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S. HRG. 110–435

SBA REAUTHORIZATION: SMALL BUSINESS LOAN

PROGRAMS

ROUNDTABLE

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

May 2, 2007

Printed for the use of the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

BENJAMIN L. CARDIN, Maryland

JON TESTER, Montana

OLYMPIA J. SNOWE, Maine

CHRISTOPHER S. BOND, Missouri

NORMAN COLEMAN, Minnesota

DAVID VITTER, Louisiana

ELIZABETH DOLE, North Carolina

JOHN THUNE, South Dakota

BOB CORKER, Tennessee

MICHAEL B. ENZI, Wyoming

JOHNNY ISAKSON, Georgia

NAOMI BAUM, Democratic Staff Director

WALLACE HSUEH, Republican Staff Director

(III)

CONTENTS

Page

OPENING STATEMENTS

Kerry, The Honorable John F., Chairman, Committee on Small Business

and Entrepreneurship, and a United States Senator from Massachusetts .... 1

COMMITTEE STAFF

Ferko, Jacqueline, Professional Staff Member for Senator Snowe ...................... *

Wheeler, Kevin, Deputy Staff Director for Senator Kerry ................................... *

PARTICIPANTS

Ballentine, James, Director, Economic Development, Office of Government

Affairs, American Bankers Association, Washington, DC ................................ *

Coratolo, Giovanni, Executive Director, Small Business Council, U.S. Chamber of Commerce, Washington, DC ..................................................................... *

Crawford, Christopher, Executive Director, National Association of Development Companies, McLean, VA ............................................................................ *

Hager, Michael, Associate Administrator, Office of Capital Access, U.S. Small

Business Administration, Washington, DC ....................................................... *

Kelly, Kevin, Managing Director for Policy and Advocacy, Association for

Enterprise Opportunity, Arlington, VA .............................................................. *

Kwiatkowski, Christopher G., Senior Vice President and Manager of SBA

Lending for Popular Small Business Capital Popular, Inc., San Juan, Puerto Rico ................................................................................................................... *

Little, Morris ‘‘Mike’’, Chairman, National Black Chamber of Commerce,

Washington, DC ................................................................................................... *

McCracken, Todd, President, National Small Business Association, Washington, DC ............................................................................................................. *

Merski, Paul, Chief Economist and Director of Federal Tax Policy, Independent Community Bankers of America, Washington, DC ............................ *

Morrison, James, President, Small Business Exporters Association, Washington, DC ............................................................................................................. *

Phillips, Ronald, President, Coastal Enterprises, Inc., Wiscasset, ME ............... *

Robertson, Sally, President, Business Finance Group, Inc., Fairfax, VA ........... *

Rowe, C. Edward ‘‘Tee’’, III, Associate Administrator, Office of Congressional

and Legislative Affairs, U.S. Small Business Administration, Washington,

DC .......................................................................................................................... *

Sikes, Chris, Executive Director, Western Massachusetts Enterprise Fund,

Inc., Greenfield, MA ............................................................................................. *

Sullivan, Ann, Federal Legislative Consultant, Women Impacting Public Policy, Inc., Washington, DC .................................................................................... *

Wasser Gish, Joan, Principal Policy Progress, Newton, MA ................................ *

West, Dennis, President, Northern Initiatives, Marquette, MI ........................... *

Wilkinson, Anthony, President and CEO, National Association of Government

Guaranteed Lenders, Inc., Stillwater, OK ......................................................... *

Walker-Wilson, Greg, Executive Director, Mountain Bizworks, Asheville, NC . *

* Comments, if any, are located between pages 4 and 50.

Page

IV

PREPARED STATEMENTS

Robertson, Sally

Prepared statement .......................................................................................... 52

Sikes, Christopher

Prepared statement .......................................................................................... 54

Walker-Wilson, Greg

Prepared statement .......................................................................................... 56

West, Dennis

Prepared statement .......................................................................................... 59

COMMENTS FOR THE RECORD

Letter to Chairman Kerry from Harry C. Alford, President and Chief Executive Officer, National Black Chamber of Commerce ......................................... 63

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SBA REAUTHORIZATION: SMALL BUSINESS

LOAN PROGRAMS

WEDNESDAY, MAY 2, 2007

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, Washington, D.C.

The roundtable convened, pursuant to notice, at 10:14 a.m., in

room 428A, Russell Senate Office Building, Hon. John Kerry,

Chairman of the Committee, presiding.

Present: Senator Kerry.

Staff Present: Kevin Wheeler, Deputy Staff Director for Senator

Kerry; Jacqueline Ferko, Professional Staff Member for Senator

Snowe.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MASSACHUSETTS

Chairman KERRY. Thank you all very much. This roundtable will

start, and I really appreciate everybody taking time to be here.

I apologize for being a little late. I had to go to the Finance Committee just to weigh in because we have a concurrent hearing going

on there, and I just needed to be there for the beginning of it, so

thank you for your indulgence. I appreciate it. And because of that,

I am not able to stay here the whole time, but that is a normal

procedure with the roundtables that we have had.

Senator Snowe initiated the roundtable process here in this Committee, and I think it worked very effectively and has been a very

comprehensive and effective way of kind of giving people a chance

to talk a little more and have more of a conversation and get rid

of some of the formality of the hearing process itself. And we do

keep a record, and that transcript will be available. So there is a

record. But, on the other hand, there is just much more interchange and exchange and back-and-forth, and I think it becomes

a more effective way of helping to respond to people’s criticisms

and understand what we can get done and how to do it and maybe

sometimes even come up with some solutions that we would not

otherwise.

Also, I want to put it in the context that last year many of you

here today or many of your organizations have already testified or

submitted testimony, and you have helped us build a record, which

is what we need to do, with respect to the very provisions that are

in the small business lending reauthorization bill that Senator

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Snowe and I introduced yesterday. So the record has been building

for that. In addition, most of those provisions ought to look familiar

to you because they were part of the comprehensive reauthorization

bill that the Committee adopted last summer.

As you know, we ran into some—the only way to describe it is

what it is: We ran into sort of a rolling-hold/administration resistance to it, which I think was regrettable, and hopefully we can

avoid it this year.

I want to emphasize that Administrator Preston in his hearings

here agreed that that was not a productive way to proceed and that

we ought to just sit down and negotiate something. If we have a

difference, let’s sit down and talk about the difference and see if

we can work through it on a reasonable basis rather than just letting things languish indefinitely. And I think maybe the dynamics

here may have shifted a little bit since both the House and Senate

have changed control, and so there may be a slightly different attitude. I know the House, Nydia Velazquez, is adamant about some

of the provisions and wants to proceed forward on them. So there

will be a more coordinated effort here to try to do that.

Today’s roundtable discussion is really meant to complement not

only last year’s hearing, but also to complement the hearing that

we already held this year on the 2008 budget. That budget has

generated a lot of discussions regarding the microcredit programs,

and on a universal basis, from members on both sides, there was

a deep concern about the proposal to make the SBA Microloan programs self-financing and eliminate the technical assistance grants

and prime. So I would say it is a fair representation to say that

overwhelmingly members of this Committee were opposed to those

proposals, and so we need to really sort of examine where we are

heading there.

It also touched on the lender oversight and the need to lower fees

on small business borrowers and lenders. My experience has

been—and, you know, this is not a pet peeve with me. It is simply

a response to what we are hearing from the marketplace, from the

users—that these fees are too high. And I do not go to any meeting

in Massachusetts or elsewhere where small businesses do not tell

us that—and the lenders tell us that, too. It comes from both sides

of the ledger.

The bill that we introduced yesterday includes language to reduce the loan fees on borrowers and lenders, and a narrower

version of that provision, I want to remind everybody, passed with

the administration’s cooperation in 2004, when they succeeded in

taking the 7(a) loan program to zero subsidy. That was part of the

60 pages that were inserted into the omnibus late at night that actually cut out all but one Democratic provision from what had been

a bipartisan authorization bill.

So I hope—you know, however well intentioned, the law is not

working, and we need to fix that. The language that we have put

in does fix it. We think it does it in a way that would address the

lending industry’s concerns that any funding scenario provides efficient program levels and stability to the program, avoiding shutdowns of the 7(a) loan program or avoiding mandating restrictions

on loan sizes or types of loans, which becomes its own set of problems.

3

Now, I know the administration remains opposed to providing

any appropriations for that program, and so we have got to work

through this, folks. But, again, I reiterate, I hope we will work

through it by really talking it through and not going through this,

you know, blind process on the floor, which will incite my anger

and others’. There are plenty of ways to choose to respond. So I

hope that we can avoid that kind of response, and I assure you that

given the options available to us as the majority, we will respond.

But I do not want to do that. I would like to get it worked out. I

am a reasonable person. We are happy to try to find some way to

do it. But we need a good-faith effort to try to do that.

I might add that while the bill was introduced yesterday, I want

to emphasize for the record that there has been a significant

amount of time available to review the fee language because it is

almost the exact same language that our Committee adopted last

summer. It is similar to what the Senate passed as an appropriations bill in 2006. So there is no surprise here. There is no ‘‘God,

we need to study this. We have to take a while to know it.’’ We

have been through this one, folks.

And I might add, OMB has been wrong on calculating the subsidy rate for the 7(a) loan program for 13 out of the last 15 years.

So I really think reasonableness dictates that we ought to be able

to find the common ground on this one.

I know there will be some differences on a few things. One—let

me just mention very quickly—is the microlending program. I

would just quickly make the case that we put less than $30 million

a year into this microlending program, but we put $200 million into

microcredit programs internationally in 2005. We spent $56 for

microcredit programs in Iraq in 2006. And there is a request for

about $160 million for microcredit programs in 2007 as part of the

supplemental funding for the war in Iraq. So at the same time as we are struggling to get $30 million for

our own country for a lot of pockets of poverty in rural and urban

centers, we are putting severalfold back into Iraq to, you know,

frustration of a lot of people here. Not to mention the contradiction

of our Government killing microcredit programs because they are

‘‘too expensive,’’ even though the loans are repaid and they work

extraordinarily well, and as the Nobel Prize Committee is awarding

the Peace Prize to Muhammad Yunus for doing exactly that on an

international basis. It just does not make sense, folks.

And so I hope that we can find a way to include this in a cooperative, bipartisan way. You know, if it were super-profitable, obviously a whole lot of banks, big banks, would be doing it. But it is

not a loss. It is not a loser for the Government, and it fills a lot

of other structural, social, educational opportunity needs.

My final comment is on the 7(a) and 504 loan programs. They

provide 40 percent of the country’s long-term capital to small business, and we all understand the benefits. You know, with longer

repayment terms, the small business owner can spread out their

payments, reducing monthly costs. It leverages their working capital, their ability to succeed, and we have got to make sure these

programs are reaching those people who really need the financing.

And, there are two significant places for improvement in these programs. One is in the lending to minorities, and the other is in the

4

lending in rural areas. Those are two places that sort of leap out

at us. And loans to these markets have been proportionally stagnant or modest since 2001. We continue to hear a lot of concerns

that the 7(a) lending is largely consolidated in about 10 lenders,

and we need to make sure that smaller community banks have an

ability to be able to participate. We tried to address this in our bill

and look forward to your feedback today and, of course, of this session.

So I want to welcome on a personal note, if I can, Joan Wasser

Gish, who worked for me in Massachusetts, and did an extraordinary job. She is now a small business owner herself. And I welcome Chris Sikes of the Western Massachusetts Enterprise Fund.

Thanks for being here, Chris, also.

They have worked on an advisory committee regarding child care

and small businesses, and I just think it would be good to have

that discussion today and for people to sort of focus on how that

fits into the array of efforts that we make here to try to empower

small business people to be able to succeed.

So, again, I want to thank you all. I am going to ask Kevin

Wheeler of our staff to facilitate this roundtable, and Jackie Ferko

of Senator Snowe’s staff, and together they will manage this, as

they have in the past. And if other Committee members come, they

will obviously have priority in asking questions or engaging you, as

they might choose to do so. And if any of the staffs of members

have any particular questions, please just put them in through

both Kevin and Jackie. We invite you to do so. We want this to be

a free-flowing, open effort to get the best information that we can.

So, again, thank you all very, very much, and I hope that we will

have a good record here today that will facilitate our ability to

mark up the reauthorization bill on May 16th and pass it out of

the Committee and on to the full Senate. And we really look forward to every member’s full participation in this so that we do not

wind up at the markup with people feeling somehow that they have

not had a chance to explore amendments or possibilities. So we

look forward to it.

Thank you all very, very much. Kevin?

Ms. WHEELER. The agenda says that we will go ahead and start

with the Microloan program, and out of courtesy to the SBA, we

will let them make their proposals first from their legislative package. And we will allow the participants at the table to comment on

them and to also offer their proposals.

Tee or Mike? We are so informal that we will just use first

names here.

Mr. ROWE. Well, thank you, Kevin.

Chairman KERRY. The record actually needs to know who

the——

Ms. WHEELER. I am sorry.

Mr. ROWE. Yes, Tee Rowe. I am the head of Congressional and

Legislative Affairs at the Small Business Administration. Good

morning, everyone. Thank you, Senator Kerry, very much.

I think the Senator has pretty ably summarized SBA’s proposal

for the Microloan program; that is, the administration believes it

would be effective for the subsidy of the program to go to zero by

raising the interest rate on the program, which is currently two

5

points below the Federal cost of funds, to slightly above the Federal

cost of funds, to, I think, 1.06 percent above. This will enable the

program to be self-funding and essentially have an open-ended

funding stream for any and all microlenders interested.

At the same time the administration is proposing that technical

assistance be provided through our existing technical assistance

providers—Women’s Business Centers, SCORE, Small Business

Development Centers.

That is a pretty straightforward summary. Thank you.

Ms. WHEELER. You know, may I just add, many of you have participated in roundtables before, and I forgot to say—we are so familiar—that I forgot to add that if you would like to speak or respond, turn your cards on their side, and then we will call on you.

So would anyone like to——

Chairman KERRY. Let me just sort of ask an open question and

some of you can dig into it. What do you say to the sort of universal

response of the members and the people we represent that this begins to be counterproductive, works against the purpose of the plan

itself? I mean, I understand the market concept, and I understand

the constraints we all operate under. But just from a practical, operative, in-the-field reality, how do you respond to this notion, you

know, you are kind of giving to Peter and you are taking from

Paul. You are giving us here, and you are taking over here.

Mr. ROWE. Well, Senator, to some extent I agree with what you

are saying there. I think, however, we cannot view this in a vacuum. I think it is clear, if you ask the other participants—for example, I know Mr. Wilson in North Carolina accesses at least four

other Federal funding streams. And what we are looking at here

is a larger question of how much and where does the Federal Government support microenterprise. Is there a need for us to begin

to coalesce these various programs?

Chairman KERRY. What other funding streams are you including?

Mr. ROWE. There is CDFI, Rural Business Enterprise at the

USDA; there are at least several others at HHS, CDBG funding.

Chairman KERRY. CDBG is really——

Mr. ROWE. Yes, it comes through HUD, because for a number of

microenterprise providers, that is a significant source of funding.

Chairman KERRY. So you are going to count a Medicare payment? Are you going to count a child deduction? Are you going to

count all those others and put them on the table and say that is

too much?

Mr. ROWE. Well, what I am talking about, Senator, is the various

funding streams that go to the microenterprise lending institutions,

the various forms of grant assistance.

Chairman KERRY. Only those in microlending.

Mr. ROWE. Right.

Chairman KERRY. And you feel that in the conglomerate, those

microlending grants from various sources are somehow overly generous?

Mr. ROWE. Not overly generous, but I think what we are looking

at is: Has there been a diffusion of effort? Is it possible that while

supporting microenterprise, we are probably overly broad in our

various outlets.

6

Chairman KERRY. Does that mean we are too generous——

Mr. ROWE. I do not think it is a question of being too generous.

I think——

Chairman KERRY. Are we overly effective?

Mr. ROWE. I think it is more like looking at your bills, and if you

had five different ways of paying your electric bill, you would say,

Why am I not just simply paying one source?

Mr. SIKES. Good morning. I am Chris Sikes. I am the executive

director of the Western Massachusetts Enterprise Fund, and thank

you, Senator Kerry, for all the support you have given us through

all these years, where you are the Ranking Member or the Chair

for small business and microenterprise. It has been phenomenal.

And as a constituent, I can say that your support has been steady

all the way through and very proactive, and thank you for that.

I want to frame, if I could, just very briefly just why the microenterprise program is so effective, because the reason, the central

core of this program is that it marries technical assistance and

lending. When you are making a loan to a microenterprise, it is the

most fragile type of business. They have the fewest resources. Oftentimes, they are in a highly competitive market with larger businesses, and when you can link the technical assistance with the

loan, you are forming a critical partnership for the success of an

enterprise.

What we have seen over the years—and we have been in this

program since it was the first year of a demonstration program—

was how effective it is when you link the technical assistance with

the loan. And we have come up with a whole array of technical assistance products to meet the specific needs of the businesses in

our market. It can be one-on-one technical assistance. We can put

together support groups for that business. We can put together advisory groups for business. And the rate of success is seen by the

fact that—roughly you flip the equation, which is generally you see

an 80-percent failure in the first 5 years, to an 80-percent success

rate. And I attribute that directly to linking the technical assistance with the lender, with the microlender. And it is the flexibility

of being an unregulated financial institution—that intermediary,

that is—that allows us to do that, where a bank cannot do that,

and allows us to take the type of risk in terms of lack of collateral

and being a start-up, et cetera, that no other lending institute can

do.

Also, because the technical assistance is tied to the intermediary,

we are the one at risk, so we are there at all times working with

that business. We are seeking the business out as much as the

business is seeking us out, and that has been a core part of our

success.

Chairman KERRY. Let me come to the gist of the proposals that

are on the table so we get at it. I doubt we have disagreement on

technical assistance. We are all in agreement we need technical assistance. There are two issues on the table. What is the impact on

the interest? And what is the impact of shifting this to Women

Business Centers and Small Business Development Centers—does

it have an impact?

Mr. SIKES. Yes, it has an impact. In terms, first of all, of the fact

that you would go to the SBDCs or the Women Business Centers,

7

the big difference there is that when the lender has access to the

technical assistance, we are going to be using our resources with

that business directly because we are in a partnership for the

length of that loan. We need that support to work with them, and

we are going to be much more——

Chairman KERRY. So there is a greater synergy to——

Mr. SIKES. And we are going to be more proactive than anybody

else because it is in our best interest to be proactive to save our

loans and to make this——

Chairman KERRY. Why does it not—I mean, this is like a venture

capitalist, you get in, you want to be involved in decisions because

you really want to make sure your loan is going to be successful.

If you lodge that technical assistance somewhere else, aren’t

you——

Mr. ROWE. Well, I would say that, unfortunately, when we look

at this, we find that the interlocking nature of many of the funds,

whether it is Mountain Business Works or the Western Massachusetts Enterprise Fund, is very directly related to the local technical

assistance providers. They make no bones about either being a

Women’s Business Center and being a microlender. And what we

believe is we are providing the funding and the technical assistance

for these borrowers.

We completely agree that the microlending intermediary needs to

be hands-on. That is part and parcel of it. What we are talking

about are the multiple funding streams that are coming out of SBA

and trying to coordinate and maximize the effectiveness of all these

outlets we offer.

Chairman KERRY. Do you want to respond to that?

Mr. SIKES. It is the same comment again. I just think that if you

want to see this program work, you have got to allow the intermediaries who are making the loans have the technical assistance

resource to support those loans. Let us get our hands dirty, as it

were, so we can really work with these businesses. You handcuff

this program to the point where it will not work if you separate the

technical assistance from the lending.

Chairman KERRY. Mr. Wilson?

Mr. WALKER-WILSON. Greg Walker-Wilson, CEO of Mountain

Bizworks, Asheville, NC, also chair of the Association for Enterprise Opportunity.

We work with hundreds of small businesses every year in North

Carolina, and many of them are low-income, they are women. Each

of these particular funding sources targets the specific needs that

each of those has. Prime is for very-low-income and low-income.

I really view these bills as the American dream funding sources.

They make the American dream possible. And that is what this is

all about. The organizations like mine and Chris’, we are helping

people succeed, pull themselves up by the bootstraps, and we are

able to help them create a better life for their family. And so we

are offering them training and consulting to hundreds of people.

Each of these sources are unique, and one is focusing on the needs

of women’s businesses, others on training for low-income.

The microloans do need to be connected to the training and technical assistance. We did a study about 18 months ago looking at

the 3-year survival rate of our businesses. We saw a survival rate

8

of 70, 74 percent. Typically, we see just in the general population

well under 50 percent. When you marry training and lending together, you have a much higher chance of success. And that is

what this is all about, and that is why it is so important.

Chairman KERRY. Mr. Kelly?

Mr. KELLY. I am Kevin Kelly. I am the managing director for policy and advocacy at the Association for Enterprise Opportunity that

Greg just mentioned.

I just wanted to mention one thing, Senator Kerry. When this

proposal was first released earlier in the year about getting rid of

the technical assistance portion of the Microloan program, we had

a call with the Microloan intermediaries that are part of our membership, and I said I think I know the answer to this and what you

are going to say, but I want to hear from you. What does this

mean? How would this work in your community? What is your reaction to what the President’s budget is saying here about using

SBDCs, Women’s Business Centers, and so forth to do this instead

of through the Microloan program? And informally they said, This

does not work in our community. Some of the SBDCs, for example,

they don’t work with microenterprises. That is not part of who they

target.

So even if there is somebody in that same community—and I

heard Mr. Preston talk about the overlap and there are a lot of

them in the same place where the intermediaries are—that does

not necessarily mean they are working with the same type of entrepreneur or providing the same type of services.

I would echo what Chris is saying because I heard the same

thing on our call with our members who are the intermediaries

who are doing this on the ground. To them this is not a practical

solution to what they are trying to accomplish.

Chairman KERRY. I have got to back to another meeting, but let

me just say to everybody it seems to me that there ought to be a

way. Draw each other out on this. Listen to each other, is the most

important thing. Let’s not get fixed in some sort of ideological

place. There is a practicality here. There is a reality of how the

business world works. There is a reality of how money works.

There is also a reality about accountability. I am not suggesting

the Government has the best way to handle all of it, but there is

a synergy that we ought to be able to try to create here where you

can get the best of both worlds, if you can get the Women Business

Centers involved in some intelligent way, but not to the exclusion

necessarily of the other folks’ ability to be able to get a handle on

it. Let the marketplace maybe decide. Let people choose, give them

the breadth of that rather than become in a sense picking a winner

or a loser here and deciding a rigid sense of the road that it is

going to go on.

So I urge you to try to explore that as you think about it, and

hopefully maybe be able to come to some kind of an agreement and

consensus on it.

I know we have got a bunch of folks with cards up and a bunch

of other issues to roll through, so let me let you do that.

Ms. WHEELER. Before we go, I did not hear anybody answer the

question to Tee’s comment about multiple sources and why SBA

contends that TA can be provided through these other sources and

9

not through this complementary program. So if somebody could—

Ron, I will go ahead and call on you.

Mr. PHILLIPS. Thank you, Senator Kerry—who has just left us.

But my name is Ron Phillips from Coastal Enterprises in Maine.

We are a rural CDC and CDFI, if you know those acronyms. But

we have the great pleasure of being on the recipient end of those

multiple programs that the SBA does put out, including the Maine

Women’s Business Center and SBDC and 504 program and SBA

microlender and the whole lot. I am not sure whether to hide under

the table or, you know, say a few things here.

But I want to back up the comments that have just started with

the three before me. I think it is a slippery slope to delink the TA

from the loan program, period. It is a debt instrument and a relationship to borrowers that is so critical that it would get defused

with other programs such as the Women’s Business Center and

SBDC. I would be very cautious about that as a slippery slope.

To the question of those programs being available to this, I am

not even sure that it would be advisable to put those programs into

a relationship to borrowers because of different goals those programs have. And so I would be very careful about that.

As far as funding goes, that is probably the nub of the issue. In

fact, from our experience at the local level, as practitioners, we are

struggling for resources to keep those programs going. We are

matching funds from the SBA at a significant level. We have to

raise those annually. We try to pursue block grant funds. By the

way, challenge development block grant, which is not an eligible

activity in a continuous way. That is more special project-oriented,

at least in the State of Maine. There may be differing plans around

that. So I would say that we struggle with other sources just to

keep the other programs going, especially the Women’s Business

Center and SBDC.

As I sit here today, we are putting applications in to just keep

the level of effort. We have much greater demand in the market

than we have counselor time and availability. So in my mind we

should dismiss that as an option.

I think more important is to keep our focus, and we would hope

the SBA would because they are a great institution to be backing

small business in America, including the micro level, and to delink

this TA program from the loan and the important value of the debt

instrument to create employment and self-fulfillment among small

businesses I think would be a very serious mistake.

Thank you.

Ms. FERKO. First of all, I would like to welcome you from Maine.

Senator Snowe gives her welcome, and she apologizes for not being

here today. I am Jackie Ferko. I am a staff member with the Committee, and I have been around for 4 years, and some of you know

me and some of you do not.

On the macro level, we would like to say obviously this is a

very—the Microloan program is a very important issue to Senator

Snowe, and we do agree that the technical assistance really does

coincide with the lending portion.

I do have a quick question for you. On a micro level, in our proposal, in our legislation, you had a proposal to eliminate the words

‘‘short term,’’ and I have been trying to work with SBA just to

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make sure what your proposal does, and I believe it is in order to

provide greater flexibility and ability to provide flexible credit lines

to qualified borrowers. And I just want to make sure that is—I

want to hear from you that is what you want to do in our legislation and then hear from Tee Rowe to see if that is exactly what

it does and if maybe there is—if we need to address that legislation

in our leg package.

Mr. PHILLIPS. OK. Am I still on here? This refers to the line of

credit type of financing? Well, in our experience that is not a particularly relevant area to be worried about, so, just my opinion, it

is not something I would want to spend a lot of time thinking about

or worrying about, frankly. We do more term financing, and that

is just fine.

It can get a little bit more costly to handle lines of credits,

though I would say that there are times and places where that can

be useful. But it is a more costly way of financing microenterprise.

So you tend to want to do more of a term loan. I hope that is helpful.

Ms. FERKO. Sure, and I absolutely agree with you that we need

to address this issue. I am just wondering, you know, does that

provision do—especially from the SBA, does that provision do what

you want it to do?

Mr. PHILLIPS. I have got to look at the language. I mean, if it

is in there—if it does no harm, I suppose it could be in there.

Maybe others would comment on that. But I am just saying from

our experience as a lender, we are not focused on line of credit language.

Ms. FERKO. Line of credit, OK.

Mr. PHILLIPS. That is all. Thank you.

Ms. FERKO. Tee?

Mr. ROWE. I guess—and when we discussed this, Jackie, I was

trying to understand how the change would have affected the program. As I understand from what Mr. Phillips says, it has to do

with line of credit financing, though I know that a number of our

intermediaries already offer line of credit financing. So I know

there is an overall cap for a per borrower lending. I am not sure

that the language in the act which says ‘‘short-term, fixed-rate financing’’ prohibits line of credit financing. I know it does—so, you

know, we certainly—if there is something in particular that that

would change and cure, we are, you know, more than happy to

have a discussion on it.

I guess what I am still trying to figure out is what the end goal

is, because certainly there is no problem with multiple loans from

an intermediary to a borrower, and there is—as long as it is within

that overall cap.

Ms. FERKO. OK. Do you have any response to that?

Mr. PHILLIPS. I am not sure where to go with this. If it does not

do any harm, if there are others that are availing themselves of

line of credit uses—is that what we are saying? As a peer field and

network, I certainly would not be one to stand in the way of their

abilities to do what they are doing. I am just saying that from our

experience we do not need that kind—we do not deploy that kind

of capital at this juncture. I can talk another hour about asset financing. That is another issue.

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So if it does no harm, and there could be options for others, that

would be fine.

Ms. FERKO. Mr. West, do you want to comment quickly?

Mr. WEST. On the technical assistance issue. I am Dennis West.

I am president of Northern Initiatives. We are based in the Upper

Peninsula of Michigan.

Some of the challenges are the universality of the programs that

were talked about. The nearest Women’s Business Center is in an

8-hour drive from Marquette. The nearest SCORE volunteers

would be a 3-hour drive one way, and if you were on the other end

of the Upper Peninsula, it would be 7 hours one day. The Small

Business Development Centers have two counselors to cover the 15

counties, and they generally only spend time in the counties where

there is matching support being offered. So the ability to offer technical assistance to the providers is not universally applicable, particularly in rural communities.

Our side of the issue is we require monthly statements from all

of our SBA Microloan borrowers. So the SBA technical assistance

is triggered by the performance of the borrower. So we are able to

tailor on a month-to-month basis based upon accounting needs,

based upon marketing needs, based upon e-commerce needs, ways

to help make that business stronger and better.

And the third point is some of the other programs that were

cited, we find ourselves as we make microloans with a multi-year

credit and to have opportunities like accessing funds, like community development block grant, would give us potentially one year of

funding on a highly competitive basis, and yet our exposure is a

multi-year credit and a credit that we are trying to grow.

So those are the three areas I see as problems with moving the

TA in the way that you have suggested.

Ms. WHEELER. Mike, do you want to say something?

Mr. HAGER. Michael Hager, head of Cap Access, SBA.

The Senator brought up a great point, and that is, what can we

do to reach a practical solution to this? And our big issue here with

TA is it is a duplicative effort. We duplicate it in so many of the

other programs. That does not mean that we do not have a location

Upper Peninsula of Michigan. But we are also entertaining the creation of software TA where one can go online and go through a program that provides technical assistance. As a matter of fact, we are

hoping to have it developed to meet the technical assistance requirement for Community Express, for example.

But we have a very nice budget that Congress has provided the

SBA for education, and we have talked about the sources of that

education: the SBDC, the WBC, and the SCORE. Again, we feel

very strongly that let’s run this program effectively, and one way

to do that is to stop duplication wherever possible.

Ms. WHEELER. You know, we hear complaints that when the argument is made that these programs are duplicative, that it is an

oversimplification of technical assistance. And just like one loan

does not serve all borrowers’ needs, technical assistance does not

serve all businesses’ needs. And so if we could just go around the

table very quickly one minute, try to respond to the SBA’s assertion that it is duplicative, and then I have another question if you

12

could get at it. Do any of you receive CDBG money to provide TA

to your micro borrowers?

Do you want to go ahead, Greg?

Mr. WALKER-WILSON. Greg Walker-Wilson. Let me see if I can

remember all the questions. CDBG, where our central office is in

the one city, Asheville, we do receive CDBG funds. It has to be only

for low- to moderate-income individuals. We do it on a contract

basis. It is sort of a per-fee basis.

The other sources are not duplicative, and while I like the idea

of trying to be more efficient and we try to do that, online, for example, could help part of the problem, but we are in the mountains

of North Carolina. There are many places that do not really even

have dial-up let alone broadband. And the clients that we deal with

are people that do not fit into the mainstream. They are lower-income. They have less education. They do not go to their computer

to try to get the answers. They say, ‘‘I trust those people over

there. They are a real person. I trust them. They have been in my

city, and they are going to help me out and help me figure out how

to do it.’’

So it may play a role in some ways to do things online. I think

in general the populations we serve would not access that. Some

of the population would. So I think that we have to deliver them.

When we deliver our training and technical assistance, it is very

specifically to the people that we are serving. And for folks who can

go elsewhere, we want them to do that with financing and whatever. We are not trying to compete with the banks. But what our

needs are, we are trying to figure out what is it they need. And

so if they are lower education, how do we make it available so it

works for them, so they can succeed and achieve the American

dream.

Ms. WHEELER. Chris?

Mr. SIKES. I just want to speak to one example on why technical

assistance is so important. We have a bakery that we are working

with that had a—it had ordered equipment, and they needed that

equipment right away because they were just growing. There was

a problem with the delivery. It threw off their whole schedule, and

it just threw off the whole business, really. And we had to get in

there and really working with them in saying, OK, how are you

going to restructure by the time that it takes to get the business

running well enough until the equipment arrives.

We provided hours of technical assistance in that case, and it

was not like making an appointment with another technical assistance provider. We had to be there right away working with them.

We restructured the loan, and we worked out a way for them to

deal with their payables and help them get a schedule together. All

that was obviously to preserve our loan and also to work with that

business in a way that we were partnering with them. So that is

why, again, linking the technical assistance with the loan is so critical for this program. I do not think the program can honestly run

unless you have the TA linked to the loan program.

With regard to the block grant program, block grants, especially

for regional funds like ours, are very geographically based by town.

So that means with every single town you have to have a separate

contract with them. Administratively, it is exorbitantly expensive

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to do that unless you can get, you know, some grouping. But then

you are constantly having to go one year after—on an annual

basis—on these contracts. So it is a very costly way, I think, to run

the micro program through block grant programs, again, because

you have got a long-term commitment on a loan, a liability on the

loan, and you have got a short-term technical assistance grant.

Ms. WHEELER. Mr. West.

Mr. WEST. We have never received community development block

grant for technical assistance support, and it so far has not shown

up as a priority by our State that would enable us. Plus we have

the complication of having to go through a local unit of government.

So even if we could get it, it would be hard to do it in such a

way that we could cover a large geographic area because the applicant would be a county or a city. So it is a challenge to think that

you could use CDBG, particularly in rural areas.

Second, to offer something on the Internet in rural communities

where there is not universality of high-speed connection, dial-up

sometimes is present, but that is a limitation. And although we respect the use of e-commerce in various ways to connect people

using the Internet, it is very much in the future and not currently

applicable in a lot of instances.

The third point is that TA is really triggered by the performance

of the business, and it is a conversation about how that business

is doing based upon its financial performance. And it is not likely

that someone is simply going to be able to look at their financials

and immediately go to a Web site and figure out off a menu of

products what exactly they need.

So working with small borrowers or start-ups, usually their first

time in business, it is very important to be able to sit down with

them to review their situation and to help craft a plan to help continue their support and growth.

Ms. FERKO. Aside from the technical assistance, I would also like

to hear from the microlenders here. How does SBA’s proposal of

going to zero subsidy affect you? In a negative way? In a positive

way? I mean, how would that affect you in lending to the borrowers?

Mr. WALKER-WILSON. It would just make the money much more

expensive, and so that affects the bottom line of these small businesses who are just getting started, and every dollar counts in

their monthly cash flow. And so that is the reality. And so it is

helping them get through in the first loan, getting their business

going, and then our goal is to mainstream them and get them

farmed out to the private sector. And that is the goal.

So this is only about helping folks get started, having a loan that

they can pay for, have enough flexibility, and then from there we

can send them out to the private sector.

Ms. FERKO. Would you still participate in the program if——

Mr. WALKER-WILSON. Say again?

Ms. FERKO [continuing]. If it went to zero subsidy?

Mr. WALKER-WILSON. I think it would be difficult to, and it

would be much less desirable. I have not evaluated it quite like

that, but I have to be a rational manager of resources, and so if

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this is very expensive and it is not good for our clients, then it

would be sort of, you know, the last resort kind of financing.

Mr. SIKES. I fully concur with what Greg said on that. There is

a lot of capital out there. People will go to lower-priced capital, to

their detriment, because they will lose the technical assistance and

they will not understand how important that is, the microenterprises. So the cost will definitely hurt this program, and if you put

the high cost and no technical assistance to this program, I think

we are effectively saying that this program will not work.

Ms. FERKO. I guess we could assume that if you were still participating in the program, less loans would be made. I mean, there

would be less participants.

Do you have——

Mr. PHILLIPS. I do. I dropped my card there to get in here. But

just on the block grant, I had said that earlier. I think that is a

very difficult source of capital to rely on. But, more importantly,

what I would like to re-emphasize is that these other programs are

also struggling for resources, and the counselors, whom I worry

about, frankly, because we have several at CEI employed—seven

business counselors, by the way, in the field—they are overworked

and overwhelmed, and we are struggling, too, for their budgets to

maintain those every place we can get those funds for matching

and other sources. So it is very difficult to think about how a program, an additional program could be put on them aside from the

fact of delinking that program from a very special lending relationship. As well, we are doing our best—I am sure others are—to create efficiencies and are attempting to put products through Webbased technology for access both in training—especially for remote

rural areas in Maine, and that has some success. So we are, you

know, doing some of the efficiencies and coordination that you are

talking about. But to delink that, I am not sure that would work.

In terms of the zero subsidy, this is a real struggle because our

field is based on helping smaller business with flexible capital and

technical assistance, and pushing us into the market level is a

place you want to eventually get to and we do get to. But it is very

difficult, because we are working with borrowers that are not quite

at that market level. Every time you ratchet up the interest rate,

you are compressing some aspect of the program.

So to the extent we can maintain the subsidies in this lending

area, it would be extremely helpful. Thank you.

Ms. WHEELER. May I ask for a clarification on this? A component

of the Microloan program is that each of the intermediaries have

a loan loss reserve in which they put up money; they are on the

hook for the loans, and if the loans go bad, then they have to cover

them. So, really, how would it work for an intermediary to be on

the hook, to have to put up the money on these loans but not have

control over the TA which counsels the businesses in order to succeed? It seems like it—and maybe SBA could tell me how they see

that this would work. How can we expect the intermediaries to put

up the money for these loans but not have the funds to counsel

them or have control? Because while some of these might have

Women’s Business Center funding, might have Small Business Development Center funding, some of them do not. So they would not

be providing the TA, is what I am saying.

15

Mr. ROWE. Right. Well, we view it as the lending institution

working with the borrower to access the counseling and make sure

that that counseling is effective, whether it is through an SBDC or

Women’s Business Center.

Now, of course, as Mr. West pointed out, you know, there are

gaps in rural areas, and these are problems that we have to surmount. Nevertheless, in looking at the TA costs and then looking

at the spread—and I believe it is a roughly 8-point spread between

what we lend the money out at and what it is lent out at, just to

address Mr. Sikes’ comment about people seeking less expensive

capital. We view the slight shift from 2 points below Fed funds to

1 point above Fed funds as a reasonable cost shift that allows us

to expand the program from a current level of about $20 million

based on roughly a $2.5 million subsidy to a much larger program

level without any subsidy, so that not only Mr. Sikes but, you

know, any microlending institution in the country can access these

funds, and we do not have to worry about requesting additional appropriations.

Ms. WHEELER. And we understand that it is considered a modest

amount, but the feedback we got is that already many of these

funds, because it is not a high-profit business, that they are already losing money and this would just exacerbate the situation.

But I want to go back to the loan loss reserve. So if SBA were

to take the technical assistance funding away from these intermediaries, would they drop the requirement that they have to put

down loan loss reserve funds as an insurance policy for the success

of these loans? Because it seems unreasonable to expect them to

take scarce dollars for an insurance policy when they do not have

control over the management or the counseling of them.

Mr. ROWE. Obviously, if we created a zero subsidy program, we

would not consider the need for a loss reserve to be as crucial.

Ms. WHEELER. Right, but they would be paying indirectly anyway. Their fees would simply go up if their defaults go up, and

right now there is only one loss in the program. So if there truly

is correlation between TA and success and the low losses in the

program and we took that out of the equation, defaults go up, then

the subsidy to provide the program would go up and, therefore,

they would be paying more in fees.

So there seems to be——

Mr. ROWE. OK. I see what you are saying.

Ms. WHEELER. There seems to be a disconnect in the proposal.

So if the TA is not going to be provided to these organizations,

would the SBA drop the requirement that they have a loan loss reserve fund?

Mr. ROWE. The problem with that is that presupposes that the

absence of the TA funding means that there is a complete absence

of technical assistance available for the borrowers, and we do not

agree with that because obviously we see all the other various outlets that we fund and have available right now.

Ms. WHEELER. Well, I think what it supposes is that these

groups are on the hook for these dollars when they are not in control of the technical assistance. We can come back to it, but I wanted to get on the record that this would have to be part of the proposal. It really seems unreasonable that these groups would have

16

to have a loan loss reserve of 15 percent of the loans if they do not

have control over the TA.

Mike?

Mr. HAGER. Kevin, I want to be really clear that we are not taking away TA. We are offering several venues to participate in TA.

Ms. WHEELER. Did SBA request money for TA, extra TA money

through Small Business Development Centers, Women’s Business

Centers, or SCORE in order to compensate for the additional borrowers going to those programs?

Mr. HAGER. We think there is capacity to do that.

Ms. WHEELER. I am sorry. Was there a request?

Mr. HAGER. No. But we think there is capacity to handle the request for TA.

Ms. WHEELER. OK.

Mr. HAGER. And, again, you know, the options that we have

today, one could argue we think we run a really good TA shop with

numerous resources to access that TA, and there could be an argument that we think our TA would be enhanced over what takes

place today.

Ms. WHEELER. OK. Greg, do you want to make one final comment? And then we are going to move on to the intermediary lending pilot program?

Mr. WALKER-WILSON. Sure. Greg Walker-Wilson. Just a respectful different point. We do have several different sources, like you

are saying. We still have waiting lists, and we still have a budget

deficit, and we are leveraging the Federal funds at least one time

over. And it is sort of a jigsaw puzzle, and a certain funding source

can serve a certain target group, and a certain other funding

source can serve another target group. There is not overlap, so it

is just—I mean, if we had twice as much money, we could serve

that many people. The demand is there, and the creative ideas are

there, and I think that our role is to try to help people, help businesses succeed.

Ms. WHEELER. OK. Jackie, do you have a question?

Ms. FERKO. No.

Ms. WHEELER. May I ask one more thing? Could someone please

on the record explain to us the distinction between the Microloan

program and the Prime program? Go ahead.

Mr. WALKER-WILSON. The Microloan program is specifically to

lend money, and so we have been talking about that. Prime is to

provide training and technical assistance to low-income and verylow-income, and it has no tie to lending. So there are many people—take my own organization, for example. Probably 75 percent

of our clients just want training or technical assistance. They do

not want a loan. Or they have some other source. And so if we only

put money in the lending, then there are these other folks that

want to start businesses that will not have options. And so these

are ways of providing capacity building, the prime funds, to helping

people have the chance to succeed, adding management capacity,

marketing capacity, and so forth.

And for the record as well, I just want to point out that right

now the prime funds, only 16 or 17 States are eligible to access

these, and this is meant to be a national program in all 50 States.

And I think it is important that that barrier be lifted so that any

17

program—there are low-income and very-low-income entrepreneurs

in every single State, and to have two-thirds of the country excluded from being able to participate is not fair to those folks.

Ms. WHEELER. OK. We are going to go ahead and move on to the

intermediary lending pilot program. For those who do not know,

the bill authorizes a 3-year pilot program, and it allows SBA to

make loans to local nonprofit lending intermediaries, and then the

intermediaries, similar to the SBA’s Microloan program, re-loan

those funds to small businesses. The program seeks to address the

capital needs of start-up and expanding small businesses that require flexible capital, but for some reason are ineligible for private

or other funding. It is aimed at businesses that desire larger loans

than what can be provide through SBA’s Microloan program, loans

of sizes between $35,000 and $200,000. The loans to the intermediary would be long term, of 20 years, at 1-percent interest, and

they would have a 2-year grace period.

I think we have two participants here today who would like to

explain to the Committee why there is a need for this program and

why we should test this to see if it could get at this gap lending.

Ron, your card is gone. Do you want to lead off?

Mr. PHILLIPS. Thank you again. And to the SBA, they can take

these clam chowders and lobster bisques with them.

Mr. HAGER. You cannot do that.

Mr. PHILLIPS. They are under a hundred bucks each.

[Laughter.]

Mr. PHILLIPS. Or whatever it is, $49. Thank you again.

We have, I guess, the honor in some ways of being the first rural

development intermediary lending program in the Nation when

USDA adopted that program in the late 1980s. It was a program

that came out of Maine with one of our colleagues in Vermont, and

it has been a terrific program, well oversubscribed, I believe, and

there are a lot of statistics on this throughout rural America, and

many entities have advantaged themselves with these kinds of

funds and had a tremendous impact in helping to develop and create jobs among small businesses in rural communities.

Our proposal is to have the SBA adopt a pilot program to mimic

effectively this successful program.

Ms. WHEELER. This is at USDA, Ron?

Mr. PHILLIPS. Yes, in Rural Development, and I am speaking out

of the experience with that rural development program, which in

our case we have made loans to over 200 small businesses in rural

Maine, and these funds have cumulatively been recycled to amount

to something like $15 million of what we call sub-debt capital. And

we all know what that means. It is the kind of capital that is near

equity that can help enhance the collateral base of the company so

that conventional financing can be drawn in, especially the bank.

And then you get into this magical area of leverage, and you bring

in the banks to that particular deal. And in our case, we leveraged

$115 million of bank capital.

The SBA program is modeled on this successful effort. There is

no TA assignment to this. The assistance we provide companies is

blended in with what you think of as the arbitrage between the

cost of funds we have and the amount we loan out to companies.

18

Some 8,000 jobs, by the way, have been created or sustained in

these projects. One of the projects, by the way, is this great company in Whiting, ME, down east Washington County, the poorest

county in Maine or among the poorest counties. And they process

gourmet-type clam chowders and seafood and herring products and

so forth. And you can buy them here in Washington if you are

around or at Whole Foods or natural food outlets, because that is

their prime market.

The story here is that there is an entrepreneur that decides to

try to make a go of it, and he and his significant partner bought

a 100-year-old company that was sitting there not going very far.

The name Looks goes way back historically in that particular county, and he took it—I think they are employing eight or ten people,

and he rebranded the company and developed a strategy to grow

the company, and hopefully it will do quite well. They have almost

tripled employment, and they are on their way. We hope they are

very successful.

Sub-debt money—and even equity capital, but I am talking about

sub-debt money—is very important to help a project like this get

off the ground. I think Machias Bank is involved with this particular thing.

So my last point—I know I am over my time here. I can go on

and mention so many other companies here. But the SBA is not the

only institution in this, but it is an important voice and piece to

put in it because we cannot use the rural development money in

the urban areas. That is only for communities with 25,000 or less

population, so we are trying to mimic this into the populations of

Maine and throughout the country. And I think you have got a

really great program opportunity.

Foundations like the Ford Foundation, the Kellogg Foundation,

the Casey Foundation, and many others have been buying into this

kind of revolving loan type of program. You are not the only ones

there. But to have the SBA, this venerable institution nationally,

in this type of pilot would be exceptionally valuable as a pilot.

Thank you.

Ms. WHEELER. Mr. West?

Mr. WEST. Again, I am Dennis West with Northern Initiatives.

We serve 49 rural counties, primarily in Michigan. Northern Initiatives has been an SBA microlender since 1994, and we have also

been the recipient of USDA IRP loans since that time, too.

We asked Senator Levin and his staff to help create this program

because what we saw is a gap in the market. Of the $24 million

that we have loaned, 55 percent of our loans have been to startups, and 75 percent of our loans come as community bank referrals. Now, why would community banks make referrals to us to

help the start-up of businesses? Generally, it is because of the size

of the loan, past bankruptcy, often health-related in a rural area

is the cause of the bankruptcy, low equity or no equity, collateral

shortages, or the loan is just plain odd and they are not sure how

to underwrite it.

So typically in our situation we help support a business to get

started and grow, and that is a 3- to 5-year process to get back into

the hands of a community bank. And by the end of that 3- to 5-

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year process, our borrowers typically are back in community banks

and successful and growing businesses.

What we would ask the Committee’s support for this title is to

recognize that what the fund will do is to be able to revolve. We

would expect that this amount of money would revolve at least four

times over the course of the pilot program the 20 years. So the

money will leverage itself.

It will enable us to support the fastest-growing sector of our local

economy, which is start-up and entrepreneurs starting and growing

small businesses. And, frankly, they have capital needs that are

not totally being met by the market, and it gives us the ability to

support them.

But in support of the success of small businesses, it helps us to

continue to grow and have a stronger partnership with our community banks, so the small business lenders will be the beneficiaries

of this program, but also community banks who are our partners

will be beneficiaries of this program because in 3 to 5 years they

are going to be getting growing businesses that are sound, workable credit.

Ms. WHEELER. James?

Mr. BALLENTINE. James Ballentine, American Bankers Association. I wanted to commend the drafters of the language, but I have

some questions in the language of the bill because the language indicates eligibility for participation and that the intermediary can

have—it looks like up to 1 year of experience or not less than 1

year of experience in making loans to start-ups. And I wondered

whether that level of experience was enough to actually be proficient in making loans through this program if you only have 1

year of experience versus what it sounds like you all have much

more experience than that.

I also wanted to speak to the availability of intermediaries in

urban communities and whether there were adequate intermediaries in those communities to serve the population that you

speak of, these start-up businesses.

And my final point was about a 3-year pilot program. I know

that is traditional in Washington, but in light of the fact that these

loans will not have to start repayment until 2 years, whether you

would have adequate experience within the program to determine

whether a 3-year pilot was enough or whether that should be extended to, say, a 5-year pilot.

Those are my basic questions.

Ms. WHEELER. I think that the intermediary drafting question

that you asked applies to the SBA Microloan program, separate

from the intermediary lending pilot program.

On the 3 years, I think we could certainly go back and discuss

making it longer. You are right that it is—typically, we do reauthorization every 3 years, and so we try to put everything on sync.

This is Senator Levin’s provision, and it has passed the Senate several times, but we could certainly go back and talk about it.

Your middle question was?

Mr. BALLENTINE. The availability of intermediaries in urban

communities to serve those particular businesses.

Ms. WHEELER. Whether there would be enough capacity in order

to reach those?

20

Mr. BALLENTINE. Whether there are enough intermediaries. I

know there are a thousand, roughly, around the country, and they

are primarily in the rural parts of the country, and whether there

would be urban capacity for the intermediaries.

Ms. WHEELER. Do any of the intermediaries at the table know

the answer?

Mr. WEST. I do not know the answer, although I will tell you one

of the intermediaries I have the utmost respect for is in Detroit,

Detroit Enterprise Institute, which I think is one of the best that

I am aware of. And I simply do not know the answer to where capacity exists in a lot of urban centers.

Mr. PHILLIPS. I would agree with Dennis, though I know that in

Maine—and this is from our experience—municipalities where we

would be active here generally do not have a funding base. They

might have a downtown redevelopment association. I know in

Lewiston and Auburn, there is Lewiston-Auburn Economic Growth

Council that has come to us for money, by the way, because they

cannot get block grant funds to refuel some of the lending. So the

demand, I think, is better.

I do not know of any group in Maine, other than us, that would

be active in these markets, that would be eligible, that would have

an entrepreneurship relationship and a business development relationship as robust as we would have. Now, that is in our State. I

think you are talking about 20—there are 20 pilot——

Ms. WHEELER. There would be enough for 20 grants, as I understand it.

Mr. PHILLIPS. Twenty, and maybe if this goes, which I think

would be great, there could be more analysis of how this is going

to supplement other areas of the country.

Ms. FERKO. I appreciate you, Ron, for bringing up the Maine

businesses. Too bad you did not bring clam chowder for the rest of

us since we are going to be here until 1:00.

Mr. PHILLIPS. Well, this is for you, then.

[Laughter.]

Ms. FERKO. I do not think I can accept that, either. But I would

like to hear from the SBA their comments on this pilot program

just to see what they are thinking and get them on the record.

Mr. ROWE. Well, we have looked at this before, and, of course,

it was in the bill through 3778 last Congress. At that time CBO

scored the proposal at about a 37-percent subsidy rate, which

means as it is drafted with the current authorization, you are talking about probably maybe $55 million if you got the full $20 million

authorized appropriation, perhaps $55 million being available for

intermediaries.

But there are a couple of other questions. First off, you know,

James is correct, the definition of an eligible intermediary, 1 year

of experience, which seems to be a pretty—an incredibly low bar

for an area of lending where you are talking about loans from

$35,000 to $200,000. The other thing is that, frankly, the way this

is drafted, I would imagine that both CDCs and credit unions

would be available intermediaries since they are not-for-profit organizations, whether it is a C-14 credit union or a CDC.

I would just go back to the fact that this is a very significant subsidy, I mean, 1-percent interest over 20 years with a 2-year grace

21

period, and I noticed there is no interest rate set for the borrower.

So there is no cap here as to what would be charged between the

1 percent the money is being borrowed at.

Ms. WHEELER. For the record, I just need to clarify that while

CBO did assign a subsidy rate estimate of 37 percent, it also said—

the quote is that, ‘‘We estimate that the subsidy cost for the authorized loan amounts would be about $7 million over the 2007–

2011 period.’’ So I just think it is important to say exactly what the

cost would be, because 37 percent sounds so expensive, but the ultimate decision of CBO is that it would be $7 million over a 5-year

period.

Mr. ROWE. Yes, well, they are basing that on $20 million authorization for 4 years, so that would work out about right, $7 million

a year. And at $7 million a year and a 37-percent subsidy rate, we

can figure that would probably be about $11 million in funding that

we would be able to put out as SBA in any given year.

Again, there is a question: What is the rate cap there and what

is the spread that the intermediary would be expected to offer? And

there is very little here that defines the responsibility of an intermediary in this program beyond the actual——

Ms. WHEELER. So SBA would like to see an interest rate parameter added to the program and to address, as American Bankers

Association pointed out and SBA has pointed out, the qualifications

for eligibility to be an intermediary at——

Mr. ROWE. Well, at the very least, you would expect that if the

proposal was to go through. But the larger question is the issue of

the market niche that we are trying to achieve here. I will point

out that the $35,000 to $200,000 range is probably the largest part

of the 7(a) program. I would venture to say it is something on the

order of 60 percent of the $15 billion that SBA guarantees in a

year.

Ms. WHEELER. I want to move on to the CDC 504 program, but

quickly, Chris, you have had your card up. And then we will go to

Mr. West to respond to——

Mr. CRAWFORD. Thank you, Kevin. I am Chris Crawford with

NADCO, the National Association of Development Companies. We

are the 504 lenders around the country. There are about 260 certified development companies, and those CDCs have many more offices spread around the country in their States.

As I read the language on page 22, frankly, I assume that CDCs

would be qualified to operate this program. Is that accurate?

Ms. WHEELER. It was my understanding that your proposal was

that you wanted to specifically name them, and not only to apply

to this program but in general to be defined as an intermediary so

that CDCs could apply for any program that calls for an intermediary.

Mr. CRAWFORD. Yes. The language here appears to describe certified development companies. We could probably make it a little

clearer if you did name CDCs in that. CDCs, as you know and as

Ron knows, are microlenders. We do a lot of microlending. I think

we have a fairly successful track record in microlending as well as

large lending. So I think our industry would be eminently qualified

to participate in this and would certainly offer a number of

endpoints, access points, as James has asked the question on.

22

Ms. WHEELER. OK. Then we can look into that going into markup.

Mr. West, did you want to comment on why the 7(a) and 504

loan programs do not serve this financing gap that the pilot is intended to serve?

Mr. WEST. In the Upper Peninsula, we have 29 community

banks, and they range in size from $30 million to $300 million, and

many are not SBA lenders and do not have a relationship with the

SBA. And so start-up money and the money to help support their

growth is not always available or easily available to them.

Ms. WHEELER. OK. Chris?

Mr. SIKES. It is important to mention that the IRP program is

really a subordinate lending program and that the loan guarantee

program is not, and that this really does fill a different niche which

the USDA program has really shown in the rural setting to fill.

And I would say that by increasing the service area to the urban

areas, we are giving a tremendous amount of financial liquidity to

the businesses in the urban areas.

Ms. WHEELER. Ron?

Mr. PHILLIPS. Just to reinforce what Chris said, that the differences in this program—of course, it is a pilot—than the 7(a), it

is a sub-debt, subordinated debt instrument, and the 7(a) program

as a guarantee program still carries with it certain requirements

around collateral coverage for that guarantee. And this is a much

more flexible way of helping to develop a company and getting

them into a more financially—standard, conventional financing

market.

Ms. WHEELER. OK. Mr. West, last comment—oh, and Chris.

Mr. WEST. I also wanted to add that the kinds of loan that we

find ourselves doing are with low-equity, no-equity borrowers, history of bankruptcy, not brought on by other things other than a

lack of access to health care, things of that nature, size of loan, collateral strategies, collateral availability, for God’s sake, we take

Airedales (dogs) as collateral in one loan.

So these are not things that if a regulator saw that a bank had

done them, they would be very pleased to see, because they in

many cases are things that a regulator would not want their banks

to do and would cite them if they did them.

Ms. WHEELER. And is the administration funding the companion

program to this within USDA? This is modeled on a program within USDA, and is it funded in the fiscal year 2008 budget?

Mr. PHILLIPS. I do believe that it is, yes; even the President, I

believe, likes this program.

Ms. WHEELER. OK. Great.

Jackie?

Ms. FERKO. Just quickly. Tee mentioned that the 7(a) program

covers that niche, but obviously there is a need for it since we are

giving out those grants through USDA.

What do the 7(a) lenders think? Is there any thought that there

is a niche out there for this? I am just curious.

Mr. KWIATKOWSKI. My name is Chris Kwiatkowski. I am senior

vice president with Popular, Inc. I head up the small business lending division, and I would like to thank the Senate Small Business

23

Committee for holding this important roundtable and letting us

participate.

This is probably an underserved niche, as our bread and butter

is the 7(a) program. My division focuses totally on SBA lending,

and we do have 50-plus business development officers across the

Nation, but probably not serving this particular niche. And the size

of the loans are difficult. The smaller loans take just as much paperwork to generate as the larger loans do, so it is not very cost

effective as a lender to go after these types of loans.

Ms. WHEELER. Jackie, would you like to let Mr. Wilkinson go?

Mr. WILKINSON. I am Tony Wilkinson with the National Association of Government Guaranteed Lenders, and I would like to just

hit one of our numbers. Year to date, about 80 percent of the loans

made in the 7(a) program are for amounts of $150,000 and under.

That said, they are not subordinated debt loans. They are typical

credits. And if this program is designed to reach lower than what

we are doing, then it is probably a niche that our members are not

serving.

Ms. FERKO. Thank you, Tony.

Ms. WHEELER. OK. Let us go ahead and move on to the next

topic, which is the certified development companies, the 504 loan

program. We will allow SBA to present their proposals, and then

as we did under the Microloan program, we will let the participants comment and then make their recommendations.

I am very sorry. We are little behind, so if we could try to keep

it short so that we can move through this. I am sorry.

Mr. ROWE. Well, I will move pretty quickly. There are just a few

proposals.

First off, there are some proposals that came from our Office of

Inspector General, changes to penalty provisions to include fraud

by loan packagers and agents, and to include fraud under the 504

program; also to extend the current 5-year statute to 10 years for

fraud against CDCs, and also small business lending companies.

The IG has pointed out that a longer statute is needed because effective fraud prosecutions often take a great deal of time.

Beyond that, really quickly, there were two proposals: to harmonize the appraisal policies between the 7(a) and 504 programs

so that appraisals by a State-licensed appraiser is required in either program when real property is being financed for more than

$250,000; and also harmonizing the leasing policy and setting a

common standard of up to 40 percent of a facility allowed to be

leased out in a new or existing building.

The last proposal is a proposal from the Office of Capital Access.

I know there has been some debate between Capital Access and industry about this. SBA has put forward a proposal that issuing debentures for 504 that would use a monthly rather than semiannual

payment schedule. One of our reasons is that we believe a monthly

payment schedule would allow borrowers to reduce their principal

balance on a monthly basis and, therefore, reduce the amount of

interest that they are paying on an ongoing basis.

That sums it up.

Ms. WHEELER. OK. Would the participants like to respond to the

three proposals that SBA highlighted out of their legislative package? Chris Crawford.

24

Mr. CRAWFORD. Yes, I would, Kevin. I am Chris Crawford with

NADCO. First of all, I apologize, I just received the administration’s proposal recently, and so we have just begun to analyze it.

On their authorization request, we oppose their authorization request. We feel it is too short; we will run out of money. I would

note, responding to Senator Kerry’s concerns, our minority lending

is up 15 percent just year to date. Our rural lending is up 11.5 percent year to date. We have loaned over $1 billion year to date to

minorities. I would hope that we would not be in a position to run

out in 2008, 2009, and 2010 and that Congress would support the

higher authorization levels which are in S. 1256. We support those

authorization levels.

Secondly, changes to the fee provisions, we absolutely oppose

what the administration is proposing. The administration disclosed

those fees to us recently in a meeting, and they indicated that the

cost of a weekly audit would be $25,000 and that they want to get

to field audits to CDCs with portfolios as low as $30 million. A

CDC with that portfolio size receives only $150,000 a year in servicing fees per year, total fees. This would take up to 20 percent of

their revenues. I would suggest that smaller CDCs would exit this

program in droves. They simply could not afford to operate under

those circumstances.

They also indicated there would be a fee for the Dun & Bradstreet scoring system that was created several years ago, and we

calculated that fee could run from $2,000 a year to $10,000 a year

for some CDCs. Those are astronomical costs given our nonprofit

status. So we oppose that fee.

Section 211, maximizing use of electronic technologies. While we

support the computerization of many of the processes that SBA

uses—and Mike knows this—in fact, we oppose the language that

is in their request. It is far too vague. There is no description of

what they would require CDCs to do. As many folks around this

table know, SBA does not have a stellar track record in implementing new technologies. So we would ask for much more definition on this because, otherwise, it could leave CDCs wondering

what we should be implementing.

Real estate appraisals. Could I ask Sally to comment on that?

Ms. WHEELER. Sure.

Ms. ROBERTSON. Sally Robertson with Business Finance Group

in Fairfax, VA. We are a certified development company.

We noted that the appraisal comment was that appraisals would be required for all projects in excess of $250,000 for both the 504

and 7(a) program. We would like to submit that that is perhaps a

fairly low dollar amount for appraisals which cost a minimum of

$3,000, and that if an average 504 project exceeds $1 million, that

means that 75 percent of 504 projects would be subjected to this

requirement. That could amount to some $22 million a year in

costs for small businesses.

We would recommend that the appraisal requirement be set at a $750,000 real estate acquisition size with the exception of a business acquisition which involves real estate, where you would definitely need to know the valuation of the fixed assets.

Then we also wanted to talk a little bit about the leasing policy.

SBA has proposed that small businesses would occupy 60 percent

25

of the facility and allow 40 percent of that property to be leased

out. We believe that that is a serious problem, particularly in inner

cities and rural areas. The primary reason is that a two-story

building would then essentially become ineligible for 504 because,

generally speaking, in a two-story building, the first floor the SBC

occupies and it leases out the second floor to another tenant. And

we think that that one-size-fits-all rule would make the program

unavailable to many more small businesses, and we think that it

is our motivation to finance more small businesses and try to keep

that more flexible.

I would say that in the District of Columbia or in Boston, which

are inner cities, one of the ways you bring small business into the

inner city areas and the low- and moderate-income areas is by allowing multiple use particularly of row house type buildings, where

you have a commercial tenant on the initial floor and a residential

use on the upper floor. And if you eliminate that, you eliminate a

lot of jobs to low- and moderate-income individuals that those small

businesses are bringing in.

Ms. WHEELER. SBA, would you like to respond to NADCO’s request that instead of setting the threshold at 250, that it be raised

to 750 and then also address the leasing numbers? Or would you

like to, you know, submit comment? We can come back to discuss

it, but we would like to give you the chance to comment.

Mr. HAGER. I would like to first of all, if I may, comment on the

fee structure.

Ms. WHEELER. Sure.

Mr. HAGER. The fee structure is created, defined as an on-site review every 2 years. There are——

Ms. WHEELER. Actually, you are talking about fees for lender

oversight?

Mr. HAGER. Yes.

Ms. WHEELER. The examinations? OK.

Mr. HAGER. Yes. Those are conducted every 2 years. There are

150 of the smallest CDCs that would receive no on-site review,

therefore, no cost.

The off-site review, which is a—you are familiar with the Dun &

Bradstreet review, and we look at that data monthly. The CDCs,

there are 55 of them that would have a fee of $200 or less. We

would waive that fee. At least it is our intent to do that. The other

fees would range anywhere from $250 per year to the very largest

CDC at $32,000. So, again, we believe oversight is absolutely critical for the program. As we expand the portfolio, we simply must

expand our role as the oversight regulator. And we feel that these

fees are pass-through fees. There is obviously no profit margin involved in these. And we think they are essential for the program

going forward.

Ms. WHEELER. Pass through to whom?

Mr. HAGER. Whatever we are charged, we pass it through to the

CDC. These are fees that we pay——

Ms. WHEELER. Yes, but then who ultimately pays?

Mr. HAGER. The CDC pays.

Ms. WHEELER. But, indirectly, does the borrower ever get

touched?

Mr. HAGER. Chris would have to answer that question.

26

Mr. CRAWFORD. It is my understanding the borrower would not

get touched, except that CDCs are going to be hurting for cash

flow. $32,000 a year for the largest CDC in the country is a significant amount of money. So I would be very concerned about that.

Pass-through, eventually I would see CDCs having to raise their

charges. Right now, most CDCs charge five-eighths, are required to

charge five-eighths for servicing, of which one-eighth is going to the

agency as part of the guarantee fee to keep us at zero subsidy.

CDCs will almost certainly have to increase their fees for the borrowers. There is no doubt. So ultimately there would be a passthrough.

Mr. HAGER. We think these fees are very reasonable. If you compare the other parts of the Government financial services, the oversight, what they charge——

Ms. WHEELER. Are those nonprofit institutions that you are

using as comparison?

Mr. HAGER. No.

Ms. WHEELER. No. So they are banks versus intermediaries, that

is the distinction here.

Mr. ROWE. We would have to say that we are not—I do not know

off the top of my head what the NCUA charges the credit union

industry for their regulatory oversight.

Ms. WHEELER. Sally, did you want to comment how your CDC

might be affected? I do not know where you fall in the spectrum

of small or big.

Ms. ROBERTSON. I think our CDC would probably fall in the spectrum of a large CDC. We rank about number 10 nationally. I think

while we are very much in favor of oversight from SBA of CDCs,

we think it is extraordinarily important to credit quality. I think

the cost is very high and that perhaps SBA should look to some

budget authorization for at least some of these fees.

Ms. WHEELER. Mike, did you want to make any comment on the

industry’s adjustments to the levels for the appraisals and for—the

appraisal threshold or for the rent specifications?

Mr. ROWE. Well, I will just toss in here that any proposals we

have put forward are just that—proposals, working with the industry.

Now, for example, raising the rate of an appraisal from 250 to

750, obviously, we are talking commercial property, and I do not

know what the standard operating procedure is in the commercial

real estate industry. It may be that a certified appraisal is really

not the norm below a certain level.

Ms. WHEELER. But SBA feels it is important for what reason?

Mr. ROWE. Well, we feel it is important to have a certified appraisal in order to, you know, protect the interest in the property

and make sure—this is both a fraud and a financial management

issue. Now, the question that Chris raises is whether, you know,

$250,000 is really probably going a little low for a certified appraisal, which is an expensive proposition, versus, you know, the

more normal course of business if it is not normal in commercial

real estate to be seeking certified appraisals for smaller properties.

Ms. WHEELER. OK. Thank you.

One other comment, Chris?

27

Mr. CRAWFORD. I would say that we are absolutely not opposed

to appraisals. We do real estate deals all the time, and we get appraisals all the time. I think our loss record demonstrates that.

Our default rate is 4.5 percent and dropping. So I think we are

doing good deals, and we are adhering to standard commercial real

estate financing practices.

Our concern is that this would hit probably 75 percent of our

projects because, as you know, our average loan is $584,000, average project is approaching $1.6 million. The cost of those appraisals

would be $22.5 million per year to our borrowers. That is a huge

amount of money. But we absolutely do not oppose the notion of

appraisals.

Mr. ROWE. We will go back and take a look and reassess.

Mr. CRAWFORD. Thank you.

Mr. ROWE. But I did want, if just for a second, to discuss the

monthly debenture payment schedule because what we are looking

at here is trying to come up with a possibly more useful tool for

the borrower. On the other hand, I know that the industry has

some concerns as regards to the financing instrument itself because, of course, debenture financing for the program is based on

a secondary market.

You know, I do not want us to be out there with a solution in

search of a problem. On the other hand, what we are looking for

here is perhaps a more normal and useful product for the borrower.

I do not know if Chris had anything to say on that.

Ms. WHEELER. Go ahead, Chris.

Mr. CRAWFORD. This is a grave concern for us. In fact, we believe—and we have met with our dealers, two fairly sophisticated

dealers, Merrill Lynch and CS First Boston. We have met with our

fiscal agent, our bond counsel. This would, in fact, rise the cost of

borrowing if we convert to a monthly debenture repayment, and it

would do absolutely nothing in terms of saving any money for anyone.

Wall Street, and I am sure everyone at this table knows, works

on the basis of risk and risk management. In fact, we have worked

for 22 years to create an instrument, the DCPC, or the bond that

is guaranteed by the SBA. We have worked for 22 years to establish a presence and a known quantity in the markets in New York

where we sell—now we are selling an average of about $400 million

a month in DCPCs. Our spread to comparable instruments is 14 to

18 basis points. We refer to our program as Small Business’ Window to Wall Street, because we have brought the kind of financing

that Wal-Mart gets and GE gets to Sam’s Sunoco in McLean. And

I would suggest that to tinker with the instrument that has the understanding of the underwriters, the understanding of our investors, among whom are the largest and most sophisticated investors

in the United States—and, in fact, the world, because we are receiving a lot of international interest in our product—this will fundamentally change the instrument, will create a new instrument.

So we will have the old instrument, the old DCPC, and we will

have the new one. The new one will have absolutely no track

record in the markets. It will take us another 15 years to establish

that track record and understanding.

28

If Wall Street does not understand something, they see it as

more risky. If they see it as more risky, more interest. By comparison, the SBIC program in March removed the prepayment requirements of penalties from their program. We happened to have a 10-

year sale. They happened to have a 10-year sale in March. This

just occurred this year. Their rate—both instruments had the SBA

full faith and credit guarantee. Their rate was 33 basis points higher than our 10-year rate. Thirty-three basis points. That means

that those borrowers for the next 10 years will be paying more interest than our borrowers were paying in exactly the same month

of sale.

Ms. WHEELER. And the reason would be that the investors were

afraid that people would prepay and, therefore, they would not

have the revenue stream. And so it was not as attractive as an investment. Is that what you are getting at?

Mr. CRAWFORD. It created unknown.

Ms. WHEELER. OK.

Mr. CRAWFORD. And any time you create unknown on Wall

Street, they are going to charge you for it.

Ms. WHEELER. OK. Thank you.

Mr. HAGER. We will go back on this issue. The purpose of this

is to do exactly what it is doing, and taking ideas going back and

reassessing it. So we will do that.

Ms. WHEELER. OK. Thank you.

Ron?

Mr. PHILLIPS. Could I just make a comment?

Ms. WHEELER. Quickly. Sorry. Your microphone?

Mr. PHILLIPS. I am sorry. We are a CDC in Maine, rural Maine.

I would want to look over this and send some comments. And we

have not studied it, but I am inclined to agree with the comments

that just went before. I just want to make sure we all understand.

It is an exceptionally interesting and important program in rural

markets, as well as nationally. We have done 170 projects. Our average venture I think is running around $350,000, with 3,500 jobs.

We just approved a daycare center in South Portland using these

funds, by the way. It is a job creation program, but it also can finance other services.

So I just wanted to go on record here that it is an important program, and we hope to make some comments, too, as well as around

this.

Thank you.

Ms. WHEELER. OK. In fact, that is a very good segue into the

next 504 component of the bill that Senator Kerry and Senator

Snowe introduced yesterday, and it is the child care lending pilot

program. For those who do not know, this pilot has passed the

Committee and the full Senate many times, going back to the

107th Congress, and what it does essentially is it makes nonprofit

child care providers eligible to apply for 504 loans. And we have

two participants here today who are familiar with the genesis of

this proposal and will explain to us why it is important, and then

we will open it up for others to make comments on it.

We will start with Joan Wasser Gish.

Ms. WASSER GISH. Thank you, Kevin, and good morning. My

name is Joan Wasser Gish, and as Senator Kerry noted, I recently

29

opened my own small business and am a former senior policy adviser to Senator Kerry.

While working with the Senator, I spearheaded his Child Care

Small Business Initiative, and in 2002, we assembled a statewide

advisory committee, which included representatives from the small

business community, such as the U.S. Small Business Administration’s Massachusetts District, the Massachusetts Small Business

Development Centers, the Massachusetts CDCs, the Southeastern

Economic Development Corporation, the Center for Women in Enterprise, and microlenders like Accion USA and the Western Massachusetts Enterprise Fund, headed by Chris Sikes, who is to my

left.

This advisory committee also included a cross-section of stakeholders from the early education and care or child care industry.

These representatives reflected an array of service delivery providers that span economic sectors. They included sole proprietors,

home-based family child care businesses, for-profit child care centers, and nonprofit providers.

Senator Kerry charged this group with making recommendations

to better connect entrepreneurial resources with child care providers in order to both strengthen the local economy and improve

the overall quality of child care programs. This advisory committee

met monthly for 1 year. One of the central conclusions this committee reached was the dearth of lending and other financial resources available to the nonprofit child care centers specifically.

Nonprofits have barriers to accessing loans through traditional

lending institutions as they operate on slim financial margins and

often lack the capacity to make a sizable downpayment for capital

investments.

Advisory committee members noted that this lack of access could

actually have broader economic ramifications, including inhibiting

economic growth, community development, and worker availability

and productivity. It was the recommendation of this committee that

Congress expand the 504 loan guarantee program to nonprofit child

care facilities, which is the idea you see embodied in the child care

lending pilot program in Section 416 of the SBA reauthorization

bill.

This program would be consistent with the 504 loan guarantee

program as it does help to maintain and strengthen the overall

economy, supports community development, promotes job creation,

worker productivity, and job retention. However, we also recognize

that the expansion of 504 should not be undertaken lightly. Thanks

to the able work of this Committee, there are numerous safeguards

placed in legislative language. These include initiating this program, first and foremost, on a pilot basis with a 3-year sunset provision in place; requiring loans to be personally guaranteed and collateral owned by the borrower; limiting access to not more than 7

percent of all loans guaranteed in any fiscal year; requiring eligible

entities to meet the same standards as a for-profit would save for

their nonprofit status; and also requiring reports by the SBA to

this Committee and the House Committee on Small Business regarding implementation of the program on a 6-month basis as well

as a final report by the Comptroller General to this Committee and

to the House Committee no later than March 2010, which would

30

enable a very careful assessment of the impact of the child care

lending pilot program before taking any future steps.

So, with these safeguards in place, I would respectfully urge the

inclusion of the child care lending pilot program in the SBA reauthorization package, and I welcome any questions.

Ms. WHEELER. Would anyone else like to comment on this program? SBA, do you have any comments about it?

Mr. ROWE. Well, despite the fact that SBA does make some limited lending available through the microlending program, in general we would oppose this provision for the simple fact that the

Small Business Act clearly states that the purpose of the Small

Business Administration is to support private enterprise in free

competition. And we would not support subsidizing unfair competition from not-for-profit entities which specifically do not pay income

taxes or, for that matter, real property taxes, have access to grants

that are not available to small businesses that are for-profit, and

have access to contracting opportunities which are not available to

for-profit small businesses.

Ms. WHEELER. And then how does SBA reconcile the fact that its

legislative package proposal this year proposed making disaster

loans available to nonprofits?

Mr. ROWE. Disaster lending is a separate item from our regular

business lending. We recognize in our disaster lending that we give

physical disaster loans to churches and other religious institutions

to whom we would not give loans in our regular program due to

constitutional implications.

Now, if we are going to start blurring that distinction, then I

suppose SBA’s response would be to completely get out of lending

to nonprofits in disaster situations. But we do not propose that. We

believe a disaster is a different set of circumstances from the normal economic life of the community.

Ms. WHEELER. And the agreement has been made to the Committee over the years since this proposal has been out there that

the child care industry is different than other industries and that

it is worthwhile to try using these loans to get at this very real

workforce issue. Would SBA be willing to work with the Committee

to find something they would be comfortable with on the pilot given

that there is precedent, as you said, in the Microloan program for

making loans to nonprofit child care centers and the SBA’s proposal this year through disaster loan programs?

Mr. ROWE. Admitting to the precedent set by the prior administration, we would be comfortable exploring this, but what we would

really be comfortable with is understanding why the child care industry, I guess, is different in the same way that any other industry is different from any other. We have a large number of for-profit family child care centers in Massachusetts and a number of other

States, the majority of which are run by women and are not offered

the advantages that the not-for-profit child care industry receives.

Those family child care centers run by women in any number of

neighborhoods all across the State of Massachusetts pay property

taxes, which are specifically exempted under Massachusetts general law under Clause 3 in the property tax.

So we are looking at this as a fair competition issue, and allowing the not-for-profits to have access to the same funding stream

31

that the for-profit child care industry has we find just fundamentally inequitable.

Ms. WHEELER. Chris, and then we will go to Joan.

Mr. SIKES. First of all, I agree that in lending to nonprofits we

do need to be very careful. For example, in my town the YMCA and

the local what they call ‘‘The Body Shop’’ is a for-profit business

are at odds because of exactly the type of things that you have

brought up in terms of unfair competition in the exemptions that

the Y gets versus this for-profit.

I would say, though, that it—and I understand it is a difficult

issue, but I would also say that child care is a crisis issue in this

country and that when we look at the for-profit centers, they are

generally in areas that can require a higher fee because they are

in generally a higher-income area, and that the areas that we see

most of the nonprofit daycare centers are in lower-income areas

where they just do not have access, as easy access certainly, to the

market and market rate, and yet it is a necessity. And so the subsidy is really needed.

We are really trying to fill a gap here—and I was, as Joan said,

part of that group—fill a gap in the sense that these lower-income

daycare centers do not have access to traditional financing, and

they need some sort of subsidy, which the 504 really is, in order

to provide the essential services that are needed in the community.

And that is why this was brought forward.

So I do think it is needed to be further explored by the SBA, and

I would ask that they do that and really see if it is an exceptional

basis by which to make a loan.

Ms. WHEELER. Joan?

Ms. WASSER GISH. Thank you. If I may, I would like to respond

to a number of the points that, Tee, you raised.

First and foremost, the child care industry does play a vital role

in supporting private enterprise in free competition. There are, as

you know, 5.8 million small businesses that hire employees, and

many of those hires are, in fact, parents who are able to work by

the availability of child care.

Moreover, research has shown that quality early education and

care is associated consistently with improved worker productivity,

and studies have shown that availability of quality child care can

reduce employee turnover by 37 to 60 percent.

Conversely, breakdowns in child care availability are associated

with absenteeism, tardiness, and reduce concentration at work, all

of which can have very substantial impact on the operation of

small businesses. It is estimated that child care breakdowns leading to employee absences cost United States businesses in excess

of $3 billion annually.

Now, nonprofits comprise a substantial share of the U.S. child

care industry. According to the 2002 economic census, they are 35

percent of all firms with employees. They contribute to the economy both by supporting parent workers and also as employers in

their own right. In fact, they hire disproportionately. Job growth in

the child care industry is projected by the Bureau of Labor Statistics to increase by two and a half times the national rate, and nonprofit firms hire close to half of all employees in that industry.

32

Nonprofits are also playing a significant role in community development. They are choosing, as Chris said, to serve children and

families in economically depressed urban and rural communities,

places that are generally unappealing to for-profit entities because

the for-profits would like to have a higher parent fee revenue base

in order to make their margins.

In many communities, nonprofits are, in fact, the sole source of

center-based child care available, and they play a very important

role, particularly in helping to allow low- and moderate-income

workers to participate in the labor force.

In Massachusetts, for example, 90 percent of the subsidized care

purchased by the State, primarily with Federal block grants dollars

through the child care development block grant and TANF, is purchased from nonprofit providers.

In talking with Bill Hager from Child Care Services of York

County, ME, he estimated that about half of all subsidized care is

provided through nonprofits in that county. A study in Minnesota

found that 23 percent of all jobs in health care and 16 percent of

administrative jobs are directly supported by child care subsidies,

which are likely supported by nonprofit child care establishments.

In addition, the nonprofits are often hiring from within the communities in which they locate, and when they are locating in lowincome communities, they are facing very significant facilities challenges. One of the few States to study the facilities’ needs of the

early education and care industry is the State of Maine, and in the

study produced last year, it was found that improving facility quality is deemed ‘‘an urgent need,’’ that facilities are barriers to providing healthy and safe environments conducive to learning for the

children enrolled, and more than 70 percent of child care centers

in Maine identified facilities as a barrier to achieving accreditation,

which is a proxy for quality within the field.

In Maine, in Massachusetts, and a lot of other States where

there is aging building infrastructure, these nonprofits have to go

in and remove asbestos, eliminate lead-based paint, fix leaking

roofs, update electrical and plumbing. They have to make buildings

handicapped-accessible. They have to put in place plumbing and

child-size fixtures and other types of modifications that are necessary in order to create settings that are conducive to the health,

safety, and learning of the children enrolled. And these entities,

which, as I described earlier, tend to work very closely in terms of

receiving subsidized vouchers and contracts from the State, are actually prohibited to use their child care development block grant

funding for capital expenditures. And so by accessing the 504 loan

guarantee program, we would really allow these programs to build

and expand and upgrade their facilities and equipment.

Now, you mentioned access to grants that nonprofits might enjoy

that would not be available to for-profits, and while that is true,

it is also true in a very limited sense almost exclusively for those

nonprofits that are in States with a very, very strong philanthropic

base. On a national level, you might consider Massachusetts to be

one of those places, but places like Maine and Montana and Oklahoma and pretty much most of the country, availability of grants

is simply not there to meet those gaps.

33

You also raised some concerns about for-profits being faced with

unfair competition, and because in Massachusetts and in many

other States around the country the nonprofits are locating themselves in communities that are generally unattractive to for-profit

providers, in most cases that concern is probably not going to be

realized. The nonprofits are at more than 95-percent capacity in

Massachusetts. There is a wait list of about 19,000 children, which

is almost exclusively concentrated within urban and other low-income communities in the State.

In Maine, a study estimated that only one child care slot is available for every four children who need care so that parents can

work, and there is a wait list there of over 43,000 children. And

the Maine Office of Child Care Service and Head Start projects

shortages would be particularly acute in five of Maine’s counties—

Cumberland, Lincoln, Knox, Waldo, Penobscot, in particular.

So with all of those factors in place as well as some longer-term

trends projected in terms of women’s participation in the labor

force and some national movement toward providing universal prekindergarten, it is anticipated that there is likely going to be both

increased enrollment and increased demand, and there would certainly be room for both for-profit and nonprofits because they do

serve such different segments of the demand side.

Mr. ROWE. I appreciate all of that, and I have read your very interesting paper on universal pre-care that you did for Progress Policy. But we are not here to talk about the need for daycare generally nationwide. That is not the point. The point right now is the

propriety of using a small business program for non-small businesses, not-for-profit organizations.

The fact of the matter is they do compete, and compete unfairly.

Without paying income taxes, very often not-for-profit organizations are able to take employees away because they are able to

offer better benefits. They do not pay property taxes. Again, I bring

that up.

Every family child care center in the State of Massachusetts, just

for instance, has to pay property taxes. The State tried to, unfortunately not very well, create an exemption for small businesses on

property taxes. That was taken up by exactly five townships in the

State of Massachusetts. We are talking about a very wealthy State

that cannot support its small business base.

Ms. WHEELER. But the State endorsed this proposal, in fact,

came here and testified on behalf of it in 2003 at the last reauthorization, one of the many times it has passed. So while they may

have disagreement——

Mr. ROWE. Because the State of Massachusetts has a long and

unfortunate history of supporting not-for-profits to the detriment of

the small business community. And, frankly, we do not see the propriety of using a small business program for not-for-profit institutions.

Ms. WHEELER. They are not going to have tax revenues if people

are not working and people do not have places to put their children.

Mr. ROWE. Again, it is not an issue of the availability of daycare,

which we can all agree on, as a useful item for our economy. It is

a question of how we are going to support both the small business

34

sector and the nonprofit sector in daycare. And SBA believes that

it is not appropriate to use our programs for this.

Ms. WHEELER. But they do for microloans, and now they are asking to do it for disaster loans.

Mr. ROWE. Again, you are asking me to support a prior administration’s decision, and I am going to tell you that, yes, they supported that to a limited extent in the microloan industry. But I am

going to tell you——

Ms. WHEELER. I am just talking about the double standard that

we see here and what is on the books and what has been proposed

and what is in this proposal that has passed——

Mr. ROWE. Again, there is no double standard there. As I told

you, disaster assistance is a completely different item from our organized assistance for the mainstream of our economy.

Ms. WHEELER. Shall we turn to Chris Crawford? Do you want to

make some comments? Microphone, Chris.

Mr. CRAWFORD. I am sorry. Thank you. Chris Crawford with

NADCO. We have had a number of discussions about this. As Tee

and Mike probably both recognize, I would normally not support

lending through our program to not-for-profits because I well understand our mission. I would also suggest that daycare for any of

you folks that live in Washington—I have raised a son and now am

watching grandsons be raised. My daughter-in-law happens to

work in the daycare industry, so I have very personal experience

with it. I would suggest that lack of daycare is an economic disaster in this country, especially in the urban areas.

My daughter-in-law, who has worked in several different organizations, indicated to me there is not one that did not have a

lengthy waiting list for kids who could not get in. Those are almost

invariably, as Joan pointed out, generally mothers who are wanting

to work who cannot work because of that. My own daughter-in-law

cannot afford to pay for the daycare that she is working in.

I would suggest that not-for-profit daycare is certainly a needed

program. I do not believe that it will result in what I would call

excess capacity in this country. I am not sure there will ever be excess capacity.

So I would suggest that it is something that needs to be addressed some way by this Congress.

Ms. WHEELER. And I just wanted to clarify for the record that

NADCO did bring concerns to us when this pilot was first initiated

in the 107th Congress and that we worked through its members

concerns about underwriting standards, collateral, safety and

soundness issues, and that the 504 trade association, NADCO,

signed off on the language and is comfortable with the underwriting standards that we have for the pilot program.

Mr. CRAWFORD. You are absolutely correct. You worked very

closely with us, and I believe that these—we have a long history

of solid underwriting, as I have said before, and our track record

demonstrates it. I am all too aware that we work at zero subsidy,

which Mike is certainly concerned about, and we have absolutely

signed off on your proposal.

Ms. WHEELER. I would like to add that there was a letter from

the president and chief operating officer of Omni Bank in Houston,

TX, that said, ‘‘Designation as a nonprofit business does not equate

35

to an inability to pay loans or other expenses.’’ And the National

Black Chamber of Commerce has submitted comments where they

are strongly endorsing this because they see it as a local economic

development issue, supportive of small businesses, and believe that

this is a worthy cause to give this a try for 3 years. And CBO has

not attributed a cost to it of harming the program at all.

Joan, did you want to add something—we need to move on to the

7(a) program. We can come back after 7(a), but do you want to

make one more comment? And then we will go on.

Ms. WASSER GISH. Yes. I just again wanted to respond. I do

think that there has been an opportunity for comment and input

from a variety of different quarters, including SBA, the CDCs, and

others. And in that I do think that there are safeguards in place

that do reflect the sensitivity of the change that is on the table

through the child care lending pilot program. And because those

are in place and because this is a pilot and it is something to be

learned from, there will certainly be opportunities to address any

types of issues that would arise from it. And because of the particular nexus between child care and the small business economy

in particular in the Nation, this would seem to be an appropriate

provision to include within the bill.

Thank you.

Ms. WHEELER. Jackie, did you want to make any comments before we go on to 7(a)?

[No response.]

Ms. WHEELER. First I want to tell everyone—oh, can we come

back? Is it on the child care? Can we come back to that? Just because I know some people need to leave, and I appreciate everyone’s patience. Let’s go on to the 7(a) loan program, and then when

we wrap that up, if others want to make general comments on

what the Committee should do or about your organization, things

that are important, we will continue. Is that OK? All right. Let us

move on the 7(a) loan program, and I am just going to flip the

order for a minute from leading with the SBA because Tony

Wilkinson, who represents the 7(a) lending trade association,

NAGGL, has to catch a plane, and then we will go to SBA to

present their proposals. Is that OK, Jackie?

Ms. FERKO. That is fine.

Mr. WILKINSON. I am fine. My flight is not until 2:05 if they want

to go first.

Ms. WHEELER. Oh, did you want—OK. Well, Tee?

Mr. ROWE. Yes. Again, I will be brief because I know we have

got time constraints. I had mentioned the real estate and leasing

proposals previously. SBA is also seeking some additional supervisory and enforcement authority for small business lending companies. Small business lending companies, as you all may know,

are the 15 SBA-licensed 7(a) lenders.

SBA is also asking for legislative authority to enable our lenders

to use the systematic alien verification for entitlement program

that is run through the Department of Homeland Security. This

would eliminate the current rather cumbersome verification process and enable SBA and its partners to meet the requirements in

the Small Business Act that our programs only be used by resident

aliens and citizens.

36

The last item is SBA is proposing a guarantee fee for the secondary market under the prompt payment guarantee in Section 5

of the Small Business Act. The fee would not be imposed in either

fiscal year 2007 or fiscal year 2008. SBA is merely looking for this

fee as a possible fee to keep that prompt payment guarantee at

zero subsidy.

Currently the market keeps the program at a zero subsidy, and

the secondary market works at a wash. But long-term projections,

we are worried it may get upside down, and a minor fee, which

would be paid by the institutional investors who purchase the securities, would keep that in balance.

That is the entirety of it.

Ms. WHEELER. Tony?

Mr. WILKINSON. Again, Tony Wilkinson with the National Association of Government Guaranteed Lenders, and I appreciate the

opportunity to comment today. I just would like to touch on a couple of SBA’s points.

I would like to agree with Sally Robertson on the oversight fees.

You talked about the 504 fees coming up. The SBA has in process

right now a rule—they solicited comments on lender oversight fees

in the 7(a) program, and those fees could be upward of $150,000.

And I know most folks have opposed the charging of those fees and

would hope that this Committee would take a look at that proposal

and see what they have in mind. I am under the impression that

SBA is moving forward, and it appears to be—well, let me just go

to the secondary market fee. This is the third time, I believe, that

SBA has requested a secondary market fee—the ability to charge

a secondary market fee in their budget, yet they always put a zero

subsidy cost along with it. So they are just simply looking for the

authority to charge the fee.

It is my understanding that there are out-years—that they are

looking at somewhere in the neighborhood of 2017 is where potentially there might be a problem, and I think with that we have

plenty of time to figure out whether we really do have a problem.

And as we have learned over the last few years, if there is the ability to charge a fee, they are going to charge a fee. And do not think

for one minute that a fee on the investor does not end up being

charged to the borrower, because it will be.

Now, if there is a fee that is truly needed, then let us sit down

and talk about it, because the one thing we simply cannot have

happen is that the secondary market would close down because we

are a 1- or a 2-basis-point fee away from solving a problem. So if

there is a problem, please disclose it. Let us talk about it. We will

work through it. But my understanding is this is a problem that

is at least a decade away, and so I would question why we would

need to put forward a fee authorization today.

I would like to comment quickly on S. 1256. NAGGL endorses

this bill. This bill would substantially improve small businesses’ access to capital in many ways, including improving the ability of

small lenders to participate in the program, particularly through

WAC pools or weighted average coupon pools. This is a proposal

that NAGGL has had out for 10 years. I do not think the SBA disagrees with this at all. It has been more of a timing thing as to

getting around to it. This would improve the efficiency of the secVerDate 11-MAY-2000 16:41 Jul 16, 2008 Jkt 041274 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 C:\SBA\41274.TXT CELINA PsN: CELINA
37

ondary market and I think would help bring a lot of community

banks back to the program as pricing on Government-guaranteed

portions of 7(a) loans would improve. And, thus, if we get more

lenders involved in the program, it will improve the ability of small

businesses to access the program.

With respect to the idea that 7(a) fees need to be reduced,

NAGGL agrees with that proposition. Just a quick history lesson.

Over the last umpteen years, anytime there was a need to increase

fees, those fees were imposed on the largest borrowers. Anytime

there was an ability to reduce fees, the fees were reduced for the

smallest of borrowers. So today we have a mismatch between large

loans and small loans such that the largest loans pay more than

double fees that the small loans do. And on some of our largest

loan requests, those fees are more than $50,000, which is very,

very expensive. So if there was a way to look at a fee reduction targeted to the largest borrowers or to get our fees more in line, that

would be something that we would seriously look at.

That said, any fee reduction that would come forward must not

result in any kind of program curtailments or shutdowns, as we

have seen in the past. What we learned in the past was the costs

of shutdowns and program caps and program restrictions was far

greater than any of the fee reductions that came forward. So we

would ask that Congress not put anything in action that would result in a program cap or a program shutdown.

Finally, we are realistic and we want a bill. There are a lot of

good things in this bill. But we also believe that unless the administration says it is willing to accept authorization language to reduce fees, they will simply place a hold on this bill, and this bill

will not move. I hate to say that, but I believe the administration

is adamant about the 7(a) program not going back on appropriation, and hopefully this can get resolved soon so that the other

pieces of this bill can move forward.

Thank you.

Ms. WHEELER. Anyone else around table like to make a comment?

Mr. CRAWFORD. We are on 7(a)?

Ms. WHEELER. Yes, we are on 7(a).

Mr. KWIATKOWSKI. My name is Chris Kwiatkowski, and I am

with Popular, Inc. Popular, Inc., is a 113-year-old financial services

institution that was founded in San Juan, PR, and it was founded

to serve the underserved. And the North American subsidiary of

Popular, Inc., is Banco Popular North America, headquartered in

Rosemont, IL.

Since 1961, being in the States, we have participated in the SBA

program, and since our institution’s mantra is to serve the underserved, the SBA programs are crucial to our ability to do so.

We are a member of NAGGL. We do support what Tony has put

forward. There are just a few things that I would just like to reiterate.

First of all, the oversight fees would be exorbitant, excruciating,

and would chase lenders away from this program. This program

does not exist without lenders like Popular, and to charge over

$100,000, as we would be charged, being the fourth largest SBA

38

lender in the Nation now, that would seriously curtail our interest

in the programs. So we are very concerned about that.

Restoring funding to the SBA. I myself—just a little background,

my career started at the SBA. I worked at the SBA for 3 years. I

then went on to work for one of the largest banks in the Nation.

I owned my own small business. I have worked for the Nation’s

largest non-bank SBA lender, and I have been here at Popular,

Inc., the number four SBA lender, for the past 21⁄2 years heading

up this institution. So I have seen small business lending from all

sides.

I have seen the SBA head count severely diminished, and to the

points that these other gentlemen brought up before who are in

rural areas and locations outside of these metropolitan areas where

the SBA offices are located, the staff has been seriously demoralized for the SBA. They cannot reach the people they are trying

to reach. They cannot carry out the mission of the SBA. They have

been reduced to marketing outposts, and they cannot even effectively do that very well.

So an agency that brings so much good to the economy has been

seriously hampered in delivering that service, and we would wish

to see restored funding to the Agency.

Increasing loan limits, this is in the bill. I think all of NAGGL

is for this. We would love to see the SBA 7(a) loan program increased to $3 million. This would help us serve a much larger market, and it supports and benefits all parties involved—the Government, the private sector, the borrowers.

7(a) simplification. One of the most popular and successful programs the SBA has rolled out lately has been the Express loan program. It allows lenders to lend on their own documentation with

a single-page form and with a diminished guarantee. It has been

very popular because banks have to have technical expertise to participate in the SBA program.

I would love to see that same sort of ingenuity applied to the 7(a)

program as a whole to help uncomplicate it. As I said before, we

have to find specialized personnel to help administer this program.

The program has become a program of the have and have-nots. As

somebody pointed out earlier, ten lenders do the vast majority of

the lending in the Nation, and it is not easy to find that talent. It

is expensive talent, and most lenders will not participate in the

SBA program, or if they do participate and their guarantees get repaired or denied, they do leave the program. And, again, without

the lenders, there is no viability to the 7(a) program. So I would

love to see some sort of simplification to that program.

As Tony said, reducing the fees, an exorbitant amount of fees is

paid by the larger loans. Larger loans do create a lot of jobs, a lot

of tax base, and we need to keep that in mind when we are looking

at the 7(a) program.

Thank you.

Ms. FERKO. Kevin—and I think you would echo my same comments on here—and, Tee, I have told you this many times. Those

oversight fees, we have serious concerns about those. I know there

are many banks in Maine that have written to Senator Snowe saying that they are concerned and that they would not participate in

39

the program. And I am sure that is the same for Massachusetts,

too.

So before you move forward with making any action, the SBA

does, I would like for you to give us sufficient notification, number

one, whether you are going to move forward on it, and just let us

know what your plans are on that. I think that there is a lot of

serious stakeholders in this, and I know many other banks have

said that. They plan on not participating in the program.

Ms. WHEELER. Before we go on to James and Todd, may I just

ask SBA where they are on the reg regarding the lender oversight

fees that participants have raised concerns about.

Mr. HAGER. It is in process.

Ms. WHEELER. As final?

Mr. HAGER. This has been cleared by OMB, and it is going to the

Federal Register.

Ms. WHEELER. I am sorry. If that is the case, can you explain to

us when this would start to impact the lenders that participate in

the 504 and 7(a) loan program?

Mr. HAGER. The 504 is not included in this. Janet, what is the

effective date of this?

Ms. TASKER. Well, it is scheduled to be published I believe on

May 4th. I believe there is a 30-day effective date.

Ms. WHEELER. In 2 days? Great.

Ms. TASKER. It has gone through the proposed rule and comment

process and, you know, a final rule has been developed.

Ms. WHEELER. But, again, the effect is that when this is released

on the 4th, the fees that we have talked about will be imposed on

these lenders.

Ms. FERKO. For the 7(a) loan program, right, only.

Ms. TASKER. For the 7(a) loan program.

Ms. WHEELER. Right, and there will be——

Ms. TASKER. Smaller lenders, those lenders that would—you

know, again, it is an issue of on-site reviews or every other year,

unless there is a problem, then we need to go in more frequently.

In addition, there is—for really small lenders, we only look at those

that are 10 million and above, and then for really small ones that

are assessed, the outside market fee, if it is $100, $200, we waive

it completely.

Ms. WHEELER. But the issue is not whether people agree that

there should be oversight. I think there is agreement that we need

soundness. But the question is the imposition of additional fees on

our lending partners and how much they would be, right? Isn’t that

the disagreement at this table? The lenders are not saying they do

not want oversight. We understand that argument. It is just that

the fees they say they cannot stomach. So—oh, I am sorry. May I

just go to Todd. Todd, do you want to comment on the fees?

Mr. MCCRACKEN. No.

Ms. WHEELER. Could we just finish this very quickly? Who else

has a comment on the fees? All right. Go ahead.

Mr. MCCRACKEN. I only wanted to step back a little bit and look

at the picture that I think the small business community is facing

there. We released a survey of small companies just last week

where we asked companies specifically about their access to adequate financing, and we have seen a full 10-percentage-point drop

40

in the number of companies that say they have access to adequate

financing in the last 7 years. In fact, while they were steadily improving for quite a few years, we are now seeing members that

are—we are going to go back down in response to that question, approaching what we were seeing as we were emerging from the credit crunch of the early 1990s for the first time in quite some time.

At the same time, we are seeing a marked jump in the number

of companies that say they are carrying balances of some significance on their credit cards every month, and it is not because they

are suddenly getting a great deal from the credit card companies.

They say that their terms on their credit cards—by a six-to-one

margin, they say the terms on their credit cards have gotten worse

in the last 5 years. So, clearly, all is not well in the credit and capital markets for the small business community.

So I would like to say that by way of backdrop that this is not

the right time, I do not believe, to be increasing fees on lenders and

borrowers, and, in fact, we believe it is the right time to begin looking at ways to restore Federal appropriation for the 7(a) loan program and to begin to roll back the fees that you already have in

place. And to that end, I think the bill, the provisions specifically

in the authorization bill you have put forth begin to move us in

that direction and I think ought to begin to help address any

emerging credit issues before they fully blossom.

Ms. WHEELER. And, Todd, just remind everybody for the record

your organization.

Mr. MCCRACKEN. Oh, I am sorry. My name is Todd McCracken.

I am the president of the National Small Business Association.

Ms. WHEELER. OK. James, did you want to go ahead.

Mr. BALLENTINE. James Ballentine, American Bankers Association. I wanted to associate myself with Tony’s remarks and Chris’

remarks as well. On the issue of the fees, I think at some point we

are going to have to carve an ‘‘F’’ into SBA and just put, you know,

associated with fees there, because everything is a fee now related

to this 7(a) program. And whether it be oversight, whether it be the

annual fee, whatever, those fees continue to go up. And we would

like to sit here and say that those fees are not passed on to the

borrower, but they are passed on to the borrower in some way,

shape, or form. So to the extent that SBA is there to help these

small businesses, these fees are not helping the small businesses

at all.

I wanted to commend the drafters of the bill as well. There are

several provisions in there which ABA is in support of—the preferred lenders program, obviously—but I also wanted to commend

them on the Minority Small Business Development portion of the

7(a) title and the rural lending outreach program, which I think is

significant to help reach some of those smaller lenders that are involved in the 7(a) program.

When we speak of the oversight fees and we say that those fees

are largely going to be waived for the lenders that are on the low

end of the scale, well, there are over 2,000 lenders that are involved in the 7(a) program. If you go below the top 20, the number

of loans below that top 20 decreases significantly, and you have a

number of lenders within this program that only make one or two

loans.

41

So I would encourage the Committee not only to look at the oversight issue, oversight fees—I do not know if we can do anything

about that since we are, you know, 2 days away from it—but I

would also encourage the Committee to look at the 7(a) program

in its entirety. I think the program has a certain level of staleness

to it that needs to be addressed as we attempt to get more lenders

involved in this program.

Ms. WHEELER. Paul, you have been scarily quiet. Would you like

to say anything?

Ms. MERSKI. Just to continue on the fees, I find it somewhat preposterous that the SBA needs additional fees to do something when

there are several regulators already in the banks examining the

entirety of the banks’ loan portfolio. I see it as simply a money grab

of fees from the SBA to reduplicate a lot of the regulatory work already done by the FDIC, by the OTS, by the Fed. When these regulators come in, they examine all the banks’ loan portfolios, including every SBA loan in that portfolio. So it is somewhat preposterous that yet another agency would be levying fees in addition to

the fees that banks are already paying to have these loan portfolios

examined.

So we strongly object, and hopefully Congress can step in and

solve this problem.

Mr. WILKINSON. I would like to comment again on James’ point

of fees. I think if you look at the trend, first it was to take the 7(a)

program to zero appropriation. Then there was a proposal and in

last year’s budget, I believe, you wanted $7 million to cover your

overhead. Then there is a secondary market fee. Now there is a

lender oversight fee. And if you just look at the trend, the trend

is, you know, let’s reduce Government expenditures in this program, period.

And I think at some point in time we have got to raise our hand

and say: Where are we going? You know, this program has

switched from 90 percent of the loans going into the district offices

for loan approval where you had to have massive amounts of staff

to process loans, to today where 95 percent of the loans go through

expedited procedures, so we are doing all that work for you now,

yet your budget has taken a significant hit downward and you continue to try to pass loan fees. We are just raising our hands saying

it is time to slow down here, that part of this is your responsibility,

in particular the cost of the overhead at the agency. And I just

think the lender oversight fees are one that the agency should

cover.

Mr. KWIATKOWSKI. I have a question. I am familiar with the PLP

audits that we go through every other year, and it has been a normal course of business that we pay for those. Why is there this new

oversight beyond that? Because as Paul pointed out here, we are

subject to Fed audit. We are subject to our own internal audit. We

are subject to the PLP audit. What is this one more oversight?

Mr. HAGER. We do oversight on loan portfolios every month. For

example, the D&B system that we contract, we compare you

against your peer group of banks. We are under extreme scrutiny

to make sure that we are managing that portfolio, managing the

growth, which today is at the all-time highest, and to, you know,

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grow the portfolio and not have increased risk management is just

something unacceptable. We have got to do this.

We do think that—you know, I hear a lot about fees, and I hear

a lot about the fee increase. Practically every month someone

brings up fees. I want to show you something.

The myth is we have been raising fees in 7(a) and 504. Look at

these lines. The only time that the dip—this is a congressional dip

for a couple of years. But some of these fees go back to the 1990s

and they have never been changed. And when you look at 504

fees—I know you are all familiar with this. Look at what is going

on with fees. We are working very hard to achieve this. One way

we can achieve it is lender oversight, making sure we are managing the portfolios, we are eliminating risk, we are addressing

risk.

But here is the fee structure, and I am really puzzled every time

I hear the fact that our fees are going up and up and up and up.

Look at this. It is not true.

Ms. WHEELER. Well, I think that there needs to be a clarification.

One, we are talking about 7(a) fees, and——

Mr. HAGER. This is 504.

Ms. WHEELER. I understand that, but there was a chart up on

7(a) fees. And I have seen the press scolded for printing that the

administration doubled the fees and rebuttals from the administration that that is not true. And I think it is important to note that

that is not quite accurate. While, yes, Congress holds the only

power to change the law and it has changed the law, the reason

the fees did not become permanent as Congress was proposing during the 2003 reauthorization is because SBA wanted to go to zero

subsidy. In order to take it to zero subsidy, the fees were raised.

That was not in a House bill. That was not in the Senate bill.

In fact, when we went into the appropriations season for that omnibus for 2005, there was money that had been put in on the House

side to restore appropriations as well as on the Senate side.

Mr. HAGER. What year was that? Excuse me.

Ms. WHEELER. 2004.

Mr. HAGER. OK.

Ms. WHEELER. December of 2004. I believe it was the 4th of December, possibly 108–664. I do not know.

[Laughter.]

Ms. WHEELER. I believe that it was in that bill——

Mr. HAGER. Are you sure it was not 665? No.

[Laughter.]

Ms. WHEELER. The omnibus 2005 bill is where SBA succeeded in

taking the program to zero subsidy. In order to get there, the proposals that were put forward by both the House and Senate were

eliminated and the fees were raised in the program. So I think it

is important to know——

Mr. ROWE. Well, to be fair, Kevin, those fees were not raised.

They were restored to their prior level.

Ms. WHEELER. But, no, let’s note the distinction here. The legislation pending in Congress was to make those permanent, and the

genesis of those fees going down was that, if we go back and look

at the record, as Senator Bond’s staff noted, the fees were increased at one time when they took the program, they said, oh, the

43

costs are going up, the business community is going to have to contribute a little bit more so that you all can get to the program levels that you want. And the industry started coming to us and noticing that the subsidy rate—and I am sorry to get very technical

here. The accounting method by which they determined how much

it cost to run these programs was seriously broken, and it was referred to as ‘‘a black box.’’ And nobody could figure out where these

cost estimates were coming from. And, of course, this is not a partisan issue. Both sides were running OMB during this, and what

they said was if we cannot get OMB to cooperate and to fix this

subsidy rate problem, then Congress will lower the fees because the

GAO study came out and concluded that borrowers and lenders

had been overcharged by almost $1 billion. I think it was $980 million or something.

So Congress took it into their hands to lower the fees until we

could get traction. So then comes the new subsidy rate model, the

econometric model, and what do we see the first year that it comes

out in the President’s budget? It is wrong by 67 percent. And if we

look at the President’s budget this year, every year that it has been

in place, it is still off. It has been operating at a zero subsidy.

So please do not present the fee increase as the doing of Congress.

Mr. ROWE. You know GAO said that the econometric model is

completely reasonable, and, yes, it is not exact. It cannot be exact.

No one can make one that is exact.

Ms. WHEELER. I understand that, but please do not present to

the public——

Mr. ROWE. The re-estimates have been downward——

Ms. WHEELER [continuing]. That Congress is the one——

Mr. ROWE [continuing]. For the past few years.

Ms. WHEELER [continuing]. Who raised those fees or draw disingenuous nuances that they did not go up, they just lapsed. That

was not Congress’ intention——

Mr. ROWE. The fees were lowered after 9/11——

Ms. WHEELER [continuing]. And we went into that session making those lower fees permanent. And I do not know anyone in this

room who was part of those negotiations who would disagree with

the facts there. So, please, do not say that. The administration

wanted this program to go to zero subsidy——

Mr. ROWE. I am not denying that——

Ms. WHEELER [continuing]. And to get there, those fees——

Mr. ROWE [continuing]. Any more than the Clinton administration did not want it to go to zero subsidy. They did, too. It is a good

policy. It gives us a good solid program.

Ms. WHEELER. But there is disagreement over that, and that is

not what this is about. I am asking, please, from the Committee’s

perspective, do not distort the facts of whose proposals belong to

whom.

Now, on the fees, can we go back to the review fees? In 2 days,

these go into effect. Is there any way—because we hear grave concern at this table that it would be harmful to access to credit

through the SBA’s program. Is there any way that we can work

with the administration before those are finalized?

44

Mr. ROWE. I do not know. It is possible for the administration to

withdraw that. It is. I would not lie to you about that. But, honestly, I do not know whether it is probable.

Ms. WHEELER. And is the administration going to have anyone

place holds on the reauthorization bill if the current language on

fee reduction allowing appropriations for fees, should there be any

still in the bill when it comes before the full Senate?

Mr. ROWE. The administration’s position is that the 7(a) fee, zero

subsidy policy, makes the most sense for the program, and that

there is honestly no fiscal necessity for lowering fees in the program. The current fee structure is almost identical to the fee structure in place in 1996 and forward. And, frankly, we have all seen

the CBO estimate to lower the fees in the program or eliminate—

to eliminate the fees would cost approximately $600 million; I

think about $589 million to be precise. To just cut the fees in half

would be about $300 million. And the cost savings we are talking

about there are honestly de minimis. To the average borrower, it

is perhaps $10 a month; to a lender, $657 on the annual ongoing

fee.

And, frankly, $300 million could be better spent elsewhere because what that does is puts us in the situation of, if you will, a

first-to-the-courthouse program. If we run out of appropriation support, then everybody who comes in later in the year ends up with

a higher fee. The administration does not support a situation

where a borrower is going to be penalized for wanting a loan in

September as opposed to May.

Ms. WHEELER. May I just clarify, in case there is a confusion,

that the language in the bill does not require full funding to get

to a program level that the industry is proposing, such as $18 billion. What the language in the bill does—and it has passed several

times, and a version of it was passed as part of that omnibus 2005.

What it says is that if there were appropriations or if there were

excess fees charged, that the administration could reduce the fees

on borrowers and lenders. What is in law right now is not workable

because there is the qualifier that it must be a zero subsidy, and

it creates a catch-22, and it only applies to borrowers. It would not

reduce the fees on lenders, too, and we have heard concerns that

should there ever be the occasion, the opportunity to reduce the

fees, that it should apply to both lenders and borrowers.

So I want to make clear that while we understand the administration does not want appropriations, this does not mandate appropriations. What it does is fix the current language and make it possible to reduce fees should there ever be an opportunity to do it.

And so I just want to make that clear because I think that there

could be a distinction that this would cause shutdowns, that it is

so expensive, that somehow we are going to have to come up with

$600 million in order to keep the program running, and that is not

the effect.

Mr. ROWE. Now, and that is not what I said. What I said

was——

Ms. WHEELER. OK.

Mr. ROWE [continuing]. That any reasonable reduction—or I

would not even say ‘‘reasonable,’’ but that to have any noticeable

45

reduction in the program, it would cost something on the order of

$300 million.

Ms. WHEELER. OK. I just make that point because it is important

that if the administration is planning to put holds on this bill, the

holds would not—it seems to me that the holds are not necessary

because it does not interfere with zero subsidy or demand the appropriations. It is fixing something that is currently in law. So——

Mr. ROWE. Well, no authorization bill can ever demand an

appropriation——

Ms. WHEELER. I understand that, but——

Mr. ROWE [continuing]. Unless it is a mandatory account.

Ms. WHEELER [continuing]. There is a distinction here, and so if

the goal is—and I think Senator Kerry made it clear that he wants

a bill, a reauthorization bill. We have not had a real reauthorization bill in years. And everybody has worked very hard in the industry. We keep spending people’s time and money to come up with

proposals that would improve upon these programs, that if we

want a bill, that it does not seem reasonable to put a hold on a

bill when it would not interfere with the policy stand of the administration.

Mr. ROWE. I guess we are going to have to agree to disagree.

Ms. WHEELER. OK. Tony, did you want to say something?

Mr. WILKINSON. Yes, if I could. The NAGGL members account for

over 80 percent of all the 7(a) loans that are made annually, and

our members have made it very clear that they have been pleased

with the fact that there have been no program disruptions over the

last couple of years.

That said, large loan volume since we have gone to zero subsidy

has gone down. The SBA has done a very nice job with the express

program. There are 10 to 20 lenders who are fully utilizing that

program, and that is where we have seen the big growth in numbers. So we have got about 80 percent of our numbers of loans

being done by the 20 most active express lenders, and they are

doing loans with an average loan size of about $50,000.

But the old regular meat-and-potatoes 7(a) program is still there,

and it is done by a broad-based group. The problem is since 2005

our large loan volume is slipping, and that is where we are focusing, on the fees on large loans as perhaps a way to get some volume back into the larger loan category.

That said, we just simply cannot have program caps and shutdowns because that is very disruptive and very difficult to manage

a lending operation if you are always worried about are we open

tomorrow or are we not. Our members have liked business as usual

for the last 2 years.

Ms. FERKO. Tee, again, I want to revisit this oversight issue, the

oversight fee. In 2 days, something is going to change, and we need

to address this now. I mean——

Mr. ROWE. Well, the rule goes final in 2 days. It does not get implemented for 32 days.

Ms. FERKO. Now, you received overwhelming criticism back in

October and November during the comment period. Why wasn’t

that taken into account?

Mr. ROWE. Well, Mike, maybe you can answer.

46

Mr. HAGER. The comments were carefully assessed. We come

back to the same issue. The way we have stabilized, we believe, the

fee structure is through managing the portfolio. This enables us

to—managing the portfolio from a quality standpoint. This enables

us to expand that oversight of that portfolio. It enables us to place

in-depth analysis of lenders on a priority, and we believe over time

it will be good for everyone. And, yes, we did solicit comments. We

addressed the comments to the extent possible. But we also felt

that we had to increase the oversight of the program.

Ms. FERKO. So you are saying what currently in the structure,

oversight structure of the program——

Mr. HAGER. That is correct.

Ms. FERKO [continuing]. Is not appropriate.

Mr. HAGER. We think it needs to be enhanced, and that is what

this program does for us.

Ms. FERKO. Kevin, could you—I have not heard from SBA that

this needed to be enhanced. Have you?

Ms. WHEELER. Again, what I hear is a distinction here only on

money. There does not seem to be a disagreement on oversight.

There seems to be a disagreement on who should pay for it. And

so the feedback we are getting is that it will be harmful to the

small businesses, and that is really who the SBA is supposed to be

serving. We want to keep that access to capital open. And so I

think that there really—the Committee would like to see SBA come

talk to us and see where we can—if there is some way to find a

more reasonable approach.

Mr. ROWE. And in implementing this, the administration was operating off of the authority we have been given and operating off

of what we consider to be fairly regular practice among financial

regulatory institutions.

Now, as Paul mentioned, OCS, OTC, FDIC all come in and examine banks for safety and soundness and other financial aspects. But

the fact is they do not pull SBA-based loans unless they happen to

grab one by accident in a random audit. Our oversight is very specific to our portfolio, which, you know, our guarantee operates as

a little bit of a shield for the average bank, and as something that

the FDIC will not normally examine very carefully. So that leaves

it in our lap.

Now, the cost of the fees, again, that is a separate issue.

Mr. HAGER. You asked specifically what this does. This enables

us to move the audits, reviews, from the current level of about 50

a year to 250—again, significantly broad—and the same review

process but more of it.

Ms. WHEELER. Again, nobody is arguing——

Mr. WILKINSON. No, we absolutely support the oversight function. I think my overriding concern is the continuation of trying to

push your overhead costs out to the lenders. This is a fee that is

going to hit the existing portfolio that we did not know anything

about at the time the loans were made. So it is now an add-on fee

to a loan that is already on the books. It will impact the pricing

structure for borrowers going forward because we have got to recoup our costs somehow. I mean, at the very least, it almost needs

to be a fee on a go-forward basis, on new loans we originate. But

we do not want to have any hiccups in our credit quality. We are

47

all for lender oversight. That is an appropriate function for you to

service. I absolutely do not want to come to the Hill and argue

about a subsidy rate problem because of bad credit. I do not want

to be here doing that. But I do question, you know, whose responsibility is it to pay for these reviews now, and I just think it is an

overhead function of the agency that should come out of your budget.

Ms. FERKO. Annually, how much would these fees cost, these additional oversight fees?

Mr. HAGER. It would be between $20,000 and $25,000 a review.

Ms. FERKO. Totally?

Mr. HAGER. Biannually. It is not every——

Ms. FERKO. Annually? OK.

Ms. WHEELER. No. Weren’t you asking how much it would cost

for the SBA to do the——

Ms. FERKO. Yes, I mean, how much in appropriations instead of

for the lenders.

Mr. ROWE. If we did not charge the fees and had to cover the overhead, it would probably be $7 or $8 million, as just an estimate.

Ms. WHEELER. I think the SBA is losing ground here.

[Laughter.]

Ms. WHEELER. I think we have gone over this issue enough, and

I feel sorry that so many people have been here and have not had

a chance to comment. Let’s just say for the record we understand

that this is a problem, and hopefully we can talk to SBA about this

before the final reg is released, and let’s go to the other people at

the table who have their cards up.

Mr. HAGER. Excuse me. Just one, if I may.

Ms. WHEELER. Sure.

Mr. HAGER. The lender reviews, the audits, we also have in that

a cost for the D&B expense that I referenced earlier. So it is a combination of that. But the number that Tee mentioned, the total

budget for this is about $8 million.

Ms. WHEELER. Right, and that includes the——

Mr. HAGER. Which includes the D&B cost.

Ms. WHEELER. OK. As I said, that weakens SBA’s justification for charging this if it is not saving $7 million versus the potential

unintended consequence of driving lenders out of the program or

ultimately increasing the cost of SBA loans to borrowers. So I think

we have been over this.

Ann, did you want to say something?

Ms. SULLIVAN. Just two comments on the issues we discussed. I

am Ann Sullivan with Women Impacting Public Policy.

First of all, it gives—the people I represent are the borrowers.

They are the end users. So it gives us great pause, sitting here listening to this discussion, the comments of the lenders, that increased fees will decrease participation in the programs. That is

counterproductive to what certainly my membership is interested

in.

Second of all, I just wanted to go back to the Women’s Business

Center microloan discussion. We are all for cross-pollination, so it

sounds like the microlenders sitting here with their technical assistance, I just want to encourage that any cooperation between

48

Women’s Business Centers and their assistance can be coordinated.

I know that in rural areas you have mentioned it is not possible,

but there are a lot of Women Business Centers that I think are trying to serve the same population that you are, and we just would

encourage them to work together.

Ms. WHEELER. Paul, did you want to make a comment? Do you

remember what your question was? I know your placard has been

up for a long time.

Ms. MERSKI. Not to beat a dead horse here, but I was going to

ask if the SBA had checked with several other banking regulators,

if they would, in fact, be able to expand their audits or oversight

in the process of already being in the bank to look more carefully

at the SBA loans if they are not, which, frankly, I think they are

already looking into these SBA loans, particularly for banks that

have large SBA loan portfolios, and why the SBA would need to

charge an additional fee for something other regulators are already

in the bank doing. And I would be curious to see if they have

checked with the Federal Reserve, the FDIC, the OTS, State bank

regulators, if they, in fact, look at this before imposing a new fee

and going ahead with additional oversight in the bank, which will

be costly to the bank in time and resources in the bank in addition

to the fee.

Ms. WHEELER. Giovanni, would you like to make a comment?

Mr. CORATOLO. Giovanni Coratolo. I am Director of Small Business Policy for the U.S. Chamber of Commerce. We represent 4,000

State and local chambers, and I will tell you the 504 program, as

well as the 7(a) program, is critical to those State and local chambers. We are very engaged in access to capital for small business.

We were involved several years ago in several battles involving

subsidy as well as the econometric model. Over the last several

years, I guess we have been on the sidelines. We do look toward

Tony as well as Chris as far as the leadership in those programs,

and we do subscribe to most of what they have said as far as the

health of those programs.

I would strongly encourage SBA to look at what they have said

as far as the comments they have had as far as the health of those

programs, and we will certainly look to see how this proceeds in

the future as to whether we get involved again and to making sure

that the SBA 7(a) and 504 programs stay healthy for the future.

Ms. WHEELER. And has the U.S. Chamber of Commerce seen,

like NSBA, any survey or anecdotes from their members about the

increased need for SBA’s programs as they rely more heavily on

credit cards or about needing more access to capital?

Mr. CORATOLO. We have done several surveys, one involving the

minority business lending, and we find that it is an underserved

community. As far as over time, we see the health of those programs waning a little bit. As far as when we are talking about 504

and 7(a) as we go into the future, we are a little concerned as to

its ability to service our small business needs. And, you know, we

have not seen any direct surveys like Todd has put forward, but

at this point we are still on the sidelines, but we can be encouraged

to be brought into the fight.

Ms. WHEELER. OK. I want to allow anyone else to make comments, and everyone should else feel free to go. Thank you for parVerDate 11-MAY-2000 16:41 Jul 16, 2008 Jkt 041274 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 C:\SBA\41274.TXT CELINA PsN: CELINA
49

ticipating. We really appreciate your time and your patience waiting your turn to make comments. But as I said, we will just spend

maybe another 15 minutes to tie up loose ends since we got off to

a bit of a late start.

Chris? Oh, I am sorry. Jim Morrison. I am very sorry. We would

like to hear from Jim Morrison. He has not had a chance to speak.

Mr. MORRISON. Excuse me. I am Jim Morrison. I am the president of the Small Business Exporters Association of the U.S. I have

just a point about one section of the bill I would like to comment

on.

Ms. WHEELER. Is your microphone on?

Mr. MORRISON. Section 309. We really do appreciate the Committee’s responsiveness to the needs to increase the loan sizes of the

international trade loans and utilize the refinancing terms and the

collateral terms offered for the other loans. That is a very positive

aspect of this bill. We also appreciate the Committee’s support on

the size of the guarantee.

Ms. WHEELER. And the guarantee is important as an incentive

to lenders?

Mr. MORRISON. That is correct, because there is foreign risk involved, and a guarantee is quite important.

Ms. WHEELER. OK. Thank you.

Chris?

Mr. CRAWFORD. Thank you, Kevin. First of all, I want to thank

the Committee for the hard work on the bill. We strongly support

this bill, as you know already.

Ms. WHEELER. Is your microphone on?

Mr. CRAWFORD. I am sorry. We are concerned—there is one section under the definition of CDC, use of excess funds. We are very

concerned with the ethics issue. We are concerned with where SBA

is going in terms of pushing CDCs to expand, expand, expand, take

greater risks potentially in the future, serve markets they are not

naturally serving, they are not used to serving, opening CDCs

willy-nilly. There are some IRS regulations that address the question of what are not-for-profits for, what are they supposed to do,

what are they not supposed to do. We would urge the SBA to take

a look at those IRS regulations—I happen to have a copy here for

your benefit—and be cautious in terms of this continued expansion

of CDCs, their role, the authorities of their staffs and associates,

especially.

Ms. WHEELER. I think the Committee in the bill makes clear that

there is a distinction between lenders and the intermediaries and

the purposes they serve, that banks are strictly for lending, whereas CDCs have a special role in not only providing capital but spurring community and economic development. And so we will work

with you, if you are concerned about that provision. We feel that

the Committee worked it out between the Chairman and—well,

let’s just say Senator Kerry and Senator Snowe in the last Congress, and so it was incorporated it in this bill. But we are happy

to work with you to address your concerns.

Mr. CRAWFORD. Kevin, you have actually done a marvelous job

doing that, and I appreciate what you have written in 1256. But

I urge the administration to look more cautiously at the way they

50

are implementing regulations and proliferating regulations, not the

least of which, obviously, is this big surprise on the fees.

Ms. WHEELER. OK. Thank you.

Joan, did you want to have any more comments on the child

care?

Ms. WASSER GISH. No.

Ms. WHEELER. SBA, Ron, Paul, Sally?

Mr. PHILLIPS. The only thing I wanted to say earlier about the

child care, because I did mention we had financed a child care facility in South Portland with the 504, that was a for-profit. We do a

lot of financing of child care facilities in the State of Maine, both

nonprofit and for-profit. On the nonprofit side, I just want to back

up some of the comments made, that the whole goal here is to get

affordable child care to the private sector, and that is the ultimate

goal. And nonprofits tend to be working with those harder-to-serve

and people who cannot pay as much as in the for-profit side. And

so we have a lot of evidence for that, and that is why this program

probably would not be competing at all, but just be a complement

if you were able to open this up. So that was one thing.

And I did want to thank Senator Snowe, too, and Senator Kerry

for this. I thought and we all think quite a visionary and innovative bill that is put forward here with different components. Thank

you for your work, and the Senator for that, too. Thank you.

Ms. WHEELER. Thanks, Ron.

Ms. FERKO. Thank you.

Ms. WHEELER. SBA, anything else?

[No response.]

Ms. WHEELER. Thank you, everyone. We appreciate it.

[Whereupon, at 1:14 p.m,. the roundtable was concluded.]

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COMMENTS FOR THE RECORD

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