U.S. GOVERNMENT PUBLISHING OFFICE

35–910 WASHINGTON : 2019

SBA 7(A) BUDGET PROPOSAL AND THE IMPACT 

OF FEE STRUCTURE CHANGES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX, AND CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED SIXTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

APRIL 10, 2019 

Small Business Committee Document Number 116–015 

Available via the GPO Website: www.govinfo.gov 

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Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA VELA ́ ZQUEZ, New York, Chairwoman 

ABBY FINKENAUER, Iowa 

JARED GOLDEN, Maine 

ANDY KIM, New Jersey 

JASON CROW, Colorado 

SHARICE DAVIDS, Kansas 

JUDY CHU, California 

MARC VEASEY, Texas 

DWIGHT EVANS, Pennsylvania 

BRAD SCHNEIDER, Illinois 

ADRIANO ESPAILLAT, New York 

ANTONIO DELGADO, New York 

CHRISSY HOULAHAN, Pennsylvania 

ANGIE CRAIG, Minnesota 

STEVE CHABOT, Ohio, Ranking Member 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member 

TRENT KELLY, Mississippi 

TROY BALDERSON, Ohio 

KEVIN HERN, Oklahoma 

JIM HAGEDORN, Minnesota 

PETE STAUBER, Minnesota 

TIM BURCHETT, Tennessee 

ROSS SPANO, Florida 

JOHN JOYCE, Pennsylvania 

ADAM MINEHARDT, Majority Staff Director 

MELISSA JUNG, Majority Deputy Staff Director and Chief Counsel 

KEVIN FITZPATRICK, Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Andy Kim ........................................................................................................ 1 

Hon. Kevin Hern ...................................................................................................... 2 

WITNESSES 

Mr. Tim Gribben, Chief Financial Officer and Association Administrator for 

Performance Management, U.S. Small Business Administration, Washington, DC ............................................................................................................. 4 

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

Guaranteed Lenders, Stillwater, OK .................................................................. 13 

Ms. Lynn G. Ozer, President, SBA Lending, Fulton Bank, Pottstown, PA ........ 14 

Ms. Gail Jansen, Vice President of Business Services and Operations, Kinecta 

Federal Credit Union, Manhattan Beach, CA, testifying on behalf of the 

National Association of Federally-Insured Credit Unions ................................ 16 

Mr. Gordon Gray, Director of Fiscal Policy, American Action Forum, Washington, DC ............................................................................................................. 18 

APPENDIX 

Prepared Statements: 

Mr. Tim Gribben, Chief Financial Officer and Association Administrator 

for Performance Management, U.S. Small Business Administration, 

Washington, DC ............................................................................................ 27 

Mr. Tony Wilkinson, President & CEO, National Association of Government Guaranteed Lenders, Stillwater, OK ................................................. 30 

Ms. Lynn G. Ozer, President, SBA Lending, Fulton Bank, Pottstown, 

PA ................................................................................................................... 37 

Ms. Gail Jansen, Vice President of Business Services and Operations, 

Kinecta Federal Credit Union, Manhattan Beach, CA, testifying on 

behalf of the National Association of Federally-Insured Credit Unions .. 47 

Mr. Gordon Gray, Director of Fiscal Policy, American Action Forum, 

Washington, DC ............................................................................................ 55 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

CBA - Consumer Bankers Association ............................................................ 61 

CUNA - Credit Union National Association ................................................... 63 

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(1) 

SBA 7(A) BUDGET PROPOSAL AND THE 

IMPACT OF FEE STRUCTURE CHANGES 

WEDNESDAY, APRIL 10, 2019 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:04 a.m., in Room 

2360, Rayburn House Office Building, Hon. Andy Kim [chairman of 

the Subcommittee] presiding. 

Present: Representatives Vela ́zquez, Kim, Davids, Delgado, 

Crow, Hern, and Stauber. 

Chairman KIM. Good morning. The Subcommittee will come to 

order. 

I want to thank everyone for joining us this morning, and I want 

to especially thank the witness—witnesses who have traveled from 

across the country to be here today. 

Just before we jump into things, I do want to just remark that 

we will have votes coming up shortly. We are going to try to see 

if we can get through some of our opening remarks before we are 

able to—before we are called over to go and vote. So I am just 

going to just jump straight in here. 

On this Subcommittee, we are focused on making sure that small 

businesses, whether in my district or in Ranking Member Hern’s 

district in Oklahoma, and every district across this country, can access the capital that they need to start, grow, and create new jobs. 

And we know that when capital is affordable and accessible, small 

businesses can do what they do best, which is strengthen our communities and fuel our economy. 

This is certainly something that I have witnessed firsthand in 

my own home State in New Jersey, where we have more than 

850,000 small businesses, making up 99 percent of our State’s businesses, employ over half of our workers. 

Recognizing that access to capital is a challenge for many entrepreneurs, SBA offers a variety of loan programs designed to help 

borrowers who may have a difficult time securing financing 

through other conventional lending markets, which brings me to 

the reason that we are here today, and that is to ensure that SBA’s 

flagship 7(a) loan guaranty program is functioning to best serve our 

small businesses and taxpayers. 

This critical program has been a vital source of capital access for 

thousands of small businesses in my home district since 2008. In 

2018 alone, the 7(a) program has supported 204 businesses in my 

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district, totaling over $58 million in loans. Additionally, the program has served businesses in an incredibly wide range of industries ranging from catering companies to nurseries. 

Under the 7(a) program, SBA partners with banks and nonbank 

lending institutions who make up loans to small businesses, with 

SBA reimbursing a portion of the loan in the event the borrower 

defaults, also known as the guarantee. This guarantee minimizes 

the lender’s risk in making the loan to the small businesses. And 

generally, SBA guarantees from 50 to 90 percent of each 7(a) loan 

made, depending on the loan characteristics. 

Now, to offset that cost of issuing these guarantees, SBA charges 

an upfront, one-time guarantee fee and an annual ongoing service 

fee for each 7(a) loan approved and dispersed. Now, traditionally, 

one of SBA’s goal is to achieve a zero subsidy rate for its loan guaranty programs, including for the 7(a) loan. This occurs when the 

programs are projected to generate enough revenue through fees 

and recoveries of collateral to issue that year’s guarantee without 

requiring congressional appropriation. 

Now, to calculate that subsidy rate, SBA and the Office of Management and Budget use an econometric model that takes into account numerous macroeconomic and SBA-specific assumptions, and 

if they predict a shortfall, SBA requests an appropriation from 

Congress to address it. 

Now, excluding the period from 2010 to 2013, when our Nation 

was recovering from the Great Recession, SBA has operated at zero 

subsidy since 2005. However, in its congressional budget justification for fiscal year 2020, SBA predicts that without modifications 

to the current law, it cannot achieve a zero subsidy rate for the 7(a) 

program. 

I look forward to hearing from Mr. Gribben about what goes into 

the calculation and understanding of why cash outflows exceed 

inflows resulting in a positive subsidy in the 7(a) program for fiscal 

year 2020. 

In response to the positive subsidy, SBA proposed numerous and 

considerable fee increases on both borrowers and lenders, and this 

caused a great deal of anxiety among small businesses, small business borrowers, and the lending institutions that participate in the 

7(a) program. Any increases in fees like those SBA has suggested 

to cover this shortfall could result in fewer small businesses applying for and getting access to capital, and that is why today’s hearing is so timely and important. 

And I look forward to hearing from our witnesses on potential solutions to this issue. And we can all at least agree that these programs are incredibly important, and I look forward to working with 

my colleagues on both sides of the aisle to address the challenges 

facing our small business owners when it comes to securing capital. 

Again, I want to thank all the witnesses for being here. I now 

yield to the Ranking Member, Mr. Hern, for his opening remarks. 

Mr. HERN. Thank you, Mr. Chairman. 

Mr. Gribben, thank you for being here. 

Despite ongoing positive economic news, the Nation’s smallest 

firms continue to face challenges when it comes to regulations, saving for retirement, access to capital. I know these challenges personally and professionally. I have been a small business owner for 

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over 34 years. Additionally, I have served 17 years on bank executive boards; 13 years on McDonald’s leadership team, which represents over 3,500 franchises; 8 of those years as ombudsman; 5 

years as Chairman of the Systems Economic Team; 5 years on the 

McDonald’s Tax Policy Team; and 8 years on the McDonald’s Insurance Corporation Board. I know these issues facing our Nation’s 

smallest firms firsthand. 

In order to help fill the gap that exists for small businesses when 

it comes to access to capital, the Small Business Administration offers numerous financing and lending options. The flagship and 

largest program is the 7(a) loan program that does not provide direct loans to small businesses but provides guarantees on the loans 

made by partnering financial institutions to eligible small firms. 

The program has grown rapidly in recent years with the program’s authorization cap going from $18.75 billion fiscal year 2015 

to fiscal year 2020 budget request of $30 billion. 

Additionally, the 7(a) loan program has built-in fees to help offset 

the cost of any losses in the program per the Federal Credit Reform 

Act of 1990. Because fees have been sufficient over the last half 

dozen years, the program has been running on zero cost to the 

American taxpayer. 

Within the fiscal year 2020 budget submission, the model that 

calculates the cost of the program indicates that the 7(a) loan program will no longer be at a zero subsidy. Rather, the program may 

require $99 million appropriation for and by American taxpayers or 

an adjustment to the fee structure that hits program participants. 

According to CRS, the average loan size in the SA loan—7(a) 

loan program is approximately $420,000. That is a total of $25.4 

billion in loans last year, over 60,000 total loans. A bill is important to run this average to the SBA’s legislative proposal that 

would bring the program to zero subsidy. 

While I acknowledge there are nuances to the fee structure, the 

average loan size of $420,000 does not seem to be impacted by the 

fee proposal if the maturity of the loan is more than 12 months. 

The upfront fee that goes to borrowers on the small business 

owner for loans of $500,000 or less seems to remain at 3 percent. 

Additionally, that fee that lenders have to pay, the ongoing fee, 

also does not appear to change for loans under $500,000. 

However, before we entertain the legislative options of either appropriation or fee change to close this potential $99 million gap, we 

must explore the reasons behind the shortfall and gain a better understanding of the model used to calculate the cost. 

What variables or assumptions are used in a model and has the 

model changed over the years? I look forward to both panels that 

will explore these questions and more. 

And, Mr. Chairman, I ask unanimous consent to enter this letter 

from the Credit Union National Association, that is addressed to 

you and I, and it is challenging us to find an amiable solution to 

keep this program viable. 

Chairman KIM. So ordered. 

Mr. HERN. And, Mr. Chairman, I yield back. 

Chairman KIM. Thank you. 

We certainly are very blessed to have the extraordinary experience that the Ranking Member brings to the Small Business ComSBR002 with DISTILLER

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mittee, and he and I are committed to be able to work on this in 

a bipartisan way. Hopefully before votes, we will be able to finish 

on up, so I just wanted to have a chance to be able to introduce 

our first witness here. 

Our first witness is Mr. Tim Gribben. Mr. Gribben is the chief 

financial officer and associate administrator for performance management at the U.S. Small Business Administration. And in this 

role, he has the responsibility of all aspects of SBA’s financial management, internal controls, and acquisition. He has been with the 

SBA since 2009, when he started as a director of performance management and deputy performance improvement officer. 

Mr. Gribben, why don’t we just jump right in. You are recognized 

for 5 minutes. 

STATEMENT OF TIM GRIBBEN, CHIEF FINANCIAL OFFICER 

AND ASSOCIATION ADMINISTRATOR FOR PERFORMANCE 

MANAGEMENT, U.S. SMALL BUSINESS ADMINISTRATION 

Mr. GRIBBEN. Thank you, Chairman Kim, Ranking Member 

Hern, and members of the Committee. Thank you for inviting me 

to discuss SBA 7(a) loan program and our fiscal 2020 budget proposal. 

I have served as the chief financial officer or the deputy CFO for 

nearly 7 years, and every year, with respect to our 7(a) loan program, my office engages in a process to evaluate and project loan 

performance. This process occurs annually, notwithstanding administration, and is a routine executive branch function. 

My written testimony provides greater overall detail on that 

process, so let me provide some general context and walk you 

through the basic steps we take every year. First, we model for future loan performance. Next, we determine what fee structure to 

achieve zero subsidy, and then we review what the agency might 

be able to offer for fee relief if that fee—if it shows that the fees 

could be set to achieve fee relief. 

Every year, my office looks closely at the elements that go into 

our model, and we make refinements to more accurately capture 

and reflect the future loan performance. The goal is to determine 

the true cost of the program and then to set our fees accordingly. 

The model is thoroughly reviewed by the agency, by a third-party 

contractor, by the Office of Management and Budget, and also by 

our external auditor every year. 

Looking back at trends over the last couple of years, we have 

been near or at the ceiling for our statutory fee structure, and as 

a result, we have not been able to offer the same fee relief each 

year. These recent trends bring us to this year’s budget discussion 

and the projection of a positive subsidy rate for the fiscal year 2020 

program under current law. 

In order to operate our 7(a) program in fiscal year 2020, SBA will 

either need an appropriation of Federal dollars or an adjustment 

to the fee rates. In our annual budget submission and in our briefings that we did to the different Committee staffers over the last 

few weeks, the agency presented options for Congress so as to support an annual level of $30 billion in 7(a) loans. 

The fee—the first option would involve a subsidy appropriation of $99 million; the second option involves statutory changes to the 

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fee structure in order to maintain zero subsidy; and the third option involves a combination of statutory changes to the fee structure and an offset to the agency’s business loan administration cost 

also to maintain zero subsidy. 

Our annual budget and my written testimony also prevents—presents details on the proposed fee structure. We attempt within that 

fee structure to maintain the ability to incentivize small dollar 

loans and lending in underserved communities. 

In closing, Mr. Chairman, the agency’s annual modeling and performance projects a positive subsidy rate for fiscal year 2020. And 

it is important to note that even absent refinements that my office 

makes to performance assessments, the program still projected a 

positive subsidy for the next fiscal year, and the Committee and 

Congress will need to consider options for the agency’s 7(a) loan 

program. 

Thank you again, Mr. Chairman, for inviting me to testify today, 

and I look forward to answering any questions that you may have. 

Chairman KIM. Okay. Great. Thank you for your testimony here. 

I am going to start off with a couple questions of my own, and it 

looks like we have a little bit more time to go, so we will get 

through as much as we can. 

Well, the reason we are here today is to examine the proposed 

changes to the 7(a) program and to ensure that any of these proposed changes would not further strain capital access for small 

businesses. 

Now, to that effect, the goal of the 7(a) program is to operate at 

zero subsidy, meaning that fees and collections cover the cost of 

running the program. And as we heard from your testimony, we 

are aware you are now predicting the program to generate sufficient revenue in fiscal year 2020, meaning that the program will 

be operating positive subsidy. 

I wanted to ask, will the 7(a) program have to shut down if the 

program remains in positive subsidy? 

Mr. GRIBBEN. Absent an appropriation for dollars, it would 

have to shut down, yes. 

Chairman KIM. So if Congress does not appropriate the money 

or the raised fees as you proposed, it would have to shut down? 

Mr. GRIBBEN. That is correct. 

Chairman KIM. So the program is not historically funded by appropriations, so I would like to take a deeper dive into the calculations that projected the need for additional funds to keep the program going. 

SBA’s economic modeling and OMB’s economic assumptions are 

leading to a bleak outlook for fiscal year 2020 performance—program performance. And right now, it is still unclear to me what 

factors went into that model and the weight each of them carried 

when the model was calculated. 

You know, for example, the Small Business Act’s requirements 

do not factor in good and bad economic times, so why would it 

make sense to propose a scenario where assumptions are tied to 

adverse economic trends if the Small Business Act itself doesn’t 

contain such assumptions? 

Mr. GRIBBEN. Prior to 2014, the—our subsidy model was not 

as—did not take into account the macroeconomic assumptions, and 

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as a result, it was leading to large upward subsidy reestimates. 

That is—that is the reestimate process that we do every year to see 

the assumptions that we made in prior years, is that meeting the 

actual performance projections, and the answer is that it was not. 

So we made a modification to the model in twenty—that we introduced in 2014 to take the long-term macroeconomic assumptions 

into account. When a loan is made in times when the economy is 

good and if the projections are a change in the assumptions over 

the long term, those loans have a tendency to default at a higher 

rate than when loans that are made when the economy is bad and 

the projections are assuming that the economy will improve over 

time. 

That is why, as part of the Federal Credit Reform Act, we are 

supposed to take things like that into account to bring the cost of 

the program into today, rather than having it borne by future reassessments being paid by the taxpayers that way. 

Chairman KIM. Well, I just want to dive into, you know, one of 

these particular issues that I am having trouble understanding 

through. Now, the programs—when we look at the 5-year average 

recovery rate on the defaulted loans as reported to Congress last 

December was about 50 percent. But that seems to stand in contrast to the fiscal year 2020 budget, which assumes a projected recovery rate of only 37.29. So I just wanted to get a sense from you 

how that is being generated and why there is a discrepancy there. 

Mr. GRIBBEN. There is—it is two different ways at looking at 

the performance measures. So the 50 percent number that you are 

mentioning is looking at all the purchases that were made in a 5- 

year period of time, all the recoveries on those purchases made 

over a 5-year period of time, regardless of the year that those loans 

were approved. And in June of 2018, that was 50 percent, according to a 5-year rolling average. That number has also changed. It 

has decreased since that time. 

But in the model, we have to look at it from the aspects of that— 

what will happen with the cohort that—the loans that are made 

and approved in that year over the lifetime of those loans. That is 

a different way of looking at it. It is not looking at it from a portfolio perspective, which is what the Office of Credit Risk Management uses, it looks at it as what is this loan cohort going to look 

like over the future of the loans. And in that case, the—when you 

look at it from that perspective, that is where we calculate the 37 

percent. That is what history is showing us. 

Chairman KIM. So I think the main thing that you are likely to 

hear from all of us today is just that, obviously, this is an incredibly important program, and a lot of small businesses depend on 

this type of access to capital. And when we are experiencing right 

now is something that really stands at a fundamental moment of 

what are we going to do with this going forward. 

So what we need from you is just an assurance that you are 

going to be able to provide us with the details that we need, the 

documentation that we need to understand what went into your 

calculations and why it is that we face this decision before us here 

in Congress right now. 

So I just want to have your assurances there that we are going 

to be able to get those documents and be able to work with you on 

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an expedited timeline so that we can understand what went into 

this and we can understand the decisions that are placed before us 

that didn’t have to come before us in any other previous year. 

Mr. GRIBBEN. We can provide more information. As an example, the briefings that I have been providing more details into the 

model. The models are very complex. They do use some information 

that are agency projections and projections from the Office of Management and Budget. 

And the models are thoroughly reviewed. The documentation on 

the assumptions of what changed from the prior year, the inputs 

into that model, those are all reviewed by external parties to determine that the agency is doing the best job it can to forecast future 

performance to make sure that we are accurately reflecting the cost 

of those programs today over the lifetime of the loans that are 

being—that the loans will be serviced. 

Chairman KIM. No, that is—I appreciate that insight. And I look 

forward to working with you on this more, because, you know, as 

we are being asked to consider, you know, $99 million in taxpayer 

money, we just need to make sure that we are doing our due diligence and thoroughly analyzing whether or not that is a good use 

of the taxpayer dollars and if every other effort has been made to 

try to avoid that from happening. And I think right now, we just 

want to think of this as a factfinding operation, be able to get everything that we need for us to be able to make those considerations. 

One last question for you. As we are going through this, based 

on what you know and the processes that you were running there, 

do you think that we need to be able to speak with OMB to be able 

to have a full picture of what is going on here? 

Mr. GRIBBEN. I personally don’t believe that is necessary. 

Chairman KIM. Okay. Well, I am going to turn it over to the 

Ranking Member here for a couple questions. 

Mr. HERN. Thank you, Mr. Chairman. 

Mr. Gibben—Gribben, I am sorry—as mentioned in the opening 

statement, the 7(a) loan program has been growing rapidly over the 

last couple years, $18.75 billion, 2015, to $30 billion in 2020. And 

the congressional budget indicates the number will be $99 million 

that you need for the $30 billion program. 

In your testimony, you state there are three main inputs into the 

model: performance assumption, cohort composite assumptions, and 

macroeconomic assumption. Are these variables weighed the same? 

Mr. GRIBBEN. They are treated differently. The—but they all go 

into factoring what the cost of the program might be. The model 

looks at the actual performance of the portfolio over 26 years. That 

has the bigger impact on the model than anything else, that and 

the projections for—when we—I said we—in 2014, when we introduced the changes to the model to put greater weight on some of 

the macroeconomic assumptions, it was on long-term unemployment. So the history of unemployment and the projections of unemployment in the future have the biggest impact on the model than 

most of the other factors. 

Mr. HERN. Yeah. So I have a lot of questions around it. But in 

fiscal 2020, the congressional budget justification, you stated that 

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you altered how your estimate—estimate purchase amounts. Can 

you describe in detail the old method versus the new method? 

Mr. GRIBBEN. The old method was taking a simpler approach 

to—what we have to try to figure out is, in the future, what percentage of the loans that are approved in that fiscal year are going 

to default and at what amount we would have to purchase them. 

The old model was assuming there was a period of time from the 

time that a loan went into default until it was actually purchased. 

When we look at the actual history, the time length between 

when a loan defaults and when it is actually purchased was longer 

than the model had been assuming. So taking that into account, 

what that means is the purchase amounts on average over this 

span of 20 years was about 8 percent higher than the model had 

been forecasting. 

So we changed the—we changed the way that we looked at the— 

that time to calculate what is an average default to purchase event 

and to be able to calculate what a purchase amount would have 

been. That was the refinement that we made for this 2020 model. 

Mr. HERN. You also state that you annually test the predictive 

ability of the existing assumptions and adjust the methodology as 

necessary. I think that is what you were just referencing. 

So I have got a couple questions. Since you also have a program, 

SBDC, where you are out helping folks understand their business 

models before they ever get a loan or go to a lending institution as 

a service to small businessmen and women in America, based on 

what you have seen with failure rates, have you adjusted that 

coaching model that you have out there to maybe look a little more 

stringent at business plans to make sure they are more long-term 

viable as opposed to what is causing the failures now? Or would 

you say it is a naturally not predictable failure rates that are going 

on? 

Mr. GRIBBEN. I am struggling to answer that question just because I am not sure exactly what the Small Business Development 

Centers, when they talk to the small businesses about potential 

lending, what they might be discussing with them. 

Mr. HERN. Well, it just seems that if you have got businesses 

that are failing and you are responsible, you are going to come 

back and ask the American taxpayers for $100 million or ask small 

businessmen and women to pay—I am just running some numbers—anywhere from 23 cents a day to 46 cents a day over a life 

of a loan because there is a higher failure rate than you originally 

had predicted, that we would somehow, in that same guise of helping people actually get to these loans, that you would help them 

maybe not make the same mistakes as their predecessor. 

I mean, you just referenced that you have taken 26 years of history and using that to formulate and sort of benchmark your model 

going forward, it seems like we would also take some of those failures maybe where you are advising some potential businessmen 

and women to not make those same mistakes again. 

Mr. GRIBBEN. Which is exactly what happens in the micro loan 

program. That micro loan program where the technical assistance 

is directly tied to the loans that are made, those—that is the counseling and training that they get that are really focused on their 

business plans and their ability to repay the loans over time. 

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And in terms of what I was referring to when we look at the assumptions that we make in the model to project future purchase 

events, the cash flows that are going to occur over the next 20 to 

30 years of the lifetime of the loan, there are a number of different 

factors why a business might not be able to repay back a loan. 

And we are trying to determine from—and there is a lot of factors that go into it, from geography to industry to loan sizes, the 

different sub programs that comprise the 7(a) category. There are 

a number of different factors why a small business might fail. 

Mr. HERN. Sure. Well, I think that would help us understand, 

as the Chairman said, because as we are looking at failure rates 

that are beyond—or earlier than you originally projected that is 

causing the problem you are saying. 

One last thing and then I will yield back. Since the 7(a) loans 

are sort of lender of last resort because banks say they can’t take 

them, then you are obviously looking at something that may be a 

little riskier than a traditional commercial bank, that there has 

been a little bit less take rate in 2018, which would probably indicate that commercial banks are a little more willing to take more 

risk now, marginally more risk. 

The failure rate, the predictability of the failure rate, also realizing that a traditional bank is not going to give you a 20-year 

fixed rate, so that is a unique thing, are you looking to see if banks 

have changed their model of evaluating the loans? I mean, it is a 

big portfolio. But I am just curious as the relationship of the bank 

and how they are looking at these business models. 

Chairman KIM. If you can just be brief in your remarks here. 

Mr. GRIBBEN. Okay. We do not look at it from that aspect. We 

look at it as the 7(a) portfolio. We look at the early indicators of 

default rates and use that to make projections for the 7(a) program 

itself. 

Mr. HERN. Mr. Chairman, thank you. 

Chairman KIM. I just wanted to recognize Representative Davids 

to be able to ask questions. You are recognized for 5 minutes. 

Ms. DAVIDS. Thank you, Mr. Chairman. 

Well, I appreciate the testimony that you have provided today. 

And I would actually love to follow up on the Ranking Member’s 

line of questioning, because I think there has been maybe a view 

that we don’t have a holistic approach to how the lending is happening and how the fee structure is working and the modeling that 

is being put out. 

And I am not positive if that is where he was going, but it does 

seem as though with the—that there are maybe some missing links 

here for some of us. When we look at an unemployment rate that 

in the modeling is like optimistic maybe, and then we look at the 

projection of a—like a deteriorating or higher failure rate, I think 

the question is how—why do you think that is happening based on 

the modeling that you have got? 

And then I suppose a follow-up question is, do you think it would 

be helpful for your program to start working with other programs 

within the SBA that is providing service—I see the votes just got 

called—but providing services to folks who are seeking to use the 

SBA 7(a) program? 

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Mr. GRIBBEN. So in answer to your first question, if you look 

at the history of the fee structure, where the fees have been set, 

and our ability to offer fee relief, the pattern is clear that over the 

last few years, we are not able—we were not able to offer the fee 

relief that we were able to offer in the prior year, because we were 

coming closer and closer to that point where the fees were not 

going to cover the expected future defaults. 

So that is where—when you look at that trend over time and you 

look at 2020, that is where the tipping point happened. And so 

there—and it is, I admit, it is an extremely complicated model. 

There are a number of things that go in to try to predict and 

project what might happen in the future, and there are a lot of assumptions that we have to make, which is why we have 26 years 

of data now to help us. 

In the very beginning of credit modeling, it was more difficult 

when we switched to the Federal Credit Reform Act way of calculating these future costs. This is also something—when you mentioned the banks, this is something that they are going to be faced 

with the new accounting rules of how they are going to have to calculate their loan loss reserves. 

But in terms of the subsequent question about the feeding— 

the—and correct me if I am misstating, but it is how we partner 

with other loan program—the other programs within the SBA in 

regards to the 7(a) loan program. And under my office is also the 

Office of Performance Management, so we closely tie all the strategies, the priorities of the agency, and as that relates across the different program offices, whether it is capital access or the Office of 

Entrepreneurial Development, in order to make all of the programs 

successful, whether it is 7(a), whether it is the 8(a) contracting loan 

program, in order to be able to achieve the mission of the agency 

to be able to support small businesses to be able to help them grow 

and achieve their goals. 

Ms. DAVIDS. Thank you. I yield back. 

Chairman KIM. Okay. We are going to try to do two more before 

we have to run for votes. So I just want to recognize Representative 

Stauber for questions here for 5 minutes. 

Mr. STAUBER. Thank you, Mr. Chair. I just have one question. 

Mr. Gribben, in your testimony, you state that performance assumptions you use over 25 years of historical 7(a) program and the 

macroeconomic data. But for the cohort composition assumptions 

you use characteristics, quote, from recent years. Please describe to 

the Committee why you use two different data sets. 

Mr. GRIBBEN. We use the historical data in order to be able to 

understand the performance of the loan based on conditions of, let’s 

say, what unemployment GDP might have been at that time. And 

we use assumptions for the future to be able to better predict performance of the loans over the future period. So we use past assumptions to help better inform our predictions for the future. 

Mr. STAUBER. Thank you. That is my only question. I yield 

back. 

Chairman KIM. I just wanted to recognize Congressman Crow 

quickly here before votes. 

Mr. CROW. Thanks, Mr. Chairman. I will yield to my colleague 

from New York. 

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Ms. VELA ́ ZQUEZ. Let me thank the gentleman for yielding. 

Mr. Gribben, based on looking at the reestimate data, it appears 

that SBA’s model has been somewhat inaccurate. There have been 

downward reestimates every year since 2010. Isn’t that correct? 

Yes or no. 

Mr. GRIBBEN. Yes. 

Ms. VELA ́ ZQUEZ. Okay. So given this, how can you defend raising fees again? Everyone in this room knows that you are going to 

end with a surplus, just like every year since 2010. Why do we 

have to play this game, sir? Whose idea is this? 

Mr. GRIBBEN. This was—— 

Ms. VELA ́ ZQUEZ. Is this your idea or is this OMB? 

Mr. GRIBBEN. Oh, no, this is completely under the agency. 

Ms. VELA ́ ZQUEZ. Okay. 

Mr. GRIBBEN. So prior—but if you looked at—prior to when I 

mentioned that the model changed in 2014, prior to that time, 

there were large upward reestimates. It was when we changed to 

take the macroeconomic factors into account that you see the downward reestimates in 2010, 2011, 2012, 2013. They didn’t exist before. 

Then if you look at it from the history since 2014, 2014, 2015 had 

higher reestimates than you see now, because once we made that 

change to the model, we also fine tuned it. We look at—and we 

have to look at each—— 

Ms. VELA ́ ZQUEZ. Let me just say, I want every piece of document, every piece of document submitted to the Committee that 

will justify raising the fees. I will not do anything, no legislation 

until we are convinced that that is the way to move forward. 

Let me say this to you, the mission of SBA is to provide resources and lending access to capital, affordable capital to those 

who cannot get it through traditional means. So the mission of the 

SBA is not going to be to make profit on the back of small businesses, and that must be clear. 

I yield back to the gentleman here. Thank you. 

Mr. CROW. One quick question, and it is regarding the Veteran 

Entrepreneurs Act program. And I know in the fiscal year 2020 

budget request, the SBA says that it intends to offer the fee waivers for the veterans program, but in light of the clear direction that 

the SBA can implement these or the—the President’s budget submission to Congress outlines the positive subsidy, obviously, which 

is what we are talking about here today for the 7(a) program. How 

do you think SBA can still offer those waivers under the veterans 

program? 

Mr. GRIBBEN. Because we provided the option to achieve zero 

subsidy. Under the zero-subsidy scenario we can offer the veterans 

fee waiver. 

Mr. CROW. So—but the entire budget—obviously, the entire request or the entire hearing today is about the fact that there is a 

positive subsidy, correct? 

Mr. GRIBBEN. It is about the options that Congress has in order 

to achieve zero subsidy or to appropriate money. I view the hearing 

about the options. 

Mr. CROW. All right. Mr. Chairman, I yield back. 

Chairman KIM. Okay. Thank you. 

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Well, one thing is we are looking at these options because of, you 

know—because of, you know, what we are hearing from your particular administration. So, you know, this is something that we are 

going to have to look into very carefully. 

I do want to recess right now for votes. We will come back afterwards, if you don’t mind sticking around a little bit longer, as we 

do have a few other members that look like they might want to ask 

questions. I just want to make sure they have that. So we will 

come back in just a little bit. 

[Recess.] 

[11:44 a.m.] 

Chairman KIM. Hi. Good morning. Thank you for your patience 

and sticking around with us as we wrangled our votes together 

down there on the House floor. Why don’t we just jump right back 

in and just be able to get started here. I am just going to just briefly introduce the witnesses and then we can start with your remarks there. 

So our first witness today is Mr. Tony Wilkinson. Mr. Wilkinson 

is president and CEO of NAGGL, the only national trade association representing the SBA 7(a) lending industry. He has served in 

this role for more than 25 years and is responsible for working 

closely with agency executives and the Small Business Committee 

and ensuring the continued stability and availability of the 7(a) 

program. 

Our second witness is Ms. Lynn Ozer. She is the president of the 

SBA Lending Department at Fulton Bank headquartered in Lancaster, Pennsylvania. She also manages all the SBA lending, which 

covers my home State of New Jersey, Pennsylvania, Maryland, 

Delaware, Virginia, Washington, D.C., and 249 office locations. 

Also, our next witness is Ms. Gail Jansen. She is the vice president of business services and operations at Kinecta Federal Credit 

Union, where she is currently responsible for all areas of loan origination within business services, has over 25 years in commercial 

lending experience. 

And I would like to now yield to our Ranking Member, Mr. Hern, 

to introduce our final witness. 

Mr. HERN. Thank you, Mr. Chairman. 

Our next witness is Gordon Gray. Mr. Gray is the director of fiscal policy at the American Action Forum, which is the leader in 

pro-growth fiscal policies in Washington, D.C., and across the country. Mr. Gray is an expert on budget matters and has previously 

testified before the House Budget Committee. Prior to this current 

role, Mr. Gray held senior staff positions in the U.S. Senate, has 

spent time with the AEI, the American Enterprise Institute. 

Mr. Gray, we are pleased to have you testify, and we welcome 

your participation. 

Chairman KIM. Great. Thank you. 

Mr. Wilkinson, why don’t we start off with you. You are recognized for 5 minutes. 

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STATEMENTS OF TONY WILKINSON, PRESIDENT AND CEO, NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED 

LENDERS; LYNN G. OZER, PRESIDENT, SBA LENDING, FULTON BANK; GAIL JANSEN, VICE PRESIDENT OF BUSINESS 

SERVICES AND OPERATIONS, KINECTA FEDERAL CREDIT 

UNION; AND GORDON GRAY, DIRECTOR OF FISCAL POLICY, 

AMERICAN ACTION FORUM 

STATEMENT OF TONY WILKINSON 

Mr. WILKINSON. Thank you, Chairman Kim, Ranking Member 

Hern. My name is Tony Wilkinson, and since 1987, I have served 

as the president and CEO of NAGGL, a national trade association 

representing lenders and other entities that participate in the SBA 

7(a) loan program. Prior to this job, I was an SBA lender for a community bank based in Stillwater, Oklahoma. 

The President’s fiscal year 2020 budget request included what we 

believe is an unnecessary positive subsidy of $99 million for the 

7(a) program. This is a major shift from the program’s track record 

of operating at zero credit subsidy since fiscal year 2005, except 

during the years covered by the Recovery Act. 

This subsidy calculation is not a proposal like the rest of the 

budget request. Congress must react to this calculation. Congress 

will have to appropriate $99 million or amend the Small Business 

Act to raise the current fee caps on borrowers and lenders to cover 

the cost of the program. 

The President will need to sign into law one of these paths forward by September 30 or the popular 7(a) program will shut down 

on October 1. But first, we must collectively question the positive 

subsidy calculation. My plea is that you challenge both OMB and 

SBA to explain this subsidy estimate in detail. 

The fiscal year 2020 budget documents provide insufficient justification for an increase in estimated program costs. The proposed 

subsidy increase does not track with performance data, and the 

subsidy calculation lacks transparency as neither SBA nor OMB 

has disclosed the details of their calculation. 

We say this for three reasons. First, SBA has overestimated the 

cost of the portfolio year after year for nearly a decade. In the fiscal 

year 2020 budget, SBA reported for last year a $757 million excess 

subsidy reserve, meaning the program took money out of borrower 

and lender pockets and sent that money to the Treasury. Doesn’t 

that sound like a tax, an unauthorized tax? 

For all programs at the SBA, the overestimation of cost recognized last year totaled almost $1.5 billion, that is with a B, billion 

dollars. This is not an isolated incident. Since fiscal year 2010, the 

SBA 7(a) model has overestimated the cost of the program by almost $3.2 billion. This is a staggering amount of money that means 

nearly a decade of unnecessary fees on small business borrowers 

and lenders. 

In fact, Congress has also been overcharged. In the few years 

when there were congressional appropriations, the fiscal year 2020 

budget documents also show significant downward reestimates for 

those years, meaning that the—many of the appropriation dollars 

were not necessary. 

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In a series of GAO—in a series of reports, GAO describes a pattern of discrepancies between actual performance and SBA’s projected performance, resulting in repeatedly overestimating the cost 

of the program. One GAO report documents that SBA hired 

Pricewaterhouse to conduct a study which found the subsidy rate 

calculation is perceived by SBA to be a tool for gaming the congressional appropriations process. 

Another GAO report stated they could not determine whether a 

bias existed in the model by systematically excluding variables to 

influence the subsidy rate in a particular direction, and SBA could 

not provide adequate documentation to demonstrate the rationale 

for the model. These are alarming conclusions. 

Actual portfolio—actual performance of the portfolio is starkly 

different than the projected portfolio. For instance, the program’s 

5-year average recovery rate on defaulted loans, as reported to 

Congress last December, was 50 percent. In sharp contrast, the fiscal year 2020 budget assumes a projected recovery rate of only 

37.29 percent. 

Why has the subsidy modeling ignored this established trend of 

steadily increasing recovery rates? Also, in fiscal year 2018, SBA 

reported a chargeoff rate of 0.51 percent, a historic low. We simply 

cannot see that there has been a negative shift in the performance 

of the portfolio. 

Lastly, we are concerned that the model fails to take into account 

appropriate assumptions such as recent significant programmatic 

changes that have improved the performance of the portfolio. There 

is a troubling pattern in how SBA and OMB model the subsidy cost 

which GAO has highlighted over multiple administrations for the 

last 22 years. 

SBA’s preferred method to cover the unnecessary positive subsidy is to raise fees on borrowers and lenders. But without justification, how can we simply accept this projection? Based on the data 

we can see, there surely must be an error in the fiscal 2020 calculation. 

Yes, Congress gave the executive branch authority to calculate 

subsidy cost, but Congress did not give unfettered authority for 

cost to be calculated without transparency or outside of congressional oversight. I urge you to challenge both SBA and OMB to explain the fiscal year 2020 subsidy model or this program and small 

business borrowers will suffer the consequences. 

Congress created the SBA in 1953 to aid, counsel, assist, and 

protect the interest of small business concerns. Levying an unauthorized tax does not comply with this mission. 

Thanks for inviting me here today, and I look forward to answering any questions. 

Chairman KIM. Thank you, Mr. Wilkinson. 

Ms. Ozer, over to you. You are recognized for 5 minutes. 

STATEMENT OF LYNN G. OZER 

Ms. OZER. Thank you, Chairman Kim, Ranking Member Hern, 

and members of the Subcommittee. I appreciate this opportunity. 

My name is Lynn Ozer, and I am currently the president of Fulton 

Bank’s SBA Lending Department, where I oversee all aspects of 

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SBA lending in the mid-Atlantic region in the five States that our 

bank is located. 

I have believed and trusted in SBA’s mission to aid and protect 

these borrowers for the entirety of my career. However, it is disheartening to see a fiscal year 2020 budget request from the SBA 

that takes advantage of these small business borrowers. The budget states positive subsidy calculation for the 7(a) program for fiscal 

year 2020 of $99 million, a marked shift from the program’s track 

record operating at zero subsidy and no cost to the taxpayer. 

SBA has essentially told Congress that it has a choice, to either 

appropriate $99 million or hike up fees on borrowers and lenders 

or the program shuts down on October 1. My first thought as a seasoned lender is to question whether or not there have been any 

performance issues in the portfolio. Purchase rates are at a near 

all-time low. Recovery rates are at an all-time high. SBA reports 

a record low chargeoff rate in 2018. When we see a positive subsidy, you would think that the portfolio would show some signs of 

worsening, but it does not. 

SBA has also overestimated the cost of every cohort of loans 

made for the past 9 fiscal years, which means SBA could have 

asked for much less from the borrowers and the lenders and still 

have covered the cost of the program at a zero subsidy. This tells 

me the current subsidy model used is not working as it should. 

I urge this Subcommittee to work with OMB and SBA to obtain 

the details of this subsidy calculation. The subsidy model has always been shrouded in mystery. Lenders are the stewards of this 

program, and Congress gives the program its authority to exist. 

Does it make sense that none of us know how the cost of this program is calculated? 

SBA has made it clear their preferred solution to cover the unnecessary positive subsidy is to hike fees on the borrowers and 

lenders. This is a tax on small business. Under SBA’s proposal, 

some of my borrowers would have seen a 7 percent increase in fees, 

others a 16 percent increase, and some borrowers’ fees would have 

doubled. This would mean shrinking access to capital. 

And the impact to lenders, under the SBA’s proposal, the cost of 

my SBA department would increase by roughly 25 percent just on 

new loan originations in fiscal year 2020, with that number multiplying itself year over year into the future since these fees are 

charged on an ongoing basis annually for the rest of the life of the 

loan. 

When the costs increase on the lenders, that creates a domino effect, the results of which hurt the small business borrower in the 

end. The goal is to increase opportunities for small business. The 

budget request would do just the opposite. It would shrink access 

to capital, closing the door on many small borrowers and lenders. 

I also want to take a moment to respond to Mr. Gribben’s comment about the portfolio doing worse in good times and his admission that his model does not take lender behavior into account. I 

am a lender. Lenders administer this loan program. 

When times are good and when times are bad, my credit policy 

does not change. This inverse relationship we have with the conventional market speaks to loan volume. When times are good, borrowers have options and our volume may plateau. When times are 

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bad, borrowers have less options and our volume increases. But we 

are not talking about volume. We are talking about cost. When 

times are good, my credit committee is not going to allow us to approve riskier loans just to make up volume. Why? 

We still need to have a portfolio that meets safety and soundness 

standards for our regulators. SBA lending has certain rules that 

govern prudence regardless of economic swings, like always requiring a personal guarantee from the borrower, requiring borrowers to 

have skin in the game, prescribing debt service coverage ratios and 

collateral requirements. 

And there is just only so much risk a lender can take. Actual performance does not support their assumption that we make riskier 

loans in good times. The emphasis on macroeconomic trends seems 

inappropriate for this highly regulated loan program. 

Do not simply take these projections at face value, and I ask that 

you seriously challenge the subsidy rate. Small business borrowers, 

lenders, and the ability of the 7(a) loan program to serve access to 

capital needs are dependent on how you respond to this surprising 

calculation. 

Thank you. 

Chairman KIM. Thank you. 

Let’s see, Ms. Jansen, over to you for 5 minutes. 

STATEMENT OF GAIL JANSEN 

Ms. JANSEN. Good afternoon, Chairman Kim, Ranking Member 

Hern, and members of the Subcommittee. My name is Gail Jansen. 

I am testifying today on behalf of NAFCU. 

Thank you for the opportunity to share with you our perspective 

on SBA 7(a) loan program and the potential impacts of the proposed fee structure changes for fiscal year 2020. 

As the vice president of business services and operations at 

Kinecta Federal Credit Union, I am responsible for a portfolio of 

nearly $1 billion in member business loans, which includes nearly 

$35 million in SBA loans. Business lending is an important aspect 

of our service to members at Kinecta. A key part of that is our ability to offer SBA 7(a) loans. 

Kinecta started our business program in 2013. We are a preferred lender with the SBA. We are the number one credit union 

SBA lender in all of California. Our SBA loans range from a low 

of $50,000 to a high of $5 million, but the average size of our loans 

is $250,000. On average, we make about 20 loans a year, and currently, we have 100 SBA loans in our portfolio. 

The kind of companies that turn to us for SBA loans include 

small manufacturers, brick-and-mortar retail shops, independent 

restaurants, and professional service companies. A business owner 

will apply for an SBA loan with the credit union because they are 

looking for something different than what the bank can offer. They 

are often pleasantly surprised that a credit union offers small business loans, and as a result, they are willing to consider us as a viable alternative. 

Our ability to offer SBA loans allows us to meet the needs of our 

members, like the one who turned to us in July 2018 with a small, 

growing residential home remodeling company to refinance existing 

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business debt and provide working capital to support new jobs and 

projects. 

At the time of the loan request, the company had only one fulltime employee and one part-time employee. The subject debt to be 

refinanced was originated from an online lender that was charging 

the business owner an exorbitant interest rate of 44 percent. 

After underwriting the loan request, Kinecta approved and funded the SBA loan in the amount of $110,000 at an interest rate of 

7.75 percent. The refinancing of the business debt resulted in a significant savings for the business owner. As a result, the business 

has since hired two full-time employees and has begun saving 

money to purchase commercial real estate. 

Small businesses like this one are the backbone of our economy 

and an essential source of jobs. The SBA’s loan program serve as 

an important resource that help credit unions provide small businesses with the vital capital necessary for growth and job creation, 

in many cases to businesses that would otherwise not be able to 

obtain financing. 

There are positives to SBA’s overall fiscal year 2020 budget request, such as the increase in the SBA express loan limit from 

$350,000 to $1 million. However, it was troubling to see the SBA’s 

request to modify its statutory fee structures and potentially increase its fees because of a refinement to its economic modeling. 

The bottom line is that the fee increases as proposed by the SBA 

in this budget submission will impact both our small business 

members and the credit union. SBA’s proposed fee structure will 

make it more expensive for members to get loans greater than 

$500,000 by increasing the guarantee fee on those loans. For loans 

greater than $1.5 million, the proposal introduces an even higher 

new fee rate. 

It is important to note that the small business member pays the 

guarantee fee one time, usually at funding. The moneys are often 

dispersed directly from the loan proceeds so the member does not 

have a direct out-of-pocket cost at origination. However, the lender, 

Kinecta in this case, pays an ongoing annual fee for each loan that 

is originated. This fee is currently 55 basis points. 

Under the SBA’s proposal, the fee will be unchanged for loans up 

to $1.5 million, but it will increase to 83 basis points for loans over 

$1.5 million. The SBA proposal will make loans more expensive for 

lenders like Kinecta. 

In a high-cost real estate market, such as California and New 

Jersey, among others, $1.5 million is not a lot when you are talking 

about commercial real estate. Increasing the costs of these loans to 

both the small business and the lending institution will likely 

make it more difficult to get an SBA loan for commercial real estate in higher markets. 

We urge the SBA and Congress to work together to protect and 

strengthen the SBA 7(a) program. This includes examining all efforts to avoid the proposed fee increases on SBA’s small business 

loans and the lenders that serve them. 

In conclusion, the ability for small businesses to borrow and have 

improved access to capital is vital for job creation. We recognize 

that maintaining a zero subsidy for the program is important, but 

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we urge you to examine all potential alternative solutions to avoid 

a fee increase. 

I thank you for your time and the opportunity to testify before 

you here today, and I welcome any questions you may have. 

Chairman KIM. Thank you for your testimony. 

Mr. Gray, over to you for 5 minutes. 

STATEMENT OF GORDON GRAY 

Mr. GRAY. Chairman Kim, Ranking Member Hern, and members of the Committee, I am honored to be before you today to discuss the budgetary considerations of the Small Business Administration’s 7(a) loan program. 

This is an important program that provides access to small business entrepreneurs who otherwise have no recourse to adequate financing in the market, supporting hundreds of thousands of jobs 

throughout American communities. As a taxpayer-funded program, 

it should be subject to continuous and rigorous oversight, and I appreciate the Committee’s attention to this program in today’s hearing. 

In my testimony, I wish to make three basic observations. Federal Government is a prolific lender, providing guarantees on and 

direct loans of $4 trillion as of fiscal year 2018. The budgetary 

treatment of credit programs is somewhat unique in budgeting, adhering to the principles of accrual accounting as set forth in the 

Federal Credit Reform Act, FCRA, of 1990. 

FCRA accounting addresses the deficiencies of cash accounting in 

measuring the cost of credit programs, but necessarily introduces 

additional complications, some of which animate today’s discussion. 

I will briefly discuss these observations in turn. 

The Federal Government currently has a combined $4 trillion in 

credit assistance outstanding as of 2018. In general, the goal of this 

assistance is to provide credit to borrowers who otherwise would 

not receive credit at market terms from lenders. 

The credit assistance takes two forms: direct loans where the 

Federal Government is the lender or loan guarantees where the 

government commits taxpayer funds to guarantee private lending. 

As of fiscal year 2018, the Federal Government has $1.4 trillion in 

direct loans outstanding and guarantees on $2.6 trillion as of last 

year. 

It is loan guarantees that concerns today’s hearing, specifically 

the 7(a) loan program. The 7(a) program provides eligible small 

businesses with private sector financing with a public guarantee. 

The program includes several specialized features, but in general, 

provides up to 75 percent guarantee on loans up to $5 million. The 

program requires lenders to ensure borrowers demonstrate adequate ability to repay, management ability in equity, among other 

considerations. Credit is also contingent on borrowers demonstrating that credit is otherwise unavailable at reasonable terms. 

According to the SBA, the 7(a) loan program supported over 

60,000 loans totaling $25.4 billion in fiscal year 2018. The budgetary treatment of this program is prescribed in the Federal Credit 

Reform Act of 1990 and its amendments. 

In general, this reform requires recording credit assistance programs in the Federal budget on an accrual basis. Accrual accountSBR002 with DISTILLER

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ing more accurately captures the taxpayer exposure for a given 

credit program by recognizing the value of the upfront outlay by 

the taxpayer but also the associated repayment stream, even if it 

is outside the budget window. 

This treatment also captures the value of preferential credit 

terms, such as longer loan maturities or interest deferral. It is important to recognize that this calculation more accurately reflects 

the totality of the Federal commitment for a given credit program. 

It also necessarily introduces additional complications. 

By nature, FCRA requires projecting all associated cash flows for 

a given loan over its duration. This also requires projecting likely 

delinquencies, defaults, prepayments, interest rates, and other factors to determine credit subsidy rates. 

Underpinning a number of these elements are OMB’s economic 

assumptions, which the agency is required to use as part of the calculation. The strength of the economy substantially effects default 

rates, for example, and a worsening economic outlook, would all 

else equal, increase the subsidy cost to the Federal Government 

through higher defaults, among other considerations. 

The subsidy cost is thus exposed to fluctuations for any of these 

factors. Those will always persist, however, and measurement uncertainty in is not limited to this program or credit programs generally. 

Any time a measurement requires projecting into the future, 

some uncertainty, however, is introduced. Annual reestimates of 

these programs enhance the estimating process. Since FCRA was 

enacted, subsidy costs of the 7(a) program have been on net underestimated with a net positive lifetime reestimated subsidy cost. Yet 

these costs are quite small over the nearly three decades and relative to the overall size of the loan disbursements. 

It does appear, however, that this net underestimate is driven 

largely by the effects of economic downturns. Accordingly, it is important to understand the factors that animate these subsidy costs 

as policymakers consider how to adequately resource this important policy objective while safeguarding taxpayer funds. 

I believe the Committee’s desire to hold this hearing reflects that 

intention, and I look forward to answering your questions. 

Chairman KIM. Thank you so much for your testimony. 

Thank you again to the four of you for coming out here. I just 

have a few questions and then I will turn it over to the Ranking 

Member, and we may have some more after that. 

But, Mr. Wilkinson, I would like to start with you. You know, 

you have now heard—we have all heard from the SBA’s CFO and 

regarding the data that was used for the subsidy calculation, and 

I wanted to ask you about your response to that. Was there anything that he said that was new to you, anything that helped shed 

a little bit more light on their process there? And what are the 

questions that you have lingering from his testimony? 

Mr. WILKINSON. Thank you for that question. I have actually 

got a lot of comments on his testimony. First of all, he talked about 

tweaking the model in 2014 to accurately reflect program performance. That was his quote. But the reestimates tell a very different 

story. 

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In fiscal year 2014, we started out at a zero subsidy rate. Now, 

remember, he said this was the year that they changed their model 

to more accurately reflect what was going on. The 2014 subsidy 

rate has now been estimated to be a negative 2.08. So they missed 

by their own calculation so far of about $359 million. 

In 2014, if you look at repurchase rates in 2018 versus 2014, our 

repurchase rate has gone down 35 percent. So the—— 

Chairman KIM. Between 2014 and—— 

Mr. WILKINSON. And 2018. So our performance today is much 

better today than it was in just 2014. And even with the rates in 

2014, they had a negative subsidy reestimate of $359 million. 

In Mr. Gribben’s verbal testimony, he did not give one single detailed reason why the subsidy rate increased. Mr. Gribben’s comments on future repurchases may not be supported by the SBA’s 

own data risk warehouse. Metrics in projected purchase rates, they 

have a very sophisticated model that the Office of Capital Access 

manages that will show a very different number for purchase rates 

than what is included in the model. 

So there are a lot of questions in here. It appears that they are 

ignoring the President’s own economic assumptions, and they continue to factor in another Great Recession or another 9/11 end of 

the model when the President’s economic assumptions don’t forecast that. They forecast strong GDP and a low unemployment rate. 

So we are confused as to how we can have an upward subsidy 

cost need when our performance tells us a very different story. 

Chairman KIM. Thank you for that. 

I wanted to turn to Ms. Jansen. I wanted to ask you, in your 

opinion, would a steady unemployment rate have any effect on the 

quality of your portfolio, the quality of your borrowers? 

Ms. JANSEN. Unemployment rate won’t really factor in, other 

than access to capital. That is what we are really looking for as far 

as SBA goes. 

Speaking from my perspective with the members who walk into 

our member service centers and request SBA loans, they want to 

grow their own business, and in order to do that, they are going 

to have to have access to capital. 

Chairman KIM. I appreciate that. 

Ms. Ozer, I wanted to ask you a similar question to Mr. 

Wilkinson. I wanted to just hear from you just straightforward, you 

know, why do you think this subsidy calculation deserves to be 

challenged? How do you respond to what the CFO said today? 

Ms. OZER. Listening to what he said means that we have to either go on to appropriations or they have to raise fees. I have been 

doing this for longer than I want to admit, and I have seen this 

go—this whole program go through being on appropriations, not 

being on appropriations, raising fees, lowering fees. And all the instability in the Small Business Administration creates problems for 

borrowers and lenders and definitely, as Ms. Jansen said, shrinking the access to capital. 

The biggest problem that I see is the effect that it has on the borrowers, specifically the increase in the cost of fees. The fees for 

loans under $500,000, they will be the same. But for borrowers between $500,000 and $700,000, the fees increase dramatically. We 

have a lot of borrowers, in your area actually, that have felt that. 

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21 

The effect on the lenders is that the ongoing fees that we are 

charged on our loans is going to go up. And whatever happens to 

cost more money to the lenders, eventually gets put back onto the 

borrowers, and their fees rise. 

I have to run a budget and explain to my shareholders, my board 

of directors, and all my stakeholders why are the costs of this program increasing. And if we look at what Mr. Gribben said, it flies 

in the face of what our own statistics, given to us from the SBA 

about how our portfolio and our peers’ portfolio performed, that I 

have been reporting to the Credit Oversight Committee, what they 

are saying flies in the face of all the actual facts. So it is going to 

be very difficult for me to explain that. 

Chairman KIM. Thank you for explaining that to me. 

So I am going to turn it over to the Ranking Member here for 

some questions. 

Mr. HERN. Thank you, Mr. Chairman. 

Mr. Wilkinson, welcome from Oklahoma. It is good to see you. 

Ms. Ozer and Ms. Jansen, I will tell you that this whole Congress needs more people like you testifying from people who actually experience what is going on with the legislation that has 

passed and what actually happens. It is so refreshing to hear— 

even though you are with the majority party here as their witnesses, it is so great to hear you actually talk about what happens 

out of Congress, and I just so appreciate it. It is so refreshing to 

hear you all. I wish every committee had folks like you testifying 

on the realities of what comes out of Congress. 

Mr. Gray, question for you. And by the way, I chaired a loan 

committee for 10 years on a bank, so I so appreciate it. It is music. 

Mr. Gray, do you know any of the requirements surrounding 

what an agency can and can’t use as assumptions for modeling purposes? 

Mr. GRAY. So as I understand it, the 1997 Balanced Budget Act 

tried to apply more uniformity to the methodologies that the agencies have. I am aware of the fact that OMB’s economic projections 

are one of those factors that they are required to consider. 

Mr. HERN. Are agencies provided guidance on how to select 

their assumptions? 

Mr. GRAY. Like I said, I believe those—they are given parameters set in statute by, for example, by FCRA and its subsequent 

amendments, like the 1997 Act, and, the previous witness spoke to 

some of this, there is some discretion at the agency level as well. 

Mr. HERN. So we will talk about the discretion. Economic assumptions, are they a major driver for their models? 

Mr. GRAY. I think the state of the economy performance of—or 

the outlook on credit markets, credit conditions certainly underpin 

their assumptions. 

Mr. HERN. Because I will tell you, as a member of Budget, 

where we get to see all the assumptions from both side—— 

Mr. GRAY. Right. 

Mr. HERN.—both parties, there isn’t a doom and gloom from either party, yet the financial guru from SBA says—appears to think 

there is. So I would like to get his thinking. Maybe he has a crystal 

ball the rest of us don’t have, because I would be interested. 

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22 

In your testimony, you touched on the reestimate process. Can 

you share with us how that reestimate process impacts a credit 

subsidy calculation? 

Mr. GRAY. Sure. So every year, on an ongoing basis, the agencies do revisit their past calculations, what elements of that may 

have changed. And so we basically get a performance exam of all 

of these programs since they were put on an accrual basis under 

FCRA. 

In the credit supplement we get, tables 9 and 10, I think, of past 

performance, and we can see how these were estimated at their inception and then over the lifetime of their performance. And those 

have been pretty instructive in thinking about how to think about 

these programs over time and under various economic conditions. 

Mr. HERN. Thank you, Mr. Gray. 

Mr. Wilkinson, in your testimony, you state that the subsidy calculation was amended in the past. Can you describe the events in 

the environment surrounding this amendment? 

Mr. WILKINSON. Yes, sir. Back in 1997, a similar discussion 

was ongoing. At some point in time, the agency decided that they 

had made an error in their calculation and they filed a formal 

budget amendment adjusting the subsidy rate. 

Mr. HERN. Who was involved in that, do you remember? 

Mr. WILKINSON. The Office of Management and Budget and 

SBA. I would say that the Senate Small Business Committee under 

Senator Kit Bond at that time was a driving force in getting that 

done. 

Mr. HERN. So what was the outcome of that? 

Mr. WILKINSON. At that particular time, we were on an appropriations so we were able to leverage those appropriation dollars 

much farther. 

Mr. HERN. Okay. So was it similar to today’s conversation or 

dissimilar or—— 

Mr. WILKINSON. It is very similar. GAO has documented this 

in a series of reports. We have had multiple former SBA employees 

tell us that the way the system works is OMB dictates to SBA a 

subsidy rate, and it is SBA’s jobs to adjust the assumptions to get 

to the rate that they have been told to get to. And that is why you 

saw the Pricewaterhouse report come to the conclusion that the 

SBA and OMB is gaming the process. 

Last week, in a Senate Small Business Committee, Mr. Manger 

from the SBA testified that the macroeconomic assumptions come 

directly from the Office of Management and Budget and that he 

has no knowledge what those are, basically, you know, leaving that 

all to the Office of Management and Budget. 

So what we have got is a subsidy calculation that is shrouded in 

mystery. We can’t see the details. We don’t know how in the world 

they can say all of a sudden we are going to have a 10 percent 

spike in our net losses when our performance trends are going exactly the opposite direction. 

Mr. HERN. Before I close, I would just like to say thanks to each 

of you again for being here and your honesty. And certainly, I can 

see in your—when you are reading your testimony that you really 

have a lot of passion. So thank you so much. 

Mr. Chairman, I yield back. 

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23 

Chairman KIM. Thank you. 

I have a few more questions I just want to get into here. Ms. 

Ozer, back to you. As you were mentioning, you know, you have a 

sizable footprint in New Jersey. And I am trying to think about 

this a lot in terms of how it is going to affect the borrowers, how 

it is going to have a real impact where the rubber hits the road. 

So I wanted to ask you, how do you think this proposal will impact the extent to which you were able to reinvest in local communities like ours, specifically how exactly would increased fees affect 

their desire to apply for 7(a) loans and your ability to provide more 

loans? 

Ms. OZER. Thank you for your question. Specifically, I can give 

you an example. We just did a loan to a trucking company in 

Robbinsville, New Jersey, right outside of Bordentown. This business has been growing tremendously. With online businesses, 

trucking and delivery is just an exploding industry. 

They were renting space to keep all their trucks. They needed to 

buy the building they were in because their lease was up, and they 

wanted to buy it as well as the adjacent property, and the cost was 

over $3 million. They put a substantial amount of money down, 

and we made them a loan. Their fees for that loan of $2.9 million 

were—let me see. I have that here actually—$81,000. 

The company, under the new fee structure, would be paying an 

additional $5,500, $5,578.11 to be exact. That money could be used 

for them to buy another truck, hire another driver, expand their 

business in many other ways, instead of having to pay for the subsidy rate or whatever in additional fees. 

How that affects us, when we get a loan this big, our cost to this 

program would increase by 25 percent on an ongoing basis. Having 

that loan on our books, that larger loan, that is real estate secured, 

as opposed to some of the very small loans that aren’t real estate 

secured and may not perform as well help balance risk. If we can’t 

make these larger loans because of the cost to the bank and the 

cost to the borrower, we will have less capital to invest in other 

areas in New Jersey. 

We have to make a certain amount of money to keep my department going. And if our infrastructure and our efficiency ratio goes 

up, my bank directors and so forth are going to say to me, what 

is going on here. You are not making enough money. And they are 

going to cut the amount of staff that I have and my ability to provide ongoing community investment to projects like this. 

The smaller loans in your area that are $300,000, they don’t pay 

nearly as much fees and their fees won’t be affected. But if we can’t 

balance out our investments with larger loans and smaller loans, 

we are going to have to have—there is going to have to be give 

somewhere. And who is going to pay for it but the small business 

borrowers. They are going to have less access to capital. 

Chairman KIM. A lot of my concerns here. That is very helpful, 

because I always want to make sure that we understand, you 

know, the tangible impacts, really understand what that is going 

to translate to in terms of the borrowers and small businesses. 

And as I have talked to a lot of small business owners, they talk 

to me about the importance of having that predictability for them 

to be able to do planning, you know, that they are dealing with 

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24 

razor-thin margins here, and, you know, of their ability to plan not 

just 1 year out but 10 years out in the growth, it really depends 

on that predictability. 

And my concerns here are certainly about what is going to happen given this, you know, fiscal year 2020 structure. But the lack 

of transparency and the lack of understanding of what is going into 

this concerns me about if we are going to be right back at here a 

year from now or 2 years from now and just, you know, what is 

going to be happening going forward. 

As we understand that, you know, we are—in many ways, it 

looks like, from what you are saying, that we are, you know, forcing or we will potentially be forcing small businesses and the borrowers into riskier loan products, and that is something that is 

going to be, you know, very damaging going forward. 

I wanted to ask, on that front, what are you hearing from borrowers in terms of their reactions to, you know, what has been happening here with the 7(a) and these developments? Are they understanding sort of the magnitude in which this is going to affect them 

and, you know, affect their abilities to be able to have access to 

capital? Please, anyone. 

Ms. JANSEN. Honestly, most of the borrowers that we deal with 

at the credit union don’t really understand an SBA loan. When 

they come in and they ask for a business loan, we have referred 

them out to the SBDC to get their financials together to answer 

those questions, but there is an education process for a lot of the 

smaller people that we deal with, our members. 

You know, as a nonprofit, we want to help them build their business. They come to us and they trust that we are going to guide 

them in the right direction. So honestly, most of the borrowers that 

we deal with, they don’t understand how this would affect them. 

Ms. OZER. As soon as they get here, as soon as they get to us, 

though, they quickly understand. When they hear the amount of 

the fees that they are paying and the fact that, you know, let’s 

hurry up and get this in because if this passes on October 1, this 

is going to cost you twice as much money as it would if we do it 

now. 

I mean, then they will understand the urgency. And what they 

can do with an additional $5,500, it doesn’t sound like a lot to a 

lot of people, but for small businesses, that could be a large part 

of their cash cycle. They could pay payroll for another month and 

it makes a huge difference and it has a huge impact. 

But I agree with Ms. Jansen, you know, they don’t necessarily 

understand the workings, but they do trust that the bank is looking out for them and putting them into the proper product. I mean, 

we as a commercial lending institution offer them conventional financing. They only come to my department when my bank is not 

going to be able to do it. 

So they are already sort of in a difficult spot, and then you tell 

them how much it is, and they feel like they are getting hammered 

over the head. But the problem for us is exactly what you said, and 

it is not just the borrowers who have to plan; it is banks and their 

lending institutions that have to plan. 

And we have to budget and we have to know how much this program is going to cost so we can allocate human resources to makSBR002 with DISTILLER

25 

ing more of these loans and doing outreach into the communities 

that need these loans the most. And we can’t afford to add personnel if we are going to keep paying fees to the government. 

Chairman KIM. That is right. And the same way that the borrowers turn to you and trust you about this analysis and understanding what they are going to need to do, they should also be 

trusting the SBA. They should be trusting us here in Congress to 

do our due diligence, that we recognize that the mission of the SBA 

is to help small businesses across this country, make sure that they 

can get a leg up, that they have a fair shot at being able to run 

a successful business and be able to grow. 

You know, the mission was not to create a revenue stream for 

the government on the backs of small businesses. Instead, everything should be geared towards what it is that we can to do to be 

able to help them. And what I assure you and assure you—this 

Committee on both sides of the aisle, we are committed to that. We 

are committed to ensuring that SBA stays true to the mission of 

helping small businesses across this country, giving them a fair 

shot, giving them a chance to really be able to succeed on this 

front. 

I wanted to ask a question, I wanted to ask this panel a question, a question that I asked the CFO, which is, do you think it will 

be the benefit to this Committee and for us here in Congress to 

hear from OMB on this? 

Mr. WILKINSON. I do. I think that is where the answers are, 

based on what we hear from former SBA employees, that is OMB 

and their macroeconomic assumptions that are driving the subsidy 

calculation. So I think it would be critical that you hear from OMB. 

Hopefully, we can get some straight answers. 

Chairman KIM. Is that the idea for every—does everyone else 

share that conclusion? 

Ms. OZER. I agree wholeheartedly. 

Chairman KIM. Does anyone disagree? 

Mr. GRAY. No. 

Chairman KIM. Well, no, thank you for that and your expert 

thoughts on this. 

I did want to just open up one last time, if there is anything else 

that anyone wanted to add for the record before this Committee before we start to move to conclusions. 

Mr. WILKINSON. The performance of the portfolio remains 

strong. We have actually had a very good working relationship 

with the Office of Capital Access at SBA. Over the last several 

years, we have worked hand-in-hand to improve the performance 

of portfolio, tightening up program parameters where they needed 

to be. I think that is reflected in the performance of the program. 

Unfortunately, we now have a subsidy calculation that does not 

reflect reality. There are some ulterior motives that we don’t see, 

and it is not borne out by the statistics in front of us. So I beg this 

Committee to dig deep into the subsidy calculation and find out 

what is going on. We need the details. There has got to be a paper 

trail somewhere of how these assumptions are come to and put into 

the model. 

I heard Mr. Gribben talk about all the auditors. From our understandings, they are checking the spreadsheets. They are not deterSBR002 with DISTILLER

26 

mining what the inputs are into the model. That is vastly different. 

We need to figure out what the inputs are and how those were derived. So there is a lot of detailed information that needs to be 

looked at. 

Thank you. 

Chairman KIM. Anyone else? 

Ms. JANSEN. Yeah. I would definitely like to dovetail on that 

and say, you know, we support examining every available option to 

avoid the fee increases, not passing them on to the small businesses, crippling their abilities, and passing them on to the small 

lenders, you know, large or small lenders. We have got to make 

this capital available to increase small businesses’ opportunities. 

Chairman KIM. Great. Thank you. 

Well, I appreciate, again, your time to be able to come and traveling here and be able to inform us and be able to help us do our 

jobs and make sure we are looking out for small businesses here. 

We know that the 7(a) program is the economy’s main vehicle for 

entrepreneurs to be able to access affordable capital on reasonable 

and fair terms. It is also an engine of job creation responsible for 

supporting over 540,000 jobs in 2018 alone; therefore, preserving 

the integrity of 7(a) is a top priority of this Committee. And any 

proposals that threaten that integrity, especially by raising fees on 

small business borrowers, will be reviewed with the highest degree 

of scrutiny. 

And I certainly look forward to working with my colleagues on 

both sides of the aisle. And I think you, you know, certainly heard 

that the Ranking Member and myself are very much on the same 

page in making sure that we are going to get all the information 

that we need to be able to make an assessment about this and understand whether it is fair. 

You certainly heard the words from the Chairman of—Chairwoman of the Committee of the whole that this is something that 

certainly has our attention and that we will be very focused on 

going forward. 

This is just going to be the initial steps. As I mentioned in the 

panel one, very much factfinding at this point. We certainly will be, 

if you don’t mind, calling upon you again, I am sure, to be able to 

get your thoughts as we move forward and get more information 

about what is best. 

So I certainly feel passionate about this. I certainly want to make 

sure we are looking out for small businesses and also understanding on the lenders side, you know, how this is affecting your 

work and your ability to plan, your ability to be successful, which 

we certainly want to see done. So we are going to work on both 

sides of the aisle, find a solution that will protect small business 

borrowers and the 7(a) program. 

I am going to ask unanimous consent that members have 5 legislative days to submit statements and supporting material for the 

record. And without objection, it is so ordered. 

And if there is no further business to come before the Committee, 

we are adjourned. Thank you. 

[Whereupon, at 12:29 p.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

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I I 

SBA 

I I 

US. Small Businf'<>S 

Admini,;tration 

Statement of Timothy Gribben 

Chief Financial Officer and Associate Administrator 

for Performance Management 

U.S. Small Business Administration 

before the 

House Committee on Small Business 

Subcommittee on Economic Growth, Tax and Capital Access 

Hearing on "SBA 7(a) Budget Proposal and the lmpact of Fee 

Structure Changes" 

April tO, 2019 
28 

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Statement of Timothy Gribben 

Chief Financial Officer 

U.S. Small Business Administration 

Thank you, Chairman Kim, Ranking Member Hern, and members of the subcommittee 

for inviting me to discuss with you the Fiscal Year (FY) 2020 budget proposal for SBA 's 7(a) 

loan program. 

In my testimony, I want to outline our credit subsidy model, our annual process to update 

and execute the model, as well as the options we have for operating the program in FY 2020. 

This will help provide context to the projection of a positive subsidy rate for the 7(a) program in 

FY2020 under current law, and the options for Congress to consider in order for the agency to 

operate at a $30 billion program level. 

Credit Subsidy Model 

The credit subsidy model is a series of processes and calculations that usc historical 

program data and macroeconomic projections to generate the expected cash flows for the entire 

life of a cohort. For the sake of clarity, a cohort is the group of loans approved in a given fiscal 

year. 

Annual Process to Update and Execute the Model 

Annually, we update our model with the most recent year of7(a) loan data and 

macroeconomic indicators. This data results in updates to the three main inputs into the model: 

performance assumptions, cohort composition assumptions, and macroeconomic assumptions. 

The model is thoroughly reviewed by the agency, then by an outside auditor, and eventually by 

the Office of Management and Budget. 

Performance Assumptions 

We use the performance assumptions to project prepayments, purchases, and recoveries 

on purchases. We develop the performance assumptions using over 25 years of historical 7(a) 

program and macroeconomic data. Annually, we test the predictive ability of the existing 

assumptions and adjust the methodology as necessary to appropriately capture program 

performance. Our performance assumption methodologies evolve as the 7(a) program and the 

macroeconomy changes, and as more data is available to us for analysis. 

Cohort Composition Assumptions 

The cohort composition assumptions are what we assume the characteristics of the loans 

approved in the budget year will be. We develop the cohort composition assumptions by 

reviewing the cohort characteristics from recent years and using that information to inform our 

assumptions for the current cohort. These characteristics include the distribution of loans by 

region, industry, loan size, maturity term, 7(a) subprogram, and several other factors that impact 

the cost of the program. 

Our model pr~jects a range of costs for a loan depending on the loan's characteristics. As 

the portfolio changes each year, we arc mindful to consider these changes when developing our 

2 
29 

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subsidy rate. We use the most recent data and work with statTfrom the program office to develop 

reasonable assumptions for the cohort we are formulating. 

Macroeconomic Assumptions 

We use macroeconomic assumptions provided by the Office of Management and Budget 

(OMB). Our portfolio is very sensitive to changes in macroeconomic conditions and the model 

uses assumptions for interest rates, unemployment rates, and GDP growth rates to develop the 

subsidy rate estimate. 

We update the cash tlow model with each of these sets of inputs to develop our subsidy 

estimate. For the past several years, after updating the inputs, we estimated that the fees we 

would earn from the loans would be adequate to cover the expected losses, and in fact, in excess 

of what we would need to cover losses. This allowed us to offer various forms of fee relief. For 

the loans we expect to approve in FY 2020, we no longer estimate that their fees will be 

sufficient to cover the expected losses. 

Steps Forward 

In order to operate our 7(a) program in FY 2020, SBA will need either a subsidy 

appropriation, or an adjustment to the fee rates. The agency presented three options for Congress 

to consider to support $30 billion in 7(a) loans. The first option would involve a subsidy 

appropriation of $99 million. The second option involves statutory changes to the fee structure in 

order to maintain zero subsidy, and the third option involves a combination of statutory changes 

to the fee structure and an offset to the agency's administration costs, also to maintain zero 

subsidy. 

The fee rates we propose in the budget, including an attempt to minimize any impact on smaller 

loans, are as follows: 

• Increase the ongoing fee for loans over $1.5 million to 0.69%, from 0.55%; 

• Increase the up front fee for loans over $1.5 million to 3.75%, from 3.5%; 

• Increase the upfront fee for loans $500,001 to $700,000 to 3.5%, from 3.0%; 

• Increase the up front fee tor loans with a maturity of one year or less to 0.5% from 0.25%. 

In conclusion, the agency annually reviews the model's predictive ability and revises 

performance assumptions when appropriate. We develop assumptions for portfolio composition 

and update the model with the most recent economic assumptions. This year, this process 

resulted in a positive subsidy rate after setting fee rates to their statutory maximum and removing 

all fee waivers. 

Thank you again, Mr. Chairman, for inviting me to testify today. I look forward to 

answering any questions you may have. 

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N 

"The SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes" 

Testimony before the Subcommittee on Economic Growth, Tax, and Capital Access of the House 

Committee on Small Business 

AprillO, 2019 

Submitted by 

Tony Wilkinson, CEO and President 

NAGGL 

Dallas, Texas 
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Chairman Kim, Ranking Member Hern, and Members of the Subcommittee-my name is Tony Wilkinson 

and I have served as the CEO and President of the National Association of Government Guaranteed 

Lenders (NAGGL) since December 1987. NAGGL is a national trade association of approximately 800 

banks, credit unions, non-depository lenders and other entities that participate in the Small Business 

Administration's 7(a) loan guarantee program. NAGGL's lender members are responsible for 

approximately 80% of the total 7(a) loans made each year. I began as a Director in this trade association 

almost 35 years ago while serving as a lender in Oklahoma, and lam proud to say that since then, NAGGL 

has been working hand in hand with the House Committee on Small Business on the most pressing issues 

for small business borrowers and lenders in the 7(a) industry. Thank you for continuing our practice of 

tackling the tough challenges together by having this hearing today to discuss the grave danger in which the 

President's FY20 budget submission has placed the 7(a) program. 

At the heart of the SBA's success is its flagship ?(a) lending program, the agency's largest source of access 

to capital for small business borrowers across the country. The numbers tell a story of great success in the 

7(a) program. In Fiscal Year (FY) 2018, financial institutions large and small provided about $25.4 billion 

in approvals to about 60,350 small businesses nationwide through the SBA 7(a) program. Roughly 

543,100 jobs were created or retained just last year thanks to the SBA ?(a) program-- if we assumed just 

$30,000 in average annual wages for those employees affected by the program, that means the 7(a) 

program is responsible for supporting at least $16.3 billion in income across the country. The impact does 

not stop with just those top line numbers-there are other benefits that are often hard to measure, like 

employment opportunities, increased tax revenue for federal and local governments, and community 

growth driven by small business expansion in cities, small towns and rural areas across the country. There 

is a never-ending domino effect of benefits gained from the 7(a) loan program. 

The performance metrics also tell a success story. I am pleased to report that the performance of the SBA 

7(a) loan portfolio has remained sound. Repurchase rates on defaulted loans remains near an all-time low, 

while recovery rates on collateral is at an all-time high. Putting the two together, SBA reports a record-low 

charge off rate for the portfolio in FY 2018. 

Over the past two Congresses, this Committee and its colleagues on the Senate Committee on Small 

Business and Entrepreneurship have been incredibly active in taking a closer look at the ?(a) loan program, 

and as a result, a number of historic legislative accomplishments were realized last year by updating the 

Small Business Act. By far, the most significant achievement in the access to capital programs for the 

Committee and its Senate colleagues was drafting and passing into law the Small Business 7(a) Lending 

Oversight Reform Act of2018, a bipartisan, bicameral effort that spanned three and a half years of work on 

the part of this Committee and staff. The 7(a) lending industry partnered with the Committee every step of 

the way to refine and create stronger oversight standards-it is not lost on the 7(a) lending industry that we 

have the privilege of being stewards of a government program with a public mission that must operate with 

integrity. 

However, this year, we are presented with a different kind of challenge--one which threatens the ahility of 

the 7(a) program to create and grow access to capital tor the tens of thousands of borrowers that we serve. 

The President's FY20 budget request, presented a little over three weeks ago to Congress, sent a shock 

wave through the 7(a) industry when it included a subsidy calculation requiring additional funding of33 

basis points (0.33%), or $99 million, for the 7(a) program. This is a major shift from the program's track 

record of operating at zero subsidy since FY05 (except during the years covered by the Recovery Act), 

which means that the fees collected from borrowers and lenders cover were projected to cover the cost of 
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making the loans. By projecting a positive subsidy rate for FY20, the budget request is triggering the 

necessity for Congressional action. Now, Congress needs to either appropriate $99 million to the 7(a) 

program or amend the Small Business Act to raise the current fee caps in order to collect $99 million in 

additional fees from borrowers and lenders on top of what participants already pay to cover the cost of the 

program. Both of these paths forward will need to pass the Senate, House, and be signed into law by the 

President by September 30-or the 7(a) program will shut down on October I. 

The positive subsidy rate from SBA and OMB has placed Congress in a tough predicament. This industry 

has been proud of the fact that we operate at zero cost to the taxpayer, and we acutely recognize the 

challenges appropriators face to stay within spending caps each fiscal year. On the other hand, raising fees 

on small business borrowers and lenders will shrink and impede access to capital, creating more barriers for 

the program's participants-the exact opposite direction we all would hope to see this program move 

toward. SBA's FY20 budget has created a lose-lose scenario for Congress, industry, and the country's 

small businesses. 

But before we can even consider how Congress might best move forward to prevent a very successful, 

popular small business program from simply shutting down on October I, we must first collectively 

question the positive subsidy calculation. My plea to this Committee is that before you simply take the 

FY20 subsidy calculation at face value, you first challenge both OMB and SBA to explain this 

subsidy estimate in detail, and specifically, the assumptions that went into the calculation and how 

those assumptions are weighted in the subsidy model. Not only do the FY20 budget documents provide 

insuftlcient justification for a $99 million increase in estimated subsidy costs, but there is ample evidence 

to suggest that a troubling pattern exists in the way SBA and OMB model the subsidy cost. This testimony 

will walk this Subcommittee through a number of overwhelming factors that should leave us all with more 

questions than answers. 

ram not the only one asking questions. The Government Accountability Office (GAO) has been raising 

the same concerns about SBA 's ability to appropriately estimate the cost of the 7(a) portfolio before this 

Committee and Congress since !997, spanning multiple Administrations. In a series ofreports, GAO has 

looked into the accuracy ofSBA's subsidy rate- or lack thereof~ no less than on four occasions over the 

past twenty-two years-this is a pattern, and one we cannot ignore. I will be referencing a number of 

GAO's findings throughout my testimony to highlight concerns with SBA's cost estimates that are shared 

by both GAO and industry. 

Allow me to also take the time to briefly explain what a subsidy calculation is and how this is reported 

every fiscal year. The 7(a) subsidy calculation is an estimate of the cost of the loan program to the 

government for loans originated in a given fiscal year and is governed by the Federal Credit R~form Act of 

1990 (FCRA). This statute dictates that the cost of credit portfolios shall be the net present value of the 

portfolio, excluding administrative costs to the government. By enacting FCRA, Congress delegated to the 

Executive branch the responsibility for estimating the future credit performance of loans into a subsidy rate, 

which Congress then uses to determine any necessary appropriations for each fiscal year. 

The majority of the Administration's budget requests are just that-proposals that make up a sort of budget 

wish list from the Executive branch to Congress. Some of these proposals in this year's budget request will 

always stay proposals-for instance, I expect Congress will once again not act on charging all borrowers 

and lenders to pay for SBA's employees' salaries and expenses in what the budget calls "counter-cyclical 

measures,'' namely because it is an egregious violation ofFCRA. However, the portion of the FY20 budget 
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request that is !!Qta proposal is the statement of a positive subsidy. SBA's proposed fee increases to 

borrowers and lenders in order to cover the positive subsidy is just a proposal, giving Congress one option 

to cover the cost this fiscal year, and we all know that there are more options than the increased fee 

structure SBA presented. But Congress does not have a choice but to react and address the fact that the 

7(a) program has a positive subsidy calculation starting the first day of the new fiscal year-and Congress 

has been given a limited timetrame in which to do so. Otherwise, absent a way to cover the stated costs for 

FY20, the program will not be permitted to operate past September 30. 

Why is the 7(a) industry questioning the FY20 subsidy calculation? 

Performance---Discrepancy Between Actual v. Projected 

First, the portfolio's actual performance data projects a starkly different picture than this positive subsidy 

estimate would suggest. Since the subsidy calculation is the projected performance of the portfolio, it 

stands to reason that SBA may have detected a significant decline in the current performance of the 

portfolio to lead them to this conclusion. However, by SBA 'sown reporting to Congress and the industry, 

the health of the 7(a) portfolio is strong. The portfolio has seen a steady decline in charge-off rates over the 

past ten tiscal years on an annualized basis and risk has generally declined since September 2012. 

In fact, there is a significant discrepancy over actual portfolio performance and projected performance in 

FY20. The program's five year average recovery rate on defaulted loans, as reported to Congress last 

December, was 50%. In sharp contrast, the FY20 budget assumes a projected recovery rate of only 

37.29%. Why has the subsidy modeling ignored this established trend of steadily increasing recovery 

rates? 

GAO reports on SBA's subsidy calculations have highlighted this very issue of repeated discrepancies 

between actual loan performance and projected performance. In an August 200 I GAO letter and briefing 

to the Senate and House Committees on Small Business titled "Section 7(a) Generall3usiness Loans Credit 

Subsidy Estimates," GAO describes a consistent pattern of SBA's estimations showing a marked 

disconnect with actual performance, resulting in repeatedly overestimating the cost of the program. 

GAO states "review of actual and originally estimated defaults and recoveries showed that, on a cumulative 

basis since 1992, defaults were overestimated by approximately $2 billion ... During this same period, SBA 

overestimated the cost of the 7(a) program by $958 million as evidenced from a trend of downward 

reestimates. The majority of these downward reestimates can be attributed to the overestimate of defaults." 

GAO goes on to explain that at the time, SBA was in the midst of proposing a new methodology to OMB 

that uses the 5 most recent years of actual loan performance, rather than all actual loan performance which 

can often include anomalies from various economic cycles that have no bearing on the current economic 

climate. Since this 200 I report. SBA's model has been adjusted and there has been a shift to a more 

sophisticated econometric modeling that attempts to create relationships between pertormance and 

economic trends and other indicators·"-but it seems more pertinent than ever for Congress and industry to 

understand how SBA and OMB currently utilize historic loan performance and tor what period of time 

given what seems to be history repeating itself. 

Part ern of Overcharging Borrowers, Lenders, and Congress 

Another concerning element of the FY20 budget request that should lead to many questions about the 

accuracy of the 7(a) model is the documentation of repeated and significant downward re-estimates in 

every cohort of loans since FYI 0, as reported in the FY20 budget. Downward re-estimates mean that the 

portfolio is consistently performing better than originally projected in each fiscal year's original subsidy 

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calculation, and that the model used by SBA and OMB has been significantly overestimating program 

costs. In other words. data that shows in dollars the net lifetime amount of a particular fiscal year's 

downward re-estimate is how much borrowers and lenders have been overcharged in fees to cover the cost 

of the program. These excess charges are simply returned to the Treasury as miscellaneous receipts. 

In the FY20 budget, SBA reported for FY 18 a $757 million excess subsidy reserve that captured reestimates from all prior years over what had been reported for FY 17, and another $143 million is already 

expected for FY19. These are not isolated incidents overfunded subsidy reserves have occurred for every 

cohort of 7(a) loans since FYI 0. In fact, since FY 10, borrowers and lenders have been overcharged by 

approximately $3.2 billion, all transferred to the Treasury as miscellaneous receipts during that period. 

This is a staggering amount of money that has unnecessarily burdened the delivery of these important small 

business loans, and is a clear indication of the degree to which the process for developing 7(a) subsidy 

estimates appears to be badly broken. A subsidy model certainly cannot be perfect and it is wrong to 

expect that it will ever be a perfect estimation-but a pattern this egregious is concerning, especially 

considering that now SBA is asking for $99 million more from borrowers and lenders. 

In fact, Congress has also been overcharged since FY20 l 0. In FY20 I 0- FY20 13, following the Great 

Recession, the 7(a) program received appropriations from Congress in order to cover the cost of the 

program, on top of fees charged to borrowers and lenders. Since those same years of congressional 

appropriations have shown significant downward re-estimates into the negative, just a few years of distance 

has shown that appropriations were not even necessary to cover the cost of the program. 

A GAO report from March 1998 to the Senate Committee on Budget, titled "Greater Effort Needed to 

Overcome Persistent Cost Estimation Problems," highlighted a concern with consistently inaccurate 

subsidy calculations at SBA. This report discussed when SBA hired Price Waterhouse to conduct a 

diagnostic review of SBA's internal subsidy estimation process and states that, "This September 1997 study 

said that 'the credit subsidy process is not viewed as a way of assessing the future risk and costs of the 

program for management purposes. Rather, the rate calculation is perceived [by SBA] to be a tool for 

gaming the congressional appropriations process."' SBA went on to insist this report was inaccurate, 

while Price Waterhouse continued to assert its accuracy. I'm sure that this Subcommittee and Congress 

join the industry in hoping that this is not currently an accurate representation ofSBA's subsidy calculation 

process, but given the repeated downward reestimates that have overcharged small business borrowers, 

lenders, and also Congress, the subsidy modeL methodology, and assumptions deserve a closer look. 

Programmatic Improvements Should Factor Into the Subsidy Calculation 

Further, I am concerned that the model fails to take into account significant programmatic changes. The 

successful passage of the Small Business l(a) Lending Oversight Reform Act of20!8lcad by this 

Committee and its Senate counterparts improved SBA's oversight capabilities and provided changes to the 

program to ensure lenders stay between the lines. These changes do not seem to factor into the 

Administration's view of the program in the FY20 7(a) subsidy calculation. SBA's Office of Capital 

Access has made significant improvements to ensure the program operates with integrity, including 

updating the agency's Standard Operating Procedure (SOP) to require that borrowers have more skin in the 

game-this change does not seem to matter when the Administration is assessing the future performance of 

this program in its FY20 budget request. When Congress increased the maximum loan size to $5 million 

from $2.5 million in the Small Business Jobs Act of20!0, lenders were able to make loans involving real 

estate and which contributed significantly more fees to the 7(a) subsidy account -two factors that provided 

more stability to the portfolio. These are just some examples of the countless programmatic changes to the 
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7(a) program over the past decade that SBA and OMB should factor in to the current subsidy calculation, 

and which do not seem to weigh heavily in current subsidy calculations. 

As far back as July 1997, GAO provided testimony before this Committee titled "Credit Subsidy Estimates 

for the Sections 7(a) and 504 Business Loan Programs" that stated, "In the President's budget for fiscal 

year 1997, SBA estimated that the costs of7(a) and 504 program loans to be made in fiscal year 1997 

would be significantly higher than the costs of loans made in fiscal year 1996, despite legislated program 

changes designed to keep costs down." There is a long-established track record of repeated over· 

estimations of cost followed by an attempt on GAO's part to determine whether significant programmatic 

changes appropriately affected assumptions-these inquiries are just as relevant today. 

Assumptions and Models Should Not Be Precluded jiwn Congressional Oversight 

!urge you to keep in mind throughout this conversation that SBA and OMB are simply making projections, 

basically educated guesses, about how loans that are made during FY20 might perform over the lifetime of 

those loans. Of course, this is no simple task and the model behind this subsidy calculation is complex, but 

it bears stressing that this subsidy calculation is really not a mathematical absolute based on a formula that 

cannot be challenged. Rather, modeling assumptions that were included, assumptions that were determined 

should not be included, and how these assumptions are weighted in the model must be reviewed and 

challenged-and it's appropriate to do so as members of this Committee and as the industry. Absent 

holding SBA and OMB accountable for correcting or amending the subsidy calculation, this Committee is 

going to have to carry out the results of a calculation that it seems no one, except SBA and OMB, 

understands. It hardly seems appropriate that the subsidy calculation's econometric assumptions and 

modeling should be shrouded in mystery. Yes, Congress gave the Executive branch authority to calculate 

subsidy costs, but Congress did not give unfellered authority to be carried out in a manner lacking in 

transparency or otherwise not responsive to Congressional oversight. 

To this end, the findings in a March 2004 GAO report to the Senate and House Committees on Small 

Business, titled "Model for 7(a) Program Subsidy Had Reasonable Equations, but Inadequate 

Documentation Hampered External Reviews," point to a consistent inability to really discern whether the 

7(a) subsidy model is most accurately estimating cost. Among the report's findings is that GAO and two 

other independent reviewers could not determine whether a bias existed in the model by systematically 

excluding variables to influence the subsidy rate in a particular direction. This is an alarming 

conclusion and one that should be looked into as it applies to the FY20 calculation. The report goes on to 

state that SBA could not provide adequate documentation, a key internal control, to demonstrate the 

rationale and basis for key aspects of the modeL Even alter SBA provided 800 pages of documentation 

to GAO, the report "concluded that this information would be of questionable or no usefulness in assessing 

SBA's development of the assumptions and selection of variables used in the modeling process." In 

addition, one of GAO's recommendations to OMB was not implemented, which was to update and improve 

OMB's Circular A-ll guidance which is either silent or unclear about the level of documentation 

necessary for credit subsidy model development. I urge this Subcommittee to look into these seemingly 

open-ended conclusions. 

Impact of SBA 's Proposed Fee Structure: Shrink Access 10 Capital 

In the FY20 budget request, SBA indicates that its preferred method to cover the 7(a) program's cost is to 

restructure fees in the Small Business Act. raising costs for borrowers and lenders. The industry could 

understand this proposal if the portfolio was displaying a troubling pattern of poor performance in the 

portfolio. However, in this instance, there are no apparent performance issue that can be identified in the 

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portfolio. the budget's own data shows significant and repeated overcharging of borrowers for nearly the 

last decade, and SBA and OMB have yet to reveal the model's methodology and assumptions. Given these 

factors, SBA's proposed fee increases are nothing more than a tax on small business borrowers. 

The consequence ofSBA's proposals will be shrinking access to capital. Small business borrowers may be 

dissuaded from considering a SBA loan in the future, resulting in a reduction in access to capital. The 

benefits of having a program that is built on private-sector participants are numerous, but it also means 

there is a stark reality that the program needs to make sense financially for private-sector banks as well. If 

the program does not make financial sense for lenders, then they will participate less in the 7(a) program 

and access to capital will be further restricted. 

In the aforementioned 1998 GAO report to the Senate Committee on Budget, we are reminded that we have 

been here before-OMB and SBA made a correction to their stated subsidy calculation mid-year for FY97 

after noticing a "technical error" which GAO describes as a "large error" resulting in a significantly higher 

cost estimation than necessary. GAO goes on to state that by "correcting this error ... SBA was able to 

guarantee approximately S2.5 billion more in section 7(a) small business loans. OMB and SBA 

officials acknowledged that better oversight and improved internal controls at both OMB and SBA are 

needed to prevent similar errors in the future." Over-estimations of cost are not just philosophical 

arguments-they have real consequences that translate to real dollars that otherwise could be available to 

this country's small business borrowers. 

Without appropriately holding OMB and SBA acconntable for their assumptions, something as 

arcane and bureaucratic as a flawed financial model for the 7(a) portfolio is essentially dictating the 

parameters of access to capital, rather than allowing Congress and the Small Business Act to exercise 

that authority. 

Thank you for holding this hearing and I appreciate the opportunity to testify before this Subcommittee. 

hope that my experience in the industry and my perspective on this incredibly detailed, technical issue 

sheds some light on the very real way that subsidy calculations and portfolio accounting can impact the 

level to which the 7(a) industry will be able to provide access to capital in the years ahead. I look forward 

to your questions. 
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"The SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes" 

Testimony before the Subcommittee on Economic Growth, Tax, and Capital Access of the House 

Committee on Small Business 

April 10, 2019 

Submitted by 

Lynn Ozer 

Fulton Bank 

Lancaster, PA 
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Chairman Kim, Ranking Member 1-lern, and Members of the Subcommittee-my name is Lynn Ozer 

and I am currently the President of Fulton Bank's SBA lending division. After graduating from Temple 

University with aBBA majoring in accounting, I got my first job at the U.S. Small Business 

Administration (SBA). After five years there I began my career in commercial lending with an 

emphasis on SBA lending. I have been leading SBA lending departments in both large banks, regional 

banks and community banks ever since. 

In my current role at Fulton Bank, I oversee all aspects of SBA lending in our bank's five-state footprint 

including Pennsylvania, New Jersey, Delaware, Maryland, Virginia, and Washington DC. I am also the 

past Chairwoman of the National Association of Government Guaranteed Lenders (NAGGL), and in 

that role, I represented over 800 financial institutions and partners that participate in the 7(a) lending 

industry. I thank this Committee for giving me the opportunity to testify both in my capacity as a 

veteran lender, but also as a voice for the thousands of lenders who devote their careers to helping small 

businesses. 

The 7(a) lending program is the agency's oldest and largest public-private partnership with 

approximately 2,000 participating private-sector financial institutions. Participating lenders make 

private-sector loans with their own capital based on their own financial decisions to small business 

borrowers who meet program standards for creditworthiness and financial health, but who fall into the 

very common lending gap for American small businesses. I have believed and trusted in SBA's mission 

to aid and protect these borrowers for the entirety of my career; however, it is disheartening to see an 

FY20 budget request from SBA that takes advantage of small business borrowers. 
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As a lender, when the President's FY20 budget was released, I was surprised, The budget states a 

positive subsidy calculation for the 7(a) loan program for FY20 of$99 million-a marked shift from the 

program's track record of operating at zero subsidy, or no cost to the taxpayer, Even more surprising is 

that SBA makes clear that its preferred solution for this $99 million cost is to increase fees on both small 

business borrowers and lenders in a proposal that would have serious ramifications that I will speak to 

later in my testimony, In reality, SBA has essentially told Congress that it has a choice of either 

appropriating $99 million or hiking up fees on borrowers and lenders--or the program shuts down on 

October L 

My first thought as a seasoned lender is to question whether or not there have been any performance 

issues in the portfolio: there have been none that SBA has made the industry aware of, none that I can 

see in the data presented by SBA, and none that I have observed as a lender with boots on the ground, 

The subsidy calculation projects the net present value of the portfolio so that the government may 

appropriately account for the best estimate of what the cost of that portfolio will be -in other words, it is 

an estimated measure of how 7(a) loans originated in FY20 will perform over the lifetime of those loans, 

It stands to reason that for the portfolio to go from a zero subsidy cost to a positive cost of$99 million, 

there would be some indication in a worsening of the portfolio's performance, but there is not In fact, 

as a lender who has seen many economic swings in my career, while volume has plateaued in the 

portfolio, the quality of our portfolio has remained high, 

It is also disconcerting that the FY20 budget reveals that every cohort of loans made for the past nine 

fiscal years show significant downward reestimates-meaning that in those years when SBA asked for a 

certain level of fees from borrowers and lenders, SBA could have asked for much less and still covered 
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the cost of the program at zero subsidy. SBA has been repeatedly overcharging borrowers and lenders, 

which tells me that the current subsidy model used is not working as it should. As a lender, I deal with 

the consequences of explaining to my borrowers and my institution what SBA fees are owedborrowers make sacrifices to pay tor those fees and my bank has to carefully account for every dollar 

spent. It is discouraging to learn that small businesses and participating SBA lenders did not need to pay 

that much in fees for nearly the past decade, yet we have no way to recoup those unnecessary losses for 

the borrowers. 

I am fully aware that the subsidy model for the program is complex and involves a numher of different 

assumptions. But as a lender and a steward of access to capital for thousands of small business 

borrowers, I think it is appropriate for both the industry and Congress to be made aware of what goes 

into this subsidy calculation. Much of the subsidy calculation involves projections and assumptionsprojections and assumptions can be wrong and arc not necessarily hard and fast truths. The model to 

develop the subsidy calculation for the 7(a) program, and all lending programs, has always been 

shrouded behind a black curtain-never discussed with industry, and I strongly doubt ever discussed 

with the Hill. This is not right, namely because the results of these subsidy calculations have real life 

consequences that. in this instance. will absolutely serve to shrink access to capital. I urge this 

Subcommittee and the House Committee on Small Business to work with OMB and SBA to obtain the 

details of this subsidy estimate, and specifically, the assumptions that went into the calculation and how 

those assumptions are weighted in the subsidy model. Lenders are the stewards of this program without 

whom there would be no SBA lending, and Congress gives the program its authority to exist each fiscal 

year--does it make sense that neither of us know how the cost of the program is calculated, but are 

expected to simply take SBA and OMB at their word without any discussion? 

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There seems to be an expectation that we should simply trust a calculation that docs not follow logic, 

despite the tact that portfolio performance is better than ever with a repeated overcharging of 

participants tor nearly the last decade. This expectation is even more incredulous given the 

consequences the 7(a) program will experience as a result ofSBA's calculation. 

If we refer to SBA's proposed increased fee structure to cover the cost ofthe $99 million subsidy 

calculation, the small business borrower's fees will increase measurably-this is a tax on small business. 

Anyone who claims that SBA 's proposed fee increases are not impactful to the borrower must not be a 

lender. Not only is SBA proposing increasing caps on the up front fees to borrowers, but they are also 

adjusting several tiers that currently separate the various fee caps by loan size (see Table I below). The 

result is that for loans made in the range of $500,00 I to $700,000, borrowers would pay an increased fee 

that was formerly reserved for only loans greater than $700,000, and for loans greater than $1.5 million, 

there is a new tier created at a higher rate than borrowers have seen before. There is also an increase in 

the fee charged to borrowers for a loan term less than a year. 

Table 1: Proposed Chanees in Upfront Fees 

Current Fee Structure on SBA Proposed Fee Structure on Upfront Fee on 

Upfront Fee on Borrower Borrower to Cover the $99 Million 1bsidy 

Loans<~ $150.000: 2.0% Loans< $150,000: 2.0% 

$150,000 < Loans $700,000: 3,0% $150,000 <Loans<~ $500,000: 3.0% 

Loans > $700,000: 3.50% $500,000 <Loans<"· $1.5 million: 3.50% 

Loans> $1.5 million: 3.75% 

Additional 0.25% fee for any guaranteed amount over$ I Additional 0.25% fee for any guaranteed amount over 

million $1 million 

Loan term Jess than 1 year: 0.25% Loan term Jess than l vear: 0.50% 
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At Fulton Bank, many of our loans are made between $500,000 and $700,000 and would be impacted, 

as well as our larger loans and working capital with a one year term or less. By way of example, in 

Mercer County in New Jersey, we made a $520,000 loan to Emcom Systems, a small manufacturing 

company employing 20 individuals that makes security devices for public and transport use-think 

security phones on subways and blue light phones on college campuses. Upfront lees to the borrower 

were $11,700 and under the new scenario, those fees would have been $13,650. The additional $1,950 

may not sound like that much, but in Emcom's world, these funds could be utilized to hire additional 

staff or increase profitability through bulk material purchasing and process improvements, 

Or take the example of a $515,000 loan to Kaylah Designs, Inc., a jewelry manufacturer with locations 

in Pikesville, Maryland and Lakewood, New Jersey. The upfront fee on this loan was $11,587.50 and 

under the proposed budget, this small business would pay an additional $1,931 .25-to this small 

business, that savings represents additional raw materials to boost sales and represents more than a 16% 

increase in fees. 

Fulton Bank's borrower, Three Eye Research, in Cherry Hill, New Jersey received an Export Working 

Capital line of credit for $1,000,000-they paid $2,500 in an upfront fcc for a 12-month credit facility. 

Under SBA's new proposal, the fee would have doubled to $5,000, potentially hampering the company 

from being able to utilize these excess funds to create jobs or increase productivity. 

T Group, LLC is a trucking company just outside of Bordentown, New Jersey that has seen its business 

expand due to the enormous boom in delivery services from online purchasing. The company borrowed 

$2,975,000 to purchase their location and adjacent property to house their fleet. Their upfront fees 

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totaled $81,171.87. Under SBA's proposed fee structure, the company would pay an additional 

$5,578.11. 

These fee increases are especially taxing on small business borrowers in light of the repeated 

overcharging of borrowers to operate this program for the past eight fiscal years. In the end, ifSBA's 

current proposal is adopted by Congress, many small business borrowers may be dissuaded from 

considering a SBA loan and there will be a reduction in access to capital. This negative consequence of 

SBA 'sown proposal seems antithetical to SBA's stated mission and the mission of the 7(a) program. 

What would be the impact to participating SBA lenders? Again, if we refer to SBA 'sown proposed fee 

structure to cover the cost of the $99 million subsidy calculation, lenders' costs increase significantly 

(see Table 2 below). For Fulton Bank, the costs for my SBA department would increase by roughly 

25%just on new loan originations in FY20, with that number multiplying by itself year over year into 

the future since these lender fees are charged on an annual basis for the life of the loan. 

Table 2: Proposed Chane:es in Ongoine: Fee 

Current Fee Structure on 

Ongoing Fee on Lender 

SBA Proposed Fee Structure on Ongoing Fee on 

Lender to Cover the $99 Million Subsidy 

55 bps on all loans 55 bps for loans up to S 1.5 million 

69 bps for loans over $1.5 million 

It is important to emphasize for this Subcommittee that when costs increase on lenders, there is a 

domino effect on how lenders will utilize this program-the results of which will only hurt the small 

business borrower in the end. For instance. in an effort to recover lost revenue, lenders who are not at 

current interest rate maximums (which are capped by statute and regulation), will be forced to increase 

interest rates on borrowers wherever they can in an effort to recoup losses. For the lenders who are at 

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the current interest rate maximums, they will have no choice but to simply shrink their 7(a) loan 

portfolios to still afford to make 7(a) loans with measurably higher costs. At Fulton Bank, many of the 

larger loans we make are not at the interest rate maximums and we will have to seriously consider 

increasing those rates, as well as rates on any other loans in our portfolio that we do not currently charge 

at the interest rate maximum. 

Lenders could turn to selling significantly more of their loans on the secondary market in order to create 

necessary liquidity, putting potential stress on the Secondary Market Guarantee Program. Since lenders 

with a high percentage of secondary market sales in their portfolio are flagged higher risk in OCRM's 

risk reviews. OCRM will likely report to Congress in the coming years that lenders are exhibiting higher 

risk profiles than they were in prior years, which will be a consequence ofSI3A 'sown making. 

To make matters worse, SBA's proposed fees on lenders are concentrated on large dollar loans, which 

makes sense if the goal is to find the easiest source of revenue to achieve $99 million in additional fees 

since larger loans generate higher fees. However, this Subcommittee needs to understand that when you 

disincentivize lenders from making larger loans, which is what this proposal will do, the subsidy in 

future years will be negatively impacted since the fee income from larger loans contribute more to the 

subsidy account and provides overall subsidy stability--again, another potential consequence ofSBA's 

own making. 

Finally, when banks take such a drastic hit to internal costs, efficiency ratios in the bank increase. This 

efficiency ratio is simply the bank's operating costs. referred to on the bank's income statement as 'noninterest expenses' divided by its net revenue (total income minus interest expense). Banks strive to have 

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their efficiency ratio as close to 50% as possible. As a result of increased costs and efficiency ratios, 

many SBA lenders could be faced with a tough conversation with their management, board of directors. 

or stockholders about whether or not the bank can invest any more in their SBA department or whether 

SBA lending is a good option for the bank at all. From a big picture perspective, banks will likely 

shrink their current volume or, at the very least, halt current volume-and they will certainly tlnd it 

difficult to increase their volume of SBA loans. Is this really the outcome that SBA hopes for when it 

comes to their flagship loan program? 

There are several other concerning provisions in the President's FY20 budget request that warrant 

discussion, such as the continued request for borrowers and lenders to pay for SBA 's employees' 

salaries and expenses by collecting excess fees beyond what SBA needs to cover the credit costs of the 

program. This is an outrageous request given the questionable positive subsidy calculation this year. 

The consequences of an additional $99 million estimated cost to the program I have outlined above will 

only be exacerbated since this proposal, combined with the necessary cost of covering the positive 

subsidy, will cost 7(a) borrowers and lenders $197 million in fees on top of what they already pay. To 

even request this additional fee structure shows an alarming disconnect between SBA and the reality of 

the costs of this program on small business borrowers and lenders. I am only comforted by the fact that 

Congress made clear in FY19 that it would not tax borrowers and lenders for SEA's administrative costs 

when SBA proposed this same request last year. 

But make no mistake, the part of this budget request that is not just a request is the subsidy calculation. 

SBA reports the subsidy rate every fiscal year and Congress reacts accordingly through the 

appropriations process. l urge you not to simply take this subsidy calculation at face value and seriously 

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challenge the subsidy rate-borrowers, lenders, and the ability of the 7(a) program to serve access to 

capital needs across the country are dependent on how you react to this surprising calculation. 

Thank you for holding this hearing and I appreciate the opportunity to testify before this Committee. As 

lenders, we arc incredibly proud of who we serve and the role we play in each of the districts you 

represent. We want to continue increasing opportunities for small businesses and open the doors to 

access to capital. The SBA 's FY20 budget request would do just the opposite-it would shrink access 

to capital, closing the door on many borrowers and lenders. I hope that I have helped to make sure that 

this Subcommittee and Congress are aware of the real consequences that will result fi·om SBA 's 

questionable subsidy calculation and its flawed proposal to address it. I look forward to your questions. 

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_._ 

NAFCU 

Testimony of 

Gail Jansen 

Vice President of Business Services and Operations 

Kinecta federal Credit Union 

On behalf of 

The National Association of Federally-Insured Credit Unions 

"SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes" 

Before the 

Subcommittee on Economic Growth, Tax and Capital Access 

House Small Business Committee 

April 10,2019 
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Introduction 

Good Morning, Chairman Kim, Ranking Member Hern, and Members of the Subcommittee. My 

name is Gail Jansen, and I am testifying today on behalf of the National Association of FederallyInsured Credit Unions (NAFCU). Thank you for holding tbis important hearing today. I appreciate 

the opportunity to share with you our perspective on the Small Business Administration's (SBA ·s) 

7(a) Loan Program and the potential impacts of the proposed fee structure changes for fiscal year 

2020. 

As the Vice President of Business Services and Operations at Kinccta Federal Credit Union, I am 

responsible tor a portfolio of nearly $1 billion in member business loans that includes nearly $35 

million in SBA loans. I hold a bachelor's degree from California State University, Fullerton and a 

master's degree from Azusa Pacific University and have over 20 years of experience in the 

financial services industry. 

Kineeta Federal Credit Union, based in Manhattan Beach, California, was originally chartered in 

1940 with $60 in deposits from 12 members as Hughes Aircraft Employees Federal Credit Union. 

Today, we have over 300.000 members nationwide with over $4.4 billion in assets and 22 

branches. We changed our name to Kinecta in 200 I, but our miss ion to serve our members has not 

changed as we have been consistently named as the South Bay's best credit union. 

As you may know, NAFCU is the only national organization that exclusively represents the 

interests of the nation's federally-insured credit unions at the federal level. NAFCU and the entire 

credit union community appreciate the opportunity to participate in this discussion regarding the 

7(a) loan programs and the budget proposal of the Small Business Administration. 

Background on Credit Unions 

Historically, credit unions have served a unique function in the delivery of necessary financial 

services to Americans. Established by an act of Congress in 1934, the federal credit union system 

was created, and has been recognized, as a way to promote thrift and to make financial services 

available to all Americans, many of whom would otherwise have limited access to financial 
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services. Congress established credit unions as an alternative to banks and to meet a precise public 

need-a niche credit unions fill today for more than 116 million Americans. Every credit union is 

a cooperative institution organized "for the purpose of promoting thrift among its members and 

creating a source of credit for provident or productive purposes." ( 12 § USC 1752( I)). While over 

80 years have passed since the Federal Credit Union Act (FCU Act) was signed into law, two 

fundamental principles regarding the operation of credit unions remain every bit as important today 

as in 1934: 

• credit unions remain totally committed to providing their members with efficient, low-cost, 

personal financial services; and, 

• credit unions continue to emphasize traditional cooperative values such as democracy and 

volunteerism. Credit unions are not banks. 

The nation's approximately 5,400 federally-insured credit unions serve a different purpose and 

have a fundamentally different structure than banks. Credit unions exist solely for the purpose of 

providing financial services to their members, while banks aim to make a protlt for a limited 

number of shareholders. As owners of cooperative financial institutions united by a common bond, 

all credit union members have an equal say in the operation of their credit union-"one member, 

one vote''-regardless of the dollar amount they have on account. These singular rights extend all 

the way from making basic operating decisions to electing the board of directors-something 

unheard of among for-profit, stock-owned banks. Unlike their counterparts at banks and thrifts, 

federal credit union directors, who are all members of the credit union, generally serve without 

remuneration-a fact epitomizing the true "volunteer spirit" permeating the credit union 

community. 

Credit unions continue to play a very important role in the lives of millions of Americans from all 

walks of life. As consolidation of the commercial banking sector has progressed, with the resulting 

depersonalization in the delivery of financial services by banks, the emphasis in consumers' minds 

has begun to shift not only to services provided, but also-more importantly-to quality and cost 

of those services. Credit unions are second-to-none in providing their members with quality 

personal financial services at the lowest possible cost. 
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Credit unions also play an important role in the on-going recovery from the financial crisis. As 

widely recognized by elected officials in Washington, credit unions did not cause the financial 

crisis. Because we did not engage in the same risky practices as big banks, credit unions fared well 

during the crisis and, as a result, had the capital available to lend. Surveys ofNAFCU-member 

credit unions have shown that many credit unions saw increased demand for mortgage loans and 

auto loans as other lenders were leaving the market. A number of small businesses who lost 

important lines of credit from other lenders during that time turned to credit unions for the capital 

that they needed. 

Our nation's small businesses represent 99.7 percent of all employer firms, employ nearly half of 

all private sector employees, pay more than 40 percent of total U.S. private-sector payroll, and 

have generated over 60 percent of net new jobs annually over the last decade. It is inarguable that 

the strength of the economy directly correlates to the health and well-being of America's small 

businesses. Many small business owners are members of credit unions around the country and rely 

on their services to help make their small businesses successful. Our nation's credit unions stand 

ready to help and, unlike some other institutions, have the assets to do so. Unfortunately, an 

antiquated and arbitrary member business lending cap prevents many credit unions from doing 

more for America's small business community. 

Artificial Member Business Lending Cap at Credit Unions Hurts Small Business 

When Congress passed the Credit Union Membership Access Act (CUMAA) (P.L.IOS-219) in 

1998, it put in place restrictions on the ability of credit unions to offer member business loans. 

Credit unions had existed for nearly 90 years without these restrictions. Congress codified the 

definition of a member business loan and limited each credit union's member business lending to 

the lesser of either I. 75 times the actual net worth or 1. 75 times the minimum net worth of a wellcapitalized credit union ( 12.25 percent). 

CUMAA also established, by definition, that business loans above $50,000 count toward the cap. 

This number was not indexed and has not been adjusted for inflation in the more than 20 years 

since enactment, eroding the de minimis level. Where many vehicle loans or small lines of credit 
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may have been initially exempt from the cap in 1998, many of those that meet the needs of small 

business today are now included in the cap due to this erosion. To put this in perspective relative 

to inflation, what cost $50,000 in 1998 costs $77,500 today, using the most recent consumer price 

index data. That is more than a 55% rate of inflation change that is completely ignored by current 

law and greatly hamstrings a credit union's ability to meet its members' needs. 

It should be noted that the government guaranteed portions of SBA loans do not count toward the 

member business lending cap, but the non-guaranteed portions do. This could ultimately lead to a 

situation where a credit union may be an excellent, or even preferred, SBA lender but have to scale 

back participation in SBA programs as they approach the arbitrary cap. This would likely hit SBA 

Express loans first, as those have lower guarantees and thus may have a bigger impact on money 

available below the cap. 

We would urge Congress to support legislation to provide relief from the arbitrary cap on credit 

union member business lending. 

Memorandum of Understanding between the SBA and NAFCU 

In September 2017, the SBA and NAFCU renewed a 2015 Memorandum of Understanding 

(MOU) in a joint effort to improve access to sm·all dollar loans to small businesses across the 

nation. Both parties entered into the MOU with the desire to increase the number of credit unions 

offering SBA loan products. Credit unions, with their not-for-profit, mission-based focus, are 

positioned to fill the gaps in capital for small businesses, especially for underserved borrowers. 

Involving more credit unions in SBA programs will expand the accessibility ofSBA products and 

ultimately strengthen small businesses and the communities in which they operate. With greater 

participation in SBA's lending programs, credit unions stand to benefit from the reduction of their 

risk on small business loans and from increasing financing resources available to their small 

business members. 

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SBA Lending at Kinecta Federal Credit Union 

Business lending is an important aspect of our service to members at Kinecta. A key part of that is 

our ability to offer SBA 7(a) loans. Kinecta is a Preferred Lender with the Small Business 

Administration, and was ranked as the# I credit union SBA lender in all of California. We currently 

have an SBA portfolio of$35 million with an average size of$250,000 per loan. Our SBA loans 

range from a low of $50,000 to a high of $5 million. Our members turn to us for SBA loans for 

working capital, inventory and equipment purchases, tenant improvements, business acquisitions, 

debt refinancing, start-up financing and to purchase commercial real estate. On average, we make 

about 20 SBA loans a year. 

The kinds of companies that turn to us for SBA loans include small manufacturers (I 0-40 

employees), logistic companies (5-30 employees), brick-and-mortar retail shops, independent 

restaurants, franchises, ecommerce and tech companies, and professional services. A business 

owner will apply for an SBA loan with a credit union because they want or are looking for 

something different than what a bank can offer. The business owner is often pleasantly surprised 

that a credit union offers small business loans and as a result is willing to consider us as a viable 

alternative. Credit unions are already well known for offering home loans, auto loans, personal 

loans, and credit cards to their members, so there is additional value added when the member is a 

business owner and is in need of financing to support their small business. 

Our ability to offer SBA loans allows us to meet the needs of our members, like the one who turned 

to us in July 2018 with a small, growing residential home remodeling company. The use of funds 

was to refinance existing business debt and provide working capital to support new projects. At 

the time of the loan request, the company had only one full-time employee and one part-time 

employee. The subject debt to be refinanced was originated from an online lender that was 

charging the business owner an exorbitant interest rate of 44.28 percent. After underwriting the 

loan request, Kinecta approved and funded the SBA loan in the amount of$110,000 at an interest 

rate of7.75 percent. The refinancing of the business debt resulted in a cash flow savings of91.10 

percent for the small business owner. As a result of these savings, the business has since hired two 
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full-time employees and has begun to create a reserve account with the future intention of 

purchasing a commercial real estate property. 

SBA's 7(a) Budget Proposal and the Impact of Fee Structure Changes on Credit Unions 

As previously mentioned, small businesses are the backbone of our economy and an essential 

source of jobs for Americans. The Small Business Administration's loan programs serve as an 

important resource that help credit unions provide small businesses with the vital capital necessary 

for growth and job creation - in many cases to businesses that would otherwise not be able to 

obtain financing. While there are positives to SBA 's overall FY 2020 budget request, such as the 

increase in the SBA Express loan limit from $350,000 to $1 million, it was troubling to see the 

request to modify its statutory fee structures and potentially increase its fees because of a 

refinement to its economic modeling. The bottom line is that the fee increases, as proposed by the 

SBA in its budget submission, will impact both our small business members and the credit union. 

Currently, the SBA guaranty fee for loans $150,000 and less is 2.0 percent. That will not change 

under the current proposal, and that is a positive. The 3.0 percent guaranty fee for loans in the 

range of $150,000 to $700,000 is proposed to remain at 3.0 percent for loans in the range of 

$150,000 to $500,000, but increase to 3.50 percent for loans in the range of $500,001 to 

$1,500,000. That proposed structure will make it more expensive for members for loans greater 

than $500,000, and we do have a number of members who seek loans in this range. For loans 

greater than $1.5 million, the proposal introduces a new fee rate of4.0 percent. 

It is important to note that the small business member pays the guaranty fee one time, and that is 

usually at funding. The monies are usually disbursed directly from the loan proceeds so the 

member does not have a direct out-of-pocket cost at origination. However, the lender, Kinecta in 

this case, pays an ongoing annual fee for each loan that is originated. This fee is currently 55 basis 

points (bps). Under the proposal, the fee will be 55 bps for loans up to $1.5 million and 83 bps for 

loans over $1.5 million. This will make loans over $1.5 million more expensive for the credit 

union. 
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In high-cost real estate markets, such as California, New York, and Washington, D.C., among 

others, $1.5 million is not a lot when talking about commercial real estate. Increasing the cost of 

these loans to both the small business and the lending institution will likely make it more difficult 

to get an SBA loan for commercial real estate in higher-cost markets. 

We urge the SBA and Congress to work together to protect and strengthen the SBA 7(a) program, 

which includes examining all efforts to avoid potential fee increases on small businesses and the 

small lenders who serve them. 

Conclusion 

Small businesses are the driving force of our economy and the key to its success. The ability for 

them to borrow and have improved access to capital is vital for job creation. Although the Small 

Business Administration's 7(a) program provides much needed opportunities to established and 

tledgling businesses, increasing fees for the program will have an impact on both borrowers and 

small lenders. We recognize that maintaining a zero subsidy for the program is important, but we 

urge you to examine potential alternative solutions to avoid a fee increase scenario. 

We thank you for your time and the opportunity to testify before you here today on this important 

issue to credit unions and our nation's economy. l would welcome any questions that you may 

have. 

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SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes 

Testimony to the U.S. House 

Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital 

Access 

Gordon Gray 

American Action Forum' 

AprillO, 2019 

'The opinions expressed herein are mine alone and do not represent the position of 

the American Action Forum. 
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Introduction 

Chairman Kim, Ranking Member Hern and members of the Committee, I am 

honored to be before you today to discuss the budgetary considerations of the Small 

Business Administration's (SBA) 7(a) loan program. This is an important program 

that provides access to small business entrepreneurs who otherwise have no access 

to adequate financing and supports hundreds of thousands of jobs. As a taxpayerfunded program, it should be subject to continuous and rigorous oversight, and I 

appreciate the Committee's attention to this program in today's hearing. 

In my testimony, I wish to make three basic observations: 

• The federal government is a prolific lender, providing guarantees on and 

directloans of$4 trillion as of fiscal year (FY) 2018. 

• The budgetary treatment of credit programs is somewhat unique in 

budgeting, adhering to the principles of accrual accounting as set forth in the 

Federal Credit Reform Act (FCRA) of 1990. 

• FCRA accounting addresses the deficiencies of cash accounting in measuring 

the cost of credit programs, but necessarily introduces additional 

complications. 

Let me discuss these in turn. 

Federal Credit Assistance 

The federal government is a prolific lender, providing a combined $4 trillion in 

credit assistance as of FY2018 to American households and businesses. 1 In general, 

the goal of this assistance is to provide credit to borrowers, who otherwise would 

not receive credit at market terms from lenders. 

The nature of this credit assistance is varied across federal agencies and activities, 

but generally takes two forms: direct loans and guaranteed loans. The Office of 

Management and Budget (OMB) defines direct loans in circular A-11, the executive 

branch's primary set of guidelines for budget preparation and execution as: "a 

disbursement of funds by the Government to a non-Federal borrower under a 

contract that requires the repayment of such funds with or without interest. The 

term also includes certain equivalent transactions that extend credit."2 Essentially, 

for direct loan programs, the federal government assumes the role of the lenderunderwriting and issuing loans to recipients on terms that are generally more 

favorable than those provided by the market. These preferential terms can take the 

form of below-market interest rates, repayment grace periods, interest-only 

J https: I /www.whitehouse.gov /wp-content/uploads/20 19/03 /ap 22 credit-fy2020.pdf 

2 hllps: //www.whitchousc.gov /wp-content/uploads/2018/06/all.pdf 

1 
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periods, and other features that are designed to provide eligible borrowers with 

greater access to credit than would otherwise be available. As of FY2018, the federal 

government has $1.4 trillion in direct loans outstanding. 

The federal government also provides substantial credit assistance in the form of 

loan guarantees. OMB defines loan guarantees as: "any guarantee, insurance, or 

other pledge with respect to the payment of all or a part of the principal or interest 

on any debt obligation of a non-Federal borrower to a non-Federallender. The term 

does not include the insurance of deposits, shares, or other withdrawable accounts 

in financial institutions." In these instances, a financial institution is responsible for 

underwriting (subject to program guidelines) and issuing loans to eligible 

individuals and institutions. Repayment of those loans is made directly to the 

lender, but the government typically receives compensating fee payments as a 

condition of the guarantee. If the borrower defaults on the loan, however, the 

federal government is liable for the amount of the loan that it guaranteed, which is 

typically a percentage of the overall loan amount. As of FY2018, the federal 

government had extended guarantees to $2.6 trillion in loans outstanding. 

It is this form of credit assistance that concerns today's hearing: the 7(a) loan 

program. The 7(a) program provides eligible small businesses with private-sector 

financing with a public guarantee. The program includes several specialized 

features, but in general provides up to a 75 percent guarantee on loans up to $5 

million. The program requires lenders to ensure borrowers demonstrate adequate 

ability to repay, management ability and equity, among other considerations. Credit 

is also contingent on borrowers demonstrating that credit is otherwise unavailable 

at reasonable terms. According to the SBA, the 7(a) loan program supported over 

60,000 loans totaling $25.4 billion in FY2018. 3 

The Budgetary Treatment of Credit Programs 

Prior to 1992, federal credit assistance programs were recorded for budgetary 

purposes on a cash basis like any other federal spending program. For any credit 

program, this presents a distorted view of the program's effects. In the most 

simplistic terms, a loan is a lump payment to a borrower in exchange for future 

payments. On a cash basis, this would look like a large outlay in the year of the loan's 

origination, and assuming the life of the loan is longer than the budget window, an 

insufficient funding stream. Loan guarantees present more difficulties still. The 

defining feature of a loan guarantee is that it is a contingency only recognized upon 

realization. Which is to say, at origination, a federal loan guarantee commitment 

would not record any budgetary flows on a cash basis (except perhaps any fees 

collected). Cash accounting simply does not capture the commitment of taxpayer 

funds that is the basis for the value of the federal guarantee. This budgetary 

treatment also confounded oversight of program performance. 

3 https:/!www.sba.gov/sites/defautt/files/aboutsbaarticle/2018 SBA PAR FINAL 1218 508.pdf 

2 
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The Federal Credit Reform Act changed the budgetary treatment of these credit 

programs beginning in 1992.4 The Act required that new federal credit 

commitments (among other budgetary flows) be recorded on an accrual basis going 

forward. Under the new methodology, the net present value of the taxpayer subsidy 

would be recorded in the year of the new commitment. Accrual accounting has the 

advantage of capturing all cash flows associated with a given credit program and 

accounts for the effect of the timing of those payments through discounting. FCRA 

requires the use of Treasury yields for discounting future cash flows under FCRA. 5 

Accrual accounting more accurately captures the taxpayer exposure for a given 

credit program by recognizing the value of the upfront outlay by the taxpayer, but 

also the associated repayment stream even if it is outside the budget window. This 

treatment also captures the value of preferential credit terms, such as longer loan 

maturities or interest deferral. 

The Anatomy of a Subsidy Rate 

The net present value of cash flows associated with a given loan cohort represents 

the cost of the credit subsidy. It is this subsidy cost for which Congress provides 

funding. For example, according to the SBA. new 7(a) loans in FY2020 are projected 

to incur a positive subsidy cost, which must either be offset through an 

appropriation, fee changes, or other terms that would reduce taxpayer exposure. 

According to the SBA. the program is projected to have a 33 basis point subsidy cost 

on $30 billion in loans, requiring a $99 million congressional appropriation to 

support the additional lending in FY2020. SBA reports this is due to, "refinement of 

the model to increase precision for estimating purchase amounts and sensitivities 

of the model related to long term macroeconomic assumption."6 

As noted above, prior to the enactment of FCRA, the basic unit of measurement of 

the budgetary effects of a credit program was the annual cash flow. Under FCRA, the 

basic unit of measurement is the subsidy cost, which is the net present value of all 

future cash inflows and outflows, discounted at term-matched Treasury rates, for a 

cohort of loans. These flows include the net effects of defaults, fees, and recoveries. 

It does not include administrative or incidental effects to other federal budgetary 

flows. 

4 P.L. 10 1-508; The 1997 Balanced Budget Act made several technical changes to FCRA generally 

designed to improve the uniformity and consistency of estimates of the costs of credit programs: 

https: //www.~ovinfo.gov /content/pkg/BUDGET -1999-PER/pdf /BUDGET-1999-PER.pdf 5 There is a robust debate among policy observers as to whether a discount rate that incorporate 

market risk would be a more accurate measure of the cost to tax payers, known as fair-value 

accounting. This discussion, however, is outside the scope of my testimony. 6 https:/ jwww.sba.gov jsitesjdefault/files/2019-

03 jS BA o/o20FY% 20 202 0%2 OCongressional%2 O)ustifica tion . .V2_15Ma r19 _508Statement_O.pdf 

3 
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To illustrate how these values are calculated, consider the following examples 

developed by the Congressional Budget Office.? Assume the federal government 

provides $100 in credit assistance to the public. Also assume that the Treasury rate 

over the term of the loan is 5 percent. At 5 percent, the cost of repayment would be 

$105. Discounted at the same rate, the $105 in future payments equals the face 

value ofthe loan. This example assumes no fees or other associated flows. Now 

consider a cohort of loans with a 25 percent default rate. For simplicity, assume that 

borrowers have no assets to recover. Under this scenario, the federal government 

would collect $78.75 in cash repayments, which are worth $75 in present value. The 

program thus has a $25 subsidy cost. If Congress were to enact this program, it 

would need to provide $25 in budget authority to fund this credit assistance. Note 

that if the federal government merely guaranteed these loans rather than originated 

them, it would face the same subsidy cost, assuming the government guaranteed 

100 percent of the loan. The subsidy rate for this program is expressed as the 

subsidy cost over the disbursement of the loan, which in this case is 25 percent. 

Additional flows would further affect this rate, such as recoveries and fees. 

It is important to recognize that this calculation more accurately reflects the totality 

of the federal commitment for a given credit program. It also necessarily introduces 

additional complications, however. By nature, FCRA requires projecting all 

associated cash flows for a given loan over its duration. This also requires projecting 

likely delinquencies, defaults, prepayments, interest rates, and other factors to 

determine credit subsidy rates. The subsidy cost is thus exposed to fluctuations for 

any of these factors. 

Underpinning a number of these elements is OMB's economic assumptions, which 

the agencies are required to use as part of this calculation. The strength of the 

economy substantially effects default rates for example, and a worsening economic 

outlook, would all else equal, increase the subsidy cost to the federal government 

through higher defaults among other considerations. 

The federal government annually reestimates subsidy rates for credit programs. 

These reestimates are presented in a supplement to the president's budget and 

provide a crosswalk from the original estimate to the current estimate, detailing 

which of the major elements of the subsidy rate changed. These elements include 

changes to interest rates as well as technical assumptions, which includes 

delinquencies, defaults, and other performance factors. Note that under FCRA, 

increased reestimated costs are funded in the following year by permanent 

indefinite budget authority, while decreased costs are returned by the agencies to 

the general fund. Thus, there is no legislative consequence for underestimating the 

cost of a loan cohort. For example, the subsidy cost for loan guarantees issued under 

the SBA 7(a) program have on net been reestimated upwards by about $1.7 billion 

(excluding interest) since 1992, but Congress did not have to enact additional 

7 https: //www.cbo.gov /sites /default/files/108th·congress·2003-2004/reports/08-19· 

creditsubsidies.pdf 

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funding into law.s Not surprisingly, the largest upward reestimates occurred for 

loans issued immediately before during and after the Great Recession. Note, 

however, that this reestimate covers guarantees on over $292.9 billion in loans 

disbursed under the program. 

Conclusion 

The Small Business Administration's 7(a) loan program is critical to providing 

entrepreneurs with access to credit, supporting over 60,000 borrowers with over 

$25 billion in guaranteed loans last year. As a credit program, however, accurately 

measuring the taxpayer exposure to risk is somewhat more complicated than is 

estimating the cost of typical federal spending programs. The current standard, 

FCRA, represents an important reform that improved the measurement of these 

risks over the cash-accounting method that prevailed until1992. The new method 

records subsidy costs that reflect the performance of the loan over its full term. This 

approach necessarily requires projecting the associated cash flows of that loan over 

time. Any time a measurement requires projecting into the future, some uncertainty 

however is introduced. Since FCRA was enacted, the subsidy costs of the 7(a) 

programs have been underestimated, with net positive lifetime reestimated subsidy 

costs. Yet these costs arc quite small over nearly three decades and relative to the 

overall size of loan disbursements. It does appear, however, that this net 

underestimate is driven largely by the effects of the economic downturns. 

s https: I /www.govin fo.gov /content /pkg /8 UDGET- 20 20- FCS /pdf/BUDGET- 20 20-FCS.pdf 

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April 10, 2019 

CONSUMER 

BANKERS 

ASSOCIATION 

The Honorable Nydia M. Velazquez 

Chairwoman 

Committee on Small Business 

U.S. House of Representatives 

2302 Rayburn House Office Building 

Washington, D.C. 20515 

The Honorable Andy Kim 

Chairman 

Subcommittee on Economic Growth, Tax. 

and Capital Access 

U.S. House of Representatives 

1516 Longworth House Office Building 

Washington, D.C. 20515 

The Honorable Steve Chabot 

Ranking Member 

Committee on Small Business 

U.S. House of Representatives 

2371 Rayburn House Office Building 

Washington, D.C. 20515 

The Honorable Kevin Hern 

Ranking Member 

Subcommittee on Economic Growth, Tax, 

and Capital Access 

U.S. House of Representatives 

1019 Longworth House Office Building 

Washington. D.C. 20515 

Dear Chairwoman Velazquez, Ranking Member Chabot, Subcommittee Chairman Kim, and 

Subcommittee Ranking Member I-I ern: 

On behalf of the Consumer Bankers Association (CBA), I would like to thank you for convening 

the Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access 

hearing on "SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes." CBA is the 

voice of the retail banking industry, whose products and services provide access to credit for 

consumers and small businesses. Of the I 00 most active Small Business Administration (SBA) 

7(a) lenders, CBA members make the majority of the total number of7(a) loans. 1 Our members 

operate in all 50 states, serve more than ISO million Americans, and collectively hold two-thirds 

of the country's total depository assets. 

The 7(a) Loan Program is a vital source of capital for thousands of small businesses unable to 

secure financing through traditional lending. The demand for these loans has grown substantially 

and the dollar amount of gross loans approved has nearly doubled since 2012. Throughout this 

growth, the performance of the program has remained healthy, closing last year with record-low 

charge-off rates. Furthermore, in recent years, the current fee structure has generated in excess of 

what SBA actually needed to cover the 7(a) credit costs. Overall, the program continues to be 

strong and provides an option that meets the needs of many of America's small businesses. 

Considering how well the 7(a) portfolio has performed historically, CBA encourages Congress to 

closely examine SBA's FY2020 budget request, specifically in regards to the agency's prediction 

that the 7(a) program will not be able to maintain a zero-subsidy rate. In the budget, SBA 

requested flexibility to modify its statutory fee structures, stating under current law the 7(a) 

011\cc ofCaptta! Access, "100 most active SBA 7(a) !enders," Small Business Admimslratwn, December J I, 2017. 

https f/www sba gov/artidc120 17/oct/01 /J OO-most-ucti\c-sba-7a-lenders 

CONSUMER BANKERS ASSOCIATION [1225 EYE STREET, NW, #550 I WASHINGTON, DC 20005 I consumerbankers.cor1 
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program would not be able to operate at zero subsidy based upon the administration's modeling 

and subsidy rate estimates. 

The budget request projects an additional $99 million will be required to cover the cost of the 

program and proposes an increase in the fee structure to offset the shortfall. If the agency's 

subsidy rate is not modified, and in lieu of amending the Small Business Act to allow for an 

increase in fees to be assessed on lenders which the banking industry would strongly oppose 

Congress would need to appropriate the dollars to cover the proposal's estimated budget 

deficiency in order to prevent the program from being shut down on October I. 

Given the nature of the 7(a) program and the small businesses that utilize it, CBA is concerned 

any increase in fees will lower participation by small business borrowers in the program and 

further restrict them from accessing needed capital to start and grow their small businesses. The 

fee structure outlined in the budget request proposes a 33 basis point (bps) increase on the fees 

already assessed to lenders. This increase, as well as the budget's proposed counter-cyclical 

measures that would also increase fees by an additional31 bps to pay for the program's 

administrative costs, would be a significant increase tor current lenders and force them to adjust 

their 7(a) loan rates to ref1ectthe change. Considering the program's credit elsewhere 

requirement, borrowers that rely on this program cannot obtain credit though conventional 

lending, and the proposed fee structure would only further reduce the already limited options 

available to these small businesses and increase the cost of capital for borrowers. 

CBA commends the committee for holding this hearing to examine the SBA budget request for 

FY2020 and the impact the fee structure changes will have on small business lending. We greatly 

appreciate this thoughtful approach to ensuring the continued success of the SBA 7(a) Loan 

Program and look forward to working with members of the Committee and Congress. 

Sincerely, 

//-·--;) //1 I/ -/--

1-<.,.•c---( __ .f: /1;:,,;;:.r;t 

Richard Hunt 

President and CEO 

Consumer Bankers Association 

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CUNA 

Credit Union 

National 

Association 

April9, 2019 

The Honorable Andy Kim 

Chairman 

The Committee on Small Business 

Subcommittee on Economic Growth, Tax, 

and Capital Access 

United States House of Representatives 

Washington. DC 20515 

Jim Nussle 

President & CEO 

f'hone: 202~J08-6/4S 

;nlJ'ilie:a·cUilO.COOp 

Dear Chairman Kim and Ranking Member I fern: 

The Honorable Kevin Hern 

Ranking Republican Member 

The Committee on Small Business 

Subcommittee on Economic Growth, Tax, 

and Capital Access 

United States House of Representatives 

Washington, DC 20515 

On behalf of the Credit Union National Association (CUNA), lam writing to commend you for holding the 

hearing on the "SBA 7(a) Budget Proposal and the Impact of Fee Structure Changes." I respectfully request 

that this letter be made part of the record for this hearing. The Credit Union National Association 

represents America's credit unions and their more than 115 million members. 

Since 2003, when the Small Business Administration (Sl3A) first expanded its loan guarantee programs to 

include originations by credit unions, credit unions have become an increasingly important provider of 

loans to America's small businesses, including through participation in the SBA's 7(a) Loan Program. 

CUNA and credit unions are strong supporters of this Program, as we believe its objectives are laudable. 

In the aftermath of the financial crisis, it was credit unions that significantly increased their small business 

lending to provide businesses with the necessary capital to sustain and grow their operations. Between 

2008 and 2016, credit unions' small business lending activity doubled to more than $60 billion. The more 

than 5,000 credit unions currently operating in the United States and their over I 00 million members have a 

vested interest in the continued availability of the SBA·s loan programs. 

While the 7(a) Loan Program traditionally operates without appropriations tl·om Congress, the SBA 

indicated in its budget request for FY 2020 an expected shortfall in funding. In response, the SBA has 

proposed to increase associated fees in order to cover the shortfall. As discussed below, CUNA has concern 

over the unintended consequences of such an increase in fees. 

One of the many services credit unions provide their members is lending through the Sl3A's 7(a) Loan 

Program. Currently, there are 6,532 outstanding SBA loans by credit unions in the aggregate amount of 

$2,768,245,096. Any increase to the current cost to participate in the Program could unintentionally lead to 

a decrease in these numbers. The primary concern with a fee increase is that it could dissuade potential 

borrowers trom pursuing loans through the 7(a) Loan Program, which is often one of, if not the, last 

possible source of credit for an aspiring entrepreneur or existing small business owner striving to increase 

his or her operations. 

cuna.org 
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