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98–783 PDF 2005

THE PRESIDENT’S FISCAL YEAR 2006 BUDGET

REQUEST: WHAT DOES IT MEAN FOR SMALL

BUSINESS?

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

WASHINGTON, DC, FEBRUARY 10, 2005

Serial No. 109–1

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

(II) 

C O N T E N T S 

WITNESSES

Page 

Barreto, Hon. Hector, Administrator, U.S. Small Business Administration ...... 4

Wilkinson, Mr. Tony, President & CEO, National Association of Government 

Guaranteed Lenders ............................................................................................ 25

Crawford, Mr. Chris, Executive Director, National Association of Development 

Companies ............................................................................................................ 27

Vivian, Mr. Steve, Board Member, National Association of Small Business 

Investment Companies ........................................................................................ 28

Wilson, Mr. Donald, President, Association of Small Business Development 

Centers .................................................................................................................. 30

Betancourt, Mr. Daniel, Executive Director, Community First Fund ................. 31

APPENDIX

Opening statements: 

Manzullo, Hon. Donald A. ................................................................................ 40

Velazquez, Hon. Nydia ..................................................................................... 45

Prepared statements: 

Barreto, Hon. Hector, Administrator, U.S. Small Business Administration ................................................................................................................. 48

Wilkinson, Mr. Tony, President & CEO, National Association of Government Guaranteed Lenders ........................................................................... 55

Crawford, Mr. Chris, Executive Director, National Association of Development Companies ........................................................................................... 63

Vivian, Mr. Steve, Board Member, National Association of Small Business 

Investment Companies ................................................................................. 71

Wilson, Mr. Donald, President, Association of Small Business Development Centers ................................................................................................. 82

Betancourt, Mr. Daniel, Executive Director, Community First Fund .......... 93

Attachments 

Chairman Manzullo’s letter to SBA Administrator Barreto ......................... 96

SBA Administrator Barreto’s response to Chairman Manzullo ................... 98

(III) 

(1)

THE PRESIDENT’S FISCAL YEAR 2006 BUDGET 

REQUEST: WHAT DOES IT MEAN FOR SMALL 

BUSINESS? 

THURSDAY, FEBRUARY 10, 2005

HOUSE OF REPRESENTATIVES

COMMITTEE ON SMALL BUSINESS

Washington, D.C. 

The committee met, pursuant to call, at 10:24 a.m. in Room 311, 

Cannon House Office Building, Hon. Donald Manzullo presiding. 

Present: Representatives Manzullo, Velazquez, Musgrave, Bradley, Fitzpatrick, Westmoreland, Millender-McDonald, Lipinski, 

Bordallo, Grijalva

Chairman MANZULLO. The Committee will come to order. We 

welcome you to the Committee’s first hearing for the 109th Congress. 

This room, 311 Cannon, is the first Committee room in the entire 

Capitol Hill complex to be restored to its original grandeur. Everything here has been restored to what it was originally with the exception of the carpet on the floor, and the floor is solid marble. The 

picture on the back wall of the ships was restored also, even to the 

extent that no one knew there were ships in the background, just 

a ship up front. 

This restoration took place over a period of about a year, and 

during the process of it, it was the culminating effort of two of the 

people from the House woodworking shop, who took countless 

hours and days and weeks to fastidiously restore the wood that you 

see here. We removed a lower group of seats that had been put up 

but was not there, according to original plans. 

So 311; this is a beautiful room, and the sound here is actually 

better than in boring Rayburn. So welcome to the first full Committee hearing in 311. 

Let me applaud the fact that our first witness on the first panel, 

Hector Barreto, was one of the longest-serving administrators of 

the SBA. He serves not because this is a position on its way to another position, unless it is president, but he serves because of his 

passion and his zeal and his love for small businesses. 

Let me also state this at the opening, that the 51-year tradition 

of Manzullos being in the restaurant business came to an end on 

December 31st. Those of you from the SBA who came out always 

would stop by and have a great opportunity there. My brother was 

honored to have a member of the president’s cabinet come and to 

officiate over numerous small businesses coming to visit. It is one 

2

of those things where he decided to close up the family restaurant 

business. I wept for seven days straight. It was also the home 

where we were raised as children. But fortunately, he is holding 

onto the recipes and the family name. He sold the buildings, and 

a lady bought the family home, and she is going to have a quilting 

shop, and she is dedicated to restoring the old family home to its 

Victorian grandeur. 

So it is one of those things; but, in passing, my brother decided 

to sell the restaurant for many reasons, but, frankly, he just got 

tired of paying the high insurances. It simply reached the point 

where he said, All I am doing is working for insurance companies. 

I know Mrs. Velazquez shares that same concern, especially in 

the area of health and accident insurance, and, I think, the first 

hearing besides this is going to be in the area of what we can do 

to curb those costs. 

So that is how we start the year. Frank will probably be out to 

testify sometime about his experience in running that family restaurant for 41 years. 

[Chairman Manzullo’s statement may be found in the appendix.]

Chairman MANZULLO. So I will now yield to the ranking Committee member, Congresswoman Velazquez of New York.

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Chairman, before I make my opening statement, I just would like for the administrator to clarify to me what is the administration policy regarding 

requests from the members of this Committee because, two weeks 

ago, in preparing myself for this important budget hearing, I requested from your office, and you did not provide the information 

that was requested from me, and I think it is a lack of respect.

Chairman MANZULLO. I would like that question to be held in 

abeyance until the administrator has finished his testimony, and 

then you can ask that question during the regular course.

Ms. VELAZQUEZ. Well, that is my question.

Chairman MANZULLO. Okay.

Ms. VELAZQUEZ. Sure, Mr. Chairman. I am using the only venue 

that I have to make my views known in this Committee. 

Mr. Chairman, every year, when I think the budget cannot get 

any worse for the Small Business Administration, the administration turns around and proves me wrong. This budget is a failure 

to America’s small businesses. It is nearly half of what it was when 

President Bush took office, and at least $100 million has been cut 

each year. 

What was once a cabinet-level agency that had a seat at the 

table, a $1 billion budget, and a large role in the decision-making 

process has sadly become the shell of an agency. It was not long 

ago that SBA was creating new, innovative programs to help entrepreneurs across the country start and grow their businesses. However, it is quite a different story today. This agency is failing to enVerDate 0ct 09 2002 13:25 Jul 22, 2005 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\HEARINGS\98783.TXT MIKE
3

sure that small businesses are receiving federal contracts and increasing the cost for entrepreneurs to access capital. 

SBA seems to have fallen off the path here. They are no longer 

helping small businesses to start and expand their dreams. Time 

and time again, SBA has not been shy about voicing all-time 

records for programs and loans, but, in reality, what SBA should 

be voicing today is an all-time record for cutting and terminating 

the most programs over the past four years. 

Let us go through the list of these programs. Cuts have been 

made to the Women’s Business Centers, HUBZone, and SCORE, 

among others. Some of the small business programs that either 

were eliminated or slated for termination include Business Link, 

SBIR Rural Outreach, SBIR FAST, PRIME, New Markets, Venture 

Capital, and the flagship lending program, 7[a], all of which help 

to create jobs. 

Of more concern is the fact that SBA proposed to eliminate the 

Microloan Program again, a program that serves a unique role by 

providing small loans to low-income communities. So much for compassionate conservatism. 

In addition, by failing to request any program effort for the 

Small Business Investment Capital Participating Securities program, SBA’s largest venture capital program, it has closed the book 

on this initiative, too. 

I want to make one thing clear. These are all valuable programs 

that have contributed to some of the greatest entrepreneurial success stories in this country. They have formed the foundation for 

millions to pursue and achieve their business venture. The real 

problem today is not the programs themselves. Their successful clientele and the economic gain they have generated over the years 

speaks for itself. The real problem is the fact that they are underfunded and mismanaged. 

This administration has a very unusual way of showing their 

support for small businesses. When the federal government cannot 

meet its contracting goal, instead of accepting accountability and 

working to fix it, they start counting large businesses towards a 

small business goal and flood the government tracking system with 

so much bad data that no one can really determine what has or has 

not been done. 

Capital is not flowing to small businesses like it should be. Rather than putting money into the lending programs, this agency gutted their staff in towns across the country that do outreach to 

small businesses and created cost burdens for lenders. Afterwards, 

the agency claims they have improved the process. 

This administration would also claim that these cuts are fine, 

and entrepreneurs simply need to do more with less, yet, at the 

same time, SBA has not been able to balance their books for the 

past four years. They have not had one clean audited opinion since 

these cuts began. If Mr. Barreto was the CEO of a corporation with 

this track record, he should be removed by stakeholders. 

The bottom line here is that our small businesses deserve better 

than this, yet we are facing a massive budget deficit now, and we 

are involved in a war on terror. These entrepreneurs are some of 

the most patriotic people out there. They will do anything to help 

4

out. However, it is not fair that we expect them to bear the burden 

of these cuts once again. 

I will say to my colleagues on the other side of the aisle and in 

the administration, if you do not believe in these programs, and if 

you think they deserve to be cut, that is fine; just say it. Let us 

have that debate. I have no problem standing up for these programs. I do believe in them, and I know they are valuable, but do 

not cut these programs year after year, mismanage them into the 

ground, and then come to the Committee and claim things are better than ever before. That is simply wrong. Our nation’s entrepreneurs know this, and they deserve better than that. They deserve to be told the truth about where people stand on these programs. Let us give them that much. Thank you, Mr. Chairman. 

[Ranking Member Velazquez’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you very much. 

Mr. Barreto? 

STATEMENT OF THE HONORABLE HECTOR BARRETO, SMALL 

BUSINESS ADMINISTRATION

Mr. BARRETO. Thank you, Mr. Chairman, Ranking Member 

Velazquez, and members of the Committee. Thank you for inviting 

me here today to discuss the president’s budget request for the 

SBA for Fiscal Year 2006. 

The past year was not without its challenges for SBA. However, 

I am proud to say that last year was a great success for both the 

administration and this Committee. We were faced with several 

critical issues, and we worked together to reach agreements that 

benefitted both America’s small businesses and America’s taxpayers. 

When 7[a] loan demand exceeded its budget authority, SBA and 

the Committee were able to come together with our lending industry partners to provide an additional $3 billion in lending for the 

7[a] program at no expense to the taxpayers. This allowed the 

agency to lift the loan caps and guarantee a record $12.7 billion in 

small business loans in 2004. 

At the beginning of Fiscal Year 2005, SBA began operating the 

7[a] program at a zero-subsidy rate. This trial period showed that 

a zero subsidy would not hinder access or delivery of the 7[a] program. As a result, SBA, the Committee, and the lending industry 

came together to craft legislation that ensured long-term stability 

in the program. 

Since October 1st, SBA has guaranteed over $4.4 billion in loans, 

and our lending partners have shown renewed support for the program. In addition, we are making more loans than ever to minorities, to women, to veterans. At this time last year, SBA’s program 

under the Small Business Act had not been reauthorized for over 

four years, and the agency and the Committee seemed to be deadlocked in the negotiating process. However, persistence and diligence in pursuit of this goal produced a compromise, two-year SBA 

reauthorization which the 108th Congress approved. 

5

Chairman Manzullo, I would like to compliment you and your 

staff on ensuring that this compromise was part of the Fiscal Year 

2005 Omnibus Appropriations Act and for your support of SBA’s efforts to become more efficient. This legislation allows the agency to 

better serve more small businesses at less cost. Our Fiscal Year 

2006 budget submission reflects a continued commitment to this 

goal. 

Small business customers are taxpayers and understand the 

need to cut unnecessary costs and to keep up with an ever-changing marketplace. Last year, I stressed to you that SBA’s goal was 

to do more with less. I know that in Washington, D.C., it is difficult 

to imagine supporting a program without continually increasing its 

budget, but SBA has proven that it can be done. Since I became 

SBA administrator in 2001, the agency’s annual appropriation has 

decreased, yet SBA’s programs have reached more and more American entrepreneurs year after year. 

Last year was a great example of this kind of success at the SBA. 

The agency provided a record $21.3 billion in loan guarantees and 

related financing for nearly 88,000 small businesses. Out of that 

$21.3 billion, nearly one-third went to women-owned and minorityowned businesses, more than in any prior year. Over $500 million 

went to African-Americans. Approximately $2.8 billion went to 

women, over $1.2 billion went to Hispanics, and over $115 million 

went to the Native American community. 

These figures represent the administration’s continued commitment to ensuring that SBA’s loan programs serve those businesses 

that would otherwise have a difficult time accessing capital from 

the lending world. SBA’s core infrastructure of technical-assistance 

programs—SBDCs, SCORE, Women Business Owners, and district 

offices—provided their services to record numbers of small businesses in Fiscal Year 2004. SBA’s Entrepreneurial Development 

programs provided expertise and guidance to entrepreneurs who 

have the drive and the idea but need a little help putting all of that 

together into a working business plan. 

SBA continued to support the federal government’s statutory 

commitment to provide a fair share of contracting dollars to small 

businesses. Small businesses received a record number of federal 

contract dollars in Fiscal Year 2003, $65.5 billion, and exceeded the 

23-percent, government-wide goal. 

SBA has also been innovative in creating contracting opportunities for small businesses. For example, the Business Matchmaking 

program has given small businesses around the nation a better opportunity to obtain government and private contracts by introducing them to procurement officials who otherwise would be very 

difficult to meet. 

The program stimulates jobs and growth for small businesses by 

taking advantage of opportunities that are normally confined to 

distinct geographical areas, such as Washington, D.C., or a city 

where a major corporation is located. Since the program started 

two years ago, 23,000 one-on-one appointments between small business owners and federal and corporate procurement officials have 

been conducted. This allowed small business firms to learn about 

and bid on procurement opportunities in their areas of expertise. 

6

As a result, $29 million in federal and private contracts have already been awarded. 

SBA has been active in other areas of contracting as well. I am 

proud of the hard work done to implement the provisions of Public 

Law 108-183 in record time, providing contracting officers with a 

powerful tool to award contracts to those who have given so much 

to our country: service-disabled veterans. 

In December, the agency implemented a new policy to more accurately monitor contracts when a small business is purchased or 

merged with a larger business. The new policy requires the business to recertify itself as small when federal contracts are transferred to it in order to continue to be counted as a small business 

contract. 

For years to come, victims of the worst hurricane season on 

record will remember how SBA helped them to get back on their 

feet. During Fiscal Year 2004, SBA’s Disaster Assistance program 

provided more than $884 million in low-interest loans to over 

28,000 homeowners and businesses. The supplemental appropriations allow SBA to increase these numbers to over 100,000 loans 

for up to $4 billion. This will enable the local economies to recover 

as quickly as possible. 

President Bush understands the vital role of America’s small 

businesses and the role that they play in creating opportunities. He 

also recognizes that small businesses generate approximately twothirds of all of the new private sector jobs. The president’s plan for 

economic growth and job creation, along with his Small Business 

Agenda, has been successful in creating an environment in which 

entrepreneurship can flourish. 

Health care continues to be one of the largest burdens a small 

business owner must bear. Time and again, as I meet with entrepreneurs around the nation, they talk to me about the cost of 

health insurance, and it is only getting worse. We will continue to 

support the use of Health Savings Accounts and urge Congress to 

pass association health plans. We also plan to make the President’s 

tax proposals permanent to help small businesses and their employees keep more of what they earn and reinvest that money in 

their families and their businesses. 

Recognizing these successes, we look toward the future with renewed dedication to serving America’s small businesses in a financially responsible manner. 

Now, I would like to lay out the specifics of our Fiscal Year 2006 

budget request. SBA’s total request is $592.9 million. This request 

provides for a strong, active SBA that can effectively and efficiently 

meet the demands of its customers, America’s entrepreneurs, while 

minimizing the cost to the taxpayer. Through improved management and program reforms, SBA will better serve small businesses. 

SBA requests $16.5 billion in lending authority for its 7[a] loan 

program. This record amount of lending authority will provide the 

loans small businesses need in a timely manner and without disruption due to the stability of a zero-subsidy rate policy. This request will also give SBA the authority to provide $5.5 billion in 

loans through its 504 Certified Development Company program, 

also at no cost to the taxpayers. 

7

SBA continues to support venture capital for small business. SBA requests $3 billion in authority for the SBIC debenture program. For 50 years, this program has provided venture capital success stories, such as Nike, Intel, Calloway Golf, just to name a few. 

However, we are not proposing to reinstate the Participating Securities program. In 10 years of operation, this program has resulted 

in reestimated losses of $2.7 billion. 

Through a more flexible budget structure, SBA is seeking increased efficiency and quality of services. The request proposes that 

the agency work through its nationwide infrastructure of Women’s 

Business Centers, Veterans Outreach Centers, SCORE chapters, 

SBDCs, and district offices. 

This budget also includes continued funding for the agency’s Disaster Loan program. As you are aware, the SBA is a major part 

of the government’s mechanism to help disaster victims get back on 

their feet. 

Some of the heaviest burdens borne by small businesses in America are the result of federal regulation and red tape. That is why 

I am pleased that the SBA’s budget includes $9.1 million for the 

Office of Advocacy. This funding will allow Advocacy to fulfill its 

mission. In Fiscal Year 2006, the Office of Advocacy expects to save 

small businesses $5.6 billion in potential regulatory costs. Mr. 

Chairman, that is a substantial amount of savings for America’s 

entrepreneurs. 

All of us are quite proud of the agency’s legacy of achievement. 

Many of today’s most successful businesses received SBA assistance in their formative stages. Who knows which of tomorrow’s industry leaders are today receiving their 7[a] or their 504 loans, 

their government contracting opportunities, or their counseling 

through SBA’s programs and services? 

However, we at the SBA cannot rest on our laurels. We must be 

forward thinking. We must anticipate changes in the marketplace 

and adjust our programs based on the realities of today’s small 

business environment. 

SBA’s Fiscal Year 2006 request is good for America’s small businesses and taxpayers. We ask for your support for our budget request. Thank you for the opportunity to appear here today. I am 

happy to answer your questions. 

[The Honorable Barreto’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you, Administrator Barreto. 

By SBA’s own analysis, participating securities funds licensed between the years of 1994 through 2000 have performed as well as 

non-SBIC venture funds of the same vintage years that CalPERS 

invested in. Over $2.5 billion in leverage was invested in the three 

years, 1998 to 2000, immediately before the collapse of the economy. Thus, my question to you is, is it fair to ask how much of this 

loss is attributed to the recession, and how much to a flawed program?

Mr. BARRETO. Well, Mr. Chairman, as you mentioned, there are 

a variety of reasons why this has happened. Some of it has to do 

with the downturn in the whole venture capital industry over the 

8

last couple of years. Some of it has to do with the way that the 

Venture Capital program was structured and the profit participation in that structure. Some of it has to do with the funds that 

were chosen to invest in. 

I cannot give you an exact number. I would be happy to go back 

and research this for you, but I think there is a combination of reasons why we have seen this downturn. I do not think we can say 

it is just one reason.

Chairman MANZULLO. Would you be willing to commit to working towards a solution of this problem and the participating securities?

Mr. BARRETO. Absolutely, Mr. Chairman. As you know, we have 

been in a dialogue all last year with the industry, with this Committee, and we are committed to continue those dialogues and stay 

in a relationship with all of the stakeholders to determine the best 

approach for the Participating Securities program.

Chairman MANZULLO. Could you provide the detail on the 

changes made in the 7[a] subsidy rate and reestimate models? 

These changes have caused an increase in lender fees. What will 

you do to stem further increases in lender fees?

Mr. BARRETO. Well, one of the things I want to do is put this into 

perspective. Obviously, the fees are still within the framework that 

we negotiated last year. It is going to be 54.5 basis points. We had 

a max of 55 basis points. We think that this change is incremental. 

It is a nominal change and should not affect the small businesses. 

Obviously, these are the fees for the lenders, the lender fees.

Chairman MANZULLO. If I may interrupt,—

Mr. BARRETO. Sure.

Chairman MANZULLO. —if the fees get too high for the lender, 

then they will drop out of the program. So we are willing to work 

with the SBA on a zero subsidy because that is our goal, and so 

I do not have to go to the well every year to get 77 to $100 million, 

but I would just advise the administrator that if the fees increase 

too much on the lender side, then the whole program will collapse.

Mr. BARRETO. I completely understand, Chairman.

Chairman MANZULLO. Okay. Did you have more that you wanted 

to talk about on the 7[a]?

Mr. BARRETO. I brought several charts to kind of give you an 

idea of where we have been with regards to the subsidy rate. It is 

really incredible what we have been able to accomplish—

Chairman MANZULLO. Why don’t you go ahead because I cut you 

off?

9

Mr. BARRETO. —with this Committee. If you will notice, this 

chart on the far left is the 7[a] subsidy rate from 2001 to 2006, and 

what you see here is a line that has precipitously gone down. I remember the first time I testified before this Committee, I was told 

that we had a severe problem with the subsidy rate for the 7[a] 

loan program, and that had been a chronic problem for years and 

years. As you see, working together, we have been able to take that 

subsidy rate down from where it was, almost 1.2 percent, down to 

zero. 

The other thing I wanted to mention is that I also understood 

from our lenders that this was a critical issue for them, and what 

they explained to me is that they needed to have consistency in the 

program, that they could not afford for this program to shut down 

for one day, that they have millions of dollars invested in this, and 

what has happened by us working together and getting to zero subsidy, we have been able to avoid that. We have been able to increase the budget authority. We are not going to have to put caps 

on these loans anymore. We are not subject to the fact that we 

have not had a budget at the beginning of our fiscal year. 

So we believe that the zero-subsidy solution that we have come 

up with has been very positive for our lenders, for our small businesses, and obviously we are seeing the fruits of that. Right now, 

our loans at the beginning of this year are up double digits again, 

well in excess of 20 percent in the 7[a] loan portfolio, so we are 

building on an historic year that we already had last year, and this 

will be the best year in our history in terms of 7[a] loans, not only 

numbers but the dollars that we will guarantee for every community.

Chairman MANZULLO. Thank you. Ms. Velazquez?

Ms. VELAZQUEZ. Wow, Mr. Barreto. That is a lot of loans. That 

is great. 

Mr. Barreto, can you tell me how many lenders are in SBA’s loan 

program?

Mr. BARRETO. Well, in total, it is approximately 6,000 lenders. 

These are not branches. These are 6,000 different lending companies.

Ms. VELAZQUEZ. I think it is closer to 10. Barely 25 percent of 

these 10,000 lenders made a loan last year. Why? Do you think it 

could be due to industry consolidation?

Mr. BARRETO. No, ma’am, I do not. What happens a lot of times 

is that there is somebody that has been signed up for the SBA program, and they may not have done a loan with us for years, and 

some of that just has to do with education. You know, what happens out there is a lot of times they believe that they understand 

the SBA program, but they do not understand all of the changes 

that have occurred in the SBA program and how this can be a good 

business opportunity for that bank. 

10

So the training and outreach that we do to lenders of all sizes 

is critically important, not only to attract new lenders but also to 

maintain lenders.

Ms. VELAZQUEZ. You do not understand my question, Mr. 

Barreto, and I do not have much time, and I have a lot of questions 

to make. I do not want to leave the impression that there are not 

any lenders that love the program. There certainly are. In fact, one 

lender makes nearly 20 percent of all 7[a] loans, 20 percent, Mr. 

Barreto, and 0.2 percent of the lenders account for almost 70 percent of the entire 7[a] program’s lending. Is this level of concentration something that SBA is proud of?

Mr. BARRETO. Well, obviously, we want to work with as many 

lenders as we possibly can, and also we understand that one size 

does not fit all. We have some large lenders that do a lot of loans, 

but we also have some community lenders and rural lenders that 

make very few loans as a percentage but are critically important 

to the communities they serve.

Ms. VELAZQUEZ. No. That is not the case, Mr. Barreto, because 

maybe this is not a problem because lenders are geographically dispersed, but that does not seem to be the case. The majority of the 

lenders are concentrated along the East and West Coasts, leaving 

middle America without adequate access to the program. What are 

you doing to reengage the smaller community lenders in this part 

of America?

Mr. BARRETO. As you know, we have a responsibility to serve 

every community in America. That is why—

Ms. VELAZQUEZ. But it is not happening.

Mr. BARRETO. That is why we have 70 major program offices in 

every state. I would tell you that we work very closely with our district directors, and we make sure that they are reaching out to all 

of the lenders in their community. In fact, I have personally been 

involved in this outreach effort. When I go into the a community, 

oftentimes what will happen is we will set up business roundtables 

for lenders in that community.

Ms. VELAZQUEZ. Okay, Mr. Barreto. Is SBA providing more localized outreach and education to lenders and working one-on-one 

with these smaller lenders? Are you doing that?

Mr. BARRETO. Absolutely. You know, I would like to share with 

you—

Ms. VELAZQUEZ. Let me ask you another question. You said ‘‘absolutely.’’

Mr. BARRETO. Yes, ma’am.

11

Ms. VELAZQUEZ. The agency has fired, relocated, or forced into 

retirement much of the district staff that was responsible for working with lenders, mainly smaller banks that do not have the resources to fully operate the 7[a] lending program. Is the agency 

looking to draw more out of the program by making the processes 

smoother for lenders?

Mr. BARRETO. Well, first of all, let me make sure that we characterize this correctly. We are not forcing anybody out of the agency, 

firing anybody, et cetera, and some of the individuals that you 

mentioned that retired actually did not—

Ms. VELAZQUEZ. Didn’t you send a letter to staff saying either 

you relocate, or you will be fired?

Mr. BARRETO. Again, in that particular instance, these were for 

people that were liquidating loans, not generating loans. These are 

the individuals—

Ms. VELAZQUEZ. Let us move on here. What is it that you are 

doing to make the program smoother?

Mr. BARRETO. Can I share with you this chart right here? This 

is our 7[a] loans to lots of communities that you mentioned, and 

what you see here is almost a stair step of progress over the last 

four years. What you see here, these are loans to minorities.

Ms. VELAZQUEZ. Sir, answer my question. What is it that you are 

doing to make the program smoother?

Mr. BARRETO. Well, you know, when I was in business, Congresswoman, I used to say that you learn a lot more by listening to your 

customers than you do by talking at them. What we have done is 

we have brought those lenders in, of all sizes, and asked them how 

the SBA could be a better partner. That is why you have seen so 

many changes to the program.

Ms. VELAZQUEZ. Okay, sir. Let us talk about small businesses 

now.

Mr. BARRETO. Okay.

Ms. VELAZQUEZ. During the fourth quarter of Fiscal Year 2004, 

the last quarter before SBA raised fees on small businesses, the 

SBA did nearly $4 billion in 7[a] loans. When compared to the most 

recent quarter that you are so proud of,—you were just talking 

about all of the numbers—this shows a decline of nearly half a billion dollars in 7[a] lending. What impact has the SBA fee increase 

on small business owners, which added between $1,500 to $3,000 

for each loan, had on this decline in SBA lending?

Mr. BARRETO. First of all, let me make sure that we characterize 

it correctly. The SBA did not raise the fees on lenders. Those fees 

went back to previous levels because legislation that this body put 

12

forward expired. So SBA did not raise those fees; those fees just 

went back to a normal level.

Ms. VELAZQUEZ. Sir, you have the flexibility to lower the fees if 

you want.

Mr. BARRETO. I would like to answer the question in terms of 

what effect it has had. The effect that it has had is that so far this 

year we are up 27 percent on the 7[a] loan, we are up 16 percent 

on 504 loan, we are up 55 percent to African-Americans, we are up 

49 percent to women, 15 percent to Hispanics, 285 percent to other 

minorities. We are on track—

Ms. VELAZQUEZ. We are talking about 7[a]. We will talk about 

loans to minorities later because I am going to stay here until I ask 

you the question.

Mr. BARRETO. Yes, ma’am.

Chairman MANZULLO. The gentlelady’s time has expired. 

Mrs. Musgrave?

Ms. MUSGRAVE. Mr. Chairman, I apologize. I had a radio program to do. I hope this has not been asked, but could you please 

comment on the HUBZone program and any changes that have 

been made to it? Much of my district is rural, and so this is very 

important to me.

Mr. BARRETO. Well, as you well know, Congresswoman, the 

HUBZone program has been a very successful program over the 

last couple of years. Procurement levels inside of that program 

have been consistently rising. 

One of the things that we have done is we have wanted to make 

sure that we have gotten more firms who are interested in this program registered in this program, and we have had great success 

there as well. I want to say that we have over 7,000 firms now that 

are part of the historically Underutilized Business Zone program. 

We work very closely with the industry, the HUBZone national organization, and Ron Newlan, and we participate in a lot of their 

activities. We are also inviting lots of HUBZones to participate in 

our procurement events, the Business Matchmaking events that we 

do. 

So as we do with all of our programs, we are wanting to make 

sure that we are capitalizing on every opportunity, and some of 

this is just getting the word out. A lot of times people do not realize 

that they could register for a number of different programs. In 

other words, they could be an 8[a] firm, they could be a HUBZone 

firm, they could be a small disadvantaged business firm, they could 

be certified as a woman-business-owner firm, and that just gives 

them more opportunities to access those federal contracts.

Ms. MUSGRAVE. Thank you, Mr. Administrator.

Mr. BARRETO. Thank you.

13

Ms. MUSGRAVE. That is all, Mr. Chairman.

Chairman MANZULLO. Congresswoman Bordallo?

Ms. BORDALLO. Thank you very much, Mr. Chairman, and thank 

you for your testimony, Mr. Barreto. What I got out of it was cuts 

are more efficient, but, you know, Mr. Barreto, cuts have far-reaching effects on people. 

I am very concerned to hear about all of the cuts in the domestic 

programs across our nation. I really am very concerned, particularly in the area of the small business. I know the ranking member 

here mentioned the fact that some people were asked to relocate. 

Well, I am from Guam. We have a very small program there, but 

it was a very important program. We had 12 to 15 employees, and 

I guess they received your letter, and, you know, it is rather difficult to relocate when you are 10,000 miles away. So now we are 

down to three, with one employee on loan from Hawaii. So we are 

not in very good shape, and I have a few questions to ask you. 

First of all, on the 7[a] loan program, you have terminated or 

transferred over 100 district and branch office loan program staff 

as part of its workforce transformation. Now, that means that the 

Guam branch office has been practically decimated, and with the 

loss of these employees, the district offices are having problems 

bringing new lenders into the program. How is SBA ensuring that 

there will be adequate staff out there to help? What are your specific plans? 

The other one, and I want to bring them all together because 

they are all basically the same, if you terminate the 7[m] Microloan 

program, completely terminate it, there is a void in the provision 

of technical assistance to low-income entrepreneurs. Do you plan to 

add SBA district staff to reach out to serve this particular community? 

And then on the Women’s Business Centers, once again, the 

budget request for the WBCs has remained the same as last year, 

yet you would like to expand the clientele served by this program. 

How do you think this is going to happen?

Mr. BARRETO. Thank you for the questions, Congresswoman. I 

will be happy to answer those in the order that you presented 

them. 

First of all, you are referring to what the SBA, and not just the 

SBA, but government, has been going through over the last couple 

of years. We need to continually look for ways to be more efficient 

to do the right things and to do them better. Any business has to 

do that all of the time. We are not a business, but we also have 

to be concerned with efficiencies and the effectiveness that can 

come from those efficiencies. 

The individuals that you mentioned were liquidators; in other 

words, folks that were responsible for liquidating a loan after it 

had gone bad. These were not the individuals that were out there 

generating new loans. We did not terminate them, but we terminated the functions that they performed inside of those district offices. 

14

What was happening to us was a lot of the lenders said to us; 

look, we cannot have 70 different ways of doing it. You have got 

to centralize this so that we can have a better situation, we can 

save time, and obviously we will make more money by doing that. 

And so that is what has happened. We offered those individuals an 

opportunity to move to another location to be able to continue the 

work that they did, and obviously it had some impact on individuals that decided that they did not want to move. But these are 

things that happen, again, in every organization and in every business. 

With regards to the Microloan program, and I would like to ask 

that we put up our Microloan chart, you know, the thing that has 

happened for us there, and we have been aware of this for a long 

time, is that we do not do a very good job on Microloans. It costs 

us a dollar for every dollar that we lend out. We did 2,400 of these 

loans over the last year. At the same time, I did 10 times that 

many loans of the same type and size, loans under $35,000, inside 

the flagship loan program. 

At the same time, there are other entities that are making these 

loans. There are 600 nongovernment microlenders that do a phenomenal job, so it is not like small business does not have other 

places to go. But we have determined that this is a program that 

we can much better deliver those kinds of services to those communities in our regular programs, our regular network of providers. 

This map right here shows you a depiction, and you have a copy 

of this in front of you, of all of the resource providers that we have 

across the United States. It is one of the things that makes SBA 

so strong. 

With regards to Women’s Business Centers, I guess, this is another conversation that we have had over the last couple of years. 

We understand very clearly that the fastest-growing segment of 

small business in the United States are women business owners, 

but the purpose of Women’s Business Centers was for us to give 

these organizations a hand up, not a handout, but a hand up, to 

allow them to get started and, over a period of five years, to become 

self-sufficient. 

What we have seen with Women’s Business Centers, those centers that are being successful, that have been around for five years, 

are oftentimes in partnership with another organization. In other 

words, they are leveraging their resources. They may be working 

with a chamber of commerce or a business association. At the same 

time, we are concerned that there are large segments of the United 

States that do not have an opportunity to get a Women’s Business 

Center because we continually invest all of the money in the existing centers instead of what the program was intended to do. 

An example, and something that Congresswoman MillenderMcDonald knows, is that up until recently, we did not have a Women’s Business Center in Los Angeles. One of the cities with the 

most small businesses in the United States did not have a Women’s 

Business Center. That is impossible to believe, but that was the 

fact. There are other areas around the country that fall into the 

same situation. 

We are committed to Women’s Business Centers. We are committed to women. We are excited about the results that we have 

15

seen for women over the last couple of years. Loans are at historic 

highs, contracts are at historic highs, training is at historic highs, 

and we are going to continue that commitment this year and in the 

years to come.

Chairman MANZULLO. Thank you.

Ms. BORDALLO. Mr. Chairman, if I could just make a concluding 

remark, I appreciate your answers to the—

Chairman MANZULLO. I understand, but other members have—

I have gone over one and a half minutes.

Ms. BORDALLO. I am just going to invite Mr. Barreto to come out 

and observe our Guam office. It is the greatest complaint I have 

as a public official.

Mr. BARRETO. Yes, ma’am.

Chairman MANZULLO. Thank you. I am coming if I get a chance. 

I am coming. You know that. 

Mr. Bradley?

Mr. BRADLEY. Thank you very much, Mr. Chairman. Mr. Barreto, 

always a pleasure to see you here. Mr. Chairman, I know you have 

taken a bit of a tongue lashing this morning, so I want to thank 

you for your advocacy on behalf of an American—

Chairman MANZULLO. If the gentleman would yield, I have a 

great relationship with Mrs. Velazquez. Her passion for small business is unsurpassed, and I respect her. She is a great member of 

Congress, does a tremendous job, and whatever she says comes 

from her heart,—

Ms. VELAZQUEZ. And the truth and the facts.

Chairman MANZULLO. That is correct. Thank you. I am doing 

fine, thank you.

Mr. BRADLEY. I would like to talk about the facts of how you 

helped a company in my district enforce the provisions of the Buy 

America Act, and were it not for your advocacy and your willingness to hold a hearing, my company would not have been able to 

expand its workforce by 10 percent. 

And Hector—excuse me—Mr. Barreto, I just received an e-mail 

yesterday or this week from a gentleman whose 7[a] loan program 

was caught up in a lack of funding perhaps a year ago, and you 

and I talked on the phone about that, and he told me the success 

of his company. 

I truly think, when I look at your budget numbers, going from 

a budget authority of about $800 million as recently as 2003 to 

what is being proposed now, just slightly under $600 million, juxtaposed with those graphs that you have shown us today, show 

that you have been able to do more with less, that you have run 

16

a government agency the way a business should be run, doing more 

with less, more efficiency, better use of technology, all of the things 

that the productivity of our economy has improved. You have made 

your government agency do that, and you have been able to increase your overall capacity to make these loans and to get them 

out there to the people that need them the most. 

So I salute you for that and look forward to continuing to work 

with you. I would yield back the rest of my time, because you have 

not had a lot of time to talk about the charts that you have had 

up there, and allow you to, you know, go into them in further 

depth. Thank you. Thank you, Mr. Chairman.

Chairman MANZULLO. Thank you, Congressman. 

Congressman Grijalva from Tucson?

Mr. GRIJALVA. Thank you, Mr. Chairman and Ranking Member. 

I am very glad to be part of this Committee. 

Mr. Administrator, I do not have the specificity in the questions 

at this point, but as I get acclimated, I will. If I may just ask for 

a comment on something. In reading your submitted remarks, you 

mentioned the importance of SBA, the agency that you administer, 

supporting the President’s agenda for small businesses. No point of 

difference there. Then you talk about health plans and the cost impact on small businesses, and I agree. I think this Committee 

should explore all options in terms of how we provide relief there. 

You mentioned the 800-pound gorilla in your comment, which 

was social security. If I am not mistaken, as part of the comment, 

and I think the ranking member mentioned social security as an 

issue that maybe this Committee should talk about, as it is going 

to be a primary area of debate for Congress in the coming days and 

months. 

Let me ask you a question. We can debate the size of that 800-

pound gorilla. We can debate the issue of whether it is a crisis or 

a challenge, and we will do that, but let me ask you another part 

of a gorilla that I see, and that is the deficit, the debt ceiling, the 

trade imbalance, and the impact that that is having on small businesses across this country. And one of the obvious impacts, to me, 

is the more-with-less mantra that we are hearing more and more 

about in domestic programs because you do have less, regardless, 

in an effort to try to deal with that deficit that has been created 

in the course of the last four years. 

So respond for me or have a dialogue regarding how you see this 

other gorilla I see and its impact on small businesses: the deficit, 

the debt, and the trade imbalance that this country has.

Mr. BARRETO. Sure. Thank you, Congressman Grijalva, and welcome to this Committee. I am looking forward to working with you 

and providing any information that you might need on any of these 

programs. 

I did not mention social security in my remarks. I have spoken 

about it before, but anything that affects the economy is definitely 

going to have an effect on small business. You know, we say all the 

time that small business is the engine that fuels the economy, and 

it is true. Fifty-two percent of the gross output—in other words, of 

17

all of the products and services that are produced in the economy—

comes from small business. 

Small businesses also are creating most of the net new jobs, and 

we talk about that, but a lot of times small business does not get 

the credit for creating those jobs. A lot of times, people do not realize that small business also creates a lot of the innovation and 

technology. Small business has 14 times more patents for products 

than large businesses do, but you would think that all of the great 

inventions come from big business. They do not; they come from 

small business. 

So we need to do everything that we can—the President talks 

about this all of the time—to create the right environment. That 

is why I am proud of this budget because this budget is fiscally responsible. The President wants to cut the deficit in half over the 

next five years. With regards to trade, that is a huge opportunity 

as well for us. Ninety-seven percent of all companies that do international trade are small businesses, 225,000 companies, but they 

only represent 30 percent of all of the trade that is going on. So 

any time, and I know this is very important in your state, any time 

that you create more opportunities, grow the pie, you are helping 

those small businesses to grow their opportunities, as well. 

But small businesses need a lot of things. They need permanent 

tax relief. They need regulatory relief. They need tort reform. They 

need an energy policy. They need access to affordable health care. 

They need new markets. All of those are part of the president’s 

small business agenda. So we not only work at providing them the 

tools in the SBA, but we also work hand in hand with the administration and this Committee to create an environment where small 

businesses not only can start their business, but where they can be 

successful over the long term.

Mr. GRIJALVA. I appreciate it. Thank you, Mr. Chairman. I have 

no other questions.

Chairman MANZULLO. Thank you, Mr. Grijalva.

Mr. GRIJALVA. I appreciate that.

Chairman MANZULLO. Thank you. Mr. Fitzpatrick?

Mr. FITZPATRICK. Thank you, Mr. Administrator, for taking the 

time to be here with us today and for your professionalism. You obviously have great knowledge of not only the programs of SBA but 

what is going on in small business. This has been very helpful to 

me as a new member of Congress. 

I have been a public official for 10 years before coming to Washington. Over the course of those years, I have referred quite a few 

members of the small business community of Bucks County, Pennsylvania, southeastern Pennsylvania, to the SBA, and I have been 

very happy with the responsiveness and the programs of the SBA, 

as have those small business persons. But one of the issues I hear 

from time to time has to do with the length of time in loan processing. I was wondering if you have any ideas, whether it be creVerDate 0ct 09 2002 13:25 Jul 22, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\HEARINGS\98783.TXT MIKE
18

ative staffing of the processing center, something that could be 

done to reduce the loan processing time.

Mr. BARRETO. Thank you very much for that question, Congressman. You are absolutely right. You know, I referenced that when 

we sat down with those lenders, and, by the way, we just do not 

sit down with them once; we sit down with them on numerous occasions, and I meet with them all across the country, but they are 

constantly asking us to streamline our processing. I think I was 

talking to Congressman Westmoreland about this, that they said to 

us, you know, time is money. We are not philanthropic organizations. If you can save us time, we can make more money, and we 

can make more of the loans that you want to make. 

So we have implemented a lot of the recommendations that the 

lenders wanted us to do. For example, on the SBAExpress Portfolio, we allow the lenders to use their own form, not our form. We 

allow them to transfer information to us electronically now through 

eTrans. So this is happening almost real time now. We allow them 

to make their own decisions. They do not have to go back and forth 

to the SBA and negotiate a buying decision on an SBAExpress 

loan. So all of those things have helped speed up the time. 

On top of that, I have referenced some of the transformation efforts that we have been undergoing over the last couple of years. 

We have literally been able to shave down the amount of time it 

takes us to actually process the loan, once we receive it, from 

weeks down to days now on both the 7[a] loan portfolio and our 504 

loan portfolio. That has been one of our big successes, as well. And 

so we continually stay committed to finding ways that we can even 

squeeze more efficiencies out, and I believe that we still can. The 

chairman referenced using technology even more to be able to cut 

out a lot of that time. 

You know, when I was in business, small businesses like to say, 

‘‘I can take a yes, and I can take a no, but those maybes kill me.’’ 

So we are removing a lot of the maybes out of doing business with 

the SBA.

Mr. FITZPATRICK. That is good news. Congratulations. 

On the 7[a] program, I noticed one of your previous graphs was 

talking about the subsidy going from one-point-something, I think, 

to zero. I suspect that that must have resulted in a net savings to 

the American taxpayers.

Mr. BARRETO. That is absolutely correct, Congressman, and I 

think that is one of the points that gets lost. When we talk about 

the funding differentials, we are really not talking about that much 

difference in terms of what we have been spending on these programs over the last couple of years. There will be some differences, 

but when you are at zero subsidy, you are able to save the American taxpayer well in excess of $80 million that we used to need 

to be able to provide these loan programs. 

This program now is self-sufficient, the way that our 504 portfolio has, the way that the venture capital program has, so we have 

history, we have precedent here, and it is one of the things that 

is really allowing us to be much more efficient than we ever have 

19

been, but you are right. We have saved the taxpayers about $80 

million just by going to zero subsidy.

Mr. FITZPATRICK. Thank you, sir. I appreciate it.

Mr. BARRETO. Thank you.

Chairman MANZULLO. Congresswoman Millender-McDonald?

Ms. MILLENDER-MCDONALD. Thank you so much, Mr. Chairman, 

and good morning, good morning. It is great to see you, Mr. 

Barreto. It was great to be with you on the ‘‘McLaughlin Show.’’

Mr. BARRETO. Thank you for being part of that.

Ms. MILLENDER-MCDONALD. It is great to have you, as a Californian.

Mr. BARRETO. Thank you.

Ms. MILLENDER-MCDONALD. At the time that you and I were on 

that show, I mentioned to you that if the President was really for 

small businesses, he would have authorized your budget. We have 

yet to see that, and by your own admission this morning, you say 

that we did not get that authorization. 

When we look at the 2006 budget that he is proposing, we are 

still looking at an anemic budget proposal for the Small Business 

Administration. It appears to me that if he has this cognition of 

knowing that small businesses are the engine that drives the economy, and you know that, Mr. Barreto, he would not do the cuts 

that we are seeing proposed in his budget. 

So my question to you is, and hopefully I will send a letter myself to the President asking him, why is it that he is cutting so 

much from SBA budget when he wants to create this environment 

of more jobs, helping Women Business Centers, which has really no 

money, and as you said by your own admission, Los Angeles did 

not have one initially; Long Beach—that one was taken away. We 

are talking about some of the largest cities in the State of California not having even the technical assistance that would help 

drive the women. 

But as I look at this notion of the President terminating nine of 

25 top SBA programs, can you identify what those nine are because 

we cannot continue to say that the President really does embrace 

small businesses when he is cutting at this type of rate? And, 

again, the proposed budget is nearly half of what it was when 

President Bush took office. So when we are talking about the 2006 

budget and the President wanting to create this type of positive climate for small businesses, it is not identified in his proposals of the 

small business cuts. 

So I just want you to talk about that, and you did a litany of the 

loans to minorities and Native Americans, and yet the Native 

Americans with the highest unemployment, that program, the Native American Outreach program, has been zeroed out. Please tell 

me what is it that this President is trying to say to us when we 

20

are trying to tell small businesses that this President wants them 

to flourish?

Mr. BARRETO. Thank you for the question, Congresswoman. Let 

me see if I can put some of this into perspective. You know, I mentioned to Congressman Fitzpatrick that you could start right away 

with the $80 million-plus that we saved on the 7[a] appropriation 

that we used to need. That is going to be a differential that we saw 

in previous budgets; we are not going to see it in this budget. 

You could look at monies that we used to request for disaster 

loans, but, as you know, we got a tremendous amount of resources 

through the supplemental, and we still have a lot of that money 

left over. You could look at, for example, something that we might 

see in the future is some of the money that is going to be added 

for congressional initiatives. We did not ask for any money for congressional initiatives. That is going to have a differential. 

But when you look at the money that we spend on all of our 

major programs and services, for example, the money that we put 

out into the district offices; that money is still there. The money 

that we put into GC/BD programs; that money is still there. The 

money that we have for all of our key programs is still maintained.

Ms. MILLENDER-MCDONALD. May I just interrupt you for a second to say that you were speaking about the total amount that you 

are putting into advocacy,—

Mr. BARRETO. Yes.

Ms. MILLENDER-MCDONALD. —which was a small amount, really, 

given that a lot of folks do not know about the money that you are 

talking about in these various districts. The advocacy program 

must be enhanced, and we must see that, equivalent to the money 

that the President should be proposing in his 2006 budget, and it 

is not.

Mr. BARRETO. Just to give you an example, in the 2005 appropriation line item, we are looking at in excess of a million dollars. 

In 2006, with all of the monies that we intend to spend on it, it 

will be over $9 million that we will be spending in the advocacy 

program. When you add in everything that we will provide for advocacy, we have allocated $9.13 million for the advocacy program. 

Now, just to clarify, it does not mean that we went from $1 million 

to $9 million because even though that $1 million was delineated 

as a separate line item. We also invested more, and we will in 

2005, than just that $1 million. Significantly more.

Chairman MANZULLO. Let me cut you off. Let me move to Mr. 

Westmoreland to get in as much as I can.

Ms. MILLENDER-MCDONALD. Mr. Chairman, hopefully, the next 

time, we can have more time.

Chairman MANZULLO. Yes. Okay. I understand. Thank you.

21

Mr. WESTMORELAND. Mr. Barreto, thank you for being here 

today. You know, I want to thank you for small businessmen across 

the country, and I happen to be a small businessman, and I applaud you in the way you have handled yourself here today and 

also in the way that you have run your agency.

Mr. BARRETO. Thank you.

Mr. WESTMORELAND. You know, sometimes people believe that 

the amount of money that you have or that you spend correlates 

with the efficiency of your business or your agency, and that may 

be a syndrome up here, and that is the reason that we spend so 

much money on so many of these agencies. We try to throw money 

at everything. 

I want to commend you on being able to do more for small business with a less amount of money. I think that is a great attribute 

to you, and I know that coming into the office in 2001 after eight 

years of being under a different administration. From an entrepreneur’s standpoint, it is easier to start a business than it is to 

come in and take over a business. I think you have done a wonderful job in coming into a situation where you have had to trim fat. 

You have had to put the administration on a diet, so to speak, but 

not cutting any muscle, and still providing and increasing the loans 

for the people who do it. 

And the other comment is I want to commend you also, from 

when we talked yesterday, about making it easier for lenders to operate with the Small Business Administration. You know, you can 

have 10,000 lenders, you can have 20,000 lenders, but you cannot 

make them do business. You can just make it as easy for them to 

do business, and that is really the government’s responsibility. It 

is not to make it harder. It is not to make it more complicated. It 

is to make it simpler so our citizens know how to interact and companies know how to interact with government, and I think you 

have done a wonderful job with that. 

So I just want to thank you for what you are doing, for the job 

that you took on, coming in and being able to do what you have 

with the amount of money that you have had to do it with. Thank 

you, Mr. Chairman.

Chairman MANZULLO. Thank you. Mr. Lipinski?

Mr. LIPINSKI. Thank you, Mr. Chairman. I look forward to working with you and with Ms. Velazquez on this Committee. I think 

we all share the desire to help out small businesses. I know I have 

hundreds of small businesses in my district, and I look forward to 

doing what I can to help them on this Committee. 

And Administrator Barreto, I have no doubts about your commitment and your expertise in this area. I do have concerns—I share 

concerns with some of my colleagues—about the budget for this 

year, but I do believe that you are certainly committed to small 

business, and I look forward to also working with you and seeing 

what we can do, and hopefully maybe we could get a little bit of 

help. Maybe we could get a better budget, get some more help for 

22

our small businesses in that budget. I look forward to working on 

the Committee and working with you.

Mr. BARRETO. Thank you very much, Congressman.

Chairman MANZULLO. Thank you. We have got to go vote. Mr. 

Barreto, if you would not mind sticking around. In the interest of 

fairness, I have acquiesced to Mrs. Velazquez’s request for five 

more minutes of questioning.

Mr. BARRETO. Sure.

Chairman MANZULLO. Okay.

Ms. VELAZQUEZ. Thank you for your kindness. 

[Whereupon, at 11:28 a.m., a brief recess was taken.]

Chairman MANZULLO. If the other witnesses could be seated, as 

soon as we are done with the additional five minutes from Mrs. 

Velazquez with Hector Barreto, then he will be excused, and we 

can move immediately into the opening statements of the second 

panel. 

The gentlelady from New York is recognized for five minutes.

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Barreto, let us see if we can do this again. Let us talk about 

small businesses and access to capital. 

During the fourth quarter of Fiscal Year 2004, the last quarter 

before SBA raised fees on small businesses, the SBA did nearly $4 

billion, in fact, $3.95 billion. When compared to the most recent 

quarter that you are so proud of, this shows a decline of nearly half 

a billion dollars in 7[a] lending. Again, I ask you, what impact has 

the SBA fee increase on small business owners had on this declining SBA lending?

Mr. BARRETO. First of all, Congresswoman, let me also put that 

in perspective. We had a tremendous fourth quarter of last year, 

and I believe that a lot of that was in anticipation of us coming to 

a zero-subsidy-rate program this year. In other words, lenders were 

taking advantage of the fee structure in the fourth quarter, so we 

got a tremendous amount of volume that we normally do not see 

in a fourth quarter. Having said that, our first quarter is doing 

phenomenally well.

Ms. VELAZQUEZ. Let us talk about January of this year. This 

January, the 7[a] loan volume average, $47 million per day, this is 

16 percent below last January when it was shut down and even 

averaged $56 million per day.

Mr. BARRETO. Well, what we believe is happening is a lot of the 

loans that we would have seen in January in a normal course of 

business, we saw those at the end of—

23

Ms. VELAZQUEZ. Can you answer, if the $3,000 fee has anything 

to do with this decline?

Mr. BARRETO. We do not believe that it does, and part of the reason why I say that is because every month so far, we have seen 

incredible increases.

Ms. VELAZQUEZ. So you do not think $3,000 is much for any 

small business person in this country.

Mr. BARRETO. We were averaging, in January of 2004, 42.6, and 

this year we are averaging 46.9, an increase on our daily average 

from a year ago.

Ms. VELAZQUEZ. Well, I guess we have a problem with the numbers that you have and the numbers that have been given to us, 

and you know what? The problem is that you have always had a 

problem with the numbers. They do not add up. When it comes to 

Medicare legislation and prescription drugs, it did not add up, and 

one more time it does not add up. 

Let us go to minority businesses. There is a picture being painted 

by you that small business opportunities are increasing in the federal marketplace. In Fiscal Year 2002, SBA claimed that the small 

business achievement was 22.62 percent. Recently, the Office of Advocacy published a report contending that the $2 billion counted toward the small business accomplishment in Fiscal Year 2002 was 

miscoded and should not be included. If we subtract this $2 billion 

from the Fiscal Year 2002 small business achievement, the actual 

accomplishment was 21.62 percent, a full percentage point lower. 

Can we agree that the small business achievement in Fiscal Year 

2002 is 21.62 percent rather than 22.62 percent?

Mr. BARRETO. Well, actually, Congresswoman, we actually believe it was 23.61.

Ms. VELAZQUEZ. So is Advocacy lying?

Mr. BARRETO. Well, first of all, I think we are talking about two 

different things.

Ms. VELAZQUEZ. Oh, are they wrong?

Mr. BARRETO. Well, if I may, I will describe the Advocacy study 

and also the—

Ms. VELAZQUEZ. Sir, I just want for you to answer my question. 

My question is about 2002, not 2003.

Mr. BARRETO. Right. That is absolutely correct. We are dealing 

with 2002 data, and obviously what we depend on is the FPDS, and 

that is where all of the agencies of government, 60 agencies of government, are responsible for putting their information in there.

Ms. VELAZQUEZ. My question is, 2002 goal was not achieved.

24

Mr. BARRETO. That is correct.

Ms. VELAZQUEZ. Correct. Okay. So let us move on. 

After the mistakes in Fiscal Year 2002, SBA claimed that the 

small business achievement was 25.37 percent in 2003. What did 

SBA do from 2002 to 2003 to ensure that those large business contracts counted in 2002 would not be miscoded again in 2003?

Mr. BARRETO. You are referring to the Advocacy study, and one 

of the things that we did, even before the Advocacy study came out, 

is that we put a rule forward as our novation, rule that basically 

requires a small business—

Ms. VELAZQUEZ. And I know that, sir. I know about the rule. 

This is my five minutes’ questioning, Mr. Chairman. 

The rule is not regressive. Basically, nothing was done between 

2002 and 2003 to fix it.

Chairman MANZULLO. We will let Mr. Barreto answer the question.

Mr. BARRETO. I think that one of the things that I want to make 

very clear is that we do not have a trend in the federal procurement environment where large contracts are being taken away 

from the small businesses on a wholesale basis. In fact, what we 

found when we looked at those, Congresswoman, is there are two 

main reasons that that happens. One is that a small business gets 

a contract when they are a small business, and we want these businesses to be successful, and then, over time, they fall out of the size 

standard because they have grown. 

The other issue that we found is that sometimes small businesses, because they have been successful, are taken over by a 

larger business. In other words, they sell to a larger business. 

Those are the primary examples that we found in the advocacy setting, not that there are large businesses that on a wholesale basis 

are misrepresenting their size and taking contracts away from 

small businesses.

Ms. VELAZQUEZ. You are being dishonest with the numbers, and 

you have been cooking those numbers.

Mr. BARRETO. No, ma’am.

Chairman MANZULLO. You do not call the Administrator dishonest. All right? You may disagree with him.

Ms. VELAZQUEZ. Those numbers are dishonest.

Chairman MANZULLO. You are out of order.

Ms. VELAZQUEZ. General Accounting Office—

Chairman MANZULLO. The numbers may be dishonest, but do not 

call the Administrator dishonest.

25

Ms. VELAZQUEZ. This is my five minutes, and I am telling him—

Chairman MANZULLO. All right. Your five minutes have ended, 

Mrs. Velazquez. 

Mr. Barreto, thank you for coming. I appreciate it very much and 

look forward to again working with you. Okay?

Mr. BARRETO. Thank you, Mr. Chairman.

Chairman MANZULLO. You are excused.

Mr. BARRETO. Thank you very much.

Chairman MANZULLO. Tony, if you guys could just shift down 

one, and our goal is to end at 1 o’clock because we have a series 

of votes coming up there, so please keep your opening remarks to 

five minutes or under. Tony, you are up first. 

Mr. Wilkinson is the President and CEO of the National Association of Government Guaranteed Lenders, and, Tony, we look forward to your remarks. Thank you. 

STATEMENT OF ANTHONY R. WILKINSON, NATIONAL 

ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS, INC.

Mr. WILKINSON. Thank you, Mr. Chairman. I appreciate the opportunity to come before the Committee again. 

As you know, last year at this time, I testified about the many 

challenges facing the 7[a] program, and thanks to the efforts of this 

Committee and our counterpart in the Senate and Mr. Barreto and 

his staff, that problem that we encountered in 2004 has been resolved. We finished Fiscal Year 2004 setting records with both 

numbers and dollars loaned. Fiscal Year 2005 is also off to a record 

pace, with almost $3.6 billion lent in the first fiscal quarter. As 

part of the compromise that we worked out at the end of the 108th 

Congress, the 7[a] program received a $16 billion program level for 

this current fiscal year, which should be sufficient to meet the net 

lending demands of small business. 

A couple of comments on the Fiscal Year 2006 budget. The administration has requested a 16-and-a-half-billion-dollar program 

level. Some have already forecasted that all $16 billion available 

for this year will be used, and given the growth rate we are experiencing in the program, we respectfully request that this Committee 

support a $17 billion program for Fiscal 2006. That $17 billion level 

would match the authorization level that was passed in the Omnibus Appropriations Bill just this past December and would lessen 

the risk of any future program caps or restrictions. So please support a $17 billion program level. 

There is also an increase in fees in the 2006 budget. From the 

start of Fiscal 2004 to the start of Fiscal 2006, lender fees will have 

increased 116 percent if the increase proposed in the 2006 budget 

is put into effect. Although the latest increase would be within the 

compromise we worked out in the 108th Congress, the trend of 

higher and higher fees must be reversed. It is disturbing that the 

7[a] program faces further fee increases, considering that this comVerDate 0ct 09 2002 13:25 Jul 22, 2005 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 G:\HEARINGS\98783.TXT MIKE
26

promise deal establishing fee levels was signed into law just a couple of short months ago. 

It is also disturbing to see that the administration reports that 

the Fiscal Year 2004 subsidy rate has been reestimated downward 

by some 70 percent, which causes us great concern that, in one 

short year, we would see that kind of shift in the subsidy calculation for Fiscal 2004.

Chairman MANZULLO. Would the gentleman yield for a second? 

Tony, could you give me a letter setting that forth, and I will get 

it immediately to the administration to get an answer back ASAP?

Mr. WILKINSON. I will do that.

Chairman MANZULLO. Thank you.

Mr. WILKINSON. I appreciate your help in getting this clarified. 

We would simply like to see what has changed in the model and 

why, and to have an understanding about what is included in the 

subsidy model. We will get you that letter. 

The Administration is also requesting the authority to charge a 

fee for loans sold into the secondary market. According to the 2006 

budget in Table 6 of the Federal Credit Supplement, the administration shows that the projected subsidy rate for next year is zero, 

so there really is not any need yet. So we are opposed in granting 

authority to the SBA right now for this secondary market fee, and 

would urge the Committee, again, to review the subsidy calculation. We would like to see the subsidy calculation on the secondary 

market fee, as well. 

As part of the compromise deal reached this past December, this 

Committee, the Senate Committee, and the Administration all 

agreed to a national Preferred Lenders program, and it was to be 

included in the Omnibus Appropriations Bill. Unfortunately, due to 

a clerical error, that provision was not included, so we would ask 

that that provision be included in the near future in any appropriate legislative package, particularly in any technical corrections 

bill which SBA will probably submit. We would like to see that national PLP program authorized. 

Lastly, we still have a prohibition against piggybacks, or combination financing loans. We have submitted a proposal to SBA, 

which they are reviewing. Hopefully, we can come to some sort of 

agreement on the reinstitution of piggyback loans. With the piggyback prohibition now, many applicants have no solution to their 

needs of larger loan packages, so we would request your assistance 

as we continue to work on getting piggybacks reinstituted. 

Mr. Chairman, that is my testimony. Thank you for having me 

today. 

[Mr. Wilkinson’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you very much. 

Our next witness is Chris Crawford, President and CEO of the 

National Association of Development Companies and Development 

Funding Corporation, from McLean, Virginia. I look forward to 

your testimony. 

27

STATEMENT OF CHRISTOPHER L. CRAWFORD, NATIONAL 

ASSOCIATION OF DEVELOPMENT COMPANIES

Mr. CRAWFORD. Thank you. Good morning, Mr. Chairman. My 

name is Chris Crawford.

Chairman MANZULLO. Chris, you have got to talk into the microphone there.

Mr. CRAWFORD. I am pleased to provide a statement on the 2006 

504 budget and a couple of other 504 issues. 

First, I would like to comment on the 504 2005 authorization situation. Certified Development Companies provided $4 billion in 

504 financing last year, and when you add our First Mortgage 

Partners loans, this totaled $9 billion in long-term capital to small 

businesses. This represented an increase of 26 percent over 2003 

and is truly a tribute to the growing demand for the 504 program 

to meet the capital needs of small businesses. 

However, despite this Committee’s efforts, a hard cap was placed 

on the 504 program for 2005 of only $5 billion. We project the demand will exceed $5 billion, and this does not include any forecast 

at all of the impact on the debenture increases nor the new manufacturing debenture that Congress passed last December. We plan 

to provide the Committee with a request to increase the authorization within a month as we assess loan demand. We will ask the 

Committee to sponsor an amendment to increase the 2005 cap. 

Now, on to 2006. The Administration is requesting only $5.5 billion for 2006. For a loan program growing at an average of over 

20 percent for the last five years, this is certainly going to be insufficient. We ask the Committee to approve an authorization level of 

at least $6.5 billion for 2006. With 504 at zero subsidy since 1997, 

there is absolutely no cost to the taxpayer and, therefore, no downside to this program level. 

We congratulate the Administration on its success in centralizing 

both 504 loan processing and portfolio servicing. These changes 

have resulted in decreased program costs for 504 while substantially improving the service to both small businesses and to lenders. However, we are concerned that the Sacramento Loan Processing Center may have insufficient staff to keep up with the demand for 504 loans. We urge the Administration to both continue 

to streamline loan operations and to consider the need for added 

staff at that critical processing center. 

There is one area of loan operations that needs increased attention by the Administration, and that is 504 liquidation and recovery. While SBA has reorganized to improve its other loan program 

liquidation activities, we are very concerned that 504 defaults are 

not being addressed sufficiently to maintain the OMB forecasted 

recovery rate of 42 percent in this year’s subsidy model. Failure to 

address this critical issue will lead directly to increased loan fees 

for all future 504 borrowers. 

SBA abandoned its asset sale program over two years ago while 

downsizing its portfolio management staff. That is what the administrator referred to as the ‘‘loan liquidators.’’ They downsized the 

28

staff in order to centralize both 7[a] and disaster loan liquidations. 

Unfortunately, 504 appears to have gotten lost in the mix. 

Since the last asset sale, there have been over 800 504 loan defaults, since the last asset sale in 2002. While the default rate has 

not increased, we are gravely concerned about the limited SBA efforts to recover on these existing defaulted loans. We ask the Administration and this Committee to work with our industry to increase the effort to recover on 504 defaults and to immediately publish for comment the liquidation regulation that is already drafted 

within the SBA. The sooner 504 defaults are addressed, the greater 

the recoveries will be for these projects. 

Our industry recognizes both the leadership of this Committee 

and the administrator for strongly supporting 504, and we look forward to working with you to grow this no-cost program in the future. Thank you very much. 

[Mr. Crawford’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you. 

Our next witness is Steve Vivian with the National Association 

of Small Business Investment Companies. Steve? 

STATEMENT OF STEPHEN VIVIAN, NATIONAL ASSOCIATION OF 

SMALL BUSINESS INVESTMENT COMPANIES

Mr. VIVIAN. Thank you, Mr. Chairman, for inviting me to Washington today. It is an honor to testify on behalf of the National Association of Small Business Investment Companies and, specifically, to have an opportunity to express my personal disappointment that the participating securities program, a program which I 

have been involved with for six years and a program that works, 

has not been included for consideration in the Administration’s Fiscal 2006 budget. 

I request that my testimony be included in the record, and I will 

summarize it here, to the best of my ability, for you.

Chairman MANZULLO. The written statements of all of the witnesses will be included as part of the record. Proceed.

Mr. VIVIAN. Thank you. 

First, we would like to acknowledge and thank the Administration for its continued strong support of the Debenture program, 

with a $3 billion recommended authorization for Fiscal 2006. However, as I indicated, we are confused, disappointed, and concerned 

for America’s small businesses that the Administration proposes no 

participating security leverage in Fiscal 2006, particularly given 

the proposed $4 billion authorization level in Fiscal 2005. 

I respectfully disagree with Administrator Barreto that the Debenture program alone will support America’s venture capital 

needs. The Debenture program serves a critical role in the nation’s 

economy but does not, and should not, be expected to incent debenture managers to serve the nation’s smallest and youngest businesses across diverse industries and geographic with true equity 

venture capital. In fact, the genesis of the Participating Securities 

program in 1994 was a direct result of the government’s belief that 

29

the smallest and youngest companies in our country cannot, and 

should not, be served by the Debenture program. 

The Participating Securities program accounts for roughly half of 

all SBIC investment dollars and, since inception in 1994, has infused nearly $9 billion into U.S. small businesses. That $9 billion 

has been estimated to have created over 240,000 jobs and over $40 

billion of portfolio revenue. The majority of those jobs and revenue 

were created during the recession while the rest of the venture capital industry was effectively in hibernation. Thirty-five percent of 

that $9 billion, or over $3 billion, went into small and growing U.S. 

manufacturing companies. That dwarfs anything coming out of the 

traditional venture capital industry into mainstream, rustbelt manufacturing. 

This program works. It serves overlooked niches of this country’s 

businesses which are avoided by the traditional venture capital 

community due to their size, their location, or their industry. These 

biases are understandable if one understands the traditional venture capitalist’s mindset. However, these biases are amongst the 

key reasons why there is a need for this program. 

Once again, I believe this program works. It works across the 

country. It works in the Midwest, and it works in Illinois, where 

over $240 million has been invested out of the $9 billion. In our 

small, Chicago-headquartered firm alone, our $50 million Participating Securities SBIC has invested in 14 companies. Six of those 

are headquartered in Illinois; ten of those are headquartered in the 

Midwest. 

We have supported manufacturing and companies like Banner 

Service Corporation, which was a second-generation, family-owned 

business under consideration for liquidation and winding down by 

its owner. Together with another Chicago-based Participating Securities SBIC, we supported an entrepreneur who purchased the $17 

million, Carol Stream, Illinois-based, manufacturing concern, and 

we are now going about the business of growing the company. 

As a result of our investment and support of strong management, 

in a little more than a year, the business has increased revenue 

and profitability substantially and has added 12 percent to its 

manufacturing workforce. 

In another situation, our investment was used to open a Paxton, 

Illinois, manufacturing facility for a consumer water-bottling company. That plant now employs 30 people during peak bottling season in a small town in central Illinois. 

These investments could not have been made out of the Debenture program. Mr. Chairman, this program works across the country. It works in the Midwest, and it works in Illinois. At Prism 

alone, our active portfolio companies have created over 100 jobs in 

Illinois and nearly 250 jobs in the Midwest and approximately 

1,000 jobs across our portfolio since our inception in 1999. 

In conclusion, we acknowledge that the program has experienced 

losses, many of which can be attributed to the recession, but some 

of which are a direct result of structural flaws in the original Participating Securities program. 

Mr. Chairman, I believe I speak for the NASBIC Board of Governors and much of its membership when I say that the industry 

stands ready to work with you, your Committee, and the AdminisVerDate 0ct 09 2002 13:25 Jul 22, 2005 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\HEARINGS\98783.TXT MIKE
30

tration in a collaborative effort to restructure this program and to 

ensure that it remains in place, serving its crucial role: fertilizing 

the roots of America’s small businesses and its manufacturing base. 

Thank you for your time, and I would be pleased to answer any 

questions. 

[Mr. Vivian’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you very much. 

Our next witness is Don Wilson, President and CEO of the Association of Small Business Development Centers. I look forward to 

your testimony. 

STATEMENT OF DONALD WILSON, ASSOCIATION OF SMALL 

BUSINESS DEVELOPMENT CENTERS

Mr. WILSON. Mr. Chairman, we appreciate very much the opportunity to be with you representing the nation’s Small Business Development Center program. 

One of the things that we have heard so much today is the discussion of doing more with less. When we look at the significant 

increase in the last five or six years in domestic discretionary 

spending, and then we look at the downward spiral in the budget 

for the SBA, it does seem a signal is going out that there are higher priorities in the domestic sector, and that troubles us if we all 

agree that between 75 and 80 percent of jobs come from small business. 

The economic data are particularly disturbing. We know that we 

are in a recovery, but we are much later, in terms of growing this 

economy, than in any previous recession since World War II. The 

labor force participation rate is the lowest since 1988. So what it 

means is that, yes, we went down from 5.4 to 5.2 in unemployment 

figures, but what it basically means is we went down because people quit looking for jobs. 

The GDP in the last quarter of last year was the lowest in the 

past 24 months. So the recovery that we are hoping for is not moving along at the rate we want. You know that so very well because 

you are concerned in manufacturing. For the last five months in a 

row, manufacturing jobs have declined after having a meaningful 

increase in the first half. 

Now, these statistics indicate that all is not well with small business. The charts that were up here earlier talking about how much 

SBA loans have gone up; I am not sure that that is a good sign. 

If small businesses cannot get conventional loans, it means their 

balance sheets are not healthy enough, and they are having to turn 

to government loans. The conventional loans; they just will not 

make them because you are not healthy enough. 

So I am not sure it is a positive sign that we are increasing the 

number of SBA 7[a] loans, and I think somebody ought to look at 

that really closely. Yes, SBDCs have trained and counseled more 

people in 2004 than at any time in history. Now, you can say we 

are doing more with less, but there is a very disturbing thing that 

happened last year. The hours per client went down. We are pushing people through faster. If you did that in a medical office, you 

would not go back to that doctor. 

31

Our counselors indicate to us, we need five to 12 hours of counseling. We are going backwards in the hour per client ratio. We are 

seeing more people, but we are not providing them the depth and 

quality of service that we were three or four years ago, and that 

is the reason job creation is not happening like we need it to. 

The most staggering statistic, Mr. Chairman, is despite the fact 

that we have finally reached the point, in January, where we had 

as many jobs as we did when the recession ended, the fact is that 

private sector employment in January was six-tenths of a percent 

below what it was 46 months ago. So the growth in jobs in this 

country is government jobs, local, state, and federal level; it is not 

private sector jobs. 

So, clearly, small business is suffering, and the reason they are 

suffering is they need help in hard times with how to manage their 

business better. 

We are trying to be innovative. We are trying to work with the 

new group of people who are coming in. A 23-percent increase in 

about the last five or six years in people over 50 who are starting 

new businesses. Why is that happening? People over 50 are being 

laid off in enormous numbers as a result of acquisitions and mergers and downsizing. These people should be at the peak of their 

earning power, and, unfortunately, they are on the unemployment 

lines. So they are turning to self-employment, and they are turning 

to the SBDCs, women’s centers, and so forth, and we do not have 

the resources to serve them. 

Small states have 17 percent less in real-dollar terms than they 

did in 1998. Large states, like your state and Ms. Velazquez’s state, 

in 2006, despite the President giving us about a $150,000 increase, 

for which we are deeply grateful—I mean that as sincerely as I can 

say it, but your state, Pennsylvania, New York, Indiana, Ohio, 

Michigan all have less resources than they did in 2001. So we cannot do the job for these small businesses and get jobs created and 

bring revenues back into the Treasury if we continue this trend. 

Thank you, Mr. Chairman. 

[Mr. Wilson’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you. 

Our next witness is with the Association for Enterprise Opportunity, Daniel Betancourt. I look forward to your testimony. 

STATEMENT OF DANIEL BETANCOURT, COMMUNITY FIRST 

FUND

Mr. BETANCOURT. Thank you, Mr. Chairman. Thank you, Ranking Member Velazquez.

Chairman MANZULLO. You have to press the button on your—

Mr. BETANCOURT. Thank you, Mr. Chairman. Thank you, Ranking Member Velazquez. I am representing the Association of Enterprise Opportunity here today. I am also a board member, and I am 

also a practitioner for Community First Fund in Pennsylvania. 

Just a couple of things about AEO. We represent over 500 members-micro-enterprise organizations across the U.S. Of the four 

32

main programs that micro-enterprises use, three of the four are actually being recommended for cut, and I really want to talk to you 

about those programs. 

Just a few facts about myself. I work, as I said, at Community 

First Fund. We cover a 10-county area in Pennsylvania. We are an 

SBA microlender. We are an SBA technical assistance provider. We 

are also a Women’s Business Center. About half of AEO’s members 

are involved in these programs that we are talking about. What the AEO is requesting is that we continue funding at a $20 million level for lending capital for the Microloan program, at a $17 

million level for the TA program, at $5 million for the PRIME, and 

$16.5 million for the Women’s Business Centers. 

The funding that we are talking about is unique, at least in two 

ways. One is that it is helping entrepreneurs, small, micro-entrepreneurs, and generally the sales are $100,000 and less than five 

employees. We believe that the private sector, in many respects, is 

unable to reach this market. The 7[a] program, while you hear that 

it is doing well in many respects, it is unable to reach the market 

that we are serving. In our particular case, 90 percent of our borrowers are people of color. Forty percent are women. I think that 

if you look at the 7[a] numbers, you are going to find that those 

numbers will not correspond. 

As a matter of fact, the Administrator indicated that these programs are expensive, the TA program itself. Well, let us talk about 

that for a moment. We are spending, in some cases, 20 to 40 hours 

with our entrepreneurs, and, in many respects, our loans might 

get, at best, $1,000 in interest. The other thing is that there is a 

less-than-one-percent default rate on the SBA Microloan program. 

The SBA gets its money back, and so do the organizations that we 

work for. What we are talking about is very intensive training for 

these entrepreneurs. 

The Administrator also talked about that these services could be 

provided by other organizations across the nation. He said about 

600 organizations, or CDFIs. I represent a CDFI in Pennsylvania, 

and I can tell you that we use SBA Microloan money so that we 

can provide technical assistance, and I will say that again. We are 

a CDFI, a community development financial institution. We do get 

money from other programs, but this is the only federal program 

that we use for technical assistance. So while you may say that 

there are other organizations that provide this to micro-entrepreneurs, if you eliminate the SBA Microloan program and Technical Assistance, and PRIME, you are going to eliminate the services that are being provided by those CDFIs. 

Another point that was said today, in terms of geographic scope, 

was that the 7[a] program is dominated by many of the larger 

banks. The SBA micro-organizations are represented across the nation. We are in rural areas. We are in urban areas. We are in suburban areas. And I think that you will notice that about, as I mentioned earlier, 40 percent of our loans are in rural areas. 

Many of our borrowers have credit issues that would not qualify 

for 7[a]. Forty percent of our borrowers are start-ups, and you will 

note that in the 7[a] program generally they are one to three years 

in terms of years in business. Our borrowers are not necessarily in 

business for one to three years. 

33

So I would say, in conclusion, we are asking you to keep in your 

budget views and estimates the $20 million for the Microloan program, $17 million for technical assistance, $5 million for the 

PRIME, $16.5 million for the Women’s Business Centers. Thank 

you very much. 

[Mr. Betancourt’s statement may be found in the appendix.]

Chairman MANZULLO. Thank you. I just have a couple of questions. 

One of the problems, at least from the Administration perspective, is the overlapping and redundancy of programs. I guess my 

question is, the technical assistance that comes from the Microloan 

Technical Assistance and SCORE and SBDC and, in many cases, 

Women’s Business Centers because I have a Women’s Business 

Center and an SBDC in the district I represent; do these services 

overlap?

Mr. WILSON. Mr. Chairman, that is a huge question. OMB has 

maintained that for the last 10 years.

Chairman MANZULLO. OMB does not like small business.

Mr. WILSON. SBA commissioned a study this past year of all of 

their ED programs.

Chairman MANZULLO. ‘‘ED,’’ Don?

Mr. WILSON. Entrepreneurial development. That is the section at 

SBA that covers SBDCs, Women’s Centers, SCORE, and so forth. 

The study has just been concluded, and the results are in, and 

what it shows unmistakably is that these programs are not duplicative. The Women’s Centers serve businesses with about $60,000 

in sales and about one to one-and-a-half employees. SCORE serves 

businesses with about $125,000 in sales, on average, and three employees. SBDCs, on average, serve businesses with $250,000 in 

sales and six to seven employees. 

They are clearly, clearly, addressing different market segments. 

And so SBA has got the data. I feel certain they will share it with 

this Committee, but it absolutely refutes the long-held claim that 

these technical assistance programs duplicate each other’s work. 

They are serving completely separate market segments.

Chairman MANZULLO. Mr. Betancourt, somebody cheerleading for 

your program there. He left out what Microloan Technical Assistance serves compared to the four programs he mentioned?

Mr. BETANCOURT. Yes. The Microloan Technical Assistance, you 

will note, is tied to the loans that we provide. It requires that we 

follow up when we provide the loans. The reason why there is a 

one-percent default rate is because we are following our borrowers. 

I can tell you that the average for non-SBA microlenders in the nation for Microloans is a 10- to 15-percent default rate, and the reason is because there is no technical assistance provided. 

34

In our particular case, our organization, we have a less-than-onepercent default rate, and we do about 100 loans a year. We are one 

of the largest lenders in the nation when it comes to Microloans. 

Now, a subset of that is SBA Microloans. 

Let me just be clear. We provide about 30 SBA Microloans a 

year. We do another 75 on our general fund. We are able to leverage your dollars, raise another 75 percent beyond that, and provide 

these services. It is just a small portion of what we are able to do 

in these communities. 

More to your point about duplication, we work very closely with 

the SBDCs and the SCORE, and the gentleman is right. When we 

have tough cases of intensive training of very small businesses of 

women and people of color, they are always referred to our organization because that is what we specialize in.

Chairman MANZULLO. Is your default rate a lot less than the rest 

of the nation on the Microloans? You said you are only one percent?

Mr. BETANCOURT. The industry as a whole has a one-percent default rate under the SBA Microloan program.

Chairman MANZULLO. Is that the amount of dollars or the number of participants?

Mr. BETANCOURT. It is number of dollars. In other words, when 

you take the aggregate number and what is charged off, it is one 

percent.

Chairman MANZULLO. Okay. I do not have any further questions. 

Mrs. Velazquez?

Ms. VELAZQUEZ. Mr. Vivian?

Mr. VIVIAN. Yes.

Ms. VELAZQUEZ. Do you think that by SBA not requesting any 

program level for the participating securities, that this closes the 

book on the program?

Mr. VIVIAN. I hope not. We are certainly willing and able and 

ready, as we tried last year, with the strong support of this Committee and the hard work that you all put in, to resolve the problem. Our hope is that it is not.

Ms. VELAZQUEZ. Okay. Why has NASBIC continued to support a 

zero-subsidy-rate program for participating securities? It clearly 

has not worked for the industry and has not produced the desired 

stability.

Mr. VIVIAN. We believe that the program can support a zero-subsidy rate. The reason that it has not in the past worked is, as I 

suggested in the testimony, there are some structural flaws in the 

existing Participating Securities program, and we are actually in 

the process right now of preparing to come to the Committee with 

35

some proposals on how to solve that problem to be able to maintain 

a zero-subsidy rate.

Ms. VELAZQUEZ. Thank you. 

Mr. Wilkinson, I know that SBA is focused on making smaller 

loans largely because they believe that they are better at creating 

jobs, but also because they believe that they are less expensive. 

What is your opinion of SBA’s focus on smaller loans?

Mr. WILKINSON. Well, they came up with a new program called 

SBAExpress a few years back to try to get the large banks back 

involved with the SBA. It is a different kind of product, and that 

program has taken off, and that is where they are getting large 

numbers of smaller loans. But we still have what I call the ‘‘regular 

7[a] program’’ in existence, and it continues to grow, but that is 

really a long-term loan. It is a niche product. So SBA’s numbers 

have increased primarily because of Express, but the regular 7[a] 

program is doing just fine.

Ms. VELAZQUEZ. And what is the 7[a] program’s subsidy rate?

Mr. WILKINSON. For the current fiscal year, it is zero.

Ms. VELAZQUEZ. So, then, why is there a cap on its program 

level? It does not make any sense. There is no cost to the government. Why do we not stand behind these estimates?

Mr. WILKINSON. First of all, we are seeing some unprecedented 

growth that we have not seen in previous years. It looks like we 

are going to do about $16 billion this year. We did $12.7 billion net 

last year. Our belief is that since it is now at a zero subsidy, there 

really should not be a limit on what we are doing. That is why we 

have supported the $17 billion estimate for next year, Fiscal 2006, 

to match the authorized level.

Ms. VELAZQUEZ. Mr. Wilkinson, can borrowers of the Microloan 

program secure loans through the Community Express program?

Mr. WILKINSON. I am not a Microloan expert, so I really do not 

know much about their clientele. What I have heard from my members is that, based on the credit scores that they are using for their 

loans in the Express program, those are credit scores that are higher than the credit scores of borrowers in the Microloan, so, based 

on that, I would say they are a different clientele.

Ms. VELAZQUEZ. Mr. Betancourt?

Mr. BETANCOURT. The credit scores in our case, in many cases, 

are less than 550; in some cases, bankruptcies.

Ms. VELAZQUEZ. And Community Express, SBAExpress loan; 

what will be the score, 700?

36

Mr. BETANCOURT. I would say 700, 650 or more. I am not an expert in that area.

Mr. WILKINSON. I think, from some of my members that are here, 

they are saying their minimum is around 630 for an SBA 7[a] loan.

Ms. VELAZQUEZ. But the SBA continues to say that borrowers of 

the Microloan program can get loans through the 7[a] program. Is 

this true?

Mr. WILKINSON. Again, our members, with their Express loan 

programs, seem to have minimums in the 630 to 650 range. A borrower would have to fit that range to be approved through the regular 7[a] program.

Ms. VELAZQUEZ. So what we are saying is that the clientele that 

will get loans through the Microloan program would not be able to 

get loans through the Express program because the score that is 

required, they might not meet. Correct?

Mr. BETANCOURT. I would agree with you, Ms. Velazquez, but I 

would also say, they would not even get to the table or at application without the technical assistance that is provided.

Ms. VELAZQUEZ. Mr. Crawford, the message NADCO gave to 

Congress last year was that they wanted the larger Debenture. 

Less emphasis was given to the cap on the 504 program. Why?

Mr. CRAWFORD. I am sorry, ma’am. Could you repeat the question? Less emphasis—

Ms. VELAZQUEZ. —has been given to the cap on the 504 program. 

Why?

Mr. CRAWFORD. I am not really sure, given the point that you 

just made, we are at zero subsidy. I would have hoped, as this 

Committee passed last year in its own reauthorization bill—you endorsed, I believe, $6 billion for 2005. We certainly supported that 

figure because we thought that figure would take care of the larger 

Debenture as well as the manufacturing debenture promoted by 

the chairman.

Ms. VELAZQUEZ. What would happen if 504 lending exceeded the 

cap?

Mr. CRAWFORD. I would presume, at some point, the agency will 

move to some sort of credit-rationing scheme, which is what they 

have had to do with 7[a] on two or three occasions over the past 

several years. I would hope that would not be the case. As you saw 

the disruption in the 7[a] program, it will certainly disrupt our program.

Ms. VELAZQUEZ. Do you think that is possible?

37

Mr. CRAWFORD. Do I think it is possible?

Ms. VELAZQUEZ. Uh-huh.

Mr. CRAWFORD. I assume, without increasing the cap from $5 billion, they will not have much alternative except to move to some 

sort of credit rationing.

Ms. VELAZQUEZ. Mr. Betancourt, do you see demand for the 

Microloan program increasing or decreasing and why?

Mr. BETANCOURT. In terms of their budget, the 2006 budget?

Ms. VELAZQUEZ. Demand for the program.

Mr. BETANCOURT. Oh, demand. I did not hear you.

Ms. VELAZQUEZ. Demand.

Mr. BETANCOURT. In our case, we doubled our volume from last 

year in the SBA Microloan program.

Ms. VELAZQUEZ. Okay. So can you tell us the profile of a borrower in the Microloan program?

Mr. BETANCOURT. I think it was said earlier, and it was a good profile, we are talking about businesses with less than $50,000 in 

sales. About half of our clients are start-up. In many cases, this is 

a part-time business they are trying to start off the ground. They 

might work and then build this up. Not a lot of collateral, credit 

is not great, but, you know, with a good business plan and the 

character of the borrower, we are able to provide the seed funding, 

follow-up, and then things work out.

Ms. VELAZQUEZ. If the program is terminated, where do you 

think the clients will go to get loans?

Mr. BETANCOURT. I think it is going to be a hardship for a lot 

of organizations in a lot of small, rural communities, some urban 

areas. I know, for example, in Washington County in Pennsylvania, 

they only have an SBA Microloan program. There are very few 

banks. If you eliminate this, I kind of doubt they are going to be 

able to offer it. 

In our particular case, it is going to hinder a lot of what we can 

do. We will just have to cut back some services.

Ms. VELAZQUEZ. So how is the technical assistance provided by 

the Microloan program different from the Community Express program?

Mr. BETANCOURT. Well, I think that this is a partnership that 

the SBA has with the banks, in terms of Community Express, 

where the banks provide the funding, and the SBA is providing the 

guarantee. You have my resume there. I am a former vice PresiVerDate 0ct 09 2002 13:25 Jul 22, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\HEARINGS\98783.TXT MIKE
38

dent of a bank, 15 years, and I know how it works at a bank. It 

is a bump and run. If the deal works, you get a guarantee, and you 

move on, but you do not have the time to provide technical assistance. You would not have your job. It is a for-profit business.

Chairman MANZULLO. Okay. Thank you for coming. We appreciate it. We have got a lot of work to do. I think, on the subsidy 

rate of the 7[a], we probably should have a preemptive hearing 

within the next 60 days because this is a 70-percent increase. SBA 

is going to have to justify that, and on the Participating Securities, 

you know, lack of capital is the biggest problem that we have. 

Don, you are right on the manufacturing. The largest city in our 

district, Rockford, Illinois, we are somewhere around nine and a 

half to 9.8 percent unemployment. It is double the rate. We have 

lost 29 percent of our manufacturing base, and the Secretary of the 

Navy has just awarded a $1.7 billion contract for Marine One to 

the Europeans. I hope he is proud of that.

Mr. WILSON. I would like, Mr. Chairman, if I could,—I mentioned 

it in my written testimony—I would like to get it to you. We had 

Dr. Chrisman do three studies over the last six years of what 

SBDCs are doing for manufacturers, and it is very, very significant.

Chairman MANZULLO. Well, obviously, we would not spend a lot 

of time working on that, but we look forward to working with all 

of you. The budget estimates have to be in—February 23rd, we will 

be getting that document in and making our statements and observations on it. Thank you for coming.

Ms. VELAZQUEZ. Mr. Chairman?

Chairman MANZULLO. Yes.

Ms. VELAZQUEZ. Can I have one more question?

Chairman MANZULLO. Sure, of course.

Ms. VELAZQUEZ. Mr. Crawford, how has the decline of local SBA 

staff affected CDC’s ability to liquidate and service defaulted loans?

Mr. CRAWFORD. Well, the problem we have with CDC’s liquidating defaulted loans is that we are not empowered yet by the Administration to do that. We have been crying for the regulation 

they have had in draft for more than six months to move towards 

liquidations. If we do not do something about that, the subsidy 

costs of this program are actually the borrower fee because they 

will keep us at zero. The borrower fee will skyrocket.

Ms. VELAZQUEZ. And, in your opinion, does SBA need to increase 

staffing at the 504 processing center and by how much?

Mr. CRAWFORD. I am not sure. I could hesitate a guess for that. 

I certainly would not advocate doubling the staff, but it is clear 

that those folks out there are working as hard and as fast as they 

39

can work, and I personally believe that there is a staff increase 

needed there.

Chairman MANZULLO. Thank you. The meeting is adjourned. 

[Whereupon, at 12:35 p.m., the Committee was adjourned.]

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