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FULL COMMITTEE HEARING ON

THE ROLE OF CREDIT CARDS

IN SMALL BUSINESS FINANCING

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 3, 2008

Serial Number 110-81

Printed for the use of the Committee on Small Business

(

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

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

Subcommittee on Urban and Rural Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

MARY FALLIN, Oklahoma, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

WITNESSES

Spearman, Mr. Bill, President and CEO, Mid-Hudson Valley Federal Credit 

Union, Kingston, NY, On behalf of the National Association of Federal 

Credit Unions ....................................................................................................... 3

Rosacker, Mr. William C., President, United Bankers’ Bank, Bloomington, 

MN, On behalf of the Independent Community Bankers of America .............. 5

Gatewood, Mr. Wayne M., USMC (Ret), President and Chief Executive Officer, Quality Support, Inc., Landover, MD .......................................................... 7

Walker, Mr. David A., John A. Largay Professor, Georgetown University, 

McDonough School of Business, Washington, DC ............................................. 9

Lahm, Jr., Dr. Robert J., Assistant Professor of Entrepreneurship, Jones 

College of Business, Middle Tennessee State University, Murfreesboro, TN . 11

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 33

Chabot, Hon. Steve .................................................................................................. 35

Altmire, Hon. Jason ................................................................................................. 36

Spearman, Mr. Bill, President and CEO, Mid-Hudson Valley Federal Credit 

Union, Kingston, NY, On behalf of the National Association of Federal 

Credit Unions ....................................................................................................... 37

Rosacker, Mr. William C., President, United Bankers’ Bank, Bloomington, 

MN, On behalf of the Independent Community Bankers of America .............. 54

Gatewood, Mr. Wayne M., USMC (Ret), President and Chief Executive Officer, Quality Support, Inc., Landover, MD .......................................................... 63

Walker, Mr. David A., John A. Largay Professor, Georgetown University, 

McDonough School of Business, Washington, DC ............................................. 70

Lahm, Jr., Dr. Robert J., Assistant Professor of Entrepreneurship, Jones 

College of Business, Middle Tennessee State University, Murfreesboro, TN . 92

Statements for the Record: 

American Bankers Association ............................................................................... 118

(V) 

(1)

FULL COMMITTEE HEARING ON THE ROLE 

OF CREDIT CARDS IN SMALL BUSINESS 

FINANCING 

Thursday, April 3, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

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

1539 Longworth House Office Building, Hon. Nydia Vela ́zquez 

[chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Gonzalez, Cuellar, Ellsworth, Johnson, Sestak, Chabot, and Akin. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. Good morning. I call this hearing to 

order. Today the Committee will examine the increasing role 

played by credit cards in financing our nation’s small businesses. 

In the past, 60 percent of small firms made use of private and 

federally guaranteed loans. In comparison, during that same period, 77 percent of entrepreneurs opted to buy new equipment and 

pay for other businesses using a credit card. 

The reason is simple. Credit cards give small businesses access 

to capital they need to grow. That fact is especially crucial given 

the current economic climate in which small firms are finding it 

difficult to secure traditional forms of financing. Not surprisingly, 

the rate at which purchases are charged continues to rise up to 14 

percent over the last 5 years. Today we will delve into what that 

means for small firms. 

Credit cards have always been a convenient means of payment. 

They expedite transactions while allowing for considerable ease 

and security. Just as importantly, since 70 percent of small business owners pay their balances in full each month, they’re gaining 

the equivalent of a 30-day interest-free loan. 

While credit card use is on the up swing, many federal programs 

specifically designed to offer small firms access to capital are falling short of this goal. That is holding small businesses back and 

denying the economic contributions from entrepreneurs precisely 

when they matter most. 

In the past months, members of this Committee have heard testimony from the Federal Reserve, the Small Business Administration, and a host of experts on small business lending programs. 

Their testimony points to the considerable gap that remains in financing. 

2

The witnesses have also shed light on how the current economic 

downturn, rising foreclosure rates, and a plummeting housing market are compounding these capital challenges. In fact, just when 

our small businesses’ economy will benefit tremendously from an 

infusion of capital, financial institutions are pulling back on credit. 

As the availability of capital diminishes, more businesses are delaying important purchases, halting expansion, foregoing the creation of new jobs, laying off current employees altogether. Ironically this keeps small firms from doing what they do best: fueling 

the nation’s economic growth. 

In such an environment, it will make sense for the SBA’s lending 

and investment program to step in. Sadly, the agency’s largest 

lending initiative, the 7(a) program, is doing the exact opposite. 

The SBA’s mission is to raise fees and erecting new barriers to 

small business loans. As a result, 7(a) lending volume is down 14 

percent and lending to minority-owned businesses has decreased by 

nearly 9 percent. Clearly this all runs counter to the program’s 

mission. 

Given these realities examining the role of credit cards in the financing of small businesses just makes sense. With the nation facing the prospect of a recession, it is also important to remember 

that entrepreneurs have always led the way back to economic recovery. This Committee will continue to work to ensure they have 

the tools to do so again. And I know my colleagues will join with 

me in strengthening what is working in the current system while 

correcting what is not. 

I want to thank all of the witnesses for being here today and for 

offering their insights on these crucial issues. With that, I recognize Ranking Member Chabot for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. Thank you, Madam Chairman, for holding this 

hearing on small businesses and credit cards. I also want to thank 

our distinguished panel of witnesses here. I know we all look forward to hearing your testimony. 

The financial services market in the United States is the most 

competitive, innovative, and robust in the world. This vibrant market has helped individuals, businesses, including small businesses, 

to meet their daily needs and achieve their dreams. 

Cash management is an absolutely critical matter for small companies. Careful management of cash and credit may mean the difference between whether a business expands or doesn’t or whether 

it succeeds or fails. 

According to the Government Accountability Office, the prevalence and use of credit cards in the United States has grown dramatically over the past 25 years. In 2005, consumer held more than 

691 million credit cards. And the total value of transactions in 

which these cards were used exceeded $1.8 trillion. 

More than half of small firms rely on credit cards to help fund 

their operations, according to a financial services trade association. 

Credit cards can allow a small company to finance a purchase over 

time that they would otherwise not be able to make. They can be 

a source of short-term interest-free loans to enable a business to 

operate. 

3

Credit cards can also help a company to manage cash flow or 

track and manage employee purchases and expenses. In addition, 

credit cards allow small companies to earn airline, hotel, retail, or 

cash-back rewards to enhance the business. 

Whether a small business is well-established or just beginning, 

these tools can have a positive impact on business operations. They 

can enable a small business to weather minor disruptions to cash 

flow. For a newly established business, credit cards provide the opportunity to build business credit. 

Especially in a time of economic uncertainty, when credit can be 

even more difficult to access, credit cards can make available the 

capital needed to maintain a company’s position or expand, create 

jobs, and add significant value to our economy. 

Like any borrower or credit card customer, small businesses 

must use credit responsibly and be vigilant about managing the 

debt. Credit is extremely valuable and is a tremendous asset when 

used wisely. 

Again I thank the Chairwoman for holding this hearing. I look 

forward to hearing this testimony from our witnesses very shortly 

here. And I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Chabot. 

And now I welcome Mr. Bill Spearman. Mr. Spearman is the 

President and CEO of the Mid-Hudson Valley Federal Credit 

Union, which draws its field of membership from Ulster, Dutchess 

and Orleans Counties, New York. He is testifying today on behalf 

of the National Association of Federal Credit Unions, a well-respected trade association that exclusively represents the interests 

of federal credit unions. 

Mr. Spearman, you have five minutes to make your presentation. 

Thank you. Welcome. 

STATEMENT OF MR. BILL SPEARMAN, PRESIDENT AND CEO, 

MID-HUDSON VALLEY FEDERAL CREDIT UNION, ON BEHALF 

OF THE NATIONAL ASSOCIATION OF FEDERAL CREDIT 

UNIONS 

Mr. SPEARMAN. Good morning. And good morning, Chairwoman 

Vela ́zquez, Ranking Member Chabot, and members of the Committee. My name again is Bill Spearman. I am here today to testify 

on behalf of the National Association of Federal Credit Unions. I 

serve as President and CEO of the Mid-Hudson Valley Federal 

Credit Union, headquartered in Kingston, New York. 

Mid-Hudson Valley is a community chartered credit union serv- ing nearly 50,000 members and with assets of $590 million. 

MHVFCU and the entire credit union community participate this 

opportunity to participate in this hearing regarding credit card and 

small business lending. 

Credit unions are not-for-profit financial cooperatives governed 

by a volunteer board of directors, who are elected by their members. At Mid-Hudson Valley, as with many credit unions, our membership includes small business owners and some of the businesses 

themselves. 

Cooperative structure gives credit unions unique ability to design 

services to meet the needs of the membership. It also enhances the 

relationship that the credit unions have with their member owners, 

4

giving them a unique working knowledge of the way the business 

is run. 

This unique relationship leads to better lending decisions and 

mitigate risk for the credit union and also for the small business. 

Even though credit unions have been able to grow in their ability 

to help small businesses, many want to do more. 

At Mid-Hudson Valley, we are an approved SBA lender. However, some of the cumbersome aspects of the SBA process constrain 

our efforts to take a more active role in the SBA 7(a) and 504 lending programs. 

Moreover, the arbitrary member business lending cap that was 

established 1998 as part of the Credit Union Membership Access 

Act has also hindered the credit unions’ ability to help small business. The Credit Union Regulatory Improvements Act, H.R. 1537, 

and the Credit Union Small Business Lending Act, H.R. 1849, 

would help to provide relief to credit unions from this arbitrary cap 

and ease the SBA process for credit unions. 

Even though the credit union has been able to grow and help 

small businesses, business lending to our members is a very important part of the Mid-Hudson Valley Federal Credit Union. During 

the early 1990s, the Mid-Hudson Valley area was left reeling with 

the closure of the IBM Kingston plant that employed over 7,000 

employees. 

As a federal credit union for that IBM plant, we help many 

former IBM employees establish their own small business ventures. 

Some of the bigger financial institutions in the area were unwilling 

to lend to these entrepreneurs. As a result, Mid-Hudson Valley 

stepped in and filled this void. 

Today Mid-Hudson continues to help fuel small business growth 

in our region. Credit card lending plays an integral role in providing much needed capital for our small business members. Currently 61 of our business members have credit card accounts with 

the credit union. These small business members pay their bills on 

time. And many do not carry balances and, thus, do not generate 

a large amount of interest income for the credit union. 

Absent this capital provided by the credit cards, these businesses 

surely would not be as successful as they are today. Credit cards 

offer a convenient form of payment and an easy way to track expenses. 

Many small companies often utilize credit cards as a main source 

of credit. Federal credit unions are the only federal financial institution with a statutory usury ceiling, currently at 18 percent. This 

helps ensure that small businesses using credit cards from their 

credit unions do not face predatory interest rates. 

Federal credit unions have traditionally been responsible lenders 

and have not participated in some of the predatory practices that 

are engaged in today. Thankfully, double cycle billing, universal default, and hair trigger repricing are not a part of the credit union 

vocabulary. At 

At Mid-Hudson Valley, we tend to hear the same reasons over 

and over again as to why our members, small businesses, prefer 

credit cards to assist them with their business. The ease of obtaining credit, the ability to monitor cash flow with their monthly 

5

statements, efficiency, fair rates, and overall convenience are the 

main reasons why our small business owners utilize credit cards. 

Knowing our members helps us put them in the proper loan 

products for their business needs. For example, if they needed to 

purchase a copier for $5,000, we would not put them in a credit 

card but, rather, suggest a term loan for those purposes. 

MHVFCU believes that any effort to restrict credit card practices 

should be carefully crafted to ensure that smaller financial institutions are not burdened by unnecessary regulation and unintentionally harmed. 

In conclusion, federal credit union small business lending is 

strong and continues to grow. However, the current regulatory 

framework prevents federal credit unions from doing more for 

America’s businesses. Legislative proposals such as the Credit 

Unions Small Business Lending Act and the Credit Union Regulatory Improvements Act would go a long way to helping credit 

unions to bolster small business growth in America. 

Furthermore, credit card lending plays a pivotal role in helping 

federal credit union business members start and grow small businesses. NAFCU urges caution and careful consideration of any legislation proposals that could simultaneously hurt credit union lending and small business development. 

I thank you for your time. And I am happy to answer any questions that the Committee members may have. 

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

Appendix on page 37.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Spearman. 

Our next witness is Mr. William Rosacker. He is the President 

of the United Bankers’ Bank in Bloomington, Minnesota. He is testifying today on behalf of the Independent Community Bankers of 

America, a leading trade association representing over 5,000 community banks of all sizes and charter types throughout the United 

States. 

Welcome, sir. 

STATEMENT OF MR. WILLIAM C. ROSACKER, PRESIDENT, 

UNITED BANKERS’ BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. ROSACKER. Thank you, Chairwoman Vela ́zquez and Ranking 

Member Chabot. I am Bill Rosacker, and I am President of United 

Bankers’ Bank in Bloomington, Minnesota. I am pleased to be here 

today on behalf of the Independent Community Bankers of America. 

On behalf of ICBA’s nearly 5,000 members, I want to express our 

appreciation for the opportunity to testify on the important role 

credit cards play in supporting America’s small business. 

Access to credit and capital is vital in today’s economy. Today I 

will focus on three points: first, how community banks are able to 

help local small businesses run and finance their operations successfully through the use of credit cards; second, how community 

banks as small businesses themselves benefit from the ability to 

offer credit card products; and, finally, the legislative and reguVerDate 0ct 09 2002 14:25 May 22, 2008 Jkt 033615 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\41332 LEANN
6

latory landscape facing community bankers and their small business customers. 

Community banks play a vital role in providing capital entrepreneurs need to succeed. In fact, community banks provide nearly 

a third of the total dollar amount of bank business loans under 

$100,000, many in the form of small business credit card products. 

A small business owner who chooses to do business with a community bank gains an important advantage of local decision-making. Community bankers know their customers and live and work 

in their neighborhoods. Should a small business find itself in a 

tough financial situation, both the banker and the owner have a 

clear interest in making the business successful. 

A small business credit card holder gains a new source of capital 

that can help them meet their dynamic financial needs while establishing a sound business credit history. A credit card simplifies the 

accounting and cash flow management. 

A small business can use a credit card to finance daily expenditures, freeing up assets to be reinvested in the business to help it 

grow, rather than tying it up in trade credit receivables and 

payables. 

Also, it has been my experience that a large majority of small 

business credit card holders pay their statement balance in full at 

the end of each month, using it as a transaction account and almost provides them the same convenience as a regular checking account. 

A small retailer accepts credit cards, improves its profitability 

and efficiency. For example, they are protected against many types 

of fraud. They do not have to keep as much cash on hand. And the 

business receives guaranteed funds in its account immediately. 

Also, as we all know, consumers will spend more if they go to a 

merchant that accepts credit cards. After all, increasing customer 

transactions is the best way to develop revenue. 

If a small merchant signs with a community bank, it is getting 

a tremendous value because of the benefits of the electronic payments and sophisticated payments network that a community 

banker can utilize to complete the transaction quickly and, most 

importantly, securely. 

While community banks are often lumped into a broad category 

of bankers, it is important to keep in mind that a community bank 

is a small business themselves. We face our own unique set of challenges in a very competitive marketplace. 

Contrary to popular belief, the consumer and business credit 

cards we offer are not always the source of tremendous profit. The 

real value lies in our basic ability to offer these products to consumers and small businesses. Offering community bank-issued 

credit cards creates a stronger relationship with the customer and 

encourages loyalty for the long run. 

Credit cards are a very small margin product for many community banks, which do not issue consumer and credit cards at volumes near the larger issuers. For the small business owner, they 

can get the same product but with local customer service at a competitive and often better rates from their community banker. 

One unique challenge facing community banks on a daily basis 

is the burden of government regulation, which directly affects the 

7

ability to support small businesses. There are a number of legislative proposals which would greatly increase the cumulative regulatory burden for card-issuing community banks. 

The increased regular costs and burdens could be the tripping 

point that will cause community banks to discontinue offering credit cards products. That said, there is also an opportunity for Congress to enact measures to make it easier for small businesses and 

community banks to grow and succeed. ICBA would like to thank 

the Chairwoman Vela ́zquez for introducing the Communities First 

Act, H.R. 1869, which provides much needed regulatory burden and 

tax relief for community banks, their customers, and their communities. 

In conclusion, even in the best of economic times, small businesses can struggle in the search of capital. Community bankers 

are well-positioned to meet these needs, be it through traditional 

loans or highly competitive business credit offerings. The support 

structure built on local decision-making and long-term relationships unique to the community bank model is a proven formula to 

help entrepreneurs succeed. 

I want to thank you for this opportunity to testify. And I look forward to your questions. 

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

Appendix on page 54.]

Chairwoman VELA ́ ZQUEZ. Thank you. 

Our next witness is Mr. Wayne Gatewood. Mr. Gatewood is the 

President and CEO of Quality Support Inc., a veteran, a minorityowned small business that provides a distinctive array of management, administrative meeting, and conference support services for 

its wide array of government and corporate clients. 

Welcome. 

STATEMENT OF MR. WAYNE GATEWOOD, JR., USMC (RET), 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, QUALITY SUPPORT, INC. 

Mr. GATEWOOD. Good morning, Madam Chairwoman and Ranking Member Chabot and members. After 21 years in the United 

States Marine Corps, I started Quality Support in 1989, with $600 

in a small loan from my dad. 

I initially used credit cards to pay for small corporate needs and 

personal items that would otherwise require the outlay of cash. To 

maximize my potential for success, I needed time. And credit cards 

gave me that time. 

From 1989 to 1998, because of favorable terms and flexibility, 

American Express became our preferred source of credit. In 1999, 

our company was selected to support a large Department of State 

requirement. To take on this work, we would need a credit line of 

one million dollars. 

Even with a substantial cash balance and an established track 

record, our bank turned us down flat. However, American Express 

worked with us and authorized a credit line up to one million dollars. By the end of our State Department contract, we had charged 

$1.1 million on our American Express cards. 

8

Since 1994, we have charged more than $8 million through 

American Express. For calendar year 2008 alone, we are on pace 

to charge $2.5 million through our AmEx account. 

Bank lines can be expensive and hinder business operations. Example, the following terms were offered us by a bank. We rejected 

the offer. No corporate cash contribution or distributions could be 

made while the agreement was in effect. This would be the case, 

whether the line of credit was used or not. We could not enter into 

any teaming agreements without permission from the bank, thus 

stunting our opportunities for future growth and stability. 

In addition, Quality Support guaranteeing the loan, the bank 

wanted me to personally guarantee the loan. The bank would put 

a lien on our receivables, and the bank would be paid directly from 

our clients. We would maintain a net worth of $1.5 million for a 

$500,000 credit line. If we dipped even slightly below the $1.5 million mark, even for a short period of time, the bank could immediately call in the loan. 

The bank reserved the right to call in the loan at their discretion 

any time. The credit line would be for one year only. And at the 

end of that year, all outstanding balances were due. And terms 

would only be extended at the bank’s discretion. 

At our expense, the bank could request field audits of our finances or the records any time they chose and as many times as 

they chose. We would pay for the preparation of all related documents and be responsible for all out-of-pocket expenses incurred by 

the bank, to include their attorneys’ fees. This would be the case, 

even if we never used the credit line and was in addition to the 

$2,500 annual maintenance fee. To pay for these expenses, the 

bank could debit any accounts maintained by Quality Support 

without prior consent from us. 

Although we now have two small bank lines of credit that do not 

include such harsh terms, we still prefer to use our credit card account with American Express. If we used a bank credit line for 

short-term credit, we would have to pay interest. If we used our 

cash, we would lose the opportunity of investing the money elsewhere. 

By using AmEx, we have access to the credit we need. We pay 

no interest as long as we pay within the terms of our agreement. 

And we are able to invest our cash on hand in interest-bearing accounts. 

AmEx is beneficial because of its simplicity. When we have a 

short term requirement, such as a large hotel bill, we make a 

phone call to Amex, explain the situation, sometimes provide basic 

financial information. In most cases American Express immediately 

increases our credit line for the short-term requirement. Even 

when we don’t have a need for short-term credit increases, American Express offers us a healthy and ongoing line of credit. 

American Express ensures international purchasing capacity for 

us and credibility internationally to support our operations almost 

anywhere in the world. As a bonus, we receive air miles for every 

dollar we spend with American Express. 

Quality Support will continue using credit cards to enhance and 

sustain our corporate operations. Credit cards when used judiVerDate 0ct 09 2002 14:25 May 22, 2008 Jkt 033615 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\41332 LEANN
9

ciously can provide the small business owners with the flexible and 

quicker access to credit they otherwise may be denied. 

Quality Support’s growth and success over the past 19 years 

would not have been possible if access to credit had not been available to us. We thank the credit card companies, especially American Express OPEN, for giving us the capacity to form and grow 

our company. 

Thank you. This ends my testimony. 

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

Appendix on page 63.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Gatewood. 

Our next witness is Dr. David Walker. Dr. Walker is the John 

A. Largay Professor and Director Emeritus of the Capital Markets 

Research Center at Georgetown University, which he directed for 

17 years. Previously Dr. Walker has served as the Director of Research for the Office of the Comptroller of the Currency. 

In his research, Dr. Walker has analyzed free credit availability 

and demand for SBA loans and has published several studies on 

the financing of small firms through venture capital, informal investment, and bank credit. 

Welcome. 

STATEMENT OF MR. DAVID WALKER, JOHN A. LARGAY PROFESSOR, GEORGETOWN UNIVERSITY, McDONOUGH SCHOOL 

OF BUSINESS 

Mr. WALKER. Thank you. Madam Chairwoman, Ranking Member, and Committee members, thank you for the opportunity to testify in front of the House Committee on Small Business. I know we 

have very limited time. So I would like to offer my conclusions to 

begin my discussion. 

I would like to urge the Committee to do whatever you can to 

increase the supply of funds to small firms. These firms are the 

growth engines of our economy, as I discuss in my testimony. 

Technically we are not in a recession. We do not have the data 

to know whether or not GDP growth has been negative for two consecutive quarters. For the fourth quarter of 2007, growth was 0.6 

percent. And we do not have data for the next quarter. 

No matter what label we use, the economy is in extremely poor 

condition. Figure 1 on page 9 of my testimony suggests that the 

contrast between the credit card interest rate and the prime rate 

is quite similar to that during the previous recession, as identified 

by the prestigious National Bureau of Economic Research. 

In my opinion, the stimulus package you have already enacted 

and the current action that you and your colleagues are working 

on this week to deal with the housing crisis will probably enable 

us to avoid what we technically define as a recession of two negative growth quarters. 

My interest in small business originates from, one, experience 

from my family owning and operating a retail store in York, Pennsylvania for 93 years; two, working with the Small Business Administration, which this Committee oversees; and, three, extensive 

small business research and policy analysis, beginning 40 years ago 

with my Ph.D. dissertation. 

10

Small business and consumer credit are often indistinguishable. 

Much of the credit available to small firms is based on the entrepreneur’s personal resources, credit card loans, and lines of credit, 

and mortgage loans and potential home equity loans and lines. 

In our recent study, Dr. Thomas Durkin and I argue that much 

of the consumer credit is revolving credit without a fixed payment 

schedule, often credit card loans from financial service firms to 

small business. I am pleased to submit that study to the Committee for your background. 

Much of today’s credit crunch has been caused by what I consider 

to be irresponsible mortgage lending and the unreasonable assumption that there would be no finite limit to housing prices during the 

current decade. 

Consider, for example, a 2/28 subprime mortgage, where the loan 

equaled virtually 100 percent of the 2005 property appraisal. When 

the mortgage resets in 2008 at new rates for years 3 through 30, 

they reset at an interest rate that is generally above the market 

rate that you would find on an adjustable rate mortgage today. If 

the borrower has negative equity in 2008, the borrower will not be 

able to refinance at the market adjustable rate that he or she 

would otherwise find. 

The adjustable rate mortgages have allowed many legitimate 

borrowers to purchase a home. They are not to blame for the current credit crisis, as has been claimed sometimes. The problem is 

the high reset rate, often above market rates, when the reset is required and the borrower has no equity in the property and no alternative but to agree to a high reset rate. 

Costs of credit to small business are often very high compared to 

rates available to other sectors. And this is especially true during 

a credit crunch. Small firms relying on debt secured by credit cards 

usually pay more than twice the interest rate that large firms pay 

when borrowing at the prime. 

The difference between the cost of credit for large and small 

American firms is at least illustrated by the difference between the 

prime interest rate and the rate of interest on credit card balances, 

the difference of costs of debt for small and large firms. 

Figure 1 on page 9 shows the substantial difference in the credit 

card rate and the prime rate between 1994 and 2007. Throughout 

this period, the difference between the credit card borrowing rate 

and the prime rate is substantial. Small firms have incurred a 

much higher cost for external resources than large firms over the 

past 13 years. 

Thank you very much for this opportunity to meet you and speak 

with you. I would be pleased to answer any of your questions. 

[The prepared statement of Mr. Walker may be found in the Appendix on page 70.]

Chairwoman VELA ́ ZQUEZ. Thank you, Dr. Walker. 

Our next witness is Dr. Robert J. Lahm. Dr. Lahm is Assistant 

Professor of Entrepreneurship as well as the Entrepreneurship Interim Program Coordinator for Middle Tennessee State University. 

Previously Dr. Lahm has founded private entrepreneurial ventures 

and has held positions as an employee of other small and large 

businesses. 

11

Although diverse, Dr. Lahm’s research has often focused on topics with practical implications for the small business sector, particularly the issues of entrepreneurial bootstrapping and the use of 

credit cards in small businesses. 

Welcome. 

STATEMENT OF DR. ROBERT LAHM, JR., ASSISTANT PROFESSOR OF ENTREPRENEURSHIP, JONES COLLEGE OF BUSINESS, MIDDLE TENNESSEE STATE UNIVERSITY 

Dr. LAHM. Thank you, Madam Chairwoman, Ranking Member, 

and the Committee, for allowing me to testify. 

As you will note from my bio, I am not a lifelong academic. I 

have been an entrepreneur. I have also been an entrepreneurial 

bootstrapper; that is, one who has started the business from 

scratch with little or no capital. I know how it feels to float with 

my head bobbing, sometimes beneath and sometimes above the 

surface of treacherous entrepreneurial waters. 

The credit card industry has in recent years been aggressively 

targeting the small business market. My research shows that credit 

cards, whether labelled or classified as personal accounts or as 

business cards, have become the surrogate for traditional sources 

of capital by bootstrappers. 

In one of my earlier papers, entitled ‘‘Just Say Charge It: The 

Use of Credit in Entrepreneurial Start-ups,’’ I estimated that somewhere in the vicinity of eight and a half million businesses with 

zero employees across all industry sectors were using personal 

credit cards as a source of capital in 2002. Usage rates as well as 

the total number of businesses have both increased since that time. 

The subject of entrepreneurial bootstrapping has thus far not 

been vigorously researched. Bootstrappers do not or cannot access 

traditional lenders, business angels who buy ownership in their 

firm, or venture capital. 

There are many reasons for this behavior. They may not want 

other owners to meddle in their businesses. They may want to prototype their business concept before jumping into selling ownership 

for capital or they may fear the loss of control by having other owners. 

There are many dangers for would-be business or consumer credit card holders. Most of us are aware of the game that is played 

given the credit card companies incorporate regular change of 

terms provisions in applicants’ contracts. Indeed, language such as 

we may change our terms at any time for any reason foreshadow 

that they can and will do so regularly. 

The biggest problem with respect to credit card companies is that 

they can be whimsical in their treatment of credit card holders. I 

believe my use of the word ‘‘whimsical’’ is appropriate given that 

some issuers have added ‘‘or for no reason’’ to their change in terms 

disclosures. 

Another danger is that so-called business cards are no different 

from ordinary credit cards relative to personal liability. Whereas, 

many small business owners may think that once they form a business, they are protected, they have typically never heard of veil 

piercing. 

12

Credit card companies may slap an unwary borrower with high 

interest rates when payments are late, in addition to late fees. According to a United States Government Accountability Office report 

entitled ‘‘Credit Cards Increase Complexity in Rates and Fees 

Heightens Need for More Effective Disclosures to Consumers,’’ 35 

percent of their credit card issuers’ active U.S. accounts were assessed late fees and 13 percent were assessed over-limit fees in 

2005. Even the Internal Revenue Service uses the postmark to signify compliance with the spirit of a taxpayer’s filing deadline. 

Knowing that entrepreneurship is vital to the economy, we must 

start and find ways to study and support bootstrappers since they 

comprise the vast majority of all start-ups. These businesses may 

finally reach the cover of Inc, Fast Company, or Entrepreneur, but 

they are started on kitchen tables. 

As policy-makers, I would invite you to consider novel approaches to disseminating formal education and training to nascent 

entrepreneurs. We need better disclosure agreements. When other 

industries have produced products that may be hazardous to consumers’ well-being, they have been forced to educate consumers. 

Unfortunately, personal finance has been greatly under-served as 

the subject for contemporary students in high schools and universities. While this may fall under the purview of the U.S. Department of Education, this Committee could advocate for increased attention to addressing the societal need for financial literacy. 

I fear a proposal to require that the terms of credit be frozen at 

the time credit was taken would actually raise the cost of credit to 

all. On the other hand, lenders who are utilizing predatory lending 

tactics, trickery, and obviously disingenuous strategy to trap borrowers in a classic game of bait-and-switch with change in terms 

agreements must be stopped given that entrepreneurs are the lifeblood of the economy. 

I wish you well in your quest to create policies that can nurture 

those businesses that deserve the opportunity to succeed. If I may 

be of further service in the future, I will hope you will call upon 

me again. 

[The prepared statement of Dr. Lahm may be found in the Appendix on page 92.]

Chairwoman VELA ́ ZQUEZ. Thank you, Dr. Lahm. 

If I may, I would like to address my first question to Mr. 

Spearman. What are some practices that credit unions use to manage risks associated with credit, card lending to member businesses? 

Mr. SPEARMAN. Well, basically what we do is we know all of our 

businesses personally. We are involved many times in helping them 

assemble a business plan. We work with them. 

Generally speaking, we work with a lot of start-up businesses, 

and we actually have them produce a business plan. We provide 

them resources to do a business plan. So when they come back to 

us, we have a pretty good idea that we are really a partnership in 

this process. 

And if it is a start-up business, we will probably start with a 

credit card, but we will start at a modest credit limit and work 

through that process. And generally speaking, the credit card is 

13

perhaps the first instrument that is used in the relationship. And 

soon it will be followed by other relationships. 

So we continue to work with them. And, really, in our portfolio, 

which is a credit card portfolio, which is rather small, we have 

about 61 accounts. We don’t have any real delinquency or any 

issues with those cards. Primarily they are used for a payment device. 

Chairwoman VELA ́ ZQUEZ. Mr. Rosacker, would you mind to comment on some of the practices that your banks use to manage risk 

associated with credit card lending? 

Mr. ROSACKER. I would love to. In conjunction with what Mr. 

Spearman said, we also develop this deep relationship with the 

customer. And, as I testified, you live in their same neighborhood. 

The kids play Little League together. You know that their goal is 

to succeed, and you want them to succeed. 

And I think that through the sophisticated computer systems 

that back the business credit card, you can actually monitor their 

sales, their expenses, where they’re spending money, how they’re 

spending money. And you can do that almost on a day-to-day basis, 

where in a traditional business loan, you really don’t do that and 

can’t do that other than on a quarterly or whatever basis. 

But I think, to sum it up, it is a relationship. It is the fact that 

you have the tools computer-wise to do it. And, finally, I think 

when you look at what a community bank is and that small entrepreneur is, that is the time when one owner of one business can 

sit down with the owner of another business and solve the problem 

and make it a win-win situation. 

Chairwoman VELA ́ ZQUEZ. Can you comment? How would restricting lenders’ ability to price risk affect credit availability for small 

businesses? 

Mr. ROSACKER. I think that the risk and pricing for risk are important. And I know that there are many studies that have said 

this is tightening or this is loosening and what have you. But I 

think when you look at it, credit card pricing is significantly different than the traditional loan pricing. There are significantly different risks involved in the credit card from the standpoint it is unsecured credit. It is not a collateralized line of credit, as you would 

in your traditional. 

So you do analyze it differently. And you do look at it. But you 

have many more tools to use than you do in the traditional business loan. 

Chairwoman VELA ́ ZQUEZ. But will this restricting the ability to 

price for risk create additional costs that will passed on to—

Mr. ROSACKER. Absolutely because you are going to have to make 

up that limitation that you have on the risk in some other form. 

I mean, you can’t do it for nothing. 

Chairwoman VELA ́ ZQUEZ. Mr. Gatewood, one of the reasons some 

individuals advocate for traditional loans is that their terms are 

perceived as being more fixed, thus providing businesses with 

greater sense of certainty and enabling them to effectively plan for 

the future. Do you believe that traditional loan terms are more 

fixed than credit cards or that they better enable businesses to 

plan for the future? 

Mr. GATEWOOD. Well, thank you, ma’am. 

14

Actually, I think they are fixed in favor of the banks. As my testimony revealed, the loan applications received from the banks 

were very restrictive. Certainly it was fixed there. So we knew how 

much we could get over time, but the risk was huge. 

And the autonomy that the bank had to call in the loan at any 

time and to require us to go through them for a number of our operations was just too restrictive. 

Chairwoman VELA ́ ZQUEZ. Any of the other witnesses would like 

to comment on that question? 

Mr. GATEWOOD. Also, ma’am, if I might, again, as I say, the credit card was our preferred means because if we paid on the terms 

of the credit cards, there is absolutely no finance charge. So our 

cost is minimal, if anything. 

Chairwoman VELA ́ ZQUEZ. Dr. Lahm, in contrast to traditional 

loans, most banks are willing to issue a credit card to a business 

without requiring personal guarantees, origination fees, or without 

taking a security interest in the business assets. What makes credit cards more open to these less restrictive lending terms compared 

to traditional loans? 

Dr. LAHM. I have found the irony in the fact that banks will not 

often provide traditional loans until a business is established with, 

for example, three years of operational history and a track record. 

But, yet, it is banks who will turn right around and with a signature provide a credit card loan for a substantial amount of money 

with no paperwork whatsoever as compared to exorbitant layers of 

process, accounting, and so forth, incurring costs for the businesses. 

And I think this explains why credit cards are so popular. 

I would say that credit card usage is very high with respect to 

personal credit cards. And those who sign both business and personal credit card agreements are, in fact, signing that they are liable for those as persons with Social Security numbers, with credit 

ratings, and so forth, which are subject to be damaged or, of course, 

enhanced positively if they perform in accordance with the bank’s 

expectations and reporting. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Dr. Walker, in the five years since the last Federal Reserve survey of small business finance, credit card use by businesses increased by 14 percent. During the same period, the use of personal 

credit cards by consumers increased by less than one percent. Are 

there factors associated with business use of credit cards that have 

contributed to this rapid growth? 

Mr. WALKER. Well, from my knowledge, business has not found 

any other alternatives at a price that they could afford. Even right 

now the prime interest rate is 5.25 percent. The typical credit card 

quotation yesterday was 13.4, more than 2 and a half times. 

And, yet, business cannot seem to find alternatives and particularly small business. That’s why I drew that contrast in my testimony because I think it is a good indicator of what small business 

faces when they go looking for funds. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now I will recognize Mr. Chabot. 

Mr. CHABOT. Thank you, Madam Chair. 

Mr. Spearman, I will begin with you if I can. You mentioned that 

H.R. 1537, the Credit Union Regulatory Improvements Act, which 

15

I support and cosponsored, would raise the business lending cap. 

Could you explain a bit more why this is important? And would 

lifting this cap increase credit card lending, do you believe, to small 

businesses? 

Mr. SPEARMAN. Yes. Yes, it would. It would increase credit card 

lending and would also create additional lending to small businesses as well. The cap is a statutory cap that was created in 1998. 

And at this point, our credit union is dangerously close to that particular cap. 

And since there is not necessarily a secondary market, much as 

there is in the mortgage business, where you can sell the mortgages and retain the servicing, there is no such established process 

here in the credit union industry at this point. 

So it will create a pull-back, if you will, of financial institutions 

that are at that level not to be able to offer additional credit. And 

at this point, like I said, our institution is facing that particular 

hurdle at this point in time. And I know many other organizations 

are as well. 

So it is a limiting factor. And it would also cause issues on credit 

cards, particularly those that are larger credit cards, say credit 

cards in advance of a $50,000 to $100,000 level. 

The way the policy works is as long as the credit limit is at that 

level, we have to account for that for the cap. Whether the balance 

is used or not, it is the limit that is counted. And that obviously 

could cause a problem, and it has caused some problems there. 

So we are anxious for relief and continue to work on that, but 

it is an issue that we are facing. And I know many of my colleagues 

are facing that as well. 

Mr. CHABOT. Thank you. 

Mr. Rosacker, what standards do most banks use to evaluate the 

creditworthiness of prospective small business customers? 

Mr. ROSACKER. Well, I think it depends, obviously, significantly 

on the type of business you are going into and where they are going 

to be doing their business. But I think traditionally community 

banks use the same criteria. You are looking at the capacity of the 

borrower, the creditworthiness of the borrower, their business plan 

and when their break-even point is going to be and what does their 

business plan look like, and who they are going to do business 

with. Are they going to do business with a certain segment of the 

economy that is very susceptible to big swings in the economy or 

big swings in the business? 

So there is no cut and dried criteria, but there is an overall review of the entire business plan. And strategic plan of the small 

business owner is very important. 

And I think that banks as a rule try to find ways to say yes. 

That community banker lives and breaths that small entrepreneur 

in this community. And, as I keep saying, it’s that relationship that 

goes in. 

I think a good example of that is a young lady that graduated 

from the University of Minnesota with a degree in architectural design and focused primarily on landscape design. She had excellent 

credentials but no idea on how to develop a business plan, how to 

do things. 

16

She worked with a community banker in Minnesota. They developed a business plan. They got her incorporated. They did all of the 

work for her and with her and set up a line of credit with her. So 

it’s a total relationship. 

Mr. CHABOT. Thank you very much. 

Mr. Gatewood will be next, if I can. Your written testimony said 

that credit cards give you and have given you the flexibility and 

fund availability you need to operate, particularly compared to traditional lines of credit. Would you elaborate on that just a little bit? 

Mr. GATEWOOD. Yes sir. Our credit cards give us a term to pay 

or a length of time to pay from the time we borrow the money. In 

my business, which is federal government contracting, I have to 

turn around my money pretty quickly. It’s sometimes tough getting 

paid from the government. 

The banks don’t give us any flexibility. They have certain days 

you have to pay. And if you don’t, you start incurring interest rates 

and sometimes fines and so forth and so on. And, of course, you 

risk default. 

I appreciate Mr. Rosacker talking about community banks, but 

we don’t deal with community banks here in Washington, D.C. We 

deal with some of the nation’s largest banks. And they are not 

warm and friendly, not at all. So they have a huge risk aversion. 

And over the lifetime of my 19 years in business, we have really 

had a hard time dealing with banks. 

The banks have a set date that that money has to be paid. And 

there is no flexibility whatsoever. So we stay away from them. We 

have gone, if I might say, in the federal government contracting 

community—and this is no kidding. As a matter of fact, some of 

you may have seen my e-mails to the Senate and the House. It’s 

444 days without getting paid by the federal government, 6 months 

oftentimes. 

I am not saying that American Express tolerates any tardiness 

or that the other credit cards we hold, Visa and MasterCard, tolerate any tardiness, but they have customer service reps that work 

with us that understand our business. And they know they are 

going to be paid. And that is a huge flexibility for small businesses 

supporting the federal government community. 

Mr. CHABOT. Thank you very much. 

Dr. Walker, you have researched business start-ups all over the 

world. Is it common in other countries to use credit cards to begin 

a business and perhaps to expand business as well? 

Mr. WALKER. From what I know, this is really just beginning, 

that lots of the rest of the world is observing the fact that so many 

successful small businesses in the United States have begun this 

way and people looking at it and thinking, gee, this may be a 

source of credit they never imagined. 

Also banks in many other countries really are just beginning to 

make loans to small business and used to depend on what we call 

informal investment, meaning other investors, friends of the entrepreneur as well as the entrepreneur’s family. 

Mr. CHABOT. Thank you very much. 

And, finally, Dr. Lahm, has the recent economic uncertainty and 

tightening of credit in the financial markets resulted in small busiVerDate 0ct 09 2002 14:25 May 22, 2008 Jkt 033615 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\41332 LEANN
17

nesses using credit cards more frequently? And do you anticipate 

that that would be true in the near term? 

Dr. LAHM. I would not have access to usage rates as of the last 

several months. Most of the data that I have utilized has been from 

earlier reports, Census reports, SBA reports, NFIB reports, and so 

forth. 

However, I am convinced that the credit card industry itself can 

tell you where you had dinner last night. They know exactly where 

you are, what you are spending, what you are doing, and I don’t 

believe that there are any illusions about their ability to do data 

mining. And they could certainly address your question very specifically if asked. 

Mr. CHABOT. Thank you. 

Let me follow up with one more question, then. You once wrote 

that there’s not a lot of academic research on the use of credit 

cards by entrepreneurs, despite the fact that there is widespread 

use of financing with them. Is this still the case, to your knowledge? 

Dr. LAHM. I believe so. I can explain why if you are interested. 

Mr. CHABOT. Yes. Sure. 

Dr. LAHM. I don’t believe that it is very sexy to study the 

landscaper who has five persons on a work crew as compared to 

some Silicon Valley start-up. Obviously when university researchers, who are independent thinkers, of course, conduct their research, they may be influenced by other factors, such as the fact 

that larger businesses that are established have better data sets. 

A landscaper might keep very minimal records. 

Nevertheless, the problem is that these zero-employee businesses 

are extraordinary in their numbers. It is the vast majority of all 

businesses. But I don’t think that they have been given proper attention as yet. I believe this is changing. 

Mr. CHABOT. Thank you very much, Doctor. I yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Gonzalez? 

Mr. GONZALEZ. Thank you very much, Madam Chairwoman. 

I want to start off with a couple of observations. And the first 

one is that we have got credit card issuers in the form of independent and community bankers and the credit unions when we 

price should have, the Chase people here, the Bank of America, 

and so on, because they probably are the ones that have the greatest percentage of credit card holders and users and so on. But, nevertheless, we do appreciate you being here. But I think that you 

probably represent what are the better practices out there by those 

that issue credit cards. 

Dr. Lahm and Mr. Walker, I want to cover a couple of basic 

points. The first one is—and we’re not here to cut off any avenues 

or to access to capital and credit cards very legitimate, prudently 

used, and so on. I think what we are trying to explore is what is 

there the disproportionate use, why isn’t there as great an effort 

by the lender to go with traditional forms of capital and financing 

and so on because there are some disadvantages associated with 

credit card use. 

So the first principle I would like to establish is, is the risk so 

great with a small business man or woman that it does not allow 

a lender to promote and extend traditional lines of credit? And I 

18

will start with Dr. Lahm and very short because I have got another 

one, and it will lead up to something else. 

Is the risk just so extraordinary out there that the lenders just 

can’t really treat them as they would, let’s say, someone like a Bear 

Stearns? 

Dr. LAHM. Well, I believe one of the points you raised in your remarks kind of does suggest that there are differences among lenders, the community bankers, for example, that we are dealing with. 

Those who I know personally I recognize that they do build their 

businesses on relationships, they get to know their clientele, they 

understand these individuals, they may have gone to church with 

them or otherwise been members of a community over a long period of time. And they’re in a capacity such that they can assess 

and get to know, if you will, who it is that they’re working with 

and they can have a very close working relationship. 

The large institutions, though they may attempt to claim that 

they have some warmth or fuzziness, still don’t get it. Even as marketers, I get letters from banks. And I love this one, ‘‘Your personal 

banker,’’ but there is no signature. 

[Laughter.] 

Dr. LAHM. So go figure. So I do think that there are differences. 

And I do think that at the credit union, community bank level, relationship bank level, that the lending field is quite different in 

terms of the model. 

I do know that in terms of the large credit card issuers, one of 

the things that changed, actually came from academic research several years ago, some earlier researchers decided to look at the relationship between someone’s personal habits and creditworthiness 

as compared to the likelihood that they might be a good borrower 

for credit cards that are labeled as business credit cards. 

While I didn’t think that that was rocket science and didn’t necessarily require empirical research, not to be disrespectful of the 

researchers, I think it is pretty evident that if someone wants to 

pay as a matter of practice in his or her personal life, that they 

are likely to carry that value system with them in their conduct of 

themselves in a business capacity. 

Mr. GONZALEZ. I would agree with you. 

Mr. Walker, does the risk just outweigh traditional products out 

there, the availability? 

Mr. WALKER. I am afraid that it does, Congressman. And I can 

tell you from my own family’s experience that if we had bad weather on what’s called Black Friday, the day after Thanksgiving, on 

that one day, that meant that our business did not make a profit, 

no matter what else we did. 

The small firms just don’t have the ability to go to the market 

for funds. And, of course, even though the law says that no bank 

is too big to fail and the implication is that no firm is too big to 

fail, the footnote in those laws says unless it would have a negative 

impact on the whole economy. And so I think it probably is too 

much. 

Mr. GONZALEZ. I guess my point is that it seems to me that everything mitigates against the lender really making a concerted effort to have traditional types of loan products out there for businesses. 

19

And let me just start by the fact that the interest rates can be 

charged are drastically different, my understanding, in a credit 

card setting, as opposed to the traditional loan. The fees, the penalties, all of that is extraordinary as far as the exposure to the 

business person. 

And I think, Mr. Walker, you are exactly right, the old thing 

about too big to fail. When it comes to small business, it’s probably 

too little to matter. And I think that is what we are trying to get 

at here with the small business with the Committee and trying to 

figure out why the over-reliance on credit card type of financing or 

access to capital. 

I think one reason is because it is so profitable. And so I am 

going to ask both Mr. Spearman and—I’m sorry. I can’t make out—

how do you pronounce this? I can’t make it out. 

Mr. ROSACKER. Rosacker. 

Mr. GONZALEZ. And I don’t know what it is for the community 

or independent bankers I have such great respect for, so different 

from my big banks. And, of course, my credit unions have more 

credit union members in my district than probably anywhere else 

in Texas. 

The question is—and I’m trying to see how diplomatically I can 

put this—do you all expend the same amount of money and effort 

in extending to the small business man and woman loan products, 

access to capital as you do in promoting credit cards? 

Mr. SPEARMAN. We do spend more time in providing input into 

business loans. In our situation, the credit cards become more—

they are certain a credit value for our credit cards in the credit 

union operations and our—they end up being more of a transaction 

to them. 

The credit card is used mostly in most cases of managing the operation. In many small businesses, the office for the small business 

is the vehicle. I have seen it up PC set-ups, cell phones. And they 

conduct their business from their vehicle. 

So the credit card, while it provides a credit limit, our maximum 

credit limit in our portfolio is something like 30 or 40 thousand dollars. It’s very small. So the credit portion of that vehicle is really 

a small piece of what they are using the card for. They are using 

it for transactions. 

And I think, as the Committee’s information research showed, 

about 60 or 70 percent of the small business credit cards get paid 

off every cycle. And so it becomes a vehicle for them. 

We do sit down. And in our situation, we do provide term loans, 

vehicle loans, lines of credit of 100,000. And many of the clients 

that we have start with the credit card. And then we develop relationships with them for these lower-cost capital situations. And I 

would assume the community bank situation would be the same, 

but I will let Mr. Rosacker. 

So we do do the traditional financing for our small businesses. 

The credit card becomes a small important piece, but it is part of 

the whole puzzle for the process. 

Mr. ROSACKER. I will address the same question, maybe coming 

at it from a little bit different angle. But I do agree that on the 

credit card side, 80 percent of our portfolio pays off every month. 

So it is an interest-free loan. 

20

On the other side, on the traditional products, one problem arises 

out of the fact of how the regulatory agencies look at market segments. When one market segment goes bad, the entire country is 

bad. 

So you get a knee-jerk reaction many times that the banker says, 

‘‘Wait a minute. I am not going to go down that road anymore because of the regulatory issues that the entire world has gone sour 

in a certain market segment.’’ And that’s not true. It is far different 

in California than it is in Virginia and Minnesota as it is in Texas. 

But also banks would like to use or have more access to the SBA. 

And the SBA, the Small Business Administration, does not make 

it real easy for banks to get access to capital and funding and guarantees of loans. The fees have gone up dramatically. So a lot of 

bankers can’t sell that. And the red tape and the bureaucracy are 

terrible. 

So if there were a better streamlined method to use the SBA, the 

community banks would certainly use that route, which is a traditional route to go. But that is one area that needs to be addressed 

because it is a real cumbersome thing to do. 

There are many small community banks that will not even—

there’s nobody even in the bank that knows anything about SBA. 

Mr. GONZALEZ. Thank you very much, Madam Chair, for giving 

me the additional time. 

Chairwoman VELA ́ ZQUEZ. Mr. Akin, do you have any question at 

this point? 

Mr. AKIN. No, I don’t have a question at the moment. 

Chairwoman VELA ́ ZQUEZ. Thank you. Thank you, 

Mr. Johnson? 

Mr. JOHNSON. Thank you, Madam Chair. 

Mr. Spearman and Mr. Rosacker, what percentage of your small 

business customers using credit cards for business purposes pay 

their credit card balances in full each month ? 

Mr. SPEARMAN. The percentage? About 70 percent. 

Mr. JOHNSON. At your bank? 

Mr. SPEARMAN. At my—

Mr. JOHNSON. At your credit union? 

Mr. SPEARMAN. Yes. 

Mr. JOHNSON. And how about you, Mr. Rosacker? 

Mr. ROSACKER. As I said, about 80 percent. 

Mr. JOHNSON. Eighty percent? In 2005, Congress passed a bill 

that made filing for bankruptcy more difficult and more expensive. 

The credit card companies strongly supported this legislation because they claimed that borrowers were being reckless with their 

credit and then filing bankruptcy to avoid paying their debts. 

These companies argued that credit card fees would decrease when 

bankruptcies decreased because individuals would not be able to 

avoid paying their debts by filing of Chapter 13. As a result, there 

would be less risk to the credit card companies in interest rates 

and fees would decline. 

This has not happened, however. Bankruptcies have fallen precipitously by 62 percent between 2004 and 2006, but credit card 

rates have not. 

Given this seeming disconnect, why is it necessarily the case that 

regulating this increasingly consolidated industry would increase 

21

credit card fees? And this is for anyone on the panel that may want 

to respond. 

Mr. ROSACKER. Well, I will take a stab at it from the standpoint 

of we are talking about small business here and individuals are 

significantly different. In the small business world, the use of the 

credit card, again because 80 percent of ours pay off, they don’t pay 

any interest. And our fees are traditionally well below the market 

value. 

Again, they are our neighbor. They are our friends, not that you 

are giving them anything preferential, but that is just the way the 

community bank is. 

We operate on a one to two to two and a half percent margin, 

much smaller margin than the large credit card issuers. Again, it’s 

a service that we offer, but it isn’t our profit-making service. 

Mr. SPEARMAN. Yes. I will try to answer that as well. We do I 

think recognize a number of studies that have been done on the 

credit card industry regarding credit card rates and the credit 

union industry as being one of, if not the, lowest. I think the average rate credit unions charge nationally is around 11 percent. 

So we have always been, I guess, the low-cost provider. We are 

maybe underwriting the credit cards a little more carefully in the 

beginning. Yes, bankruptcies have subsided a little bit, but now 

with economic situations and pressures, we have seen the blip up. 

But we are very, very competitive with rates. We don’t charge 

those fees, and we provide a very competitive product. 

Now, to exhibit the result of this, our credit card portfolio has actually grown over the last five years, in spite of the competition 

that everyone receives in their mail every day. Our portfolio—and 

I think people have read our fine print and have not found any surprises in our fine print. And that is why our portfolio has grown. 

So we offer, we think, a very, very competitive product and a fair 

product for our members. 

Mr. JOHNSON. All right. Have any of you experienced or seen 

predatory credit card lending to small businesses? And if so, what 

form has it taken? And if not, can you explain why not and if you 

anticipate predatory lending becoming a problem for small businesses in the near future? 

Mr. ROSACKER. I don’t think on the small business side the community banks have—they’re not into that. I mean, it would not be 

to their best interest to have any hidden things in their agreements 

and be in the piranha and predatory mode because of the other relationships that they want to build. 

And I would think, Bill, you would be the same way. 

Mr. SPEARMAN. Yes. We still actively engage in the credit card 

programs for small business. We offer a very competitive rate. I 

think right now the actual rate for a business account is 11 percent, which is I think an extremely fair rate. 

Mr. JOHNSON. Well, neither one of you would argue that predatory lending in the credit card industry is nonexistent? 

Mr. SPEARMAN. I would agree. There is predatory lending out 

there. We can only speak for the industries that we represent. 

Mr. JOHNSON. How extensive is it, do you think? 

Mr. SPEARMAN. I don’t know if I could really answer that from 

our perspective. I don’t have the data to be able to identify that, 

22

but I have read and understand that there are some issues out 

there in that regard. But I can’t speak to our industry in that regard. 

Mr. JOHNSON. Dr. Lahm, do you want to jump in? 

Dr. LAHM. Yes, sir. I don’t know what we want to call predatory 

lending in terms of a definition, but if someone is late, they get a 

late fee. That is the least of their problems, whatever it may be, 

$35. They tend to be tiered based on account balances held. But 

when a revolver is late and when they incur a late fee, that is just 

the beginning. The next thing is 30-something plus interest. 

I don’t know what rate we are going to call legalized loansharking, but I think we are certainly pushing it when we get into 

30-something plus interest. Maybe we’ll just call it 40. When they 

get to 40, we’ll call it official legalized loan-sharking. 

But 35 percent, as I had read in my earlier testimony, quoting 

a government report, 35 percent of account holders were charged 

late fees in 2005. So there’s a tremendous number of big banks, in 

particular, accounts that are suffering through these sorts of practices. 

Mr. JOHNSON. Thank you. 

Mr. GATEWOOD. Congressman, I think that, actually, the late 

fees have gone up dramatically, but the rates on the credit cards 

have come down a bit. If you compare, for instance, the rates on 

the credit cards have come down faster than the prime rate over 

the last couple of years. And I think what they are doing is making 

it up in fees. 

Mr. JOHNSON. There has got to be a profit motive to it and a 

profit—

Chairwoman VELA ́ ZQUEZ. Time has expired. 

Mr. Ellsworth? 

Mr. ELLSWORTH. Thank you, Madam Chair. A lot of the questions 

that I have been asked a couple of different ways already. I would 

like to ask—we just heard some testimony mentioned of the SBA 

and its effectiveness. 

Do any of you have any suggestion on how we could make that 

in Congress more effective, one, the SBA, just your shoot-from-thehip reaction? What can we do in this Committee to make that more 

effective for you all? 

And, second, just the ones, twos, and threes of how do we make 

credit cards more effective for the small business owner? What is 

a good way? What can we do in this Committee and this Congress 

to make the use of credit cards more? 

I was very interested in the interest rate. I think Dr. Lahm just 

answered my question about the interest rates because I get a lot 

of calls on that but how the SBA could be more effective. 

And so you all just start wherever. 

Mr. ROSACKER. Since I brought it up, I will take a shot at it. I 

think from the community bank standpoint, they are not big organizations. They don’t have deep staff. Their lending people are ag 

or commercial-orientated. 

Streamlining the process so they can get at the SBA and get the 

loan application in. Get rid of the red tape and some of the fees. 

Make it easier. Most community bankers now shy away from the 

23

SBA. I don’t know in our part of the country—and our bank covers 

about 11 states. 

We have even seen a program put on by the SBA telling us about 

programs and things that they are doing. I mean, they are not out 

there. They are missing in action. And I think that would be a big 

help. 

Streamline the process and then educate us on what you can do 

and can’t do and won’t do. Don’t forget years ago the SBA was very 

active, but they have slowly drifted away. And now you have new 

young loan officers that have never seen the SBA and don’t know 

what it’s all about. That would be my response, a knee-jerk reaction. 

Mr. ELLSWORTH. Thank you. 

Mr. SPEARMAN. If I could comment? While I agree with Mr. 

Rosacker’s comment on it, we have a couple of SBA loans. Our 

member business loan officer is familiar with them but, frankly, because of the tedious nature of the process sometimes shies away. 

I certainly would support an increase in SBA lending with a 

streamlined process. 

And I guess I would suggest that we taken action on H.R. 1849 

introduced by Chairwoman Vela ́zquez and move on that issue. It 

is an important tool that we have. We received education years 

ago. Programs have changed. We don’t see the SBA people. We 

don’t have contact with them. 

I think it is a valuable tool. I really do think that it is a valuable 

tool. I would like to see us use it more. And I would encourage the 

Committee to do whatever they could to push that along. 

Certainly we are an approved lender. And we would certainly 

want to include that product in more and more opportunities with 

our member businesses. 

Mr. GATEWOOD. Congressman, I sought a small business loan for 

my wife’s partnership. And inquiring of banks in the Washington 

area, Washington, Maryland and Virginia, close in, I found that if 

the loan was going to be an SBA guaranteed loan, then the rate 

would be at least 50 basis points higher because of the cost of dealing with the SBA process. And I am quite sure that is not what 

the Committee intends and it is not what any of us as public policy 

interest would prefer, but I think that is the fact. 

Mr. ELLSWORTH. Thank you. 

I don’t want to start a fight with the two gentlemen from the 

end, but I know Mr. Chabot brought up the curiae legislation. Does 

the Community Bankers Association have a position on curiae? I 

know that when I talk to bankers and credit unions back home, 

you know, it seems to be a little bit of a sticky point, to say the 

least. 

[Laughter.] 

Mr. ROSACKER. Can’t we all just get along? 

Mr. ELLSWORTH. I was going to say, if you want to switch chairs 

before you answer this, that is okay. 

Mr. SPEARMAN. No. That is all right. He has no sharp objects. 

[Laughter.] 

Mr. ROSACKER. The community bankers have always taken the 

position that we oppose expansion of powers, et cetera. And that 

has been our history, and that is our position today. 

24

So yes, we would be opposed to some expansion of that as we 

move forward. 

Mr. ELLSWORTH. Don’t turn the microphone off now. 

[Laughter.] 

Mr. SPEARMAN. We disagree. We would argue that the enhancements in the bill are very, very important. They include the riskbased lending process, which I think puts us on equal basis with 

all financial institutions, modest increase in the member business 

lending areas, and a number of other things that would actually 

help us serve under-served areas and things of that nature. 

So we strongly obviously support the bill, respect the community 

bankers in what they do in their communities. And so that is the 

counterpoint on that. 

Chairwoman VELA ́ ZQUEZ. Time. The time expired. 

Mr. ELLSWORTH. Thank you very much. 

Chairwoman VELA ́ ZQUEZ. Mr. Sestak? 

Mr. SESTAK. Thanks, Madam Chairwoman. 

Just a question. Mr. Gatewood, I am really taken by your written 

testimony. I wasn’t here for your spoken testimony. It really speaks 

of kind of what America is all about. You know, here you are. You 

knew by your effort, you say, that you’re going to make it. So you 

with prudence used probably an abnormal but, nevertheless, an accessible form of risk, so to speak, access to capital, and use that 

to have float time, as you describe it. 

I guess my question is more—I mean, I really am taken that this 

is neither inherently good nor bad, credit cards using for business. 

I am more taken that oversight or transparency in education and 

preventing ill use of it, I am convinced of that. 

But I guess my question would have to do maybe just a little different. I am more concerned about people being less, like Mr. 

Gatewood here, be more risk-averse. 

Yes, a credit card use is going up, but SBA’s access to capital is 

going down. Health premium has gone up 70 percent. You know, 

people not going to small companies are going to big companies because they still, by and large, give health security to some degree. 

Do you see this risk-averse, independent almost, credit card 

usage? Because I think I got enough from that. Do you see any of 

this in people who are even coming? Is there an impact that you 

are seeing as the SBA comes down, as the economy comes down? 

Yes, more go into credit cards maybe, but is there more of a 

sense of a difference of this entrepreneurialship you see and I think 

emblazoned in you? 

And I guess that is really more of a question for the community 

bankers and credit unions. 

Mr. GATEWOOD. Well, yes. As far as risk aversion is, let me just 

be quite honest here. I hear the congressmen talk about the predatory lending. No one is a victim unless they want to be a victim. 

First of all, business people, entrepreneurs as such, have a responsibility to function responsibly. Good business people understand what they are getting into or they shouldn’t be in business, 

first of all. 

So I, for one, don’t have a lot of feelings for people that recklessly 

use credit cards or any form of lending. 

25

Mr. SESTAK. I guess mine was more of a strategic type of take, 

not so much on the credit cards, because I think I got enough out 

of the testimony and the great questions that are—

Mr. GATEWOOD. Right. 

Mr. SESTAK. I am just wondering about what you see, particularly down at that end of the table, about small business people 

coming forward to invest with their time and a bit of risk as they 

reach for capital to do what you did. That’s kind of what I am curious about, the state of the risk taking, so to speak, out there in the 

economy. 

Mr. GATEWOOD. I think it is dependent upon the person and 

what they have and what they can afford to give up as collateral. 

I had absolutely no collateral, and the banks wouldn’t talk to me. 

So I had to take the risks I had. 

I will tell you right now coming from a minority business community at the same time, oftentimes we’re just turned out flat basically from where we come from. 

Mr. SESTAK. How about the institutions? Because they all come 

to you. 

Mr. ROSACKER. I can respond to it this way. The entrepreneurial 

individual is a risk taker from the start. And I think that is what 

has built this great nation. We were all risk takers at one time. 

And I think bankers, contrary to the popular belief, we are risk 

takers. Community bankers are the only people that bet their personal net worth that that entrepreneurial is going to succeed. And 

their personal net worth is in the value of that bank, their franchise value. 

So they are risk takers, community bankers. But when you look 

at how that risk is assessed, when you are looking at a traditional 

bank business loan, the regulatory agencies look at it differently 

than they do a credit card loan. 

They look at a credit card loan from the consumer side. Is the 

application filled out properly? Is the closure statement sent? And 

are they reminded of those terms annually? 

Mr. SESTAK. If I might, what about the person who walks in the 

door? All your years you have been involved in this, for the two of 

you, have you seen less people willing to be like him? I am more 

interested in the trends right now. 

Mr. ROSACKER. No. 

Mr. SESTAK. You are saying you are still seeing the same type 

or the breadth, not just the individual but the breadth, willing to 

take? 

Mr. ROSACKER. I would say so because we are all community 

bankers. And in that town of 500 people, 300 people, businesses are 

dying, but there is somebody else willing to take the hardware 

store business on or be it the gas station fellow or the auto body 

repair store, the implement dealer. 

There are always people walking in. They want a certain lifestyle 

of living in a community, and that is their way of doing it: staying 

in the community and starting a business. No, I don’t think it has 

dropped off at all. 

Mr. SESTAK. If I could, if you don’t mind, Mr. Spearman? 

Mr. SPEARMAN. Thank you, Congressman. 

26

Yes, I would agree with Bill on that. We are in the business of 

managing risk, not risk-averse. Because of the—

Mr. SESTAK. I am not worried about you. I am worried about the 

person coming in the door. 

Mr. SPEARMAN. Yes. And we have no problems with people walking in the door. Simply because of the fact in our area that IBM 

went away a number of years ago, many of the folks stayed in our 

community and started small business. 

So all the business in our community, to be frank with you, is 

small business. So we have a tremendous amount of demand for 

that type situation. And that’s relevant, again, to the member business lending cap. We have no scarcity of people coming in with innovative ideas, some well-thought-out, and some very, very successful stories, just even based on our portfolio. 

Mr. SESTAK. Thank you. 

Chairwoman VELA ́ ZQUEZ. Time has expired. 

Mr. Cuellar? 

Mr. CUELLAR. Thank you, Madam Chair. 

I have been a small business. I was in the import/export business. And I never used credit cards for a way to finance. I went 

to a bank. But I know of friends of mine that it was so easy for 

them to go to a credit card and use the credit card for financing. 

Part of the reason has been mentioned already, ‘‘Oh, you know, 

you’ve got to go to SBA, so much paperwork.’’ They’re going to say, 

‘‘No’’ for whatever reasons have been mentioned. And it’s just the 

process is so long. And it was a lot easier to just go ahead and get 

a loan. And, of course, when they have to pay the high interest 

rates and when they have to pay all the fees, the late fees and all 

of that, they regretted that. 

But at the moment, they needed something to be done quickly. 

It’s the moment because you are under all the pressure to get this 

done and get some money available, get some cash into the business. 

So I guess what the Committee has been referring to is, how do 

we make this—you know, because there are a lot of steps. We know 

the SBA, the accessibility, and all of that, the paperwork. I mean, 

what is the easiest way to get this done? 

By the way, credit cards are a heck of a job at marketing. I 

mean, I think they know how to market. They know how to make 

it easy. And it’s on the moment when you need the money. And, 

like I said, I have been a small businessman. But, you know, I 

never used the credit cards for the business. I use it personal but 

not for the business. It is so easy to just go ahead and get something because on the moment you need the money. 

So, I mean, how do we make this? How do we make government 

more or how do we work with you to become more responsive? 

And I don’t want to get into curiae. You guys have done very well 

sharing the same mike together, but how do we get this competition? How do we make this more flexible? 

And keep in mind put yourself in the shoes of a small business 

person. They need this on the moment. They are not going to go 

and do all this paperwork unless if it’s a longer-term type of situation. I mean, you have got to put yourself in the shoes of the small 

business person. 

27

From anybody? 

Mr. SPEARMAN. Well, part of the thing that we didn’t talk about, 

we have identified our small businesses. And small businesses use 

business credit cards. What we haven’t talked about are the folks 

that are using our personal credit cards for the same reason. We 

don’t know that. So this is a lot of times—

Mr. CUELLAR. And they do that. 

Mr. SPEARMAN. I know they do that. 

Mr. CUELLAR. And they do that. 

Mr. SPEARMAN. And the point of view of education is if they were 

to come into the organization, a bank, mini bank, credit union, discuss what their plans are, I think we could handle it a lot better. 

But some of these decisions are made independently by the individual. And we have no idea. Perhaps even some home equity loans 

have been done in this regard. We have no idea because they have 

never come in to talk to us. 

Mr. GATEWOOD. And if I might add, sir, when I started my business, I had, I would say, maybe 13-14 credit cards. Sometimes I 

just paid the interest because I needed that lead time to become 

successful. I knew I could make it happen. 

And, in all due respects, you indicate you went to the banks. 

Well, many of us don’t have the capacity to do that. I came out of 

the Marine Corps, 21 years. I never had a bank account. I was 

overseas for 15 years of my 21-year Marine Corps career. I never 

had a credit card. I was unknown. 

Many of us who come from communities throughout the United 

States never had bank accounts. Our families never had money. I 

mean, I grew up on surplus food in the projects in upstate New 

York, you know? So nobody would look at me. 

The only way, the only way possible I was able to take this idea 

I had and move forward with it was to use credit cards. But I used 

them responsibly. 

I knew when my payables were coming in. And I knew that I 

would succeed over time. The banks would not let me in the door. 

Mr. CUELLAR. Right. 

Mr. GATEWOOD. They would not talk to me. 

Mr. CUELLAR. And you are hitting the point that I want to emphasize. As a former small business person, the import/export business and having a lot of folks on the border, you know, going to 

the bank, you know, bank, credit union, whatever it might have 

been, it was a lot easier just on the moment to move it, to go with 

a credit card. 

I didn’t do that, but, again, you put yourself in their shoes. So 

what do we do? And I guess it is more to you all. I mean, is there 

anything that can be as flexible as a credit card and not be the 

credit card company out there, but—

Mr. ROSACKER. I suppose we could develop that at the SBA or 

something. I think, like I said earlier, it is the streamlining of the 

application process and the reams of paper that go along with it 

and al of the disclosures and everything else that have to be made, 

not that that is bad unto itself. 

But, again, it is part of this whole regulatory burden. And if you 

could shift some of this, make it streamlined, and move forward 

with it, you know, make it a low-doc loan of some type, yes, more 

28

banks would use it. But it is not an easy process to go through 

today. 

And I can only say streamline. And I don’t have any particular 

examples of how I would recommend doing it, but that is it. 

Mr. WALKER. Congressman, I think that is why the home equity 

lines have become so popular, that essentially what you have is a 

line of credit. And when you want to use it, you write a check. 

The disadvantage, of course, to the institution is that it is an offbalance sheet liability. And they really have no control. If I have 

a line of credit of $400,000 and I have drawn down nothing, tomorrow the bank could have a $400,000 loan outstanding to me without me even telling them they have it. 

Mr. GATEWOOD. If I might before—because I don’t know what 

time we are going to finish, Madam Chairwoman. So I am going 

to take this opportunity, Madam Chairwoman and Mr. Chabot, 

Ranking Member, to thank this Committee, particularly under 

your leadership, ma’am, for what you are doing for Service-disabled 

veterans and veteran-owned small businesses. 

We need your help. We appreciate your help. And it is not only 

our veterans but our women in business and our minority-owned 

business. So I want to thank you for all of your initiative and leadership. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Dr. Lahm, do you want to answer? 

Dr. LAHM. Thank you. I would like to insert something. What I 

have to say will be a little bit fuzzy, but I think it should be a point 

that should be considered. Particularly the bootstrapper, particularly the students that I work with, one of the biggest problems is 

they don’t have know-how. 

You had an import/export business. I recently heard someone 

who has expertise in that area addressing some study that he had 

done, but basically 65 percent of all small businesses wouldn’t 

know where to turn to. They wouldn’t have a clue where to start 

should they begin pursuing an import/export opportunity, which, of 

course, is a huge opportunity. 

The point that I want to raise is that know-how is so critical. I 

know the focus of today’s meeting is capital itself, but if we have 

know-how, we don’t necessarily need quite as much capital. And 

that is one of the biggest problems, one of the biggest roles that 

the SBA could perhaps play. And this goes to one of the earlier 

questions asked at the end. 

Students don’t have know-how. They have all of these grand 

schemes. But they don’t know how to actually act upon it. So if you 

want to make the capital more efficient, make the people more efficient through their knowledge enhancement. 

Mr. CUELLAR. Thank you. Thank you, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. SBA has a network of small business 

development centers throughout the nation. And some of them 

partner with higher education institutions. The problem is that the 

funding for those has been cut in the last six years. 

The same is true with the fact that the cost of guaranteed loans 

has increased in the last six years at a time when there is a credit 

crunch. 

I understand, Mr. Gonzalez, you have more questions. 

29

Mr. GONZALEZ. Yes, Madam Chair. Just a couple of things. I 

think it has been so enlightening. And I surely want to pick up on 

something quickly. I think there has been by both the credit unions 

and the independent community bankers—and I call independent 

community bankers—to me they are one and the same—which represent, really, the old way of doing business, which I so appreciate 

because you still maintain relationships with the customers. 

But I think those remarks that maybe as great as 70 percent or 

some number of credit card holders actually pay their accounts on 

time or maybe in full. I know Mr. Gatewood—in full?—which then 

means that the other 30 percent have to be subsidizing that service, which then, in turn, means that you have to build in those penalties, those fees, and those interest rates. And I think it is undeniable. 

And I am not casting blame on you two particular lenders on it 

because I think, actually, where the abuses truly are and taking 

advantage of the consumer lies elsewhere. 

I think we set up ourselves a system where, yes, the prudent and 

the responsible, but even those that are prudent and responsible 

sometimes because of situations, circumstances beyond their control cannot make that payment, cannot pay it in full. And there are 

consequences. 

The interest that they are paying on that balance far exceeds 

what probably would be paid in a conventional loan instrument. I 

think that is undeniable. And I think we have to face this. 

If it is, in fact, free money for 30 days or whatever it is, like my 

American Express account, I have got to pay it at the end of the 

month. And it does really instill discipline in me, as opposed to, 

let’s say, my Visa or whatever it is account, which I don’t pay fully 

at the end of the month. 

So I understand it, but the problem that we have—and now this 

leads me into the last question, which is going to be posed to Mr. 

Walker and Dr. Lahm. And maybe it is just something I have 

struggled with and I don’t know if Mr. Chabot and the Chairwoman—I don’t think that Congressman Cuellar was here. 

But a couple of years ago or maybe more than a couple of years 

ago, we voted on a bill that made it impossible to discharge a consumer’s credit card debt. We thought at that time that was a good 

and prudent thing to do. We weren’t going to reward irresponsibility and so on. 

I will tell you that part of that debate did entertain that the 

lenders, the issuers, were going to do something else in return. We 

were going to look at interest rates. We were going to look at penalties. We were going to look at the fees. We were going to look at 

how you score. We were going to look at how you score credit and 

so on. 

We were also going to look at practices such as you may be paying your credit cards on time on two accounts, fall behind on another one, and it impacted those other two accounts. We were going 

to try to establish that you should set and ascertain one’s creditworthiness based on that relationship one on one and not necessarily with a third party. 

I will tell you now that never came to fruition. And I am going 

to ask Mr. Walker and Dr. Lahm, did Congress make a mistake to 

30

make it so incredibly difficult for the consumer to discharge credit 

card debt, which impacts small businesses? 

Mr. WALKER. I am not sure, Congressman. I have studied that 

history a bit, but I don’t really feel like I can contribute to that discussion. 

Mr. CHABOT. Would the gentleman yield? 

Mr. GONZALEZ. Of course. 

Mr. CHABOT. Thank you. 

I just want to make sure I understand what you are talking 

about. Are you talking about the bankruptcy reform bill when you 

say it made it impossible to discharge debt on credit cards? 

Mr. GONZALEZ. The way we set it up makes it nearly impossible 

to completely discharge. 

Mr. CHABOT. Okay. I guess when you say, ‘‘nearly impossible,’’ it 

depends on what you are really talking about because the bankruptcy reform, what it did is that you can discharge, just as you 

could before, except you have to go into Chapter 13. Most people 

qualify, you know, depending on the means test, how much your 

income levels are, et cetera. A whole lot of people can still fully discharge debt, including credit card debt. 

Now, if you have a job and you have certain income levels, then 

you have to go into Chapter 13, which is like a wage-earner test. 

The idea is that, rather than discharging all of the debt, if you had 

the ability to pay off some of the debt, that made more sense to 

everybody. So that is why a lot of—

Mr. GONZALEZ. But, see, you know, reclaiming my time, it is unquestionable, indisputable that we made it so incredibly difficult 

for the average consumer, businessman, businesswoman, to take 

advantage of bankruptcy laws that were there, actually, to take 

care of these circumstances. 

There is no doubt. And if you talk, even to your bankruptcy 

trustees, to the judges, and to the practitioners on both sides, the 

creditor side as well as the bankruptcy applicant, we have totally 

changed that whole universe. I think there is no doubt about that. 

So, Dr. Lahm, do you have an opinion on where we are in that 

state of the law? 

Dr. LAHM. Thank you. I yielded to my colleague to let him go 

first, but I do have plenty to say. I am not sure what the timer is. 

Let me just start by saying I am in favor of responsible borrowing and lending. And I think across this table and probably in 

this room at large, we are all in favor of people doing the right 

thing. 

The problem is that the bigger banks, in particular, are definitely 

plaything a game. I characterized their ′′or we may change their 

terms for no reason′′ as whimsical. I think that is a very fair statement. 

A lot of the bankruptcies if they are frivolous, well, you know, 

maybe they shouldn’t be, those who are filing should not be able 

to so easily discharge, but, on the other hand—and payback is kind 

of interesting. 

I personally have had dealings with the likes of MBNA. And I 

remember very vividly a few years ago a discussion in which I said, 

‘‘But we didn’t do anything wrong. Go pick on someone who has 

done something wrong.’’

31

This was a discussion about an adverse decision that had been 

made with respect to my wife and myself personally when we had 

missed no payments. And the little quip, which I am happy to repeat here today, was I said ‘‘Why don’t you go pick on someone who 

has done something wrong?’’

The quip was ‘‘Oh, we pick on them, too!’’ Well, I hope that is 

entered into this record. 

Furthermore, it doesn’t take much cruising of the Internet to find 

credit card company horror stories. Someone was on an automated 

payment system. The bank failed to deliver on time, no fault of 

their own. They were late. 

Years ago anyone reasonable would have taken a letter from the 

bank saying, ‘‘Sorry. We messed up this payment. Please know, 

credit card company, it was our fault. Let things go on as normal.’’ 

And someone would have accepted that. 

They don’t do that now. They are waiting for someone to be late. 

They want someone to be late. And they will just cream someone 

if they are late—one hour late. I have got a cite tip for that, which 

is in a paper. 

Chairwoman VELA ́ ZQUEZ. The time has expired. 

Mr. GONZALEZ. Thank you very much. And thank you for your 

indulgence. 

Chairwoman VELA ́ ZQUEZ. Mr. Chabot, do you have any questions? 

Mr. CHABOT. Yes. I don’t want to get into a huge discussion here 

about the bankruptcy law, but it was basically kicked around for 

seven or eight years in the Congress before it finally passed years 

ago. 

But the whole idea of the changes that did pass with considerable support on both sides, although it was mostly Republicans, but 

there were a fair number of Democrats who supported the change 

as well, the idea was we had some folks that were literally filing 

for bankruptcy on a fairly regular basis, every seven years. There 

were just a lot of abuses in the system. 

And that was causing the average household to have an extra 

cost of, I believe it was, 5-6 hundred dollars a year or something. 

Just stuff costs more because people weren’t paying for what they 

bought. They were just filing bankruptcy. So we were trying to do 

away with the abuses. 

And Henry Hyde was instrumental in this. He was the Chair of 

the Judiciary Committee, I believe, when this passed. And what 

Henry was trying to do was a lot of folks who clearly—it was a 

medical problem they had, loss of job. There were a lot of people 

who really needed bankruptcy. It was still there. They can still file 

and have all their debts discharged and get a fresh start. 

But for those folks that do have a reasonable income—and this 

is written into the law—reasonable income and able to pay at least 

a portion of their debts, why not have them over a period of a number of years try to pay off some of that debt so that that debt isn’t 

just hoisted on the rest of the consumer public? That was the idea 

of the bankruptcy reform. 

So I just didn’t want to leave unchallenged the fact that all debt, 

that credit card debt, is non-dischargeable now. That is just not the 

case. Some of the credit card debt is clearly dischargeable by those 

32

folks at lower income levels. Folks that have income and can pay 

off, some of that will be paid off. So I just wanted to put that out 

there. 

I yield back. 

Chairwoman VELA ́ ZQUEZ. Well, again I want to thank all the witnesses for participating today and for offering your insights on this, 

the issues at hand. And I ask unanimous consent that members 

will have five days to submit a statement and supporting materials 

for the record. Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 11:46 a.m., the Committee was adjourned.]

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