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91-190 PDF 2004

S. HRG. 108–238

SBA REAUTHORIZATION: CREDIT PROGRAMS

(PART I) ROUNDTABLE

ROUNDTABLE

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

APRIL 30, 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

Coleman, The Honorable Norm, a United States Senator from Minnesota ....... 91

COMMITTEE STAFF

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

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

Freedman, Marc, Regulatory Counsel, Majority Staff .......................................... *

Wach, Greg, Banking Counsel, Majority Staff ...................................................... *

PARTICIPANTS

Bartram, David, President, SBA Division, US Bank, San Diego, California ..... *

Ballentine, James, Director, Community Development, Office of Federal Operations, American Bankers Association, Washington, DC ................................. *

Bew, Ron, Associate Deputy Administrator, Office of Capital Access, U.S.

Small Business Administration, Washington, DC ............................................. *

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

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

Byrnes, Steven, Senior Vice President, Fleet Boston Financial, Portland,

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

Corbet, Alan, Executive Director, Go Connection, Kansas City, Missouri .......... *

Criscitello, Douglas, Vice President, JP Morgan Chase (Colson Services),

Washington, DC ................................................................................................... *

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

U.S. General Accounting Office, Washington, DC ............................................. *

Feldmann, Greg, Partner, Gryphon Capital Advisiors, Roanoke, Virginia ......... *

Gast, Zach, Policy and Research Manager, Association for Enterprise Opportunity, Arlington, Virginia ................................................................................... *

Hearne, Michael, Director of Member Business Lending Program, Credit

Union National Association, Washington, DC ................................................... *

Matthews, Mary, President, Northeast Entrepreneur Fund, Inc., Virginia,

Minnesota ............................................................................................................. *

Merski, Paul, Chief Economist and Director or Federal Tax Policy, Independent Community Bankers of America, Washington, DC ............................ *

Schuster, Deryl, President of Mid-American Division, Business Loan Center,

Wichita, Kansas ................................................................................................... *

Wilkinson, Anthony, President and Chief Executive Officer, National Association of Government Guaranteed Lenders, Inc., Stillwater, Oklahoma ............ *

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bew, Ron

Prepared statement .......................................................................................... 108

Brown, Blake

Prepared statement .......................................................................................... 111

Corbet, Alan

Prepared statement .......................................................................................... 120

Criscitello, Douglas

Letter ................................................................................................................. 123

* Comments, if any, between pages 3 and 105.

Page

IV

D’Agostino, Davi

Prepared statement .......................................................................................... 127

Post-roundtable questions posted to Ms. D’Agostino ..................................... 181

Gast, Zach

Prepared statement .......................................................................................... 147

Kerry, The Honorable John F.

Prepared statement .......................................................................................... 149

Merski, Paul

Prepared statement .......................................................................................... 151

Landrieu, The Honorable Mary

Prepared statement .......................................................................................... 154

Levin, The Honorable Carl

Prepared statement .......................................................................................... 155

Matthews, Mary

Post-roundtable questions posted to Ms. Matthews ...................................... 182

Mica, Daniel

Letter ................................................................................................................. 157

Schuster, Deryl

Letter ................................................................................................................. 161

COMMENTS FOR THE RECORD

Gryphon Capital Advisors, Inc.

Submissions for the record .............................................................................. 171

Hummel, Alan Eugene, SRA, President, Appraisal Institute, Chief Executive

Officer, Iowa Residential Appraisal Company, Des Moines, Iowa

Prepared statement .......................................................................................... 166

(1)

SBA REAUTHORIZATION: CREDIT PROGRAMS

(PART I) ROUNDTABLE

WEDNESDAY, APRIL 30, 2003

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

The Committee met, pursuant to notice, at 9:42 a.m., in Room

SR–428A, Russell Senate Office Building, the Honorable Olympia

Snowe, Chair of the Committee, presiding.

Present: Senators Snowe and Coleman.

OPENING STATEMENT OF OLYMPIA SNOWE, CHAIR, SENATE

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

Chair SNOWE. We welcome all of you here today. We will begin

quickly. I will only be able to stay until about quarter of 11:00, so

I want to be able to hear most of what you have to say on some

of these issues and obviously the staff will be here, both my staff

and Mark Warren, Marc Freedman, Greg Wach, and Patty on behalf of Senator Kerry.

We are going to be sure that we include all of your comments

here this morning, because as we prepare for the reauthorization

of the SBA programs we want to ensure that we have considerable

input as we develop our recommendations for how we should proceed on the SBA reauthorization—all the more so, given the fact

that it is the 50th anniversary of the SBA. I think there could be

no better way to celebrate these programs, and the value that they

represent to this country in developing America’s economy, than

ensuring the vitality of these programs and improving the well

being of small businesses throughout the country.

I know that you represent a broad section of organizations and

institutions that enable small businesses to thrive in America. We

want to do everything that we can to ensure that these programs

are working well and efficiently. If we have to redirect our efforts

from ineffective programs to more effective programs then we certainly want to do that. Anyway we can improve the delivery of

these services to small businesses, and through your institutions,

we want to do that as well.

The program that we are talking about today is the SBA’s 7(a)

Loan Guarantee Program, which is the essence, the core, of the

SBA programs. I know you have been on the front lines in delivering these loans to small businesses. They put a face on America.

Whether it is on Main Street or in manufacturing facilities, we are

able to develop small businesses in a way that would not be posVerDate 03-FEB-2003 10:36 May 13, 2004 Jkt 091190 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\SBA\91190.TXT SSC2 PsN: SSC2
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sible without the assistance and support of these types of programs.

The 7(a) program has had a profound effect on America. During

the last 3 years, the SBA 7(a) loan programs have provided financing to more than 40,000 startup small businesses and to more than

99,000 existing small businesses that received financing for operating and expansion purposes, totaling more than $28 billion in the

same 3-year period.

More significantly, perhaps, is the fact that it has resulted in the

creation of more than 1 million new jobs.

As we consider ways in which to improve the SBA guaranteed

loan processes, we also should keep in mind that it is vital to provide support not only for startups but also for existing small businesses, so that we can protect the millions of jobs that have already

been created.

Obviously the expansion of the 7(a) Loan Program has already

made a difference, and I want to get your input today on the administration’s proposal. We know that there are ways in which the

7(a) loan program can be improved and that is obviously what we

want to hear from you today.

We have tried in the past, and I know the leadership here in the

Committee and at the SBA, have tried, to improve upon the delivery of these services by reducing the burden of paperwork, obviously reducing the fees, and trying to deliver speedy services

through the lending process.

We know the 7(a) program got a jump start with the Low Doc

Program several years ago, and more recently the Express Loan

Program that has proven that we can improve the 7(a) loan program. Hopefully that has worked well. It has done a lot, I think,

in reducing the paperwork burden and the time it takes for a small

business to obtain a 7(a) loan, and eliminating the SBA’s internal

loan processing, saving time for businesses and processing costs for

the SBA.

I hope that your comments here today can help, I think, elaborate on these issues and whether or not they have worked well and

identifying other facets of the program that we ought to be working

on, where we have succeeded, and what we should emulate, and

those areas that we should address.

We will also address the Microloan Program. We know that

microloan lenders, including many of you represented here today,

made over 8,000 loans to existing and startup small businesses

during the past 4 years, creating more than 34,000 jobs. This is another area where we must build upon the program. I know the SBA

has expressed a desire to continue to improve all of its loan programs, and that is based on the fiscal request for this next year.

I hope that we can look at some of those issues.

I tried to redirect the 7(a) loan program by reducing the cost by

more than 72 percent by using an econometric model. I am disappointed that it was not fully implemented by the SBA and I hope

we have an opportunity to discuss that here today and what the

obstacles are so that we could have the full benefits of using that

model that ultimately could result in thousands of more jobs, because if realized—at least with the STAR Program, where it has

3

not been used—we could achieve a savings of more than $13 million that could be turned around into millions of dollars of loans.

As we address these and other issues, I hope you will feel free

to comment and to submit further comments during the course of

the reauthorization process, because we want to do all that we can

to elicit your views on what is working, what is not working, and

what can we do better.

Why don’t we begin? I would like to begin with the 7(a) loan program. I think many of you are familiar with the format that has

been utilized here in the past, but you can put your card up to signify the fact that you want to make a comment. I will keep a list

of speakers in the order that you put your nameplates up.

I hope that you feel free to comment, and frankly we can start

with the 7(a) loan program, but if you want to move in—let us do

that first, and then we can move onto microloans and so on. I want

to focus on those areas where it matters most.

Before I depart in the next hour, please feel free to comment on

those or any other programs that you want to get my attention on.

Who would like to begin? Tony? Please identify yourself. You all

know each other.

Mr. WILKINSON. I am Tony Wilkinson. I am the President and

CEO of the National Association of Government Guaranteed Lenders, Inc. Our members account for approximately 80 percent of the

7(a) loans that are made annually.

First of all, we want to thank you for your efforts on Senate bill

141, the econometric bill. As you know, Senators Kerry and Bond

worked on that bill for a long time and tried to get that situation

rectified. You came in and made that your first legislative priority,

and we certainly appreciate that.

I also want to thank you for your efforts, with Senator Kerry, to

get the leftover STAR money reprogrammed. That is going to be

very critical to help meet demand for this fiscal year.

I would like to comment on the Administration’s 2004 budget request. Basically it is inadequate for the 7(a) program. Last year we

did $12.2 billion gross, $11.1 billion net. They have a budget request for next year of $9.3 billion and that is just not going to

work.

We did $5 billion the first 6 months of this fiscal year, even

though there was a $500,000 loan cap in place. Historically the second 6 months of the fiscal year has substantially higher volume

than the first. We are clearly going to be well ahead of a $9.3 billion pace this year, so the budget request for next year is going to

be insufficient.

We fully believe that if we start the next fiscal year with a $9.3

billion program level, that the Administration will have to take

steps to limit loan volume in the 7(a) program, and that is something that we hope we can avoid.

We agree with you that the agency has not fully implemented

the STAR rescoring. We hope that is another issue that we can get

resolved. We believe we will need some of those monies to get

through this fiscal year. Even if we are wrong and we do not need

it this fiscal year, we obviously need it the next fiscal year. We

need to see if we can get that situation rectified.

4

That action would cost no money. The money is sitting out there.

It has already been appropriated. It is a no cost solution to our

funding shortfall this year and next. So we hope that the Agency

will take a look at that quickly.

Lastly, we know that the Federal Credit Reform Act is going to

be reauthorized this year. As a member of the Budget Committee,

we would ask that you would take a hard look at what is going on

in there. As you know, in our words, the 7(a) subsidy rate was

gamed for several years, and I do not know what the Administration has planned in the reauthorization process. We do know that

they are looking at putting what we call the master reserve fund

in our secondary market, under the Credit Reform Act, which we

do not believe they have the legislative authority to do. So that is

another issue that we would hope that you would take a close look

at.

Our association has a legislative package proposal that we will

submit for the record today. With that I am finished.

[The information follows:]

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Chair SNOWE. Thank you very much, Tony.

At some point, Ron, I would like to have you comment on some

of these issues because it is important, I think, to talk about the

Administration’s proposal.

Mr. BEW. Do you want me to comment now?

Chair SNOWE. Yes, why don’t you and then we will go on to hear

your view on both of the issues he raised. That would be helpful.

Mr. BEW. The Administration feels that the 2004 budget is ade- quate at $9.3 billion. It is basically in line with historic numbers.

We went back over the last 4 years and it has always been $9 billion. You have to accept the fact that $11.1 billion includes the

STAR appropriation which was a supplemental appropriation, and

just a one time event. We are running about $37 million on a daily basis now, and that is in line, if you multiply it times 251 days, we are at $9.3 billion.

Mr. WILKINSON. Is that a year-to-date daily average?

Mr. BEW. That is actually over the last 3 years. I think 2000,

2001, 2002. It was running about $37 million a day.

Mr. WILKINSON. What we typically see happen is—let us just

take last year. We did $5.1 billion the first 6 months. The last 6

months was $7.2 billion. The last half of the fiscal year, there usually is at least $1 billion growth. Last year it was a $2 billion

growth.

I want to be cautious about whether they are using a historic

loan volume for 3 years, because that does not match what happened the last 6 months of last year and is probably not going to

match what will happen this year.

Chair SNOWE. Would most of you agree on that point?

Mr. BEW. The $37 million is the average for the whole year.

Sometimes we hit under $20 million in the early months.

Mr. WILKINSON. There is a definite cycle to the 7(a) program. The

second half is much larger than the first.

Chair SNOWE. Is that most of the experience here, would you

say?

Mr. BARTRAM. Yes.

Chair SNOWE. Steve.

Mr. BYRNES. Good morning, Senator Snowe. My name is Steven

Byrnes. I manage small business lending for a lender in Maine.

In order to maintain our position in the State of Maine as the

number one SBA lender, there are two programs I would like to advocate for continuing and expanding. One is the Preferred Lender

Program, which Fleet participates in. Since 1998, that has been expanded from 1 lender in the State to 11, and I think, is largely attributable to the increase in the SBA volume throughout Region I.

Secondly, I would also like to advocate for the continued expansion and support of the SBA Express Program. That has really

been the key to our success as far as driving more capital into the

hands of small business. Prior to 1998 and that program roll-out

we made 10 SBA loans in the entire State of Maine. Two years

after SBA Express and PLP status was established, we made 137

SBA loans. So more than a ten-fold increase in our activity in SBA

Express.

Chair SNOWE. What precisely made the difference in this Express

Loan Program?

26

Mr. BYRNES. Ninety percent of our SBA Express Loan approvals were scored less than $100,000. We were able to allow our clients,

with a 1-page application, to score their approvals, a credit score.

Based on that we were able to approve the loan, document it, close

it, and hopefully not liquidate it but we can liquidate it. It gave the

bank a lot of the authority to manage the process on behalf of the

client with the authority from the SBA, and we have been very successful managing that.

I think, to your point, there are three key benefits to the SBA

Express. It reduces the paperwork, it streamlines the process, and

significantly reduces the closing costs because the bank does not

have to hire legal counsel to prepare the documents which under

traditional 7(a) can be fairly complicated and have a lot of regulations and requirements. Our own in-house documents and our centralized SBA underwriting group allows us to be very efficient. We

approve those loans in less than 48 hours because we credit score

them.

It really is a very efficient process and I would like to continue

to advocate for that.

Chair SNOWE. It is good to know that it is working well. That

makes a difference, when you make those changes, that you see the

end result and it is positive.

Mr. BEW. May I make a comment on that?

We are very proud of the changes we made to Express. When I

got here, I guess a little over 12 or 13 months ago, the Administrator asked me to dramatically expand the number of loans that

we make and really to touch more businesses. Which in essence,

even though we focus on number of loans, (7a) is really a job creation program. He wanted me to drive down that average loan size

and Express was a way to do it.

So we made a couple of changes. One, we increased it from $150,000 to $250,000, and then we opened it up to 2,400 banks

that could qualify for it. I think we have about 500 new banks that

joined the program.

It is an important point to realize, these banks are taking a 50

percent guarantee and not the normal 75, 85 percent. That is how

positive they felt about the program and the cost of delivering the

normal 7(a) programs.

We have doubled our volume and we have also, by driving down

the average loan size primarily with Express, really increased our

minority lending. We have a chart here to get a little plug in for

Express, since you brought it up.

This is one I used in the House and updated it. Minority lending

year-to-date, almost 7 months into the year, is up 43 percent overall. And in the categories, African-American is really up at 68 percent, and women are up 37 percent. We think there is a correlation

between the average size of the loan, the smaller loan, and

startups and minority lending. It was always thought to be that

way and I think the numbers are starting to prove it to be. So it

is part of our philosophy to drive down the average loan size.

Chair SNOWE. I think that is obviously a very positive development. Is there outreach in this process, too? Is that what also happens? What accounts for the increase? Do people come through the

door and then they realize this is going to be a much easier procVerDate 03-FEB-2003 10:36 May 13, 2004 Jkt 091190 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 D:\SBA\91190.TXT SSC2 PsN: SSC2
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ess? How do they learn about the Express Loan Program? Or is it

just when they come through the door that they find out it is not

going to be as difficult as they might have thought?

Mr. BEW. We market directly to the banks on the Express Program. You can maybe address that, Steve.

Mr. BYRNES. We market the Preferred Lender Program status.

We actually put the preferred lender status on the front of all of

our doors of all of our branches. When we sit down with a client

and they may have been talking with two or three banks, the fact

that we are a preferred lender allows us to put it through in a

much faster streamlined process. So the clients tend to gravitate

towards our institution.

Outside of the normal day-to-day sales activities that usually

comes in the door, we do not specifically market against it except

for the PLP program.

Chair SNOWE. The point is that a lot of people came through the

door that otherwise would have been denied, or they did not want

to be hassled with the process.

Mr. BYRNES. Correct.

Chair SNOWE. But once they were familiar with this process, it

made it much easier because you could process it without having

to use the SBA, and had greater authority to exercise the ability

to process this loan.

Mr. BYRNES. The key is the underwriting side. We were able to

expand the credit score to capture a larger audience of clients that

may have been declined without the guarantee. That was the key.

Chair SNOWE. That is the key.

Ms. FORBES. I wanted to follow up. Ron, I noticed your chart

combines 7(a) and 504. Is it possible for you to submit for the

record breakdown of 7(a) and 504?

Mr. BEW. Sure.

Ms. FORBES. I think we would all be interested in that.

Chair SNOWE. Dave.

Mr. BARTRAM. Senator Snowe, thank you very much for having

me here today. I certainly appreciate the opportunity.

I am Dave Bartram, President of the SBA Division, U.S. Bank.

I will give you a little bit of background on our bank. We currently have an outstanding SBA loan portfolio of $1.6 billion and

almost 6,000 loan customers in the SBA program. I personally have

been active in the SBA program for over 20 years.

I am here today also as the Vice Chairman of the National Association of Government Guaranteed Lenders.

I want to certainly echo what our President has stated, that the

Administration’s request for the 2004 program level is short, and

we believe short around 25 percent, and do we believe that with

a $9.3 billion program level that the SBA will be forced to do some

sort of rationing, which basically is a loan cap.

I believe that most lenders are expecting to lend more, not less.

That, in my mind, supports the fact that we need more funding not

less. Our bank is expecting a 20 percent loan increase, which is in

line with what the trade association is also stating.

I would like to, if I could, put into the record my testimony in

the House. It basically outlines 10 points of the legislative proposal

that the trade association has.

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Chair SNOWE. Absolutely. It will be included in its entirety in the

record.

[The prepared statement of Mr. Bartram follows:]

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Mr. BARTRAM. I would like to highlight, if I could quickly, just

3 of the 10 points.

We would like to see the SBA directed to establish a simple alternative size standard, as now exists with the 504 program, rather

than the very complex and exclusive size standard that is now

being used for 7(a) loans.

Presently, a client could receive a 504 loan for fixed asset purchases, but may not qualify for a 7(a) working capital loan, which

just does not seem right. There are two SBA programs and the size

should be the same.

Secondly, I would like to see the current fee structure that will

sunset 10/1/04 made permanent. Clients would pay the SBA a onetime fee of between 1 and 3.5 percent, based on the loan size. Lenders would pay an ongoing fee of .25 percent to the SBA on the outstanding loan balance.

Lastly, instruct the SBA to limit the lien on secondary collateral

to a more reasonable equity amount. Presently, we have to file a

lien on secondary collateral, which typically is the client’s home,

and we have to file that for the amount of the loan amount. The

problem with that is it increases costs to our clients. In some

states, they are taxed on the size of the lien, which is far in excess

of the amount of equity that they have in their home.

Again, I appreciate the opportunity to be here and I would like

to participate.

Chair SNOWE. Thank you. Do you have any comments?

Mr. BEW. David, you will be happy to know that we have a study

underway now to look at size standards. It is not in my area but

it is ongoing on the collateral issue. The study is making its way

through the bureaucracy of the SBA.

The other one, the 2004, that would be under review.

Mr. BARTRAM. Ron, thank you.

Mr. SCHUSTER. Madame Chair, I am Deryl Schuster with Business Loan Express, the Nation’s largest 7(a) lender. Thank you for

this roundtable.

We are a preferred lender in 68 SBA offices, including Maine and

Massachusetts. We are proud to be involved in those states.

During the Nixon/Ford days, I spent 8 years as District Director

and Regional Director of SBA. I am a past Chairman of NAGGL

and a past Chairman of the ABA Small Business Committee. I can

boast of receiving the SBA’s District Office of the Year Award and,

on the other side of the desk, the National Small Business Banker

of the Year recognition at one time.

With these experiences, I was given the responsibility of obtaining and retaining PLP authority for our company. I have got to tell

you, if Senator Proxmire was still alive today, one of his infamous

awards would go to the SBA for the manner in which the PLP program renewal and expansion is administered. It has got to be one

of the most wasteful and unnecessary and frustrating experiences

in all of Government.

Let me just cite a few negatives of the current procedures. It has

driven several good lenders from the SBA loan participation. It

makes a mockery of SBA’s lender examination results. It discourages lenders from committing resources to the loan programs. It

has opened the door for some SBA officials to blackmail lenders

36

based upon national performance data. A lender can be the most

outstanding lender and still not be approved as a preferred lender.

In fact, a lender has to prove and reprove themselves as many as

80 times every 2 years. It makes it very difficult for a lender to

market the SBA’s loan programs.

Just one of NAGGL’s 10 legislative issues is a national PLP program. It is sorely needed in the industry and would favorably impact most all aspects of the 7(a) program.

Chair SNOWE. What would you recommend? Certain standards

and criteria?

Mr. SCHUSTER. Some very stringent standards.

Chair SNOWE. A lengthier process for approval, that you would

not have to go through a review process?

Mr. SCHUSTER. NAGGL’s legislative package does include a detail of what we would propose, and it would include a very stringent set of criteria that a lender would have to meet as it relates

to operational criteria on a national basis. We think those criteria

should be very stringent. It includes—I do not have that right now,

but you would have to have done so many loans in at least five

states. Performance criteria—Tony you might—

Mr. WILKINSON. It is in our legislative package, but we believe

the Administrator should come up with a stringent set of standards

that a preferred lender would have to meet. But it would be administered at a national level rather than having to go to each individual district office and meet each individual district office’s requirements, as opposed to here is a national level and if you are

performing at the levels set out by the Administrator, then you

should be PLP, wherever you choose to lend.

Mr. BALLENTINE. Good morning, Madame Chair, James

Ballentine with the American Bankers Association.

I wanted to echo the comments of both Tony and David regarding

the appropriations for the 7(a) program. We are particularly concerned about the appropriation process in light of the fact that SBA

has proposed to expand the number of lenders within the 7(a) program. In the usual case, more lenders means more loans, which

means you need more dollars. In this case, it seems the pot is

shrinking while the number of lenders is increasing.

We would ask SBA, as it operates this unique 7(a) program that

has a private sector/public sector/lender/partner relationship, that

a much more open dialogue be set up amongst the lenders,

amongst their partners as they call them, to not only set the appropriations process but also work to see how we can work to make

the program work better.

We are concerned that the SBA is becoming not the Small Business Administration but the very small business administration,

and that they are attempting to, as Ron says, drive down the size

of the loans and at the same time serve all markets.

I think Chairman Manzullo said it best when he said there is a

certain sector of the small business community that needs not a

very small business loan, but rather, a larger small business loan.

That type of capitalization is needed for those businesses that are

expanding and that are in their fifth, sixth, seventh, and eighth

year. We would really ask that the SBA become a little more open

in its process and working with its lending partners to really see

37

what the adequate funding level is for this program going forward,

particularly as they expand the number of lenders.

Chair SNOWE. Is there a possibility of doing something like that,

Ron? I do not know historically what has been the case, working

with——

Mr. BEW. As far as the dialog?

Chair SNOWE. Yes.

Mr. BEW. I think the very first couple of months when I arrived

we had a bankers roundtable. We have probably done five or six.

That very first one was really the genesis of expanding the SBA

Express Program, so we normally keep those groups to around 10

or 12 bankers at a time. We can continue to do that. The Administrator asked me to continue to do that.

Chair SNOWE. I think that would be worthwhile and I encourage

that, because it is helpful and obviously you get some good ideas

from the process in trying to improve upon it.

But also in the case here about the budget and the amount of

7(a) loans and the fact that you are going to have more lenders

participating, smaller loans, and so on, about the need. Our inability to meet the need or to fulfill the ability for the number of loans

that could be processed if we had more authority to do so. Can you

address the number?

Mr. BEW. Yes, the numbers are going on. A lot of those 500 that

have joined, mainly under the Express, are really doing the smaller

loans so it does not eat up that much volume. We still anticipate

we can serve the larger banks and lenders, the larger loans as well

as the smaller ones.

Chair SNOWE. Why was there not a greater request made for the

7(a) loan program? Obviously, there is a need. It would be utilized.

It would make sense, given the fact that—especially in this sluggish economy. Would it not make sense?

Mr. BEW. Again, I think it is adequate that what we requested

is in historic lines. We have also found, through a Department of

Labor study that looked at our portfolio, that the smaller loans

generate more jobs. So as far as the economy, it meshes. They

broke down our portfolio a couple of years ago and it showed in

loans from 0 to $50,000 it takes $14,000-plus of a loan to create one

job. In the loans over $1 million it takes $140,000. So, it is more

effective on the smaller loans for the job creation. That has been

our track so far.

Mr. BALLENTINE. I think one of the important parts, and I have

heard that cited a couple of times, is that there is job creation and

there is also job retention, as it relates to making the loans that

are needed for small businesses. So every loan is not for a startup

small business, but there are loans made for job retention as well.

Mr. HEARNE. Good morning. Thank you for having me.

I am here with the Credit Union National Association, and I

want to thank you for inviting us and giving me the opportunity

to not only speak but to see so many of my old colleagues from the

SBA days.

I used to work at SBA back until 1997, in the Office of the Chief

Financial Officer, back when my good friend Mr. Criscitello was

Chief Financial Officer.

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I am also the Treasurer of Lafayette Federal Credit Union, which

among its field of memberships, the SBA is one. Finally, I am also

a small businessman and a small business borrower, and I have

been through the SBA 7(a) borrowing process from that end, also.

I would like to piggy-back on what some of my colleagues here

have said. As you know, the SBA recently adopted a rule that allows credit unions more full participation in the process. We believe that that is going to go a long ways towards not only increasing access to capital but the credit unions themselves have an average loan size of under $100,000. I think it allows more participants.

In addition to that, on the funding side of things, like everyone,

more money is better just like I think more lending participants is

better. But an important thing, I think, sometimes gets overlooked

is just the act of applying for an SBA loan does a lot of what some

of the Microloan Program is aimed towards, which is counsel the

borrowers. Going through the process of doing your business plan,

your cash flow projections, and so forth, I think, is a weed out process for some of the smaller borrowers.

It also, I think, reduces your default rate and ultimate liquidations because those borrowers who do not have access to a 7(a) program or a structured business loan will go and finance their programs with credit card debt or home equities and vehicle loans and

so forth. They do not really have the opportunity to really take a

step back and, with the guidance of a seasoned loan professional,

take a look at what their business prospects are.

I also think that SBA and the borrowing community would be

well served with a more centralized process, not only for the PLP

lenders but also for those lenders, particularly the credit unions,

who are applying to become 7(a) lenders. Again, I understand

where SBA is coming from on this, but it is difficult to have to deal

with every district office and their varying requirements for becoming an SBA certified lender. I would love to see SBA work towards

a more centralized role for both PLP and that.

Finally, I would just like to commend Mr. Bew and his staff, who

have really been very helpful with us in helping to put our program

together. I know exactly what you guys are up against, but we do

appreciate all the efforts that you have had to date and we look forward to working with you in the future.

Chair SNOWE. Thank you very much.

Mr. MERSKI. Thank you, Madame Chair, Paul Merski with the

Independent Community Bankers of America. We represent over

5,000 community-based banks around the Nation in all 50 states.

A number of our community banks are the No. 1 SBA lenders in

their state.

First of all, we would like to see at least a $12 to $13 billion program funding level. Based on our projections for the next 12

months, we are looking at $12 to $13 billion in SBA 7(a) loan volume demand. The $9.3 billion earmarked in the budget is very inadequate for the demand that our bankers are seeing for the loan

program.

In surveying our community bankers on some of the problems

they had with SBA loan programs last year, when the budget funding was in jeopardy and the SBA quickly put in a loan cap amount,

decreasing to $500,000 the loan limit amount, we heard from a

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number of our bankers that a number of their loans that were in

process had fallen through. That is unfortunate because that was

jobs that were not created and business that was not created. It

was unfortunate that the SBA had so quickly put in that loan cap

without fair warning to the bankers who were in the process of

processing SBA loans over $500,000, and were unable to complete

those loans.

So we are hoping that the budget funding would be adequate

enough so that rationing of loans would not be put in place.

Also, the fee structure. The most sensitive thing for the community banker to do SBA lending is the fees that are associated with

that. We would like to see the current fee structure, that was reduced a couple of years back now, kept in place. Any slight increase

in fees, you are going to see a quick drop off in the amount of SBA

lending that our bankers will do. It is a very marginally profitable

activity for them now and if the fees go up even slightly, I think

they will be dropping off their SBA business.

Another concern that our bankers have expressed and that we

hope can be addressed is the fact that the SBA guarantee is often

not a guarantee. We have had a number of our bankers complain

that when a loan went bad for various reasons and they went to

the SBA and said, ‘‘Well, we would like to see our guarantee in effect now’’, and the SBA came back and said, ‘‘It is not really appropriate that we give you the full guarantee or any of the guarantee.’’

That has, frankly, caused a large number of our community

bankers to completely drop out of the program because they cannot

take the risk with the low margins they make on these loans that

the guarantee will not be there from the SBA.

They were also disappointed in the treatment that they received

from the SBA on these debates over what the guarantee should be

on particular loans.

Finally, we are also concerned with the quick action the SBA had

taken on allowing the tax-exempt credit unions into the program.

There was no proper administrative procedures action taken for a

radical change in that program. We are somewhat concerned that

the default rate on these loans might be impacted as the credit

unions, who have little or no experience in commercial lending, and

in fact are limited by the banking laws from expanding into commercial lending, enter these programs.

We would request that a separate database, or at least separate

information, is kept on the default rate for credit union lending activities versus the participants in the program as of now.

Finally, one of the other complaints we have heard from our

bankers when we surveyed them is what has been mentioned here

several times already as the access to the Preferred Lender Program and the complications of being determined as a preferred

lender. Many of our bankers have been in the lending business for

over 100 years and still have a difficult time of convincing the SBA

to get them up and running in the Preferred Lender Program. A

lot of work needs to be done there to make that easier and quicker.

If you are not in the Preferred Lending Program, it is almost impossible to compete with other lenders who can offer a loan in 48

hours when it would take weeks for you to get your SBA loan if

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you are not in the Preferred Lender Program. Those are some of

the suggested changes we would like the Committee to look at.

Thank you.

Chair SNOWE. Thank you very much, Paul.

Mr. FELDMANN. Thank you, Senator.

I am Greg Feldmann. I am with Gryphon Capital Advisors based

in Roanoke, Virginia. We are in the business of advising and helping small- and medium-sized businesses access capital, both equity

and debt.

We just wanted to share our experience today over the last 6- or

8-year period. The problems that small businesses have, in terms

of accessing capital through the banking system generally, and

some of the constraints that we are seeing, as well as comment

on—this would probably fall under the innovations or other recommendations category—to encourage the Committee to perhaps

authorize the SBA to provide a limited form of credit enhancement,

so that business loans could be securitized and create a capital

markets solution for having capital flow into small businesses.

The 7(a) program is a good program. We think that there have

been improvements made over time. What we are seeing structurally, within the banking community with consolidation, is we

have fewer outlets for our type of businesses to go and seek capital.

The community banks that we interface with, and we have polled

over 60 of them in the western Virginia and North Carolina area

principally, are actually fighting a funding problem. Attracting core

deposits has become a problem and they are hitting against walls,

in terms of being actually able to fund loans.

They are also obviously facing a lot of increased competition from

larger banks, securities firms, et cetera. The deposit-to-loan ratio—

and we have prepared a little piece for the record here—most of

these banks are at 40-year highs.

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Mr. FELDMANN. So it is not just a matter of having the dollars

appropriated, but it is actually having the monies available in the

banks, from a liquidity standpoint, to be able to fund the loans.

We think there is a role that the SBA could play in providing,

as a complement to the 7(a) program, a limited form of guarantee

to allow poolers and aggregators of small business loans to purchase those loans from the community banking system, sell those

into the capital markets, and over a period of time have business

loan category become much like the asset-backed categories of

mortgages and automobile loans, et cetera, that are prevalent in today’s market.

We wanted to simply come on record today and encourage, in

this reauthorization process, that the Committee look at this as a

means for the SBA to help facilitate funding for small business in

a different sort of way than just the 7(a) program.

Chair SNOWE. Have you ever considered that, Ron?

Mr. BEW. Yes. I am from Virginia and people will think I put

Greg up to this. I do not know Greg.

But that is what we mentioned in the budget about what we are

calling pooling. We have explored it. We do not have anything definite, but the concept was obviously to provide more capital for

small business outside of the 7(a) program. If the SBA could use

its guarantee for a pool of loans, it would free up the banks to liquefy their assets and then reload, so to speak, and make more business loans.

So yes, we are looking at it because it would be good for small

business.

Ms. FORBES. When you were looking at it, were you considering

this in addition to fully finding the 7(a) program?

Mr. BEW. It would be additional, yes. Definitely additional, not

to supplant or replace the 7(a).

Chair SNOWE. Doug.

Mr. CRISCITELLO. That is a good segue into my comments.

I am Doug Criscitello from J.P. Morgan Chase. We are the parent company of Colson Services Corp., which is the fiscal and

transfer agent for SBA for loans that are sold on the secondary

market.

I think it is important to point out the importance of the secondary market here. As Mr. Bew just referred, a secondary market

allows a lender to take a loan that has been made, sell it, generate

additional liquidity, and make additional loans. That cycle goes on

and on. The existence of a very fluid secondary market is critical

to that equation.

Go back in time 20 years to when there was no formal structure

in place for a secondary market for 7(a) loans. It was a very inefficient and cumbersome process to get rid of loans that were on your

books. The Congress stepped in in 1984 and passed the Secondary

Market Improvement Act. SBA quickly implemented that Act,

hired Colson Services Corp. to serve as the fiscal and transfer

agent. Over time, the process has become more and more efficient.

I would really point to it as a model public/private partnership in

that it is important to know that we have a very active fluid secondary market and the cost to taxpayers over the last 17 years has

been zero. It is a partnership that has worked extremely well.

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I would like to commend the SBA for a fine job it has done over

the years.

Chair SNOWE. We appreciate, as I am sure they do, your comments.

We want to move on to the Microloan Program. Next will be

Tony, David, and Michael. You can make three quick comments

and then we will move on to the Microloan Program. Then you can

come back to anything else after I leave, however, I want to get

your comments in.

Mr. WILKINSON. I just want to touch on a couple of items that

Ron and some of the others have talked about.

We went through a period in the 1990s of a very good economy

where lenders were making loans, we call it fringe loans, without

an SBA guarantee.

History changed on 9/11. Lenders pulled in their credit horns.

Borrowers who were on the fringe now found themselves being put

into the 7(a) program. We think that the history that is relevant

is what has happened since 9/11 and that we are going to continue

to see the kinds of loan volume that we saw last year. Yes, we did $9.3 billion, $9.4 billion in the 1990s, but this is a

new day. We are going to continue to see the higher loan volumes

and hope we can find a way to fund those loans.

Second, Mr. Bew made a comment that this was really a job creation program. There is nothing in the Small Business Act that

says this is a job creation program. This is a long-term credit program for small business. There are businesses out there, in particular manufacturers, who use the 7(a) program to buy specialty

equipment that makes them much more efficient, and is critical to

their operations. It is not only job creation, it is really a long-term

capital program for small business.

I wanted to echo the comment that Mr. Byrnes made about the

Express Program. That really is one of the highlights of the Agency. They have found a new way to get the large banks back in the

program by SBA Express, and they have really done a masterful

job refining that program and getting it where it works.

The one issue we have is that it appeared, going through the last

fiscal year, that they were trying to use the Express Program to replace the existing 7(a) program. That is where we would be at

great odds, doing only Express loans at the expense of putting

other loans aside.

We fully support keeping the fees the same. If you go back a few

years, and it is part of the subsidy issue that we touched on just

briefly. The fees that were required to be charged to borrowers and

lenders were excessive. It was done through the subsidy calculation, and well over $1 billion has been sent to Treasury, taken out

of the pockets of borrowers and lenders, that could have been used

in their business operations or for other loan incentives.

Some lenders finally figured out what was happening to them,

and that they really were not making a profit in this program and

they left the program, including a lender who was the largest volume lender in the country, and got out of the program.

At that point in time, we started working with Senator Bond and

Senator Kerry saying fees have got to come down. If they do not

fix the subsidy rate, that is one issue. We have got to get the fees

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down so we will keep lenders in the program to deliver it. The fees

came down, lenders are coming back to the program.

So it will be very important that we keep those fees and do not

allow that change to sunset. Thank you.

Chair SNOWE. Tony, in talking about the explosive growth in the

7(a) loans, and what you are recommending, do you see that as a

trend or an aberration? In this last year, because you took a 3-year

average; is that correct?

Mr. WILKINSON. He used a 3-year average in his daily loan volume. What we are seeing is a spike post-9/11.

Chair SNOWE. Do you see that as a trend? Do you think that is

sustainable?

Mr. WILKINSON. I think that the days of $9 billion in 7(a) lending

are over. We are going to see higher levels, especially if—again,

you look at the volume in the Express Program, the big banks are

finding that a great program, they are coming on board. The loan

cap is now gone.

We would have had higher volume in the first 6 months of this

fiscal year were there not a $500,000 loan cap. Where the next

cycle is, where the times are good and the lenders are making more

loans absent the guarantee, I do not know when that period is.

However, in the near future, we are going to see higher loan volumes.

Chair SNOWE. Thank you. I would like to call on Davi D’Agostino

from GAO.

Ms. D’AGOSTINO. Thank you. I am very pleased to be here this

morning to discuss GAO’s work on SBA’s 7(a) preferred lender

oversight.

Why is it so important for SBA to have a credible preferred lender oversight program? First of all, preferred lenders approved nearly $7 billion in Government guaranteed 7(a) loans in fiscal year

2002 alone with full approval authorities delegated by SBA. This

amounts to significant exposure for the taxpayer.

The preferred lenders that are banks are overseen by bank regulators whose main focus is not on the quality of Government guaranteed 7(a) loans or their appropriateness for the 7(a) program

mission goals.

The other preferred lenders, the SBLCs who we have heard from

today, are not otherwise regulated or examined. The SBA did contract with Farm Credit Administration to examine the SBLCs in

response to our 1998 recommendation.

Strong oversight is needed to maintain the integrity of the 7(a)

program in meeting its mission to provide credit to those who cannot get it elsewhere.

What do we find in our work? SBA certainly has made a tremendous amount of progress since our 1998 report when there was virtually no lender oversight. Still, we identified several aspects of the

program that do need some improvement.

The program does not adequately focus on the 7(a) portfolio risk

at both bank lenders and the SBLCs. For example, it was optional

to evaluate financial risk in preferred lender oversight reviews at

the time of our work.

Preferred lender reviews have also been cursory checklist file reviews and do not qualitatively evaluate or test lender decisions on

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eligibility, for example, how they use the credit elsewhere test and

apply it, and the credit worthiness.

Also, SBA standards for the credit elsewhere test are very broad

and variable, making it difficult to assess lender decisions about

eligibility as they are currently written.

The SBA has also been slow to respond to important Farm Credit

Administration recommendations in their examinations about the

program and even specific SBLCs.

For example, Farm Credit has recommended that the SBA better

define for SBLCs what constitutes a delinquent loan, and also what

constitutes adequate capital for capital requirements purposes.

That is how much capital an SBLC should hold against the risk on

its books. This would obviously greatly affect the amount of taxpayer exposure to higher SBA 7(a) costs in the long run.

SBA also had not developed enforcement policies and procedures

to No. 1, deal with the safety and soundness problems at SBLCs

and in bank lenders’ 7(a) portfolios; or to No. 2, describe the

grounds for suspending or revoking preferred lender status.

Finally, we found that the SBA’s Office of Lender Oversight is

within the Office of Capital Access, which is a program promotion

function, which also recruits lenders to participate in the 7(a) program. This raises potential conflicts of interest and independence

concerns when you are doing oversight and evaluation. They should

be separated. The promotion and oversight should be separated.

What did we recommend and what was SBA’s position? We recommended improvements to the preferred lender oversight program in all of the areas I mentioned, including the need to separate lender oversight functions and responsibilities from the Office

of Capital Access. It is not clear in all cases that the SBA fully responded to all of our recommendations, but the SBA seemed to

agree with part or all of the recommendations to improve its assessments of the lenders and to separate lender oversight from

OCA. But the SBA said it was working to expand its enforcement

policies and procedures.

I also wanted to mention we have related ongoing work, looking

at the new 7(a) credit subsidy model that the Administration and

the SBA came up with at the request of Senator Kerry and the

House Committee on Small Business.

We are also looking at SBA’s transformation initiatives.

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Chair SNOWE. Thank you very much. I am going to look at some

of the issues that you have raised. Any response, Ron, at this point

to any of those issues?

Mr. BEW. Yes, I am aware of the report and actually one of the

four goals that the Administrator set for me was to increase the effectiveness or role of lender oversight when I came here, and we

have increased staff there. We have, this month, just awarded a

contract through Fed Sim for the loan monitoring system. That

should be up and running in about 6 months. That will help us address these problems on lenders, loan programs, products, regions,

whatever. It will really help us take an off-the-shelf product from

Dunn and Bradstreet and have a more effective oversight policy.

I think we have some items in the leg package for the enforcement policy. We have taken some of those recommendations, most

of them, and are addressing them.

Chair SNOWE. Thank you, and we will follow up as well.

Can you tell me, on some of the recommendations here of

NAGGL, about centralizing the certification process. Would that

complicate oversight at all?

Ms. D’AGOSTINO. Actually, I do not think so. It was also part of

our report. We discussed the same issues that NAGGL and some

of the banks have brought up about the unevenness that we heard

from the lenders across district offices and how it would help them

if there was more consistency across.

Chair SNOWE. Thank you.

Let us move on to the Microloan Program. Who would like to

begin on that score? Anything? All satisfied?

Go right ahead, Alan.

Mr. CORBET. Thank you, Madame Chair. My name is Alan

Corbet and I am the Executive Director of Go Connection, which

is a small non-profit in Kansas City, Missouri. We service a geographic area in Kansas and Missouri for the SBA’s Microloan Program as well as the SBA’s Women’s Business Center.

Today I am here to add support to the funding needs of the SBA

Microloan Program specifically. We must receive the funding levels

necessary to support this program. We are requesting $25 million in technical assistance grants and a program level of $25 million in loan funds for this program for

fiscal year 2004, which supports AEO’s recommendations to the

Committee. The President’s budget has only suggested $15 million

for the technical assistance side of that program. I want to speak

directly to you about the technical assistance grants today.

For the past 2 years, the approved budgets have reduced the

technical assistance grants. If this continues, the SBA Microloan

intermediaries will suffer and may eventually go out of business.

This is not just about a non-profit going away.

We, as a group across the nation, owe the Federal Government approximately $96 million today on the money that we have borrowed for the benefit of our microborrowers. If we are not in existence, this amount represents a potential loss to the Government.

The only way to protect that from happening is to continue to provide technical assistance, as we do, to the small business owners.

These are the ones that we have helped out to get in business to

begin with.

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We would not be making these loans without that assistance in

place. These are high risk businesses. In fact, these are non-bankable businesses. The banks will not touch these, and I do not blame

them. They do not have the systems in place and they are put together to be profit making and they have returns to their shareholders that they are responsible for.

This program was created specifically to help these high risk

businesses to get off the ground. Without the one-on-one business

counseling that we provide, they will not exist and they will go out

of business.

The SBA guidelines provide that grants will be made to intermediaries of up to 25 percent of the borrowings that we receive

from the SBA. This year, fiscal year 2003, we are only receiving 15

percent of that grant. Last year it was 15 percent, and prior to that

was 25 percent.

To give you an example, my organization roughly owes the SBA about $1 million and we received $250,000 2 years ago in technical

assistance matching grants. This year our grant of $150,000 is a

huge reduction to us. To continue the growth that we need to continue, it makes it very difficult for us to manage those accounts

that we have on the books.

Based on the suggested technical assistance grants and this

year’s President’s budget for the fiscal year 2004 recommendation,

our grant would next year go from 15 down to 11 percent. This is

an extremely critical reduction in the funds that we need to monitor and assist these high risk businesses that SBA has encouraged

us to help.

If the funding levels in the President’s budget is enacted, the future of the Microloan Program is in jeopardy.

As you indicated in your comments earlier, we have over the last

4 years, helped create 34,000 jobs. We handle a market that no

other SBA program will handle. There has been some suggestion,

and I guess my comments or questions today to you, Mr. Bew, are

that there have been some suggestions to us that there is a possibility that the Community Express Program, which is a new program for the SBA, may be an alternative that is cheaper to the taxpayers in order to provide that same dollar amount of loans. That

may be true, but it is completely a different borrower. Even the

Community Express Program does not go to the borrowers that we

assist.

I also understand that there is a need to consolidate technical assistance or grant programs within the SBA and try to get those

two—there are several different organizations from the Women’s

Business Center, Small Business Development Centers, et cetera,

SCORE, as well as the Microloan Program, that provides technical

assistance. I want to stress the point that, in consolidating these

dollars with others of those resource programs, the concern about

that is those programs do not have the $100 million at risk that

we do to the SBA. When you do not owe the money, you will not

help the borrower as heavily as we will.

Those are just a couple of my comments that, if you could respond too, I would appreciate it.

Mr. BEW. As far as the Microloan Program, yes, it appears that

TA is down to $17.5 million, I believe, last year, to $15 million. We

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are doing a couple of things to make that whole program work

more efficiently. One is to give you—it is in our leg package—the

flexibility on how you allocate the 25 percent TA, between the old

and the new borrowers coming online.

During the course of the year we instituted a performance standard for microlenders. You had to produce four loans per year. Some

of the microlenders in the program were not producing as many as

four loans, and I think they will not draw the TA which will let

us reload that and just use the amounts of money in the Administration’s budget more effectively.

Those two items will help us on the microloan. That is our position.

Chair SNOWE. Blake.

Mr. BROWN. Madame Chair, thank you for inviting us today.

Chair SNOWE. The Maine contingency here.

Mr. BROWN. Yes, the Maine contingency. We travel together.

Again, I appreciate your inviting us today.

I am Blake Brown, Chief Financial Officer at Coastal Enterprises. We are a community development corporation located in the

great State of Maine.

I wanted to personally thank you for all that you have done for

our organization, with all of the SBA programs that we use. That

goes from the Microloan Program to the SBA 504 Program through

the SBDC and the Women’s Business Ownership Technical Assistance Program.

I guess my comments will be very brief. I wanted to play off of

what Michael had said earlier about banks having to turn clients

down because of various reasons, and they end up going to credit

cards and they do not get the counseling that they need. The whole

focus of the Microloan Program is to provide that technical assistance to budding entrepreneurs. That is a key link. The financing

and TA are a critical piece.

I really think the SBA has a jewel in the Microloan Program. I

think the major issue to us is continuing funding for the program. Over the past 8 years, we have borrowed about $2.8 million from the SBA and have done about $3.6 million of loans, with an average size loan of about $13,000, well below what a bank would typically be looking for. So I think it is really a critical program.

I think Steve would probably concur that a number of our customers have eventually graduated to the bank and we have actually done joint deals. The banks view this program as very beneficial.

A couple of comments. Again, the funding is an issue. CEI, over

the last 3 years, have actually had a decline in volume because of

lack of funding. Although recently we just received an allocation,

which we thank the SBA for gratefully. But basically we pretty

much had to slow things down for a good 9 months, and actually

elected to borrow money without TA, which we think is not a good

thing for us or any of the microloan providers. The TA component

is extremely important to the field.

Again, funding level is key. Just a couple of minor points, we

would like to see more uniformity in terms of interest rate. That

is driven by a number of factors. No. 1, the cost of funds to the

microlenders. It would be a much simpler process if we could come

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up with a mechanism that blended loans. For instance, we have a

series of five loans that range from interest rates of 1.25 points to

6.25 points, a fairly broad range. We are capped in terms of what

money we can put out to borrowers.

In the marketplace, we are showing a pretty broad range of rate.

We would like to see a consistency in rate. We think that it makes

more of a uniform program to the customer.

In terms of eligibility for the Microloan Program, I think we

would like to see flexibility in terms of eligibility of organizations

apply for funding, and really looking to staff experience and not

necessarily organizational-wide experience. Although, again, I

think there should be flexibility there.

Again, I think Alan touched on the flexibility of TA and how that

gets spent, and I think the SBA concurs with that.

I think those are my key points. Actually, the last one would be

eliminating State funding restrictions, although I think the SBA

has shown some flexibility there, the way the funds get allocated

among States. I think they have been flexible with us in terms of

receiving money. But I think I would like to see that incorporated

in the laws.

I think that is all that I have. I have written testimony for you.

Chair SNOWE. Thank you Blake, and you can submit the entirety

of your testimony. I appreciate those comments.

[The prepared statement of Mr. Brown follows:]

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Mr. BROWN. If we have time, I would like to explore the possibility of creating another lending program within the SBA. We

think there is a gap in funding from $35,000 to $200,000 direct

lending, that we think could be a beneficial program for the SBA.

I really do not want to take up more time with this, but we would

love to explore that with you and the SBA.

Chair SNOWE. Great. We will follow up on that, as well.

I am delighted to welcome here today my colleague, Senator

Coleman from Minnesota, who is not only a new member of the

United States Senate, but also a new member of this Committee.

We certainly want to welcome you. We know that he is going to

provide invaluable insight and perspective on this Committee. He

is also here to welcome one of his constituents, who is Mary Matthews from Virginia, Minnesota.

Senator Coleman.

OPENING STATEMENT OF NORM COLEMAN, A UNITED STATES

SENATOR FROM MINNESOTA

Senator COLEMAN. Thank you, Madame Chair.

I should note, a brief aside, I just came from the Senate Floor,

in which I had an opportunity to display the Minnesota Golden Gopher tie that Senator Gregg is going to be wearing after Minnesota

beat New Hampshire.

I say that because I see the Maine contingent is here, and last

year, of course, Minnesota beat Maine in the finals of the NCAA

hockey championship. So I have the tie right here.

Mary, being from the Iron Range, that is really kind of the heart

of a strong Minnesota hockey country, so it all fits together, Madame Chair.

I am pleased to see that Mary is here today. She is President of

Northeast Entrepreneur Fund. It is a community development institution based on Iron Range.

The Iron Range, for those not familiar with it, is up in northern

Minnesota. It is a place where we dug out the taconite ore that

built the battleships and produced the steel that won two world

wars. The reality is that we face some tough times up on the range.

Many of the largest taconite producing operations have closed.

Clearly, the future of the Iron Range, the future of the towns, the

Virginias and the Hibbings and the Chisholms, is tied to small

business being vibrant and vital. That is why what we are doing

here today is so important.

I would note that I was an urban mayor for 8 years and had

great familiarity with some of the microloan concepts and programs

in an urban setting. It is really important to have Mary here today

representing a more rural perspective and to highlight the importance of this program.

I think it is very fair to say that the SBA Microloan Program is

actually essential to Northeast Entrepreneur Fund’s mission. It

needs to be there. They rely on the Microloan Program to help

those who want to learn how to start a business or to grow an existing business.

I understand that through their work they have helped start or

expand over 625 businesses and have created and retained over

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1,400 jobs in the region. That is a big deal in a region that has

seen significant job loss, this is really, really important.

I think that sometimes the impact the microbusinesses in our

economy is often overlooked. For instance, in Minnesota, companies

with four or fewer employees employ over 447,000 workers, which

is over 13 percent of the total workforce in the state. These are the

businesses that directly benefit from the Microloan Program.

So, again, as a former mayor who understood the importance in

some of my neighborhoods that we were struggling to preserve and

revitalize, creating opportunity oftentimes for new Americans and

new immigrants, this program is essential. But it is not just an

urban program, it is a rural program.

I want to thank Mary and all the other participants for being

here, and I look forward to being very much involved in the work

of this Subcommittee.

Chair SNOWE. Thank you very much, Senator Coleman. We appreciate your comments.

Mary, with that introduction——

Ms. MATTHEWS. Thank you, Senator Snowe, for the invitation.

Thank you, Senator Coleman, for the introduction. It is a pleasure

to be here today.

The Northeast Entrepreneur Fund is a 14-year-old microenterprise and small business development organization serving 10

counties in northeastern Minnesota and one county in northwestern Wisconsin. Our mission is to create a spirit of entrepreneurship, help people start and grow small businesses in a region

of the country that is not known for its entrepreneurial spirit.

Senator Coleman talked about the economic dislocation that our

region has undergone, and we see a continued, growing interest in

small business development.

The Entrepreneur Fund, and particularly the Microloan Program, serves a specific niche in the marketplace, and it is a niche

that is not met by banks. It is a niche that is not met by the Small

Business Development Centers and other technical assistance providers. That provision of capital through the Microloan Program, as

well as the technical assistance, is really a critical link.

To describe that, about 6 weeks ago, our staff looked at our portfolio. We are probably an average size microloan program. We have

made 145 loans since 1992 for a total of $1.2 million. Our average

loan size is about $8,200.

We have 33 loans in our portfolio. For 85 percent of those loans,

at the time when they were made, the business had little or no equity to invest in the business. Two-thirds did not meet bank credit

criteria. We have just started collecting credit scores, and of the

credit scores that we have been collecting, the highest is 601, the

average is about 550. We are actually looking at a loan right now

that is below 500. So I am anxious to hear all of you bankers respond to that.

Ninety percent of these businesses were startups. These loans

went to startups. Most of them had little or no business experience.

Fifty-one percent had no experience in the business they were

starting. Would any of you bankers want that portfolio?

Let me tell you how it is performing. The delinquency rate at the

end of last month, at 30 days, was 2.1 percent. Our charge-off rate

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last year was 3 percent. We have historically charged off about 10

percent of those loans. Early on we were not lenders. As we learned

how to be lenders, the performance was not as good at the beginning. It is continuing to improve.

So what makes the difference? The SBA’s technical assistance

grants tied to the loans invest in business success and it makes it

possible for people in a region who have not been starting businesses to start and grow businesses.

Some of them employ themselves. Some over time begin to employ additional employees. Some of those businesses will grow.

I can think of a number of examples where initially the business

served a local market. As they have grown confident, their product

lines of expanded. We have one business that has been a service

business for 12 years and is just starting a second business. It is

a manufacturing business that has a regional multistate market,

potentially a national market.

This is somebody who is employing all of her neighbors, who

works out of her garage, and maybe need to move into a new building.

These businesses grow and they have great potential. However,

it is the tie of the training and technical assistance funding that

we get from the SBA that makes this kind of performance and this

kind of success possible.

So Alan provided the numbers of what the industry request is,

and also what the impact is going to be if the administration’s

budget for $15 million is enacted next year.

There are already organizations leaving the program because

there are not enough funds. You cannot separate the two. There is

no banker in this room that would delegate monitoring their portfolio, particularly one that I described, to another organization. We

cannot give the monitoring and the follow-up to the SBDC. We

need to have the funding for both sides of the program.

Part of the difficulty for the SBA is the SBA is divided into two

sections, capital access and entrepreneurial training. So this is

housed within the capital access side of the program, and there is

kind of a disconnect. It is sort of an odd, unique duck, within the

SBA environment. Whatever you can do to support the program, its

continued growth, and ongoing funding is critical. Thank you.

Chair SNOWE. Thank you, very much. That is very helpful.

Zach.

Mr. GAST. Thank you, Madame Chair.

I think I would like to begin by thanking the SBA for including

in their legislation package some changes that were actually

brought forth by Senator Kerry and yourself and passed last year

in the Senate. I think those are going to be some excellent changes

in terms of flexibility, and we would wholeheartedly support those

and thank you for working with industry to come up with those

changes.

I would then like to turn to a little bit bigger picture. It is easy

to focus on the funding and the authorization. Ron Bew cited a statistic that loans of $14,000 are the best job creators. The average

loan size in the Microloan Program last year was $14,000.

Beyond that we have more statistics. We have statistics that estimate that the return on investment for the Federal Government for

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one dollar invested in microenterprise was $2.06 to $2.72 in either

reduced federal expenses or increased federal revenue only. We are

just looking at federal. So while you can look at $15 million as

quite a bit of money, that is hard to say in the context of the Federal budget, that actually is quite little. When it potentially is returning over two dollars for every dollar that you put in, I would

say it is a very worthwhile investment.

Now I would like to focus on the Microloan Program. I think it

is a program that is going places and we need to make sure that

happens. Nearly one-sixth of all the loans that were made in the

program’s history were made in fiscal year 2002—and this is a 12-

year-old program. It is certainly going places. The quantity of the

organizations participating is always improving, and I think we can

continue that.

But I think it is been highlighted that the technical assistance

is key. These are businesses that need a little bit of help but they

can go a lot of places. We just asked for success. We wanted to hear

from microloan intermediaries and others. We heard stories of business that started with $10,000 loans in the Microloan Program and

now have $13 million in revenue. We heard from a defense manufacturing company that started with a $25,000 microloan and is

now doing more than $3 million in business for defense manufacturing.

I would like to point to those and just thank you for the opportunity to be here today and to present the information.

Chair SNOWE. Thank you. Alan, and then Steve.

Mr. CORBET. I would just like to say that my position has been

that I am a real champion of small business and of small business.

My background is 22 years in banking, but I spent a lot of that

time as a supervisory investigator for the Resolution Trust Corporation and that disaster that we had to deal with several years

ago.

Getting back to helping the very small businesses has been real

exciting for me. I have been doing this for 6 years, but no one ever

listens to us. I have my own funding problems in my own community because venture capital is sexy. So people want to talk about

that. They do not want to talk about the little $10,000 loan where

we help someone get a small cafe started.

I continually struggle to have the people with the money hear

about us. The same thing goes to the Federal Government.

So I guess my statement is that I ask you to help send our message to the right Budget Committees and Appropriation Committees, that the funding is provided as we have requested. As Zach

indicated, $15 million is pocket change in the Federal budget. So

when we only ask for a $10 million increase to restore the previous

years’ cuts, when it gets to the Committee process and trying to allocate those monies, it becomes very difficult to get those earmarked to our program.

I implore you to help the very, very small business owner of

America to get the funding that we need to help them out.

Chair SNOWE. I know exactly what you are saying. You can certainly have a greater bang for your buck with these types of programs, especially at a time in which we have a declining economy.

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Small business is the engine that drives the economy, without

question.

It seems counterproductive not to be investing more in these programs, because it really does maximize the effect. The only job creation that is occurring is from small business. It really does not

make sense to be ratcheting back these programs at a time in

which we need job creation.

To me it really is staggering, when I look at these numbers, the

respective programs within SBA and to see the thousands of jobs

that it ultimately generates.

Essentially, I think those of us serving on the Committee and

maybe some others, and obviously all of you, understand. However,

I do not think people can fully appreciate, and even I did not until

I was looking at these numbers, the extent to which these programs become a great catalyst for job creation in our society. They

really do produce.

I think we really have to do more to advance these programs.

You are right, for a small amount of money we can get so much

from them. So I would like to do more in that regard, without question.

Steve, and then I have to go. I do not know if I will leave it with

Norm or just leave it with the staff to continue the discussion for

the rest, because I want to make sure you all have the opportunity

to fully participate in any other aspect. I am sorry that I have to

depart.

Senator COLEMAN. I can stay for a little bit.

Chair SNOWE. Great, that would be terrific.

Mr. BYRNES. I would just like to throw my support behind the

Microloan Program. It is administered through CEI in the State of

Maine.

Over the last 6 months we have had two specific transactions.

Both were women-owned businesses that were acquiring a retail

shoe outlet and a restaurant. In both of those transactions, there

were not sufficient proceeds after the bank loan and the equity contribution from the women-owned business owner. We had to turn

to CEI as gap financing to provide a microloan.

I can say with complete honesty that if the microloan was not

there to provide that gap financing, both of those transactions

would not have happened. Many times at the 12th hour, those

microlenders can turn these transactions around in a very short period of time. Because you have situations that no one can anticipate, such as a light evaluation on the assets or an appraisal that

comes in light, and you have a gap that is created in the 12th hour.

The CDCs and the CDFIs do a great job of providing that gap

financing in critical situations like that. It helps move that 30 percent number for women-owned businesses up to an even higher

level.

Chair SNOWE. Thank you.

I just want to express my appreciation to all of you for the

thoughtfulness that you have brought to the table with respect to

your recommendations, and I can assure you we are going to follow

up on each and every recommendation that has been presented

here today, and to vet them further as we proceed to reauthorization, working with Senator Kerry. We have a great working relaVerDate 03-FEB-2003 10:36 May 13, 2004 Jkt 091190 PO 00000 Frm 00099 Fmt 6633 Sfmt 6633 D:\SBA\91190.TXT SSC2 PsN: SSC2
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tionship, and I know we will continue to do that. With members

like Senator Coleman on the Committee we hope to have a very

good reauthorization process that I think everybody can be proud

of.

I just want to thank each and every one of you. All of your testimonies will be submitted for the record in their entirety.

Thank you, Senator Coleman.

Senator COLEMAN. Thanks and I will take it from here, if there

are others that still wanted to speak.

Ms. MATTHEWS. Thank you, Senator Snowe, again for the opportunity. Thank you, Senator Coleman.

In fiscal year 2003, that is our current budget, right? The $15

million that has been appropriated for the SBA Microloan Program

means that there are limited technical assistance grants for new

loan capital. Blake referenced the fact that CEI has just taken on

a loan with limited technical assistance to support preparing borrowers to access financing. So that is going to limit the ability to

grow the program.

We created some projections about what the technical assistance

grants need to be between now and 2000 and fiscal year 2007. In

order to continue to grow the program and continue to serve new

loans, the amount of appropriation for the technical assistance

grants needs to increase because we are bringing on new loans. We

are also supporting and providing ongoing assistance to past loans.

[The information follows:]

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Ms. MATTHEWS. The other thing that I think is critical to note is that the program has been authorized for $70 million in technical assistance funds and $100 million a year in loan capital. With

these requests, we are still way below what has been requested for

the program.

It is also not available across the country. It is available in about

two-thirds of Minnesota, the central piece of Minnesota is not covered. There are a number of pockets throughout the country where

there is not yet an SBA Microloan Program. So in order to have

this available across the country to grow small businesses, we are

going to need to add additional intermediaries and, as a result, additional funding.

Senator COLEMAN. Mary, may I ask you, or perhaps someone

from the SBA, what is the reason or the basis for, let us say in

Minnesota, the areas in which there is not coverage? What is the

reason for that?

Ms. MATTHEWS. There are actually six intermediaries in Minnesota, two in the metro area and four in rural Minnesota. There

needs to be an organization that is taking on the program. The four

outer corners of the State are covered by intermediaries and then

there are two in the metro area.

There have not been organizations that have requested the program as of yet.

Mr. BEW. I think I can respond a little bit to that. I believe you

are aware of the leg package where we are asking for flexibility

and experience to encourage some other people to be microlenders,

other entities. Hopefully that will be cured, particularly in the

rural areas.

Ms. MATTHEWS. It will not be cured if there are not the technical

assistance grants to support that.

Mr. BEW. I hear that. I have got the message.

Ms. MATTHEWS. One of the difficulties that we have had, as a

matter of fact, is that as funding has been declining, the SBA has

been bringing in new organizations. So the pot that was getting

smaller is spread among more people. It makes it more and more

difficult to work.

We all look for alternative sources of funding. We all look at

streamlining our process and making changes that will—while not

as efficient as the Express Program—hopefully make us more efficient. However, we still need more funding in order to provide the

kind of support that business owners need.

Senator COLEMAN. Thank you, Mary.

Mr. WARREN. Senator Coleman, we really appreciate you stopping by today.

We obviously have more time that we can spend on microloans,

but I think we also do, before we conclude, need to go back because

I think there were some issues left open on the 7(a) side of things.

One question that I wanted to ask Ron, if you could add into, and

then the group as well, the Administration’s proposal includes

some changes to the amount of experience that a microlender

would have to have. I was wondering if you could comment on a

proposal.

Mr. BEW. I think that is what I was alluding to with Mary, that

there is an experience requirement—I do not know exact details of

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it—that precludes other entities from joining the Microloan Program immediately. I think there are some years of experience requirements.

We are proposing that if entities have people with experience

that the microlenders need or have, then it would accelerate that

entity’s ability to join the microlending program.

Mr. WARREN. I guess the question for us would be has that current restriction presented a significant enough bar? Does that raise

additional issues in terms of having an organization with no organizational experience, yet having somebody come from another organization that has the 1-year requirement? Is that going to create

new potentials for problems?

Mr. BEW. I am not sure about the creation of problems. I do not

believe so, because the entities that would probably ask to be a

microlender are already lenders. It could be a 504 lender, for instance, and already have experience in the field but just do not

have that specific microlending experience.

Mr. GAST. If I could make one comment, there is currently a provision in the legislation that asks the SBA to provide capacity

building services through a grant to a non-profit organization that

would allow the SBA to bring people up to speed very quickly, if

people were able to go in and provide intensive assistance.

Up until now, that has not occurred. Obviously, that is something the industry would like to see—is the opportunity to work

with people and bring them up to speed so that we can get full coverage across the country.

Ms. FORBES. That is Senator Snowe’s amendment to S. 174, the

bill that passed the Senate last Congress, right?

Mr. GAST. Actually, that was separate. There is a provision currently in the legislation, and I believe Senator Snowe introduced a

second provision that would add $1 million for that purpose.

Mr. CORBET. I just had a couple of comments. I guess the only

comment was the subsidy rate, I know what the rate is. What I

don’t know is how it was derived.

I would ask the Committee to look into that regarding the

Microloan Program subsidy rate. Ron, maybe you can explain it. It

confuses me.

But I think most specifically, we have seen the subsidy rate for

the microloan program going up, and I know that is what helps decide the President’s budget and what they allocate. We do not quite

understand why it is going up, because as far as the loan volume

that has been lent to the intermediaries, there has been no loss,

or maybe a minimal loss to the Federal Government in that program, but the rate continues to climb each year. Whereas the Disaster Loan Program, which has significant defaults, has been declining in its subsidy rate.

I hate to get into this too far, because I do not know enough

about it except just what the rate says, but I would ask the Committee to look into that to see if there is any rectification.

Mr. WARREN. Ron, do you want to comment on that?

Mr. BEW. I think I will leave that to the Chief Financial Officer.

I am like you, Alan. I was a banker most of my life, and I have

never heard of subsidy before I came here.

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Ms. FORBES. Can I just clarify one thing? To our knowledge,

there have been no losses to the Government in this program since

its inception. Is that still accurate, Ron?

Mr. BEW. I think there has been a minimal amount of loss.

Ms. FORBES. So an intermediary——

Mr. BEW. An intermediary, yes, defaulted.

Ms. FORBES. Can you submit that to this Committee, so that we

see it? Because we are not aware of that.

Mr. BEW. But it is very minor.

Mr. SCHUSTER. Thank you, Mark.

I would like to just return to a general discussion of the impact

of the total SBA loan programs. As we all know, OMB has too often

taken an annual look at this program. Let me cite an example.

A few years ago a Congressman in my district, on the night of

his election, said, ‘‘We are going to consolidate and eliminate some

agencies’’. The one he mentioned was SBA.

I had him come into my office after obtaining from the local SBA

district a computer printout of every single loan made in that district since 1953. This new Congressman spent 2.5 hours going page

by page which was—he could not believe all businesses that one

time or another in their life had received assistance from the SBA.

I think we, as an industry, the Committees, and the SBA need

to focus more on the cumulative impact of these programs rather

than the 1-year snapshot. There is not a story here that would not

be dramatic 10 years from now.

As this Congressman, who has become a great supporter of SBA,

said once, ‘‘If you removed all of the businesses from our economy

that at one time or another received SBA assistance, it would be

a major impact on this country’s economy’’. Somehow we have got

to get OMB and SBA to focus on that.

While I am on that, let me just put on the record, we need to

also recognize that it is the large loans that ‘‘subsidize’’ a lender’s

ability to do smaller loans or the Agency’s ability to do smaller

loans. We need to come to grips with that. There is no question,

but the income generated under the 7(a) Program by the borrowers

that pay the 3.51⁄2 percent guarantee fee, do help create an environment and a subsidy rate and affordable loan program for the

smaller ones.

Then, to just put another hat on, a few years ago the Agency had

a direct loan program called HAL or Handicap Assistance Loan

Program. It then was changed to Disabled Assistance Program but

not funded. I think now it has been removed.

But just so everybody would focus on it, back years ago, when

there was a HAL Program, I am familiar and on the board of an

organization that received two HAL loans. Today, they employ over

200 people, of which 75 percent are severely disabled individuals

who prior to this program were wards of the state. Their total lifestyle was dependent upon government handouts. They are now contributors to society.

As a point of interest, they were the sole source for every M–16

magazine used in the recent war. It is an incredible success story.

Those are the kinds of things I think SBA and the Committee need

to focus on, look to the future, and to sell people on. SBA is, in fact,

the greatest bang for the buck in all of Government.

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While we have some minimal disagreements from time to time,

I too take my hat off to the professionals at SBA.

Mr. WARREN. Thank you. Not seeing any other placards—I am

sorry, David.

Mr. BARTRAM. Thank you very much, Mark.

I would like to go back to the possible, or what we believe to be,

a real shortfall for next year. Ron Bew has basically stated that the

Administration feels comfortable with the funding levels for next

year. If we did see a trend where funding levels are significantly

higher than they think for this current fiscal year, what would the

SBA’s position be starting next year?

I would maybe ask it and give you an option, Ron. No. 1, would

the SBA immediately be forced to put a cap in place as of 10/1/03?

Or, realizing that maybe they had miscalculated, would the SBA

push or suggest that perhaps additional appropriations are required to find an inadequate, or what would basically be supported

to be inadequate at that time, 2004 budget?

Mr. BEW. Of course, we think the $9.3 billion is adequate and we

would just review the situation at that time.

Mr. BARTRAM. But what if you are wrong?

Mr. BEW. We would just review the situation at that time.

Ms. FORBES. Can I just comment that if it is October or later

when the situation is determined to be a problem, SBA has missed

the appropriations cycle. So it would be very hard, unless there

was another supplemental appropriations request coming up, to secure additional appropriations and then if the supplemental request were limited to defense, for example, or homeland security,

it would be very hard to get this kind of money onto that bill.

Mr. WILKINSON. We should have an indication over the next few

months if we are experiencing the cycle that we have experienced

for the last 10 years or so, with the second half loan volume being

bigger. They should have a pretty good indication over the next

couple of months whether loan volume is going to be at a pace

higher than what is in the next year’s budget request.

Mr. WARREN. If I could, before we wrap up, I would like to go

back to Greg. You have talked a lot about the pooling idea, or a

few minutes on it. How would that mesh with the current 7(a)

structure?

Mr. FELDMANN. The concept that we have advanced and left for

the record would be, again, a complement for the 7(a) structure as

supposed to supplanting it in any way. The idea would be to follow

the same track that the SBA does with SBICs. You could license

some pooler/aggregators who could then purchase and use a limited, probably second loss position, to guarantee from the SBA in

order to credit enhance that pool and sell it on into the capital markets.

We think that there would be institutional buyers. We know,

from talking to community banks, that they would be interested in

using this as a potential vehicle to address liquidity concerns.

Currently, if you look at the community banks say between $100

million and $1 billion in the United States, they are at a 40-year

high in terms of loans versus core deposits. They are struggling

with funding and keeping up with funding right now, and I think

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probably some other colleagues here can address that even better

than I could.

But again, one piece of data that might be interesting to this

Committee, we have made an estimate in that same segment of

community banks that there are roughly $100 billion worth of real

estate-backed small business loans, owner-occupied properties and

that sort of thing. I think that type of debt would lend itself, as

an initial block of debt, that could be pooled and aggregated and

sold onto the market.

However, we do feel that there is some sort of a credit enhancement role to jump start that process, since it is a fairly new asset

class.

Mr. WARREN. Anyone else want to chime in on that?

Ms. FORBES. I have a question. When you are talking about a

credit enhancement role, do you have something in mind? Do you

have a price that goes with that?

Mr. FELDMANN. Again, conceptually, the idea would be that there

would be a first level loss reserve that would be created at the private level. Then a second level loss reserve that the SBA would

provide, maybe in the 3 to 5 percent range of the pool, something

like that.

But you would go through the private first level loss reserve before you would ever hit the second level.

Ms. FORBES. Would the first level be the same percentage as that

proposed for SBA’s contribution, or would it be a lower percentage?

Mr. FELDMANN. It could be the same, or maybe even slightly

higher. That is something, I think, that would have to get structured in the details and more discussion.

But the idea would be to get a lot more bang for your dollar. In

the current 7(a) Program, you are providing up to a 75 percent loan

guarantee, whereas I think under this structure you could cap out

at a much lower percentage of potential loss than you would in the

7(a) Program conceptually.

If you look again on the record, we have kind of outlined a little

plan that I think a lot of detail would have to be fleshed out on.

But on page 12 of our presentation that is part of our record, we

lay that out.

Ms. FORBES. Can you estimate a cost for that? You are proposing

some sort of cost.

Mr. FELDMANN. Yes. I think the pooler/managers would charge

a fee necessary to meet any cost at the SBA for the credit enhance.

So there would be a wash. There would be no cost to the SBA, and

that would be the concept.

Ms. FORBES. There would be no cost to run it, but there would

be a cost of the credit enhancement; correct?

Mr. FELDMANN. That is right.

Ms. FORBES. That is what I am trying to ask, what are you estimating for that?

Mr. FELDMANN. What I am trying to say is I think the pooler/

aggregator would charge a fee as they pool those loans sufficient

to meet any cost that the SBA would have for the credit enhancement. So it would wash.

Mr. HEARNE. So it would make this like a zero subsidy type of

program?

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Ms. FORBES. Somehow you have to have something up front to

start it, right? Do you have any estimates on that? You can submit

it for the record.

Mr. FELDMANN. I think that is something that we may want to

think about offline.

Ms. FORBES. What I am trying to do is identify the amount relative to what is spent on 7(a).

Mr. WILKINSON. Mark, if I could just comment briefly on the

pooling concept.

We have not been briefed, so we do not know the details. But I

would say that in the past we have looked at various and sundry

ways to supplement the 7(a) Program and really have not found

anything that worked. We went, I do not know how many years

back, we looked at a Government-sponsored enterprise and we just

could not find a way to make all the pieces of the puzzle fit together.

We would have some concerns as to whether this was actually

pulling out what we would call the grade A credits out of the 7(a)

portfolio, which would then ultimately cause the subsidy rate in

the 7(a) Program to rise. So you would start a vicious cycle. I am

not saying that would happen because I do not understand the intricacies of this deal.

One of the other items that we have picked up on as we looked

at some of these alternatives was the reason that this program is

doing well is that we have got a program that works for the borrowers, and is profitable for the lenders. It is a good match.

From my understanding of a program like this, it becomes profitable for the pool assembler and that there would be a diminished

demand by the lending community. That is one thing we would

have to cross over, are you putting together a program for pool assemblers, as opposed to the ultimate borrower?

Mr. WARREN. Greg, did you have any other comments on that?

Mr. FELDMANN. I am not a pooler/aggregator. I am just simply

saying that from our experience we are seeing tighter liquidity

issues in the community banks and it is creating a constraint. I

think this is one way we have seen other asset classes successfully

cross this divide. I think the case can be made, although further

study would be required, that there is a capital market sufficiency

in terms of cost to borrower that would come to bear over time.

Mr. WILKINSON. There is a very active secondary market that, for

the 7(a) Program, provides great liquidity, that is working quite

well. I would be a little shocked that there is a liquidity crisis right

now. I think most banks are flush with deposits.

Mr. BARTRAM. Only 38 percent of the SBA loans are sold. So that

does not support that there is a liquidity issue.

Mr. FELDMANN. Again, I am not saying that you would sell the

SBA loans. I am saying that there are other blocks of loans inside

these institutions that could qualify. So I am not sure that we are

at competing odds here.

Mr. WILKINSON. As long as it is not a replacement for, and that

is what has been said several times, that it is in addition to. That

said, we are staring at a budget shortfall next year, and we are

going to have to find ways to solve that problem.

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We have got a legislative package we are going to submit. You

may see some additions to that as we get farther down the road.

If it appears that the Agency is not going to come forward with a

supplemental budget request, or if we cannot handle the appropriation process to come up with additional funds, we may have to

come back and revisit some of the program parameters and have

some new ideas at some point in time.

Mr. BARTRAM. Mark, if I could just add, one way to augment part

of this shortfall is to get the STAR money rescored, and that just

boggles the mind.

Mr. WILKINSON. An absolute must.

Ms. FORBES. Ron, do you know what happened to the response

to Senator Snowe and Senator Kerry’s letter on the STAR rescoring? It was sent about a month ago. We had asked for a return

within a pretty short time. I think it was a week or less.

Mr. BEW. I am not sure where that is. I do know that we are

reviewing the STAR rescore.

Mr. WARREN. If you could look into that, because I know Senator

Snowe has asked repeatedly for it, as well as Senator Kerry. We

would very much appreciate a reply on that.

Ms. FORBES. The only other point that I was going to return to

was GAO. Davi, I know that you have been working hard on our

requests and both sides of the Congress really appreciate it. Everybody appreciates all the good work that you and your office do for

us.

But I would like you to talk a little bit about some of the problems that you have had in getting information to validate the econometric model. We are all delighted that the econometric model is

there and that it is seeming to be a better model, but we want it

validated. Senator Kerry is very interested in that.

Ms. D’AGOSTINO. As you know, you all and the House Committee

requested that we very quickly look into the new credit subsidy

model and try to explain some changes that occurred through different iterations, and then to also look in more depth and verify

and validate the model.

I think we reported fairly quickly in January to you all in a briefing about some of the things you asked us to do, and then began

to undertake the more in-depth work, pulling about the model

which is fairly complex.

What has happened is things have somewhat changed at SBA.

We have always had a great working relationship with basically all

the program offices and the CFO. Our work seems to be taking a

turn for the slower, at a minimum. The new liaison for GAO is the

CLA and they have put in place some fairly cumbersome procedures for our work that has slowed our work to a point where what

would normally take 3 to 4 months is now going to take 9 months

or more, and it is hard for us to even estimate now when we could

complete that work.

Some of the examples, all communications must go through that

office. Meetings have to be scheduled so that their staff have to be

present, even if other times are more convenient for both the SBA

program officials and GAO staff.

Also, there are cases where we are not getting timely or complete

information in response to our requests, and we do have to keep

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going back and asking for the complete information or documents

in basically all our work, not just the work on the 7(a) credit subsidy model. We are also doing work for Chair Snowe and others on

the transformation initiatives, et cetera.

It is just becoming more and more of a challenge to meet the

time frames that you all ask us to meet. It has become difficult.

We cannot even make a commitment to the Committees about

when we could complete the work, given the process that we are

having to go through.

Mr. WARREN. This may be an issue that is broader, Ron, than

your shop, but I think it is something that we need to address.

Ron, we will be asking, possibly the Administrator, to help us work

through that, because obviously the GAO is an incredibly important asset for Congress. In order for you to do your work, you have

got to have access to the information. That is all we are really asking for.

Ms. D’AGOSTINO. I would like to add that GAO is trying to work

with SBA and we are going through the process right now and

probably will end up talking with the Administrator. We have a

few more steps to go through, I think, before we get there. But we

are trying to work out some different operating procedures so that

we can get our work done.

Mr. WARREN. If you could keep us informed on that.

Ms. D’AGOSTINO. Sure.

Mr. WILKINSON. Mark, could I just echo, we have the same kind

of issue on the flow of information. This is nothing against Ron and

his staff, but the flow of information has stopped.

I have got a couple of e-mails that have come in and says we are

no longer allowed to talk to industry. A memo went out of central

office a week or two ago that said working with lenders was not

considered mission critical. There appears to be, at the management level somewhere, a demand that says no information flows

out of the Agency.

It has stopped flowing in our direction, as well.

Mr. WARREN. We have just about wrapped up our time. I want

to thank everybody on behalf of Senator Snowe and Senator Kerry,

if I can, for coming to the roundtable.

Obviously, we have heard a lot of good suggestions, identified a

number of problems. Clearly, we have quite a bit of work to do.

As Senator Snowe said at the beginning, the record will remain

open for 2 weeks. If you have additional information, things you

want to supplement for the record, please feel free to send them in.

Probably the best way to do it is to either e-mail or fax to our hearings clerk, who will get them into the record.

We also may submit some written questions to you on behalf of

the members, and we would ask for your timely responses on that.

With that, we are adjourned. Thank you.

[Whereupon, at 11:36 a.m., the roundtable was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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COMMENTS FOR THE RECORD

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