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OVERSIGHT OF THE SMALL BUSINESS

ADMINISTRATION’S FINANCE PROGRAMS

HEARING

BEFORE THE

SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC, MARCH 9, 2006

Serial No. 109–41

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS 

JEB BRADLEY, New Hampshire Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

THADDEUS MCCOTTER, MICHIGAN

RIC KELLER, Florida 

TED POE, Texas 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

JUANITA MILLENDER-MCDONALD, 

CALIFORNIA

DANIEL LIPINSKI, Illinois 

ENI F. H. FALEOMAVAEGA, American 

Samoa 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois

ADAM NOAH, Counsel

(II) 

C O N T E N T S 

WITNESSES

Page 

Hager, Mr. Michael, Associate Deputy Administrator for Office of Capital 

Access, U.S. Small Business Administration ..................................................... 6

Mercer, Mr. Lee, President, National Association of Small Business Investment Companies ................................................................................................... 7

Wilkinson, Mr. Anthony, President & CEO, National Association of Government Guaranteed Lenders ................................................................................... 9

Chilcott, Mr. Kurt, Chairman of the Board, National Association of Development Companies ................................................................................................... 10

Schubert, Ms. Lynn M., President, The Surety Association of America ............. 12

Mayo, Mr. Grace, President & CEO, Telesis Community CU ............................. 13

APPENDIX

Opening statements: 

Bradley, Hon. Jeb ............................................................................................. 33

Millender-McDonald, Hon. Juanita ................................................................. 34

Velazquez, Hon. Nydia (Ex Officio) ................................................................. 36

Prepared statements: 

Hager, Mr. Michael, Associate Deputy Administrator for Office of Capital 

Access, U.S. Small Business Administration .............................................. 38

Mercer, Mr. Lee, President, National Association of Small Business Investment Companies ..................................................................................... 45

Wilkinson, Mr. Anthony, President & CEO, National Association of Government Guaranteed Lenders ...................................................................... 53

Chilcott, Mr. Kurt, Chairman of the Board, National Association of Development Companies ........................................................................................ 68

Schubert, Ms. Lynn M., President, The Surety Association of America ...... 77

Mayo, Mr. Grace, President & CEO, Telesis Community CU ...................... 83

Additional Material: 

Edwards, Mr. Bill, Association for Enterprise Opportunity ......................... 90

(III) 

(1)

OVERSIGHT OF THE SMALL BUSINESS 

ADMINISTRATION’S FINANCE PROGRAMS 

THURSDAY, MARCH 9, 2006

HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON TAX, FINANCE, AND EXPORTS

COMMITTEE ON SMALL BUSINESS

Washington, DC 

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

2360 Rayburn House Office Building, Hon. Jeb Bradley [Chairman 

of the Subcommittee] presiding. 

Present: Representatives Bradley, Chabot, Millender-McDonald, 

and Velazquez (Ex Officio). 

Also Present: Representatives Moore and Sherman. 

Chairman BRADLEY. Good morning. I am going to open this hearing and welcome all of you to this hearing on the Tax, Finance and 

Export Subcommittee of the House Committee on Small Business. 

I am pleased to be working closely with my colleagues—I think 

they will arrive here shortly, hopefully—as we review the current 

state of the finance programs of the Small Business Administration. And I look forward to hearing the recommendations made by 

our witnesses in this regard. That said, I would like to thank our 

distinguished witnesses for taking the time to appear before us 

today. 

Access to capital is a vital element in the success of any venture. 

And the knowledge of where to find such resources is equally essential. Accordingly, one of the key roles of the Small Business Administration is to provide financial assistance to American small 

businesses. 

Small businesses are responsible for more than half of the 

United States’ gross domestic product, and the finance programs 

available at the SBA are vital to the development and expansion 

of those small businesses. SBA financial assistance is delivered 

through investment programs, loan programs, and bonding for contractors, among other approaches. It is through these programs 

that small businesses are able to obtain the means to grow, create 

more jobs, increase revenue, and help strengthen our economy. 

Over the years, the SBA and its methods of assistance in the 

strengthening of the small business sector of our economy have undergone changes and improvements. Today we have the opportunity to hear the comments and recommendations of those who 

are on the front line of these programs in order to better understand the demands of the small business sector and to continue our 

support in the most efficient and economical manner possible. 

2

The President’s budget for fiscal year 2007 funds small business lending at $28 billion. $17.5 billion of that funding would go to 

guaranteed loan volume under the 7(a) loan program. 

The section 504 loan program, which provides guaranteed loans 

for fixed assets, such as land, equipment, and buildings, would receive $7.5 billion. And guaranteed long-term loans for venture capital investments in small businesses as a supplement to the capital 

of small business investment companies would be allocated $3 billion. 

Congress must continue to enable small businesses to have access to the capital needed to expand and prosper. The input of 

those working closely with these small businesses is vital to this 

committee as it moves forward with the SBA reauthorization. And 

with your testimony today, we can help create an environment that 

fosters the growth and development of American small businesses. 

I am looking forward to hearing the testimony from our witnesses here today. And I look forward to their thoughts on this extremely important topic. However, before we do so, I would like to 

recognize our ranking member of this Subcommittee, Mrs. 

Millender-McDonald. And I know that Congresswoman Velazquez 

will be here shortly. And she will have an opening statement, too. 

And I will recognize her when she gets here. 

Thank you. 

[Chairman Bradley’s opening statement may be found in the appendix.] 

Ms. MILLENDER-MCDONALD. Mr. Chairman, thank you so much. 

And good morning to all of you. I am pleased to join with the 

Chairman and those members who will be finding themselves into 

this committee room today as we discuss an issue of great importance to our nation’s entrepreneurs. And that is access to capital. 

For budding small business owners, a five-year plan is an essential step towards building a business. This forward-thinking planning sets a strong foundation and demonstrates a commitment to 

success. 

Unfortunately, it has been five years since the SBA has shown 

that same commitment to America’s businesses in the form of a 

new reauthorization plan. Instead, every year we have seen force 

and have been forced to fend off cuts in the budget without any improvements to the SBA financial programs that our nation’s entrepreneurs so desperately need. 

In our discussion today, I want to bring forth new ideas that we 

can use to update and improve our nation’s entrepreneurs access 

to affordable capital. In today’s economy, securing affordable capital is one of the most important components in growing a successful small business. Yet, many small business owners have difficulty 

qualifying for traditional bank loans. All too often, they are forced 

to use various methodologies of financing, such as credit cards and 

personal loans, to fund their business ventures. Because small 

business owners cannot access capital in the same way that large 

businesses can, it has been Congress’ responsibility to ensure that 

there are special financing options geared to meet their specific 

needs. 

This is why it is so critical that we show a commitment to America’s small businesses by enhancing and strengthening SBA’s fiVerDate 0ct 09 2002 20:55 Sep 22, 2006 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\HEARINGS\27430.TXT MIKE
3

nancing programs. These initiatives, including the 7(a), the 504, 

new markets venture capital, and SBIC programs, fill an important 

role. These initiatives fill a financing gap for small firms by making 

loans on great ideas that probably would not have been looked at 

twice by traditional banks. By bridging gaps in the capital markets, 

these programs have more than proven their effectiveness over the 

years. 

In fact, since 1953, nearly 20 million small businesses have received direct or indirect help from one or another of the SBA programs. In turn, the agency’s programs have become the government’s most effective instrument for economic development: creating jobs and providing stability during times of uncertainty. 

These programs are especially helpful for women, minorities, and 

individuals in low-income communities that often face additional 

barriers in accessing capital. Their entrepreneurial success can 

greatly assist in uplifting their local economies. This is where special initiatives, such as SBA’s microloan programs, come in. 

The microloan program assists under-represented small business 

owners with loans that they otherwise would not be able to attain, 

even through the SBA 7(a) program. Last year alone, the microloan 

program provided entrepreneurs with $20 million in loans and 

helped our budding entrepreneurs progress from poverty to successful business ownership. 

Still, over the past three years, the Bush administration has proposed eliminating this vital program. This program deserves to be 

supported, not dismantled. Clearly, access to capital is access to opportunity for our nation’s entrepreneurs. If we sincerely want our 

nation’s entrepreneurs to have the ability to secure capital, spur 

economic development, and create job opportunities, we must support the SBA programs with the long-term initiatives that will ensure their survival. This is why it is so important that we are talking at this time today to review the success of SBA’s financing programs. 

Today we will hear testimony from a variety of organizations and 

individuals representing the various small business programs.Drawing upon their experiences in helping our nation’s entrepreneurs succeed, I am hopeful that their useful insight and recommendations can be used to improve the SBA programs and ensure the success of our nation’s small businesses. 

Mr. Chairman, it is clear that our nation’s entrepreneurs have 

done an outstanding job of creating jobs and spurring economic 

growth. In order to continue their good work, we must be empowered and they must be empowered with all of the necessary tools; 

most importantly, affordable and available capital. If we want our 

entrepreneurs to continue serving as America’s main economic 

drivers and job creators, it is integral that we form a long-term vision for their vital initiatives. 

Mr. Chairman, I thank you so much for this hearing. And I look 

forward to the testimony of all of the witnesses who are here today. 

[Ranking Member Millender-McDonald’s opening statement may 

be found in the appendix.] 

Chairman BRADLEY. Thank you very much, Mrs. MillenderMcDonald. 

4

Now I would like to yield as much time as you would like to consume to the ranking member of the committee, Congresswoman 

Velazquez. Thank you. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. I really appreciate it. 

I also would like to thank Congresswoman Millender-McDonald for 

letting me sit in on this hearing. And I appreciate all of the work 

you are doing on this issue. 

The President never misses an opportunity to proclaim that 

small businesses are a priority for this administration. Yet, time 

and time again, his policies simply do not back up his rhetoric. No 

place is this more apparent than in how SBA access to capital programs are being run. 

Ensuring loans are affordable and that relief from rising capital 

costs is available are both critical in helping entrepreneurs to remain a driving force in today’s economy. 

While this administration has talked the talk, they have failed 

to walk the walk. For evidence of this, one only needs to look at 

the 7(a) program, the largest long-term lending initiative for small 

businesses. 

Under the current administration, lending has grown much more 

costly and harder to obtain. In the past two years alone, costs on 

borrowers have doubled and lender costs have risen by 118 percent, 

making it increasingly difficult for small businesses to receive the 

capital they need. 

As if that was not bad enough, in the F.Y. 2007 budget, the administration plans to further increase the cost of this program by 

proposing to raise current fees and creating a whole new set of 

fees. This would make the program even more costly, only pushing 

7(a) and other lending programs further out of reach. 

It has become very clear what type of effect these poor policy choices are now having. Lending was down by $300 million last 

quarter. When you factor these new costs, coupled with the rising 

interest rates, it is apparent that the trend of less and less capital 

going into the economy is only going to continue. 

Traditional capital is not the only place this administration is 

failing our nation’s entrepreneurs. For the last year and a half, 

SBIC’s participation in security programs has been shut down due 

to mismanagement and poor policy decisions. However, the agency 

has yet to propose a new plan to reopen the program. 

I think this speaks to the level of commitment that exists for this 

nation’s small businesses. When you consider this decision in light 

of the fact that currently less than one percent of venture capital 

goes to minority businesses, it really makes you wonder where the 

administration’s priorities are. 

Compounding this is the proposal to abolish one of the most significant policies affecting low-income entrepreneurs: the microloan 

program. So much for compassionate conservatism. It is just like 

this administration to put politics in front of good policy. They continue to call for an elimination of the microloan program when they 

do not have the support of one single member of the House or Senate. 

This program makes loans to entrepreneurs that are unable to 

get a traditional loan due to inexperience with credit, lack of access, or the need for an ongoing technical assistance. Clearly this 

5

initiative is crucial for the thousands of entrepreneurs that have no 

other means of financing available to them. 

By terminating the microloan program and not reopening the 

participating securities program, the administration is turning its 

back on start-ups of all types that need access to seed capital. 

Blocking access to start-up financing impedes the formation of new 

businesses and prevents the job growth that is still netted in so 

many parts of this country. 

Small businesses are the measured driver of this economy, but 

it is crucial that we work together to make sure that they have the 

tools needed to thrive and be successful. I don’t see the administration coming to the table with the interest of small businesses in 

mind. 

This agency’s proposals repeatedly represent OMB’s interest and 

not those of our nation’s entrepreneurs. Small businesses deserve 

better than this. 

Thank you, Mr. Chairman. 

[Congresswoman Velazquez’s opening statement may be found in 

the appendix.] 

Chairman BRADLEY. Thank you very much. 

And now I would recognize Congressman Sherman for purposes 

of an introduction. 

Mr. SHERMAN. I am here to introduce Grace Mayo of the 

Chatsworth Community Credit Union. She is the president and 

chief executive officer of that credit union. And that credit union 

has really shown among valley organizations in my district for its 

dedication to the community. They’re building a new building, 

which will have a community room. 

Grace herself is involved in virtually every charitable and business organization in the valley. And she has taken a lead in the 

credit union movement and will be particularly able to tell this 

Subcommittee how credit unions can be involved in lending to 

small business. 

So I introduce to you a real valley girl who knows her stuff, 

Grace Mayo. 

Ms. MAYO. Thank you, Congressman. 

Chairman BRADLEY. Thank you very much. 

Now I’ll turn to the panel. Our first witness is Mr. Michael 

Hager, who is the Associate Deputy Administrator for the Office of 

Capital Access of the SBA. 

Our second witness is Mr. Lee Mercer, the President of the National Association of Small Business Investment Companies here in 

Washington. 

The third witness is Mr. Anthony Wilkinson, who is the President and CEO of the National Association of Government Guaranteed Lenders in Stillwater, Oklahoma. Thanks for coming so far. 

The fourth witness is Mr. Kurt Chilcott, Chairman of the Board 

of the National Association of Development Companies in McLean, 

Virginia. 

Our fifth witness is Ms. Lynn M. Schubert, President of The Surety Association of America here in Washington. 

And our last witness, as Congressman Sherman introduced, is 

Grace Mayo, President and CEO of Telesis Community Credit 

Union in Northridge, California. Thank you for coming so far. 

6

So first Mr. Hager. Thank you. 

STATEMENT OF MICHAEL HAGER, OFFICE OF CAPITAL 

ACCESS, U.S. SMALL BUSINESS ADMINISTRATION 

Mr. HAGER. Well, thank you Chairman Bradley, Ranking Member Millender-McDonald,— 

Chairman BRADLEY. If I could just interrupt? I should have started out by saying that because there are six witnesses in this panel 

and we want to make sure we get to questions, if you could do your 

utmost to try to stay within the five-minute rule, summarize? And 

then we’ll be able to have more questions. Thank you. 

Mr. HAGER. Thank you again for inviting me to testify before this 

committee regarding the SBA’s reauthorization and the fiscal year 

2007 budget for capital access programs. I am here this morning 

to talk about the SBA’s incredible loan growth over the last five 

years, our actions to manage that growth, and our actions to manage the risk associated with that growth. 

We have significantly increased our loan volume since 2001, 

more than doubling the number of 7(a) and 504 loans, doing so at 

zero additional cost to our subsidy rates to our taxpayers. 

The President’s fiscal year 2007 proposal provides, as you indicated, Mr. Chairman, $28 billion for SBA’s refinancing of small 

businesses. In 2005, we served more businesses than ever before in 

our two major loan products. And we increased the numbers of 

loans funded by 22 percent in one year, moving from 80,000 in 

2004 to 98,000 loans in 2005. During this period, lending to minorities increased by 23 percent and to women-owned businesses by 39 

percent in terms of the number of loans funded. 

To maintain the zero subsidy cost of these programs, minor fee 

changes will need to occur. And in the 7(a) program, the guaranty 

fee will increase slightly in 2007, from 54.5 basis points to 55 basis 

points, an increase of only one-half of one basis point. 

We are especially pleased that the performance of the 504 program permits the SBA to lower the ongoing fee from 19.8 basis 

points to 1.8 basis points. 

The SBA is seeking authority to cover more of its expenses 

through fee authority that will enhance the ability of the SBA to 

properly manage our programs. First, we are requesting authority 

to charge fees to certify development companies, the CDCs, in the 

504 loan program to cover the cost of oversight. We have the authority for the 7(a) program and are requesting comparable authority for the 504 loan program. 

Second, we are proposing the addition of an administrative fee to 

cover the cost of making loans of more than one million in the 7(a), 

504, and SBIC programs. Now, please, this is separate from the 

subsidy rate, which exclusively considers the credit and potential 

losses of a loan guaranty program. Again, it’s separate from that. 

Based on SBA’s 2005 experience, only 3 percent of 7(a) loans will 

be impacted. And under the 504 program, only 15 percent of those 

loans would be impacted. 

Managing the tremendous growth of our loan portfolio is another 

key priority. Many improvements have been made over the past 

several years by centralizing lending functions. We have centralized 7(a) loan guaranty purchase and liquidation as well as 504 

7

processing. We are moving toward centralization of the 504 liquidation and purchase components and the remaining 15 percent of 7(a) 

loan processing. 

We now process 504 loans in two to three days, as opposed to 

previous time frames of up to six weeks. We also process guaranty 

purchase requests in all-time record time. In order to streamline 

this process of becoming a preferred lender, we are also looking at 

setting up a national point of contact for PLP lenders, replacing today’s 68 points of contact. This move will reduce processing time 

from up to 8-9 months to less than 30 days. 

We are constantly looking at ways to improve lending functions 

and better manage operations. A major initiative underway is to 

streamline the liquidation process. The proposed changes will give 

the agency more flexibility in managing its loan portfolios that are 

being liquidated. If finalized, these regulations will give SBA more 

flexibility to sell purchased guarantied loans using asset sales. And 

we are also proposing that lenders fully liquidate loans prior to requesting purchase. This would be an essential component if we are 

to maximize our resources. 

We also need to manage the risk in our loan portfolio. We have 

a state-of-the-art loan and lender monitoring system provided by 

Dun and Bradstreet that incorporates the best practices of the financial industry. As part of the monitoring system, we have developed and are introducing the concept of lender risk ratings using 

both historical performance and projected future performance and 

are able to evaluate every SBA lender on a quarterly basis. 

Lender risk ratings also allow us to prioritize on-site reviews so 

those with the poorest performing lenders are reviewed first and if 

ratings decline, attention can quickly be focused on those lenders. 

Now, in conclusion, we are very proud of the growth of the programs and our efforts to ensure that this growth is managed effectively. Today SBA is helping more small businesses meet their financial needs than ever before and at no subsidy cost to the taxpayer. 

Let me say again we have three priorities in capital access: continuing our loan growth, managing that growth, and managing the 

risk of that growth. 

Thank you for your time today, Mr. Chairman, Ranking Member, 

and members of the Committee. I will look forward to the Q and 

A time. 

[Mr. Hager’s testimony may be found in the appendix.] 

Chairman BRADLEY. Thank you, Mr. Hager. 

I recognize Mr. Mercer and remind everybody to try to stay within that five-minute time frame. Thank you. 

STATEMENT OF LEE MERCER, NATIONAL ASSOCIATION OF 

SMALL BUSINESS INVESTMENT COMPANIES 

Mr. MERCER. Thank you, Chairman Bradley, Ranking Member 

Millender-McDonald, and full committee Ranking Member Velazquez, members of the committee. 

I appreciate the opportunity to appear today to discuss the status 

of the SBIC program. My written testimony speaks for itself. I believe it addresses all of the issues of relevance. And I will not reVerDate 0ct 09 2002 20:55 Sep 22, 2006 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 G:\HEARINGS\27430.TXT MIKE
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peat that testimony here in detail. Rather, I would like to make the 

following points. 

The SBIC program is one of the most effective programs in the 

world, in the world, in stimulating investment in the smallest of 

fast-growing companies called gazelles by many experts that are 

the foundation of America’s economic structure. The program has 

been studied by virtually all foreign countries interested in stimulating growth in their small business sectors and has been replicated in one form or another by many. 

At the current time, the Bush administration is bent on eliminating the equity investment portion of the program, the participating security program, which represents more than 55 percent of 

investments made last year, and has proposed an ill-considered, illdefined, and damaging new fee for the subordinated debt investment portion of the program, the debenture program. 

With regard to the participating security program, the administration’s actions ignore the demonstrated need for the program, a 

need established in the 2005 hearing held at the full committee 

level last year. 

The participating security program still exists in law, though no 

new funds have been licensed since the close of F.Y. 2004. However, the administration has kept the industry and this committee 

jumping through hoops trying to find a replacement structure because it claims that the underlying security, the participating security, as an equity security does not meet the requirements of the 

Federal Credit Reform Act for the purposes of a credit subsidy program that can be scored for appropriations purposes. Without that 

qualification, the program would need a dollar for dollar appropriation, obviously a non-starter. 

Now, in January, the administration states in writing that participating securities are debt securities and specifically requires 

SBICs to list those securities as debt in their financial statements. 

It cites the Financial Accounting Standards Board, FASB, as authority for this position. 

It seems to me that the administration cannot have it both ways. 

And if the participating securities are debt securities, we can restart the program this year by making simple adjustments in the 

fees and cash flows to bring the subsidy rate to zero. If need be, 

Congress, the author of the Federal Credit Reform Act, can state 

in the reauthorization bill that a participating security is a debt security for all purposes of that act. 

If the participating security program is not restarted one way or 

another, whether, as I have suggested, which is the easiest way, or 

through passage of H.R. 3429 or a like bill, the Bush administration will have succeeded in cutting the SBIC program by more than 

half and will have eliminated all of the SBIC money flowing to 

start up early stage companies. I do not believe that that will be 

a legacy to be proud of. 

We hope the committee will hold the administration’s feet to the 

fire this year so we can solve the problem in a way that will benefit 

the small businesses that depend on the program for equity capital, 

the precursor to all growth. 

To return to the matter of proposed fees for the debenture program, for all the reasons stated in my testimony, the proposal is 

9

ill-considered and will do significant damage to individual SBICs, 

in particular, and the program in general. It attempts to pass costs 

to SBICs that they have no ability to control. Who has the ability 

to control those costs? That’s a question we would like to have answered. 

SBA cannot even tell us to this date how the fee would be imposed. The Investment Division was not involved in developing the 

fee. So we hope and urge the committee to oppose the budget proposal in that regard. 

Finally, I believe our suggestions for the reauthorization bill are 

self-explanatory. We have raised them in the past. We look forward 

to working with the committee to determine how those proposals 

might be adopted to further improve the SBIC program. 

Thank you for your attention. I will be happy to answer questions at the appropriate time. 

[Mr. Mercer’s testimony may be found in the appendix.] 

Chairman BRADLEY. Thank you very much. 

Mr. Wilkinson? 

STATEMENT OF ANTHONY WILKINSON, NATIONAL 

ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS 

Mr. WILKINSON. Thank you, Mr. Chairman, Ms. MillenderMcDonald, Ms. Velazquez, Mr. Chabot. Thank you for the opportunity to testify today. I’m just going to quickly summarize my 

written statement. 

The budget request for 2007 touches on just a few items. Number one, the administration requests a $17.5 billion program level for 

2007. We had requested $18 billion, just a little more than they 

had in their budget proposal. We find the 17.5 to be acceptable. 

The budget request also increases the lender fees up to the statutory maximum. It’s not a big increase, going from .545 up to .55, 

but the real point is that we are now at the statutory maximum 

for that fee and it cannot be increased any further. 

The administration also proposes an administration fee. This is 

something we are adamantly opposed to. It is, in effect, a step towards a government-sponsored enterprise. And, most broadly stated, if we want to move in that direction, we should have proper debate before we start covering what truly is a government function 

at this point. 

The other thing that shows up in the fiscal year 2007 budget request is the fact that we have a declining average guaranty fee in 

our program. We are making more and more small loans, which is 

a good thing. What is missing from the mix is fewer and fewer 

large loans. The large loans, in fact, subsidize the cost of the smaller loans. What has happened over the last five years is that the 

dollar volume of small loans has gone from 18 percent up to 25 percent. Those loans pay a much lower guaranty fee than do larger 

loans. 

To stop this trend, we are proposing an increase in the maximum 

loan size from $2 million up to $3 million and an increase in the 

maximum guaranty amount up to $2.25 million. We think this will 

be a way to stop the trend of a declining average guaranty fee. And 

if we don’t stop that trend, we are going to be faced with some 

tough decisions in the fiscal year ’08 budget that would include 

10

raising fees even further on borrowers and lenders, something we 

would not like to see happen. 

The rest of our legislative proposal is to be able to use the alternative size standard that is available in the 504 and the SBIC programs. We have requested a national PLP program. This is something that the SBA has agreed to. And we are working to get that 

done. 

And, lastly, we had the authorized level of $18 billion. 

That summarizes the written testimony. And I would be happy 

to answer questions. 

[Mr. Wilkinson’s testimony may be found in the appendix.] 

Chairman BRADLEY. Thank you very much 

STATEMENT OF KURT CHILCOTT, NATIONAL ASSOCIATION OF 

DEVELOPMENT COMPANIES 

Mr. CHILCOTT. Again I would first like to thank Chairman Bradley, Ranking Member Millender-McDonald, and the Committee 

Ranking Member Velazquez, as well as the other members of the 

Committee on Small Business for your continued support of the 

CDC industry and the SBA 504 program. 

I represent NADCO as its chair of the board and also CDC Small 

Business Finance based in San Diego, where I serve as President 

and CEO. I am going to address two things with you this morning: 

the proposed SBA budget for 2007 and then NADCO’s legislative 

proposal. 

NADCO has two concerns regarding the proposed budget. First 

of all, the authorization ceiling that has been set of 7.5 billion is 

too low. We have experienced 30 percent annual growth in this program the last three years. We expect that to continue. And we need 

a larger authorization to accommodate that growth. 

If we meet that authorization and exceed it during the year, it 

means the program is shut down, rationed, not available to small 

businesses. It is disastrous. There is no reason not to provide more 

than adequate authority for this program given the fact it’s zero 

subsidy. NADCO requests that you provide an authorization level 

for 2007 of 8.5 billion to avoid the shutdown in service and accommodate program growth. 

The second major issue, as you have heard, is on fees on small 

businesses that are proposed for 7(a) and 504 programs. NADCO 

agrees with the committee that these fees should be removed from 

the budget. It’s as detailed in our written statement. 

We do not believe we should place additional costs on our small 

businesses that detract from their ability to grow and create jobs. 

We are concerned about the precedent of establishing such an administrative fee. How can we be sure that, in fact, these costs are 

justified or SBA will not continue to increase this fee to cover more 

of the agency’s overheads? 

We also are concerned about that this might be the first step in 

moving SBA’s capital programs off budget and out of the purview 

of Congress. So, in sum, we urge you to make removal of these fees 

a top priority. 

In the last several years, the CDC industry and SBA have gone 

through unprecedented structural changes. We have seen the cenVerDate 0ct 09 2002 20:55 Sep 22, 2006 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 G:\HEARINGS\27430.TXT MIKE
11

tralization of our loan processing functions. And we have seen considerable expansion of the CDC’s area of operations. 

These changes are already and are continuing the fundamentally 

change the nature of the industry and the 504 program. NADCO 

believes it’s critical that Congress take action to firmly establish 

the purpose and future of the CDC industry and the 504 program. 

Aspects of our legislative proposal will help streamline the program, reduce costs to small businesses, and increase their ability 

to utilize the program, but I really want to focus on one issue. And 

that is the definition of a certified development company. 

CDCs are the most recent embodiment of state and local development corporations that were established over 50 years ago. Our 

mission and the value that we bring to small businesses, the SBA, 

and the communities that we serve has not and should not change. 

That mission is economic development. As not-for-profit entities, 

our priority, our passion is to help small businesses grow, to create 

jobs, to invest, and become owners and to build strong communities 

in local economies. 

We play a role, provide expertise and service to small business 

and communities and undertake initiatives that banks cannot and 

should not do. We don’t set profitability, return on investment, return to shareholders as our mantras. We count how many businesses we help, how many loans we provide, how many jobs we create, how much private capital we leverage, how many loans we 

make to women, minorities, veteran, rural, low-income, and what 

program services and support we provide to meet our economic development mission. 

Our boards of directors and our membership are made up of economic development directors for cities, counties, and nonprofits, the 

Chamber of Commerce, the local CPA, the community banker. 

NADCO is deeply concerned that SBA has taken steps to blur 

the lines between the 7(a) and 504 programs, despite their different 

missions. And of even greater concern, SBA has introduced competition to the regulatory process that is blurring the lines between 

CDCs and for profit lenders, deemphasizing our economic development and our accountability and commitment to our communities. 

We urge you to take the steps that are outlined in legislation, set 

the course for the future, and clearly define the purpose and role 

of the CDC industry as not-for-profit, financial intermediaries that 

deliver small business programs for the purpose of economic development. 

Finally, we ask you to recognize and acknowledge the network of 

250 small nonprofit organizations as created over the course of 25 

years, tremendously successful and efficient economic development 

finance program that, in turn, supports a tremendous amount of 

local economic development programs and services throughout the 

country. 

I would be happy to answer any questions the committee has. 

Thank you. 

[Mr. Chilcott’s testimony may be found in the appendix.] 

Chairman BRADLEY. Thank you. 

Ms. Schubert? I believe also we have a vote in a few minutes, 

but I think we can hear both of your testimonies and then come 

back for questions. 

12

STATEMENT OF LYNN M. SCHUBERT, THE SURETY 

ASSOCIATION OF AMERICA 

Ms. SCHUBERT. Thank you, Mr. Chairman. And thank you for inviting us here to testify today on this critical issue. 

We are here for one purpose only. And that is to testify about 

the SBA surety bond guaranty program. You may notice this is the 

first time you have heard those words, ‘‘surety bond guaranty program’’ since the Chairman’s opening remarks. This is not a program well-known outside of the construction community and the 

insurance community, but it is critical and vital to small businesses, particularly at this time. 

The Surety Association was involved many years ago in creating 

the program. And we remain committed to the viability of the program and the workings of the program. 

The existing leadership, new leadership, of the program also appears to be committed. And we look forward to working with them. 

But they cannot do it alone. They need your help in making this 

program work. 

For those of you who are not completely aware of what this is 

all about, to obtain a construction project on a public project, 

whether it’s federal, state, or local, a contractor needs to provide 

a surety bond. Small and emerging contractors have a very difficult 

time obtaining those bonds until they show that they have a track 

record of success and they have financial backing. 

Obtaining loans for these contractors is a wonderful thing, but it 

will not get them a surety bond. And they will not get that work 

without both the loan and the surety bond. 

There are contractors who have the opportunity to participate, 

particularly right now, in the reconstruction in the Gulf Coast 

states in helping to rebuild those areas as well as rebuild their own 

businesses. But those contractors are going to need surety bonds. 

Surety companies, when the economy is good and everything is 

strong and contractors are being paid rapidly, sureties are willing 

to participate with those contractors and put their backing behind 

the contractor because they believe the contractor will be able to 

perform the work. If they don’t perform the work, the surety then 

pays the loss. 

In slow economic times, however, those contractors have a more 

difficult time completing the work because pay comes to them slower. Owners are slower in making the payments on the project. It 

is more difficult for them to complete the work. 

Sureties understand that. They have a responsibility to make 

sound business judgments. They have a responsibility to their 

shareholders. They cannot take a risk that the contractor is not 

going to perform when it’s not a sound business risk. That is where 

the bond guaranty program comes in. 

What the SBA does is provides guarantees up to 70, 80, or 90 

percent of the loss depending on the particular program, for small 

contractors if a surety will write that bond. 

Because the surety writes the bond, the contractor can work on 

public construction. They can establish a track record. They can become a stronger contractor. They then are moved by those sureties 

from the bond guaranty program into the standard surety market, 

meaning that the surety will write that contractor without the 

13

guaranty, allowing, then, more capability or capacity for new and 

different contractors to come in through the guaranty program. 

It’s a win-win for everybody who is involved in the program, but 

the program is in serious trouble. There has been very little commitment to the program over recent years. And there are a few 

fundamentals that just absolutely have to be changed to make this 

program work for small contractors. 

First, the program has to recognize that as surety companies lose 

money in certain years, the program is not going to be self-sufficient every year. It will make money some years, and it will lose 

money some years. 

OMB has determined it needs to be self-sufficient and has proposed a 60 percent fee increase to the sureties. This is absolutely 

untenable. A proposal has been made to reduce the fee increase but 

to make up the funds to increase the fee to the small contractor. 

The small contractor is already paying enough to participate in this 

program. This needs to be changed. 

The rates that sureties are allowed to charge in the program are 

stuck in rates that were established in 1987. Those are 20 years 

old. If we can just have a change that would allow sureties to 

charge the rates that are approved by the state insurance departments, then the program would be more financially viable. And 

there needs to be more funding for staff and for education of the 

staff on the surety bond program. 

As you could probably tell by listening to all of the testimony 

here today, just like everyone else, the staff at the SBA regional 

offices know a great deal about the loan programs and very little 

about the bond program. They need training on the bond program. 

There needs to be a commitment at the highest level to this program. 

Sureties are interested in the program. However, it has to be financially viable for them to participate. We would like to work 

with the SBA and with Congress to make this a workable program 

for small businesses in the United States. 

Thank you. 

[Ms. Schubert’s testimony may be found in the appendix.] 

Chairman BRADLEY. Thank you very much. I think that we are 

down to just a few minutes of the close of the vote. So if it all right 

with you, Ms. Mayo in particular, Mrs. Millender-Mcdonald, I think 

both of us would like to go. And she would like to be here to hear 

your testimony. 

So if we can postpone you until we get back in about—I think 

it’s one vote. So probably about ten minutes we should be back. 

Thank you. We will be in recess. 

[Brief recess.] 

Chairman BRADLEY. Thank you again for your forbearance. At 

this time I would like to recognize Ms. Mayo. Thank you once again 

for coming so far. 

STATEMENT OF GRACE MAYO, TELESIS COMMUNITY CREDIT 

UNION 

Ms. MAYO. Thank you, Chairman Bradley; Ranking Member 

Millender-McDonald; and, of course, Ms. Velazquez. On behalf of 

the Credit Union National Association, which we refer to as 

14

CUNA—and I will do that within my message—I obviously appreciate the opportunity to address the Small Business Administration’s funding level and fee structure for the 7(a) guaranteed program. 

I am Grace Mayo once again, President and CEO of Telesis Community Credit Union. And my wonderful congressman, Brad Sherman, was delightful to come in and give me that intro. So thank 

you for seeing him. 

Just so you know, I am also the chairperson of a credit union 

service organization as credit unions are cooperatives. And one of 

the things that we do best is we share our resources amongst each 

other. So with that, we created this MBL CUSO, member business 

service called Business Partners. We are cooperatively owned by 14 

credit unions around this country, and we service 160 of them nationwide. 

What we do is we try to use our resources in assisting them to 

provide member services, especially the SBA lending program. So 

we unite, use these expertise, and get to the membership as soon 

as we can. 

CUNA represents basically 90 percent of our nation’s approximately 8,800 state and federally chartered credit unions. With 

that, we represent over 87 million members. So, once again, we are 

so thankful to let us be here and share this because we are a growing entity in obviously the entrepreneurship. These are members 

that have either lost their jobs, have downsized, and now are looking at becoming entrepreneurs. 

And within my written testimony, as you will notice, Telesis has 

been very active. In fact, we are the largest SBA lender in California. And, darn it, we’re going to continue that because we have 

seen the enrichment that this program along with our business 

lending programs give to the entrepreneurs. 

In my written document, you will see that the first two have 

been females. They are, of course, the ones that we are also trying 

to make sure that we support accurately. And the movement totally understands that. 

The industry has only been given SBA approval since 2003. They 

issued a legal opinion removing restrictions. And so we’re very new 

to this marketplace. However, we love SBA. And I use that adjective, but we do sincerely mean that. 

Without this program, because of our overregulate burdens on 

the member business side, we have no choice but to make sure that 

we utilize the wonderful SBA programs. This is good news for credit unions, and obviously it’s even better for small businesses as you 

have documented in your written testimonies. 

So we understand the SBA. And we understand it is very difficult from the SBA that some of our small business owners cannot 

get these loans from the larger banks, especially as the conglomerates take its place. 

Credit unions are very well-known to give out smaller business 

loans. In fact, our average SBA loan limits are somewhere around 

98,000 on the average. This is our niche. This is what we want to 

do. And when we help our members, I’m not kidding you. I would 

believe if they were here today, they would hug each and every one 

15

of you for getting it because the entrepreneurship is the growth of 

our economy. 

Once again, credit unions are homegrown. We are community 

credit unions for the most part, regardless of our bonds. And so 

this is our mission. 

CUNA is hopeful that credit union participation in the 7(a) program will continue to grow. Of course, we have concerns, though, 

with the appropriation. We highly support the appropriation funding, not only for this fiscal year but beyond. 

And, of course, we urge you not to support the fee increases because our small business members are the ones that are burdened. 

And the last thing we want to do, obviously, is to turn them away. 

And what has happened is when we have SBA loans that are 

turned down in our institution, we literally have calls from the outside market, capital venturists, hard money lenders, that say, ‘‘If 

you didn’t approve of the SBA loan, can we have that referral?’’ 

Now, that might be a good thing to a certain degree, but the 

down side is for the long term, that small business owner is giving 

up sometimes their equity position in the company. And they’re obviously not being charged the up-front fees, but their interest rate 

is severely higher. 

So, once again, CUNA strongly supports legislative initiatives to 

reduce the program’s fees, especially when it comes to the smaller 

loans, and has advocated for the highest possible appropriation. 

Additionally, as credit unions and credit union members are—

and you have to understand they are accustomed to almost no fees 

from credit unions. This really takes us out of the marketplace so 

that we can provide this type of wonderful program’s ongoing futures. 

Many credit unions, including mine, have been approached, as I 

said, once again, by outside entities. And we don’t want to turn 

these entrepreneurs down. 

Another roadblock—and this is significant for us—is that there 

is a threatening ability for us to expand in the 7(a) program. As 

gracious as they were and Hector Barreto was wonderful in aligning our industry to come in and support this program, we are imposed with a very big cap. In fact, this program in member business loans has a cap of 12.25. 

CUNA strongly supports H.R. 2317. It is called the Credit Union 

Regulatory Improvements Act, which proposes, among other things, 

to increase the current cap that credit unions are limited to in providing business loans at 12.25 to just up to 20 percent. It also increases the loan threshold from 50,000 to 100,000. 

Through the government guaranteed portion of the 7(a) program, 

basically we believe that if you help us raise this cap, we can then 

continue to support the SBA program. The arbitrary limits that are 

currently in place greatly restrict many credit unions’ ability to 

offer business loans and, as a result, once again, may prohibit us 

in providing the 7(a) program to our members. 

In reforming credit union member business limits, as proposed in 

H.R. 2317, Congress will help to ensure a greater number of available sources of credit to small businesses. More credit unions could 

enter the business lending market and take advantage of the SBA’s 

16

7(a) and other loan programs, which ultimately benefits the small 

business owner. 

In closing, we urge Congress and this Subcommittee to reconsider the importance of the 7(a) program in helping support small 

business in this country and improve the funding process for this 

very significant program by, one, pursuing legislation that would 

reduce the program fees without affecting the program level; two, 

restoring the 80 million appropriation for 2007 and, I urge greatly, 

in the future; and, of course, three, reforming the credit union 

members’ business lending limits. 

I thank you so much for this opportunity. 

[Ms. Mayo’s testimony may be found in the appendix.] 

Chairman BRADLEY. Thank you all very much. 

Let me start out the questioning with a question to Mr. Hager. 

There has been testimony about increasing the cap size of the 7(a) 

loan to $3 million. What would be your position on that? Would you 

favor something like that? 

Mr. HAGER. The $3 million proposal that we received information 

on in the last couple of days in 2007 would have a slight positive 

impact on the subsidy rate. 

We have not seen, I have not seen personally a lot of demand for a $3 million loan. We believe what we have is sufficient. 

Chairman BRADLEY. So you don’t think it is necessary? Okay. 

A question to Ms. Mayo. In your testimony, you mentioned that the credit union average loan size is less than $100,000. I think 

you said 98,000. Yet, 7(a) loans under $150,000 have grown pretty 

significantly, even after fees were raised. Why do you support the 

appropriation to eliminate the fees in that case? 

Ms. MAYO. Because even though we have all grown—and honestly when you design a program which focuses on the smaller 

loans and as lenders, that is exactly the marketplace we will go 

for—what is happening here is that if you start increasing those 

types of fees, it makes it much more difficult for us to persuade our 

member borrowers to take this program. 

So what we are hoping for is that there will be less of these fees 

in the future. I mean, if we are going to live with what we do 

today, I believe we will continue. But if you lessen it, I believe it 

gives us all more opportunities to go after and help those entrepreneurs that have already been gun-shy. 

So for all the increases you see, the other question is, how many 

have we not helped because of this? 

Chairman BRADLEY. Mr. Wilkinson, would you comment on the 

same question? 

Mr. WILKINSON. Could you repeat the question, please? 

Chairman BRADLEY. Well, the question is that the loan growth 

of under $150,000 has been pretty significant, I believe about 25 

percent over the last couple of years, despite the increase in the 

fees. 

And I would say, just for full disclosure, I think I have agreed 

with the minority members on the committee and have opposed, actually, when we have had a chance to vote on this on the floor imposition of the fee. 

So I am interested in the fact that, even despite these fees, the 

loan growth has been pretty significant. Why do you think that is 

17

the case? And is it as major an impediment as some people believe 

it is, obviously Ms. Mayo? 

Mr. WILKINSON. Well, the fees have just been one part of the 

issue. And yes, there have been some fee increases, but the small 

loans have taken the smallest portion of the increase. But the other 

side of that coin is that the indirect costs of this program have actually gone down. 

SBA has done a very nice job over the last five years with their 

SBA Express program. And they have taken other initiatives that 

have streamlined the process, making the smaller loans much easier today than it was five years ago. So while there have been some 

fee increases, there have been some indirect cost decreases to offset 

that. And yes, volume has been up 20-25 percent. 

Chairman BRADLEY. And even if the fees are to continue, as the 

administration’s proposal would have it, do you feel that that volume growth is also going to continue as the demand is out there? 

Mr. WILKINSON. I don’t know that we will continue to see 25 percent growth, but that would be more of a function of the significant 

rise in interest costs we have seen over the last couple of years, too. 

I mean, a couple of years ago, prime was half of what it is today. 

And higher interest rates slow down demand. And so we are seeing 

a little softening, but it would be more attributable to higher interest rates. 

Chairman BRADLEY. Another question to you, Mr. Wilkinson. The 

7(a) loan program has now been without an appropriation and has 

been self-funded for a fairly long period of time. Are your members 

happy with this situation? 

Mr. WILKINSON. Yes. We went to zero subsidy at the beginning 

of the last fiscal year. So we have been on zero subsidy now for a 

year and a half. And we have had plenty of loan authority to meet 

demand. We have not faced any of the caps, shutdowns, program 

restrictions that we suffered through the decade previously. So 

thus far, zero subsidy has worked just fine. 

Chairman BRADLEY. Ms. McDonald? 

Ms. MILLENDER-MCDONALD. Thank you so much, Mr. Chairman. 

And thanks to all of you for your testimony. 

Mr. Hager, I am deeply concerned about the increase in fees, especially to those who tend to not have the opportunity to get loans 

in the manner that they solely need. And when you have a community such as mine, which starts at the base of Watts but goes down 

to Virginia Country Club, then I have from the most impoverished 

to the most affluent. But I am speaking about those that are the 

small ones in the Watts and the Compton area. 

We know that SBA eliminated the prime and the microloan programs in its budget. Why is it that SBA is opposed to having specific programs targeted to low-income communities? 

Mr. HAGER. Thank you for the question. You know, if you take 

a look at 2005 and 2006, the number of loans at 150 and below, 

the total loan portfolio of the SBA, 78 percent of those loans were 

less than 150. 

Ms. MILLENDER-MCDONALD. Were less than? 

Mr. HAGER. A hundred and fifty thousand. So we are making lots 

of smaller loans. I mean, our growth in the smaller loans has been 

outstanding. We believe that a combination of— 

18

Ms. MILLENDER-MCDONALD. To whom are you making those 

loans? I need to have them more specifically identified. Are they 

women? Are they minorities? And within the minority, who are 

they? Are they disabled? I need to have some specifics on that percentage that you’re speaking of. 

Mr. HAGER. You know, I would be pleased to— 

Ms. MILLENDER-MCDONALD. Provide that for me? 

Mr. HAGER. Absolutely. 

Ms. MILLENDER-MCDONALD. Would you please do that? 

Mr. HAGER. The thing I would like to comment on is that in my 

opening comments, I referenced the number of loans that were 

being made to women and— 

Ms. MILLENDER-MCDONALD. You have. And I have that. 

Mr. HAGER. Yes. 

Ms. MILLENDER-MCDONALD. You have 23 percent to minorities— 

Mr. HAGER. That is correct. 

Ms. MILLENDER-MCDONALD. —and 39 percent to women. 

Mr. HAGER. That is correct. 

Ms. MILLENDER-MCDONALD. But within that scope, I need to 

know how many within that—the 39 percent are women. How 

many of the 23 percent to minorities are that of women? You see, 

because sometimes when you say 39 percent women, 23 minorities, 

they are still intertwined within those percentages. 

Mr. HAGER. That is correct. 

Ms. MILLENDER-MCDONALD. So that’s why I want to know just 

where are we in terms of that. 

Mr. HAGER. I will get the number for you. 

Ms. MILLENDER-MCDONALD. I need to have that, sir. 

Mr. HAGER. I want to bring up—I keep hearing the fee issue. 

And, you know, it was part of the comment here. 

Ms. MILLENDER-MCDONALD. Yes. 

Mr. HAGER. I want to show, if I may—I’ve got an exhibit that I 

would like to show. If you take a look at this chart, this chart represents the fee, 7(a) fees, since the year 2002. And if you take a 

look at these fees, the only fee that is greater than at any time 

since 2002 is the half of one basis point we’re talking about for next 

year, for the annual fee. And it’s going up to the threshold that 

we’re allocated to. But all other fees are no more than they were 

back in 2002. We have held those fees. 

We believe our fee structure is very solid. We believe it’s good 

when you compare it to what has gone on with rising costs 

throughout the country in financial services. So we feel pretty good 

about the fee structure. 

Ms. MILLENDER-MCDONALD. Well, is that fee structure anyplace 

within your group, sir? 

Mr. HAGER. No, ma’am, it is not. 

Ms. MILLENDER-MCDONALD. The other question that I do have is 

that your 7(a) program has returned in excess of $1.2 billion in excess of these fees to the treasury in the past 10 years. And it’s due 

to its overcharging of small businesses and lenders in the program. 

Now, rather than increasing 7(a) fees, as the administration recently did and proposes to do it again, why didn’t the SBA propose 

a plan to write this wrong and return the money that it wrongfully 

took from the program participants in the first place? 

19

Mr. HAGER. You’re going back in history on me that I— 

Ms. MILLENDER-MCDONALD. I understand that. And I’m saying 

you don’t go back that far but as far back as you go. And I would 

like for you to look into that. I would like for you to look into that 

because if there is any funding that is being returned back to the 

treasury from those who have been overexposed by fees, then certainly that should be something that is put back into a pot for 

these small business people to get. 

Mr. HAGER. I will absolutely when I get back look into that. 

Ms. MILLENDER-MCDONALD. Okay. 

Mr. HAGER. It’s a good point. 

Ms. MILLENDER-MCDONALD. Mr. Wilkinson? 

Mr. WILKINSON. Ma’am? 

Ms. MILLENDER-MCDONALD. You said in your presentation—I 

started writing all these names until I don’t know now just what. 

I might ask you a question that should have been someone else’s. 

But you did speak to administrative fees. 

Mr. WILKINSON. Yes, ma’am. 

Ms. MILLENDER-MCDONALD. And you don’t know whether that’s 

a government function in the first place? 

Mr. WILKINSON. It is a government function, the lender oversight 

part. 

Ms. MILLENDER-MCDONALD. But you did have some question 

about the administration fee imposition? 

Mr. WILKINSON. This is a fee that has nothing to do with credit 

subsidy. It is a fee to start paying salary and expense dollars. 

And I still don’t understand why the magic number of 7 million. 

It just appears to be a start of okay. This year is 7 million. Next 

year is 17 million. At some point in time, they want to have all the 

administrative costs covered by the program, which, in effect, what 

a government-sponsored enterprise is. And so if we’re going to go 

down that road, we should just recognize it up front. Let’s have 

that discussion. 

Ms. MILLENDER-MCDONALD. And, Mr. Chairman, just, really, one 

more question, please. And that is I see my red light, but I have 

got to ask this question. 

Now, when you talk about the amount of increase in the 7 loan—

I think, Mr. Wilkinson, you proposed that. I was trying to follow 

you. 

Mr. WILKINSON. The increase in the maximum loan size. 

Ms. MILLENDER-MCDONALD. Yes. Yes, it is yours. 

Mr. WILKINSON. Up from 2 million to 3. 

Ms. MILLENDER-MCDONALD. That is correct. And, yet, small businesses don’t really partake in that because those small loans still 

do not go to the smallest entrepreneur. Those loans tend to still go 

to the highest level of those who are requesting loans and do not 

go to the lower borrower, which means even if it’s an increase, this 

does not necessarily help that lower entrepreneur, it seems, from 

the data that I have gotten. 

Mr. WILKINSON. Okay. I guess I am not totally following the 

question. 

Ms. MILLENDER-MCDONALD. All right. 

Mr. WILKINSON. But we’re missing a gap in our program. I disagree with Mr. Hager from SBA that he hasn’t seen them in. I just 

20

had our management retreat last week. And the number one topic 

from the folks who attended was ‘‘We need a way to service our clients who need bigger loan requests. And we’re missing those loans 

between 2 and 3 million dollars.’’ 

Now, that is a different kind of product than the small loan product that is being done through SBA Express. 

Ms. MILLENDER-MCDONALD. And we understand that. But our 

7(a) loan programs have also been for the little guy and girl, too, 

to some degree. 

Mr. WILKINSON. Well, I think that is why you see 78 percent of 

our numbers of loans that are being made are in the small loan 

category. 

Ms. MILLENDER-MCDONALD. All right. Let me just say this. This 

committee is Tax, Finance and Export. I want to see more small 

businesses have an opportunity to go international, but how can 

they when they do not even in their own country have the propensity to get loans and to have those in a credible way where fees 

are imposed in a way that they cannot broaden their horizon, if you 

will? 

Thank you, Mr. Chairman. 

Mr. WILKINSON. If I could just add one quick comment on that? 

Without the bigger loans, we’re going to see pressure in the subsidy 

rate going forward, which we’re going to have to consider raising 

fees on those small loans in the future. And that’s why we need to 

add the bigger loans that pay higher guaranty fees that subsidize 

the cost of smaller loans included in our loan mix. 

Ms. MILLENDER-MCDONALD. I will come back to this later. 

Chairman BRADLEY. Congresswoman Velazquez? 

Ms. VELAZQUEZ. I will defer to Ms. Moore and then the— 

Chairman BRADLEY. I am sorry. Congresswoman Moore? 

Ms. MOORE. Well, thank you, Mr. Chairman. Thank you, Ranking Member, for yielding. 

I think I want to start my line of questioning out to Mr. 

Wilkinson because I was confused or stunned a little bit by a comment you made as I was coming into the room. And perhaps you 

have answered it already. But you talked about the larger loans 

subsidizing the smaller loans. 

I’m very concerned because there seems to be a huge gap in loans 

made to minority businesses versus majority businesses. And as 

those loan volumes decrease, most of them being made under 

$150,000, the guaranties also decrease, which squeeze minority 

businesses more and more and more. 

I am wondering because it is my sense that there are many small 

minority businesses that come with the same portfolios, the same 

capacities to borrow but, yet, they don’t get the larger loans and 

they also don’t get the larger guaranties. 

And given our discussion here today regarding increasing fees for 

borrowing and so forth, I want to know how we meet our goals to 

provide more funds to minority businesses in this environment. 

Mr. WILKINSON. Well, first of all, looking at the number and the 

dollar amount of loans going to minorities back to 2000, we have 

gone from 26 percent of the numbers of loans up— 

Ms. MOORE. How about the amount? I’m talking about the— 

21

Mr. WILKINSON. —to 34 percent. And the dollar amount, we have 

gone from 30 to—let me get on the right line here—33 percent of 

the dollars. And that’s year to date in 2006. 

Ms. MOORE. But you seem in your testimony to be advocating for 

lower loans, for under $150,000 loans, which also reduces the guaranties. 

Mr. WILKINSON. We support making small loans. And you can 

see that. There has been a tremendous growth in the amount of 

small loans being made. But those loans pay a disproportionately 

low guaranty fee. 

So as that part of the portfolio becomes bigger and the large loan 

part becomes less, we collect a smaller guaranty fee. That means 

the subsidy costs are going to go up. So what we have to do is get 

some more larger loans into the mix so that the fees on those 

smaller— 

Ms. MOORE. Give the larger loans to minorities is what I want 

you to do. 

Mr. WILKINSON. I would be happy to give it to whoever. 

Ms. MOORE. But that is not what is happening from those data. 

I want to ask Mr. Hager before my time expires questions about 

the commitment to venture capital for minorities. The President 

has—you know, there has been a rescission of the new market venture capital program. For as long as I have been here, last year 

and this year again, there has been no reauthorization of the new 

market venture capital program. 

I know you are going to tell me about the SBIC and so forth. 

Those loans are available to more mature companies, the debenture 

program. Can you tell me how we propose to meet our goals to help 

minority business, small businesses, women-owned businesses 

when we are not committing to the generating of these businesses? 

We are proposing higher fees. We just heard Mr. Wilkinson talking about—you just heard the dialogue between us regarding minority businesses getting lower and lower and lower loan amounts. 

And I am concerned that we are not meeting our mission to help 

grow minority businesses in this environment. 

Mr. HAGER. Thank you. Congresswoman Moore, more than 15 

percent of SBIC funds licensed between 2002 and 2005 had at least 

one minority or female fund manager. 

Ms. MOORE. Thank God for that one. 

Mr. HAGER. I said either one minority or one female that was in 

a very large position within that SBIC. 

I believe that one way to accomplish what you’re concerned about 

is making sure that the infrastructure of the SBIC ownership, if 

you will, are minority and women. And they will definitely look out 

for— 

Ms. MOORE. But why not just fund the new market venture capital program, which would be a more direct—there would be a more 

direct match in those types of businesses that could benefit from 

it, as opposed to those minority businesses that have to reach such 

a high bar? 

The SBIC clearly is targeted for more mature businesses. And we 

know that minority businesses are last in. So what I am saying is 

that translation to me is—because we saw what happened with the 

22

first round of the new market venture capital program. There was 

significantly more minority participation. 

And the fact that it has not been reauthorized indicates to us a 

lack of willingness to generate those businesses. It’s a more direct 

way of doing it. Wouldn’t you agree? 

Mr. HAGER. I still believe that one way to achieve the concern 

that you have is to make sure that we have women and minorities 

in fund manager positions, meaning the very top of the leadership 

of that SBIC, to enable that SBIC to be looking and targeting more 

venture capital funds to minorities and women. I believe again that 

that— 

Ms. MOORE. You have completely not answered my question because the fact is that the SBIC loan program structure is inimical 

to minority businesses that make up 50 percent of the small business community. The new market venture capital program is structured to assist businesses that are minority businesses. 

And you have so not answered my question. Thank you. 

Chairman BRADLEY. Congresswoman Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Hager, we are working on a reauthorization of SBA. In light 

of your earlier comments that the larger loan proposal creates a 

positive subsidy rate for F.Y. 2007, would SBA support putting this 

proposal in the committee’s reauthorization bill? 

Mr. HAGER. We support the proposal that is in the budget today. 

I would not go beyond that. 

Ms. VELAZQUEZ. So that means that anything that is not in the 

proposal, you are opposed to? 

Mr. HAGER. I would not go beyond what is in the budget. 

Ms. VELAZQUEZ. In your testimony, you mention that the loan 

monitoring system is able to draw on historical as well as projected 

performance of SBA loan portfolio. 

Mr. HAGER. Right. 

Ms. VELAZQUEZ. I am concerned that the recent hurricanes could 

increase defaults in SBA loan programs and lead to further fee increases in the future. How have the recent major hurricanes affected the SBA’s portfolio to date? And what are your expectations 

of the potential future impact? 

Mr. HAGER. Congresswoman, that is an outstanding question and 

one that as we look upon the Gulf area—I have spent a lot of time 

down there. I was down there two days last week. I’ve gone back 

and forth many times, concerned. What are we going to start seeing in trends? 

And I am pleased to say so far we have not seen a degradation 

of those trends. We will continue to monitor it. We will continue 

to watch it. We will continue to be flexible wherever we can. But 

so far we have not seen a degradation of the portfolios down there 

yet. 

Now, again, it’s still early. And it takes a lot of constant monitoring to see what kind of trend may develop. But so far it’s okay. 

Ms. VELAZQUEZ. Ms. Grace Mayo, 85 percent of the 1,759 credit 

unions that offer business loans do not participate in the 7(a) loan 

program. And only 93 credit unions have actually made at least 

one loan in the program. Are the high and constantly increasing 

23

fees associated with the 7(a) program deterring credit unions from 

participating in the 7(a) program? 

Ms. MAYO. To a certain degree, yes. And I do have a suggestion, 

though. If we do have the larger loans come in, one of my concerns, 

obviously, as an industry is, is that going to impact all of the 7(a) 

program, especially if we’re talking about the smaller loans? 

If anything, maybe as a committee, my suggestion could be—and 

this is just Grace Mayo alone—that possibly if we have the continuation of the subsidy or the zero subsidy, then maybe we can consider a higher guarantee for the smaller cap, the smaller loans. 

Maybe then we can have even more momentum to the minority 

groups and really carve that program out. 

But, going back to your question, the other problem with our industry is, one, we’re very new to the SBA world because we did not 

have that authority until 2003. 

The other reason is SBA in its own right—and I’m not putting 

any negative comments, but they have had to downsize their resources. So it takes us a while. The SBA program is not that simple to administer. And we would obviously like to engage. But it 

is also the MBL cap that we’re prohibited to really commit ourselves into these programs. 

Ms. VELAZQUEZ. So let me ask you if there is a point at which 

higher lender fees make this program not worth it for credit 

unions. 

Ms. MAYO. Right. We would see less participation, absolutely. 

Ms. VELAZQUEZ. Mr. Wilkinson, in your testimony, you state that 

‘‘It is significant that the budget clearly shows, as NAGGL has long 

argued, that the large loans subsidize small loans.’’ Given the significant decline in the average size of the 7(a) loan, is it your opinion that SBA’s focus on making smaller loans through SBA has 

ironically created the dire situation that we now face? 

Mr. WILKINSON. Well, they have had a focus on small loans, particularly through the Express product, but I don’t think they have 

tried to exclude large amounts up to the point where they banned 

us from using combination financings. That provision of law expired, a combination financing or piggyback. 

So we don’t have a way to get the larger loans into the loan mix. 

That’s where we need that big loan back in the mix to keep the 

fees down so we don’t face fee increases in the 2008 budget. 

Ms. VELAZQUEZ. I will come back, Mr. Chairman. 

Chairman BRADLEY. As long as everybody is okay, we will have 

a second round of questions. 

Ms. VELAZQUEZ. Sure. 

Chairman BRADLEY. Mr. Wilkinson, I would like to go back to the 

microloan situation. The testimony of the SBA and Mr. Hager is, 

if I can paraphrase it correctly, that because more and more smaller loans are being made and a greater percentage of smaller loans, 

that the microloan program is not as necessary as it is in the past. 

Would you agree with that assessment? 

Mr. WILKINSON. First of all, I am not a microloan expert. So I 

have not ever participated in that program. I have had some discussions with some folks who have done microloans. And it is my 

understanding from them that their average credit scores are quite 

24

a bit lower than the average credit scores that we would use in a 

7(a) product. But that’s the only information I would have. 

Chairman BRADLEY. Anybody else want to chime in on that? 

Mr. CHILCOTT. Sure, Mr. Chairman. CDC small business finance 

is an SBA micro lender. We also offer a number of other products 

for small businesses that would not otherwise be available as a 

part of our mission. And, in essence, what we are able to provide 

is if a small business contacts us, we provide access to a full range 

of alternative finance programs for that small business. 

It could be a 7(a) loan. It could be a 7(a) community express loan. 

It could be our SBA microloan. It could be a loan pool that we have 

that a number of banks have created. So in the full range of financing that is available out there, certainly the SBA microloans that 

we are making are for those who cannot access a traditional 7(a) 

community express type of loan. 

Chairman BRADLEY. So you would support retaining the 

microloan? 

Mr. CHILCOTT. We believe it still serves a viable purpose out 

there in terms of meeting a need that is not met by other programs. 

Chairman BRADLEY. I would like to go to Ms. Schubert for a moment. There has been so much talk about the Gulf Coast. And you 

focused a little bit on that in your testimony. 

First of all, I think you said that there was a necessity for further training for the bond guaranty staff. Would you talk about 

that briefly? 

Ms. SCHUBERT. Yes. Under the Plan A, the regional staff actually 

approves a bond before it’s written. And so for a surety to submit 

applications to regional staff to ask for approval of a bond, you 

need someone at the staff level who actually knows something 

about underwriting surety bonds. 

Unfortunately, there have been over the years changes in the 

staff, reductions in the staff. And there are not as many welltrained surety folks out there. 

Chairman BRADLEY. And is this essential in getting reputable 

contractors into the Gulf Coast area and ability to rebuild? 

Ms. SCHUBERT. We believe it is. If you want to allow the local 

and the small businesses to participate in that rebuilding, they’re 

going to need bonding capability, particularly with some of those 

businesses having had the same kinds of issues as other businesses 

in the Gulf Coast. They have lost some of their capacity. They have 

lost some of their people, some of their construction equipment. 

We are going to need a guaranty to back up the sureties’ willingness to take that risk to assist those contractors to participate in 

those programs. 

Chairman BRADLEY. Let me move in the time remaining in this 

round of questions to Mr. Mercer. Sir, what happens if there’s no 

legislation that restarts the participating securities program or a 

similar equity-focused program? 

Mr. MERCER. Well, equity financing, as the Chairman knows, is 

how you start small businesses. I mean, you can’t have debt without equity. So all the SBA lending programs to any small businesses depend on those small businesses having a strip of equity, 

sufficient equity, to qualify them for loans. 

25

The participating security program is the only pure equity program in the SBA arsenal. So a company like Build-A-Bear, for instance, which I think maybe you know of or anybody who has children knows of, was launched by two SBICs, now a very successful 

public company. That’s not the type of program that traditional 

venture capitalists, who focus on high tech investments and 

biotech, are going to invest in. Over the past four or five years, about $4 billion of investments 

have gone into manufacturing companies, 30 percent of the investments last year. That disappears. So small companies—and they 

are few in number, but they tend to be the gazelles that grow dramatically and then will need senior lines of credit—will not have 

equity available to them. 

Chairman BRADLEY. Mr. Hager, do you want to chime in on any 

of those questions? 

Mr. HAGER. The only thing I would say, Chairman Bradley, is 

that the participating program is going to cost the taxpayers $2.4 

billion. We have another 3.6 billion promised. That’s going to yield 

another 500 million to 700 million. We don’t know what that number is yet. 

The program is a bad deal for the taxpayer. The program, I think 

the venture capital monies that we believe can more effectively be 

used will be the debenture program. We have absolutely no problem with that. 

We do have a problem with funding a program that is costing the 

taxpayers unbelievable amounts of money of their dollars. 

Mr. MERCER. Could I? 

Chairman BRADLEY. Sure 

Mr. MERCER. One, SBA is in a negative cash position. That’s correct. We won’t know for 12 or 13 years what the eventual outcome 

will be in terms of absolute loss. Right now it’s in a negative cash 

position. 

The economy has improved. SBA receipts from the participating 

security program are increasing dramatically. So maybe in 12 

years, we can come back here and figure out what the actual loss 

is going to be. 

There’s no question and the industry has agreed that there 

should be some restructuring of the economics, if you will, in 

quotation marks of the participating security program to address 

the risk that SBA has. 

And a substantial amount of that $2 billion in negative cash is 

the result of the crash of the economy that we just went through 

in the recession. I don’t think anybody’s portfolio remained unscathed. And participating security SBICs during that period did 

not perform any worse than the funds that, for instance, CalPERS 

invested in. 

So to say it was a fatally flawed program is just not true. Does 

it need adjustment? Can it be restarted? Yes. It really depends on 

whether Congress wants to have an equity program. 

Thank you. 

Chairman BRADLEY. Congresswoman McDonald? 

Ms. MILLENDER-MCDONALD. Yes. Thank you so much. 

Mr.—is it Chilcott? 

Mr. CHILCOTT. Chilcott. 

26

Ms. MILLENDER-MCDONALD. Why is it that the 504 programs are 

not as well-known as the 7(a) programs? And has the reduction of 

the SBA fill staff affected the 504 programs’ liquidation? 

Mr. CHILCOTT. I would be happy to answer that second question 

first if that’s okay. 

Ms. MILLENDER-MCDONALD. Whatever. 

Mr. CHILCOTT. I will get to the first one. But certainly with regards to what is happening with SBA 504 liquidations, we have a 

major concern, which we have expressed for some time now, that 

as the District’s portfolio management staff has been eliminated, 

that, in fact, a number of our loans that are supposed to be handled by SBA are not being liquidated in an effective and timely 

manner. 

And there are many CDCs across the country that do not have 

information about what is happening with their loans. We’re not 

sure about the status of that. We know that they are there, but we 

have been unable I think to really get the kind of information that 

would provide any sense of recoveries, what’s happening with those 

loans. And if I’m a small CDC and I’ve got a couple of loans in liquidation and they are not liquidated in a timely manner and I suffer losses, that has a big impact on my ability to deliver loans and 

on SBA’s oversight of my organization. 

So we continue to be concerned about those loans that have been 

stuck between eliminating the portfolio management staff and our 

hope and legislation that will hopefully move that responsibility 

with compensation to the CDCs themselves. 

In terms of why the 504 program is not well-known, I think my 

first response to that is that in many ways it depends on the area 

of the country that you’re in in terms of how well-known the program is. 

I would say in California, we have—that program is very wellknown. We probably have more banks that are helping to offer and 

market that program. We have an extremely strong secondary market that is buying the first trust deeds. And the program is just 

very well-known out there in the marketplace. 

Ms. MILLENDER-MCDONALD. And I know you support the 504 

programs. I am just saying that you might think in California, perhaps in some areas, there is a great appreciation for the program, 

but there are some areas that still do not. 

And, Mr. Hager, I come back to you on that because we know 

that 504 lending is expected to increase by at least 20 percent this 

year. So how many employees does SBA intend to add on to the 

centers to process this increased loan volume, especially in minority communities? 

Mr. HAGER. An excellent question. We have a strategy that has 

been created to handle the loan volume. I mentioned it in my opening comments. 

Ms. MILLENDER-MCDONALD. Yes, you did. 

Mr. HAGER. We are going to manage the growth. And the way 

we manage the growth is to make sure that we have a proper infrastructure to handle the increased loan volume. 

The SBA has a number of proposals that are very close to closure, centralized loan processing. And in 504 liquidation, as a matter of fact, we will hopefully very soon move from a lot of the field 

27

staff into two processing centers to be able to leverage our resources to handle and accommodate the loan volume. 

We believe that longer-term we have a proposal also on the table 

to require liquidation from the CDCs and the 7(a) lenders before 

we actually provide the guaranty. They know more about the liquidation than we do. 

So our proposal is let the liquidation take place in the CDCs. 

We’ll manage the growth. 

Ms. MILLENDER-MCDONALD. Providing you have the staffing. 

Mr. HAGER. Well, the CDC would provide that staffing. 

Ms. MILLENDER-MCDONALD. Staffing. Okay. Mr. Wilkinson, do 

you want to comment on that? 

Mr. WILKINSON. Could I comment on that? Yes. The comment period on SBA’s proposal to liquidate first, as we call it—they call it 

the business loan and development company loans, liquidation, and 

litigation procedures—had some proposals that would be very detrimental to the 8(a) program. 

We have sent in a comment letter. And I would like to provide 

a copy of that letter to the committee and ask that it be included 

for the record. 

Mr. WILKINSON. We are happy to work with SBA. And we have 

passed this on to them. Our members are happy to do the work of 

the liquidation process. But honoring the guaranty in a timely 

fashion is going to be very important. 

Delaying any kind of payment of that guaranty to the end of a 

liquidation, which can sometimes take 18 months to 2 years, becomes very expensive. Those costs are going to turn right around 

and be put back on— 

Ms. MILLENDER-MCDONALD. So, Mr. Hager, then how do we 

honor this in a timely manner, then, to circumvent any imposition 

of negatives? 

Mr. HAGER. We believe, again, that the overall process of transferring the actual liquidation to the lender will enable, actually, a 

more effective processing of that claim, that, in fact, that at the end 

of the day won’t create delay problems. It won’t worsen the purchase of the guaranty or delay it more than what we have today. 

That’s our opinion. 

Ms. MILLENDER-MCDONALD. Ms. Mayo, do you want to patch in 

here? 

Ms. MAYO. I just want to support the 504 program in California. 

In fact, we just did a drug rehab right outside of your area, in 

Crenshaw, and it was through the— 

Ms. MILLENDER-MCDONALD. Not in my area. 

Ms. MAYO. No, it wasn’t yours. 

Ms. MILLENDER-MCDONALD. I’m further south. 

Ms. MAYO. It was Maxine’s, actually. 

Ms. MILLENDER-MCDONALD. That’s right. 

Ms. MAYO. And she was very happy to— 

Ms. MILLENDER-MCDONALD. Don’t get us mixed up here. 

Ms. MAYO. I won’t, but I just want to reiterate that the 504 program is very valuable in helping this type of insurgence, really, to 

the communities. One area— 

Ms. MILLENDER-MCDONALD. We want to see more in my district, 

though. 

28

Ms. MAYO. I would be happy to as long as you open up our field 

of membership, but that is a whole different story. 

Ms. MILLENDER-MCDONALD. Mr. Hager is going to help us to do 

that, I’m sure. 

Ms. MAYO. He is absolutely right. And the only thing that we do 

ask is when we go and, unfortunately, if the business does go in 

failure, then obviously the guaranty portion needs to be expedited 

very quickly back to us as a lender. 

So we’re happy to take that initiative. I believe that is our role. 

I think that helps expediently get through the process of losses. 

But then the response back from the agency needs to be just as efficient. 

Ms. MILLENDER-MCDONALD. I just want to again make a statement that our communities need these programs. And they have 

got to be broadened where they get to the very little Joes and 

Janes in the communities. And that is what I am talking about. 

Thank you so much. 

Chairman BRADLEY. Congresswoman Moore? 

Ms. MOORE. Well, thank you, Mr. Chair. 

I believe it was Mr. Mercer who really gave us the discourse on 

how the SBA loan programs were in a negative cash position and 

that was one of the bigger problems. I guess that leads me to sort 

of take another stab, Mr. Hager, at my question that I had for you. 

I am wondering, I am suspicious, quite frankly, that programs 

that benefit minority communities and minority entrepreneurs, 

women entrepreneurs, that the SBA is balancing its act on their 

backs. 

We look at the 7(a) program. I mean, it’s a program designed for 

those people who are unable to get financing on reasonable terms. 

The new market venture capital program that we talked about before, it focused on investments in low-income communities. The 

community express program again focused on under-served communities, with 85 percent loan guaranty. 

It seems to me that given the strapped position of SBA, that 

they’re targeting the programs where program guidelines would 

more benefit minority lenders. And I’m wondering why the administration is—it appears that they are balancing their acts on the 

backs of minorities. I guess I want you to respond to that. 

Mr. HAGER. Congresswoman Moore, in all due respect, I totally 

disagree that we are balancing anything on the backs of minorities 

and— 

Ms. MOORE. These are the programs that are not getting refunded. The funds have been in rescissions, the programs, the very 

programs, that would help them the most. 

Mr. HAGER. We spend and we have a budget in the SBA of $100 

million to assist those that need education on how to apply for a 

loan. They need education on how to create a business model. They 

need education on ‘‘Well, what do I do with it now? How can I take 

it on to reality? We have an extremely strong, $100 million outreach program to handle these kinds of issues.’’ Yes, the community express program has historically made loans to a very large 

degree to women and minorities. 

Ms. MOORE. But that’s what I’m saying. It expires May 31st. 

29

Mr. HAGER. The pilot for the community express program was 

extended to May. And there are lots of alternatives being worked 

out in the community express program. 

Ms. MOORE. But I heard just from the ranking member here and 

others that microloans—how much are you allocating to them, new 

markets programs? 

Mr. HAGER. The microloan program is a program that has been 

flat. If you take a look at— 

Ms. MOORE. Flat? Is that the same as zero? 

Mr. HAGER. No, in growth. Microloan has been flat in growth 

over the last several years. We believe that those loans that historically perhaps the bank walked away from today they’re not walking away from those loans. They’re making them. Our loans less than $150,000 amount to 78 percent of our portfolio. I mean, we are making small loans. We are reaching out to 

communities with $100 million investment in education. 

Ms. MOORE. We appreciate the two percent of the venture capital 

financing that you’re giving to minority businesses. We appreciate 

that two percent. But, you know, just because I’m paranoid don’t 

mean it ain’t happening that you’re destroying the infrastructure 

for minority businesses. 

And it seems obvious, you know, because, you know, budgets 

aren’t just about dollars and cents. And you have failed to tell me 

how much money you have put into these programs. They are 

about priorities. They’re about what your values are. 

So you can tell us all day long that you want to help, you want 

to get information out to minority businesses about how to be a 

business, but when you don’t give up the money and when there 

are recisions on program funds and you flat-fund the programs, you 

know, like Peter Drucker said, communication is about what ain’t 

being said and in this case about what ain’t being done. 

My time has expired. 

Chairman BRADLEY. Thank you. 

Congresswoman Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Hager, recently the SBA IG team concluded a report about 

the STAR loan program. While I know that you were not at the 

SBA at the time, what is your perspective on their report? Did SBA 

implement the program in a manner that was unclear or did lenders simply hear what they wanted to hear? 

Mr. HAGER. Congresswoman, that’s, again, an excellent question. 

The STAR program was done before I arrived. I’ve done a lot of 

work on the STAR program. 

One, the IG audit was at the request of the administrator. He 

asked for it. Two, the disaster that we all remember on that morning on 9/11 will be with us for the rest of our lives. The need to 

get money, capital into the affected areas was extremely— 

Ms. VELAZQUEZ. Sir, you know, I have five minutes. 

Mr. HAGER. Okay. 

Ms. VELAZQUEZ. I just can’t go into the whole background and 

history. 

Mr. HAGER. You know, very quickly— 

Ms. VELAZQUEZ. Will you please answer my question? Was it 

SBA or the lenders— 

30

Mr. HAGER. It was— 

Ms. VELAZQUEZ. —based on the report and the conclusion of the 

report? 

Mr. HAGER. The report concluded that in some cases, documentation was not adequate. We do not believe there is a problem. We 

think that the lenders that made these loans made them with good 

faith. And we have a robust process now in— 

Ms. VELAZQUEZ. No. I’m not talking about now. I’m talking— 

Mr. HAGER. No. I think the program— 

Ms. VELAZQUEZ. —at the time when the report was made. 

Mr. HAGER. The program served its purpose. It served it in my 

opinion well. 

Ms. VELAZQUEZ. So SBA did everything fine and the lenders did 

not? 

Mr. HAGER. SBA did, we believe, everything fine. The lenders in 

some cases have not documented. They reached a conclusion without support documentation in some cases. 

Ms. VELAZQUEZ. Okay. Let me ask you this. SBA has announced 

that it will not process repurchases of STAR loans that do not possess suitable lender documentation justifying the loans as a STAR 

loan. Have you exercised this policy to block the SBA repurchase 

of a defaulted 7(a) loan? 

Mr. HAGER. We are today making sure that there will be no 

guaranty completed without the proper documentation. In those 

cases where documentation is not appropriate they are being returned to the lender to make sure that the documentation is there. 

Ms. VELAZQUEZ. Mr. Wilkinson? 

Mr. WILKINSON. I would agree with Mr. Hager that the STAR 

program served its purpose. There has been a very limited number 

of instances where— 

Ms. VELAZQUEZ. I just want for you to tell me if you have any 

concern about the new policy. 

Mr. WILKINSON. No, ma’am. The situation seemed to be where 

there are files with no documentation whatsoever. If the lender did 

not do that, they need to go put it in the file. 

But thus far, the good news is that star loans perform better 

than the other 7(a) loans made during the same time period. And 

the issues coming to me regarding STAR loan defaults have been 

zero. 

Ms. VELAZQUEZ. Do you believe, Mr. Hager, that the negative 

publicity surrounding STAR contributed to the failure of the Go 

Loan program? 

Mr. HAGER. No, ma’am, not at all. By the way, STAR was implemented according to the direction of Congress. The Go Loan program, by the way, is not creating hundreds of millions of dollars, 

but Go Loan is serving a good purpose. 

I talked to Guy Williams, Gulf Coast Bank in New Orleans. And 

he will— 

Ms. VELAZQUEZ. Mr. Wilkinson, the Go Loan program has no— 

Mr. WILKINSON. I would respectfully disagree. I had members 

who said they would not participate in the Go Loan based on the 

way the STAR issue was blown totally out of proportion. The rider 

on STAR confused STAR loans with disaster loans. And the mess 

went from there. 

31

Ms. VELAZQUEZ. Thank you. 

Mr. Hager, the significant backlogs related to the recent hurricanes have created substantial processing backlogs for disaster 

loans. Has the SBA been using District employees assigned to 

other SBA programs to help with the processing of those loan applications? 

Mr. HAGER. Yes, ma’am, they have. 

Ms. VELAZQUEZ. How is this affecting these other programs? 

Mr. HAGER. It is not affecting those programs. We have loaned 

in some cases on a very limited basis, and then we transferred 

those folks back. 

Ms. VELAZQUEZ. Mr. Chilcott? 

Mr. CHILCOTT. Certainly the use of some of our centralized processing staff in Sacramento for disaster loan purposes slowed down 

our approval processes. But I would add that those five people are 

back in the processing center. And we have seen that processing 

time get down to certainly a reasonable, quick turnaround. 

Ms. VELAZQUEZ. Mr. Chilcott? 

Chairman BRADLEY. One more? 

Ms. VELAZQUEZ. May I? 

Chairman BRADLEY. Yes. 

Ms. VELAZQUEZ. Okay. Well, let me ask this one. Mr. Hager, 

looking forward, you have indicated that the agency is not ready 

to support larger loans to make up a possible funding shortfall in 

the 7(a) program. You opposed those in appropriation. 

What would be our option? Would the agency propose more fees 

to make a future shortfall in the 7(a) program? 

Mr. HAGER. We have everything on the able that we think is required right now. We are not proposing any more fees other— 

Ms. VELAZQUEZ. If there is a shortfall, can we get a guarantee 

that you will not come to us for an increase in fees? 

Mr. HAGER. No, ma’am. 

Ms. VELAZQUEZ. ‘‘No, ma’am’’ why? 

Mr. HAGER. I will not give you a guarantee we won’t be back. 

Ms. VELAZQUEZ. So what you are telling me is that higher fees 

are a possibility? 

Mr. HAGER. I’m not saying. I will have to wait and see the facts. 

I can’t give you that answer right now. 

Ms. VELAZQUEZ. Tony? 

Mr. WILKINSON. We are concerned that SBA has used all of the 

tricks in the bag to get us to zero subsidy this year. We are concerned that if the trend with the declining average guaranty fee 

continues, that there is not going to be a choice but to push for 

higher fees. That is why we are pushing so hard on the $3 million 

loan size to try to keep that average guaranty fee from declining 

any further. 

Ms. VELAZQUEZ. But when we were discussing loan size and all 

of that, they say, Mr. Hager, it seems to me that he is saying, that 

higher fees are not an option. So between higher fees and appropriation, what would be your position? 

Mr. WILKINSON. Well, our position is the bigger loan size because 

we think it is subsidy rate— 

Ms. VELAZQUEZ. He said, he is on record, that they do not support the loan size. 

32

Mr. WILKINSON. I did not hear him say he didn’t support. I heard 

him say that— 

Chairman BRADLEY. I think what he said is that it was not necessary at this time. Isn’t that correct, Mr. Hager? 

Mr. HAGER. That is correct. 

Mr. WILKINSON. I think what he is talking about is the ’07 budget. There is nothing needed for the ’07 budget. our concern is the 

’08 budget because we have driven this car to the end of the road. 

If I could, I hate to go back to the liquidate first. There are some 

fee increases in the ’07 budget. The lender fee goes up a little bit. 

That pales in comparison to what the cost of the liquidate first policy can be. And I am really hopeful that we can spend some time 

on this. 

There are two pieces. Who does the liquidation work? Lenders 

are happy to do that. We originate the loan. We service the loan. 

We will be happy to liquidate it. But when do we honor the guaranty? Judicial disclosure states it could take up to two years for a 

foreclosure to be completed with the lender sitting there holding an 

asset on non-accrual. And it would. It would disproportionately 

hurt smaller banks. 

We’re very concerned on the liquidate first policy. That’s more 

expensive than the fee increase we’re seeing in the ’07 budget. 

Ms. VELAZQUEZ. I am telling you we have two options. On larger 

loans, it is not going to happen. So it’s either increasing the fees 

or appropriation. Where do you stand? 

Mr. WILKINSON. I don’t know what the fee would be in the 2008 

budget. And there may not be one. Performance of the portfolio 

may be good enough that that is not anything we would have to 

address. We are just concerned that that is where we are headed. 

Chairman BRADLEY. And on that note, if there are further questions for any of the witnesses, they can be submitted for the record. 

I thank the members for participating in the hearing and thank 

the— 

Ms. VELAZQUEZ. Mr. Chairman, I just would like— 

Chairman BRADLEY. —witnesses very much, too. 

Ms. VELAZQUEZ. —to make it clear that I will be submitting some 

written questions to SBA. 

Mr. HAGER. Thank you very much. 

Ms. VELAZQUEZ. And I expect answers as soon as possible,— 

Mr. HAGER. You will get them. 

Ms. VELAZQUEZ. —not three months from now. 

Mr. HAGER. No. You will get them right away. Thank you. 

Chairman BRADLEY. And once again I thank all of the witnesses 

for participating in this hearing today. 

[Whereupon, at 12:41 p.m., the foregoing matter was concluded.]

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