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91-191 PDF 2004

S. HRG. 108–238

SBA REAUTHORIZATION: CREDIT PROGRAMS

(PART II)

ROUNDTABLE

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

MAY 1, 2003

Printed for the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED EIGHTH CONGRESS

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

ROBERT F. BENNETT, Utah

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE ALLEN, Virginia

JOHN ENSIGN, Nevada

NORMAN COLEMAN, Minnesota

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK PRYOR, Arkansas

MARK E. WARREN, Staff Director and Chief Counsel

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(III)

C O N T E N T S

OPENING STATEMENTS

Snowe, The Honorable Olympia J., Chair, Committee on Small Business

and Entrepreneurship and a United States Senator from Maine .................... 1

COMMITTEE STAFF

Warren, Mark, Staff Director and Chief Counsel, Majority Staff ....................... *

Forbes, Patty, Staff Director and Chief Counsel, Minority Staff ......................... *

PARTICIPANTS

Bew, Ron, Associate Administrator, Office of Capital Access, U.S. Small Business Administration, Washington, D.C. ............................................................. *

Brown, Blake, Chief Financial Officer, Coastal Enterprises, Inc., Wiscasset,

Maine .................................................................................................................... *

Casey, Peter, Vice President, Colson Services, New York, New York ................. *

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

Cripe, Julie, President and Chief Operation Officer, Omnibank, Houston,

Texas ..................................................................................................................... *

D’Agostino, Davi, Director, Financial Markets and Community Investments,

U.S. General Accounting Office, Washington, D.C. ........................................... *

Foren, Wayne, Managing General Partner, DCC Growth Fund, LP, Alexandria, Virginia ........................................................................................................ *

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

Companies, Washington, D.C. ............................................................................. *

Mitchell, Herb, Associate Administrator, Office of Disaster Assistance, U.S.

Small Business Administration, Washington, D.C. ........................................... *

Robertson, Sally, Executive Director, Virginia Asset Financing Corporation,

Fairfax, Virginia ................................................................................................... *

Tesdell, Kerwin, President, CDVCA, New York, New York ................................ *

Wieworka, Ardith, Commissioner, Massachusetts Office of Child Care Services, Boston, Massachusetts ................................................................................ *

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bew, Ron

Prepared statement .......................................................................................... 96

Brown, Blake

Prepared statement .......................................................................................... 99

Casey, Peter

Letter ................................................................................................................. 102

Crawford, Christopher

Prepared statement .......................................................................................... 4

Post-roundtable questions posted to Mr. Crawford ....................................... 118

Cripe, Julie

Letter ................................................................................................................. 106

D’Agostino, Davi

Prepared statement .......................................................................................... 37

Additional information for the record ............................................................. 108

Mercer, Lee

Prepared statement .......................................................................................... 64

Robertson, Sally

Prepared statement .......................................................................................... 112

Post-roundtable questions posted to Ms. Robertson ...................................... 123

Page

IV

Tesdell, Kerwin

Prepared statement .......................................................................................... 79

Wieworka, Ardith

Prepared statement .......................................................................................... 26

Letter ................................................................................................................. 110

COMMENTS FOR THE RECORD

Danton, Heather, Vice President, SEED Corporation, Taunton, Massachusetts, letter ............................................................................................................ 128

Dorgan, The Honorable Byron L., a United States Senator from North Dakota, letter and prepared statement ................................................................... 129

Easley, The Honorable Michael F., Governor of North Carolina, letters ............ 134

Eurkus, Erika, Greater Boston Program Director, ACCION, Boston, Massachusetts, letter ...................................................................................................... 135

Guinn, The Honorable Kenny C., Governor of Nevada, letter ............................. 136

Hodges, The Honorable Jim, Governor of South Carolina, letter ........................ 138

Kerry, The Honorable John F., Ranking Member, Senate Committee on Small

Business and Entrepreneurship and a United States Senator from Massachusetts, prepared statement .............................................................................. 140

Korsh, Eric, Director of Loan Funds, Neighborhood Business Builders, Boston,

Massachusetts, letter ........................................................................................... 143

Madaus, Edward P., Executive Director, Guild of St. Agnes, Worcester, Massachusetts, letter .................................................................................................. 144

Patton, The Honorable Paul E., Governor of Kentucky, letter ............................ 145

Sikes, Christopher, Executive Director, Western Massachusetts Enterprise

Fund, Inc., Greenfield, Massachusetts, letter .................................................... 147

Southern Governors’ Association, letter ................................................................ 148

*Comments (if any) between pages 2 and 93.

(1)

SBA REAUTHORIZATION: CREDIT PROGRAMS

(PART II)

THURSDAY, MAY 1, 2003

UNITED STATES SENATE, COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, Washington, D.C.

The Committee met, pursuant to notice, at 9:38 a.m., in room

SR–428A, Russell Senate Office Building, Hon. Olympia Snowe

(Chair of the Committee) presiding.

Present: Senator Snowe.

OPENING STATEMENT OF OLYMPIA SNOWE, CHAIR, SENATE

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR FROM MAINE

Chair SNOWE. Since time is of limited duration here—I have a

vote at 10:15 and conflicting markups—we will begin and I will dispense with much of my opening comments. Suffice it to say that

I truly appreciate the fact that you are all here this morning to

continue this dialogue regarding the upcoming reauthorization of

the Small Business Administration (SBA). This has been very helpful to me as new Chair of the Committee on Small Business and

Entrepreneurship. Senator Kerry and I will be working on some of

these issues together.

This has been very instructive for me in this process, so I really

appreciate your helping to continue this discussion. Today, obviously we will be concentrating on the 504 program, the disaster

loan program, the venture capital programs that include small

business investment companies, and the New Market Venture Capital program, all of which have been extremely effective and successful programs that have played a pivotal role in the growth of

our economy and the growth of small business.

Just looking at the numbers in the 504 loan program, in the past

3 years, the SBA has provided guarantees for more than 15,000

new loans through the 504 loan program, almost 3,000 for new

business startups and more than 12,000 for existing small businesses. The total number of jobs created and retained as a result

was 325,471 jobs during the 3-year period, which I think underscores the value of this program to small businesses and to our

overall economy.

Obviously, the SBA’s venture capital programs have also been

extremely effective, particularly at a time as you well know, that

lending institutions have had to ratchet back availability to small

businesses in particular because of the stock market bubble burst.

As a result, it has been much harder for small businesses to access

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venture capital. That is where these programs have really come in

to play. In fact at a time in which venture capital firms have decreased their investments, the number of SBICs have increased.

There are now 443 licensed SBICs and they have made more than

16,000 investments in small businesses since the start of fiscal year

1999 with a total of more than $17 billion in value. Clearly they

have played a critical role in the creation and retention of almost

a half-million jobs during this period of time.

SBA’s disaster assistance program, obviously, is their foremost

direct lending program. In the wake of the terrorist attacks on September 11th, the SBA approved more than 11,700 business disaster

loans to businesses across the country with a total volume of more

than $1.1 billion.

We understand that the SBA has improved its efficiency in approving and processing these applications, and in fact increased the

percentage of applications processed within 21 days during each of

the last 4 years. I would like to commend the SBA for really upgrading the process and making it more efficient and effective. We

want to thank the SBA for that as well.

Again, I appreciate your presence here today and your thoughtfulness that you give to the recommendations that you will be advancing. Obviously, your full statements and comments will be put

in the record in their totality. So let us begin with the 504 program, and anything else, particularly since I am not going to be

here for the entire duration, so please feel free to give me your

comments on those issues that you consider to be a priority.

Mr. CRAWFORD. Good morning, Senator. I am Chris Crawford. I

am Executive Director of NADCO, the 504 Trade Association. I

would like to make just a couple of points, if I might, about the program.

First of all, we do appreciate your support through the years and

the Committee’s support. Secondly, the most important thing to us

is that our program must be reauthorized by September 30th. We

are unlike other SBA programs in that we receive no appropriations. So if we are not part of an appropriations bill, on September

30th we are dead ducks if we are not reauthorized. So that is crucial to us. I would also say that our core mission, as you probably

know, is job creation. You cited the numbers over the past 3 years.

I believe SBA’s numbers over the life of the program are in excess

of 1 million jobs created, which is a pretty impressive record. Our

loan volume for this year is up 22 percent, year-to-date, over last

year. Last year we were up 15 percent, and we continue to grow.

As the banks contract and pull in their credit horns, there is a further demand for this program and it is crucial.

I would say that we have traditionally been part of the 3-year

reauthorization. I believe the Administration is proposing a 6-year

reauthorization. We are opposed to that. We believe that is too long

of a time to go between Committees looking at the program. Business lending is a dynamic process, a dynamic program. However,

business needs change. The only way we can change the program

year to year is through the reauthorization process.

We have provided the Committee with a substantial legislative

package. We are working with your staff and Senator Kerry’s staff

on that package. We hope you will seriously entertain it and work

3

with us on that. We have also talked to the Administration about

it. I think we have had very productive discussions with the Administration.

OMB, I cannot help but bring up the subsidy model. Once again,

we are concerned about the fees of the program. We have talked

for the last 6 years now about the inaccuracies of the subsidy

model. We continue to be concerned about that. We would like to

see it continue to be looked at. We would like to continue to work

with the Administration on the subsidy model to see that it is revised and made more accurate. We have concerns about, frankly,

the recovery rate on the program. The subsidy forecast for this

coming year is a 17-percent recovery rate. That is extremely low.

We believe that there are better ways to work with recoveries on

our defaulted loans and, again, we would like to work with the Administration on that.

Finally, I would comment on, and you touched on it, the centralization pilot, the processing pilot. This pilot has been in effect,

I believe, for only 2 months. At this point its track record, in my

view, is nothing short of phenomenal. They have reduced the processing time for 504 loans for small businesses from anywhere from

2 weeks to 30 days to 40 days down to 2 to 3 days, which is amazing. Frankly, we predicted it. So it is coming true. We want to encourage the Administration to continue to move more district offices into this pilot as its success continues, and we are very supportive of it.

Finally, I believe that Sally will talk about some things such as

streamlining and centralization.

[The prepared statement of Mr. Crawford follows:]

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Chair SNOWE. It appears with that pile that we need to.

Ms. ROBERTSON. Good morning, Chair Snowe. I am Sally Robertson with Virginia Asset Financing. We are the state-wide Certified

Development Company in Virginia that delivers the 504 program.

Our CDC has done over 1,000 loans for small businesses resulting

in $1 billion dollars in projects, and our borrowers have created

over 12,000 jobs as a result of those financings. Nationwide, I think

through a variety of programs, CDCs have seen over 1 million jobs

created through their efforts.

We think it is extremely important that the 504 program get reauthorized given the sluggish condition of the economy, the rising

unemployment rates, and the ability of 504 to help the small business sector grow and create more jobs. Again, since it is at no cost

to the taxpayer it would seem to be a fairly simple decision to reauthorize the program.

I would also like to mention that our small business owners who

have benefited from the 504 program would tell you, if they were

here today, that the things that make this program so important

to them are the low down payment, the fixed rate, and the long

term. They would not have been able to make the next step in their

growth process if they had not had the 504 program to do that

with.

I will also tell you that they will consistently say that the paperwork is extraordinarily burdensome in a 504 loan. I have brought

with me an application package and a closing package. If you had

to produce all that paper to do this loan, it is extraordinarily burdensome and there has to be a way to streamline this.

Chair SNOWE. That is one loan?

Ms. ROBERTSON. One loan. One application package, one closing

package.

Chair SNOWE. That is really unbelievable.

Ms. ROBERTSON. We need to find a way to reduce the paperwork.

This is not only from the small business owner’s perspective, but

as we get into the centralized process it is extraordinarily difficult

for SBA personnel to properly do their job when they have this pile

of paperwork that they have to look at in order to properly approve

or look at a loan that is being closed. We think there are a lot of

ways in which this can be reduced.

The CDCs, I think, are overall very much in favor of centralized

processing. As you know, in this day and age, small business owners are used to instant communication and instant information.

Sellers of property are also used to that. If a small business owner

cannot get a loan approval in a reasonable time he is likely to lose

that property and the opportunity to grow and expand his business

and create more jobs. We need to be able to give them a quick turnaround time on loan processing. Thirty days is just too long. Centralized processing, given the reduced staffing at the SBA, is critical to that. In order to make centralized processing work we have

got to reduce the paperwork.

Chair SNOWE. Without question. You would think that even one

pile would be too much, let alone two for one application.

Ms. ROBERTSON. I would agree. You have to admit too that this

adds to the cost of the program for the small business owner.

Chair SNOWE. No question about that.

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Mr. BROWN. I just wanted to make a comment that in Wisconsin

we do not have enough filing space. We are also a CDC, doing the

504 program. I think we currently have about 110 loans outstanding. I would agree with Sally that the administrative part of

it gets quite burdensome, so any effort to make that more streamlined would be helpful.

Chair SNOWE. Ron, do you think that is possible?

Mr. BEW. Absolutely. When I came on board a year ago, I looked

at the 7(a) programs and made changes to 7(a), and now the focus

is on the 504 program. Somebody deemed that, even though I am

credited with it, I am not sure I did, this is the year of the 504,

just to show our emphasis and focus on this program. When I was

a lending officer, I did a loan, a huge loan with VEPCO which is

Dominion Resources, and the documentation was that much more

for a multi-million dollar loan.

Ms. ROBERTSON. This one was $300,000.

Mr. BEW. So it is a great visual of the problems in the program.

We definitely will streamline this program.

Chair SNOWE. We appreciate that.

Julie.

Ms. CRIPE. I would like to make two comments. One, I concur

with the reduction of the paperwork. As a lender of a $300 million

community bank, of which I am the President, we do many, many

504 loans. We find it is a great program. That is my day job, and

by night I was the President of a state-wide CDC in Texas, and I

am now the Vice President. I stepped back after 8 years.

It is a great program but the paperwork is very burdensome to

small businesses. The small businesses I deal with are very busy.

They walk into the closing room and they really have a reflex that

is unbelievable when they see the paperwork. It sometimes takes

4 and 5 hours to pass the documents around just for signature. So

I concur with that.

I would like to make one comment about recoveries, because I believe that everything is into interrelated, and it speaks to our subsidy rate and the reason that we perhaps do not get the subsidy

rate we would like to see. I think there is a lot of work that can

be done on recoveries that are positive for taxpayers and lenders

and CDCs. I have seen many examples, which I will not go into,

of SBA making a decision not to buy out a first lien or to rush to

walk away from a 504 second lien position when in fact they could

recover 75 to 100 percent of the debenture amount. As a taxpayer

that is distressing to me. As a lender, the bank comes out whole,

no question. But wearing my CDC hat I feel that it can be worked

on in some very simple ways that are not going to create a burden

of administrative costs and actually can go through the CDCs for

recommendations. Thank you.

Chair SNOWE. Thank you.

Chris.

Mr. CRAWFORD. Senator, we did a study, our Association did a

study about 5 years ago in advance of this Committee authorizing

a liquidation pilot, which Patty will certainly recall whereby about

20 CDCs actually tried to do their own liquidations as opposed to

having the SBA doing the liquidations. The results were better

23

than 50 percent average recovery on the outstanding loan, the

guaranteed loan.

We did this because we also talked to a number of SBA staff, the

portfolio management staff out of the field. These are the people

out in the field that actually do the recoveries. We found that some

of them had loan workout, workloads in excess of 200 loans. We

then surveyed commercial banks and said, how many loans do your

workout people work on at one time. Twenty to 30 loans. It is just

humanly not possible to work on 200 recoveries at a time, and the

SBA simply is not staffed to do that, which is why we advocated

to do this pilot that was, in my own view, very successful. Following that, this Committee actually got passed a bill which made

that pilot permanent. We continue to await regulations on that

pilot which would make the pilot available to many other qualified

CDCs. We would like again to work with the SBA to get those regulations established so that we do that.

Chair SNOWE. When was this pilot established?

Mr. CRAWFORD. The bill that actually was established was Public

Law 106–554 which made that pilot permanent; is that not correct,

Patty?

Chair SNOWE. When was that? The last Congress? Two Congresses ago? So why have the regulations not been developed and

implemented?

Mr. BEW. I do not know. I will look into that.

Chair SNOWE. 2000, the reauthorization.

Mr. CRAWFORD. So we think there is a real opportunity to help

on recoveries. There is a direct impact on our fees, and we think

this is the opportune time. As the agency looks to streamline its

processing, streamline its other services, deals with its budget

problems, we can help. Every CDC in this country is prepared to

help on this. I think we have proven that we can do it.

Chair SNOWE. Absolutely. Would you follow up on that?

Mr. BEW. I will follow up on that.

Chair SNOWE. It is critical.

Mr. BEW. Our overall theme has been to push more and more of

the decision making, use of forms, and processing out into the private sector. I am sure this could be a logical extension of that

theme.

Chair SNOWE. The liquidation issue, it is because it does require

much staffing to do it, is that what accounts for the difference between the SBA and the private sector?

Mr. CRAWFORD. It requires a lot of work.

Chair SNOWE. It requires a lot of work to drive it and to recapture the greatest amount. That is a good suggestion. Any oversight

problems with that from GAO?

Ms. D’AGOSTINO. Actually we have not looked recently at the 504

program. We have not been asked to and we have not done any on

our own initiative. We have mostly focused on 7(a) lender oversight

and disaster lately.

Chair SNOWE. What are the most effective or ineffective aspects

of the 504 programs? One is the issue of the subsidy rate and paperwork, streamlining? Anything else in the 504?

Ms. ROBERTSON. From a lender’s perspective I would think that

the PCL regulations which we have been hoping for for sometime

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would be issued to give qualified certified development companies

more authority to process loans. Additionally, the change in the job

creation ratio from 1 per 35,000 to 1 per 50,000. Jobs have become

far more expensive to create. It would allow us to help more businesses where the cost of those jobs are higher, such as manufacturers.

Ms. CRIPE. I am here really to speak about Senate bill 822 which

applies to the 504 program. It is something that actually came up

4 years ago in my own bank when I was approached in a minority

neighborhood to finance a daycare center. The woman was successful and had been running a child care center. She needed to expand

her business and wanted to buy the building that she had identified would add another 100 kids to the program. She was a nonprofit. She would fully guarantee the loan, getting that issue out

of the way. It was not a credit issue as her credit was strong. She

paid her bills. It was not any kind of corporate welfare, if you will.

She fit all the credit criteria.

She did not have a lot of cash because she was expanding so the

504 was the perfect fit for her. After much ado, we found out that

she did not qualify because the company was nonprofit. We thought

perhaps we could put it in her name, since she owned the company

100 percent, and she could create a for-profit company to own the

real estate. That still did not fly, and in fact we met with SBA and

it just did not fit within the parameters of the regulations.

So a long story short, we were not able to do it. She had to maintain the nonprofit status in order to get the parents the subsidies

for their children to be allowed to be in her daycare center in this

enterprise zone. It was not an option for her to give up the nonprofit status that she had in this particular daycare. I think it is

very important that this pilot program be attempted in an opportunity for us—I have financed many, many daycares under no program whatsoever and no defaults to date. I think that Sally can

speak to that same issue. She has done even more.

Ms. ROBERTSON. We have done $28 million worth of daycare

projects in Virginia for 26 small business owners. We have not had

a single default under the 504 program in any daycare center

transaction.

Chair SNOWE. Thank you. Ardith, do you want to speak to this?

Ms. WIEWORKA. Yes. Good morning, Chair Snowe. My name is

Ardith Wieworka and I am the Commissioner of the Massachusetts

Office of Child Care Services. I just wanted to talk this morning

about how important the Childcare Lending Pilot Act would be to

childcare providers. Certainly in Massachusetts, but I am sure

across the Nation. We have about 15,00, 16,000 licensed childcare

providers in Massachusetts. I know this map is a little hard to see,

but basically all those little dots, those are the licensed childcare

providers in Massachusetts. It is really a huge industry. These are

businesses. These are businesspeople.

At the Office of Child Care Services we regulate this industry,

we license it, but we also administer the subsidy system. There are

50,000 kids, low income kids, kids from unstable families, and disabled kids who use our subsidies. In this industry, many of these

programs are in church basements, and historically, therre are very

low margins that these programs run on. The extension of the 504

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program to nonprofits would really make a huge difference in their

abilities to succeed.

For the kids in those programs, we have basically a two-tiered

system. There is your high-end national childcare chains. Those

chains are not beating down the door to take care of poor kids. But

there are a lot of dedicated, passionate nonprofit programs that do

want to take care of the kids, the poor kids that we serve. This program would allow them to do things like build new classrooms.

We were having a debate earlier about whether playgrounds

would qualify. I know that the playground in my elementary school

is still there, so that is more than 10 years. But I think that there

are a lot of adaptive measures that are needed for disabled kids.

If you have a kid in a wheelchair, you need a ramp or you need

certain designs of the program. The design of a program is so important. At OCCS we have prosecuted cases of child mistreatment

simply because mistreatment went undetected because of the design and layout of the classroom.

There is an enormous potential for positive outcome here if these

programs had access to money. That is really what it comes down

to. They need the access to money to improve the program, to improve positive outcomes for disadvantaged kids. That is really the

win-win here. This would support the goals of the 504 program and

it would support kids. It is a winning combination.

[The prepared statement of Ms. Wieworka follows:]

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Chair SNOWE. What is the question here, Ron, about opening it

up to nonprofits? I think that is one of the issues. I do not have

any question about the need and availability of childcare facilities

and supporting that. Certainly it is absolutely essential for so

many people, in order to enable them to go to work, opening small

businesses, as an adjunct to businesses. What is problematic here,

if anything, with respect to opening the door to nonprofits?

Mr. BEW. I think it is statutory. The statute requires a borrower

to be a profitenity, although in the Microloan program there is an

exception to that. It would require a statutory change to let nonprofits into the 504 program.

Chair SNOWE. It is statutory in the sense that it prohibits or it

is confined to only for-profit. But whether or not, does that present

any problems?

Mr. BEW. Philosophically, I think the program was set up for forprofit entities. We would have to look into that.

Chair SNOWE. Whether it is a slippery slope?

Mr. BEW. Whether it opens the door to other nonprofits.

Chair SNOWE. It is something to certainly explore. It is an interesting issue. There is no doubt about it. The need is out there, undeniably. Obviously, that is a dimension of small business and it

is a major issue in the development and helping to create more

daycare facilities. We just have to explore the different dimensions,

if there was a rationale for nonprofits.

Chris and Julie.

Mr. CRAWFORD. Senator, I have to agree with Ron. I do not want

to characterize it as a slippery slope. Obviously our program was

established to make loans to for-profit small businesses to enable

them to repay their debts. Given that we have no subsidy, we have

zero appropriation, and it is something that my industry is extremely sensitive to. Because the minute our losses start going up,

our fees go up, the demand for our program gets less and less. So

we are very concerned about that. We want to be very cautious in

this. I believe that it has been proposed that it be a pilot. I think

that it is most appropriate to try and see how it works.

I do not want to sit here and encourage that we look at opening

this loan program to every Tom, Dick, and Harry nonprofit that is

in the country. I do not think that is appropriate. Daycare is a very

special circumstance.

Ms. FORBES. I would just like to say for the record, the reason

that Senator Kerry was looking at opening this up to nonprofits is

because in this industry such a high proportion are nonprofit, and

there did not seem to be another way to get the money to this very

needy cause.

Ms. CRIPE. My favorite way of debate, I guess, is to use analogies. I am in the trenches every day and my bank is located in a

minority neighborhood, has been for 50 years in Houston, Texas.

We have just at my small bank, 114 church accounts and over 100

of those have loans with me. They are not eligible for programs,

and I am not advocating that. As Patty brought to everyone’s attention, in the daycare industry I do not have a Kindercare, if you

will, coming to my neighborhood to serve that area. They are not

going to come. The real estate will not support what they normally

want to do.

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The elementary schools are understaffed and they have problems. If we can get experienced people to open daycares and expand, then it certainly meets the spirit of the 504 program, which

is job creation and meeting the needs of economic development in

underdeveloped areas. I have seen repeatedly the daycares fix up

the neighborhoods, if you will, because if they buy a building, if

they have ownership, it creates a sense of spirit in the whole neighborhood that makes a pride come about.

I understand the slippery slope that we are talking about. I understand that most of the churches in minority communities lead

the charge in economic development. They form separate corporations which, yes, are nonprofit. That has to do with the fact that,

and I am sure Ardith can speak to it better than I, they must have

a nonprofit status in order to receive the subsidies to get the children in there.

Chair SNOWE. That is an interesting point where they develop a

different entity for that purpose, because how then would you collect collateral, using collateral from a church, from a religious institution?

Ms. CRIPE. You do not. They create a separate nonprofit. We all

know that nonprofit does not mean they do not make money—as

a separate business. That owns the real estate. They also hire the

teachers and supervise. In fact my own church does that in Houston and we are not—all churches are nonprofit.

Ms. WIEWORKA. I just wanted to point out, in Massachusetts the

childcare providers that we contract with, 90 percent of them are

nonprofits. They do that for a variety of reasons. It gives them certain access to other Federal programs that if they were for-profit

they would not be able to access. I wanted to say, I think one of

the reasons this for-profit versus nonprofit issue comes up is that

nonprofits are considered—they already get a break because they

are nonprofits, so we do not want to give them another advantage

over for-profits. But I think that the historically low rates of reimbursement for childcare providers puts them in no significant advantage over their for-profit counterparts.

The childcare industry is also, I think, unique in that it absolutely is an industry that supports workforce development. The bottom line is, if you do not have a childcare provider and you have

kids, you cannot go to work. If you do have a childcare provider,

you can go to work. I think it meets the goals of the SBA program.

Chair SNOWE. Do any of these nonprofits, childcare facilities develop into schools, or become schools?

Ms. WIEWORKA. Sure.

Chair SNOWE. Does that create any complications there, in your

estimation?

Ms. CRIPE. I also have the issue of charter schools in Texas and

we are not allowed to use the SBA program for charter schools.

Again, I have financed 10 of them in the last year and I have had

no collection problems whatsoever.

One issue that I know will come up is personal guarantees. As

I mentioned in my previous example, the businesswoman who was

running the nonprofit daycare center was willing to step up to the

plate and personally guarantee the loan. Her credit was impeccable

and she was a good businessperson.

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When I loan money to churches, I typically have the Deacons

sign on the dotted line as guarantors. So the guarantee issue, I believe, can be resolved.

Chair SNOWE. Maybe many of these questions could be addressed

through a pilot project, so that is something that we will obviously

explore.

Mr. BROWN. Just one quick comment. I think, representing CI,

we have done about 150 childcare loans in Maine, in excess of

about $8 million. One of the issues is quality of childcare, and one

is the facilities in which they provide their programs. I would see

this as a way to provide that long-term lower-cost financing to

make that happen.

Chair SNOWE. There is no question there is a tremendous need

out there for quality, and affordable daycare without a doubt.

One other question I wanted to follow up on with the 504 and

the 7(a) program, do you think they overlap between those two programs? Is there a need for two separate programs?

Mr. FOREN. Absolutely. There is a definite need. I have a view

on this that other people may not share. In a prior life I had something to do with the 7(a) and 504 program. 7(a), historically is a

secured lending program and so is 504. 7(a) typically has been used

for working capital short-term. The 504 program is a different program in that it is strictly fixed asset financing for small business

development, creating jobs. They have a distinct purpose. 7(a) is

under the Small Business Act, 504 is under the Small Business Investment Act. The purpose of the Small Business Investment Act

has a slightly different focus than the Small Business Act. I think

there clearly is a need for the 504 program.

But if I could just take a rabbit trail, I understand you are leaving in a few minutes. We have an SBIC and we have a small business that we financed up in upstate New York that is in a decommissioned Air Force Base, kind of like Loring, and in that business

we are completing an equipment line that requires new equipment

of $1.5 million. Ideal for 504 financing. I found out in the last 2

to 3 weeks that I have got a problem, and that problem is simply

this. Since we own more than 20 percent of the small business, not

much more but a little bit more, our SBIC is required to guarantee

that loan, the 504 loan, which then uses up my liquidity that I

could provide to the business if it needs additional liquidity in the

future.

Something needs to be done relative to giving SBICs some flexibility and not requiring personal guarantees so that these two programs can be used in concert to help small business development.

I know that is not part of the subject area, but it is critical.

Chair SNOWE. It is.

Mr. FOREN. Lee has got a copy of—would you provide the Chair

with the product? It is a small business.

Mr. MERCER. There is no powder in this. It is safe. But that is

an SBIC investment in an LMI company.

Mr. FOREN. It would qualify as an LMI.

Mr. MERCER. It is a new way of applying polymers to ammunition which will reduce—Wayne can tell it better—reduce the

weight of the ammunition by 25 percent.

Chair SNOWE. Is that right?

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Mr. FOREN. It is cheaper and safer. You throw a handful of those

bullets into a fire, they will not explode. The plastic will melt and

the powder will fizzle. This is in the final stages of testing with the

military and we hope that in the fall it will be ready for acquisition

by the military. This is disruptive technology in the small arms

area. To me it is a sad commentary that we cannot use the 504 and

7(a) program, or the SBIC and 504 program in concert to help complete this plant.

Chair SNOWE. Because of the high-level guarantee?

Mr. MERCER. What the guarantee does is once Wayne has to

guarantee the 504 loan, that counts as a financing in the SBIC regulations and therefore he runs the risk of violating what are known

as the overline limits. In other words, he would be considered to

have invested, because of the guarantee, too much in one company.

Mr. FOREN. I can only put $3 million into any one deal. We have

already invested $2.5 million. The 504 portion of this loan is close

to $600,000. If I were to guarantee the loan I would be in violation

of SBIC regulations. The only way around that is to get SBA to approve an overline request. But if I do that I have used up my precious dry powder, as it were—no pun intended—to be able to give

this company further assistance. So I will talk with the folks at the

SBA and see if we cannot get an exception, but heretofore have not

been able to do that.

Chair SNOWE. Ron, do you have any response to that?

Mr. BEW. We can look into it. It is the first I have heard of it.

Mr. FOREN. It is an SOP issue. It is not regulatory, and it is not

statutory.

Mr. BROWN. We have actually run into a similar type of dilemma

using the 504 with our venture capital funds. Because CI is the

sole owner of our for-profit venture capital funds, including our

New Markets Venture Capital fund, we are restricted from using

the 504 program with our equity positions in the companies that

we are investing in. It would be nice to be able to combine the two.

Mr. FOREN. This would apply for 7(a) as well as 504.

Chair SNOWE. We will look into that.

Ms. CRIPE. I was going to go back to your original question and

state that, yes, I believe the 504 and the SBA 7(a) are two distinct

programs and are not needing to be combined. They meet different

needs for the small businessperson. When a customer approaches

me for a loan, I try to find what will best fit their business. For

most of them in expansion, and the 504 emphasizes businesses that

are already operating and have a history, that is where we want

to use that program, and then use the 7(a), as Wayne already identified, for working capital and equipment that does not have as

long a life perhaps as the bullet-making equipment. But it really

serves a distinct purpose, the 504 program.

Chair SNOWE. Ron, with respect to the disaster loan programs—

anything else on the 504 or anything else?

Mr. BEW. If I could just make one comment on the 7(a) and 504

programs. That is somewhat of a controversial issue I guess. We

did a run of the top 25 industries that both the 7(a) and the 504

programs lend to. I think the top four were about the same; a lot

of larger loans for motels, restaurants, convenience stores, and gas

stations with convenience stores, if I remember the four correctly.

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Both loans, the 7(a) and the 504 were being lent for the same purposes, at least the same industries. There was some overlap.

Ms. D’AGOSTINO. I am pleased to be here to talk about GAO’s

work on the SBA disaster loan program. We have actually reviewed, and my statement would highlight, first of all, SBA’s disaster lending for the 9/11 terrorist attacks. Second, some issues

with the performance goals and measures that SBA uses for this

program. Third, the loan asset sales, which actually had involved

mostly sales of disaster loans. Actually, of those that were sold

most, the number of loans not the dollar amount, were disaster

home loans.

First, our work showed that SBA was very responsive, flexible,

and this was particularly true in light of the unique challenges of

9/11 which caused nationwide economic injury. For 9/11 victims,

the SBA modified some terms and lending practices, such as increasing maximum loan amounts and reducing the documentation

needed. As Senator Snowe noted in her opening statement, there

were a tremendous number of disaster loans approved for 9/11 victims in a very short period of time.

Second, the SBA’s performance goals, and measures for the disaster loan program, did not fully capture or give full credit to the

programs true performance and results or outcomes. For example,

SBA’s loan processing performance goal has been set at 21 days

within receipt of an application. Yet in both fiscal years 2001 and

2002 SBA actually achieved average times of 13 and 12 days, respectively. These numbers include 9/11 loan processing time.

Also, the SBA does not include some key measures that could

help them identify areas in which this fundamentally good program

could be even better. For example, rather than surveying all loan

applicants, the SBA surveyed only the successful applicants, thereby missing the opportunity to get valuable feedback on how the

program could be improved.

The SBA agreed to our recommendations to improve the program’s goals and measures and said that it was preparing a customer service survey. Of course, we will be following in our normal

recommendation follow-up efforts to see how that is going.

Third, our work showed that SBA’s loan asset sales program was

very effective at selling loans to the private sector. In the first five

loan sales, SBA sold nearly 110,000 loans valued at $4.4 billion.

$3.8 billion in disaster loans were included in those sales and 84

percent of those disaster loans were performing loans. The SBA

built in some safeguards to protect borrowers whose loans were

sold to the private sector. Yet the SBA did not systematically or

fully capture those borrowers complaints and concerns. Actually,

about one-half of the letters we reviewed in the SBA’s files seemed

to warrant a closer look by SBA.

SBA headquarters did have a tracking system for borrower complaints but because there was limited guidance to the field. Not all

the complaints received in the field offices were actually included

in the headquarters tracking system. Further, we found that the

SBA may have overstated some of the operational benefits it

achieved from the loan sales. For example, the SBA said that loan

sales, which began in 1999, would reduce the servicing workload allowing staff to be reallocated to more mission critical areas like

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lender oversight, which we discussed yesterday, and business outreach. The servicing workload for disaster loans did decrease to

some extent, but servicing and liquidation staff did not get reassigned to non-servicing activity.

Finally, the SBA could not explain a significant decline in the

subsidy allowance account for disaster loans. You have a chart that

accompanies my testimony that would show what happened in

those subsidy loan accounts. In simple terms, and hopefully you

will not ask too many detailed questions of me, basically it shows

that more was being taken out of this account to cover the costs

than had ever been put in it. They also lacked reliable data to determine the overall financial impact of the loan sales, or their impact on the quality of the remaining disaster loan portfolio.

These accounting flaws seriously affected the SBA’s budget and

financial statements. Ultimately, the overall benefits or cost to the

Government from the loan sales remain uncertain. One thing I

would mention too is because of the accounting issues, SBA’s Auditor did have to withdraw its clean opinion from its audits for fiscal

years 2000 and 2001, and they did issue a disclaimer for SBA’s fiscal year 2002 financial statement.

Chair SNOWE. What does that mean?

Ms. D’AGOSTINO. That means that for those fiscal years that

SBA’s financial statements were audited by a certified public accounting firm, and they had issued a clean opinion saying that

there were no material problems in these financial statements.

What has happened as a result of this work is that the auditor basically issue a disclaimer on their clean opinion that said, those

were wrong, do not rely upon those statements. So they changed

their position on the statements.

Chair SNOWE. So where does that leave us?

Ms. D’AGOSTINO. The SBA still has a lot of work to do on its financial statements and its accounting situation. I want to say that

in response to our findings and recommendations, the SBA is working very diligently to determine the problems and correct them as

quickly as possible.

Also, the SBA did agree with our recommendations on tracking

borrower complaints and better analyzing the operational benefits

from the sales. So that is where the work stands now.

[The prepared statement of Ms. D’Agostino follows :]

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Chair SNOWE. I know you said, do not ask too many questions—

Ms. D’AGOSTINO. I actually have somebody here who can answer

your questions.

Chair SNOWE. Just to make sure I understand what this chart

implies.

Ms. D’AGOSTINO. This is Linda Calbom, Director of Financial

Management and Insurance at GAO.

Ms. CALBOM. Basically what that chart is telling you is that

SBA’s level of their allowance for their subsidy account was up

around 20 to 30 percent. You can see this back in 1998 and 1999,

which is about where you would expect it to be. In 1999 they

changed their disaster model, and at that time they actually decreased some of the—one of the key assumptions which is the

amount of time that they expected the loans to be outstanding. As

you know, this is a highly subsidized program. It is mostly through

an interest subsidy, so the longer the loan is outstanding, the more

it costs. In 1999, and this is speculation as far as what we think

was one of the major causes of this decline, they reduced the loan

term, the expected loan term for those disaster loans from, it used

to be 22, 23 years. They reduced it down to more like 16, 17 years,

at the same time they started the loan sales. The disaster loans

pretty much started in 2000. While the sales did not really cause

the problems, the sales brought to light this problem. That in essence they were not putting enough costs into their allowance account to begin covering the real cost of the program.

Now this has been an issue that they have been aware of and

have been trying to resolve for sometime. With our work we went

in and we were able to say, ‘‘Look, this really does not make any

sense. You cannot have a negative allowance account for this kind

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of a program.’’ Then the auditors said, ‘‘Gosh, we guess you are

right, so we better reconsider.’’

Ms. FORBES. So if you were to boil this down, you are basically

saying that the subsidy calculation is broken for this program? It

sounds similar to problems we heard yesterday, and I know problems the 504 program has.

Ms. CALBOM. This subsidy calculation is definitely broken. As I

said, the SBA has hired some consultants, and they believe they

are getting down to the bottom of it. It does appear that one of the

key things is this loan term issue. You could tell from the loans

that were sold, the average loan was 25 years in the five sales we

looked at, whereas their assumption was it was 16 to 17 years. So,

yes, it is broken. That is not the only problem. There are some

other problems—I will not get into them but very complicated problems—that also were leading to the decline in the account, the very

unnatural decline in the account. Once they get this all resolved

and figure out what assumptions need to be corrected, and they

plug that back into their model—not that the model is broken per

se, but it is the assumptions that went into the model. Once they

get the right assumptions figured out, then they are going to need

to go in and do a big re-estimate to bring the account back up to

a more normal balance.

Chair SNOWE. Is that directly as a result of the changes that occurred in 1999?

Ms. CALBOM. I am not sure. That is speculation we had because—part of it I think is—because when they went to redo their

calculation of their loan term they used a straight average apparently instead of a weighted average. So I think that is part of the

problem.

Ms. FORBES. Was that when the Administration’s budget assumed that all the loans would be sold? Have you tracked it with

what the budget proposals were to see, if what the budget was proposing in a given year was then incorporated into the subsidy

model even though Congress did not act on what the proposal was?

Ms. CALBOM. I am not sure about that.

Ms. FORBES. We would be interested in seeing some sort of follow-up on that.

Chair SNOWE. I agree. I think we need to follow-up on this issue

and find out—Herb, do you have any comments? I have to go because we have a vote.

Mr. MITCHELL. I do not have any particular comments on that

issue. That is obviously an issue for GAO, OMB, and the CFO to

address.

But just briefly, the disaster assistance program, while we have

certainly been successful, has had a lot of cooperation from this

Committee and the Congress. As you well know, disasters are not

predictable and we project future needs based on the 5-year average. What happens when we do have emergency events like 9/11

and events that we have had in the past? We have gotten excellent

support from this Committee and the Committee in the House to

develop supplemental packages and legislation that give us the

flexibility to address the needs of disaster victims.

9/11 is unique in that historically about 80 percent of all disaster

loans are to homeowners and renters as to opposed to businesses.

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That was reversed with 9/11. But we just simply appreciate the

support that we have gotten as well.

Chair SNOWE. We appreciate that, Herb. Thank you.

I have to depart and staff is going to take over, Mark, Greg, and

Patty are here. Feel free to follow-up on any of the issues.

I really do appreciate the time that you have given here today

in participating in this roundtable. It will be very helpful, useful,

and constructive as we proceed in the reauthorization.

I want to express my appreciation to each and every one of you

for being here today, and those of you here yesterday. Thank you.

See you in Caribou.

Mr. FOREN. In fact, I am going up there Tuesday to work with

a company that is a distributor of fasteners, working on the

Humvees that are being rehabbed at Loring. We have some inventory in Philly we are going to see if we cannot put to work up

there.

Chair SNOWE. We appreciate that. Thank you.

Mr. FOREN. Is the snow gone yet?

Chair SNOWE. Not quite.

Ms. FORBES. Herb, I have a follow-on question regarding 9/11

loans. You are intending to sell them as well, in the normal course?

I do not mean you personally, but the Administration.

Mr. MITCHELL. I am not sure. At this point, the asset sales program has been put on hold until we can review a lot of the financial issues.

Ms. FORBES. That is the entire asset sales program?

Mr. MITCHELL. Yes, that is correct.

Ms. FORBES. Let us say it gets back on track and you were going

to sell them. What year would that come up?

Mr. MITCHELL. I am not sure. I am not in a position to address

that.

Ms. FORBES. If it gets back on track, would you please let us

know, because obviously there are a lot of these loans made across

the country, and we often get the complaints when the loans are

sold.

Mr. MITCHELL. Sure, we would be glad to.

Mr. WARREN. Davi.

Ms. D’AGOSTINO. Sure. Basically one of the protections, the borrower protections, that I mentioned in my brief oral summary was

that SBA had been waiting for 2 years after disaster loans had

been made before they put them under consideration for the Loan

Asset Sales Program. The SBA waited 2 years because they

thought that 2 years was a reasonable amount of time, any

changes to the loans would have probably been made by then. Additional assessments of physical damage, et cetera, would have

been made within the 2-year period.

That is the thinking, I think, the SBA had behind this 2 year

date. I do not know if it is applicable to 9/11 victims and what have

you, but that is pretty much their criteria.

Ms. FORBES. The Bill that established the 9/11 loans, was a bill

that this Committee worked on and it had a lot of co-sponsors

among our Members. We were trying to expand that two years to

a 4-year waiting period. So that is one of the reasons why I am

asking.

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Mr. WARREN. If I can go back a little bit more broadly to the

work that GAO has done, and Herb, your input would be real helpful here. One of the issues that was raised in these asset sales was

that there was not a good mechanism for keeping track of the complaints from the outside. We certainly have heard a lot about them.

Has anything been done or thought about, in terms of trying to

put that type of a system in place?

Mr. BEW. I will answer that.

I think the complaints, to put it in perspective, to date 170,000

loans have been sold and 350 have complaints. Yes, we have instituted a tracking system. I think there was a disconnect between

the complaints coming into Washington and the complaints coming

into the field. Now we have connected that together, put in an 800-

number, and I think there is also a website. We have done three

things to correct the tracking.

Mr. WARREN. How were complaints recorded prior to that?

Mr. BEW. I think some were coming into the districts and some

were coming into the headquarters. When they came into headquarters, we had a person assigned to contact the original lending

entity and address it.

Mr. WARREN. Davi, did you want to add something?

Ms. D’AGOSTINO. Yes. I think there was a disconnect in the guidance that was out in the field. The field people were very conscious

about trying to follow-up and respond to the complaints and inquiries. A lot of them are also just inquiries, like why are you selling

my loan?

So it is not all complaints about how they are being treated by

the private sector purchaser.

But basically, I think what was happening was only the congressional-backed complaints were being sent from the field to headquarters. So that if there were any people who did not contact their

Congressman or Senator, and have that going on, their complaints

did not make it to Washington. They did not have enough insight

into that.

But I think the SBA has clarified the guidance. We have not

gone in and followed up yet, but from what we understand they

have put out better guidance and have created a web-based system.

Mr. WARREN. From your review of those complaints, can you give

us some idea of what the most common causes were?

Ms. D’AGOSTINO. I can get back with you on that. I do know that

about half of the ones we saw, there were about 155 complaints.

We looked at 130-some complaints. About half of those were complaints surrounding the way the purchaser was dealing with them.

They may not have been getting the same kind of treatment that

they had gotten from the SBA, in terms of changing terms, things

like that, subordination.

But I can look into whether there was any particular trend. I am

not sure that there was, but I will get back to you on that.

Mr. WARREN. Thank you.

Ms. FORBES. So Ron, that 350 number is including the other complaints that GAO located when they did their work? Or that was

your original number?

Mr. BEW. I believe that includes it. I am not 100 percent sure

on that, but I will check.

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Ms. FORBES. Can you just provide that for the record, please?

Thanks.

Mr. WARREN. Going a little more broadly to Herb, are there

plans to try to offer more in the way of disaster application or disaster loan applications online?

Mr. MITCHELL. Right now we do have a project underway to completely automate the disaster loan project. We have a contractor in

place. In fact, we have a team of about 20 people that are working

on that project right now. It is estimated that we will have the first

iteration of that available in June 2004 with a capability for applicants to apply online.

The other thing that we are doing as well, is that we will have

remote capability. For example, if you are in the disaster area

where we have field locations, and obviously if your property has

been destroyed, you will be able to come into these centers to apply

online, or to give that information to us. If you are a homeowner,

you can apply by telephone, or we will be able to take the application online.

Mr. WARREN. Any other comments on the disaster loan area?

Why don’t we move on to our final topic which is the SBA’s investment capital areas. We know from a long history that these

programs, namely we are speaking of the SBIC Program and the

New Markets Venture Capital Program, that they have offered financing and investment opportunities that promote economic development, job creation and retention, and business expansion and

growth. They have been incredibly important in this country.

We would like to try to highlight this morning some of the lessons learned and look for ways that we can apply those lessons to

improve the programs going forward. With that, who would like to

start? Lee, would you like the honor?

Mr. MERCER. Thank you.

I am just going to briefly run over the issues, as we see them

at NASBIC, and I will be submitting a formal statement. But I

wanted to wait and see what the flavor was to make sure that I

addressed all the issues that might be of concern. Think twice and

write once, somebody once told me. I guess carpenters measure

twice and cut once.

So the issues, very briefly. Obviously, we hope to have a continued zero subsidy rate, which means authorization is extremely important to us, as well, this year. The Administration has asked for

levels, fiscal year 2004 levels of $3 billion in debenture authority

and $4 billion for participating security authority and we concur

with that.

If there is to be a 3-year authorization, as we suggested in the

House testimony, I think market conditions are such that if those

numbers were just bumped up maybe $250 million per year, that

would more than cover, we think, the demand right now.

As everybody who reads the financial pages knows, venture capital is shrinking dramatically. The good news is that the SBIC Program is not shrinking anywhere near as dramatically as the strictly private area. In fact, the SBA would be able to talk about the

number of people who are in line to become licensees. So that is

the good news.

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In order to maintain a zero subsidy rate in the participating security program, it would be required to increase the statutory rate

that says not to exceed 1.38 percent, which is a direct payment to

the SBA, to 1.454 percent, I believe. We suggest that the number

be raised not to exceed 1.5 percent.

It should be noted that the increase that is required is not related to a change in assumptions. It is related really to the fact

that because 10-year Treasury rates are so low, the profit participation that participating security SBICs have to pay the Government, which are directly related to that rate, are much lower. So

when you are filling the subsidy bowl, if you will, you have got to

get your money from someplace. If you are getting less money from

the SBICs in terms of profit, you have to get more from SBICs in

a preferred return. So the SBIC is not being punished, it is kind

of being taken from one pot and put in the other pot.

Unrelated to reauthorization—I just want to highlight this right

in the middle—is our proposal with regard to UBTI and we feel extremely fortunate that Senator Snowe and Senator Kerry are such

strong supporters of that. It has nothing to do with the reauthorization bill but as the staff in the Senate Finance Committee becomes increasingly unavailable as the bill is written, we are hopeful that staff on the Small Business Committee can be in direct

contact with staff on the Finance Committee and perhaps urge

them to consider putting that provision in the Chair’s mark. I get

calls, more and more calls every day, about the debenture program.

Sometimes good timing is everything.

The tax-exempted investors, the pension programs, the pension

funds, really do have an appetite for what are considered safer investments in the venture capital area. The debenture program is

certainly far less volatile than the participating security program,

and fills a real need. I think we have a great opportunity there.

Going back to reauthorization, an issue that we hope to address

is what we think is a congressional clarification in the area of capital impairment. As you know, there is a statutory imperative that

in advancing leverage to an SBIC that the SBA has to make a decision as to whether or not advancing that additional leverage will

create an unreasonable risk of loss to the Government. We are not

suggesting that that statutory imperative be changed.

However, ending a support of leverage is a little bit different

than taking some of the actions that over the years the SBA has

decided to go along with. For instance, the SBA asserts a right to,

at a time when it stops supporting an SBIC, to reach out for any

private capital commitments that have yet to be paid into the

SBIC, and require them to be paid in and then paid directly to the

SBA to pay down leverage without having first been invested in

small businesses.

I just want to read you from an investor. This is the Arkansas

Development Finance Authority, which has authority to invest in

venture capital funds and is considering an investment in an SBIC.

They may not do it.

We are very concerned with the SBA’s unilateral right or the assertive right to call outstanding portion of private capital commitment to the SBIC and require that it be applied not to new or existing investments, but to outstanding leverage. We view ourselves

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no different than private investors who expect their money, less

fees, to be invested in small businesses not to be used to repay

SBA. We understand that the SBA has a preferred position with

respect to return of capital upon dissolution. However, that is much

different from an expectation that private capital will never be deployed as investment capital that carries with it a potential for

both return and gain.

I will submit that for the record.

[The information follows:]

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Mr. MERCER. That is a significant issue for many private investors, and we think that perhaps through the reauthorization bill

Congress could kind of clarify what the intention was.

In a related area, we are working with the SBA to probably suggest a change in the participating security distribution laws. We do

not have an exact proposal yet, but I think we are getting closer.

What this will do is it will have a positive impact on the subsidy

rate. It will allow the SBA to get its money back faster without

being a disincentive for private investors to continue the strong

support for the participating security program.

Other issues that we hope to discuss with the Committee, as we

develop the bill, are the leverage cap. As you know, there is a leverage cap that any one SBIC or group of co-managed SBICs cannot exceed right now under the law, about $112 million in leverage.

The SBIC program is a program of smaller venture capital funds,

making smaller investments, and we really do not want to change

that.

By the way, you might be interested that over 65 percent of

money committed to venture capital funds in 2001 went to funds

with more than $250 million. The SBIC program is really a small

fund program, and we want to keep it that way.

But what is happening is for funds that are on the larger size

of the SBIC program and are successful, and if they succeed in getting an additional license from the SBA, because of market conditions liquidity events are being pushed further and further out in

their first fund. They are not able to get their money back in the

first fund, even though value might be there, and the SBA has supported that by giving them a second license. Therefore they cannot

pay leverage down on the first fund and start to draw leverage in

the second fund.

I think what we would like to discuss, and we have not even discussed this with the SBA, but thought about it last night, to discuss it as we go forward in reauthorization, is perhaps having the

cap as it exists now apply to any one fund, as it does, but to provide a bridge for subsequent funds by saying that no more than

$150 million for multiple funds. I just took a third and said maybe

we can bridge this so that they will be doing that.

Finally, and I did this in the House testimony, and I think

Wayne will be an awfully good person to ask about some of these

issues, is one of the values of the SBIC program is that fund managers not only provide money but work very closely with the entrepreneurs that they support. They serve on board seats and they do

much more than that. They spend a lot of time working with individual companies.

There is a provision in the law that says that all SBICs must invest 20 percent of their money in smaller funds, smaller businesses, which is a subset of permissible small businesses. For the

very large SBICs, and we are talking about probably less than 10

percent or about 10 percent as the SBICs who have been able to

raise private capital of say $50 million or more, what that does is

it starts to force them to invest in far more portfolio companies

than they have personnel to actually go out and work with.

What we would like to discuss, both with the SBA and with the

Committee as we go forward in reauthorization, is taking away the

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mandatory nature of that statutory clause for SBICs with $50 million or more. I think Wayne would agree with me that once you are

forced to invest—you always need a diversified portfolio for safety

and soundness rules, and that covered by the overline limits. In

other words, SBICs have to have a certain number of portfolio investments. But if you start to make them invest in too many investments, then they lose the ability to work with the entrepreneurs.

I have well exceeded my 5 minutes.

Mr. WARREN. Lee, I think I can say for Senator Snowe that, at

least on the UBTI issue, that the message has been delivered, so

you are in good shape there.

Wayne, did you want to add anything?

Mr. FOREN. Yes. We have a small SBIC that is a participating

security SBIC. We have $15 million in private capital and with

that small capital base we are then eligible for the third dollar of

leverage, which we are in the process of seeking a forward commitment on.

Our focus is growth stage businesses. $1 million to $3 million is

the amount that we invest in a company. We very seldom put in

$3 million. It is usually $1.5 million to $2 million, keeping a little

dry powder because you always need it.

Our focus, in terms of type of business, is manufacturing, distribution or B-to–B service, business-to-business service. We have

13 to 14 businesses in our portfolio, eight of which are manufacturing.

It is interesting to note, when we think of the LMI area, of our

companies, three of them are in enterprise zones and four of them

are either minority-owned or minority-managed. I think, without

being an LMI-type company, that we are doing what is appropriate.

We seek to do businesses whether or not they are in that area. We

are not an LMI-type fund, but from time to time we run across

pretty good deals in that regard.

With respect to the point Lee was making, having every fund

focus on smaller businesses is not a bad idea. When we established

that rule in 1993, it was with a purpose. We did not want larger

SBICs to forget from which they came.

Now the smaller standard is $6 million in tangible net worth or

$2 million in net income after taxes. That is the old SBIC standard.

Having said that, it is also important to realize that the management team can only shepherd a certain number of investments.

To the extent that you hold that fast and grow the fund, you are

forcing them to have a larger staff. However, to some extent, you

are also requiring them to continue to serve that smaller business.

Ms. FORBES. Wayne, can I just do a follow-up on that? Why is

it bad for them to have a bigger staff?

Mr. FOREN. There is nothing wrong with having a bigger staff.

Ms. FORBES. That is just a natural flow from having—

Mr. FOREN. As you grow the fund you are going to have a larger

staff. I used to think that it would be an easy task for an SBIC

person to do five or six deals a year. It is like 504 loans, you ought

to be able to do one a month. I have to tell you, it does not work

that way.

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I would like to reitierate the point that Lee made. When we provide financing to small businesses we do not just give them the

money. If we make an equity investment, we always take one

board seat, sometimes two, on a five-person board. That other seat

would be occupied by an independent director who can add value

to the company, either by being an industry person or somebody

who is of value.

If we are doing debt deals, of course, we have observation rights.

We do not take board seats, but we are actively involved. We like

to think that we are knowledgeable, actively involved, add value,

but we do not take control unless the company gets off its plan that

we have financed.

We have a couple of our companies that have gone sideways to

us, and of our four partners, two are acting as CEOs. In one case,

we bought back a sub-debt strip that was in a deal for 20 cents on

the dollar. But by doing that, and that required an overline investment and we appreciate that. But by doing so, we were able to protect not only our investment but keep the SBA from suffering

losses because we could walk away from our total equity investment and recover it all out of the sub-debt strip through collection.

It is a traditional business, and it has revenue. But it was just

overleveraged, so we will do fine on that bill.

However, Patty, it requires a lot of work.

Ms. FORBES. I could not understand what the downside of having

a bigger staff would be. It seems to be part of your point, too, and

frankly, it sounds like an argument on why you should not have

bigger funds if they cannot handle more than 20 to 30 deals.

Ron, do you have a view on that?

Mr. MERCER. Essentially, to run a venture capital fund, I mean

people try to run them in the most efficient manner. In other

words, deploy the capital in a way where you have mitigated as

much risk as you can but without spreading yourself too thin, because management fees are capped at some level. Actually there is

a pressure on reducing management fees across the industry.

At some point, you cannot keep expanding. It just does not work.

Ms. FORBES. But are not management fees a percentage of the

total funds?

Mr. MERCER. Right.

Ms. FORBES. So if it is bigger, there would be more fees?

Mr. MERCER. There is only so much time that these are highly

paid individuals. At some point it starts to break down.

Ms. FORBES. Does Ron have a view on this?

Mr. BEW. I think one of the 5 problems the industry is having

is the average size of the investment was probably $1 million last

year, and it has now dropped to close to $500,000. So it is meaning

more investments going up. But it would appear that 2.5 percent

is the cap the fees would allow for.

Mr. MERCER. That is the maximum allowable.

Mr. FOREN. 2.5 percent of combined capital which is leveraged on

private capital.

Mr. MERCER. But private limited partners, as I am sure Wayne

would attest, are starting to revolt at 2.5 percent, because most private limited partners are trying to get managers to accept less.

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Mr. FOREN. But it is a balance. The limited partners give you a

reality check. They are watching. We have got great limited partners. They want to make sure that you are properly managing the

fund, so that you get enough resources to effectively manage it.

When you have deals that go sideways on you, make sure that you

do not just walk away from them but handle them right, and that

takes time.

We have not had pressure with respect to the management fee.

What our limited partners want to know is what are you doing

with the deals? Are you acting responsibly to get the money back

and to grow the fund? They have not questioned the management

fee, at least ours have not.

Mr. WARREN. Wayne, can I go back for just a second to something you mentioned earlier on in terms of the LMI work that you

have done? Following up on the theme of a question that Senator

Snowe asked earlier, is there an overlap between the SBIC program and the New Markets Venture Capital Program?

Mr. FOREN. SBICs ought to be doing deals that deserve to be

done, whether new markets or otherwise. SBICs, in my opinion,

ought not to say, because we have a new markets initiative, we do

not have to focus or do not have to give consideration to that market area.

Going back to the 1970s, the specialized SBIC program started

in 1972 as an initiative before there was a legislative initiative to

provide financing to a specific area, those who were socially or economically disadvantaged. Out of that grew the specialized SBIC

program, and it served a purpose.

If you would like to emphasize a given area, then proceed with

your LMI initiative. If you want to have the mainstream program

provide assistance to that area, then encourage and give incentives

to do so.

Our fund, we have committed to our limiteds to put money to

work where we have raised it. For example, we have raised part

of our fund in Puerto Rico. I believe that we are one of few SBICs

that have done deals in Puerto Rico. It is because we have raised

money down there.

There are some good deals down there, but just like any other

area you have to be careful what you do. I believe there are good

deals in the LMI area. If you are going to have a fund, you have

to propose that you are going to give those deals consideration.

Again, if you want to have a special emphasis program, then obviously you are going to get more attention to that special emphasis

area.

However, you’re spreading the risk. If you have the SBICs do

some assistance in that area, then you are spreading the risk and

you are not having it focused in a specifically targeted area.

Mr. TESDELL. My name is Kerwin Tesdell.

I would agree with that and think that the SBIC program, which

is very important, has a different focus. It is getting equity capital

into smaller businesses. The specialized program, the New Markets

Venture Capital Program, has a different focus which is getting equity capital into lower income communities.

You had asked about lessons learned. I think one lesson my organization has learned is that this is a specialized activity that knowVerDate 03-FEB-2003 14:23 May 14, 2004 Jkt 091191 PO 00000 Frm 00081 Fmt 6633 Sfmt 6601 D:\SBA\91191.TXT SSC2 PsN: SSC2
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ing how to do developmental venture capital in these areas is a different kind of thing from—many of the tools are similar. But what

Blake and the folks at CEI do is a different practice from traditional venture capital and you need specialized funds that know

how to do that. Also, you need a program that provides appropriate

resources. We can address that, I guess, in a few minutes.

[The prepared statement of Mr. Tesdell follows:]

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Mr. WARREN. Actually, this whole topic covers both SBIC and

New Markets Venture Capital, so feel free to jump in.

Mr. BROWN. Blake Brown, Chief Financial Office at Coastal Enterprises.

We are a sponsoring organization of a New Markets Venture

Capital fund, CEI Community Ventures, Inc. We just closed our

fund last month after a fairly lengthy effort. But we are really excited about the program.

Also, to address some of the concerns that Wayne had brought

up, I think this program really has been crafted and structured to

address some of the management issues of a fund by providing

some matching technical assistance funding that goes along with

the financing piece. I think that is a critical distinction between

SBIC’s and the New Markets Venture Capital companies, in order

to provide that service to the small business.

I think the critical piece here, is making sure that they get that

hands-on experience and help. As Wayne said, it is hard to manage

a fund with a lot of deals in it. It is a very labor-intensive business,

venture capital is.

I am on the board of both of our venture funds and we have very

talented and qualified staff who go the extra mile, but they need

that additional help. Part of the program, under the way it is set

up under New Markets Venture Capital, is to allow us to be able

to set up a mechanism whereby we can develop an appropriate

range of outside expertise that can be brought in to assist the companies that we are investing in.

Again, that is a critical component to this, to our effort, and we

think that that is what is really going to make the difference between failure and success in terms of the businesses that we are

supporting.

We have had Venture Capital experience that goes back to mid- 1980s. We started our first formal venture fund in 1997 with $5.5

million and have been able to invest that fully and are starting to

generate some reasonable returns from that fund. So small funds

can be managed. It does not have to be a $30, $40, $50 million

fund. I think the average size of our investments has been between

$100,000 and $300,000, which is what the New Markets Venture

Capital program is targeted to.

It is interesting that under the SBIC program they have gone

from $1 million down to $500,000. It is still above the target market that we are looking for in our venture funds.

I think the other distinction is the fact that we are focused on

underserved low income communities. Those are areas that need

directed capital, and support. It cannot be just kind of an offshoot

of a larger program. I think it takes that concerted effort to make

things happen in those communities.

That is why we are really excited to have this fund. We are one

of six that, I believe, have closed and have received funding. We

are a little bit concerned that funds have not been authorized going

forward for this.

We think there is a lot to be learned with this program. We are

really excited about it.

I would just cite an example of the deal that we did through our

first fund. It is basically a company that is called Maine Coast OrVerDate 03-FEB-2003 14:23 May 14, 2004 Jkt 091191 PO 00000 Frm 00092 Fmt 6633 Sfmt 6601 D:\SBA\91191.TXT SSC2 PsN: SSC2
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ganic Products in Washington County, Maine, which has an average wage of $12,500. It is a very low income county. We have invested a little over $100,000 in this particular company that converts waste product, from fisheries to blueberry barrens, into what

we call designer dirt, or compost. I think you can actually buy it

here in Washington, D.C. But it is a company that would not have

come up on the radar screen.

Mr. BEW. Does it come with black flies?

Mr. BROWN. Depends on the season.

I think this probably would not have come up on the radar in an

SBIC-type of situation and would not have attracted traditional equity. We think there are a lot of those opportunities that are being

missed because venture capitalists have got their radar set a little

bit too high.

Again, I think the SBA can play a big role here in promoting

that kind of activity. Those are my comments.

Mr. TESDELL. Maybe I can just add a little bit. I am the President of a community development venture capital alliance, the Association of Community Development Venture Capital Funds.

As you know, we are sort of the new guy on the block, a new program. I think I can report that at least so far the program has been

a tremendous success. There were seven conditionally approved

New Markets Venture Capital companies and, at this point, all of

them—while they have not all completed the full process with the

SBA—all of them have raised their private sector match. That is

$70 million that is going into lower income areas. This is money

raised from investors, many of which are not traditional venture

capital investors. It is coming from colleges and universities, from

foundations, from local governments, and from local corporations,

all interested in supporting the development of their communities.

This is a really remarkable success, given what is happening in

the rest of the Venture Capital field where capital raising has come

to a standstill. We had a situation where we had a new Government program, and our sales pitch was: give us money to invest in

some of the most disinvested areas of the country. Yet, these companies have been successful. I think that is remarkable.

Again, just to emphasize some of what Blake was saying about

the differences between new markets and some of the other programs that the SBA operates, first of all, we are targeted. We are

specialized companies. The kind of expertise that organizations like

Coastal Enterprises and others around the country develop in

doing this developmental venture capital activity is really necessary in doing the kind of work that we do.

Also, this sort of flows directly from your discussion, the issue of

the program providing this technical assistance money to help pay

for the extra assistance that our funds provide to smaller companies run by people who do not have Harvard MBAs and experience

at Intel and so forth. That is the key portion of this program that

allows New Markets Venture Capital companies to play this developmental venture capital role.

I want to emphasize that this is not a program that was invented

in Washington, that there is an entire industry out there of funds

that do this sort of thing. We count 79 community development

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venture capital funds and funds in formation around the country,

with more than $500 million under management.

Again, differences from the SBIC program. While 50 percent of

the money of the investments from SBICs recently have gone to

five high wealth states—California, New York, Texas, Massachusetts, and Illinois—community development venture capital fund

focus on places like Appalachian, Kentucky and the Delta region of

Mississippi, and northeastern Minnesota areas, that traditionally

have been disinvested and where rates of unemployment are very

high.

We also mentioned investment sizes. The average investment

size for a community development venture capital fund is $350,000,

as compared with the numbers you were just hearing.

Through SBICs over the last few years, about 41 percent of the

financing has gone to higher tech companies. For community development venture capital funds, fully half of our investments have

gone into manufacturing companies, the types that provide good

jobs for lower income people.

Just to sum up, I think Congress originally authorized and created this program because it saw a need to bring equity capital and

the power that that tool has brought through the SBIC program

and other venture capital funds to the Nation and focus that on

areas of the country that need it most. That was in December 2000.

If you look at the economic situation right now, the program is

even more needed.

We are asking that this program be reauthorized and also we are

hoping that the appropriations will continue to this program.

Mr. FOREN. Just an observation. I would expect that your investors, your limited partners, would require a lower rate of return.

Is that true?

Mr. BROWN. No, not necessarily. Again, our philosophy has always been what we talk about as two bottom lines, and we added

a third. We really are conscious about what we invest in with respect to the environment, but also we are looking for the social

mission and the financial return. We do have some banks that are

investing in our funds.

I think they are looking for a reasonable rate of return. Venture

capital returns are all over the ballpark, we know that. But the

whole point is that we are here to try to make money, but also to

have social impact.

Mr. FOREN. But I would think the thesis would be, because you

did have the public purpose focus, that your investors would have

a greater tolerance for a lower rate of return, as opposed to venture

funds that limiteds are putting money into with the expectation of

getting a higher rate of return.

Mr. BROWN. Again, some of our investors may have that philosophy, but our approach has always been that we are here to make

money but also to provide the social impact and to test that thesis,

that you can make money and be socially oriented.

Mr. TESDELL. If I can add, I think those two things tend to go

together. You can have a successful business that creates profits for

your fund, but that also creates jobs and is a sustainable business.

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Mr. WARREN. Wayne, can I ask for your comments, in terms of

how is technical assistance handled when your SBICs make investments in LMI businesses?

Mr. FOREN. We do not, when we make an investment we are

looking at where this company is going. Our focus is growth stage

companies. We are looking for a growth plan. The business plan we

expect to show growth.

Frequently, the only thing we would do is, which is a little different, is that we typically have a management consulting arrangement with them, established right at the outset, whereby if we

have to put a lot of time unexpected into that company, we expect

to get paid for it because we have limited resources. But that is not

giving technical assistance where they are getting it for free or on

the cheap. That is where they are paying us, getting back to this

point of having limited fees income.

When we make an investment, it is a determination that we believe in the business proposition, in the plan, the concept, and we

are there to do what we can to help grow that company. So whatever we give, we give. But there is no concept of funding that ‘‘technical assistance’’.

Mr. WARREN. Lee, I know you have been patiently waiting.

Mr. MERCER. I do not want this to be a battle of statistics, but

since you opened the door, last year $737 million of SBIC money

was invested—that is 28 percent of all money—was invested in 434

manufacturing companies in 41 States. So I do not want it left on

the table that somehow this program is some high-tech program for

rich kids.

Secondly, of all the money invested last year by SBICs, 27 or 28 percent of it, again over $700 million, was invested in companies

located in LMI areas. My understanding actually, in talking to

some people at the SBA, is it may be closer to 45 or 50 percent of

the money, depending on the definition.

So NASBIC has remained neutral, and has never taken a position on the New Markets Venture Capital Program. We do not profess, as an organization, to have expertise to say whether or not

the targeted program is necessary. All we can show is what we do,

and our members, like Wayne, invest in small businesses that

show the potential for growth, wherever they are, and whatever the

industries they are in.

Thank you.

Mr. WARREN. Ron, did you want to add to that?

Mr. BEW. I can follow up on that. Lee makes an interesting

point. Those numbers are pretty close to correct. It is interesting

to note that the market is serving with great impact the LI and

LMI areas. The LI area, I do not think you quoted that number,

since I have them all in my head, was $1.2 million.

Mr. MERCER. I did not know there was an LI area.

Mr. BEW. We looked at the LI impact and it is around 25, almost

26 percent, $725 million. I think the New Markets Capital Ventures Program was more akin to an LI area. The SBIC program actually, stunningly, went up to 46 percent by dollar and $1.2 billion.

That is the market serving these areas.

Mr. TESDELL. I obviously did not, at all, mean to imply that the

SBIC program was not doing important things in low income areas.

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In fact, this whole tool of using venture capital equity tools to promote growth is something that we certainly believe in.

I guess the question is whether there is a place within the SBA

and within the federal programs for a program that can specifically

target these areas and that can provide the kind of resources and

support needed for funds like Blake’s that very specifically target

these areas and develop that kind of expertise.

Ms. FORBES. We have some questions about the SBA’s processing

of these proposals. Evidently, you got through the process of conditionally approving NMUC’s just fine. But then there seemed to be

a number of holdups in the closing process. I am wondering, as you

are going forward, do you know how many of the seven conditionally approved NMUC’s have actually closed?

Mr. BEW. I think five have actually closed. Is that correct? Jeff

Pierson is here and can add some of the details. Five of the seven

have closed. We extended the program to July 9th. I also think we

expect the other two to close. Am I mischaracterizing that?

Ms. FORBES. Is that correct?

Mr. PIERSON. That is correct.

Ms. FORBES. Right now the money has been rescinded for the

second round, but if we were successful in getting that restored,

would you be prepared to continue work on this program?

Mr. BEW. To do what?

Ms. FORBES. To propose another round of funding and do the

conditional approvals. We have a lot of concern that SBA seemed

to be dragging its feet on this program. It was a new program and

did not seem to be given the proper attention. So we are just wondering, as the money comes to you, the next time there is a supplemental for example, you will be prepared to move forward on the

next step?

Mr. BEW. Of course, I was not here back then, but the SBA, the

Investment Division area is running the program. The market is

difficult and this program has gone on for close to 3 years. There

has been difficulty. These five to seven New Market Venture Capital funds have had difficulty, just getting support in the marketplace and investments.

Ms. FORBES. But there have been significant delays in the processing at the SBA. My question is really going forward, will you be

prepared? Is the New Markets Office going to continue, up and

running, so that when the SBA gets this money restored, you are

going to be prepared to act on it? Or are you going to have to reconstitute an office or add people?

Mr. BEW. We are running the program now.

Ms. FORBES. Your intention is to keep the office open? The separate office for New Markets Venture Capital?

Mr. BEW. We will continue to operate the program. We have people dedicated to the program, yes.

Ms. FORBES. We will have some follow-up questions on how

many people are staffing that, et cetera. Because we do not want

to re-create another delay.

Mr. BEW. It takes some resources, because it is not just funding

or licensing going through competitive bidding. It is also an oversight issue. So it will take some resources to manage the fund.

Ms. FORBES. You are continuing to do that?

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Mr. BEW. We are.

Ms. FORBES. Great.

Mr. WARREN. Are there any other comments on the SBIC and

New Markets Venture Capital area?

Ms. FORBES. I actually have some questions for Lee. You are recommending that the percentage go up to 1.5 percent?

Mr. MERCER. Correct.

Ms. FORBES. Are you confident that that will be okay for a 3-year

reauthorization period? Or is there some way that we should allow

for adjustments in year two and three of the 3-year reauthorization?

Mr. MERCER. Well, the suggested 1.5 has no magic in it. If the

number that were put in were higher than that, I think it probably

would leave more room for variations over a 3-year period so we

would not have to come back in.

There is really no, right now, existing sensitivity analysis that I

can point you to that says at X percent it becomes a disincentive

for people to invest in SBICs.

But clearly, and I think some in the SBA have suggested—well,

the SBA, I believe, has suggested 1.7 percent, am I correct? We

would not have any quarrel with that.

Ms. FORBES. Ron, what is that based on, the 1.7?

Mr. BEW. It is just the allowance going forward.

Mr. MERCER. It is the fudge factor.

Ms. FORBES. It would be up to 1.7 percent? Right?

Mr. MERCER. It is a floating percentage.

Ms. FORBES. You would only place it at whatever it takes to get

to the zero subsidy rate?

Mr. MERCER. Right. Our hope is that actually when we come to

the Committee with—when the SBA and the industry come, hopefully within the next 30 days, with a proposal to change the law

on participating security distributions and how they are characterized, that that is going to have a positive impact on the subsidy

rate so that not to exceed 1.5 or not to exceed 1.7 would hopefully

trend down. Unless OMB makes some serious errors in their assumptions.

Ms. FORBES. You will have some sort of projection about the effect on the subsidy rate that the new proposal is likely to have?

Mr. MERCER. As I understand it, the SBA right now is trying

to—and I do not want to put words in their mouths. NASBIC has

suggested one potential change in the law. What we have asked is

whether the SBA could determine if the law were to change that

way, say for this year, if it had been changed this year what would

the subsidy rate have been. So that we can get a feeling for what

the impact would be.

That is what the SBA is working on now, and we are hopeful

that that will bear fruit in the next 30 days.

Mr. WARREN. Lee, we would obviously like to continue working

with you on that package, as well. I now you and Greg and others

have discussed it and we are wide open for that.

Mr. MERCER. I just do not want to lay anything on the table yet

because we are uncertain as to—A, we want to be in agreement

with the SBA, if it is at all possible. We do not want to lay anything on the table until we try to understand exactly what the imVerDate 03-FEB-2003 14:23 May 14, 2004 Jkt 091191 PO 00000 Frm 00097 Fmt 6633 Sfmt 6601 D:\SBA\91191.TXT SSC2 PsN: SSC2
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pact will be. We know it will have a good impact. We just do not

know how much.

Ms. FORBES. And there is no cross subsidization? Sometimes in

the subsidy rate calculations, when one thing goes up, and the

other thing goes down.

Mr. MERCER. There certainly is the potential, that is why I mentioned OMB. There certainly is the potential for OMB to readdress

some of the assumptions that are in the model that are unrelated

to what we are suggesting. Those could have a negative impact on

the subsidy rate. The two could end up either balancing each other

out or one having more impact than the other.

Ms. FORBES. I have one last question for Kerwin. Do you have

a sense of the demand for the second round of funding? If this were

reauthorized, do you have any sense of what the demand would be

be for the third round of funding?

Mr. TESDELL. Right. Among our membership, already, there are

six or seven funds that have expressed very strong interest or had

plans to apply for the second round. We expect a much higher demand than that for the third round.

I think, to the extent that we are seeing people holding back, it

is because of the uncertainty of what is going on with the program.

But once that uncertainty is clarified, I think there will be very

strong demand.

Mr. WARREN. Thank you very much. I think this has been very

helpful. We have had a lot of good positive feedback and some excellent suggestions on all of the programs we have covered today.

We are coming towards the end of our phase of collecting feedback on programs, looking for recommendations. We have a little

bit more work to do in that area, and then obviously then the Committee is going to turn to preparing the reauthorization legislation,

which it is certainly our hope to have a 3-year bill as we move forward into the summertime.

We know time is of the essence, and we are keeping that in

mind. So we will obviously be calling on you.

As we have done with the prior roundtables, the record will remain open for 2 weeks. If there are additional comments or suggestions that occurred to you that there was not an opportunity for,

please, if you would, send them in. One of the easiest ways to do

it is if you will e-mail them in to our hearings clerk, Lindsey

Ledwin, or to any of us and we will get them into the record that

way.

With that, I thank you, and we will be adjourned.

[Whereupon, at 11:30 a.m., the roundtable was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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POST ROUNDTABLE QUESTIONS

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COMMENTS FOR THE RECORD

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Æ