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73–289 2001

U.S. SMALL BUSINESS ADMINISTRATION BUDGET

REQUEST FY 2002

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

WASHINGTON, DC, MAY 16, 2001

Serial No. 107–7

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

DONALD MANZULLO, Illinois, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

JOHN THUNE, South Dakota

MIKE PENCE, Indiana

MIKE FERGUSON, New Jersey

DARRELL E. ISSA, California

SAM GRAVES, Missouri

EDWARD L. SCHROCK, Virginia

FELIX J. GRUCCI, JR., New York

TODD W. AKIN, Missouri

SHELLEY MOORE CAPITO, West Virginia

NYDIA M. VELA ́ ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

WILLIAM PASCRELL, New Jersey

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

JAMES R. LANGEVIN, Rhode Island

MIKE ROSS, Arkansas

BRAD CARSON, Oklahoma

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico

DOUG THOMAS, Staff Director

PHIL ESKELAND, Deputy Staff Director

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on May 16, 2001 ............................................................................... 1

WITNESSES

Whitmore, John, Acting Administrator, U.S. Small Business Administration .. 4

Wolverton, Diane, State Director, Wyoming Small Business Development

Center .................................................................................................................... 29

Wilkinson, Anthony, President & CEO, The National Association of Government Guaranteed Lenders, Inc ........................................................................... 31

Mercer, Lee, President, National Association of Small Business Investment

Companies ............................................................................................................ 32

Finch, Zola, Vice President, The National Association of Development Companies ........................................................................................................................ 34

Means, David, Executive Director, Greater Newark Business Development

Consortium ........................................................................................................... 35

APPENDIX

Opening statements:

Manzullo, Hon. Donald .................................................................................... 42

Vela ́zquez, Hon. Nydia ..................................................................................... 44

Prepared statements:

Whitmore, John ................................................................................................ 46

Wolverton, Diane .............................................................................................. 84

Wilkinson, Anthony .......................................................................................... 95

Mercer, Lee ....................................................................................................... 106

Finch, Zola ........................................................................................................ 116

Means, David .................................................................................................... 126

Additional information:

Letter from SBA to House Small Business Committee ................................. 129

Additional submission from SBA Chief Financial Officer ............................. 131

(1)

U.S. SMALL BUSINESS ADMINISTRATION

BUDGET REQUEST FY 2002

WEDNESDAY, MAY 16, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS,

Washington, DC.

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

2360, Rayburn House Office Building, Hon. Donald Manzullo

(chairman of the Committee) presiding.

Chairman MANZULLO. The committee will be called to order, if

the panel would be seated. I am going to go ahead and read my

opening statement.

Good morning and welcome to this hearing of the Committee on

Small Business. A special welcome to those who have come some

distance to participate and to attend this hearing. I applaud those

parts of the president’s budget which will fund America’s important

priorities, that reduce the federal debt, and that provide for tax relief for the American people, including a decrease in the marginal

rates which will greatly help out a lot of small business people

throughout the nation.

However, I disagree with a number of items contained in the

president’s budget request for the Small Business Administration

and I am particularly disappointed that the budget was made up

without any input from the chairmen of the respective committees,

including this chairman.

Specifically, I disagree with the increases in the fees for the 7(a)

loan program when the budget submission shows a substantial surplus. In fact, these fees should be decreased. Last year, $171 million extra came in over and above what was

necessary for the 7(a) program. The subsidy rate has been unfairly

set so the borrowers are paying more for the user fee. They are effectively paying an additional tax.

I disagree with the increase in the interest rate for loans for the

businesses without credit under the disaster loan program. I do not

know how anyone could suggest increasing fees for persons who

have just lost their businesses as a result of a flood or earthquake.

This proposal is a double disaster to them. In fact, it is apparent

by looking at these fee increases that the budget is attempting to

tax small business people as a revenue raiser to fund other programs.

I disagree with the proposal to charge fees for persons seeking

business advice from the local Small Business Development Centers. Is the administration going to charge farmers for assistance

2

from the Department of Agriculture or the taxpayer who calls the

IRS 800 number?

I also disagree with the failure to request funding for three technical assistance programs. There may be some redundancy, but a

case has not been made as to how the SBA intends to make up for

the services small businesses would lose if the programs were terminated.

As you can see, I am concerned about the specifics of the president’s budget as it impacts the SBA. You may be assured that I

will remain concerned until the issues are resolved.

I would ask as the witnesses testify, especially with regard to the

7(a) loan programs, how they can justify an increase in fees in light

of the fact that based upon the exhibit that we have over there in

the lower left-hand corner, it demonstrates the tremendous amount

of surplus, in fact, almost $600 million in surplus fees have been

generated by fees taxed to the small business people while at the

same time the administration budget attempts to increase those

fees.

Again, I appreciate your attending this hearing. I look forward

to the testimony of our witnesses and I yield for an opening statement from my good friend, Mrs. Vela ́zquez, the ranking minority

member from New York.

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

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman.

Earlier this year when we met to consider the Small Business

Administration budget request, I said at the time that this budget

was without a doubt the worst I have seen in my three years as

ranking member and my nine years of service on this committee.

Mr. Chairman, I have seen nothing in this budget that changes

that opinion, nor am I likely to. One of the critical roles that SBA

plays in helping small businesses is providing for those who cannot, for whatever reason, receive access to the capital necessary to

either start or grow their business. That is why this proposal to replace the current SBA loan appropriations with a fee system is so

dangerous and, indeed, reckless. For example, the average small

business borrower in the 7(a) program will under this proposed

structure pay thousands of dollars in up front and ongoing costs.

And with these costs attached to both borrowers and lenders, we

will create a situation where fewer and fewer banks offer these

loans and therefore close off a vital source of capital to small business owners.

Is that what we should be doing in an economy that has more

questions than answers? Should we not be making it easier to access these programs so that small businesses, the real economic

foundation of this country, can help lead us back to prosperity as

they have done in the past?

This budget is a formula for disaster. By cutting off access to

capital, you are cutting off access to opportunity. It is just that simple.

To add insult to serious injury, the president’s budget proposes

to impose fees on the critical disaster loan program. As a result,

many entrepreneurs will never be able to rebuild their businesses

without being saddled with a literal mountain of debt, so the business and the jobs it provides are gone forever. And I wonder, is this

3

what President Bush meant when he campaigned as a compassionate conservative?

What is even more alarming is that under this budget small

business will be forced to pay for the counseling and technical assistance provided through the Small Business Development Center

program. And those of you who have owned a small business know

that businesses receiving critical technical assistance are more likely to succeed than those that do not.

These new fees will force many businesses, many of whom can

hardly afford added expenses, to go without technical assistance.

The result, the business community will be subjected to increased

business failure and bankruptcies. Somehow, I do not think that

that is something we need in this economy.

What concerns me is that the vast majority of SBDCs are located

in minority communities that are trying to build a new life in areas

that economic prosperity has somehow forgotten. And now we tell

them just wait a little longer because we have to get the economy

back on track.

Well, I am here to tell you that these communities cannot wait

any longer. These entrepreneurs as well as others around the country need help now, not when this cut finally trickles down to them.

That is why it makes absolutely no sense to me that this budget

chooses to eliminate programs like PRIME, BusinessLINC and the

New Market Venture Capital Program.

Not coincidentally, these were programs aimed at building new

economic anchors who have yet to benefit from the boom of the last

decade. Let me say for the record that this budget has failed in

both houses of Congress and in a very bipartisan fashion.

My colleagues, everyone on this committee knows the important

role that small business has played in our nation’s economy. That

is why this budget represents such a disconnect between the White

House and the reality of this economy.

In closing, let me say simply that this is a bad budget and it will

be bad for small business. This budget fails us in so many ways,

particularly given the fact that this proposal does not take into account that the economy is no longer operating at peak efficiency.

We must have a budget that recognizes these changes and puts us

back on the road toward economic growth. Without a reasonable

budget plan, we are placing America’s economic foundation and the

key to future prosperity at risk of failure. It is something that none

of us can afford.

And, as my father always told me, ‘‘If you fail to plan, plan to

fail.’’ Small business owners and future entrepreneurs are counting

on us to do the right thing by them. Let us not let them down by

passing an irresponsible budget.

Thank you, Mr. Chairman.

[Ms. Vela ́zquez’s statement may be found in appendix.]

Chairman MANZULLO. There is a vote. What I am going to do is

I am going to adjourn here.

Congressman Issa went over to vote early. As soon as he comes

back, he will start in with the testimony, as long as there is a

member from the minority present.

[Recess.]

4

Mr. ISSA [presiding]. Thank you all for your patience. We will

now begin with our panel of witnesses, beginning with Mr. John

Whitmore, Jr., Acting Administrator of the Small Business Administration, and then we will introduce the rest of the panel later.

Mr. Whitmore.

STATEMENT OF JOHN WHITMORE, JR., ACTING ADMINISTRATOR, UNITED STATES SMALL BUSINESS ADMINISTRATION

Mr. WHITMORE. Thank you, Mr. Chairman, Madam Ranking

Member, and members of the committee. Thank you for inviting me

here today. I am pleased to present the Small Business Administration’s budget request for fiscal year 2002. I ask that my full

written statement be submitted for the record.

Mr. ISSA. Without objection, so ordered.

Mr. WHITMORE. With me today is Greg Walter, the Deputy Chief

Financial Officer at SBA.

The budget request of $539 million represents a renewed focus

on SBA’s core programs. It will provide credit, capital and technical

assistance to America’s small businesses at a substantially reduced

cost to the taxpayer. It includes $5 million for SBA’s portion of the

president’s new Freedom Initiative to help small businesses comply

with the Americans with Disabilities Act and $5 million as part of

the Paul G. Coverdale Drug Free Workplace program. The budget

also seeks to streamline the agency.

The budget proposes funding SBA technical assistance programs

at last year’s level with three exceptions. We are proposing to increase the funding for the SCORE program by $250,000 to $4 million. SCORE is one of SBA’s most cost-efficient programs and will

soon implement an electronic delivery system to broaden its reach.

The Veterans’ Business Development Program was not funded in

2001 but will receive $750,000 in 2002.

The budget proposes a funding level of $88 million for the Small

Business Development Center Program, $75.8 million coming from

appropriations and $12 million in fees.

Some SBDCs already impose a variation on the counseling fee by

requiring new start-up businesses to take the training course at a

cost between $35 and $45 before receiving counseling. This is also

in line with other SBA technical assistance programs. Charging a

modest fee of under $11 an hour will maintain the current service

level, while reducing the expense to the taxpayer.

The budget proposes funding the Government Contract Assistance programs at the 2001 level. However, it does include $500,000

for a women’s contract initiative study and a contract bundling

study.

The budget fairly demands that those who benefit most from

SBA programs share in its costs. In the exact language of the president’s budget, these programs will become self-financing by increasing fees. The budget acknowledges that some small businesses

may have trouble accessing private capital in the absence of a government guarantee, but does not require the government to subsidize the cost of borrowing. The budget increases fees sufficiently

to make these programs self-financing and would save $141 milVerDate 11-MAY-2000 07:57 Sep 26, 2001 Jkt 010199 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 E:\HEARINGS\73289 pfrm01 PsN: 73289
5

lion. This will reduce the burden on appropriation, will allow for

expanded program levels and is fair to the taxpayer.

The budget proposes increasing fees in the Small Business Loan

program and in the Small Business Investment Company program.

In the Small Business Loan Program, the budget raises fees for

small business loans above $150,000. There is no fee increase for

loans made under the $150,000 benchmark and continues the rebate to the lender.

We hope this will encourage small loans to those that are in the

start-up phase of business. This will also serve to provide capital

to those most in need and will support a zero subsidy rate.

The new administrator faces many challenges once confirmed.

Two principal challenges include antiquated programs and delivery

systems that are out of touch with today’s dynamic small business

environment and resource and personnel questions. SBA needs to

transform itself into an entity that is governed by efficiency, flexibility and the empowerment of small business through knowledge.

More specifically, within the SBA Business Loan Program, the

number of loans has decreased 21 percent in the last five years,

while the dollar volume of the loans have increased 26 percent.

While the dollar volume has increased, the Small Business Loan

Program suffers from a lack of reach. Larger loans have gone to

fewer companies. This is where SBA faces the biggest challenge,

cultivating small businesses in their initial stage of growth is crucial in advancing America’s small business community. This is

where SBA should focus its attention. This is true gap lending.

The fastest growing groups in America’s small business community are Hispanic and women-owned businesses. These groups,

along with African-American, Native American and veterans, are

also the most underrepresented in SBA’s Small Business Loan Program.

Another challenge facing us is the need to focus on the current

organizational and functional structure of SBA. This challenge has

been exacerbated in recent months by the hiring of 70 people in the

November–January time period without regard to the agency’s top

priorities of loan monitoring and lender oversight.

We also recognize the need to emphasize performance measures.

We have addressed internally the measures we need to focus on

and are working to implement a reliable system to increase accountability.

I would also like to address SBA’s loan monitoring project which

was authorized in December 1997. After determining that the

project had run off course, I directed the program to refocus on that

which Congress authorized and appropriated. With this in mind,

we have signed a contract with KPMG to provide us with expert

assistance in assessing the available options. Other elements of our

modernization effort will wait until the loan monitoring system is

fully operational.

Thank you. I will be pleased to answer questions.

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

Chairman MANZULLO [presiding]. Ms. Vela ́zquez.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman.

6

Mr. Whitmore, welcome and thank you for your testimony. I

know, sir, that this is not your budget, so you are today in the hot

seat and that you get hazard pay for today.

Mr. Whitmore, you stated in your testimony that from fiscal year

1995 through fiscal year 2000, 7(a) loan levels have declined. I

would like you to look at the following charts, sir.

Looking at loan levels back to fiscal year 1992, you get a far different picture. In fact, 7(a) lending overall and lending to both Hispanics an African-Americans has steadily increased.

This being the case, why do you choose to go back to fiscal year

1995 in your testimony?

Mr. WHITMORE. Well, I picked 1995 because it was really the

highest year of our production and we moved from that year on.

Ms. VELA ́ ZQUEZ. Mr. Whitmore, is it not true that 1995 was the

year SBA announced the LowDoc program which at first attracted

a high industry interest but nine months later when SBA published the regulations and they were not what SBA led lenders to

believe, many dropped out from the program?

Mr. WHITMORE. I know that was the year that we initiated the

LowDoc. I do not know what the dropout rate was.

Ms. VELA ́ ZQUEZ. So you did not make a connection between the

new regs and the fact that many lenders decided to drop out?

Mr. WHITMORE. No, we just picked the year that—we looked at

the highest production year we had.

Ms. VELA ́ ZQUEZ. Sir, is this trend not more reflective of SBA mishandling of a program than lack of lender interest?

Chairman MANZULLO. Excuse me a second. Could you pull the

mike closer? Thank you.

Mr. WHITMORE. The downward trend, ma’am?

Ms. VELA ́ ZQUEZ. Yes.

Mr. WHITMORE. I think it is a lack of focus in management on

the areas in which we really want to participate. What we are seeing is the two fastest growing communities, women-owned businesses and Hispanic-owned businesses, where we should see a

trend upward in the last few years without even having a specific

focus and we are not seeing that.

Ms. VELA ́ ZQUEZ. Do you have more information?

Mr. WALTER. My name is Greg Walter, the SBA Deputy CFO.

Ms. VELA ́ ZQUEZ. Yes?

Mr. WALTER. During that same time period, the guaranteed percentage on the loan was lowered and the fees were also raised; We

think those are also contributing factors to some of the downturn

in the volume in the 7(a) program.

Ms. VELA ́ ZQUEZ. Mr. Whitmore, according to SBA’s statistics, 7(a)

loan volume declined by 18 percent from 1995 to 1996. Is that correct?

Mr. WHITMORE. Ma’am——

Ms. VELA ́ ZQUEZ. Yes or no?

Mr. WHITMORE. I do not know.

Ms. VELA ́ ZQUEZ. You do not know?

Mr. WHITMORE. We do not have the exact numbers for 1995 to

1996.

Ms. VELA ́ ZQUEZ. Can you get an answer, a written answer to that

question?

7

Mr. WHITMORE. Can you hold one second on total loans?

Ms. VELA ́ ZQUEZ. Can you look at the chart?

Mr. WHITMORE. I have a chart. What years again, ma’am?

Ms. VELA ́ ZQUEZ. From 1995 to 1996. The 7(a) loan volume declined by 18 percent.

Mr. WHITMORE. It declined from $8.2 billion to $7.7 billion.

Ms. VELA ́ ZQUEZ. Can you look at the chart? What 7(a) fee

changes were implemented in 1995 to respond to what was determined by CBO to be a regularly miscalculated 7(a) subsidy rate?

Mr. WHITMORE. I cannot answer the subsidy rate question.

Ms. VELA ́ ZQUEZ. Well, I have an answer for you. The guaranteed

percentage was dropped from 90 percent to 80 percent and a 50

basis point fee was imposed on the outstanding balance of every

7(a) loan.

Mr. WHITMORE. I was not sure what year that was. I take it that

is accurate.

Ms. VELA ́ ZQUEZ. You do not know? And the gentleman?

Mr. WALTER. It did happen during that period. That is correct.

Ms. VELA ́ ZQUEZ. Thank you. So in 1995, in response to continued

miscalculation of the 7(a) subsidy rate, the cost for the 7(a) lenders

and borrowers was increased, right?

Mr. WALTER. As a result of the subsidy rate calculation, the fees

were changed.

Ms. VELA ́ ZQUEZ. Yes or no?

Mr. WALTER. That is correct.

Ms. VELA ́ ZQUEZ. Yes.

Mr. WALTER. That is correct.

Ms. VELA ́ ZQUEZ. And, as a result, the market responded by having 18 percent fewer loans made. Is that correct?

Mr. WALTER. Yes, ma’am.

Ms. VELA ́ ZQUEZ. Do not small businesses that need more than

$150,000 loan deserve access to the 7(a) program?

Mr. WHITMORE. Yes, we believe they do deserve access.

Ms. VELA ́ ZQUEZ. So how are businesses going to get access when

history has proven that increasing lender and borrower costs just

causes the program to shrink? How are they going to get it when

the federal regulators prompt banks to tighten loan underwriting

criteria and conventional small loans of any kind become scarce

like they have in the past?

Mr. WHITMORE. Well, we believe on loans of a million dollars or

any over the $150,000 level that the increase is not that large and

would not affect demand at this particular point.

Ms. VELA ́ ZQUEZ. Sir, history is there to tell us that when you increase the cost for lenders and borrowers we are going to have less

volume of loans. I am not coming up with that, that is what history

is telling us.

Mr. WHITMORE. I see that, but there are also other——

Ms. VELA ́ ZQUEZ. My next question, sir. In light of the fact that

over the last ten years the SBA has returned over $1 billion in fee

overpayments from the 7(a) program to the Treasury Department,

what steps has the CFO’s office taken to correct what CBO, the

President’s budget and this committee have found to be continued

errors in calculating the 7(a) subsidy rate?

8

Mr. WALTER. Congresswoman, we have been looking at the model

continually for the last few years, as I am sure you are aware; We

have recognized the trends that you have identified in that the default rates, the actual default rates of the portfolio, have been

much less than what were modeled in the subsidy rate models.

Ms. VELA ́ ZQUEZ. Sir, every year that you have come before this

committee it is the same answer. So if year after year, year in, year

out, the 7(a) subsidy calculation has been so wrong and the margin

of error fails to improve, so tell me, has not the credit subsidy calculation just become an increase to increase borrower and lender

fees in order to shrink the 7(a) program size? Yes? No?

Mr. WALTER. I believe the model as developed and used serves

a useful purpose for looking at a long-term cost of the programs.

Because of what the results are and have been in the recent years,

it probably deserves to be revisited again this year. You are correct.

Chairman MANZULLO. Thank you, Ms. Vela ́zquez.

I have just a couple—— Ms. VELA ́ ZQUEZ. Well, I will continue to—when we finish here,

Mr. Chairman, I did not finish and I need to ask some more questions.

Chairman MANZULLO. I have a couple of questions.

If somebody could remove those first two charts on the board

closest to me—there we are. Thank you.

Mr. Whitmore, the lower left-hand corner of that is a page out

of the budget. That is page 1092 out of the budget, starting at functions 2330, 7(a) downward re-estimate. Do you see those figures

there?

Mr. WHITMORE. Yes, we have them.

Chairman MANZULLO. Where does it start? Actually, starting at

2330, General Business 7(a), do you see that up on the chart there?

Mr. WHITMORE. Yes, sir.

Chairman MANZULLO. Could you explain what that means?

Mr. WHITMORE. Greg Walter will explain the subsidy area.

Chairman MANZULLO. Okay. Could you pull the mike closer to

your mouth and spell your last name for the record, please?

Mr. WALTER. The name is Greg Walter. The last name is W-al-t-e-r.

Chairman MANZULLO. Okay. Go ahead.

Mr. WALTER. Mr. Chairman, what these reflect are that the subsidy rate process that the agency undergoes. Federal credit reform

requires us to do two things each year. It requires us to calculate

the estimated cost of the loan program for the budget year into the

future, so we develop a subsidy rate estimate for the future year.

It also requires us to look backwards at the subsidy rates that have

been provided for the past year since credit reform was passed in

1992 and to recalculate those subsidy rates based on the most current knowledge we have about the performance of the portfolio.

What you are seeing in these charts is what we call the re-estimated calculations of the subsidy rates for the loans that were

made prior to 2001. These are funds that in fact are being returned

to the Treasury as a result of the actual costs of the program being

less than what we had estimated them to be when the subsidy was

first developed.

Chairman MANZULLO. So it is overpayment of fees.

9

Mr. WALTER. It is a reflection of excess costs of the program

which translated to fees to borrowers and lenders. You are correct.

Chairman MANZULLO. So it is a tax. It is more money that has

to be paid.

Mr. WALTER. It is funds that were appropriated or paid by borrowers and lenders that were not needed to cover the costs of the

program.

Chairman MANZULLO. Okay. So we agree on that, so my question

is if there has been an excess of $525 million in fees, then why does

the budget want to increase the cost of loans including disaster

loans and charge a fee for giving advice at the SBDC? I know this

is not your budget. If you say you do not know, I could accept that.

Mr. WALTER. I can give you an answer to that.

Chairman MANZULLO. Go ahead.

Mr. WALTER. The funds that you see being returned to the Treasury cannot be used to offset the current year’s appropriation, so we

cannot use one to offset the other. They are considered to be independent decisions and independent analysis.

Chairman MANZULLO. Well, that is a budgeteer’s answer. How

about a businessman’s answer? This is the Small Business Administration.

Mr. WALTER. What you all are all saying, I think we believe, is

that the modeling process that had been used previously while it

was a valid and a sound process to look at the long-term costs of

loans should be revisited because of what we are seeing as actual

results today. That information says that the estimations done in

the past have been overly conservative.

Chairman MANZULLO. Okay. I can understand that and I appreciate that——

Mr. WHITMORE. Mr. Chairman, if I could add——

Chairman MANZULLO. Yes?

Mr. WHITMORE. We have spoken to OMB a number of times on

this and we have agreement from them to revisit this area and——

Chairman MANZULLO. Maybe we should bring somebody from

OMB here. I mean, I do not like the word ‘‘revisit’’ or ‘‘take a look

at.’’ You know, you have one shot in this world to make a sale. If

you do not sell a hamburger the first time, that is a lost sale. That

is the way businesses work and we would anticipate that at least

it could work the same way.

And, John, I know your frustration with the OMB, but if we have

another hearing on this, we can bring them in here and let them

do their loop de loop as to why $525 million of small businessmen’s

money is going into the general pot and why the small

businessperson has overpaid and now he is being asked to pay

again. I think it is grossly unfair. I think it is totally incompetent.

I look at it—here is $150,000 to $700,000 one-time fee goes from

3 percent to 3.5 percent, that is a half percent increase and on a

$200,000 loan, the fee goes from $6,000 to $7,000, but the ongoing

fee increases from .5 percent to .8875 percent. That means a

present balance on a $200,000 loan goes from $1,000 a year to

$1,775 a year.

I mean, I am scratching my head trying to figure out what we

are doing here, when these small businesspeople who have gotten

10

these loans have paid in excess in the last two years alone of $525

million and now they are facing increases.

Do you have a response to that?

Mr. WHITMORE. Well, I think the response is as Greg just said,

that the cycle of evaluation of the subsidy rate is a long-term evaluation to try to take in a full economic cycle. A lot of people believe

that is pretty conservative and it should be re-looked at. We have

talked to OMB about it. I know revisiting is not the word you want

to hear, but—— Chairman MANZULLO. Would you give me your answer on it?

Give me your gut instincts. You are a businessperson.

Mr. WHITMORE. It seems that we have collected more fees in the

past than need be.

Chairman MANZULLO. Okay. I appreciate that.

Ms. VELA ́ ZQUEZ. Mr. Chairman?

Chairman MANZULLO. Do you want to—— Ms. VELA ́ ZQUEZ. Yes. Would you please yield?

Chairman MANZULLO. Of course.

Ms. VELA ́ ZQUEZ. When are you going to do it? You said that you

are going to revisit it. Last year, the administration was here testifying on the budget, the same issue was raised, so you tell me

when are you going to deal with this issue once and for all?

Mr. WHITMORE. Madam Ranking Member, we have a new administration and a new administrator coming and we have every reason to believe this will be revisited in late summer and we will see

some changes.

Chairman MANZULLO. Good. What we will do is we will have a

hearing on it then and then perhaps Ms. Vela ́zquez and I can sit

down with the new SBA administrator and give him our input on

it and we could take it from there.

I have one question that is unrelated. Mr. Whitmore, it is totally

unrelated, but, as you know, I am interested in improving and enhancing the Office of Advocacy and one provision in my draft bill

would fold the Office of the Ombudsman into the Office of Advocacy. I would like to have your opinion of this idea.

Mr. WHITMORE. I really cannot give you an opinion at this particular point. We are discussing it with OMB, again, and also it

will be discussed with the new administrator once confirmed.

Chairman MANZULLO. That is fair.

Mr. WHITMORE. I think the ombudsman office is a very valuable

office and I think it does an awful lot of good, but whether it should

move or not, I would ask that you wait until a new administrator

is confirmed.

Chairman MANZULLO. Okay. I appreciate that.

Mr. Pascrell.

Mr. PASCRELL. Mr. Chairman, on the way over to vote, you may

say get a life, I read your opening statement, Mr. Chairman. I

found it very, very interesting because the things that you disagree

with I think most of us disagree with, but there is a basic problem

here. Both sides should understand what the basic problem is and

if I repeat myself, I apologize. We are trying to squeeze a gallon

and a half out of milk into a pint bottle. It is not going to work.

We are talking here with the messengers. And all due respect,

these are two good people who have good public service behind

11

them and they have been asked to come before us to sort of justify

what is happening here.

And most of the people on the other side of the aisle—look. All

my legislation I have introduced is bipartisan. I take a back seat

to no one. But you all voted for a budget that puts every issue on

the line, including small business. You cannot do it. You cannot

have it both ways.

You cannot say you are out to help the small business folks and

then accept a budget that cuts what we are able to do by 43 percent. You put the public officials on the line, on the spot, and it

is an unfair group of questions. It is like me asking, Mr. Whitmore,

can you live within this budget, that is like asking the question

when did you stop beating your wife. It is an unfair question and

I am not going to do that.

I have looked at the budget very, very carefully and this is going

to be repeated throughout the Hill over the next few weeks, not

just in small business. Well, you will have to learn to live with it.

Well, I guess we will. Whatever the numbers are, the numbers are.

Unless they are changed in appropriations. We have not seen that

scene yet, that drama yet.

Even though this administration acknowledges that small businesses will have trouble accessing private capital in the absence of

a government guarantee, it still does not want to subsidize the cost

of borrowing. That is the bottom line. The Bush administration

wants the tax cut, yet the change to the 7(a) loan program effectively levies a tax.

You can call it a fee, I am going to call it a tax.

It levies a tax on small businesses that use the program and it

demonstrates specifically what the numbers are. And this tax will

cost the average small business an additional $1,400 in up front

fees, just what they need at this point in the history of mankind

in the United States. Just what the doctor ordered. And this will

be justified.

Recent changes contained in the budget and the reauthorization

bills that were adopted on the closing day of the 106th Congress

provide an interesting comparison. One of the changes included a

simplified loan guarantee fee structure which replaced the complicated tiered structure which was in place since 1995. Guarantee

fees are paid by the SBA by lenders, but the cost is commonly

passed on to the borrowers. Remember, this was done in the closing days of the 106th Congress. The guarantee fee structure was

amended in January of 2001. So you heard the chairman talk

about loans of $150,000 or less, the guarantee fee is 2 percent of

the guaranteed portion, for loans greater than $150,000, up to and

including $700,000, the guarantee fee is 3 percent of the guaranteed portion and for loans greater than $700,000, which there are

some of, the guarantee fee is 3.5.

Now, what is being proposed in the new budget? What are the

changes that we are saying we need now even though we just did

what went into effect in January of this year?

Let us go back to those loans of $150,000 or less, there will be

no change in the guarantee fee as I understand what is proposed.

On loans of $150,000 to $700,000, the guarantee fee will go up

16.6 percent.

12

The wrong people are in jail. What are we doing here?

And loans of $700,000 to $2 million, the fee will increase by 14.3

percent.

The annual loan servicing fee that lenders pay to the SBA would

rise 50 base points. This is a 66 percent increase.

The Small Business Development Centers which provide management and technical assistance services to small business clients

are going to receive far less money than they received last year and

this year.

After the first initial hour, the estimated costs will be $10.75 an

hour. Right now, that is not even charged. Now, that may not seem

like a lot of money. To people who are sustaining themselves and

to people who are trying to make ends meet in a tough economy

where new forces are impacting upon our daily lives like energy,

that is a minor issue cost-wise, cost increases, and on top of that,

we are going to tax small businesses, this business friendly administration.

Now, you tell me, Mr. Whitmore, what I am missing unless I

have described accurately what is at hand.

Mr. WHITMORE. I think certainly your depiction of the fees and

what the changes are is accurate. I would say with respect to the

Small Business Development Centers, they are currently charging

very similar fees right now on all training that is being done. In

fact, a number of them they charge a fee on training new businesses before they start counseling. So it is not something new to

the Small Business Development Centers. It is certainly a proposal

that has been put in the budget for many years. I think it is very

modest this year, compared to previous years.

Right now, in some Small Business Development Centers a new

client coming in, a start-up business client coming in, would be

charged the equivalent of what we are proposing to take a training

course even prior to starting counseling. So this is not a brand new

thing for either the SBDCs or for SBA to do.

Ms. VELA ́ ZQUEZ. Would you yield on that answer, please?

Mr. PASCRELL. Go ahead.

Ms. VELA ́ ZQUEZ. Mr. Whitmore, can you please tell the committee

which SBDC is currently doing this and the total number of SBDCs

that are charging fees?

Mr. WHITMORE. There are four that required charge——

Ms. VELA ́ ZQUEZ. On the start-ups.

Mr. WHITMORE. Yes.

Ms. VELA ́ ZQUEZ. On the start-ups.

Mr. WHITMORE. Right. Fee-based training required for pre-counseling. There are four that require it and I would say there are

eight to twelve, that encourage fees to be charged.

Ms. VELA ́ ZQUEZ. Twelve?

Mr. WHITMORE. Well, I can count them, if you would like.

Ms. VELA ́ ZQUEZ. Twelve? So——

Mr. WHITMORE. It is not all, but some do it already.

Ms. VELA ́ ZQUEZ. Sir, out of a thousand?

Mr. WHITMORE. No, out of the lead centers.

Mr. PASCRELL. Mr. Chairman, if I may conclude?

13

This dilemma mirrors the president’s proposals. It is a dilemma

which will be heard in many rooms similar to this throughout the

Hill. You cannot have it both ways.

So therefore I have come to this conclusion, Mr. Chairman, we

should accept and support the 43 percent cut in small business and

let the cards fall where they may. Would you agree with that?

What other choice do we have?

Mr. BARTLETT [presiding]. I think it is the purpose of the hearing

to determine the facts and then when we have all the facts on the

table we will deal with it.

Mr. PASCRELL. No, I am sorry, Mr. Chairman, that is not acceptable to me because you cannot have it both ways. You vote for a

budget that puts us in a shoe box. With all due respect, you put

us in a shoe box and then you are telling us to ask questions to

these panelists who are simply here to carry the message. It does

not work that way. We are being made fools of, to think that we

could change what is already out there, unless we are going to

make the pint bottle larger through the appropriations. That is not

necessarily unheard of either, is it?

Mr. Chairman, this is a fraud. Thank you.

Mr. BARTLETT. Mr. DeMint would like to make a very brief comment and then we will go to Mr. Issa.

Mr. DEMINT. Thank you, Mr. Chairman.

Mr. Whitmore, appreciate you appearing here and taking the

heat. You mentioned in your testimony, and I do apologize for

being late, that you need to look at streamlining the agency, with

changes in budget, changes with situations in the market, perhaps

allowing private sector administration, more oversight.

Is there work going on within the agency to effectively restructure long-term strategic plans that look at how you are operating?

Is this something that is going on now that we can look forward

to a different way to deliver services and even upgrade services?

Mr. WHITMORE. Yes, sir. We are looking at virtually all our programs in all areas to make sure that they meet the needs of small

business in the 21st century. Certainly electronic commerce has

changed everything and how fast we can deliver information is

very important. We are making detailed recommendations in each

of the program areas that we intend to give to the new administrator once confirmed and I assume that some decisions to change

program areas and restructure and streamline the agency will take

place.

Mr. DEMINT. Thank you.

Thank you, Mr. Chairman. I will yield back.

Mr. BARTLETT. Thank you.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

I will be brief, but I am going to follow a pattern that you might

find, Mr. Whitmore, very reminiscent of your previous—I will say

inquisitors because I think that is why we are here today. We do

realize that you are in an interim position and I appreciate your

understanding that you are getting combat pay, we are going to

make sure that happens.

The first point, would you put back up Ms. Vela ́zquez’s poster

that was taken down?

14

And I am new to Congress, I have been here 140 days, but I

spent 20 years as a small——

Pardon me? Just put that one back up.

I was in business for a long time and in 20 years, in every one

of those years I would have shot a messenger that tried to tell me

that there was a steep decline or there was less need and chose a

peak year that looks like that. So if there is one message you take

back from both sides of the aisle, it is do not try to use a convenient statistic on this body. We get enough of them and when we

find them coming from the other side of the aisle or from this side

of the aisle we do not like them, but we cannot tolerate them coming from an administration.

We need the facts in as an honest a way as you can so that we

can make appropriate decisions on budgets and on other areas. No

question there.

I do have one question and that is that if this body were to work

with the body of the whole and create the ability for funds to not

go back into the general fund, as is so often our tradition, but to

remain within your organization, would you consider that, based on

your tenure, to be something that you would look forward to?

Mr. WHITMORE. I think that would be very viable.

Mr. ISSA. Okay. The next question, I will put you back on the hot

seat. You mentioned somewhat in passing that in the latter days

of the last administration, November and December, 70 to 80 slots

were filled. Can you tell us a little bit more about that?

Mr. WHITMORE. Well, there was hiring right at the end of the

last administration. I am not sure that most of those were not

going to the areas that we thought were most in need and that is

portfolio oversight, especially in the changing times, we are very

concerned with that.

Seventy additional hires at SBA is very difficult to deal with. We

are a very small agency. The turnover rate is roughly maybe 150

positions a year. We have been going down in terms of size over

the years and so that really handicaps the next administrator.

Mr. ISSA. Would it be fair to say that this administration was set

up somewhat deliberately by the outgoing administration?

Mr. WHITMORE. I think the new administrator is going to have

difficulty as a result of those recent hires at the end of the year.

Mr. ISSA. I appreciate that. The one thing that I would also pass

on, again, not as a congressman as much as somebody who spent

a long time in business, this subject of the fees perhaps being

raised when they should be lowered, being poorly calculated based

on historic events. I will remind you of the story of the outgoing

CEO and the incoming CEO and when the outgoing CEO hands

the incoming CEO envelopes and he says, ‘‘Any time you get in

trouble open one of these envelopes.’’

And the first one, the very first one, when the CEO gets in trouble, he opens it and it says ‘‘Blame your predecessor.’’

You only have one chance to do that, you only have one chance

to say that work done in the previous administration might have

been in light of new facts misguided. I suggest strongly that your

administration prepare the way for the new administrator to open

that envelope and reconsider the historic way that these were calVerDate 11-MAY-2000 07:57 Sep 26, 2001 Jkt 010199 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\73289 pfrm01 PsN: 73289
15

culated to get to this body a more accurate calculation based on

your own reports.

Just for everyone else, of course, the next two are ‘‘Reorganize.’’ I would suggest that the new administrator, if he is going to do,

open both at the same time.

And the last one, if you do not do those two well and you come

back to this body again year after year with the same problems,

the last of the three envelopes says ‘‘Write three letters and put

them in envelopes.’’ So let us recognize that you really only get this one chance for

change.

The last point I have, and it is one of deep concern, I believe the

microloans which have worked so well around the world and they

are targeted and they are intended to be expendable if they need

to be, but they have proven to be paid back in huge amounts, area

an area that I would like to see year after year your proposals

come back with more funding for that, more availability and more

emphasis and your own statements that the quantity is going

down, albeit a little debatable based on base year, but the dollar

figure is going up, to me as somebody who spent my entire business career as a small business man is a bad sign. When I got to $100 million, yes, I could have gotten a small busi- ness loan, but, no, I no longer needed one. But when I had $7,000

and a 1967 Carmen Ghia, that is when I had a dream and should

have gotten the kind of attention that I hope you will be giving.

I yield back the balance of my time.

Mr. WHITMORE. Mr. Chairman, if I may respond, the 1995 year

I selected. It was not done by the administration and we selected

it solely as the high year when we walked through this. It was not

to pick off any other thing.

What we were trying to highlight here is not so much that we

were going from the high year down, but for certain segments of

the community that want loans we are seeing a flat trend more

than anything else. It was definitely high in 1995, but we are saying in certain areas, the percent of dollars and the percent of loans

going to African-Americans or Hispanic-Americans, should be on

the up rise and we are not seeing that trend. And that is the reason we picked 1995. I made the selection of 1995, it was Administration.

Mr. ISSA. Well, I appreciate that. And, of course, year after year,

if we continue to use five years, we would accept that the anomaly

would be reasonable, if that is always the case.

Mr. WHITMORE. We just picked a year that went back and certainly that was a high year.

Mr. ISSA. Thank you.

Ms. VELA ́ ZQUEZ. Would you yield on that?

Mr. ISSA. Yes, I would yield.

Ms. VELA ́ ZQUEZ. Did you check on 1992 and see the number of

loans for Hispanics?

Mr. WHITMORE. We did look at the loans all the way back and

we just picked a year and I made the selection on that.

Mr. BARTLETT. Thank you very much.

Now we will turn to Mr. Gonzalez.

Mr. GONZALEZ. Thank you very much, Mr. Chairman.

16

I want to cover policy and then its application and I am looking

at your statement on page 1, ‘‘The proliferation of new programs

at the SBA has come at a cost of diluted focus and lack of attention

to our bread and butter programs. * * * We are concerned that

neither our programs nor our delivery structure are ready to serve

small business needs in 2002 and beyond.’’ My understanding of your strategy and that of the administration is to try to have some of these programs where you already

have fees to increase fees, where you do not have fees, create fees

and they become self-sustaining and non-subsidized. I think that is

the basic approach.

Did you all consider, and I know we have covered it more or less,

but I want to know in process, did you all consider how that would

impact the utilization of any of these programs?

In other words, reduced opportunity for individuals to take advantage of the programs and, of course, then the result of that in

your projections in what fees you think they would be generating.

And then I will have a follow-up question and apply it to a local

entity.

Mr. WHITMORE. A demand study was not done in the 7(a) loan

program, but we did look at it from the sense that we wanted to

ensure that the majority of loans be $150,000 or less. I believe it

is 60-some-odd percent. And they would not be impacted by fees at

all.

On a large loan, a $1 million loan, for instance, it would amount to $42 a month additional cost to the borrower. It is still an additional cost, but we did not think that that would really slow down

demand for the program in the larger loan areas.

Mr. GONZALEZ. And on fees for counseling, did you think that

might impact the availability to individuals seeking the services of

the Small Business Development Centers?

Mr. WHITMORE. As I said earlier, some already charge training

fees in that same range and it does not seem to—— Ms. VELA ́ ZQUEZ. Just ten.

Mr. WHITMORE. No, they all charge training fees.

Mr. GONZALEZ. Training fees in other programs, but counseling

which you are proposing after the first free hour would be about

$10.75 per hour?

Mr. WHITMORE. We thought that over the course of a year that $44 would not affect demand.

Mr. GONZALEZ. Did you consult the Small Business Development

Centers on that policy?

Mr. WHITMORE. We did not consult them until after the budget

was developed.

Mr. GONZALEZ. Because it would seem to me that maybe before

you propose that, that maybe you would go straight to the individuals on the ground and say: ‘‘Hey, do you think this would have

any kind of negative consequence?’’

Mr. WHITMORE. We have proposed fees for probably 10 to 15

years and we have gone through this same situation. The fee proposals in the past were considerably higher. We thought this was

pretty reasonable at $44. A recent study that was done by the

SBDCs indicated the businesses they counseled, I guess at 55 of

the centers, had over $5.3 billion in revenues. That was based on,

17

I think, a 1999 study that SBDCs had commissioned. So we

thought that some of the businesses and the SBDCs themselves say

quite a few of their businesses are more seasoned businesses and

we did not think that a $44 cost over the course of a year would

impact demand.

Mr. GONZALEZ. Okay. But we are talking about the first hour

being free and thereafter—regardless, I mean, we are not saying

big, small, medium size, we are talking everybody, right?

Mr. WHITMORE. Right. We are.

Mr. GONZALEZ. And I think that is a real important distinction.

And then so I bring it down to my Small Business Development

Center in San Antonio which is something that is truly treasured,

and that is the University of Texas at San Antonio, Small Business

Development Center, it covers 79 counties, 108,000 square miles,

a population of nearly 6 million people and about 108,000 businesses and they do a tremendous, tremendous job. And the director

received a letter from the SBA and in it it states ‘‘Please ensure

that your budget proposal has an additional column for the proposed fees for the counseling portion of the funding’’ and in the request for their budget, it indicates that a federal dollar amount not

to exceed x amount and it says and a program income amount of $246,135.

My question to you is I guess you are asking these directors to

incorporate what they perceive or anticipate that they would be collecting under this fee structure. Is that correct?

Mr. WHITMORE. Yes. That letter has caused some confusion. I

was made aware of it yesterday. I think it tried to indicate that

this is what the budget proposal is. We have also indicated in there

that it is subject to the final appropriation as well. But we will

send a letter out today to every SBDC to clarify that.

Mr. GONZALEZ. But they still will be required basically to indicate their anticipated fee structure and what they would be bringing in if there was a $10.75 per hour counseling fee after the first

free hour.

Mr. WHITMORE. When we send this particular letter out, we do

not know what the final numbers are, so it is usually estimated.

When we know what the budget number actually is, the SBDCs

would come with adjustments. But we will send a letter out this

afternoon that will clarify that.

Mr. GONZALEZ. And, Mr. Chairman, I seek your indulgence, one

last part——

Mr. WHITMORE. May I mention one last thing, Mr. Congressman?

Mr. GONZALEZ. Sure. Yes, sir.

Mr. WHITMORE. In San Antonio, that is one of the SBDCs that

does encourage fees on new businesses before they start counseling.

It is encouraged, it is not required.

Mr. GONZALEZ. And have you talked to the director regarding

your proposed fee on counseling after the first free hour? Because

I do not think you will have—let us just move beyond that.

Let us say they do not meet—they have the projection, they provide it in the budget, you adopt it and they are going to come up

with x amount of dollars in fees.

Now, contrary to what you all thought, it does impact the number people utilizing the program and they come up short on the

18

fees that they are collecting. What is the consequence to the center?

Mr. WHITMORE. If they do not raise the fees?

Mr. GONZALEZ. I am just saying as you all go through with this,

they are going to have projections on what they anticipate, because

I am sure you are not asking that for no reason. But they do not

meet those because you all were wrong. You all were wrong because it did impact the number of people, especially in south Texas,

$10.75 on counseling is—I will tell you, that will impact the program. So let us just say you have fewer numbers of people utilizing

the program, therefore you do not have the fees that you anticipated collecting on this counseling fee arrangement, so they are not

meeting that particular projected budget amount. What is the impact to the center?

Mr. WHITMORE. I assume the impact would be very similar to

when they establish their own budget, they include fees when they

are doing their own budget projection. They include fees from what

they anticipate they would take in from training, so I assume they

would view it the same way.

If they do not make their fees, they probably would have to limit

the amount of time they are open or the amount of services given.

But in their own budget projections, I assume they include fees

that they raise themselves through training as well as what they

anticipate getting from the matching funds required for our program, either through state or private entities.

Mr. GONZALEZ. All right. Thank you very much.

Thank you, Mr. Chairman.

Mr. BARTLETT. Thank you.

Mr. Grucci.

Mr. GRUCCI. I have some questions but will you pass me for a

moment.

Mr. BARTLETT. Yes, sir. I would be happy to.

Ms. Millender-McDonald.

Ms. MILLENDER-MCDONALD. Thank you, Mr. Chairman. And may

I first ask unanimous consent to submit my statement for the

record?

Mr. BARTLETT. Without objection.

Ms. MILLENDER-MCDONALD. Thank you so much.

I am really distressed, Mr. Whitmore. I suppose the person who

spoke a couple of speakers before stated that you are the messenger, you are not the one really we should be driving this wedge

to or through, but I am really concerned about the seriousness of

this budget. This is an assault on the Small Business Administration. It certainly does not do well for those who are trying to increase economic viability in low income areas, urban areas, rural

areas, for those who small businesses have created the jobs for and

especially women-owned business.

As I look at your 7(a) program, there are decreases for veterans

as well as for women. This does not fit well in communities which

I serve, Watts and Compton, some of the most impoverished areas,

because they are looking to small business to help them in

microloan programs, as Mr. Issa said, that you really need to revisit that microloan program and do open the envelope or put

19

something in the envelope yourself to revisit these programs that

are just so important to urban and rural areas.

I could shout at you, but you are just the messenger, but please

report back to the person down on 1600 Pennsylvania Avenue that

we do want to see not increase in fees, decreases in programs that

help those who are distressed and in distressed areas, but let us

revisit this budget and look at where we can improve the funding

base and try to minimize the fees because it is critical for those

who are trying to create jobs, especially in my district and I suppose for all of us who represent urban and rural districts.

And that is it, Mr. Chairman. Thank you so much.

Mr. BARTLETT. Thank you very much.

Now Mr. Grucci.

Mr. GRUCCI. Thank you, Mr. Chairman.

I have a couple of concerns and they are on both sides of the

issues that we are dealing with today, certainly on the SBDC and

the 7(a) program. I have an SBDC shop in my district, it is at the

University of Stoneybrook and it does wonderful work and it has

done a lot of good to help a lot of small businesses get underway.

And they are very fearful of the fee schedule that is now being imposed.

And I just want to ask you a question on that. You have indicated a fee of about $44 a year. I would have to assume that that

means the first hour being free that you are thinking about four

hours worth of counseling at the rate that I am looking at, you get

about four hours worth of counseling at $44 and that is enough for

a small business entrepreneur with no experience in the business

community, no experience with running a business, four hours of

counseling will be enough to satisfy their knowledge of running a

business.

I would have to see that statistic to really appreciate it being accurate. I mean, I know that—we have a small business and it requires a great deal more counseling by our professionals than four

hours a year. I would welcome just four hours of counseling to help

us through some of the mazes of getting through the bureaucracy

that exists for small businesses. And so I question that fee.

And the fear that our SBDCs have is that since this is both a

state and a federal program you are now going to have the state

jumping on board with their opportunity to create the fees because

now it is going to be new monies for them as well, so now you do

not have a $10 an hour or $10.75 an hour fee, you have something

closer to $22 an hour that is being placed on the small business

entrepreneur and my guess it would be far more than four hours

worth of counseling necessary and, you know, we discourage them

from coming into the business world rather than getting involved

in the business world.

I really think as some of my colleagues said here today that we

do need to revisit this issue. I do not think there is going to be a

great deal of support for the fee structure on the SBDC programs

and I know that I am speaking to the ones in my district, they are

very fearful of it, they are concerned about it, and they do not

think it is going to be helpful, they think it is going to be injurious,

is their words.

20

Let me just move on to the 7(a) program for a moment. We were

a recipient of the 7(a) program. My family’s business suffered a

very significant issue in 1983, we had a fire. I am in the firework

business. It led to a series of explosions, completely wiped out the

operation of the business and without the 7(a) program to be able

to go to to borrow from, we would not have been able to stay in

business and we needed to borrow a half a million for capital and

a half a million for working line and obviously under this structure

we would have been then subject to the fee schedule.

And I do not see the formula for the fee schedule anywhere, I do

not know how that fee would be created, what it is based against.

Is it based against the volume of dollars that you borrow? Is it

based against some other formula?

All of that does not help to sustain business or to grow business.

And I know when I say this I am preaching to the choir because

you probably know far better than I do that the engine that drove

this economy is not the Fortune 500s but the mom and pop operations that dot the Main Streets of America for Montauk Point to

Monterey Bay and to that end we have to do all that we can to

make it easier for them to come into these businesses, provide

those jobs, provide those opportunities and what I am seeing here

is not going to do that.

I think we need the funding in place, we need to reinstate the $12 million for the SBDC and we need to fund the 7(a) program

while we can be assured that it can ultimately get to a zero subsidy

and that it can operate independently of the subsidy.

Until that point, I am not convinced and I would certainly like

to see you pay closer attention to the needs of the districts like

mine and others that you heard from here today because we speak

for the American small business people.

I do not know if there was a question in there or not, if you

would like to respond to that, you certainly can. I feel very passionate about these two programs because I have dealt with them

firsthand and I think that they are in jeopardy and being in jeopardy hurts the American business person.

Mr. WHITMORE. I would like to say a couple of things on fees on

both 7(a) and on SBDC. Generally on business loans or any kind

of loans, there are points charged to make the loan. So there are

some points, whether it is an SBA loan or whether it is a commercial loan.

There is an increase in fees on the very large loans. We are concerned that the smaller loans are the most difficult for SBA to get

made and not increasing fees on loans under $150,000 we think

would be helpful to the program.

In terms of SBDCs, there is no fear in charging training fees, so

I am a little confused myself on why there is a great fear in charging counseling fees. The SBDCs across the country charge fees

today as we speak, they just do not charge them on counseling.

And to address the hours, I agree with you, it may very well be

more. What we took was an average number of counseling hours

based on the number of clients they counseled and we came up

with five, the average. But if that is the average, there are some

at three and there are some at 15 also.

Mr. BARTLETT. Thank you very much.

21

Ms. Tubbs Jones.

Ms. TUBBS JONES. Good morning, Mr. Chairman.

Mr. Whitmore, I apologize, I missed the beginning of your presentation. Will you give me very quickly your background with SBA,

please?

Mr. WHITMORE. I have been with SBA since 1977. I worked primarily in the procurement and 8(a) programs. I also was the CFO

of the agency at one point. It does not sound like I can keep a job

very long as I am telling you this. I was the head of Management

and Administration, and I worked in the Entrepreneurial Development Program as well.

Ms. TUBBS JONES. And what is the Entrepreneurial Development

Program?

Mr. WHITMORE. SBA’s technical assistance programs. It is the

Women’s Business Centers, it is the Small Business Development

Centers, it is Business Information Centers, Veterans’ Business Assistance Centers and SCORE. And I probably missed one.

Ms. TUBBS JONES. Thank you. In your statement, Mr. Whitmore,

you began to outline what programs would no longer be funded in

2002 and as I read through each of them, it said that they are

being defunded because they are duplicative or they are redundant

programs.

Can you specifically tell me what program will handle the programs that BusinessLINC was put in place to provide?

Mr. WHITMORE. BusinessLINC had been in operation for two

years without any funding. It is designed to foster mentor-protege

relationships. SBA has 11,000 senior executive volunteers that certainly would be able to work in that area.

Ms. TUBBS JONES. That is the SCORE program?

Mr. WHITMORE. The SCORE program.

Ms. TUBBS JONES. Before——

Mr. WHITMORE. In addition, there are other——

Ms. TUBBS JONES. Hold on a second. Hold on. I only get five minutes and I know I walk on treacherous grounds when I start doing

this, but I only get five minutes, so I do not want long answers.

I want you to specifically address my question so I can take you

to the next question, okay?

Now, particularly because you brought up SCORE, now, the people who work in SCORE are retired executives who no longer have

businesses, correct?

Mr. WHITMORE. That is correct.

Ms. TUBBS JONES. Now, the purpose of BusinessLINC, however,

was to take existing strong businesses, make relationships with

small businesses to kind of create an old boy network, right?

Mr. WHITMORE. Yes.

Ms. TUBBS JONES. And clearly if you have BusinessLINC and an

old boy network, it is much better than having somebody who is

retired who has no existing business to maybe provide you the opportunity to do business, correct?

Mr. WHITMORE. I do not want to talk about the old boy network

there because——

Ms. TUBBS JONES. Well, it is true. I mean, you are not offended

because I am talking about old boy, but everybody—it is a concept.

22

Mr. WHITMORE. SCORE, I may be going there myself soon. But

there are other programs. SBA has had a mentor-protege program

for quite a while. The Department of Defense has a mentor-protege.

I believe NASA has a mentor-protege program.

Ms. TUBBS JONES. Well, were you around when they talked about

creating BusinessLINC? You have been with SBA a long time,

right?

Mr. WHITMORE. I was not involved in the creation.

Ms. TUBBS JONES. You were not in that. But you have been involved in SBA and the various technical assistance programs and

clearly having a mentor is a great technical assistance for any

small business, correct?

Mr. WHITMORE. I certainly think it is.

Ms. TUBBS JONES. Okay. Now, I am particularly concerned about

the defunding of BusinessLINC because as a result of the

defunding of affirmative action programs and the lack of opportunity for minority businesses to access people who they traditionally might not get involved with, BusinessLINC was going to provide them that opportunity, to meet and greet people, because we

know that much business is done on the golf course, much business

is done where people have an opportunity to meet people that they

traditionally would not meet under normal circumstances, correct?

Mr. WHITMORE. Correct.

Ms. TUBBS JONES. Okay. And so I am asking that you take back

to the powers that be, whoever that ultimately ends up being, I

want to buy into all the other statements that my colleagues have

made, but to say that here we have a program, BusinessLINC is

funded for this year, right?

Mr. WHITMORE. It is funded in the 2001 cycle. The performance

of BusinessLINC will actually take place really in the 2002 year.

Ms. TUBBS JONES. Say that again?

Mr. WHITMORE. The awards for the BusinessLINC awards will

take place later this summer.

Ms. TUBBS JONES. Okay.

Mr. WHITMORE. The performance of the BusinessLINC awards

will be during the course of fiscal year 2002, starting probably in

October of next year.

Ms. TUBBS JONES. And before you have had a chance to really

evaluate the value of such a program, you are defunding it? Is that

correct?

Mr. WHITMORE. Well, it is not funded in 2002.

Ms. TUBBS JONES. Right.

Mr. WHITMORE. It will be operational——

Ms. TUBBS JONES. So then my question is that before——

Mr. WHITMORE. It will be operational in 2002.

Ms. TUBBS JONES [continuing]. You have had a chance to evaluate the success of the program, you have decided—maybe not you

personally, but a decision has been made to defund the program.

Mr. WHITMORE. Yes, ma’am.

Ms. TUBBS JONES. And it appears to me that throughout all of

the defunding—this is my last question, Mr. Chairman—that everything that has been called redundant are programs that the last

administration trying to reach new markets, as they called them,

are not being funded. Is that correct?

23

Mr. WHITMORE. There are two programs that were not funded,

the PRIME program and BusinessLINC. The New Markets Venture Capital Program was funded according to the authorization, it

was a one-time funding, it was not defunded, the authorization was

for a one-time funding.

Ms. TUBBS JONES. Well, if I am a program, whether I am

defunded or not reauthorized, it is the same effect, though, right?

Mr. WHITMORE. The effect is the New Market Program is going to last for five or six years. It is intended to fund up to $150 million

in venture capital and it was funded for the term of its authorization.

Ms. TUBBS JONES. I do not know if you answered my question,

but I am not going to belabor the point.

Mr. Chairman, are we going to get another chance to make inquiry?

Mr. BARTLETT. We can have a second round if the members wish.

We will have another panel and opportunity to question them.

Ms. TUBBS JONES. Thank you.

Chairman MANZULLO. Thank you very much.

Mr. Udall.

Mr. UDALL. Thank you, Mr. Chairman.

I come from a district, Mr. Whitmore, that has a number of small

businesses and small businesses accounted for nearly 90 percent of

all new net jobs in my state last year—80 to 85 percent of those

jobs were created by businesses with ten or fewer employees. I also

have a large Native American population and New Mexico is one

of the states that has a very high utilization of SBDCs.

I have heard you talk here and heard you try to explain this, but

I am really not happy with this proposal to charge fees for SBDCs

and I wanted to ask a couple of questions in that area and also possibly follow up on what Ms. Tubbs Jones talked about in terms of

the mentoring program. For 2001, SBA requested $4.5 million for the Native American outreach program. Of that, $1.5 million was to fund 18 existing

Tribal Business Information Centers, upgrade the technology infrastructure and to provide additional business development training

and technical assistance to Native American customers.

The remaining $3 million was to establish reservation-based Native American Small Business Development Centers to provide

business development assistance, counseling, training and other

services to Native Americans who want to start, maintain and grow

businesses.

My question is being that the SBA never received the funding for

Native American outreach or the TBICs, how has SBA been able

to assure the proper operation and success of the program?

Mr. WHITMORE. With regard to the Tribal Business Information

Centers, we have been funding them out of the SBA’s operating

budget. I will tell you the funding is roughly around maybe

$30,000–$33,000 per TBIC. That is basically to fund somebody,

usually from the tribal community college, to work there. We are

looking at that area very seriously. It did not get funded, as you

know, last year. We do not anticipate taking funding away from it

at this point. However, we do think that we are not seeing the productivity out of the Tribal Business Information Centers that we

24

would like to see. We are not seeing economic development out of

there.

With respect to the SBDCs, there is no prohibition by the SBDCs

right now under the current statute and their current funding to

opening subcenters on Native American reservations. Certainly it

would always be nice to get additional funding, but we would question why they are not open on reservations today with the current

funding. There are 900 centers, we have very few, if any, on reservations.

Mr. UDALL. In your experience with the SBA, do you see a need

out there in terms of the Native American community?

Mr. WHITMORE. I think that that is probably the most under

served community in the United States, especially reservationbased Native Americans.

Mr. UDALL. And you realize, I think, in saying that, from your

experience, that some of the reservations have unemployment of 50

and 60 and sometimes 75 percent and so this kind of a program

obviously is very, very important to Native American communities

and when you say we are not seeing the economic developing out

there, I would hope that your agency would try to look at creative

ways and come back and talk to us about how we can see small

business growth out on the reservation because this is a dire need

and I would hope that you would try to focus on that. If something

you have in place now is not working, then come back and give us

some suggestions on that.

Mr. WHITMORE. Mr. Congressman, we talk about funding our

core programs. We think our core programs should meet the needs

of all small business and all Americans. Certainly the 7(a) program

and the SBDC program should be able to deal with Native American problems and economic development and we have not seen

that and we think we need to focus and manage in those two areas.

I am sure the new administrator is going to take a look at this area

and if we have ideas that are a little different, we certainly would

come up here and propose them.

Mr. UDALL. Thank you very much, Mr. Whitmore.

And thank you, Mr. Chairman.

Mr. BARTLETT. Thank you very much.

Dr. Christian-Christensen.

Mrs. CHRISTIAN-CHRISTENSEN. Thank you, Mr. Chairman. I

apologize for being here late but I am glad I had a chance to get

here before Mr. Whitmore has left.

And I am sure you have heard a lot from this committee and the

dissatisfaction with the proposed budget for SBA. I want to focus,

though, on the disaster loan area because over the past two years

SBA has begun to conduct asset sales and some of those sales have

included disaster loans.

Can you tell the committee if SBA has conducted a study or done

any research on the impact of those asset sales on small businesses, the small businesses that receive loans through the disaster

loan program?

Mr. WHITMORE. I am not aware that we have conducted any

study.

Mrs. CHRISTIAN-CHRISTENSEN. We are having problems in my

district with some of those loans. I would imagine that we are not

25

the only jurisdiction that is experiencing those problems. Has there

been any follow-up at all on what has happened since those sales?

Mr. WHITMORE. I cannot answer that. I would be happy to submit an answer for the record on that. I am not sure.

Mrs. CHRISTIAN-CHRISTENSEN. Okay. Then, Mr. Chairman, I

would ask that we have that submitted in writing to us. Thank

you.

Let me just go a little further into this. When the sales first

began to take place and we started to receive complaints from my

community, we called officials from SBA who oversee the disaster

loans and we were really assured that the terms of the loans would

not change and even the administration of those loans would not

change.

Now, in my district, we have had several major hurricanes and

businesses have secured loans to rebuild their business in one season and then been faced in another subsequent season with a similar disaster and had to take out another loan, and this despite a

lot of work being done on really mitigating for these kind of disasters. We are getting better, but still some have had two subsequent

loans. And now they are being asked by the banks to repay their

outstanding balance.

Have you heard any——

Mr. WHITMORE. The asset sale program is required of SBA. I

have only been there since February in an acting capacity and have

not received any feedback on the subject. I am unaware of any reason that any of the terms and conditions of those loans should

change unless it would affect their ability for future borrowing.

They should not change the terms and conditions just because the

loan is sold.

It may affect someone’s ability, ma’am, to get an additional loan

if they have outstanding balances.

Mrs. CHRISTIAN-CHRISTENSEN. Yes.

Mr. WHITMORE. Where we may have some issues there, but it

should not come from the purchaser of the asset sales, it would be

coming from the SBA disaster assistance office, if they had questions regarding the cash flow of the business or the homeowner.

Mrs. CHRISTIAN-CHRISTENSEN. Well, we would like to follow up

on this issue with the administration because it may not be specifically so much the terms of the loan, but there were certain things

in the operation of that program that borrowers traditionally could

expect when dealing with SBA that does not occur now with the

banks having bought those loans and it is creating a hardship in

my district.

Mr. WHITMORE. Those that have purchased the loans have been

fairly cooperative in working with borrowers when they have run

into financial difficulty, but I really am not versed in this area and

I would be happy to get any response to you.

Mrs. CHRISTIAN-CHRISTENSEN. We may have to ask you to help

us get some response and cooperation from at least one of the

banks that holds most of the home loans and most of the disaster

loans in my district.

Thank you, Mr. Chairman.

Mr. BARTLETT. Thank you very much.

26

I want to thank the witness and the members of the committee.

When I chair a hearing I usually reserve my questions until the

last and I will recognize our ranking member in just a moment.

With the anticipation that most of the questions that I would

have asked will be asked by someone else and that has certainly

been true today, everything has been said pretty much, I think,

and I do not need to repeat it.

I would just ask Mr. Whitmore if he has gotten the message that

this is a truly bipartisan committee that is concerned with the

small business community.

Mr. WHITMORE. Without a doubt.

Mr. BARTLETT. That message is loud and clear. Okay. We speak,

I think, with a unified voice on this committee. We are concerned

for the small business community.

I am one of probably 35 more or less people who came to this

Congress from an FIB. I was in small business before I came here.

Too few of us have been there. And so I am very appreciative of

the really good attendance at this hearing today by our subcommittee members and thank you for your testimony.

Let me turn now before we convene the next panel to our ranking member.

Ms. VELA ́ ZQUEZ. I really appreciate it, Mr. Chairman.

Mr. Whitmore, in your testimony you state that the objectives of

the New Market Venture Capital Program can be achieved more efficiently and at a lower cost to other means. You also state that the

programs that provide direct investment into economically distressed areas already exist. What other program is there provides

a combination of equity investment and technical assistance?

Mr. WHITMORE. Well, the Small Business Investment Company

Program invests a substantial number in low and moderate income

areas——

Ms. VELA ́ ZQUEZ. Sir, I am asking you a combination of equity investment and technical assistance.

Mr. WHITMORE. Certainly those receiving the SBIC investment

would be eligible to get SBDC assistance or SCORE assistance, but

we do not have a program that has those in combination.

Ms. VELA ́ ZQUEZ. So then how could you come before our committee and state that equity investment can be achieved through

other programs that already exist?

Mr. WHITMORE. We think the New Market Venture program will

be run over the next five or six years. We are not saying that it

is being eliminated, there was just not additional funding. The program was authorized for a one-time funding and received that onetime funding.

Ms. VELA ́ ZQUEZ. Targeting low and moderate income communities.

Mr. WHITMORE. Absolutely. Yes. And we expect the final rule for

that program to be published probably tomorrow or the next day.

Ms. VELA ́ ZQUEZ. I said in my opening statement that it seems to

be a disconnect between the White House and what is going on in

terms of our economy and the small business community. Does the

administration understand the importance of technical assistance

when it comes to investing in low income areas?

27

Mr. WHITMORE. I think they do. They support the New Market

Venture program this year—— Ms. VELA ́ ZQUEZ. You are telling me that, yes, they do, but the administration insists on eliminating the new market’s and PRIME

technical assistance components while at the same time funding for

the microloan technical assistance program has been done just at

one-third of its authorized amount. Is that not correct?

Mr. WHITMORE. That is correct. At $20 million.

Ms. VELA ́ ZQUEZ. So can you tell me where will the technical assistance come from that the new markets is supposedly duplicating?

Mr. WHITMORE. I think it should come from our existing programs. I think our focus on our existing programs should ensure

that we serve all Americans. SCORE, SBDC, 7(a), the Women’s

Business Centers, we need to broaden the reach and manage our

current programs to ensure that this kind of service gets to all

Americans.

Ms. VELA ́ ZQUEZ. You state earlier that the funding for the new

markets program was intended to be a one-time appropriation. I

was the author of that bill and I can tell you that that was not my

intent. There have been different interpretations of the language

including from the speaker’s office. Can you explain that?

Mr. WHITMORE. The report language, talks about a one-time

funding. And also in a press release that you issued last May indicating, Madam Ranking Member, that it was a one-time appropriation of $45 million.

Ms. VELA ́ ZQUEZ. Not for the technical assistance component of

that.

Mr. WHITMORE. It was a combination of both technical assistance

and investment. Both the technical assistance program and new

markets is a five-year funded program.

Ms. VELA ́ ZQUEZ. That is a five-year program? GAPP?

So let me just say this to you, Mr. Whitmore, I am not satisfied

with that answer. The new market was a commitment that we got

from the White House, from Speaker Hastert, from Jim Talent,

J.C. Watts, and you are going to tell me that now that the face of

small business in America is changing where we have more women

and more Latinos and more blacks and it is proven that technical

assistance is an important component to help those who want to

start up a business, you are going to come here and tell me that

the New Market Venture Capital Program is not important because

some of that technical assistance is being provided through other

programs that you recognize have been either zeroed out or their

funding has been decreased?

Mr. WHITMORE. Madam Ranking Member, specifically with the

New Market Venture Capital, it is a five-year program and it is not

zeroed out, it was a one-time funding of $45 million to encompass

$150 million in debenture or an investment in the rest. So we are

not saying it is not being emphasized. It is going to be run over

a five-year period, longer on the investment side, and certainly we

will have ample time to evaluate that as we go.

Ms. VELA ́ ZQUEZ. So then explain to me what about the expenses

to administer the program? If SBA does not request funds to administer the program, how will those expenses be covered?

28

Mr. WHITMORE. We have hired four people so far in the New

Markets Venture Capital area to work on that specific area. We

have a division within that area that will do the oversight and examinations already existing, but we have added four people to the

New Market Venture Capital.

Ms. VELA ́ ZQUEZ. I just want to ask you how do you think any

company will want to make investment in any low or moderate income communities when the same administration is telling us that

you wish to eliminate the program?

Mr. WHITMORE. In our SBIC, they are investing in low and moderate income areas now and we are not eliminating that program.

And we did not say we were eliminating—— Ms. VELA ́ ZQUEZ. Have you seen the numbers?

Mr. WHITMORE. Yes, I have. I believe it was $700 million last

year. The New Market Venture program, is just starting. The first

year will be in 2002, the debentures, I believe, will go over a sevenyear period and the technical assistance is over a five-year period.

So I think we will have ample opportunity to assess whether that

program is operational and whether it actually is meeting the

needs.

The most recent change we made in that program is on the regulations themselves. When the original proposal came out, I believe

January 19th, it came out as an interim final rule and we redid

that proposal just recently and changed a couple of the things that

we felt would not be beneficial to low income areas. There was an

eight-to-two investment ratio, for every eight investments you

could have two investments that were not in low income areas.

We thought that would be a loophole, so what we changed that

to include the money aspect, as well 80 percent of the dollars have

to be invested, not just 80 percent of the loans.

Ms. VELA ́ ZQUEZ. Do you think it will be a multi-year funding?

Mr. WHITMORE. It is multi-year funded with the one-time appropriation.

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman.

Chairman MANZULLO [presiding]. Thank you very much.

John, you set a record. We appreciate your stopping by. I hope

you will come back again. I trust you will.

Ms. VELA ́ ZQUEZ. Well, Mr. Chairman, I have not finished with

him. I will be submitting some questions, especially on the

HubZone program and the 8(a).

Chairman MANZULLO. That is okay. You will have an opportunity

also, Ms. Vela ́zquez.

And we appreciate your graciousness. Thank you for the terrific

job you are doing in a very difficult position, having to defend the

budget when you are the acting administrator. I appreciate your

candor and coming here. Thank you very much.

The first panel is discharged. Let us have the second panel. I do

not think it will take this much time.

Mr. ISSA. And, John, you look good with arrows all over yourself.

Chairman MANZULLO. Okay. If we could have Ms. Wolverton, Mr.

Wilkinson, Mr. Mercer, Ms. Finch and Mr. Means. We are going to

start with Ms. Wolverton.

The light in front of you is five minutes. You probably want to

finish as quickly as you can. When the yellow light comes on, that

29

means that you have one minute. When the red light comes on,

that means that your five minutes are up. Some members have

subcommittee meetings that start at 1:00, so I want to get this finished as soon as possible and appreciate your stopping by.

Ms. Wolverton.

STATEMENT OF DIANE WOLVERTON, STATE DIRECTOR,

WYOMING SMALL BUSINESS DEVELOPMENT CENTERS

Ms. WOLVERTON. Thank you, Chairman Manzullo, Ranking

Member Vela ́zquez. I am Diane Wolverton. I am the State Director

of the Wyoming Small Business Development Center. I am here

today on behalf of the Association of Small Business Development

Centers. I want to thank you today for extending the invitation to

the Association of Small Business Development Centers to testify

and for the support that you have given to the program and that

I have heard even this morning.

I have given you my written testimony and I would like to offer

some highlights this morning, as well as some insights into my personal experience with the Small Business Development Center.

I am a passionate advocate of the program because I am a product of it. Since the time I graduated and finished my studies in

journalism, I had the dream of owning a small newspaper and that

dream was realized 14 years ago when I signed the papers to buy

the Bridger Valley Pioneer Newspaper in Lyman, Wyoming. And

that was the beginning of an entrepreneurial adventure that was

at some times exciting and sometimes perilous. I worked hard as

editor and janitor of the newspaper and the business grew.

We increased circulation by more than four, we increased revenues by five times and we put people to work at a time in Wyoming

when we were experiencing the oil bust and the unemployment in

my county was higher than 15 percent.

Then I was an ambitious entrepreneur, as we see many of those

at the SBDC, and I set my sights on purchasing the other publishing company in my town, which was the community shopper.

Soon I was able to complete that deal and was busy working on my

new publishing family. That is when I started to run into some

trouble.

I found that I was having difficulty paying my bills on time, I

found that I was struggling to make payroll and I found that very

often when I was able to make payroll for my employees I was not

able to take a paycheck for myself. And that is when I called the

Small Business Development Center in Rock Springs, Wyoming

and the counselor there helped me see that my problem was cash

flow.

He gave me a visual example that was very powerful. He told me

that a business is like a fish bowl. There is water coming in the

top and there is water going out the bottom. My business is the

fish in the middle and my job was to make sure that it does not

get empty and the fish would die.

And the big aha experience was I saw that I had my sights on

all the new revenues that would be coming in with my new expanded business, but I had not focused carefully enough on the

new expenses that I had taken on. The Small Business Development Center helped me develop strategies that enabled me to make

30

it through a very difficult time. They helped me solve problems to

get my business back on track and eventually allowed me to sell

that business for a substantial profit and it is still publishing in

Lyman, Wyoming and doing very well.

Mr. Chairman, as I am before you today, it is a little embarrassing to tell you the mistakes I have made in my business, but

I do it to point out the power of the Small Business Development

Center and how it helps to fill in the knowledge gaps of talented

entrepreneurs.

The Small Business Development Center counsellors see more

than 600,000 businesses every year who are entrepreneurs like I

was, that understand the basic profession or trade but the facts of

business such as finance and marketing and how to deal with government regulations, they may not have total understanding of

those. The SBDC plays a powerful role in filling in those gaps.

And as a woman business owner, I am also keenly aware of the

need to have these services available to populations that have been

disadvantaged. The SBDCs work very hard across the country to

meet the needs of women and minority business owners. Last year,

43 percent, I believe, of our clients were women business owners

and 31 percent minorities.

And when I started my business, I will tell you that I was recently divorced and I was reeling from the financial and emotional

setback that that had brought to me and I needed that business

to work, not only for the financial standing, but also to bring my

confidence back, and SBDC helped me do that. And that is the

power of the SBDC, it forges not only economies, but it helps to

build community leaders.

We are a country that embraces the free enterprise system and

it is one of the tenets upon which our country is built and I think

that many people are like me that want to participate in the free

enterprise system, understand parts of it, but not the whole picture, and that is what the SBDC program does effectively and it

is the only national comprehensive non-academic government-sponsored program that helps our citizens participate in the free enterprise system by giving them knowledge they need.

And it is important that this program continues to be available.

It is critical that it remains free. As I testified earlier, at the time

I went to the SBDC, I was not even sure I could keep my lights

turned on, let alone pay fees.

Chairman MANZULLO. Diane, we are at five minutes. You very

emphatically and persuasively have made your point as to the

value of the SBDCs. Thank you.

Ms. WOLVERTON. Okay. Thank you.

[Ms. Wolverton’s statement may be found in appendix.]

Chairman MANZULLO. Our next witness is Anthony Wilkinson,

the President and CEO of the National Association of Government

Guaranteed Lenders.

Mr. Wilkinson.

31

STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, THE NATIONAL ASSOCIATION

OF GOVERNMENT GUARANTEED LENDERS

Mr. WILKINSON. Good morning, Mr. Chairman, and other members of the committee.

Chairman MANZULLO. Is that clock not working in front of you?

Mr. WILKINSON. It is on.

Chairman MANZULLO. It is on?

Mr. WILKINSON. Yes, sir.

Chairman MANZULLO. Okay. All right.

Mr. WILKINSON. Thank you for the opportunity to testify today

on the fiscal year 2002 budget request for the SBA 7(a) program.

You have my written testimony and I would ask that it be included

in the record of today’s hearing.

In the fiscal year 2002 budget request, the Office of Management

and Budget predicts that the subsidy budget authority for fiscal

year 2001 for all SBA credit programs will be a negative $525 million, as you have up on your chart.

This means borrowers and lenders will have paid $525 million

after recovering the initial appropriation provided in the various

programs. The original subsidy budget authority for fiscal year

2001 was $163 million for all SBA credit programs. This will be offset by $688 million in downward program cost re-estimates, leaving

$525 million subsidy budget authority profit for the Treasury.

And this is not the first year it happened. In fiscal year 2000,

the subsidy budget authority was a negative $137 million and for

fiscal year 1999 the subsidy budget authority was a negative $473

million. That totals $1.135 billion in just the last three years—

$1.135 billion in excess fees charged users of SBA’s credit programs

in just three years.

Please keep in mind that this amount is after covering any initial

subsidy budget authority provided to SBA’s programs like 7(a) and

SBIC.

Anybody who thinks that government has been subsidizing the

SBA credit program users needs to look again because it is clear

that it is the SBA program users who have been subsidizing the

U.S. Treasury.

Specifically, for the SBA 7(a) program, the Office of Management

and Budget now re-estimates that 7(a) borrowers and lenders have

returned $1.257 billion to the Treasury since credit reform began

in 1992. That means on average that OMB has over estimated the

cost of the SBA 7(a) program by $125 million per year for ten

years.

Compare the $125 million annual cost over estimate to the $118

million needed for fiscal year 2002 to fund an $11 billion program.

Even knowing all of the above, the OMB budget request asks for

higher fees on SBA program users. OMB wants to supposedly drive

the subsidy rate to zero so that the federal government is not subsidizing the cost of borrowing for small business.

As I have already stated, it is clear that it is the SBA program

user who has been doing the subsidizing. Second, we believe the

SBA 7(a) subsidy rate is already at or below zero, OMB just refuses

to recognize the actual performance of the program.

32

For instance, OMB still requires the use of an approximate 14

percent default rate in the subsidy model. SBA officials just last

year testified before this committee that the program was being

managed to a loss rate of 8 to 10 percent. Using the highest default

estimate per their testimony of 10 percent, the SBA 7(a) subsidy

rate for fiscal year 2002 would be about a minus .29, as the subsidy

rate would fall by 34 basis points for every 1 percent decrease in

the default estimate. And we think defaults are actually closer to

the lower end of SBA’s estimates, which would drive the subsidy

rate farther into negative territory.

Mr. Chairman, it is clear that small businesses have been subsidizing the U.S. Government, not the government subsidizing

their borrowing costs. We at NAGGL encourage an immediate independent review of the assumptions used in the subsidy model. It

is clear to us that OMB has gone well beyond the scope of the Federal Credit Reform Act. Rather than simply providing you with an

estimate of the program’s cost, OMB has attached a tax on program users to their cost estimates. Make no mistake about it, to

a small business excess program fees are no different than a tax.

While we wait for the results of an independent review of the assumptions used by OMB, we encourage the members of this committee to support fiscal year 2002 appropriations of $118 million.

This would support an $11 billion program next year. Based on the

evidence we have provided, the government will get all this money

back in the from of downward cost re-estimates in the future.

So please do not punish small business borrowers because the

Office of Management and Budget has purposefully over estimated

the cost of the 7(a) program.

Mr. Chairman, with that, I will conclude my remarks and be

happy to answer questions.

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

Chairman MANZULLO. Thank you very much.

Mr. Mercer.

STATEMENT OF LEE W. MERCER, PRESIDENT, NATIONAL

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES

Mr. MERCER. Thank you, Mr. Chairman.

Ms. Vela ́zquez, members of the committee, thank you for the opportunity to appear today to discuss the president’s budget with respect to the SBIC program. I do not know whether it is a just a

coincidence that I am sitting in the seat that Mr. Whitmore sat in,

but I am probably the only one who is going to say that we support

the president’s budget, with reservations.

Chairman MANZULLO. Mr. Whitmore enjoyed it so much that he

is sticking around to listen to the rest of the testimony.

Mr. MERCER. The SBIC program is in the strongest position it

has ever been in right now and in great measure that is a compliment to Congress, which has, over the past five or six years,

worked with the industry to completely redesign the program that

was first started in 1958. The growth has been so phenomenal that

the SBIC program is, I believe, the fastest growing program that

SBA has in terms of financing, percentage growth, that is, and in

fiscal year 2000, the program provided $5.5 billion in equity and

loans to growing small businesses.

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The reason we support the president’s budget is that the program needs growth and the president’s budget impacts the participating security program, the fasted growing part, the equity capital

program. The program needs $3.5 billion in participating security

leverage for fiscal year 2002 and without an increase in fees, that

would require $65.5 million in appropriation or a 150 percent increase over the current appropriation in fiscal year 2001.

We believe that that is extremely difficult to achieve, if not impossible to achieve, under the current situation and even though

this committee joined with the Senate committee in having money

added back into the budget, it would essentially just flat fund the

programs, if you will. And flat funding for the participating security program at $26.2 million in appropriations would produce just

$1.4 billion in participating security leverage, far less than we

need.

Increasing the fees will produce the result that the industry

needs and it will create tremendous new growth and availability of

equity capital for small businesses. So, the only question is can

that growth be achieved through these fees in such a way that the

increase in fees paid do not do any damage to the SBIC program

or to the small businesses that are receiving the financing.

In this regard, this program is distinct from the 7(a) program

where even though the fees increase in both programs, not every

program is the same. The fee increases in the participating security

program will impact only one portion of the annual rate, if you will,

that participating security SBICs pay for their money.

In February of 2000, that rate for participating security leverage

was 9.52 percent per year. If the president’s budget were adopted

today, effective today, even with the increase in fees proposed for

the participating securities program, the total rate would be 8.52

percent, 1 percent less than it was a year ago. That is because the

biggest driver of the rates for participating security SBICs is not

the fees that paid to the government. The biggest driver is the interest rate in the market that we have to pay for our guaranteed

leverage.

Thus, for the SBIC program, the choice is fairly simple. If we

want to increase to the level where the demand is and where the

small businesses can use the money, we need to impose the fees.

We join with those who say that there has to be a revisiting, if you

will, or a critique of the subsidy models and perhaps in the SBIC

program we would find that they were too conservative as well because money has been released from that program as well.

But at this time, increasing the fees would produce three positive

results: it would reduce the cost to the government of the program,

making more money available for other purposes; it would increase

the equity capital available to small businesses; and it would continue the growth and leverage necessary to attract private capital

to the program.

Thank you, Mr. Chairman, and members of the committee. We

value our working relationship with you and we look forward to

working again with you this year.

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

Chairman MANZULLO. Thank you.

Ms. Finch.

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STATEMENT OF ZOLA FINCH, VICE PRESIDENT FOR CONGRESSIONAL RELATIONS, THE NATIONAL ASSOCIATION OF DEVELOPMENT COMPANIES

Ms. FINCH. Good afternoon. My name is Zola Finch and I am the

Vice President of Congressional Relations for the National Association of Development Companies or NADCO. I am also the Director

of Finance Programs for Rural Missouri, Inc. and we are the statewide certified development company. We also administer four other

economic development financing programs to small businesses and

one of those is the SBA microloan program as well.

I am pleased to be invited by the committee to provide comments

on the SBA fiscal year 2002 budget and ask that my written statement be entered into the hearing record.

Chairman MANZULLO. All of the written statements will be entered into the record without objection.

Ms. FINCH. Thank you.

We have four objectives in providing this testimony to the committee. First, NADCO would like to comment on the 504 authorization level and the proposed borrower fee contained in the FY 2002

budget for SBA. Secondly, our statement compares some of the 504

performance projections by SBA and OMB with the actual performance to date for the 504 program. Third, we will comment on some

of the SBA performance plan objectives submitted to Congress with

the fiscal year 2002 SBA budget. And, fourth, we will provide the

committee with several 504 program proposals that could result in

additional enhancements as we serve America’s small businesses.

First, NADCO supports the current program reauthorization

level passed by Congress last year, rather than the administration

proposal of $3.75 billion. With 504 having a zero appropriation,

there is no cost to the taxpayer for the current ceiling of $4.5 billion.

We believe this higher authorization level may well benefit small

businesses if the current economic slowdown continues to restrict

private sector lending.

We also appreciate the continued reduction in the program borrower fee. Going from .472 down to .410 for fiscal year 2002 will

mean a total reduction of over 50 percent from fiscal year 1997 fee

which was imposed when the program was taken onto a zero subsidy.

However, we continue to have major concerns about the calculation of this and the other program fees. Three of the primary assumptions used in calculating our fees is the default rate, the loan

recovery rate and the debenture prepaying rate.

The default rate calculated by SBA and OMB went down from

11.1 percent to 8.41 percent for fiscal year 2002. We are very interested in how the administration computed this, since actual defaults have been fairly stable for a number of years and I would

like to refer to the second chart in my written testimony, which

was actually provided to NADCO from the Bank of New York, our

trustee for the program. This is private industry information provided to us and has been provided to OMB and SBA over the years

and has not been taken into consideration in the calculation of the

subsidy model.

35

As revealed in this chart, the rate of debenture prepayments has

declined over 50 percent in the last three years. Please note that

this has occurred during both times of increasing interest rates and

decreasing interest rates. We are troubled by the administration’s

forecast of prepayments moving up from about 40 percent to almost

50 percent of our loan portfolio.

The administration’s forecast giving us the greatest concern is

the SBA estimate of recovery rates on future loan defaults. This

projection decreased from 31 percent to an unfathomable 26.93 percent. Conversely, the results of both the CDC liquidation pilot program and the SBA asset sales paint a much more favorable pictures.

With the liquidation pilot program focusing on loans from 47

CDCs, both SBA and CDC staff are averaging about a 60 percent

recovery on defaulted loans. The average recovery rate for 778 504

loans from three asset sales was reported by SBA at 46 percent.

Given our experience with the CDC liquidation pilot and SBA figures on the three asset sales, we can find no justification for another decline in this important program statistic.

Thirdly, the fiscal year 2002 performance plan is of great interest

to the CDC industry. As lenders and taxpayers, we are all concerned about the prevention of loan program fraud and abuse.

However, it is simply taking too long to authorize, approve and

close 504 loans. It is clear that the agency must do something to

improve the procedures it has developed for all lenders to work

with to protect against loan fraud. These cumbersome procedures

are grinding, however, the loan process to a crawl by requiring

weeks or even months to process and handle verifications that

could be done in days or hours.

Fourth, NADCO strives to meet the changing needs of America’s

small businesses. Therefore, the 504 program just remain dynamic

and ready for change and renewal. We have recently completed a

major strategic analysis of the program and we will be bringing our

recommendations to this committee.

Mr. Chairman, you and the ranking member have already shown

support of the 504 program. We have serious questions, though,

and doubts about the current assumptions going into the administration’s 504 cost model. We ask for your assistance in getting to

the bottom of the extreme and inconsistent forecasts so that we

might see lower borrower fees which our portfolio performance reflects.

Thank you for this opportunity to testify and I would be happy

to answer any questions.

[Ms. Finch’s statement may be found in appendix.]

Chairman MANZULLO. Thank you very much. I am sorry we misspelled your first name. It says Lola on there, but it is Zola.

Ms. FINCH. That happens frequently. It is Zona.

Chairman MANZULLO. Mr. Means.

STATEMENT OF DAVID MEANS, EXECUTIVE DIRECTOR,

GREATER NEWARK BUSINESS DEVELOPMENT CONSORTIUM

Mr. MEANS. Thank you, Mr. Chairman, and members of the committee, for this opportunity to testify before you today. My name

is David Means. I am Executive Director of the Greater Newark

36

Business Development Consortium (GNBDC) in Newark, New Jersey and a member of the Association of Enterprise Opportunity

(AEO), the nation’s only micro enterprise development trade organization. My testimony represents the views of AEO, as well as the

Greater Newark Business Development Consortium.

I am a retired banker with 33 years experience. I retired as Senior Vice President responsible for Branch Administration, Operations and Legislative Relations.

My interest in community development began early in my banking career as project manager for the bank’s Urban Development

Housing Program. Today, I am the director of New Jersey’s leading

SBA/Microloan Program. Over the past seven years, GNBDC has

borrowed from the SBA directly or indirectly $3,523,139. The

GNBDC has approved and closed 207 loans for $3.2 million, with

an average loan of $22,000. The default rate is a low 6 percent with

57 borrowers already fully repaid.

My organization also has a full technical assistance program,

training and technical assistance program of 27 hours. We have a

component small business mentoring program also.

The theme of our organization is make the loan, then make the

loan work.

A.E.O., founded in 1991, is the national association of organizations committed to microenterprise development. The AEO provides

over 400 organizational members with a forum, information and a

voice to promote enterprise opportunity for people and communities

with limited access to economic resources. A good number of AEO

members are SBA intermediaries as well as Women’s Business

Centers. AEO has three policy priorities for this fiscal year. They

are to fund the SBA microloan technical assistance and loan capital

programs at $30 million each; to fund the Office of Women’s Business Ownership’s Women Business Center Program at $13.7 mil- lion, and to fund the PRIME program at $15 million for fiscal year

2002.

Microenterprises are small businesses with five or fewer employees that have difficulty accessing small amounts of credit from conventional sources. Many microentrepreneurs, particularly those

served by microenterprise development organizations, are low income, women, minorities or disabled individuals who may face

other challenges to business success as well. The Aspen Institute

estimates that there are at least 2 million low income microentrepreneurs in the United States.

As I mentioned earlier, in order to meet the demand for training

and technical assistance and credit among microentrepreneurs,

AEO urges Congress to support and acknowledge the distinct and

complementary programs within SBA and to assist microenterprise

development organizations to serve more entrepreneurs effectively.

Convention sources of business credit, such as banks, are often

beyond the reach of microentrepreneurs. These potential borrowers

often seek very small amounts of capital, have poor credit histories

and can offer banks little or no collateral. The SBA microloan program contributes to solving this problem by providing funding to

over 160 community-based intermediaries to help microentrepreneurs gain access to credit. To date, these intermediaries have

made more than 12,000 microloans totalling over $130 million.

37

Since microloan borrowers require training and technical assistance to start or expand their business, the SBA microloan program

also provides funding to intermediaries who offer these services. In

contrast to PRIME, however, this program supports the training

and technical assistance needs of borrowers and provides only minimum amounts of funds for technical assistance to individuals who

do not borrow.

The SBA’s Office of Women’s Business Ownership (OWBO) is the

only federal office that specifically targets women business owners.

Its Women’s Business Centers provide training and technical assistance to women starting or expanding businesses. There are a

total of 92 Women’s Business Centers. Fifteen new centers were

opened this past year.

Finally, in order to succeed in our complex economy, microentrepreneurs need training and technical assistance in areas such as

financial management, bookkeeping and marketing. Fifty percent

of the PRIME Act funds are to be used to support training and

technical assistance for low income entrepreneurs. PRIME funds

also enable non-profit microenterprise organizations to build their

management, outreach and program design capacity so that they

can more effectively serve low income clients. PRIME funds can

support the full range of non-profit of organizations that assist

microentrepreneurs, not only those organizations providing

microloans.

I will reserve the comments of the last part of this presentation

of the testimony, they are comments to me from some of our borrowers. I think it is widespread throughout the organizations.

[Mr. Means’ statement may be found in appendix.]

Chairman MANZULLO. We are going to go and vote and come

right back.

[Recess.]

Chairman MANZULLO. I have just a couple of questions and it

would be of Ms. Wolverton.

Ms. WOLVERTON. Yes?

Chairman MANZULLO. There was a bill that has been introduced

by Congressman John Sweeney of New York called the National

Small Business Regulatory Assistance Act, H.R. 203, that would

allow Small Business Development Centers to offer advice and

refer clients to resolve various environmental and workplace related problems.

What would your opinion of that be?

Ms. WOLVERTON. Well, Mr. Chairman, I have not seen the bill,

but I am familiar with the concept and also that the Small Business Development Centers have asked, I think, since 1996 to assist

businesses with these regulatory compliance issues and they are

big issues for small business. We have been doing it on a limited

basis because we have not had the financial resources to assist

that. Some states have been able to find grants and have quite extensive programs, but this to me from first blush sounds like an

opportunity to enhance that and to be able to offer that to the businesses when they are in the stage of learning how to set up their

business and not to build a building that is not in compliance, not

to set up procedures that are going to cause damage and fines later

on down the road, so we think this is an excellent opportunity.

38

Chairman MANZULLO. What do you do now when somebody has

an environmental question? Do you refer them to the local EPA or

what do you do?

Ms. WOLVERTON. Well, in Wyoming, I can speak that we do have

a government office, it is the Department of Environmental Quality

in Wyoming and they have what they call an Office of Business

Outreach and so we do work in partnership with them, we have

done some programs with them. And also one of the issues is in

referring businesses to them, though, is there is a little fear that

this is a regulatory agency and that if the business comes and is

open about what they are doing that they will be shut down. And

so they do have that office, there is some resistance to it, but we

feel that with a partnership arrangement, and we have been working to forge those partnerships in different states, that this is a delivery system that could work very well.

Chairman MANZULLO. Well, I guess my question would be what

level of training would the SBDC people have to have? I mean, as

it stands now, any time somebody has a question, you have the authority to refer those people to the appropriate agencies. Is that

correct?

Ms. WOLVERTON. Yes. Yes. Absolutely.

Chairman MANZULLO. And my question is if somebody comes to

the SBDC, I mean, an environmental workplace-related problem,

these are highly technical.

Ms. WOLVERTON. Exactly.

Chairman MANZULLO. Would it not be kind of dangerous going

off into an area where you—— Ms. WOLVERTON. Absolutely. And we would never intend—just as

we do not give legal advice, we know to call in the experts that

have the technical assistance in that area. Absolutely.

Chairman MANZULLO. Do you have brochures from these other

agencies that you give to people that may have a question on workplace related problems such as wage and hour issues? Do you already furnish that to them?

Ms. WOLVERTON. Yes, we do.

Chairman MANZULLO. Okay. Does anybody else here have any

input on that?

(No response.)

Chairman MANZULLO. Okay.

You came back just in time to ask a question.

Ms. VELA ́ ZQUEZ. Thank you. Thank you, Mr. Chairman.

Mr. Wilkinson, why do you think the SBA subsidy estimate for

the 7(a) program has been wrong year after year and then what

can we do to try to fix it?

Mr. WILKINSON. That is the same question we have been asking

for quite some time. From our perspective, it looks like OMB still

requires a default estimate that is well beyond what this program

is being managed to today, yet they continue to want to hang their

hats on the old SBA way back into the 1980s that had high default

rates and that is just not the program we have today. So the OMB

could quickly fix some of their problems by using a more realistic

default estimate in the model.

Ms. VELA ́ ZQUEZ. So, Mr. Chairman, are we going to do a hearing

where we could bring here OMB and deal with this issue?

39

Chairman MANZULLO. I think they are here now in the back.

Ms. VELA ́ ZQUEZ. But they are not testifying.

Chairman MANZULLO. No, but we can—— Mr. WILKINSON. They were here for a while. I do not think they

are here now.

Chairman MANZULLO. Oh, they left?

Mr. WILKINSON. Yes, sir.

Chairman MANZULLO. Yes, we can bring them in. We will be glad

to let you ask them some questions.

Ms. VELA ́ ZQUEZ. Sure.

Chairman MANZULLO. I am sure you might have a few.

Ms. VELA ́ ZQUEZ. I guess so.

Mr. MERCER. Can I reserve a seat for that hearing? That will be

standing room only.

Ms. VELA ́ ZQUEZ. Mr. Wilkinson, what kind of response did you

get from SBA when NAGGL told then you wanted to do an outreach program to increase credit availability among under served

populations?

Mr. WILKINSON. As you know, the agency and NAGGL entered

into a cosponsorship agreement after those discussions whereby we

provided training to intermediaries that work with minority and

women-owned businesses and we put on training classes throughout the country and looking at the loan dollars and women and minority loans from 1998 to 2000, you will see that there was a good

increase across the board in all categories.

Ms. VELA ́ ZQUEZ. Would you please comment on Mr. Whitmore’s

analysis of 7(a) lending by ethnicity and gender?

Mr. WILKINSON. Well, again, I agree that picking on 1995 was

the wrong year to choose, that was an anomaly and not a good

choice of years to pick because there has been a good trend, as you

can see, from the charts.

Clearly, we can always do a better job, but when you go back to

1996, we had a change in fees that dramatically drove up the cost

of the program to both borrowers and lenders and there was a decrease in participation. It is very clear that any dollars that could

have been used for incentives with those small loans have been

scraped off the table by OMB and sent to Treasury. And I again

come right back to OMB, they have taken all the money away

which we could use to try to provide incentives on small loans.

I disagree with Mr. Whitmore that you do not stipulate the volume of loans $150,000 or less by doing nothing, which is in the administration’s proposal.

Ms. VELA ́ ZQUEZ. Thank you.

Mr. Means, the administration’s budget does not request any

funding for PRIME. In addition, the administration has declared

their intent to eliminate the program all together, arguing that it

duplicates programs like the microloan program and CDFI.

As a participant in the microloan program, do you believe that

the PRIME program offers something different from the 7(m) program?

Mr. MEANS. Yes, it does, because the PRIME program is a fund

for giving counselling and technical assistance pre-application, preloan application, which is extremely important when you are dealing with microloan enterprise individuals going into business. You

40

need a thorough understanding of what going into business is all

about and this comes before the application. Yes, it is different.

Ms. VELA ́ ZQUEZ. Thank you.

Ms. Wolverton, what will be the impact of fees on your match?

Ms. WOLVERTON. That is an excellent question because the

match providers from our various states provide the match with

the understanding that it is for an outreach program that is offered

free and the addition of fees would be a huge disincentive for them

to participate in this program.

Ms. VELA ́ ZQUEZ. So what do you think the effect on the host institutions will be?

Ms. WOLVERTON. The host institutions will look at the burden of

calculating the fees, they will look at the publicity detraction from

people who were being able to receive these services not being able

to receive them any more. The host institutions have used this as

an outreach. For example, the University of Wyoming has an outreach program. It was earlier mentioned do we charge farmers to

contact the Department of Ag? We have outreach with our ag extension agents and they do not charge. And so it would be an

anomaly within what the host institutions do and many of them

may decide to pull out of the program.

Ms. VELA ́ ZQUEZ. Ms. Wolverton, there is a very hot topic in terms

of the privacy issue.

Ms. WOLVERTON. Yes.

Ms. VELA ́ ZQUEZ. Whether it is financial, personal or medical

records. More and more people are concerned that critical private

information may be disclosed. How important is the privacy issue

in terms of business information to your clients?

Ms. WOLVERTON. Well, I guess the best answer I can say to that

is how often do we walk up to someone and ask them how much

money they make? It is an extremely private issue and we are discussing these things, we have these things in paper form and it is

just absolutely unacceptable for our clients to think that this could

be made public or made known.

Ms. VELA ́ ZQUEZ. It concerns me because recently I was made

aware that the Virginia SBDC was required to turn over their client list to the local SBA office.

Ms. WOLVERTON. This is also very troubling because not only are

the clients very protective of the information that is in the file, but

the fact that they walk through our doors is also something they

like to keep private. For example, some of them may be employed

in another place and they are getting ready to start a business and

they really do not want that known; some of them may be in trouble financially, they do not want that known, it could impact maybe

a potential sale of the business or their customers having confidence in them. So they do not even want people to know who they

are coming into our offices.

Ms. VELA ́ ZQUEZ. Do you think that this could——

Chairman MANZULLO. Could you yield a second?

Ms. VELA ́ ZQUEZ. Yes.

Chairman MANZULLO. On that issue with Virginia, I would be

willing to sign a letter with you to the state organization that is

in charge of the VASBDCs and find out by what authority they are

getting these lists and for what purpose they are using them.

41

Maybe we should send a letter to all 50 states to see if they are

doing that.

Ms. VELA ́ ZQUEZ. Yes. I would like to do that, but I would like to

ask her if you consider that this committee should consider some

statutory changes to ensure the confidentiality because, look, this

is one office, but what about if it happens in some other regional

offices?

Ms. WOLVERTON. We would welcome that. Our clients do sign a

form that says their records will be kept confidential and yet they

are still nervous, so if they knew there was some statutory relief

they would be—I think that would go a long way to ensure their

confidence. Yes. Thank you very much.

Ms. VELA ́ ZQUEZ. Thank you.

Thank you, Mr. Chairman.

Chairman MANZULLO. I have no further questions.

Mr. Whitmore, did you want to respond to that last question on

privacy that we talked about?

Mr. WHITMORE. You want me to respond.

Chairman MANZULLO. I mean, if you wanted to.

Mr. WHITMORE. Well, I would say that we don’t have an electronic database nationwide.

Chairman MANZULLO. If you could do that, we would appreciate

it.

Mr. WHITMORE. It would be possible to have a nationwide database and track clients but not by names.

Chairman MANZULLO. Okay. Just by function.

I want to thank you all for coming. After the first panel, those

of you who are not used to testifying figured why I am here, coming

this long distance to do this. We really want to thank you for coming and testifying before us today.

Mr. Whitmore, thank you for participating in the first panel and

sitting through the testimony of the second panel. I really commend the SBA for always having somebody here; oftentimes, the

administrator is here or acting administrator to gather firsthand

what is going on.

Again, thank you very much.

This committee is adjourned.

[Whereupon, at 12:46 p.m., the committee was adjourned.]

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