with the mortgage 

meltdown is that these holders, as you mentioned, are so far away 

from the actual origination and borrowers that there really is a 

lack of flexibility in trying to restructure and work with the borrowers as problems emerge. 

Mr. BUCHANAN. Okay, thanks, I think—how much time do I have 

left? Are you—okay, I wanted to make sure. Just your thoughts—

I mean you were talking about also the community banks in general are pretty good from and equity capital standpoint. Is that 

what you’re saying today? 

Mr. SCHROEDER. Very definitely. Community banks are very well 

capitalized and again, we are not suffering the direct result of the 

mortgage meltdown but because of the slowdown in the economy, 

we are definitely suffering as are out customers, the indirect result 

of the mortgage meltdown. And that’s putting pressure on us. It’s 

putting pressure on our customers. It’s effecting our underwriting 

standards, and it is making it more difficult to emerge from this 

situation. 

Mr. BUCHANAN. And your thoughts on a couple of things we 

could do up here to help the community banks to get more capital 

out to small business? 

Mr. SCHROEDER. Our bank, as I mentioned, is a very active SBA lender. We originated $62 million in 7(a)loans last year and $15 

million in 504 loans. Anything that can be done to increase—a 

number of things. We can increase the guarantee limit, reduce the 

fees that are charged to bankers and borrowers which are significant. I think one trend that’s evident within the SBA program 

right now is the concentration of originations with the largest 

banks and the sharp decline in the number of small community 

banks that are participating in the SBA program. So anything that 

can be done to increase the number of small community banks that 

participate in the program would be very, very helpful. 

What that does is drive the benefits of the program down and out 

in terms of geographies, in terms of census tracks and again, from 

my standpoint, concentration of power is never a good thing. And 

right now, we have a handful of the largest banks in the country, 

several of them that are originating 60 percent of the SBA loans. 

I don’t think that’s healthy and I think community banks need to 

participate more in the program and whatever Congress can to do 

help that would be very much appreciated. 

Mr. BUCHANAN. My experience was like Ms. Baugh, it’s been 15, 

20 years ago working with SBA was almost impossible. Eight 

months, 9 months, a year, finally you just give up out of frustration. What’s been your experience and what’s the time frame? She 

comes in, you know, wants to get an SBA supported loan. You 

know, what does a normal customer of a community bank, how 

long is that going to take? 

Mr. SCHROEDER. Because our bank is an active SBA lender, I am 

probably not the best person to ask about—

20

Mr. BUCHANAN. But I’d like to know from your standpoint, being 

an active lender, what’s possible? I mean, what’s the average, you 

know, how long? She comes in. She’s a small business in the community. How long before she gets a yes or a no and if she gets a 

yes, how long is it going to be before she’s going to get funded? 

Mr. SCHROEDER. Because our bank is able to underwrite and approve on behalf of the SBA, as soon as we have all of the information and can do our underwriting, we can get an approval. Thirty 

days is not unusual. 

Mr. BUCHANAN. Okay. 

Chairwoman BEAN. Will the Chairman yield? 

Mr. BUCHANAN. Yeah. 

Chairwoman BEAN. If I an also ask, so then what you’re essentially saying is it’s the challenge of getting banks up to speed the 

way yours is so that they can facilitate the same type of experience. 

Mr. SCHROEDER. Right, yeah, the learning curve is steep. There 

are certain application standards, underwriting standards, documentation and closing standards, as well as ongoing servicing 

standards. Our bank has long since gone up on that learning curve 

and we’re very efficient at it. The challenge is to get the smaller 

banks to participate and again, whatever Congress can do to facilitate that would be very much appreciated and there are several 

bills moving through, Chairwoman, that will accomplish that. 

Chairwoman BEAN. Thank you. I yield back. 

Mr. BUCHANAN. Thank you, Mr. Sorgatz, let me ask you, you 

mentioned the 12-1/2 percent in terms of being capped. How much 

of difference would it make if Congress relooked at that or rethought that? And I know there’s a lot of pressure from a lot of different groups up here on that, but I’m just curious because, you 

know, today—my mind today needs to be about helping people in 

small business and we’ve got to get out of the business of politics 

to the extent we can, but just what’s your sense of how much difference would that make in the credit unions one way or the other? 

Mr. SORGATZ. The difference that we’ve calculated it would make 

if we were able to get up to the 20 percent level would be approximately 4 to $5 billion that would be available in the marketplace 

for small businesses. As I mentioned, earlier, you know, our average loan is about $181,000.00. So just that change alone would be 

able to put more money, liquidity in the marketplace for small 

business. But also I wanted to talk a little bit about the SBA side 

of it, too, from a credit union perspective. Being able to reduce the 

fees, as Mr. Schroeder said, reduce the—you know, the application 

process, make it more—a lot more smooth and easier for both the 

financial institution application side and for the borrower side. 

I’ll mention that a smaller percentage of credit unions today do 

SBA lending mainly because of the application process and the fees 

involved. Credit unions would like to get more involved but we 

need a little help in terms of addressing what those fee issues are 

and addressing what the application process is, also. 

Mr. BUCHANAN. I thank you. I’m going to yield back and then I’ll 

come back with a couple more questions. 

Chairwoman BEAN. I’d like to recognize Congressman Sestak 

from Pennsylvania. He has some questions. 

21

Mr. SESTAK. Actually, I think I only have two. Those were great 

questions. When Governor Mishkin came before us last November, 

he had stated that in the—as far as the impact on small businesses 

of credit that there seemed to be no issues but it was still a bit uncertain what the impact would be and when he went to the Senate 

side the other day, he made comments that, well, it looks now as 

though—and I’m sorry I wasn’t here to listen to your testimony, 

but that lending standards have now tightened among the lenders 

for small businesses, and the rates have increased. 

In fact, for small businesses, small commercial banks and all, the 

spread is actually more now than it was previously between the 

cost of funds and the interest rates, probably because of the risk 

attendant to lending today. And so small banks, community banks 

are now only lending a 12-percent growth this past recent month 

or two rather than 20 percent you’ve been seeing. 

My question is more one of how well are we really shooting 

ahead of the rabbit? You know, the Governor was here and said 

really no issues, but it’s uncertain and now we see some harbingers, something that’s more than harbingers of impact. How — can 

you describe to me how well—what is your monitoring out there in 

the field so to speak for the credit union, for the bank? How do you 

monitor this so there’s a better sense in Washington of are we really shooting ahead of the rabbit early enough to help in some way? 

I say that because I was taken by the facts that—and this is 

what I’m curious about is, 45 percent I gather of all small businesses use collateralized real estate which you were speaking to, 

you know, to back them up and 15 percent of that is personal. 

Forty-seven percent of them use credit cards, and house finances 

and automobiles. What — how do you raise to Washington that 

early enough there’s such an issue that’s impacting and if it’s going 

to get worse? That’s probably not a great question but I’m just curious how just a few months ago somebody you hope would have a 

lot of foresight said there doesn’t seem to be any issues right now 

but it’s uncertain, and all of a sudden now we’re hearing, gee, you 

know, this is really impacting us. 

I don’t think it’s his fault, it’s just how do you get a better view 

of this from you all? 

Mr. SCHROEDER. Well, things have happened incredibly quickly 

since August of last year. Just look at the decline in the Fed funds 

rate. There’s been a 300 basis point reduction and depending upon 

how things go at the Fed today there may be an additional reduction. So things have very definitely happened quickly. I can say for 

the banking community, we —

Mr. SESTAK. They have happened quickly but the impact is 

still—it seems as though, you know, they happened last August. 

Here you are this past three months having instead of 20 percent 

expanded, you know, you’re down to 12 percent all of a sudden. Are 

we doing enough? 

Mr. SCHROEDER. Let me try to explain from our standpoint, underwriting standards and how we look at credit. It’s not only internal as far as the bank but external in terms of our regulators. In 

a situation like this, where we have an economic downturn, we, 

quite honestly have restricted and tightened our underwriting 

standards. What pays back a loan is profitability and cash flow and 

22

when the economy is not doing well, the predictability of profitability and cash flow is not there. 

So there are some loans, particularly loans on the margin that 

may not get done in an economic downturn. If we’re not doing this, 

our regulator is certainly going to be there making sure that we 

do in terms of monitoring our customers and monitoring the economy and monitoring our portfolio. So we—maybe a different way to 

answer your question, you know, we look at all the different economic reports that come out the different views on the economy 

and see what’s happening within our own portfolio and with our 

own customers and based on all of that information, make a decision as to how to proceed. 

Mr. Sorgatz. I think from the credit union perspective our consistency in the underwriting standards has been pretty level. When 

I talk to the other credit unions around the country and ourselves 

in particular, the group of five credit unions that work together on 

the commercial lending side, we haven’t changed our underwriting 

standards and to be honest with you, we have no current delinquencies either and that’s more of a relative factor with credit 

unions who have a much smaller delinquency rate on business 

lending compared to our banking partners. So we haven’t changed 

how we approach the commercial lending side from the due diligence that we do, meeting the requirements of our regulators. I 

think the concern that we have and that we’ve tried to express 

early in my testimony is the ability to be able to continue to offer 

more services to more small businesses in the community and that 

goes back to the 12-1/4 percent issue. 

That cap level does prohibit or limit severely what credit unions 

are able to do in terms of serving the small business community 

throughout the country. And when you have the capability of being 

able to provide an additional 4 to $5 billion in the marketplace, 

that’s fairly substantial and can help at a time when the tightening 

standards that banks have had to put into place because of the 

issues that they’ve dealt with in terms of obviously, the sub-prime 

crisis issues and so on, we’re here, we’re ready to help fill that need 

at this point, but we do need some help from the congressional 

standpoint to be able to step up to the plate and be able to deliver 

those additional services in the community and we like to do that. 

Mr. SESTAK. Thank you. That’s all I have. 

Chairwoman BEAN. Thank you. I wanted to just throw out one 

thing before I yield to Congressman Buchanan. Mr. Eckstein had 

mentioned the homebuilders and the lost carry-back is something 

that you’re interested in. As you know, in the stimulus package, 

we’d introduced that as one of the things that didn’t end up making 

the final cut. I know the Senate is still looking at maybe the future 

housing package that’s still going to be coming out and let me 

yield. 

Mr. BUCHANAN. Thank you, Madam Chair. Ms. Baugh, I wanted 

to ask, you talked about soft collateral. Just for the audience and 

that, how do you define that in your mind, sort collateral? 

Ms. BAUGH. From what I understand from many bankers, when 

you have your inventory that you sell, such as in my case or in a 

restaurant even, I sell jewelry. Well, the jewelry leaves the store. 

So even though in my store, I have $3 million worth of collateral 

23

to me, they will not look at it as collateral, because it leaves the 

building. 

I lease where I am. I don’t own the real estate, so therefore, I 

have no collateral that the banks are willing to loan me a business 

loan on and it’s not—

Mr. BUCHANAN. Just out of curiosity in your industry, do you 

own that or do you pay for it as a kind of on consignment when 

you say soft collateral? 

Ms. BAUGH. When you’re an independent jewelry store, you have 

to buy the majority of it. There is some that’s on memo, but the 

majority, you do have to purchase. And it’s not even just the jewelry industry. There’s many other businesses that—retail businesses that are set up the same way as mine. 

Mr. BUCHANAN. And when you look at, you know, Sarasota or 

just that region, you know, we’re talking about tight credit but it’s 

a lot more than tight credit. I mean, in our case, we’ve got property 

insurance challenges, property taxes have gone up a lot over the 

years and haven’t been adjusted. You’ve got now the cost of oil and 

gas and you know, everything at the pump. 

What do you see other than the tight credit market is the other 

big issue for you in your area, your biggest area? When you’re talking with your customers and that, what is the biggest thing they’re 

talking about today? 

Ms. BAUGH. Well, more on the local level, property taxes, insurance, homeowner’s insurance of course, gas is a big issue at this 

point. And I think that’s part of the problem with the economy. 

Even though the real estate market is so terribly down, a lot of 

people that do have extra income are not spending it because they 

just don’t know what’s going to happen with the economy. So it’s 

a no-win situation all the way around. 

Mr. BUCHANAN. Yeah, and let’s say if you had access to additional capital, would that in this environment, in your case, make 

a difference? I mean, what would you do if you had it? I mean, is 

the market there to expand your business, for example? 

Ms. BAUGH. Well, in all honesty, I, myself, I’m in a holding pattern where I’m sitting back waiting to see what is going to happen 

with the economy. Once we turn around, and I’m sure that we will, 

I mean, this happens from time to time, we will open another location. I hope that we weather the storm and we’re able to do that. 

That is my goal. 

Right now I’m in a holding pattern. I’m sitting back hoping to 

survive in all honesty. 

Mr. BUCHANAN. We appreciate your comments on that. Ms. Hollingsworth, let me mention in terms of your business, you brought 

up, I thought predatorial lending practices are detrimental to the 

development. What did you mean by that? 

Ms. HOLLINGSWORTH. Are you referring to the credit card interest? 

Mr. BUCHANAN. Yeah, stuff like that. 

Ms. HOLLINGSWORTH. Our firm, along with probably the majority 

of small businesses utilize credit card debt for various things. For 

example, when we mobilize to a disaster site, I have employees in 

hotels for maybe months. Sometimes we have airfare, all that gets 

charged on a credit card, typically. So while we have a very favorVerDate 0ct 09 2002 11:51 Jun 04, 2008 Jkt 033615 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40861.TXT LEANN
24

able lending rate from our bank, and we try to pay our credit cards 

off as soon as possible, these 17, 18, 19, 20, 22 percent interest 

rates on credit cards are just unbelievable. And I think credit cards 

are a cornerstone of small business funding and cash flow management, and that’s what I consider predatory lending. 

Mr. BUCHANAN. Okay. Thank you. I yield back. 

Chairwoman BEAN. Thank you. I just had a few final questions 

myself, to Mr. Sorgatz and possibly Mr. Schroeder may want to 

comment as well, the SBA, as you know, recently implemented a 

portfolio monitoring system to oversee the 7(a) and 504 portfolios. 

The system is drawing criticism from a number of lenders in the 

lending community as not accurately providing a good measurement of portfolio risk. 

At the same time, the SBA is ready so spend more money on this 

program. So I’d like to hear your comments about how well this 

program is doing coming at particular time when the credit crunch 

is severe. Is it effecting lender participation in the program, number 1? And is it a good idea to spend more money if the tool isn’t 

helpful? 

Mr. SCHROEDER. Well, from our perspective, this oversight is new 

program, again, relatively new, so in that respect we haven’t seen 

all of the—all the ramifications of it, but there is a certain amount 

of overlap between what the SBA is doing and what our primary 

regulator is doing, namely the FDIC, and we’re a state-chartered 

bank. So there is a certain degree of overlap there. 

Chairwoman BEAN. Which become burdensome then. 

Mr. SCHROEDER. Which is an added burden for us. So to the extent, and again I think this will take a little more time to really, 

you know, flesh out and flush out all of the different issues, but at 

least right now my initial observation is there’s an overlap between 

our primary regulator and what the SBA is doing. 

Chairwoman BEAN. So it mostly presents and obstacle to lenders 

who otherwise might participate in the program, but might decide 

not to as a result. 

Mr. SCHROEDER. Yeah, definitely. 

Chairwoman BEAN. Mr. Sorgatz, did you have any additional 

comments? 

Mr. SORGATZ. Well, we currently don’t do SBA lending but I 

would concur with Mr. Schroeder, with our federal regulator having the oversight on our underwriting standards and lending guidelines and so on. I would agree it would probably dovetail into additional duplication of the process. 

Chairwoman BEAN. The other question I had and thank you for 

that, is on the SBA Express Program. Over the last several years, 

the SBA has become very heavily reliant on that program because 

it carries only the 50 percent guarantee. What is the effect of the 

current credit crunch on the SBA Express Program from your perspective? 

Mr. SCHROEDER. We tend to a smaller number of larger SBA 

loans so we do not use the Express Program. 

Chairwoman BEAN. You’re not using it. 

Mr. SCHROEDER. We’re not an active user of that program, no. 

25

Chairwoman BEAN. Do you think the fact that the SBA is relying 

so heavily on it and emphasizing it is one of the reasons we’ve seen 

participation go down? 

Mr. SCHROEDER. SBA loans, by their very nature, are riskier 

than conventional loans, and to the extent that you reduce the 

guarantee fee, or the—I’m sorry, reduce the guarantee percentage, 

you will very definitely have a negative impact on banks that participate in the program from my perspective, yeah. 

Chairwoman BEAN. All right, I thank you very much for your testimony. Did you have any additional? 

Mr. BUCHANAN. The only thing I’d like to comment, just thank 

all our witnesses for taking your time and all of you are busy and 

could be doing other things, but it does help us. I know the Chairman of the Committee and myself, it helps us up here to hopefully 

come up with better policies and things that we can do to help 

make a difference for you. So I appreciate you coming up. Appreciate you taking your time. It’s helpful to me and I know to the 

Chairwoman, too. 

Chairwoman BEAN. Thank you so much, and know that obviously 

we’re both here and on a bipartisan basis recommitted to working 

together to address what you’ve raised. I particularly like the questions that both of you raised about having to access your own pension monies and certainly we want to do that in a way that allows 

you to reinvest your own money in your business and we’re going 

to look at that closely. Thank you so much. 

I do ask unanimous consent that members will have five days to 

submit statements and supporting materials for the record. Without objection, so ordered. The meeting is adjourned. 

[Whereupon, at 11:17 a.m., the Committee was adjourned.]

26


40861.001
27


40861.002
28


40861.003
29


40861.004
30


40861.005
31


40861.006
32


40861.007
33


40861.008
34


40861.009
35


40861.010
36


40861.011
37


40861.012
38


40861.013
39


40861.014
40


40861.015
41


40861.016
42


40861.017
43


40861.018
44


40861.019
45


40861.020
46


40861.021
47


40861.022
48


40861.023
49


40861.024
50


40861.025
51


40861.026
52


40861.027
53


40861.028
54


40861.029
55


40861.030
56


40861.031
57


40861.032
58


40861.033
59


40861.034
60


40861.035
61


40861.036
62


40861.037
63


40861.038
64


40861.039
65


40861.040
66


40861.041
67

Æ


40861.042