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SUBCOMMITTEE ON FINANCE AND TAX 

FIELD HEARING ON ACCESS TO 

CAPITAL FOR SMALL BUSINESSES 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

APRIL 19, 2010 

Small Business Committee Document Number 111-063 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

SUBCOMMITTEE ON FINANCE AND TAX 

KURT SCHRADER, Oregon, Chairman 

DENNIS MOORE, Kansas 

ANN KIRKPATRICK, Arizona 

MELISSA BEAN, Illinois 

JOE SESTAK, Pennsylvania 

DEBORAH HALVORSON, Illinois 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

VERN BUCHANAN, Florida, Ranking 

STEVE KING, Iowa 

W. TODD AKIN, Missouri 

BLAINE LUETKEMEYER, Missouri 

MIKE COFFMAN, Colorado 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Schrader, Hon. Kurt ................................................................................................ 1 

Buchanan, Hon. Vern .............................................................................................. 2 

WITNESSES 

Mr. Zarnikow, Eric, Associate Administrator for the Office of Capital Access, 

U.S. Small Business Administration .................................................................. 5 

Mr. Miller Jr., William C. , Senior Vice President Political Affairs & Federation Relations, U.S. Chamber of Commerce ....................................................... 19 

Mr. Hall, Brian D., President & CEO, Sabal Palm Bank, Sarasota, FL ............ 22 

Mr. Orr, John Paul President & CEO, CAST, Inc., Sarasota, FL ....................... 24 

Mr. Brill, Herbert L., Business Consultant, Lakewood Ranch, FL ..................... 26 

APPENDIX 

Prepared Statements: 

Schrader, Hon. Kurt ................................................................................................ 35 

Mr. Zarnikow, Eric, Associate Administrator for the Office of Capital Access, 

U.S. Small Business Administration .................................................................. 37 

Mr. Miller Jr., William C. , Senior Vice President Political Affairs & Federation Relations, U.S. Chamber of Commerce ....................................................... 41 

Mr. Hall, Brian D., President & CEO, Sabal Palm Bank, Sarasota, FL ............ 47 

Mr. Orr, John Paul President & CEO, CAST, Inc., Sarasota, FL ....................... 52 

Mr. Brill, Herbert L., Business Consultant, Lakewood Ranch, FL ..................... 54 

(V) 

(1) 

SUBCOMMITTEE ON FINANCE AND TAX 

FIELD HEARING ON ACCESS TO 

CAPITAL FOR SMALL BUSINESSES 

Monday, April 19, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:30 a.m., in 

Selby Auditorium, University of South Florida, 8350 North 

Tamiami Trail, Sarasota, Florida, Hon. Kurt Schrader [chairman of 

the Subcommittee] presiding. 

Present: Representatives Schrader and Buchanan. 

Chairman SCHRADER. Good morning and welcome to Vern’s and 

I hosting of the Committee on Small Business Issues. This is a 

hearing on the Subcommittee of Tax and Finance of the Small 

Business Committee of the House of Representatives. We’re trying 

to get out in the real world and solicit some interesting conversation, give you all a chance to listen and hopefully give us some 

feedback over time. 

We’ll probably give a lot of the testimony to our witnesses, but 

both Congressman Buchanan and I are very interested in hearing 

about your responses to the—to the hearing today. 

My name is Kurt Schrader. I’m a Congressman from Oregon and 

chairman of the Committee. Mr. Buchanan, of course, is the ranking member of the Committee. We actually are in the eye of the 

storm when it comes to lending and access to capital for small businesses. 

I really appreciate the opportunity to be here in Sarasota. Thank 

you for the weather. A lot nicer than it is in Oregon right now, I’ll 

tell you that. 

There’s a reason we call small businesses the backbone of our 

economy. Throughout our history small businesses have generated 

enormous wealth in this country and often led us out of the toughest and darkest times. They’ve also unlocked innovation and powered our markets like no other business. 

We also know that the entrepreneurship of the small business is 

the driving force in our economy. But at the same time, small businesses can’t operate on good ideas alone; it takes money to get a 

start-up off the ground. It takes capital to keep a business running. 

It takes investment to build a small firm into an economic powerhouse. 

During past economic downturns small businesses have actually 

managed to grow and flourish, like companies like Microsoft, 

2 

FedEx, Hewlett-Packard, big companies in my part of the world, 

and 45 percent of Fortune 500 companies have all been founded 

during recessions. 

Many Americans who have lost their jobs are not looking to 

unlock their own hidden potential as small businessmen and 

women by starting small businesses right now. And as the next 

generation of entrepreneurs step up to the plate, we need to make 

sure that they have the same opportunities to succeed that I had 

when I got my small business going. 

I’m a veterinarian, started a small business there. Also a farmer, 

started a small farm in the valley of Oregon. 

This hearing is very important. In our conversation this morning 

we’re going to be talking about financing options of America’s small 

firms, looking for ways to improve those choices, choices both here 

in Florida and hopefully my home state of Oregon. 

As a small business owner myself, I understand the impact that 

lending declines can have on small ventures. I’ve seen firsthand in 

previous recessions as well as this one the role that capital plays 

in all phases of small businesses. In my veterinary practice I could 

have used some of the programs we’re talking about right now 

when we had the last recession. We’ve been through some tough 

times. 

Vern and I, along with some of the rest of our colleagues, were 

able to introduce a bill that is sitting in the Senate right now: H.R. 

3854, The Small Business Financing and Investment Act, passed 

bipartisanly out of the House, out of our Committee, our Subcommittee and the Committee and the House of Representatives. 

And it actually has the opportunity to deliver $44 billion in lending 

and investment for small businessmen and women. 

Mr. Buchanan played a critical role in those efforts. He particularly sought to modernize the Certified Development Company Program, helping established businesses secure capital for fixed-asset 

purchases. 

Meanwhile, his continuing work to enhance SBA’s SCORE Program would also go a long way to supporting new companies, training them in the areas like credit repair and loan package preparation. 

Whether we’re talking about small companies starting up in the 

valley in Oregon or real estate—real estate developers here in Florida, one thing is pretty clear: These entrepreneurs are struggling 

for the capital for the reasons we’ve talked about. 

We’re frustrated. We want to know, at least my guys want to 

know why, with a sound credit score and good payment history, 

why they can’t access more capital or why their credit cards are 

being terminated, why their lines of credit are being stopped. 

So we’re hoping that all options will be put on the table as we 

discuss them here today. That includes policies to empower creditworthy borrowers over banks, greasing the wheels for equity investment, and otherwise deliver the widest array of choices for our 

small business innovators that we can do. 

These are the avenues that Congressman Buchanan and I are 

working on to open and are just some of the issues we’ll be exploring here today. 

3 

So I’m looking forward to hearing from all of the witnesses as we 

discuss ways to ensure that your small firms have the tools they 

need to be successful. 

And with that, I’m going to yield to the ranking member for his 

opening remarks. 

Mr. BUCHANAN. Thank you, Mr. Chairman. 

I want to first thank our audience and thank everybody for coming. I know I did a seminar probably on small business access to 

capital myself about a year ago, seven months ago. We probably 

had 150 people show up. 

And the first question I asked is how many people are having a 

challenge with banks and can’t get lending. I thought maybe 20 

percent of the room would raise their hand, and everybody in the 

room raised their hand up. So that’s the reason that I’ve asked the 

Congressman to come. 

I want to thank Congressman Schrader for his leadership as 

chairman. We’ve had a good working relationship. They always 

talk about Washington doesn’t work, you can’t get Republican and 

Democrat working together. But we’ve had a good friendship and 

his leadership has meant a lot to the Committee. 

So I just want to thank him personally for being here today because congressional hearings are very unique and I don’t know of 

the last time we’ve had a congressional hearing in Sarasota or 

Manatee County. Usually they’re held up in Washington. And if 

you have one here, you have a member of the other party be a part 

of the process. So he was very willing to do this. Oregon is a long 

way. So I appreciate him being here in a bipartisan effort because 

he’s interested, like I am, to do everything we can to help small 

businesses access capital. 

The other thing I want to say is this Committee oversees about an $8 billion loan portfolio, the Committee that he chairs and I’m 

the ranking member of. So it’s an important Subcommittee in 

Washington. I’m very proud. A lot of people have various committees. I do serve on other committees, like the Veterans Committee. 

We dedicated a new facility in Manatee County—very excited about 

that, a new veterans facility for our veterans. And I’m on Transportation, a big Committee and—in Florida. 

But passion—these are—I’m passionate about the others, but my 

passion, and this is for 30 years, is really to work with small businesses. 

When I think about our country, I think what makes it special 

and great and unique is entrepreneurs and small business. Being 

chairman of the Sarasota Chamber and the chairman of the chamber in Florida, one thing I realize, that 99 percent of all businesses 

registered in Tallahassee, Florida are small to medium-sized businesses. 

They create 70—in communities like ours, probably 80 percent of 

the jobs. So capital is a very critical thing. 

The national unemployment, I don’t have to tell you, is hovering 

around 10 percent, 9.7. Florida is over 12 percent. I think in our 

region it’s 13. 

So again, when we look at any kind of legislation, you know, 

we’re trying to find a way to help small businesses because they 

create 70 percent of the jobs. 

4 

Access to capital. I did a thing the other day. One of our witnesses that’s a banker for, I think, 30 years. But I did a seminar 

or a little meeting the other day, I think with about 12 or 13 community banks. And most of them aren’t lending today. And that’s 

why the SBA is such an important aspect of that. 

I look forward to hearing from our witnesses today. And I hope 

that we can identify ways to open up lines of credit for small businesses, things that work and change things that aren’t working. 

So the idea of our hearing today is to take back these ideas, formulate some policies, and see if we can’t introduce, the chairman 

and myself, a bill maybe where we can get more access to businesses. And maybe that sunsets in a couple of years. 

But I can just tell you you’ll hear from our panel today, many— 

there are many good businesses in our region. If they had access 

to capital, they could grow from 15 to 30 employees. They can’t get 

access to the money. 

So I look forward to our witnesses. And I’ll turn it back over to 

the chairman. 

Chairman SCHRADER. I’m just going to explain the ground rules 

a little bit so everyone understands what’s going on, hopefully. 

The witnesses will basically have five minutes for their opening 

remarks. We’ll probably be a little easier today than we would normally be in Washington, D.C. We’re more casual in Florida. But try 

and get the witnesses to stay somewhat close to that because a lot 

of the better part of the hearing is, quite frankly, in the questions 

and responses going forward. 

The green light will go on when they start. When they’ve got a 

minute left, the yellow light goes on. And when we’d like them to 

sort of wrap up the remarks would be when that red light is blazing away. So if witnesses could pay attention, that would be helpful. 

Since we’re in Mr. Buchanan’s district, I just want to put a plug 

in for Mr. Buchanan. It’s unusual for newer members to be in 

charge of committees and the fact that he’s been selected as ranking member is pretty significant for Sarasota and Manatee County. 

It’s a pretty big deal. So I— he’s too modest to say that, but I’m 

saying he obviously has some cachet in Washington, DC. 

With that, let’s go ahead and I’ll let the ranking member introduce our witnesses; we’re in his district. 

Mr. BUCHANAN. I’m excited. Our first witness today is Eric 

Zarnikow. He’s an associate administrator at the SBA Office of 

Capital Access. He oversees and manages SBA lending, venture 

capital, international trade, a surety bond program. He’s come to 

the SBA with 25 years of private sector experience. His latest corporation position was senior vice-president, chief officer and treasurer of ServiceMaster companies where they played a major role in 

the sale—he played a major role in the sale of the company to a 

private equity holder. 

I welcome our witness today and look forward to your—your comments. And we’ll proceed from there and ask you some questions 

and get your thoughts on various things. 

Mr. Zarnikow. 

5 

STATEMENT OF ERIC ZARNIKOW 

Mr. ZARNIKOW. Thank you, Subcommittee Chairman Schrader 

and Ranking Member Buchanan. I’m honored to be here today. 

One of the missions of the Small Business Administration is to 

provide small business owners with access to much-needed capital. 

We do that primarily by providing a partial government guarantee 

on loans made by banks and on lending partners. 

This guarantee helps provide access to capital for creditworthy 

small businesses who would otherwise be unable to get loans. 

As a result, loans to women and minorities comprise a greater 

percentage of our portfolio than from the conventional lending market. Our programs are lifelines to many small businesses. 

To address the disruptions in the credit markets the Recovery 

Act temporarily raised the maximum available guarantee on SBA 

loans to 90 percent and allowed us to reduce or eliminate most 

fees. The raised guarantees provided an extra incentive for riskaverse banks to lend to small businesses. And the fee reductions 

made loans more appealing to borrowers. 

As a result of these actions and stabilization of the economy, 

SBA lending has increased by about 90 percent since the Recovery 

Act’s enactment. It has turned about $600 million of taxpayer 

funds since the Recovery Act’s enactment into support for over $25 

billion in loans to small business owners. 

We know that times are still tough for small business owners. 

While SBA’s Recovery Act loans are helping, it is clear that many 

small business owners are still having a hard time getting access 

to credit. 

Declines in home values have hurt small business owners as well 

because many entrepreneurs use home equity to help finance their 

business. 

At SBA we understand how to use our program to address demand for credit, availability of capital, and risk tolerance. And with 

the President, we’ve proposed a jobs plan which targets gaps that 

still exist. 

There’s really five key components to that plan. First, to address 

the issue of banks that still have trouble taking risk, the Administration has asked for an extension through the end of fiscal 2010 

of the increased 90 percent guarantee and reduced fees. 

Second, for banks that don’t have enough capital to lend, the Ad- ministration has asked Congress to establish a $30 billion small 

business lending fund to provide low-cost capital to community 

banks to allow them to lend more. This money would come with incentives to increase lending to small businesses. 

Third, many small businesses need bigger SBA loans to create 

jobs. This could be franchisees, manufacturers, exporters, or other 

businesses. We want to increase our top loan limit for eligible 7(a) 

loans from $2 million to $5 million and from $4 million to five and 

a half million for 504 loans to manufacturers. 

Fourth, for businesses that can’t find access to working capital, 

we propose to temporarily raise SBA Express Loan limit from 

350,000 to $1 million. These loans will help businesses restock 

shelves and fill orders that are coming in. 

And fifth, we know that many small businesses have conventional owner-occupied commercial real estate mortgages that will 

6 

need to be refinanced soon. As real estate values have declined, 

many banks will find that these businesses no longer qualify for 

conventional loans, regardless of the strength of the business. 

As a result, even small businesses that are performing well and 

making their payments on time are going to have a hard time refinancing these loans and may face foreclosure. So we want to temporarily open up SBA’s 504 program to commercial real estate refinancing. 

It’s critically important that we help creditworthy firms here in 

Florida and across the country avoid unnecessary foreclosure and 

lost jobs. 

This plan is guided by basic principles: Build on what works, 

maximize limited taxpayer dollars, make targeted changes as 

quickly as possible. It addresses specific gaps in supply, availability 

of credit, and risk tolerance. 

SBA is confident that this will allow us to better help small business in this tough economic environment. 

Some people ask ‘‘Why doesn’t SBA just make direct loans to 

small businesses?’’ Direct lending would require hiring a new work 

force and significantly expanding our reach. It would be much less 

efficient than the plan we’ve laid out. Moreover, we believe a partnership with private lenders is important for the sustainability of 

small business and to help target viable enterprises. 

We want to build on the success of the Recovery Act by expanding points of credit access and bringing more small businesses into 

long-term banking relationships with an SBA lender. And we want 

to increase the number of banks that offer SBA products. 

Let me close by saying that the SBA is here to help small businesses. Our field staff and resource partners are standing by to 

help small business owners and entrepreneurs as they start and 

grow their businesses. 

And small business owners here in Florida have access to district 

offices, 35 small business development centers throughout the 

state, three women’s business centers, a veterans’ business center, 

and several chapters of SCORE, which is our executive mentoring 

services. 

I thank you for your support of small businesses and for working 

with the SBA to get the support that they need. And I’m happy to 

discuss any of these proposals and answer any questions. 

[The statement of Mr. Zarnikow is included in the appendix.] 

* 

Chairman SCHRADER. Very good. You’re experienced. 

I appreciate you coming down. It must have been a tough deal 

coming from Washington, D.C. to beautiful Florida, but you have 

to sacrifice every now and then. So I appreciate you doing that. 

Talking about some of the programs you were mentioning, back 

up first on the ARC. We chatted a little bit before the hearing. The 

ARC Program, for those in the audience that don’t know, is 

$35,000, basically, line of credit that we’ve set up in the Recovery 

Act that small businesses were supposed to be able to access, provided they had a half decent balance sheet and plan to turn their 

business around, even if they were suffering a little bit in the recessionary economy. 

7 

With that, it’s been a program that’s been tough to get off the 

ground. In my own home state we’ve only had one bank making a 

number of loans and most of the other banks, in the year or so the 

program has been in existence, have only made like one loan. 

What are some of the barriers you’re hearing, Mr. Zarnikow? I’ve 

got some that I’ve heard, and I’m curious what you’re hearing. 

Mr. ZARNIKOW. Sure. The ARC Loan Program is attached as part 

of the Recovery Act. And it’s a loan of up to $35,000 that’s guaranteed 100 percent by SBA. And we actually pay the interest on behalf of the small business so the small business does not pay any 

interest on the loan. 

The loan is to go to viable small businesses that are facing immediate financial hardship. And proceeds of the loan can only be used 

to make scheduled payments of principal and interest on all high 

end small business debt. It’s— basically it’s in essence a bridge 

loan to help a struggling small business that is still viable make 

payments on existing debt until economic times improve. 

With the money that we got out of—out of the Recovery Act we 

have the ability to make about 10,000 ARC loans. So far we’ve 

made about 7,000—a little over 7,000 ARC loans. We’ve used about 

70 percent of the money. We’ve seen loans in 49 of the 50 states 

plus the District of Columbia. And so far we have about 1200—over 

1200 different lending institutions that have made at least one 

ARC loan. 

So we’ve seen pretty good acceptance of it. The program was 

started up in June of last year so we got it out very quickly after 

passage of the Recovery Act. We’ve seen a ramp-up in the program 

and it’s really—we’ve seen sort of a stabilization of the number of 

loans that are being made. 

I think that some of the challenges that we’ve seen in it is some 

of the—in many cases what the business is looking for is not just 

a loan to make payments of principal and interest on existing debt; 

in many cases people are working—looking for working capital or 

ability to either start up or expand a business. And ARC loans 

don’t fit that. 

We also found that the level of documentation that’s required to 

show that the business is viable and is facing immediate financial 

hardship has been challenging for some of the lenders. 

In addition, there is a requirement that the lender take as much 

collateral as possible or they follow their existing collateral policy. 

And that’s been a challenge, I think, for some of the lenders. 

So the level of paperwork that’s required has been a bit of an 

issue in order to meet the requirements of the loan program. 

Chairman SCHRADER. In follow-up on that then, is SBA looking 

at ways to reduce that paperwork? 

I hear from the bank side that it’s not, a lot of times, worth their 

effort to get into that book of business. Frankly, you’re not going 

to make much money on a $35,000 loan and you have to do all— 

go through all the bells and whistles and documentation you do for 

a much bigger loan. 

Is SBA working on ameliorating or streamlining that to like a 

one-page application and look at freeing up some of the paperwork 

that banks usually have to do? 

8 

Mr. ZARNIKOW. I think there are several challenges to the program, and you reference one of them, which is for a temporary program, in some cases banks are unwilling to commit the resources 

that they need to train people, develop the infrastructure they need 

to be able to make the loans for what’s a temporary program. 

I think that one of the challenges we have is making sure that 

the lenders are following the requirements of the law: It’s got to 

be a viable small business facing immediate financial hardship. 

The payment of the loan proceeds can only be used to make payments on existing qualifying small business debt. So there’s a set 

of definitions that we have around that to ensure that the borrower 

is actually eligible for the loan and if the loan goes bad, that we’re 

able to pay on the guarantee that we’ve made. 

So we try to balance the oversight and responsibilities that we 

have as an agency with the goal of getting the capital out. 

After the rollout of the program in June of last year we did— 

prior to the rollout we did a lot of conversations with banks to try 

and understand how they would utilize the product, how we could 

make it as desirable as possible for them to make loans. We got 

a lot of feedback. 

When we rolled the program out in June, we continued to have 

a lot of dialogue with our lending partners. That’s one of the things 

we do a lot is listen to small businesses, listen to lenders to try to 

understand how we can better— have programs that better fit or 

better meet the needs that are out there. 

And we did make some changes to the program to simplify some 

of the documentation requirements, particularly around loans that 

were being used to pay credit cards. So we tried to narrow it down 

but at the same time also meet the statutory requirements of the 

program. 

Chairman SCHRADER. Mr. Zarnikow, you reference the Administration’s interest in beefing up the Express Loan Program. On one 

hand that makes sense because it’s a program with a little less onerous paperwork; banks like those apparently. But they’ve had traditionally a pretty high default rate. 

So how do we juxtapose increasing the amounts and putting 

more taxpayer money at risk and at the same time trying to get 

money out the door but not have that default rate issue? 

Mr. ZARNIKOW. Sure. Our SBA Express product is a product 

that—it has a 50 percent guarantee, which is a lower guarantee 

than the rest of our loan programs. 

That program is really targeted and focused primarily around 

working capital and providing working capital to small businesses 

and we have seen historically that that program has a higher default. 

As Administration, we’ve proposed increasing the maximum loan size in that program. It’s currently $350,000. We propose increasing it up to a million dollars. And the hope there really is to try 

and help small businesses that are now emerging from the recession, so they’ve survived the downturn. 

We’re hearing more and more that business is beginning to pick 

up. But when lenders look at my historical results, they’re not as 

good and they have a hard time supporting a higher loan dollar 

amount, even when I have orders or I’ve gotten a new contract. 

9 

So we think that increasing the SBA Express Loan limit up to 

a million dollars will help provide access to capital. 

To address the concern about taxpayers and taxpayer risk, we 

have seen historically that that program overall has a higher loss 

rate or default rate than our other programs. 

However, when we parse the data and really drill into it, we find 

that that higher loss rate is really for loans of a hundred thousand 

dollars or less and that the default rate is actually much lower 

than our other programs when you get to loan sizes that are over 

a hundred thousand dollars. 

So we think that increasing the maximum loan limit from 

350,000 up to a million dollars on a temporary basis would help 

small businesses get access to working capital that they need as 

the economy is recovering without taking on undue risk for the taxpayers and providing that appropriate balance. 

Chairman SCHRADER. Just a note of cautionary concern. The fact 

that the larger loans don’t have as great a default rate, I understand. But I don’t think there have been that many loans made of 

high magnitude to really justify statistically, you know, a lot of the 

information there. 

And to be honest, I’m concerned most—most of the small business and stuff that I talk to are a much smaller nature. I’m a little 

concerned that the limited money set aside for the program go to 

these bigger concerns and be all eaten up and then a lot of smaller 

businesses wouldn’t have any money at all to access. So just as a 

note of caution, I think for the SBA going forward. 

Similarly, in the 7(a) program there’s a push to increase the loan amount from $2 million to five. I believe in 3854, Mr. Buchanan’s 

and my bill, we went up to three. 

Again, trying to figure out, my understanding and Vern can correct me, but the average 7(a) loan in the state of Florida is about 

$290,000. So we’re jumping it up to five. 

I’m wondering again like in the Express Loans, are we catering 

to the bigger smaller businesses as opposed to the small—the 70 

percent that are mom, pop with just a few employees, small businesses that I think need more help than some of the larger firms. 

So if you could comment on why five. 

Mr. ZARNIKOW. Sure. What we’ve tried to do at SBA is really 

serve all small businesses, whether you’re a tiny small business, 

micro small business, or a little bit larger small business. 

And what we’ve found is as the credit crunch has hit, a little bit 

larger small businesses typically have had better access to capital 

than the very small businesses. 

With the upset in the credit markets, little reduced or increased 

risk tolerance, reduced risk tolerance from the banks, we hear 

more and more from a little bit larger small businesses and from 

their lending partners that they’re having a harder time getting access to capital for what I would call a little bit larger small business. 

The $2 million maximum loan limit hasn’t been changed for a 

number of years. What we find is particularly in certain industries, 

franchise markets, exporting manufacturers, that there is a need 

for a little bit larger loan size. And those larger small businesses 

also provide a lot of job growth and job opportunity. 

10 

We do find and it would seem historically over the last several 

years that there’s been more of a bunching in our loans, loans in 

the one and a half to two million dollar range, which is right up 

against our $2 million maximum; that the percentage of loans in 

our portfolio that are being made each year, there’s an increasing 

percentage that’s in that one and a half to the two million dollar 

range. 

So we’re seeing in our own lending that people are bumping up 

against that maximum. 

When we talk with small businesses, when we talk with our 

lending partners, we hear a lot more of a concern that ‘‘I could help 

these businesses; they don’t meet my conventional standard but I’m 

maxed out by the $2 million limit.’’ 

So our proposal is to increase the limit from two million up to 

five million. 

We also have found that historically in our portfolio the larger 

size loans perform better and they actually provide a positive subsidy which helps support smaller dollar loans that are made in the 

portfolio as well. 

Chairman SCHRADER. Just as a follow-up comment, again, most 

of these loans are smaller. I guess I want to make sure that, again, 

the limited dollars in these programs, these are not mandatory programs where just anybody comes in and gets it; if the money runs 

out, then someone wouldn’t be able to get a loan. 

So I would urge the SBA, if they haven’t already, to look at some 

sort of set-aside, some, you know, information or—or an account 

where there is a certain amount allocated to smaller businesses, 

perhaps under the two million and then a certain amount of the 

money that would go to those over that to make sure that, again, 

the small businesses have that— that access and don’t get crowded 

out. 

With that, I’m going to turn it over to the ranking member for 

his series of questions. Thank you. 

Mr. BUCHANAN. Thank you, Mr. Chairman. 

I want to mention a couple of things. SCORE is out front if anybody—SCORE is a national organization. We’ve got a good chapter 

in our area, a very active chapter, a lot of our seniors, executives 

in big companies that want to help small businesses get off to a 

faster start. They’ve got a lot of expertise. And one of the big things 

I like about them is business planning. 

The other thing I wanted to mention, again, the administrator 

will be available after all of our witnesses today, and I think he 

would really like the opportunity to visit a little bit. If it runs a 

little later, I’ll buy you lunch or something. But we need to keep 

you here for this. 

Let me mention I talked to your boss, the lady that’s—the SBA 

administrator and we spent, you know, probably a half hour on the 

phone. We identified a lot of things. 

But the President agrees on many things. I mean, he agrees in 

terms of capital gains taking zero for a year or two. That’s one of 

the things that he agrees with the idea of 30 billion. 

She was talking to me about getting access to community banks, 

$30 billion for those who qualify. It just seems like we’re very good 

about watching—getting money out to the big banks. We’re not getVerDate Aug 31 2005 15:58 Jun 23, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\55998.TXT DARIEN
11 

ting it out to the little guys, the little banks. The little banks are 

dying. They provide a lot of capital for, you know, this area. 

That’s why the SBA really in this kind of environment, which 

doesn’t come along very often, happened in the early 1990s and 

now—Florida has had a great run, I’d say, from 1993 to 2006, 13 

years. But now we need some help. And the SBA is someone who 

is a provider and can really make a difference. 

So I want to just—you know, listen: We need to get action because people are dying out there on the vine; they don’t have any 

access to loans. So I want to run through—you know, I’ve got quite 

a few different questions, but I want to keep it—so if you keep your 

answers a little bit more concise. They’re fine, but I just want to 

get to some things and get your point on a couple of things. And 

these are things that people in the audience have asked me if I 

wouldn’t mind asking. 

First thing: Is there, in your opinion, a segment of lenders, big 

banks, community banks, or other lending partners that, in the environment in the last year or so, that are lending or doing anything 

particularly well in the past year to year and a half? Do you see 

any segment? 

What’s your—and I’m sure Arizona, California, our area in Florida has been hit harder than most. Some areas aren’t quite as bad, 

but we’ve been hit real hard because we’re so heavy in terms of 

housing. 

But what’s your thoughts in terms of your sense of whether 

banks are lending or not? 

Mr. ZARNIKOW. What we’ve seen is that there’s been a real focus 

in small business lending around smaller or regional or community 

banks. 

One of the things we have is strategic goals to increase the number of banks that participate in our program. We really want to increase the points of access. 

And in fiscal 2009 we had about a 15 percent increase in the 

number of banks that made at least one SBA loan. And the vast 

majority of those were really focused around regional, you know, 

smaller regional and community banks, banks with less than $10 

billion assets or community less than $1 billion of assets. 

And we’ve seen a shifting in our portfolio over the last years 

where a much increasing percentage of SBA loans are being made 

by smaller community banks. 

Mr. BUCHANAN. Let me ask—I just want to make a quick note 

here. SBA, the default rate in the last ten years, what has that 

been? Do you know offhand? 

Mr. ZARNIKOW. Now— 

Mr. BUCHANAN. Just an overall portfolio. 

Mr. ZARNIKOW. I’d say the overall portfolio has varied depending 

on economic conditions. But when you look at the overall default 

rate, it’s probably in the 6, 7, 8 percent range. 

Mr. BUCHANAN. Because I heard it was—are you talking about 

lately or are you talking about the last ten years? 

Mr. ZARNIKOW. I’d say for the last ten years it’s probably lower, 

lower than that, and we’ve seen an increase in the last few years. 

Mr. BUCHANAN. Okay. 

12 

Mr. ZARNIKOW. There’s also a difference between the default rate 

and our loss rate because we do have recoveries on loans that are— 

Mr. BUCHANAN. What is the loss rate? 

Mr. ZARNIKOW. The loss rate is more like 4 percent. 

Mr. BUCHANAN. Okay. So 4 percent. So the taxpayer’s helping 

small business, and we’ve got about a 4 percent loss rate. I think 

that’s important for people to know. 

Also you suggested that the Administration supports increasing 

loan size for the SBA loans. My question is: If the banks are hesitant to do the $2 million loan now in the current system, why are 

we suggesting up to five million? 

I’d like to see it go up to five million. But, you know, what’s your 

thoughts on that? 

Mr. ZARNIKOW. What we’ve seen is: an increasing percentage of 

our loans that are made each year are in that one and a half to 

two million dollar range, which tells us there’s kind of a bunching, 

that the two million dollar cap is sort of an artificial limitation on 

expanding access to capital. 

We would say that, you know, we would expect that banks would make larger loans with the SBA guarantee up to the $5 million 

level. We’re not saying that the volume would be enormous, but we 

do see that there is a big, you know, access or loss of access to capital as businesses get a little bit larger. I think these businesses 

have been successful and want to expand. They want to add a location. We want to be able to grow with those small businesses and 

continue to support their needs. 

Mr. BUCHANAN. Why is the general feeling with the SBA with a 

lot of banks you provide 80, 90 percent guarantees, some of these 

small loans maybe a hundred percent guarantee, we can’t get more 

banks to access SBA? 

It seems like it’s a no-brainer for banks and something banks 

should do or want—because we need that capital in our communities, whether it’s here or in the Chairman’s district. 

Why is it in such a tough time that we can’t find a way to either 

cut the fees a little bit or be more accommodating to small banks? 

Small banks in general, you know, like it takes forever to issue a 

loan or something like that. 

I think it’s gotten better, but we need to make it—find a way 

where banks will actually access and use you guys more. 

Mr. ZARNIKOW. You know, we, as an agency, have been very focused on how do we be better business partners. You don’t often 

hear a government agency talk about being a business partner, but 

that’s how we really think about it. 

I mean, our programs, ultimately we’re supporting small businesses. But our programs, our lending programs, are all delivered 

through lending partners. 

Our programs are voluntary, so if the lending partners don’t find 

them attractive, they’re not going to participate in them. So we try 

very much to be more and more business friendly while also making sure that we have appropriate oversight to protect the interest 

of taxpayers. 

We have seen last year, fiscal 2009, about a 15 percent increase 

in the number of lenders who made at least one SBA loan. And 

that was about 2800 different lending partners. 

13 

We’re on pace in fiscal 2010 to actually exceed that goal. One of 

our strategic goals really is to increase points of access and add additional lenders into our lending, you know, programs. So we’re 

very focused on trying to simplify our programs, be better partners, 

and have commitment to our lending partners as far as turnaround 

times and other things while at the same time making sure we’re 

appropriately protecting taxpayer dollars. 

Mr. BUCHANAN. The other thing, you have offices in Florida; one 

in Tampa and the one in Jacksonville, one in Miami. Where do you 

have other—human employees, if someone has a question and 

wants to—what office would they use? They’d use the Tampa office, 

wouldn’t they? 

Mr. ZARNIKOW. You know, here in Florida? 

Mr. BUCHANAN. Yeah. 

Mr. ZARNIKOW. I would say for this area they would use the 

Tampa office primarily. And we actually have a couple of people 

here from this area who are also—would be glad to help answer 

questions afterwards as well. 

Mr. BUCHANAN. Okay. Where are they at, just out of curiosity? 

Do you want to stand up just so everybody can see you, if anybody 

wants to see you after the program? 

Thanks for coming. Thank you. 

Mr. ZARNIKOW. I would say too, very quickly, if you go to our 

website, which is www.SBA.gov, you can get through—off the 

Internet, access to all of our resource partners across the state of 

Florida or across the country are available on website. You can see 

the address and contact information as well. 

Mr. BUCHANAN. Okay. I have a few more questions. I want to 

kind of run through these. 

You touched on the idea of the Express Loan, the SBA Express 

Loan, raising that up to a million dollars. Is the Express Loan 

more attractive to lenders, do you find? Because that’s important. 

When I’m thinking express, I used to go to the SBA in the 1980s 

and Express was like a year later. But the point is is there—what 

is—how long does it take to get an Express Loan that’s a million 

dollars? Raising that up, have you found more lenders open to 

that? 

Mr. ZARNIKOW. No, the—there’s a trade-off for lenders in our Express products. Our regular, our 7(a) product carries either a 75 or 

85 percent guarantee depending on the size of the loan. 

The Express product carries a 50 percent guarantee, but essentially we allow the banks to use their own paperwork to process the 

loan. So there’s a trade-off for a bank. They get a lower guarantee 

but they’re allowed to use their own paperwork. 

SBA Express is really used by our most experienced lenders. 

They have delegated authority so they’re actually allowed to put 

the guarantee on behalf of SBA. 

So to the lender it’s really a trade-off on ‘‘how much risk am I 

willing to take? Would I prefer to do more paperwork and have the 

higher guarantee or am I okay with the lower guarantee and the 

express paperwork?’’ 

Mr. BUCHANAN. Another thing—again, I can’t tell you how many 

businesspeople I talk to; been to six banks, seven banks, been 

turned down. 

14 

Why isn’t the SBA open-minded towards direct lending for these 

economic times for a year or two where we can get money out 

quicker? Because you’re really at the mercy of the bank if you have 

no banks in the region that are enthusiastic about it or might do 

it or might not do it. 

I mean, you’re guaranteeing 90 percent. Why don’t we, you know, 

make some funding available for small business on a more direct 

basis? I know you touched on this in your opening remarks. But 

I—that’s something I’ve been pushing for, the idea, sunset in a period of time. 

What’s your thoughts? Anything additional on that? 

Mr. ZARNIKOW. Sure. The concern we have in trying to do direct 

lending, we really work through lending partners. We provide a 

partial government guarantee that—of the loan that’s made by a 

bank or a credit union or a non-depository institution. 

When you look at the reach out there, we have 68 district offices 

around the country. Our lending partners literally have tens of 

thousands, if not a hundred thousand branches. 

What we’re trying to do is make sure that when a small business 

needs capital, they go to a bank. Our programs have credit elsewhere attached, so we’re not trying to replace the conventional 

market. 

If a loan can be made by a bank on a conventional basis, they 

do it conventionally. If it doesn’t qualify for a conventional loan, 

they can look at doing an SBA product. And obviously there are 

some small businesses that are out there that aren’t creditworthy 

and are going to be unable to get access. 

When we look at the infrastructure that would be needed to set 

up a direct loan program, there would be an enormous amount of 

hiring, and we would have to do training and we’d have to do—we 

would also be redirecting small businesses to now come to the government and apply for loans, go to those 68 district offices rather 

than go to the lending partners. 

And we just feel that it’s a very costly process to do. It would 

take a long time to hire up that level of people. And then we would 

have these loans on our books for a long period of time we’d have 

to continue to have to service and liquidate. 

We also look at and have a concern that it is a small—if a bank 

is unwilling to make the loan at a 90 percent guarantee, should we, 

as the government and as taxpayers, in essence doing the loan— 

be doing the loan at 100 percent guarantee. 

Mr. BUCHANAN. I don’t think the bank is—they like the guarantee, but I think that they—many banks just feel like it may— 

you know, to get that guarantee, it takes too long to get the money 

back if someone defaults on a loan. 

Let me mention—someone just dropped me a note— because we 

do have hurricanes and coming into hurricane season, you do do 

some SBA lending for national disasters, don’t you? Is that true— 

Mr. ZARNIKOW. Our disaster group, which is a whole ’nother area 

within SBA, we do do lending for disaster. Their mission is really 

focused on lending in areas there’s been a disaster, whether it’s a 

hurricane or an earthquake or flooding. And the focus there is primarily on homeowners and it’s primarily on property damage. 

15 

So if you look at the number of loans that they do, 95-plus percent of the number of loans would be to homeowners and it would 

be for property damage. 

They do do a limited amount of business disaster lending, once 

again, primarily focused on damage, replacement or damage loans 

that are—have caught—businesses had. 

So when you look at their expertise, they do a wonderful job. 

They really do a great job in responding to disasters, but their 

focus is on property damage loans for homeowners. 

Mr. BUCHANAN. The last question, I think maybe the Chairman 

touched on a little bit, but what are you doing to develop relationships with community banks, with banks, you know, local regions? 

You mentioned—touched on it a little bit, but it just seems like 

we need to do a lot more. I want to bring SBA down here with our 

banks, I know, and I’m sure the Chairman does, just to make sure 

that our banks have complete access and they understand the 

pluses and—ideally pluses and some minuses with SBA— 

Are you—do you have an aggressive reach-out program with 

banks or do you kind of let the banks come to you? Are you marketing it in this period, in this time frame? 

Mr. ZARNIKOW.—I would say we have a very aggressive reach-out 

program primarily through our district office network in that you 

have 68 district offices around the country. And we’re very aggressive about reaching out to lending partners who are—can potentially do SBA loans. 

I mentioned we’ve seen 15 percent increase in the number of 

lending partners who made at least one SBA loan in fiscal 2009. 

And we have a goal to increase that even more. 

We’re also reaching out through some of the trade associations, 

the American Bankers Association, Independent Community Bankers Association to try and get the word out through the trade associations as well about SBA programs. So I would say we have a 

very aggressive program to try and increase the number of lending 

partners that participate in our programs. 

Mr. BUCHANAN. I appreciate your comments. And I yield back to 

the Chairman. 

Chairman SCHRADER. Thank you very much. Just a few followups if I may. We don’t have others to ask the questions so we can 

ask a little longer period of time than usually in Washington, D.C. 

here. 

You talked about aggressive outreach and I would agree with 

that. I see that in my district back in Oregon. 

What about the follow-up? Getting one more bank to sign up is 

considered a victory, but it’s not really a victory for a small business that can’t get a loan from that individual. 

What sort of follow-up—do you have the manpower, I guess is 

the basic question, to actually follow up and, you know, encourage 

these banks to sign up? You know, what are your barriers? How 

can I help you follow through and make sure, you know, Schrader’s 

Veterinary Clinic gets a loan? 

Mr. ZARNIKOW. I’ll tell you a couple of things. One is what we 

really measure is the number of partners who make at least one 

loan. So it’s not enough to get them to sign up and say I’m open 

for— 

16 

Chairman SCHRADER. Could we expand that to three loans 

maybe? 

Mr. ZARNIKOW. We’d be glad to do that. You know, our focus really is points of access for—you know, points of access to capital for 

small businesses. 

We also are continuing to try and make our products easier to 

do. A little over a year, year and a half ago we rolled out what we 

call Small Rural Lender Advantage product, which is a simplified 

processing method that’s really focused on the smaller community 

banks that basically do less than 20 SBA loans per year. They have 

a simplified method. 

We have a process to really kind of hold their hand through the 

whole process because our processes and paperwork can be a little 

bit intimidating. So we have a simplified processing method that 

really helps the community banks get through the process. 

Chairman SCHRADER. I think both the ranking member and I 

would like to see data on how that works— 

Mr. ZARNIKOW. Sure. 

Chairman SCHRADER.—as soon as possible. 

You mentioned with the ranking member along this line of questioning about letting—some of these progressive banks are allowed 

to use their own paperwork. Why not allow that as a routine at 

least temporarily for the 7(a) program, the 504 program, some of 

the others, you know, besides the Express Loan program? Why not 

do that with some of the ARC loan program? Why not allow the 

banks to do their own thing and not have to jump through another—another hoop for the SBA? 

Mr. ZARNIKOW. The balancing we have there is making sure we 

have programs that do protect taxpayers’ dollars but also help support and expand access to capital. 

Chairman SCHRADER. I just would be cautionary because—because we’ve heard, at least our communities, the banks are being 

pretty tough already. So I think not only are they protecting their 

shareholders, they’re trying to protect the taxpayers too. They do 

not want to make a bad loan. I’ve yet to come across a banker or 

credit union individual that’s making frivolous loans, at least in 

this day and age. 

I just urge SBA to think about that. 

What other elements—the other big thing I hear all the time is, 

Well, the SBA talks a good game, but they really can’t—you can’t 

get guarantees paid, they’re difficult to work with, et cetera. 

What has happened in the last year, year and a half that SBA 

has changed how they’re doing business to make it more friendly 

for banks? 

Mr. ZARNIKOW. Sure. We have focused very hard on our guaranteed purchase process. That’s when a loan goes bad and the bank 

comes to ask money on our guarantee. So we put in about two 

years ago now what we call a brand promise where if the bank submits a package, a guaranteed purchase package, and it’s complete, 

it’s all the information we need to evaluate the guarantee to ensure 

that the loan was eligible, that the bank followed the rules around 

servicing and liquidation, we have committed that we will decision 

that case and get the guarantee paid within 49 days. And so far 

we have not missed a brand promise. We’ve been very focused on 

17 

making sure that we paid a guarantee timely as long as the bank 

submits the information that’s required. 

Chairman SCHRADER. Last question and I’ll turn it back to the 

ranking member for any additional questions here. 

One of the things that was identified in my neck of the woods 

and in Washington, D.C. in some of our hearings was, you know, 

some of the carve-out programs and some of the abuses. 

We have a pretty robust veterans small business assistance program trying to encourage entrepreneurship among our fighting 

men and women that come back and want to start a business. 

They’re, unfortunately, 45 to 50 percent underemployed or facing 

no job. 

But there have been horrible abuses in that program so the veterans aren’t really getting help; there’s the charlatan companies 

that are actually getting help. 

What’s SBA doing to fix some of those problems that we’ve seen 

particularly—I know Vern has met with veterans here in Florida. 

So how are we helping our fighting men and women? 

Mr. ZARNIKOW. You know, from the loan side, and I don’t know 

if you’re talking about government contracting or the lending side. 

My area is really the loan side. 

You know, we do focus on and have specific outreach to the veterans community because we find that a lot of the veterans want 

to be entrepreneurs, they want to start small businesses. You 

know, our loan volume, somewhere between 5 and 10 percent of 

our loan volume each year goes to veteran-owned businesses. 

We do have also our Patriot Express product, which is really focused on the veteran community and their families. Once again, it’s 

an express product with a higher guarantee to try and make sure 

that they have access to capital. We’re supporting the veterans 

community. 

Chairman SCHRADER. Thank you very much. 

Mr. BUCHANAN. Yeah, I just—one other question. You know, one 

of the things that, you know, anybody that’s looking for a loan, 

they want a quick yes or no; I’m sure that banks are the same way. 

What is the process time? I mean, even—people say, Look, if I 

get a no, I don’t want it but that’s fine. But give it to me. Don’t 

drag out it for three months and then find out I can’t get my, you 

know, $75,000 loan. 

Have we done anything to expedite decision-making to get a 

quicker yes or no? I know some of the programs that have a little 

less money attached to them, they’re quicker. 

But just in general, are we doing anything to expedite that? Because, you know, people are usually at their wit’s end to try to get 

a loan and you wait three months and they’re all frustrated. 

And that’s true of banks a lot of times too. They don’t give a 

quick yes or no. It’s a slow no. 

But what’s the mentality on that today? What are we doing to 

try to get a quick yes or no? 

Mr. ZARNIKOW. Sure. Our process—there are several things that 

we’ve done. One is we have what we call preferred lending programs where for our largest, most experienced lenders we actually 

delegate authority with them to put the government guarantee on 

18 

the loan. So they can have the ability without coming to SBA for 

pre-approval; they can actually put the guarantee on a loan. 

And through delegated authority for the loans that come to SBA 

for approval we generally have a five- to seven-day turnaround 

while we decision that loan and give either a yes or no once we 

have a complete package. 

The thing that I would highly encourage anybody, a small business who’s looking at getting a loan, make sure you’re well prepared, you know, through our small business development centers 

or SCORE volunteers or women’s business centers. They can help 

you get prepared to go to a bank to get a loan. Make sure that you 

have a business plan, that it’s well thought out. 

Make sure you have the basic information that the bank’s going 

to ask for. They’re going to want to see tax returns, they’re going 

to want to see financial statements. They’re going to want to see 

information about your business and what your road map is, which 

is basically your business plan. 

So I really encourage any small business who’s thinking about 

getting a loan, make sure you’re well prepared when you walk into 

the bank. And please access SBA resource partners to help you get 

it. 

Mr. BUCHANAN. If you’re prepared and you give them a complete 

package or maybe most of it, how long should it take between 

whether they’re going to get a loan or not in terms of the bank 

making a decision and then getting your commitment towards the 

guarantee from the SBA? What do you think is a reasonable period 

of time in your mind for that time frame? 

Mr. ZARNIKOW. You know, for the—it’s hard to speak for each 

bank because each bank has their own internal process that they 

have to go through, the credit approval. 

Smaller dollar loans tend to get decisions pretty quickly. A lot of 

times those are done on credit scores and some basic analysis. 

A much larger dollar loan that’s complicated can take longer. 

Once again, once—you know, we do have delegated authority, so 

once the bank decides, if it’s a delegated lender, they can make the 

decision right away. Or if it comes to SBA, generally we have fiveto seven-days turnaround time. 

So it really depends on the size of the loan and the complexity 

of the situation. 

Chairman SCHRADER. Okay. I’d like to thank our witness. He will 

be available later. And if we can get our four other witnesses to 

come forward, we’ll take a quick break. 

[Recess.] 

Chairman SCHRADER. Let’s resume. And the ranking member 

will introduce our first witness. 

Mr. BUCHANAN. We’ve got a great panel. I appreciate all of our 

panelists for being here today. 

Our first witness is Brian Hall, who is president/CEO of Sabal 

Palm Bank; has 26 years in the Air Force as an officer and pilot. 

Mr. Hall received his degree in finance from Indiana University, an 

MBA from University of Cincinnati. He’s been a leader and very 

active in the Sarasota and Manatee community. 

And I personally have known him and he’s been a great banker, 

as well. I met him when he was actually at South Trust Bank. But 

19 

he started his own bank, I would say, about 2005, I guess, 2006 

he started a bank from scratch and they’ve done well. 

We look forward to Mr. Hall and your testimony. 

STATEMENT OF BRIAN HALL 

Mr. HALL. Good morning. Thank you for the opportunity to participate in today’s hearing. 

In June of 2009 there were 53 FDIC-insured banks with locations in Sarasota and Manatee counties with approximately $18 

billion in deposits. 

This market has three banks, Bank of America, Wachovia, and 

SunTrust that have a combined 48 percent share of the market. 

The nationwide and regional banks typically control 80 to 85 percent of banking in this area and the community banks around 15 

to 20 percent of the market. 

With the exception of a few banks that are focused only on consumer lending, private banking and/or wealth management, most 

banks in this market consider small business lending to be an important target segment. 

Banks can play an important role in helping our economy recover. Our industry is needed to supply loans to small businesses 

that want to buy, build, expand, or support something that creates 

commerce and job growth. 

Banking is a highly regulated business and banks are required 

to maintain certain leverage and risk-based capital ratios by their 

primary regulators based on the financial condition of the bank and 

the composition of the bank’s loan portfolio. 

For every dollar of capital that a bank has, it can leverage this 

about ten times into loans, again based on the type of loan and 

overall condition of the bank. 

Many bankers will tell you that the number one consideration for 

determining the volume and the type of lending that they can do 

is their level of capital. 

The key considerations for a bank’s capital are as follows: 

First, do banks have enough capital to deal with the loan risk 

that’s inherent in their current loan portfolio? 

Almost all small businesses—small business borrowers, unless 

they’re in the business of providing a highly essential product, have 

experienced declining trends for the past two or three years. The 

cumulative impact of declining revenues, margins and liquidity has 

left small businesses in a very fragile condition and with reduced 

ability to pay their loans. 

Second, are banks confident that they can get additional capital 

when they need it in a timely manner and a fair price to support 

future growth or use as a cushion for the risk of losses? 

For most community banks, even mature banks that are profitable and have relatively clean balance sheets, it is very difficult to 

raise additional capital today, even at 50 percent book value per 

share. 

The President’s announcement a few months ago about a Small 

Business Lending Initiative that would make capital available to 

community banks under reasonable terms and conditions has many 

of us eagerly waiting for more details. 

20 

And third, how confident are banks about the results of their 

next regulatory exam, especially as it applies to the review of their 

loan portfolios and capital expectations by regulators? 

There have been many well publicized comments by our political 

leaders and banking association leaders calling for regulators to 

show restraint, consistency, and provide more time for banks to 

work through problem loans and complete capital raises. 

The only microwaved solution for a problem loan today is just to 

charge it off or set aside reserves which reduces capital, which reduces—which results in less lending that banks can do, which results in less commerce and job creation. 

So what can be done to help small businesses get more access to 

bank loans for building, buying, supporting something? 

I have a few suggestions: 

First as it applies to bank capital, as I previously mentioned, the 

level of bank capital is the key driver for how much lending and 

what type of lending a bank can do. 

There are a number of initiatives being discussed to strengthen 

bank capital which will lead to more lending. 

Number one, the President’s Small Business Lending Initiative 

proposed $30 billion to be provided to banks with $10 billion or less 

in assets as recommended by their primary regulator. 

The details of this program have not been announced. But it’s 

critical that the applying bank be evaluated based on their condition and ability to repay after receiving the capital, not on the 

bank’s current condition. This wouldn’t be a bailout or a handout, 

but it would be a capital investment required to be repaid with 

dividends. 

Banks should be encouraged to use these funds for small business lending and receive a reduction in the dividend or interest 

rate based on their lending results. 

The program should encourage but not require banks to do SBA 

lending if they participate. Many banks are SBA lenders, as we 

heard this morning, but many are not. 

Gearing up to do SBA lending does take a lot of time and expertise that many banks don’t have today. We just don’t have that 

time to spend. 

Currently banks are limited on the amount of their allowance for 

loan loss that can be counted as part of their capital. These limits 

didn’t anticipate the type of economic challenges that we’re facing 

today and the limited access to new bank capital. 

Accordingly, a bank’s entire allowance for loan loss should be 

treated as a form of capital. And really that’s what it is. It’s funds 

to be set aside to help support the future risk of loss in a loan portfolio. This would increase bank capital which could be leveraged 

into increased small business lending. 

Third, very few banks have been profitable over the last two or 

three years. Current accounting for deferred tax assets, which are 

basically treated as reductions from capital for capital adequacy 

measurement, needs to change. 

Current treatment of deferred tax assets is very destructive to 

capital and the U.S. has among the most outdated accounting 

treatment for deferred tax assets of any modern country. 

21 

Our leading trade association, American Bankers Association, recently announced this issue as a key initiative. But frankly, with 

so many other things gong on in our industry it’s really not received the attention that it deserves. 

Modifying the treatment of deferred tax assets for capital adequacy would increase capital for banks which would—could be used 

for additional small business lending. 

Second, as part of the American Recovery and Reinvestment 

Act—we heard a lot about it this morning from our first speaker, 

I agree and applaud the SBA’s efforts to reduce fees and increase 

the amount of guarantees. I think as Mr. Zarnikow said, that has 

been helpful. Our bank is a relatively young bank. But we have 

been an active participant with the SBA. 

And finally, regulators need to provide some relief as it applies 

to commercial real estate lending. Not all commercial real estate 

loans are alike. Most bankers agree that loans for land, development and other speculative purposes are very high risk, especially 

in the current economy. 

However, if conservatively underwritten, other types of commercial real estate loans such as office, medical, anchored retail, and 

multifamily are not necessarily higher risk than traditional commercial loans. 

To summarize, in order for our economy to recover, qualifying 

small businesses need access to capital from banks for loans to buy, 

build, expand or support their businesses. Banks are motivated to 

find ways to make loans; that is what they do. However, bank capital is the key. 

These are solutions that I mention that are available to increase 

capital for banks which will allow for more lending which will advance the volume of commerce and job growth in our economy. 

Thank you again for the opportunity to speak for you today. 

[The statement of Mr. Hall is included in the appendix.] 

* 

Mr. BUCHANAN. Our next witness is Bill Miller. Bill is Senior 

Vice-President for Political Affairs and Federation Relations, which 

means—when I was chairman of the Florida chamber, we had 

137,000 businesses in the federation. A lot of chambers are part of 

the state federation. And they are, all of those chambers, tied into 

the national. I think there’s over three million small business and 

businesses that tie in, in terms of the U.S. Chamber; Bill Miller 

oversees that. 

In his capacity he’s responsible for directing and implementing 

the Chamber’s political grassroots and elected-related activities. 

You know, his job is to find members of Congress and the House 

or Senate that are pro-business, Democrats or Republicans. 

His biggest issues in terms of his portfolio, in terms of legislation 

pertain to keeping taxes low, trade, legal reform, govern—corporate 

governance and election reform. 

He serves as spokesman and has appeared on many numerous 

shows including CNN, Inside Politics, Bloomberg, ABC Nightly 

News, PBS as well as the Wall Street Journal—he’s written articles, published articles in the Wall Street Journal, New York 

Times, Fortune. 

I want to thank you for being here today, Bill. 

22 

STATEMENT OF BILL MILLER 

Mr. MILLER. Thank you. 

Good morning. Again, my name is Bill Miller. I’m here proudly 

representing the United States Chamber of Commerce. 

Thank you, Chairman Schrader. Thank you, Member Buchanan. 

I greatly appreciate the opportunity to offer the perspective of the 

business community on the important discussion of issues today. 

In addition to representing the chamber, I’m also a small business owner myself; over the years starting and selling an entertainment company, starting a—starting and running a small community bank. And today I’m a part owner of two restaurants in Washington, D.C. 

The nation is clearly emerging from trying economic times. With 

the unwinding of the housing market, severe liquidity crisis, and 

the general deleveraging of financial markets, the economic downturn was severe. 

Not surprisingly, many small businesses are still in that survival 

mentality, making defensive operational decisions in an attempt to 

protect assets. 

As economic activity gains momentum, credit markets will need 

to respond by providing robust avenues of capital for Main Street 

to replenish those inventories, purchase equipment, and make investments in new opportunities. 

The following are a couple of policy initiatives that the U.S. 

Chamber of Commerce feels are warranted to help small businesses 

grow and create those new jobs. 

First, with regard to federal income tax rates, many small business are organized as Subchapter S Corporations, limited liability 

partnerships, or LLC for federal income tax purposes. 

This means the profits are not taxed at the corporate level but 

instead passed through to the individual income tax returns. 

While small business owners pay personal income tax on the 

profits, the reality is only a portion of the income generated by the 

businesses actually make their way back to the personal bank accounts. Much of the income small business owners are being taxed 

on is actually reinvested in the companies in the form of expansion 

and new equipment. 

The chamber recommends that Congress lower all marginal tax 

rates or, at the very least, keep those rates at present levels. By 

lowering or keeping the rates at present levels, Congress would enable small business owners of all size to invest more in their businesses. Allowing these rates to increase would increase the cost of 

capital and diminish the investment opportunities. 

Secondly, repealing the 3 percent withholding tax, Section 511 of 

PL 1009-22, requires a 3 percent tax withholding on all government payments, which affects all government contracts as all as 

other payments, such as Medicare, grants, and farm payments. 

While this requirement is not set to go into effect until January 

1, 2012, there are many companies that are already expending 

funds to prepare for the implementation of this. These are needless 

preparation expenses for a requirement that most believe should 

have never been enacted. 

The chamber supports repealing the 3 percent tax withholding 

law which will have tremendous impact on working capital for 

23 

those companies that are local, state and federal government contractors. 

Three, access to capital provisions. As was discussed by the previous two witnesses, access to capital is a critical component for 

small businesses for them to fully unleash the job-creating engine 

that will be vital to igniting the economic turnaround for our country. 

In order to have capital available for small businesses they need 

to revive the economy, the chamber supports the following legislative efforts: Extend and fund through the current calendar year the 

reduced borrowing and lending fees for SBA 7(a) and 504 programs. These fee reductions will continue to incentivize financial 

institutions to lend and will make funds more affordable for small 

businesses to borrow. 

Extend—number 2, extend fund—extend and fund through the 

calendar year the 90 percent government guarantee percentage of 

the SBA 7(a) loans. Appropriate increases in the federal government guaranteed portion of the loan reduce risk to the financial institutions and provide additional incentives for the industry to underwrite small business loans. 

Make improvement in the SBA Express Loan provisions increas- ing the maximum Express Loan value to $1 million and temporarily increase that Express guarantee for 75 percent for the next 

two years. This was discussed in some detail in the last presentation. 

Number 4, increase the maximum loan size and maximum guaranteed portion of the SBA loans. This was discussed also. And the 

Chairman and Ranking Member have a proposal. There’s also one 

in the Senate by Senators Landrieu and Snowe on the Senate 

Small Business and Entrepreneurship Committee that has introduced increasing the size of the maximum size of the SBA 7(a) and 

504 loans from two million to five million. 

And then finally, Small Business Innovation Research and Small 

Business Technology Transfer programs, these were established by 

the Congress in 1982 to use innovative talents of small businesses 

to help meet the government’s research and development needs at 

a time when there was a significant concern that the United States 

was falling behind its global competitors in developing innovative 

technologies. 

SBIR and STTR currently do not enjoy long-term reauthorization. In order to make sure that these small businesses are fully 

involved in advancing the nation’s innovation and technology, we 

need to expeditiously get the Senate to get a comprehensive reauthorization of these two programs. 

In conclusion, I appreciate the opportunity to submit these comments on proposals that will be helpful to small businesses. I look 

forward to working with you and the Committee to champion the 

policies to unleash the innovative abilities and the entrepreneurial 

spirit of American job creators, our small and medium-size businesses. 

[The statement of Mr. Miller is included in the appendix.] 

* 

Mr. BUCHANAN. Thank you, Mr. Miller. I just want to say the 

U.S. Chamber, as well as the state Chamber, will lobby in terms 

24 

of small business or pro-business in Tallahassee with members of 

the House and Senate. The U.S. Chamber weighs in aggressively 

with Democrats and Republicans in the House and Senate in 

Washington. 

And I say that because it’s just not a Republican-based thing. Aggressively with Democrats, anybody that’s going to be pro-small 

business policies in terms of less tax, less regulations, less frivolous 

lawsuits. They do a heck of a job, and I appreciate Mr. Miller being 

here today. 

The next gentleman I just met a week or so ago, but he represents why I want to have this access to capital. This whole thing 

is about jobs and working families. 

And he—I got introduced to him by a mutual friend. And he was 

talking about if he had access to capital, he’s got a company that’s 

grown quickly. He’s got a company that’s profitable; just that he’s 

a newer business, he can’t get—he can’t get money from banks or 

anything else locally, as many small businesses can’t. 

Mr. Orr is the founder and CEO in Sarasota of Creative Agency 

Service Team, Inc. or CAST. CAST provides retailer and manufacturers with creative manpower and virtual interactive services. 

His company currently supports an average of over 25,000 retail 

locations a month, brands like American Express, Macy’s, WalMart, CVS, and many others. 

Mr. Orr has over 30 years of retail and marketing experience and 

serves in a—he did serve in a senior leadership position for three 

different Fortune 500 companies prior to starting the company 

three years ago, CAST. 

After initial investment of 175,000 from private investors less 

than two and a half years ago, CAST is projected to deliver topline revenue of $6 million this year in 2010 in downtown Sarasota. 

The company currently employs about 450 employees, not all 

full-time, some of them are part-time, and employs opportunities 

for over 18,000 independent contractors in the country. 

I’m glad to have Mr. Orr with us today. 

STATEMENT OF JOHN PAUL ORR 

Mr. ORR. Thank you. 

Well, before I begin, I think I’d like to start by introducing my 

wife Kelly who’s—stand up, Kelly. Kelly is my wife for 28 years 

and the last two years she’s been my business partner. She left her 

nursing career as an RN and she’s joined me in business. 

So I said to someone as we were preparing for this that now that 

we’ve learned to work together in business, that if you should need 

some help with settling peace in the Middle East, Kelly and I 

would be glad to step up. 

So what I want to do today is just really give a personal experience here in Sarasota, how it’s related. It’s related to our need to 

raise capital and some of the challenges that we face. 

I’d like to first just repeat some of the things that Vern has already said. As founders of a small company that’s experienced fairly significant growth since its inception, I’m honored today to discuss the opportunities that we believe could be created if small 

businesses are afforded more sufficient and reliable access to capital. 

25 

Like many small business owners, our American Dream actually 

began as a nightmare. Without notice, we received a phone call informing us that the job we thought our entire future depended on 

was being eliminated. 

Fortunately, we were armed with over 30 years of corporate experience, an extremely generous group of friends and family who 

believed in us, many of those are here today, and a healthy dose 

of entrepreneurial naivety; in other words, we didn’t know what we 

were getting ourselves into. 

I’m here today to provide evidence though also of society’s return 

on investment when small businesses do succeed. 

The name of our company is Creative Agency Services Team, Inc. 

or CAST for short. Our mission is to support major retailers and 

their suppliers in over 100,000 retail store locations across the 

country. 

And CAST’s model requires us to train and deploy thousands of 

agents to do work in all 50 states. This means that our success is 

hinged greatly on our ability to make investments in state-of-theart technology, to establish scalable infrastructures, and to create 

sufficient cash flow to floor plan our payables. 

CAST was started, as Vern said, with an initial investment of 

$175,000 from private investors just a little over two years ago 

when the company started and is projected this year to deliver topline revenues of 6 million. It’s a testament to the American economy that a company started by a husband and wife and one employee in the worst economy since the Great Depression currently 

provides jobs to over 450 employees and deploys opportunities to 

18,000 independent contractors. 

Naturally we are proud of these accomplishments and grateful 

for the support that has got us to this point. But it’s important that 

I use the opportunity today to point out to the Committee that with 

better access to capital, we believe that CAST could have grown at 

twice that rate and employed a much larger work force at a time 

when America desperately needs jobs. 

Small business investment is not only a great deal for savvy investors, it also yields significant returns for society at large. In contrast to the rhetoric we hear about corporate America and big labor 

and big government, small business continues to embody the true 

spirit of America. By definition, no small business is too large to 

fail; and, therefore, company politics and hidden agendas and 

wasteful spending are better left to those who can afford to fail. 

We’ve been thrilled to find that in small business it’s still very 

personal. Loyalty to customers and to employees and to deep-rooted 

principles is still very much in vogue. 

Small businesses literally bloom from the roots of the community. Friends and relatives offer unconditional support and encouragement. Employees bring their experience and their ambition, 

while investors add a sense of confidence and responsibility to the 

organization by betting that success is within reach. 

If you think about it, all great American institutions can ultimately be traced back to their small business DNA. That’s why I 

submit to you today that placing too much of our nation’s priority 

on businesses thought too large to fail at the expense of small busiVerDate Aug 31 2005 15:58 Jun 23, 2010 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\55998.TXT DARIEN
26 

ness is like frantically gathering fruit from a burning vineyard 

while allowing the roots to die. 

At the end of the day, small business gives birth to our future 

economies. It makes a major contribution toward the culture that 

most Americans long to restore and it truly represents the most 

powerful mechanism at our disposal for stimulating economic 

growth and job creation. 

I’m honored to be part of the panel, and I look forward to learning, as I’ve already learned some things today, and sharing ideas 

that can help us maximize the potential of our small business economy. Thank you. 

[The statement of Mr. Orr is included in the appendix.] 

* 

Mr. BUCHANAN. Thank you, Mr. Orr. I—you know, I—that’s the 

American dream. You start out a business. My wife and I started 

ours in 1976, we put in a few dollars and grew it over the years. 

In fact, the two of you are doing that. 

We’re going to find in this recession, a deep recession, you’re 

going to see a lot of successful entrepreneurs come out of this. But 

even if they didn’t want to necessarily be an entrepreneur but always had some interest in maybe being one, it’s forced them into 

that position. 

So I’m excited about your company. I’m excited it’s based in 

Sarasota. And I think the American Dream, as long as we’ve got 

access to some capital, is alive and well. 

Our fourth witness, Mr. Herbert Brill, is a private business consultant who advises small business clients on a host of activities 

including access to capital. We’re excited about him being here 

today. He’s a member of several professional associations such as 

the New York and Florida Bar Association. Mr. Brill has held a variety of jobs throughout his career, I believe managing partner of 

a law firm in Miami. He’s also general counsel to a bank in Miami 

so he understands a lot of things that we’re talking about today in 

terms of access to capital. 

In addition to his professional experience, Mr. Brill has also 

taught at several universities throughout the United States including locally in this region the University of Florida, University of 

Miami. He has a law degree from Columbia University Law School. 

He currently resides in Lakewood Ranch. 

We’re excited to hear your testimony today, Mr. Brill. 

STATEMENT OF HERBERT BRILL 

Mr. BRILL. Thank you. Before I begin, I’m very happy to be here 

today, but it did cause me some distress this morning. And that 

distress was how do you make a tie? It’s been so long since I had 

to put on a shirt and tie that I’m thinking, Well, wait a minute, 

they are only members of Congress. What do I need a tie for? So 

I figured, Well, what the hell. 

So I put a tie on and I did remarkably. Thank you for jogging 

my memory. 

I look at what I am here today to say and what I’ve heard from 

the bank’s point of view. I was general counsel for Bank of Miami, 

Banco Popular, and counsel to Key Credit, et cetera, et cetera, et 

cetera. So I look at it from a lender’s point of view, having sat in 

27 

on executive Committee meetings, board of directors meetings, that 

said yes or no over a long period of time. 

We all know we’re in a recession. And the cause of it, you know, 

that’s for another time. But we do know that the Secretary of the 

Treasury went to the President in the fall of seventy—2007 and 

said, ‘‘Mr. President, the sky is falling, we’re out of credit, the 

banks are frozen, the credit is frozen. What do you want to do?’’ 

Well, historians ten years from now will probably tell us what he 

really thought or really said. I don’t know and I don’t really care. 

But at that point that Administration, the prior Administration, 

said, ‘‘We have got to do something’’, and went to Congress. And 

in Congress and it was Congress that said, ‘‘Okay, we approve all 

this lending and borrowing, et cetera, et cetera’’. 

Was it good? Was it bad? Was it done well? We’ll see. But it did 

do one thing: It did stop the bank panic. It did stop the credit flow 

from increasing and at least put a stop to it. It is now progressing 

on the right side. 

I don’t think anybody can argue about that. You can argue about 

means, methods, and long-term effect, but we did stop it. 

Okay. One of the specific things that came out of that, among 

many others, and that is that credit to small business like Mr. Orr 

dried up. It just isn’t there. 

Personal experience, first let me just say that the SBA—the SBA 

is wonderful. They do a good job. They’ve increased their lending. 

They’ve modified their ability to do it quickly because they’ve eliminated cost. They’re doing a terrific job. 

Congress has hampered them by saying this increased authority 

is month to month. Now it’s only until April 30th. After April 30th, 

you can’t continue to do what you’ve been doing, which is the right 

thing. 

And the President has asked that they extend it to September 

30th. And there’s a bill pending and I spoke to Congressman 

Schrader, I think it’s 3854, that would extend that until the end 

of fiscal year 2011. 

So it’s not a question of fault. But one of the answers to keep 

SBA going—and I love SBA, they’re very effective, especially 

today—is to get that extension. Banks are not going to want to loan 

on a month-to-month basis and set up a program, hire people, train 

them, and then say, Oh, it’s over next month. You’ve got to get real 

about these things. 

I do most of my work pro bono for the Manatee Chamber of Commerce. And I think the chambers of commerce are terrific locally. 

And they do a great job. And I agree with everything that Mr. Miller said about taxes on small business. 

I do not agree on the national policies of the U.S. Chamber on 

national tax policies. But that’s for another time. 

But as far as the SBA and as far as local tax and tax on small 

business, I’m in total accord. 

I was retained and paid a nice fee, thank you, for getting a loan 

on a business, a local business, manufacturing, that hired people, 

that I helped streamline, got their balance sheet in shape, et 

cetera. And I personally wrote the proposal, business plan, everything. 

28 

I know what banks want. I’ve reviewed them for banks. I’ve been 

with banks. And I said to my client, It’s a 90 percent shot. 

This is January of 2008. Okay? 2009. I’m sorry, 2009. I spent six 

months and went to six banks, three major, three local, one small 

community. I was turned down by all six. 

And I was almost insulted. I said, ‘‘I know what you want. This 

is a good loan.’’ 

‘‘Oh, yeah, but it’s based on collateral, the major collateral’’ 

which is the building in which he operates. And I said, ‘‘Fine. But that’s $175,000 on a building that was as- sessed today, now, in the middle of recession at $800,000, and we 

want four and a quarter.’’ 

They said, ‘‘Sorry.’’ 

It just didn’t make sense. So I got this answer from virtually 

every bank. 

But knowing bankers, I then said to two or three or four of them, 

‘‘Let’s go to coffee’’. So we went to Starbuck’s. I drank Starbuck’s 

coffee, and I don’t like Starbuck’s coffee; it’s too bitter. But we 

went. 

And I said, ‘‘Guys, what’s going on?’’ 

They said, ‘‘Herb, we’ve raised our lending standards to the extent where if you come in and before all this happened you were 

triple A, we were delighted to give you the money, to keep you on 

our books. But now those loans are going to the SBA.’’ 

So I said, ‘‘Well, the effect of that is to eliminate all these goodcredit people over a standard and your triple -- AAA’’. And he says, 

‘‘That’s right.’’ 

I said, ‘‘Why?’’ He said, ‘‘Because we have got to get our balance 

sheets in order or I’m going to lose my job. I will not make a loan 

or approve a loan or even set up a loan, I don’t care how good it 

is, unless I know the bank examiners are not going to come in and 

say it’s questionable because—not because it’s SBA, but it’s SBA, 

or it may go into default because we have to get our balance sheets. 

Why do they have to get our balance sheets? Because the Secretary of the Treasury and the government has said, ’Clean up 

your balance sheets’.’’ 

How many times have you heard that? 

Mr. Hall said balance sheet. Mr. Orr was talking about balance 

sheet. Most clients don’t know what a balance sheet is, by the way. 

That’s another problem. 

And they said, ‘‘Because you must do that.’’ 

And that problem stems from the federal government’s left hand 

saying, Clean up your balance sheet, and the right hand saying to 

the banks, Loan money. 

They’re not going to loan money. If I—if Mr. Orr came to me 

today and said, ‘‘Get me a start-up loan’’, I’d say, ‘‘Thank you. Buy 

me a cup of coffee and let’s go home because there’s no way; no 

way, any start-up is going to get a loan. Absolutely not. I don’t care 

what it is or how it’s collateralized.’’ 

So it doesn’t happen even with the 90 percent bank guarantee. 

The big problem there—and again, this gets somewhat technical—it’s GAAP, generally accepted accounting principles, which 

are formulated, that all banks must look at because the major accounting firms will look at it that way. 

29 

And I could go into what—what—the games that have been 

played, Lehman Brothers made assets disappear, they disappear 

off their balance sheet. They weren’t just sold and put on as assets, 

which is what they did; they disappeared because GAAP said you 

could do that. And we could spend a— you know, a whole day talking about GAAP. 

The problem with GAAP is because it was so loose and so flexible, that banks can do whatever they want. 

But when it comes to the balance sheet now, if you come back 

to the balance sheet, as everybody on this panel has said, the problem lies in having enough equity. 

Sabal Bank—I’ve never done business with them, but they’ve got 

a good reputation, has basically said, ‘‘We must protect our balance 

sheet.’’ 

The three items or three of the four or five that he listed are capital, additional capital, and bank examiners. 

That means capital. That means keeping your balance sheet 

clean. 

I can only tell you that you can say what you want and do what 

you want, have all the great programs like SBA, which is a great 

program, but it starts with the banks. 

The SBA doesn’t lend money. I have clients that think, Oh, let’s 

go to the SBA. You don’t go to the SBA. You’ve got to go to a bank. 

So why are the banks not lending? They’re scared. They’re frightened of their jobs. They’ve seen what’s helping. 

The last two years friends of mine in the banking business call 

me and say, Herb, do you know anybody who’s looking? I lost my 

job. 

What do you mean you lost your job? 

Well, it’s the industry. That happened to Mr. Orr. He went out 

on his own. 

So what is the answer? There’s no one answer. But certainly 

GAAP and the Accounting Standards Board that sets the rules for 

GAAP are a major, major problem. We get left hand to know what 

the right hand is doing, we’re going to be fine. 

I could go into the history like everyone has written government 

intervention. And government intervention started in 1933, and 

that was the year I was born, not that that’s particularly noteworthy. But when I got out of law school and went into law and 

into business, the FHA and the alphabet people, all government 

regulation, the FCC were there and doing what they were supposed 

to be doing. 

That ended when the Glass-Siegel Act was—was canceled by 

Congress. When they canceled Glass-Siegel, which was the law that 

said the banks shall only lend; they should not invest; and Wall 

Street, you invest, you don’t lend. And you don’t mix the two. 

Well, we’ve got Citibank which became 300,000 employees 

around the world. And they became everything. And you’ve got 

the—I think I know a little, and I don’t begin to understand them, 

but they’re bets on bets on bets. There’s five hundred million dollars worth—trillion, trillion dollars out there, and guess who controls 95 percent of them? Right. The five big banks. 

There’s a lot to do. But my bottom line is we can do what we 

want with SBA, we can have all these things going that are great. 

30 

But unless Congress, and I mean Congress, steps up—and I don’t 

want bipartisanship, I want nonpartisanship—and get this thing 

solved. 

Thank you. 

[The statement of Mr. Brill is included in the appendix.] 

* 

Mr. BUCHANAN. Mr. Brill, I agree with you. And that’s reason I’m 

holding this hearing today. 

I’ve met with banks, they’re not lending. And they’re—it’s all 

about—I ask them where they’re at. One key word: Capital, capital, 

capital. That’s it. Most of them don’t have enough capital. 

Mr. Hall knows if you lend ten to one your capital is not there, 

you’re going to shrink the size of the bank. That’s what’s going on 

a lot in our region and all over the country. 

I’ll turn it back over to the chairman. We are a little bit on a 

time frame here. People have got flights and things. So we’re going 

to—I ask you to be fairly concise. Our witnesses will be around for 

few minutes right after. Mr. Chairman. 

Chairman SCHRADER. Well, I guess the obvious question—well, a 

comment first. I agree with Mr. Brill that we need to put some certainty in the marketplace. And frankly, it would be nice if the Senate would pass our bill, and hopefully that will happen. It would 

be nice to have that, to do what he was talking about. And hopefully that will happen. We’ll get back and use his testimony, might 

light a little bit of a fire. 

I’d like Mr. Hall to respond a little bit to Mr. Brill. Obviously you 

guys aren’t lending at all. You’re not doing anything right. And 

you’re hamstrung by all these evil regulators. Respond, please. 

Mr. HALL. Well, it is interesting. If you had a group of bankers, 

I think you’d hear them say the two toughest challenges for banks 

today—and I’m talking about local community banks here— number one is just managing through the loans that are already on 

their books. 

But number two and maybe it’s 1, 1A, is ′′we’ve got to grow our 

own portfolios. Do you know of any good loan opportunities? Do you 

have any that you could participate with me?′′ 

Now, there are a few banks that really are not doing that. 

They’re trying to manage to their current capital levels. And it’s 

clear they’re on the sidelines. 

But I think if you got most banks together they’d say, ′′We’ve got 

to find a way to grow our loan portfolio.′′ 

But yes, I would say lending standards having tightened; there 

is no doubt about that. The economy is very, very uncertain right 

now. As my directors say, Brian, let’s look at the business; the last 

three years key indicators have gone from here to here to here. 

Where is it going next? Well, that’s a very hard thing to know. 

Chairman SCHRADER. So if I can interrupt you guys, just for the 

sake of moving things along, not to be disrespectful. So how do we 

untighten standards and still protect investors and taxpayers? 

Let’s do several things. GAAP is one I’ve heard again. 

Mr. BRILL. Let me add to GAAP, get rid of mark-to-market. 

GAAP is scoring the balance sheet. And that makes people like— 

Chairman SCHRADER. But on a temporary basis. Not doing markto-market, some people have argued, is what got us into this mess. 

31 

Mr. BRILL. I think it’s the worst thing that can happen to keep 

credit—to keep banks from lending. 

Chairman SCHRADER. Mr. Hall? 

Mr. HALL. Well, I think the SBA is doing a much better job. They 

are being good business partners. We’re a young bank; we’re three 

and a half years old. We’ve done six ARC loans. We have two more 

that are pending. I’d like to see that keep going and make it a little 

more streamlined but raise the dollar amount, to at least $50,000. 

That would be helpful. 

But I think that really in the current environment banks are 

going to be looking at what’s the primary source of repayment and 

what’s the secondary source of repayment. And if there’s a heavy 

speculative element to that, those kinds of loans are going to be 

very, very hard to get done. 

Chairman SCHRADER. The ARC loans we are trying to increase. 

That’s in our bill actually. So we agree with you and hopefully that 

will come to fruition. 

Mr. Orr, you mentioned some things that—well, obviously you’re 

successful. You could have been more successful. What things in 

the lending environment got you to be successful briefly? And then 

what are the things in the lending environment that are hindering 

you from being as successful as you think you should be? 

Mr. ORR. Well, the thing that I think helped us with our capital 

getting started up is angel investors. And with the current unemployment rate, a lot of very qualified people are being in the market considering starting businesses. 

These programs may exist and they just don’t know about them. 

But I think one of the things that would be powerful in our nation 

is I think it’s high time that angel investors are given tax breaks 

or given some of the benefits that banks are given for backing 

loans, even though it may not be at the same rate. 

These people are actually stepping up and taking huge risks, believing in people like myself who have given us an opportunity and 

absolutely given no—none of these programs or none of them the 

benefit— 

Chairman SCHRADER. Are you aware of the new market venture 

program that—okay. We’ve got to get more information out on that. 

Mr. ORR. So I think that— 

Chairman SCHRADER. What’s holding you back? What should we 

do? 

Mr. ORR. At this point, I think it’s kind of like a conventional 

loan for an individual: Once you get to the point where you don’t 

need the money as much, obviously you can get a loan. 

So I think that some of those things will be behind us. But I 

think a lot of it—as I’ve learned today, a lot of it’s education. When 

you’re—when you’re starting a new business, you’re very busy. 

You’re scrambling. You’re trying to find out where you can get capital and get it quickly. 

And, you know, I think it’s—a lot of it’s just educate yourself. So 

some of that is not—you know, not up to Congress. It’s not up to 

society. It’s up to the business owner themself. 

But I do think that programs that motivate people who have previously been in the real estate market made a lot of investments, 

32 

there’s quite a bit of capital out there with investors who are willing to bring capital to the table for the—for the right business plan. 

I just think that emphasis in not only educating business owners 

but educating those potential investors of the programs that 

you’re—that are out there can be very powerful. 

Chairman SCHRADER. Last comment and I’ll turn it over to the 

ranking member. I’d ask Mr. Hall, you reference in your testimony 

the allowance for loan loss and accounting. If you could give my office, our offices some more elaborate information on that, that 

would be very helpful as we go back. 

Mr. HALL. I’ll be glad to. 

Mr. BUCHANAN. Thank you, Mr. Chairman. 

Mr. Hall, there’s been discussion with the Administration and 

the administrator called me about capital, access to capital for community banks. Big banks got the money; we’re talking 30 billion. 

What’s your thought? Is that something—because what I hear 

from banks, you know, a lot of them, if they don’t get it, they’re 

going to be out of business, and they can’t get it anywhere else; it’s 

too expensive or nobody wants to invest in this period of time. 

Isn’t that 90 percent—I hear from banks, community banks, all 

of them, many of the banks that have gone out of business in our 

communities here came to see me a week or two before they got 

taken over, taken out. Isn’t that 80 percent of the issue? 

Mr. HALL. I think capital is top shelf for all bankers right now. 

And the details are important of this program, kind of headline 

news. But I think having something where banks could apply for 

up to 5 percent of the risk-weighted assets. A bank like ours, we’re 

three years old, that would amount to somewhere around two and 

half, $3 million. 

It’s very, very difficult to go out in the private market and raise 

bank capital today. If you can, the price is extremely low. 

So, yeah, I think that—I think that would be an outstanding program. It would help, I think, banks quite a bit in terms of, maybe 

being more bullish towards small business lending. 

You can’t give it to every bank. There are some banks that probably wouldn’t qualify. But the banks that are well run, well managed we could look at ... 

Chairman SCHRADER. So like if we did the program, how do we 

make sure it goes out to small businesses? You said you didn’t 

want to tie up SBA necessarily. How do we make sure—would the 

banks be open to some requirement that that be loaned out to 

small businesses? 

Mr. HALL. I think so. I think most banks, that’s what they would 

want to do is to put it in small business loans. 

And as I’ve heard discussed, there would actually be some, incentives for banks based on their small business lending performance; 

the more they do, the lower the cost of the program is to the bank. 

So I think something like that would be very good. 

Mr. BUCHANAN. Thank you. 

Mr. Miller, I know one of the big things I always hear is markto-market. We’re in an area, region, where somebody might have 

a piece of land, you know it’s worth five million three years ago. 

And today, you know, you could put it almost zero, 20 percent or 

some number. So the regulators come in, make them break that 

33 

down. And if they’ve got ten million in capital, all of a sudden 

they’ve got to write down four million or something else. 

Why—you know, everybody talks about adjusting the accounting 

on that, the GAAP, in terms of mark-to-market, the original market. How come they don’t make a concession for a year or two? Are 

you up to speed on that? 

Mr. MILLER. Well, to a degree. And one of the things that we do 

often is poll our membership with regard to, you know, the major 

issues that they’re facing, particularly small business. 

One of the things that has been discussed today is what is collateral. And as—with the problems with regard mark-to-market and 

the lack of identifying, because of the downturn in the housing 

market and the ability to actually identify from the bank’s perspective what collateral is, and at the end of the day when a loan goes 

bad, what is the banker going to be able to hold is a very difficult 

issue. 

And so while there are—the SBA programs help out a lot of the 

banks that are not just trying to manage current loan portfolios but 

actually moving forward, it’s—the real issue is the issue of 

collateralization and as—making the final determination, as a loan 

committee or others are making those determinations on good 

versus bad loans, the lack of ability on mark-to-market 

collateralization is a huge issue. 

Mr. BUCHANAN. Someone says, ‘‘Are the banks lending?’’ Yeah, 

they’ll lend. If you want to borrow a million, put up a million-dollar 

CD; they’ll loan it back to you. 

Mr. Orr, let me ask you, because we’re talking about SBA today, 

and I know you talked about access to capital, have you looked at 

SBA? If you have, great. If you haven’t, why not? 

Mr. ORR. Well, we looked at SBA early on. And actually we did 

participate in an Express Loan, you know, early on in our business, 

a small loan. 

But after that it’s basically every banker we talked to before we 

even filled out an application, within two minutes they could tell 

you if you haven’t been in business for two years, you need not 

apply. 

So it doesn’t matter really how well you’re doing. It doesn’t really 

matter what your balance sheet says. If you haven’t been in business for two years, then you need to survive another year. 

So that’s been our experience, and we’ve survived it. But at this 

point I’m fairly confident we would qualify for an SBA loan. 

Mr. BUCHANAN. I want to say, Mr. Brill, a little bit on the SBA 

thing because you sound like you’ve had some experience with it. 

You said, ‘‘Well, the banks aren’t lending.’’ And I agree with you 

totally. But then if the banks aren’t doing SBA, can’t we look at— 

are there banks in the region—I would say ideally Sarasota/Manatee County, but if you go up to Tampa, aren’t there some banks 

that are open-minded to SBA? 

Part of the concern I don’t understand is if a bank can get a 90 

percent guarantee from the federal government, it seems like a regulator is not going to come in and pop them on it. I mean, they 

might write it down 10 percent, but you’ve got a 90 percent guarantee. 

34 

Why don’t banks do a lot more lending under some of these programs? They have a guarantee. Why not? It’s just crazy. If I was 

a bank, whether I liked to do it or not is one thing, but I’d want 

to do it as a community service, especially in these tough times. 

It might take a little longer, but you still have the guarantee of 

90 percent; where you’ve got a piece of real estate, God only knows 

what that might be worth in a couple of years. What’s your 

thoughts on that? 

Mr. BRILL. Well, when you say banks, lending, community service, that’s an oxymoron. No way. 

Mr. BUCHANAN. Trying to give Brian the benefit of the doubt 

here. 

Mr. BRILL. Like it or not, over the last 25, 30 years banks have 

become the primary source of capital for small business and big 

business, of course. Well, they become the source of capital for 

small business and they have ability and did make loans with a 

certain amount of community access because they do have the SBA. 

But things changed two and a half years ago. And when the 

bank examiners come in, having an SBA loan doesn’t necessarily 

make them, Oh, my goodness, we don’t really care, you can keep 

that as a full asset on your balance sheet, at least up to the 90 percent. That’s not the way that works in the real world. 

The trauma, the absolute trauma, that the bank officers, their 

people, have felt in the last two, two and a half years when they 

see their friends losing their jobs— one guy I know very well; I visited him in Miami and he said, ‘‘Come look at our office.’’ 

We looked at the office. He said, ‘‘This is my desk. Look at those 

other empty cubicles.’’ He says, ‘‘I survived; they didn’t. I’m not 

making any loans, period.’’ 

That’s one thing. Now you’ve got to get the banks themselves, 

and I don’t mean the local banks, Sabal Bank; I mean the major 

banks to say, ‘‘Okay, we’ve got to get the balance sheet working. 

But we’ve got to get the examiners and GAAP to coordinate. Otherwise, it’ll be there a year from now and it’ll be a little bit better, 

but it isn’t going to change.’’ 

Mr. BUCHANAN. I want to thank you, Mr. Brill, and all our witnesses today. We’re on a time frame. We have a big thing on Port 

Manatee down the street. I’m speaking at 12:30 or 12:45. And I 

want to especially thank our Chairman of the Finance and Tax 

Committee, who came all the way here from Oregon. 

I appreciate that, Mr. Chairman. And I yield back. 

Chairman SCHRADER. Thank you very much. It’s been a great 

hearing and a great outpouring of interest, which I think we both 

appreciate. We thank the witnesses very much. 

The members will have five days to submit statements and supporting material for the record. Without objection, so ordered. The 

hearing is now adjourned. Thank you all very much. 

[Whereupon, at 12:12 p.m., the Subcommittee was adjourned.] 

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