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92–957 PDF 2004

S. HRG. 108–514

THE PRESIDENT’S FISCAL YEAR 2005 BUDGET

REQUEST FOR THE SMALL BUSINESS

ADMINISTRATION

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

FEBRUARY 12, 2004

Printed for the use of 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

WESTON J. COULAM, Republican Staff Director

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

(III)

CONTENTS

OPENING STATEMENTS

Page

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

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

Crapo, The Honorable Mike, a United States Senator from Idaho ..................... 3

Pryor, The Honorable Mark, a United States Senator from Arkansas ............... 14

WITNESS TESTIMONY

Baretto, The Honorable Hector V., Administrator, United States Small

Business Administration, Washington DC ........................................................ 5

Wilkinson, Anthony, President and Chief Executive Officer, National

Association of Government Guaranteed Lenders, Inc., Stillwater,

Oklahoma .............................................................................................................. 40

Coit, David, Chairman, National Association of Small Business Investment

Companies, Portland, Maine ............................................................................... 47

Mathews, Mary, Former Board Chair, Association for Enterprise Opportunity,

Virginia, Minnesota ............................................................................................. 64

Golden, Ellen, President, Association of Women’s Business Centers,

Wiscasset, Maine .................................................................................................. 70

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Baretto, The Honorable Hector V.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 8

Bayh, The Honorable Evan:

Post Hearing Questions for The Honorable Hector V. Barreto .................... 137

Burns, The Honorable Conrad:

Post Hearing Questions for The Honorable Hector V. Barreto .................... 138

Crapo, The Honorable Mike:

Opening statement ........................................................................................... 3

Coit, David:

Testimony .......................................................................................................... 47

Prepared statement .......................................................................................... 50

Golden, Ellen:

Testimony .......................................................................................................... 70

Prepared statement .......................................................................................... 73

Kerry, The Honorable John F.:

Post Hearing Questions for The Honorable Hector V. Barreto .................... 109

Mathews, Mary:

Testimony .......................................................................................................... 64

Prepared statement .......................................................................................... 66

Pryor, The Honorable Mark:

Opening statement ........................................................................................... 14

Prepared statement .......................................................................................... 92

Snowe, The Honorable Olympia J.:

Opening statement ........................................................................................... 1

Post Hearing Questions for The Honorable Hector V. Barreto .................... 94

Wilkinson, Anthony:

Testimony .......................................................................................................... 40

Prepared statement .......................................................................................... 48

(IV)

COMMENTS FOR THE RECORD

Page

Anderson, A. Scott, President and CEO, Zions Bank, Salt Lake City, Utah,

letter ...................................................................................................................... 160

Automated Food Systems, Inc., Duncanville, Texas, letter .................................. 161

Barnett, Ralph, President, Bay Area Association of Government Guaranteed

Lenders, letter ...................................................................................................... 163

Bateman, Dwight, Executive Vice President, Community South Bank,

Knoxville, Tennessee, letter ................................................................................ 165

Bentley, J. Frayne, Senior Vice President, First Bank of the South,

Lawrenceville, Georgia, letter ............................................................................. 167

Berkowitz, Martin, COO and Interim CEO, The Veterans Corporation,

Alexandria, Virginia, letter ................................................................................. 168

Blasetti, Jennifer, Senior Vice President, Eaglebank, Everett, Massachusetts,

letter ...................................................................................................................... 169

Bowers, Billy, Knoxville, Tennessee, letter ........................................................... 170

Burns, The Honorable Conrad, a United States Senator from Montana,

prepared statement .............................................................................................. 172

Cantwell, The Honorable Maria, a United States Senator from Washington,

prepared statement .............................................................................................. 173

Casani, Drew, Director, The Texas Manufacturing Assistance Center, Fort

Worth, Texas, letter and attachments ................................................................ 177

Chevalier, Joseph, Senior Vice President, First American Bank, letter ............. 186

Cowan, Sarah A.P., Vice President, National Bank of Middlebury,

Middlebury, Vermont, letter ................................................................................ 187

Crawford, Christopher L., President and CEO, The National Association of

Development Companies, Washington, DC, statement .................................... 188

Culver, Robert, CEO, 4dSolutions, Boyertown, Pennsylvania, letter .................. 195

Cymerman, Z.A., CEO, NATO Expansion Engineering & Program

Management Corporation, letter ......................................................................... 197

DiFrango, Jerry, CPA, Controller, SMC Business Councils, Pittsburgh,

Pennsylvania, letter ............................................................................................. 199

Dugdale, Raymond W., Vice President, North Shore Bank, Peabody,

Massachusetts, letter ........................................................................................... 200

Gill, William C., Vice President, ResourceBank, Virginia Beach, Virginia,

letter ...................................................................................................................... 201

Goddin, Scott, Director, U.S. Export Assistance Center, Portland, Oregon,

letter ...................................................................................................................... 203

Hampson, Tom, Executive Director, ONABEN—A Native American Business

Network, Tigard, Oregon, statement .................................................................. 204

Harvey, Judi, SBA Processing Manager, Community South Bank, Knoxville,

Tennessee, letter .................................................................................................. 206

Hice, Alan J., Assistant Vice President, Community South Bank, Knoxville,

Tennessee, letter .................................................................................................. 207

Homer, Jr., Pete, President and CEO, National Indian Business Association,

Washington, DC, statement ................................................................................ 208

HUBZone Contractors National Council, Washington, DC, statement ............... 210

Hurst, Jan Sandhouse, President, The JSH Group, Inc., Parker, Colorado,

letter ...................................................................................................................... 211

Jain, Rakesh, President, RJ Engineering Systems, Inc., Cedar Rapids, Iowa,

letter ...................................................................................................................... 213

Kirsch, Philipp, President and Entomologist, IPM Tech, Portland, Oregon,

letter ...................................................................................................................... 215

Knight, Ernest, Director of International Sales, PlayPower, Inc., letter ............ 216

(V)

COMMENTS FOR THE RECORD—CONTINUED.

Page

Landis, Marilyn D., President, Basic Business Concepts, Inc., Pittsburgh,

Pennsylvania, letter ............................................................................................. 218

Lomell, Frank E., Vice President, SBA Manager, California Oaks State Bank,

Thousand Oaks, California, letter ...................................................................... 219

Lowles, Thomas, Chair, Export Council of Oregon and S.W. Washington,

Portland, Oregon, letter ....................................................................................... 221

Mahn, Sherlock B., President, Kwaplah International, Inc., Corvallis, Oregon,

letter ...................................................................................................................... 222

Metcalf, Lori, Director of Operations, Enterprise Development Corporation,

Boca Raton, Florida, letter .................................................................................. 223

Miller, Jeffery, Foothills Sanitation Recycling, Inc., North Wilkesboro, North

Carolina, letter ..................................................................................................... 226

Moravick, David N., Vice President, Rivergreen Bank, letter ............................. 228

Myers, Jim, CPA, Knoxville, Tennessee, letter ..................................................... 229

Mynatt, Michael D., Knoxville, Tennessee, letter ................................................. 230

Nagle, Patrick F., Vice President, First Commonwealth Bank, Indiana,

Pennsylvania, letter ............................................................................................. 231

Neese, Terry, President, Women Impacting Public Policy, Oklahoma City,

Oklahoma, statement ........................................................................................... 232

Noonan, Agnes, Executive Director, WESST Corporation, Albuquerque, New

Mexico, letter ........................................................................................................ 241

National Small Business Association, Washington, DC, statement .................... 243

Rappleye, Kevin, Vice President, Bank of the West, Sacramento, California,

letter ...................................................................................................................... 247

Redmond, Dorothy E., Director of Finance, BETA Calibrators Corporation,

Dallas, Texas, letter ............................................................................................. 249

Riley, Joseph, Senior Vice President, Small Business Banking, Eastern Bank,

Lynn, Massachusetts, letter ................................................................................ 251

Ross, Spencer, Chair, New York District Export Council, Cold Spring Harbor,

New York, letter ................................................................................................... 252

Ruhlman, William P., President and COO, Borrego Springs Bank, LaMesa,

California, letter ................................................................................................... 254

Russell, Karen, President, IBS Commodities, Inc., Newtonville,

Massachusetts, letter ........................................................................................... 256

Simon, Theresa A., Vice President, Ultima Bank Minnesota, Winger,

Minnesota, letter .................................................................................................. 257

Smith, Lee J., Program Director, BusinessLINC, Tucson, Arizona, letter and

attachments .......................................................................................................... 258

Streich, Susan E., SBA Relationship Manager, Capital One, Glen Allen,

Virginia, letter ...................................................................................................... 291

Thamert, David A., Credit Analyst, United Prairie Bank, Owatonna,

Minnesota, letter .................................................................................................. 293

True, Scott C., Vice President, Danvers Savings Bank, Danvers,

Massachusetts, letter ........................................................................................... 294

Waldkoetter, Fred, Chairman, North Texas District Export Council, Dallas,

Texas, letter .......................................................................................................... 295

Weaver, Andreas C., Senior Vice President, Gateway Business Bank, letter .... 297

Weldon, Tracy, Community South Bank, Knoxville, Tennessee, letter .............. 298

Willmann, L.D., SulTa Manufacturing Company, Sulphur Springs, Texas,

letter ...................................................................................................................... 300

Wilson, Donald, President, Association of Small Business Development

Centers, Washington, DC, statement ................................................................. 301

Yancey, Jr., W. Kenneth, CEO, Service Corps of Retired Executives

Association, Washington, DC, statement ........................................................... 311

Young, Thomas M., Vice President, Boston Private Bank & Trust Company,

Boston, Massachusetts, letter ............................................................................. 314

(1)

THE PRESIDENT’S FISCAL YEAR 2005 BUDGET

REQUEST FOR THE SMALL BUSINESS

ADMINISTRATION

THURSDAY, FEBRUARY 12, 2004

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP,

Washington, DC.

The Committee met, pursuant to notice, at 9:35 a.m., in Room

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

Chair of the Committee, presiding.

Present: Senators Snowe, Crapo, and Pryor.

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, CHAIR,

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

Chair SNOWE. The hearing will come to order.

Good morning and welcome to this morning’s hearing on SBA’s

budget proposal for fiscal year 2005. I want to thank Administrator

Barreto for being here this morning to examine some of the issues

regarding the SBA’s blueprint for priorities as well as several small

business representatives who are also here to testify in the second

panel.

I know the Administration has made the economy, and specifically job creation, the cornerstone of its agenda and I could not

agree more. As economic signs appear to be pointing in the right

direction, we must also move heaven and earth to ensure that jobs

remain job one, if this recovery is to be meaningful to Americans

in their every day lives.

So as we explore the SBA’s bottom line for fiscal year 2005, we

must do so understanding that the bottom line for Americans is

that 23 million small businesses are producing over 50 percent of

the gross domestic product and that our Nation’s small businesses

have consistently created three-quarters of the new jobs in the

United States.

Specifically, SBA programs have contributed to the creation of

nearly 6 million jobs since 1999, a remarkable record of achievement in challenging times. Moreover, according to the SBA’s own

analysis, reauthorization of the Agency will result in an estimated

3.3 million jobs over the coming 5 years with the SBA and its programs predicted to support over one million jobs over that same period through prime contracts and subcontracts.

So there should not be any doubt about the critical role that

small businesses play in putting Americans to work. And if that is

2

not enough, when you consider that the Small Business Administration budget represents only .03 of 1 percent of the Federal budget, yet at the same time small businesses are creating about threequarters of all new jobs in America, can there be any question that

assisting our small businesses is not only an investment in our

country’s economic future, but also the future of the fiscal health

of our Federal Government?

Therefore, I come to this hearing to examine some of the issues that have been raised with respect to the $678 million budget request of the Small Business Administration. This represents a 15

percent decrease from the 2004 request. And we have to examine

some of the issues concerning whether or not we are sacrificing

vital assistance to the very entities that are putting people at work

which I think we can all agree is our mutual goal.

This morning I will be listening very carefully and analyzing the

SBA’s budget line-by-line, because I believe that we have an obligation to ensure that we can continue not only to maintain, but also

to strengthen and improve the SBA’s key loan and assistance programs. I have heard time and again, from my constituents in

Maine and throughout the country that SBA’s key loan and assistance probrams are critical lifelines to the job generators that we

call small businesses.

Specifically, the SBA’s lending and investment capital programs

are two of the Agency’s central resources in providing small businesses with capital to grow, expand and operate. In fiscal year

2003, the SBA approved a record number of loans and venture capital financed more than $16 billion for small businesses. Those loan

programs, such as the 504 and the 7(a) loan programs have a proven record of helping small businesses to create and retain more

than 2 million jobs throughout America. In 2003, the 7(a) program alone reached a level of $11.3 billion

in loans. Yet, as I have expressed many times, I have been deeply

concerned about the management of this program over this past

year in particular. In June of 2003, this Committee highlighted the

potential for a shortfall in the 7(a) loan program and that shortfall

occurred just last month, resulting in a shut-down of the program.

Obviously, we have got to prevent this from recurring. And I am

committed to finding a long-term solution to funding the needs of

the 7(a) program.

What that will require is the fullest possible disclosure from SBA

regarding the past performance of this program and the data necessary to conduct a complete analysis and develop options for the

future so that we can prevent this from recurring? Only by completely understanding the accounting for the program will we be

able to construct the best possible solution to assist small businesses and ensure that they do not have to suffer from an inconsistent program or from unnecessarily high loan fees. And I will be

looking to the SBA for that accountability.

Moreover, while recent years have been difficult times for businesses seeking venture capital, the SBA has allowed for venture

capital at a far greater level than would otherwise have been available. Indeed, over the last 5 years the Small Business Investment

Company Program alone has made more than 20,600 investments

in small businesses with a total value of $19.4 billion with a diviVerDate 03-FEB-2003 12:37 Jul 16, 2004 Jkt 092957 PO 00000 Frm 00008 Fmt 6601 Sfmt 6601 D:\DOCS\92957.TXT SSC1 PsN: SSC1
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dend of the creation and retention of approximately 549,000 jobs

and 4,800 investments to small businesses during this past year

that totals almost $2.5 billion in equity and debt capital.

This is strong evidence that this program is worthy of our continued support to guarantee that it continues to benefit emerging

businesses.

Finally, we must ensure that we continue to build on the successes of SBA’s Technical Assistance Programs. When we know

that for every dollar we spend on counseling through the Small

Business Development Centers creates $3 in return in the form of

tax revenues while creating 64,000 new small businesses and retaining 68,000 jobs in fiscal year 2002; and, when we know that the

SBA’s Women’s Business Center Program has helped to create

more than 2,000 new small businesses and retain almost 5,000 jobs

through its unique training and counseling programs. Given the

successes of these programs, who could argue that they are indispensable?

So I will want to be assured and convinced that these programs

will be strengthened, not jeopardized.

Today, I also look forward to hearing from each of our participants on the SBA’s budget proposal and its potential implications

for small businesses. Your input is essential to identifying any barriers that might limit the success of small business. Because in the

end, the SBA is one of our most valuable resources for ensuring the

success of small business.

As Chair of this Committee, I look forward to working with the

Administration and with the Administrator, to assure that businesses can benefit and prosper in the future.

So it is my pleasure to recognize a colleague from Idaho, Senator

Crapo, who has been a real champion of small businesses and I

welcome you. Any comments?

OPENING STATEMENT OF HON. MIKE CRAPO,

A UNITED STATES SENATOR FROM IDAHO

Senator CRAPO. Thank you very much, Madame Chair and I do

have a few comments.

First of all, I want to indicate that it is interesting as I listen

to your remarks that you pretty much gave my speech. So I can

make this short and associate myself with your comments.

Administrator Barreto, I welcome you here and I want to tell you

that, although you will hear some concerns from us today about the

budget that the SBA is presenting to Congress, I want to personally thank you for your leadership at the SBA and for your attention to Idaho and to the needs of people in Idaho and your recent

trip there.

In fact, I was just on the radio doing an interview today talking

about some of your upcoming activities in Idaho for some of our

Hispanic community members. And again, I appreciate that very

much.

I also want to say, by way of introduction, that I will not be able

to stay for the whole hearing. I have three hearings today going on

at the same time. Secretary Thompson is front of the Budget Committee right now and Chairman Greenspan is in front of the BankVerDate 03-FEB-2003 12:37 Jul 16, 2004 Jkt 092957 PO 00000 Frm 00009 Fmt 6601 Sfmt 6601 D:\DOCS\92957.TXT SSC1 PsN: SSC1
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ing Committee, and I have got to be with you and with both of

them. And so I apologize if I have got to step out.

I do ask, Madame Chair, that my questions and so forth that I

may not get to ask be made a part of the record and submitted if

possible.

Chair SNOWE. Without objection, so ordered.

Senator CRAPO. Thank you. I just want to briefly indicate that

I share some of the concerns—well, all of the concerns that Chair

Snowe raised in her comments. I want to make it very clear that

I, with all Americans, support the President’s call to balance the

budget, or to at least cut it in half over 5 years. Actually, I am

going to work, when I go to the Budget Committee in a few minutes, to try to get us on a glidepath to balance it in less than 5

years. I realize that that calls for some pretty stringent measures

as far as the budget goes.

As we move ahead in that process, however, and I look at what

has happened with the SBA budget over the last 5 years and in

the most recent 1 year period, I have to wonder whether we are

making the right decisions about this budget and whether sacrifice

is being asked to be shared across the Federal Government. When

you look at the fact that the SBA has been reduced in its budget

by 25 percent since 2001 and we see a 15 percent reduction proposed just from last year to this year, that concerns me when our

number one issue is jobs, and when the engine for driving jobs is

small business in this country.

It also concerns me when I look at the broad picture of all other

agencies. There are only four other agencies in the Government

that have had overall reduction in their budget over the last 5

years. Again, although I am a very strong fiscal conservative who

is going to be fighting to make that sure that we have an even

more fiscally conservative budget than the President has proposed,

once we have that budget out there I am going to be looking to be

sure that those parts of our Government that drive the important

priorities are adequately funded and that they receive adequate

priorities. And I just do not see that right now, frankly, in terms

of the allocation to the SBA.

In particular, with regard to the 7(a) program, I know this is not

a partisan issue and I know you knew you were going to talk about

it today when you got here. Each of us is concerned about what has

happened with the 7(a) program to this point and want to make

sure that this—which I consider to be the flagship program of the

SBA—that this program is adequately funded and managed. And

that whatever we end up seeing with regard to the actual budget

for the SBA, that the allocations and the management of that

budget make certain that the 7(a) program is made whole and is

put on a glidepath for success. It is that, that I believe is behind

much of the success of the small business endeavors in this country

and we must not see that lost.

And then again, interestingly, the Small Business Development

Centers were also on my list of things to talk to you about. So

Chair Snowe I am going to leave those issues in your hands to

cover when I have to leave.

5

But again, Administrator Barreto and Chair Snowe, I thank you

for being here, and Chair Snowe for this hearing, and look forward

to discussing these kinds of issues.

Chair SNOWE. Senator Crapo, I appreciate the comments that

you have raised and actually I think you have identified some very

key issues and statistics with respect to what has happened to the

Small Business Administration. And the fact this is the very program that we ought to be buttressing and reinforcing because of its

job creation capability, we ought to be leveraging the number of

programs within SBA to create the kind of jobs in America that

strengthen our economy.

I mean, there is a cause and effect. I think all too often so many

in Congress and outside of Congress do not appreciate the value of

these programs and the SBA becomes a target for reductions. That

is one of the things that hopefully we can continue to do more of

is to expound the value of these programs.

I appreciate what you have mentioned here this morning and I

know it is very interesting in illustrating the point that SBA is one

of four other programs that has been cut over the last 5 years.

Senator CRAPO. That is right.

Chair SNOWE. So I think that highlights some of the problems

that we have been facing in the past where people do not realize

that it creates a real incentive for job creation at a time when we

certainly need it the most.

So I appreciate your comments. You can be sure I will raise

many of the issues that you have raised here this morning on your

behalf.

Senator CRAPO. Thank you very much. I leave you with my

proxy. You had it to start with.

Thank you, very much, Mr. Barreto.

Chair SNOWE. Thank you for taking the time to be here.

Administrator Barreto, we thank you for taking the time as well

to be here. We thank you for your commitment and your leadership

at the Small Business Administration. You truly have been the

champion of small business in America and we thank you for all

that you have done. So we appreciate the fact that you are here

today to explain the Administration’s request and the SBA’s submission on its priorities for the coming fiscal year.

You may begin, and I will obviously incorporate your entire

statement in the record. You may proceed.

STATEMENT OF HON. HECTOR V. BARRETO, ADMINISTRATOR,

U.S. SMALL BUSINESS ADMINISTRATION

Mr. BARRETO. Thank you very much Madame Chair and thank

you for inviting me here today to talk about the Small Business

Administration’s 2005 budget and our strong commitment to continue to offer the very highest quality services to America’s small

business owners.

A lot has happened over the last few years, both in America’s

small business community and at the SBA. When I became the

SBA Administrator, I wanted to change the culture of our Agency.

I wanted to create a new environment at the Agency and a new environment for America’s entrepreneurs. And that meant not sticking with the status quo. That meant not doing things the way that

6

we have always done them before. And that is what I would like

to talk to you about today.

The SBA is ready to send legislation to Congress that could add

as much as $3 billion to our 7(a) Lending Program this year while

simplifying the application process and moving the program towards a permanent zero subsidy rate. The President and I believe

that this proposal provides a clear long-term vision for a more successful 7(a) program, a bold new 7(a) program that addresses the

real issues of these new economic times.

The plan calls for the expansion of the successful SBA Express

program which accounted for a remarkable 33,000 SBA loans in

2003 and has proven effective in reaching underserved and rural

markets.

I know there are some skeptics in the industry that doubt the

ability of this plan to succeed. Some of those same people doubted

the success of the SBA Express program. They doubted our ability

to convince banks to go into markets they had never been in before.

They said banks would not make those loans. They said it would

not be profitable.

Well, the numbers do not lie. SBA Express was a tremendous

success and this bold new 7(a) proposal will help continue that success so that our loan programs remain a powerful source in our

growing economy. This proposal will move 7(a) loans to a lower

guarantee rate, allowing the Agency to increase lending authority

by 34 percent. That 34 percent increase will allow the SBA to remove the caps on 7(a) loans.

But it will do too far more than that. At a program level of $12.5

billion in fiscal year 2004, that 34 percent increase in lending authority could mean 90,000 new loans in 2004 and as many as

500,000 new or retained jobs. This proposal allows lenders to use

their own forms and procedures to apply for 7(a) loans, reducing

the burden of excessive paperwork and making 7(a) loans more accessible for rural and community banks and their customers.

Our plan also helps move the 7(a) program towards our goal of

a zero subsidy rate. There is also long-term potential for reducing

fees on lenders and borrowers.

There is more. I am proud to say that the budget we are submitting also increases the SBA 7(a) lending authority for fiscal year

2005 by 30 percent. That will allow us to reach thousands, perhaps

tens of thousands more entrepreneurs than we ever have before.

There is an added benefit to these proposals, because we are

moving towards a zero subsidy rate for 7(a) loans. These tremendous increases in loan authority go hand-in-hand with demanding

savings for America’s taxpayers. Furthermore, zero subsidy for 7(a)

loans also translates into long-term stability for the 7(a) program,

something our partner lenders will appreciate.

Let me hasten to add that our 7(a) program is not our only successful loan program. Our budget submission includes $4.5 billion

in lending authority for the 504 Certified Development Company

program. The 504 is a great program for our small business customers and for the American economy. It is a job creator and we

are particularly proud that the 504 program is continuing to make

more and more loans to minority small business owners, yet anVerDate 03-FEB-2003 12:37 Jul 16, 2004 Jkt 092957 PO 00000 Frm 00012 Fmt 6601 Sfmt 6601 D:\DOCS\92957.TXT SSC1 PsN: SSC1
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other sign that the fastest-growing segment of the small business

community continues to thrive.

But that is not all that we are doing. I am also extremely proud

that this budget strengthens the SBA core service delivery systems.

We are investing in the successful delivery systems that we know

get results for our clients. $88 million for Small Business Development Centers. $5 million for the Service Corps of Retired Executives. $12 million for Women’s Business Centers. $750,000 for National Women’s Business Council. $750,000 for veterans outreach.

$1.5 million for 7(j) technical assistance.

These proposals are part of our commitment to a new SBA with

new ideas and new ways of serving our customers: new ways of

reaching out, like our regional roundtable events, one of which you

attended, Madame Chair, in Bangor last year;

Madame Chair, our ongoing efforts to open up new offices in underserved areas known as alternative work sites, as we have done

this month in Maine, in Portland and Bangor; new ways of fighting

for the things that small business owners need like less burdensome regulations and association health plans; new ways to help

create an environment of success for small business. That is the

culture I want at the SBA, the new SBA. I am proud of the

progress we have made.

In 2003, the SBA approved 74,169 loans in our two major loan

programs, more than ever before in our 50 year history. Nearly

one-third of those loans went to minority business owners. In 2003,

2.1 million entrepreneurs received business counseling and technical assistance through SBA’s counseling and training programs.

In 2003, the Office of Advocacy saved small businesses $6.3 billion

in regulatory costs. In that same year, the SBA website recorded

more than 54 million visits. In 2003, the SBA’s Disaster Assistance

Loan program made almost 26,000 loans.

Those are real results and that is what matters the most. Let me

tell you why.

At a business matchmaking event in Houston a few months ago,

a businesswoman came up to me with tears on her cheeks. She

said to me, ‘‘Mr. Administrator, I am not a statistic. I am a real,

living, breathing business owner. I want to thank you. After 9/11,

it was an SBA disaster loan that kept my business open. And now

I am here, learning and making connections to make my business

grow.’’

That is what is important. That reminds us of what our job really is. This is about real people and real lives. Our responsibility is

great.

I am proud of these proposals, because I believe that they live

up to that responsibility. I believe that they reflect an SBA that

understands what is at stake. It is not about just programs and

statistics. It is about results, measured by the success of our clients.

I hope we can work together to get those results and help usher

in more of that success for even more American entrepreneurs. And

again, I want to thank you very much for having me here and I

would be glad to answer any questions you might have.

Thank you very much.

[The prepared statement of Mr. Barreto follows:]

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Chair SNOWE. Thank you Administrator Barreto. We appreciate

your testimony and obviously, I am going to be following up with

some questions.

But before I do so, I would like to recognize Senator Pryor, a very

important member of this Committee. We welcome you, Senator

Pryor, for any comments that you care to make.

OPENING STATEMENT OF HON. MARK PRYOR,

A UNITED STATES SENATOR FROM ARKANSAS

Senator PRYOR. Thank you, Madame Chair, and I want to thank

you for your commitment to small business and helping small businesses get started and to maintaining themselves throughout the

country.

I also want to thank Senator John Kerry who—I do not know

where he is today, I am not sure he knows where he is today, but

I know that he has been a very valuable member of this Committee

and something that we are very focused on is trying to help small

businesses.

I must say that I am a little bit troubled in that, as I understand

this budget, there have been a number of decisions made that will

not only impact Arkansas, but impact the country. For example,

the budget does not fund the 7(a) Guaranteed Loan Programs, it

eliminates the Microenterprise Program, and it cuts funding both

for the Women’s Business Center Programs and Small Business

Development Centers.

And I know in my State, and I am sure everybody else’s, the colleges and universities have taken advantage of some of those programs and they have really helped and had a good positive impact

on communities all over this Nation.

So let me say I acknowledge completely the very important role

that SBA plays with small businesses. And also, I acknowledge the

extremely important role that small business plays in our economy.

If you look at all the numbers, you look at real job creation, you

look at employment numbers, small business is really where the

action is.

A lot of times we focus on maybe the top 500 companies or the

top 1,000 companies, whatever it may be. But really the bread-andbutter of this country and this economy is small business,

entrepreneurhip, people who are willing to get out there and take

a risk and put it all on the line. They are facing a lot of challenges,

whether it is health care, finding the ability to retain employees,

et cetera. They have a lot of challenges on their plate and I just

hope that this budget will help and assist small businesses.

So, I appreciate your comments and I look forward to the question period.

Chair SNOWE. Thank you very much for your comments, Senator

Pryor, and points well taken. These are some of the issues that we

want to explore here today.

Just to reinforce what Senator Pryor has indicated about the job

creation potential of SBA, I have a chart here—unfortunately, we

just do not have it on a large chart—to show the total jobs created

or retained by SBA programs since 1999.

[The information of Chair Snowe follows:]

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Chair SNOWE. But I think it is illustrative of the point that SBA

does have the capacity for job creation in this country. And I think

those of us who represent small States like Arkansas and Maine,

it certainly has been true. But it also is true across America.

So that is why there are concerns, Administrator Barreto, about

perhaps some of the issues concerning, for example, the 7(a) program and the restructuring that is being proposed in the Administration’s request. So let us start with that.

Obviously, we know what happened in the last few months. It

has been a concern of mine, because actually I convened a roundtable last year around the whole issue of 7(a) and to what extent

we should authorize that program.

And I heard a very different figure than what was included in

the Administration’s budget. That figure would have been more

consistent with the demand that occurred and ultimately that led

to the shutdown of the program, albeit it was temporary, but it did

affect the credibility and the integrity of the program and the SBA

with respect to this issue.

So I would like to have you address that issue, because clearly

the program was reopened. But those small businesses that had

submitted applications prior to the closure, prior to the deadline,

they were then subjected to the cap of $750,000 even though their

applications were not large.

Was there not a way of spacing out those loans so that we could

adhere to our commitment and to their expectations? What is clear

from everything that I received in the form of anecdotal information throughout last year, the demand was far greater than what

was ultimately going to be authorized for meeting the demand in

the program of $9 billion.

So could we have done it in a different way that did not affect

the credibility of the SBA program and people’s dependency on it?

Mr. BARRETO. First, let me explain why it did happen. First of

all, one of the things that we have really been challenged by over

the last couple of years is the fact that we have been operating

under a continuing resolution for 2 years in a row. It is very difficult for us to be able to manage a program like this when you are

getting an apportionment for something that happened a year ago.

If we would have had our budget, it would have been much easier

for us to be able to manage and navigate this.

So that is what happened. There was no intention on our part

to close down our program. We simply ran out of money. Obviously,

as soon as that happened and as soon as it was beginning to happen, we notified Congress of our intention to look at possibly putting a cap on the loan program. And by the way, we had to put

in a cap last year because we were on a continuing resolution. Last

year, the cap was $500,000. We were going to propose a $750,000

cap.

I would like to put up a chart that shows the fluctuations in the

volume that we were getting in the 7(a) loan program, because it

is very illustrative. You see here at the end of last year what was

happening to our loan volume. Usually we get about $25 million a

day. But you see here these incredible spikes. We had days with

$80 million. We had one day it was $115 million. It was absorbing

a lot of our budget authority.

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Something very important to know, Senator Snowe, is that 95

percent of the loans that the SBA guarantees are under $750,000.

It is only 5 percent that are over $750,000. The problem for us is

that those larger amounts are real estate loans or fixed asset loans

that eat up one-third of the money.

This proposal that we are submitting today will help us to mitigate that. If we can move forward with that proposal in this year,

we will be able to do some of those larger loans in the 7(a) loan

program. Obviously, we want to achieve more in the 504 loan program as well.

The last point I want to make on this is that it would not have

mattered what we would have asked for in a previous budget cycle.

That would not have helped our situation at the beginning of this

year because we were operating under a continuing resolution. So

we were getting an apportionment that would have been similar to

the previous year when we were not seeing these kinds of spikes

in volume.

So I hope that helps to illustrate some of the challenges that we

were faced with as we were ending last year and beginning this

year.

Now, we have our budget. The Omnibus Bill has passed, thankfully. We are happy for the support that we were able to receive

on that Omnibus Bill, because that helps us to be able to manage

the situation a little bit better.

It does not solve all of the problems. We still want to pursue this

proposal that we are making for this year. With the 30 percent increase that we are asking for in budget authority for next year, up

to the $12.5 billion, we believe that the increase is going to help

us to be able to accommodate this volume that we are seeing. We

have kind of been the victim of our own success. We are not complaining about that, but we are making proposals that will address

those issues.

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Chair SNOWE. First of all, was this last year unique in terms of

the volume and the spikes?

Mr. BARRETO. Yes, it was.

Chair SNOWE. I am sorry, I cannot read it.

Mr. BARRETO. I am sorry.

Chair SNOWE. Is that big spike, what is on the bottom? Are those

years?

Mr. BARRETO. Let me explain it to you, and I promise I will get

you a smaller copy of this.

Chair SNOWE. I wish I had better eyesight.

Mr. BARRETO. This is starting at December 8th and it is going

to January 6th. Basically what we are doing here is tracking daily

volume. For us, a normal day would be $25 million. We did not

have very many $25 million days in December. Usually, when you

get into the holidays, volume spikes down. But you see here, on December 9th, we had an $85 million day. On December 12th, we had

an $80 million day. On December 22nd, 3 days before Christmas,

we had a $90 million day. On the day before Christmas we had a

$90 million day. On January 6th we had $115 million day. So, incredible spikes.

By the way, some of those spikes are related to the fact that we

communicated to Congress that we were going to look at putting

a cap in. And what ended up happening is the industry flooded us

with larger loans, these multi-million dollar loans that eat up much

of the budget authority. It really exacerbated our situation.

I have one other chart I would like to show you. This is a 5-year

average of what the program has actually done. I think there is

some confusion here as to what it is that we asked for.

If you look at this chart, which is actually in billions, the yellow

represents the actual expenditures. The blue line is SBA request

and the orange line is the industry request. You see in 1999 the

industry asked for something in excess of $10 billion. Well, SBA

only did $9 billion. In 2000, they again asked for something close

to $11 billion. Well, we only did $9 billion. In 2001, they asked for

$11 billion. We only did about $9 billion. In 2002, the same. In

2003, the same. In 2004, the industry asked for $12.5 billion and

that is what we are addressing in the proposal that we are making

today, to obtain that $12.5 billion with an expansion of the SBA

Express program.

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In 2005, we are asking for $12.5 billion, because now we know

that the volume is there. For the last 5 years, our request has always been appropriate for what it is that we actually have done.

Chair SNOWE. In response to the earlier chart, in terms of volume, first of all the small businesses were playing by the rules and

all of a sudden they were subjected to a cap. That cap has not been

lifted.

Mr. BARRETO. That is right.

Chair SNOWE. And that is a problem, because those 5 percent of

the 250,000 businesses remaining. Their applications exceeded that

cap already are going to be affected. They have spent a lot of

money in making investments and processing that type of loan and

their plans for the future.

I think it is a matter of trust in the final analysis. I mean, irrespective of what happened the question is those were the rules,

that was the program. And there should have been some way to

resolve the remaining issues regarding that program for those who

were subjected to the cap and their applications exceeded it. I think

we should have found a way to equitably resolve that problem in

fairness to them.

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Mr. BARRETO. I agree with you 100 percent, Senator Snowe. By

law however, SBA cannot make loans if we do not have money. We

would be in violation of the law. We did return those applications

out of fairness to the small businesses. We did not know how long

our program was going to be closed. We did not know if we were

going to be able to get any kind of a budget passed.

Luckily, we finally did get our budget passed. We were able to

reopen the program.

By the way, a lot of those applications that were returned, they

have come back to us and we have processed those loans.

Now, I want to reaffirm, 95 percent of the loans that the SBA does are under $750,000. We are helping 95 percent of the people

that apply. Now, some of those loans that were above that $750,000

cap, they have already gone over to the 504 loan program, which

we think is an excellent program. It is intended for those large real

estate loans and fixed asset loans. So, we have addressed that.

We would love to take the cap off. But one of the things that the

industry has told us is: look, caps are one thing. But when you

close down the program, that is just impossible for us. We cannot

have the program closed even for one day. So what we are doing

is managing the program right now with a cap.

With the new proposal that we are making, we would be able to

remove that cap tomorrow and accommodate some of those larger

loans. The new proposal is going to get us pretty close to $12.5 billion in budget authority this year because we are going to be able

to reduce that subsidy rate.

Chair SNOWE. In your previous chart, were we not still on track for the $12 billion in authorization? I think the point is, from

everybody’s calculation the demand for the program was going to

result in at least $12 billion in authorization. Why did you not

make that request last year?

Mr. BARRETO. There is no doubt about it. The reason is that we

had no idea that 5 percent of the loans, those large, multi-million

dollar real estate loans that are coming into the 7(a) program, the

working capital program. We had no idea that those loans were

going to eat up one-third of the money. You see, 95 percent of the

people that borrow money from us are affected by the 5 percent

who are making those large loans.

We are not opposed to making large loans. We want to make

large loans. We have a program that can do that. The 504 loan program leaves $2 billion on the table every single year. We had no

idea. It has never happened before.

And again, we have taken steps to address that. The industry

has said: look, we want to do some large loans in the 7(a) loan program. That is why we put forward our proposal for this year. We

will be able to do some of those large loans if we expand the SBA

Express program.

Chair SNOWE. I have further questions on this issue, but I will

recognize Senator Pryor.

Senator PRYOR. Thank you, Madame Chair.

One of the former members and chairs of this Committee, Senator Dale Bumpers from Arkansas, one time was in Pine Bluff, Arkansas and they had this locally operated loan program they called

the Good Faith Fund. And basically, he took the concepts of that

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and brought it to Washington and he started the Microloan program.

My understanding of the Microloan program is that it has been

very successful and it has helped an untold number of businesses

and people get started in the process and really be productive in

this economy.

In fiscal year 2004, in that budget, the Administration states

that ‘‘the demand for microlending has increased because of the

weakening economy and the increased awareness among potential

entrepreneurs of the benefits of this program.’’

So can you explain to me, here we are one year later, can you

explain to me with, I assume, the same demand or even greater demand, the Administration has determined that this program is now

unnecessary?

Mr. BARRETO. I would be happy to Senator. A lot has changed

in 12 years. We have been phenomenally successful with our loan

programs.

Let me give you an example. When I first came to the SBA, the

average loan size at the SBA in our 7(a) loan program was close

to $250,000. Those were not Microloans. Most small businesses do

not need $250,000 for working capital. They need smaller loans.

They need a $50,000 loan or a $100,000 loan. They do not need millions of dollars.

So one of the things that we wanted to do was to get that average loan size down. And that is one of the reasons why the SBA

Express program has been so phenomenal.

Let me give you an idea of what I am talking about. Last year,

in our Microloan program, we did 2,442 loans nationwide. We

lended out about $30 million.

By the way, we are not the only ones that do Microloans. There

are many other organizations that do Microloans. They do them

better than we can do them!

Now, through the 7(a) loan program, our flagship loan program, we did 23,335 loans for $424 million. Those loans were smaller

loans. Those loans were under $35,000.

They were going to those underserved communities. Last year we

broke a record, Senator Pryor. We not only did 30 percent more

loans overall, a 50 year record at the SBA, we did 75 percent more

loans to African-American businesses, 44 percent more loans to

Hispanic-owned businesses, 35 percent more loans to women, 20

percent more loans to Asians, and 20 percent more loans to veterans. Across the board, we did more.

When we started this outreach initiative and started to promote

our SBA Express loan program, everybody said it would not work.

The lenders do not want to do loans in those communities. They

are not profitable. They will not do the small loans. Do you know

what? They were not correct. We were not only able to do more

loans, we were able to do more small loans in every community.

As I said, those loans now are going into the flagship program.

It costs us 97 cents for every dollar that we lend out in the

Microloan program. We are not as efficient in implementing that

program.

What is happening is that 10 times more people get those smaller loans in our flagship program than they do in the Microloan proVerDate 03-FEB-2003 12:37 Jul 16, 2004 Jkt 092957 PO 00000 Frm 00032 Fmt 6601 Sfmt 6601 D:\DOCS\92957.TXT SSC1 PsN: SSC1
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gram. That is what has happened over the last 12 years in our

Microloan program.

Senator PRYOR. As I understand the Microloan program criteria

versus the Express loan and the flagship loan, et cetera, the demographics, the terms, the conditions, the purposes are different than

the Microloan program. Is that a fair statement? How is SBA going

to handle that?

Mr. BARRETO. I am not sure what you mean by criteria. I will

tell you somebody has to submit to us when they apply for the 7(a)

loan program. It is almost the size of a phone book. This is what

they have to submit to us when they do a SBA Express loan. This

is what is happening at the SBA now. This is one of the reasons

why we are up 38 percent in our minority loans. It is easier to access our flagship program than ever before.

You see, I know a little bit about minority communities. I spent

my whole life in those communities. Those communities deserve to

have access to our best programs and our best services. That is one

of the reasons why we have done the unprecedented outreach.

The good news is that the lending industry has spoken loud and

clear. They like these loans, and they like these communities. And

the reason that they do is because they understand it is good business.

Senator PRYOR. This budget also asserts that eliminating funding

for the 7(a) loan guarantee program ‘‘will result in savings of approximately $100 million.’’ Could you elaborate on that?

Mr. BARRETO. Absolutely. We think that is a very positive sign.

There is a lot of talk right now about the SBA budget being decreased $100 million. It is being decreased $100 million because we

are proposing a zero subsidy rate on our 7(a) loan program. This

is not anything new for the SBA. Our 504 program is a zero subsidy program. Our SBIC program is a zero subsidy program.

What is happening is the 7(a) program is joining some of our

other successful programs. We are modernizing the way that we

treat that 7(a) program. We have a new econometric model that allows us to get that subsidy rate down.

And so the $100 million is not a decrease in what the SBA can

do. It is a return to the taxpayers of $100 million that we do not

need anymore, because the 7(a) program will be a zero subsidy program.

Senator PRYOR. I understand what you are saying about you do

not need it, but my question is do those small businesses out there

need it? Do they need that access to that extra $100 million that

they are not going to have now?

Mr. BARRETO. What they need is a 30 percent increase in the

SBA’s budget authority. We have $9.5 billion in this year. With the

zero subsidy proposal we are going to $12.5 billion.

The small businesses do not understand all of this talk about

subsidy rates and apportionments and appropriations. They just

want to know is it going to be easier for me to get a loan? And is

there going to be enough money for me to borrow? This proposal

does that, and at the same time, saves the American taxpayer $100

million.

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Senator PRYOR. Let us talk about the fees that you are charging

to process these loans, et cetera. As I understand it, some of these

fees are going up fairly substantially in your budget; is that right?

Mr. BARRETO. I want to explain that, Senator. The SBA is not

raising fees on small businesses. What is happening is that the legislation that Congress passed 2 years ago to take those fees down

is expiring at the end of this fiscal year. What is happening is that

we are going back to the previous fee schedule that existed. These

fees are fees to the lenders.

I want to give you an example. There is a lot of talk about what

these fees are going to mean. If you are processing a loan for

$150,000 or less, the fee is going to be $8.34 a month. That would

be the difference in the payment if that fee was passed on to the

small business owner. If you are processing a loan for an amount

between $150,000 and $700,000, one of those larger loans, the fee

is going to be $29.14 a month. There is a lot of talk on these larger loans, with $700,000 plus

loans, there is no change in the fee. So we are not raising fees on

small businesses. The legislation that Congress enacted expires at

the end of this fiscal year. We are going back to the fee schedule

that was there before.

Senator PRYOR. Would it be your preference that we continue

those reduced fees?

Mr. BARRETO. My sense of it is that what the banks have proven

is that these loans are very profitable. They are going to do these

loans. I just think this is a more balanced and equitable way. And

it also gets us to the zero subsidy rate and the 30 percent increase

in our budget authority. The lenders have told us that is critically

important to them. They cannot have the program shut down. They

do not want to have any caps on the loans. They want to give larger loans inside the 7(a) loan program. Our budget, and also the

proposal that we are making for this year, allows them to do all

of that.

Senator PRYOR. Madame Chair, I have one last question I would

like to focus on, although I may submit some for the record, if that

is okay.

Chair SNOWE. Without objection, so ordered.

Senator PRYOR. Last year, you centralized the liquidation functions of the 7(a) loan guarantee program and you moved a number

of employees to Herndon, Virginia. And I understand and actually

agree that we should look for ways to save money and to save the

taxpayers money and tax dollars and we should try to improve

service.

But the implementation of the plan, whatever we do, I think

needs to be done in a way that is fair and is not drastic. I must

say that I believe you gave employees only about 7 days to decide

whether they were going to relocate or take a buyout from the Government. Now, if they took the buyout, as I understand the terms

of it, they could not return to work for the Federal Government for

5 years.

Under the circumstances that you had there, it was at the end

of the year, it was during the holiday season, and obviously, it was

a gut-wrenching decision for many of your employees around the

country, I just do not know if it is fair, in my mind, to get rid of

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employees in that manner when they may be months away or

maybe a year or two away from retirement. And I think that you

should not be opposed to granting hardship exceptions for employees under these types of circumstances.

And I would like to hear your explanation about why you did

what you did in the manner that you did it? And I would also like

to know exactly how much money you saved by doing this?

Mr. BARRETO. First of all, let me explain exactly what this is all

about. This is really about Transformation of the SBA. See, when

we first came on board at the SBA, we realized that we were not

as efficient or effective as we needed to be. And if we were going

to be relevant in the future we needed to take some strong looks

at how we do business. How is it that the SBA delivers its services?

This is not a new thing. We have been working on Transformation for almost 2 years. Obviously, we wish we could have

done it much sooner than that, but we needed to work very closely

with all of the stakeholders and make sure that we got their input.

We had an agreement with our union to be able to proceed with

transformation. Transformation is working. It is working big time.

We have now been able to reduce the time it takes to process 504

loans. For example, what used to take a couple of months is now

down to as little as a couple of weeks. We have reduced the time

it takes to do liquidations from years to a couple of months.

SBA does not do a lot of liquidations anymore. Most of our lending partners do the majority of those liquidations.

We determined that we needed to free up our offices in places

like Little Rock and Maine to be able to work more with small

businesses. We were bogging them down with a lot of process, with

a lot of bureaucracy. So we made a determination to centralize that

function. We offered every SBA employee a position with the Agency. We did not terminate those employees. We offered them a position in a new location.

Again, this is not something that happened in one day, in one

week, in one month. This is something that we have been talking

about for years. We took every effort to be as communicative and

as responsive and sensitive to every one of our employees situation.

You are right, we offered some of them early retirement and

some of them took it. We offered some of them buyouts and some

of them took it. We offered some of them the new position in the

new location and some of them took it. But not all of them took

it.

It is very difficult for us, OPM has no standard for classifying

hardship. We received many requests, and unfortunately, we were

not in a position to put one person’s hardship over another person’s

hardship. We gave those employees every opportunity to continue

on with us.

We understand one of our most important assets is our personnel, and we want to keep our personnel whenever possible. But

Transformation has worked. It has not only worked for the Agency

and the taxpayer, but it has worked for the small businesses. We

are doing things faster and better than we ever have in our history

and that is what is at stake with transformation.

Senator PRYOR. If you could answer the second part of my question, how much money have you saved by doing that?

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Mr. BARRETO. I do not think we can give you a specific answer. We think it is roughly $5 million that we will be able to save in

this year, in 2004.

Senator PRYOR. Let me say this, and I do not want to speak for

all the other Senators here, but I have heard a number of complaints from my constituents about this, about first the way you

treated your employees during that process. I do not think you did

yourself any favors, I do not think you built any positive morale by

doing that in the way you handled it.

Secondly, from your customers, the people who are getting these

SBA loans who are accustomed to being able to contact a local office, or at least someone that is fairly close by. For example, in our

State, and our State capital in Little Rock, now they have to call

someone in Virginia and who knows who they are going to get?

I will say that there seems to be, with my constituents, a disconnect in the quality of service that they are receiving because of

this move.

Now it is a little too early to be able to judge that completely.

But from anecdotal evidence, phone calls, letters, e-mails we have

received in our office, this has not been received positively in Arkansas. And I am sure that is true in a lot of other States, as well.

Mr. BARRETO. Senator, we will be happy to come up and brief

you on some of the success stories, some of the things that are actually happening. I just want to clarify, the liquidators, those are

when loans are not successful. They are liquidating the assets of

the small businessperson.

Liquidators are not out there in the community making loans,

doing technical assistance, helping small businesses get contracts.

We are much more efficient now.

I think it is much easier and much better for somebody to know

that it is not going to take a year or more to go through the process. They can go through it in a couple of months now.

Again, we take very serious our relationship with our employees.

I can tell you that I have been around the country—I have been

to Little Rock, Arkansas several times, met with our district office

people—we have some of the best people in the country working in

our district offices—to make sure that this was not a surprise.

Again, we did have agreement from all of the necessary parties

that we needed to be able to do this.

Change is very difficult. It is always difficult. People would rather if we did not change, but we do not have any option but to

change. If the SBA is going to be relevant and successful in the future, we have got to make good business decisions.

I think the decisions that we have made, especially in the long

term, will be very positive. And I would be happy to meet with you

and your staff to discuss what it is that we are doing with Transformation, because we think it is one of most important things that

we will do for the future of the SBA.

Senator PRYOR. That is all I have, Senator Snowe. Thank you.

Chair SNOWE. Thank you very much, Senator Pryor.

Administrator Barreto, on the issue of the 7(a) program, and obviously, this Committee is going to be examining the proposal that

you have submitted to the Committee, but one of the issues and it

gets back to last year and what occurred, because obviously, the

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program was on track for doing essentially at least as much as the

previous year. That was clear. In fact, the previous year in the 7(a)

program was about $11.3 billion. So that is why I was mystified,

and the Committee was mystified, as to why you would request

something less than that, $2 billion less than that, on the $9 billion.

We do not want to have a repeat scenario. And so that is what

we really have to examine with your request now of a little more

than $12 billion when you have a statutory authorized level of $16

billion. So the question is why you have not requested the full authorization? That is number one.

Secondly, on the zero subsidy rate, and obviously I am going to

hear from the next panel and there will be concerns raised about

what that rate is going to imply. Is it going to be too onerous for

some small businesses?

Secondly, the 50 percent guarantee that is a decrease from the

75 percent, is that going to make it more difficult for small businesses to get the type of loans, because some of them may be

riskier and require a higher guarantee? That is going to be another

question that will be raised. So those are some of the issues.

I know you have also requested eliminating the 15-day notice

and it probably will not come as a surprise to you that I will not

be supporting that, because I do think it is important to have a 15-

day notice to Congress. And I know that did not happen with the

7(a) program on three different occasions in this last month.

We really do need to be notified, because we have a public accountability and oversight responsibility as well.

So obviously, I certainly do not intend to move in that direction,

because I do think it is important for Congress to be notified and

I hope that we can, in the future, adhere to that 15-day notification.

On that, because I want to go to the next issue on HUBZone and

also to what Senator Pryor raised on Mircroloans. We are going to

have to look at those issues, because those are some of the questions. I hope that the Committee can work with you on those issues

and to examine them. Because I know in just reading the testimony of the second panel, there will be those issues raised.

And will there be uncertainty with the size of the rate that will

be required, since it will not be an appropriation? I understand the

value and the attractiveness and not depending on appropriations

to move ahead in the 7(a) program. I think that is obviously an interesting notion. The question is what does that mean in the final

analysis with the type of rate that will be imposed on small business?

Mr. BARRETO. I think there were several questions in there and

I want to make sure I answer all of them.

Chair SNOWE. Can you also include the piggyback issue?

Mr. BARRETO. You may have to remind me what order those

questions came in, but I will do my best.

First of all, last year was not an apples-to-apples comparisons.

You are right, we did $11 billion, but $2 billion of that was STAR

money. In other words, that was money made available to people

that were affected by 9/11. That was a temporary program. If you

take that $2 billion off, we did a little bit more than $9 billion.

32

As illustrated on the chart, we have consistently done between

$9 billion and $10 billion. It is only now, because we have been

making these changes to our program, especially the SBA Express

program, that we have seen the kind of growth in the volume. That

is a good thing.

The changes that we made in the SBA Express program, I wish

I could take all of the credit at the SBA, but it really did not come

entirely from the SBA. See, when we first came in office, one of the

first things that I wanted to do was find ways for us to do more

loans, to do smaller loans, to get into the minority communities, to

do more women business loans.

So, I convened the lenders, all of my major lenders, community

lenders, rural lenders. I brought them into the SBA. It had been

a while since they had been there. And we talked to them. And

they gave me a list of things that they wanted done. It was a long

list. It was about 15 or 20 things.

And I said to them, I cannot do all of those things, but I can do

a few of those things. What are your top priorities? And they said

we will tell you what our top priorities are. We want you to expand

the SBA Express program. Take it from $150,000 and move it to

$250,000. And they said if you do that we will take less of a guarantee, we will take a 50 percent guarantee.

And they said and by the way, while you are at it, we do not

want to give you a phone book of information anymore. We are

tired of giving you this. We are not going to give you this anymore.

We want to give you this.

And by the way, we do not want to use your forms anymore. We

want to use our own forms. Can we do that?

And lastly, we do not want to be calling back and forth all the

time. We want to transmit information to you electronically. Would

you allow us to do that?

And we said yes to all of those things. It is one of the reasons

why SBA had the banner year last year with regards to the 7(a)

program. It is why we got our average loan size down. It is why

we reached more communities than ever before.

So these proposals that we are making to you today and also

with our budget next year are reflective of the direction in which

SBA is moving. We believe that the SBA has become a better partner to the lending industry. The lending industry has told us very

loud and clear what they expect from us, and we have tried to respond in each one of those cases.

With regards to the piggyback loans——

Chair SNOWE. Can I just ask why would you not request a higher

authorized level allowed under law, $16 billion as opposed to the

approximately $12 billion?

Mr. BARRETO. SBA, for the last 5 years, has done $9 billion to

$10 billion. We try to look at what we have done to try to predict

what we will do. I will give you an example——

Chair SNOWE. Excuse me, I just think that the point here is if

we are trying to create jobs why put ourselves in the position of

what occurred this last year? You can talk about appropriation, but

this time you are going to talk about hitting a ceiling. Why create

that ceiling when you are allowed to go $4 billion more? It just does

33

not make sense to me when we are trying to create as many jobs

as we can in America. I mean, we are desperate to create jobs.

Mr. BARRETO. That is why we are requesting the $12.5 billion in

our proposal for this year. That is why we requested $12.5 billion

for last year. We agree with you that we need to do loans that create jobs. That is the purpose of the 504 loan program. That is one

of its basic centralized assumptions: if you do these larger loans in

the 504 loan program, you are going to create more jobs.

Last year, we were up 20 percent in our 504 loan program. We

have opened it up for competition and we think we can do more.

But 504 is very illustrative, because we ask for $4.5 billion every

year on that program. We are asking for it again this year. We are

going to do that next year, as well. But we do not do $4.5 billion

in the 504 loan program. I want to. I think that we can, especially

with some of the changes that we are making in that program. But

we leave $2 billion on the table every single year on that program.

So we want to be accurate, and we want to ask for what we need.

We believe that this proposal will help us to do everything that we

are being asked to do: the larger loans, to get the cap off of it, to

possibly reduce fees for the lenders in the future. And that is why

we have brought this proposal forward this year.

Chair SNOWE. Also, on the other issues, on the rate, how predictable will that rate be?

Mr. BARRETO. You are talking about the fees on the loans.

Chair SNOWE. That is right.

Mr. BARRETO. I mentioned to Senator Pryor that our figures tell

us that the fees for loans worth $150,000 or less would be about

$8.34 a month. For the loans up to $700,000, you are probably talking about a little bit higher fee, $29.14.

Chair SNOWE. Do you pretty much think that that will remain

static?

Mr. BARRETO. If we get support on this new proposal, we think

there is an opportunity to lower the fees this year and forward. We

are working those numbers out right now and I will be happy to

share some estimates with you, but we think that we can get some

relief on the fees this year if we have support on the proposal that

we are bringing forward.

Chair SNOWE. Obviously, we will be working with you on that.

I plan to conduct a roundtable of interested parties on this very

issue over the next week or so, because I do believe we need to

have a sense of what direction we should take with respect to that.

Because that is a profound difference. I understand why you are

doing it, because I understand the nature of not wanting to depend

on appropriations. It is a question of making sure that we all understand how it will work inevitably.

On the Microloan program, to which Senator Pryor referred to,

because it is a critical program and it is one that obviously has

worked well in Maine. Now I know that I am going to hear from

the subsequent panel on some of these issues that you have just

raised. The question is whether or not we will get sufficient lenders

who will be willing to engage in this process for these small loans.

I think that is going to be one of the questions.

34

I know you are suggesting in your testimony that somehow lenders will be willing to make these loans. So that is one issue, whether or not that is true.

Secondly, in terms of the cost, we hear from other witnesses who

say that the cost of the technical assistance and the program operations are also counted in determining the loan and that is why it

contributes to the higher cost in delivering that loan that you have

indicated in your statement.

The question is whether or not many of these banks are going

to be willing to make these loans. And I think this Microloan is

also very appealing, because it does begin the process of business

startups. It really does encourage entrepreneurship in our economy, which is also needed.

So I just would like to have you address some of those issues, because I do think it is going to be important and this is a program

that I have certainly supported and has worked well in Maine. And

obviously, Senator Pryor and others, from smaller States especially,

for small businesses or individuals who might not be able to get

loans elsewhere.

Mr. BARRETO. Yes, Senator. The good news is that the lenders

are already making the smaller loans. I mentioned to Senator

Pryor that last year we made 2,442 Microloans. Those are the

smaller ones that we make. Last year, in the 7(a) loan program,

especially through our Express program, we made 23,335 loans, 10

times more than we make in the Microloan program for more than

10 times the dollars, $424 million in those 7(a) loans under $35,000

versus $30 million. That is $424 million versus $30 million in the

Microloan program.

Just to break it down, for example, in Maine we did 7(a) loans, 409 loans for about $40 million. Loans under $150,000, we did 331

loans for a little over $15 million. The SBA Express loans, we did

230 of those loans in Maine for almost $11 million.

Now in terms of Microloans, in Maine we did 39 Microloans in

Maine for $786,000. But we did 169 7(a) loans under $35,000 for

$3.4 million in Maine.

What I am trying to say is that the lenders have already spoken.

Not all lenders. Many lenders have told us that they do not want

to do small loans. They said: we are not going to do them. That is

not the business that we are in. We do not care about those loans,

they are not profitable. We are not a philanthropic organization. I

understand that.

Our responsibility is different. We have to make sure that we

help as many small businesses as we possibly can in every community. Not just big businesses, not just medium-sized businesses, but

small businesses, start-up businesses, minority businesses, womenowned businesses. And that is what we are doing with our 7(a)

loan program now. That is what we are doing with SBA Express.

That is what our proposals that we are submitting today and the

budget in 2005 are going to do.

So the good news is that I think that we can do both. I think

we can do some of those larger loans, and our proposal allows us

to do that. But we will continue doing what we have been doing.

I do not think it is a bad thing that we do more loans than ever

before, that we got that average loan size down, and that we reach

35

every community within the small business community. That is

what we are supposed to do, and that is what we are committed

to doing.

Chair SNOWE. Again, we are going to explore those issues with

you in the future to make sure that we know what direction we are

taking and what the ultimate impact would be.

Finally, just on the HUBZone, I know you are not going to make

a request for a separate line item. The Senator from Missouri will

be mighty disappointed if I do not raise these questions. And it is

important, because obviously, you have chosen to put that in the

category of Government accounting and business on the budget.

The question is one, as to what the implications will be for that

program, what the impact would be? Secondly, why was more not

requested for the HUBZone? It is only 17 percent of the 8(a) program and yet there are many more firms under the HUBZone program than there are in the 8(a) program.

So I wish you could address some of those issues and again we

will explore it. Obviously, we are not opposed to new ideas and delivering these programs differently or more efficiently or whatever.

I think the question is making sure that we have a true understanding of the impact in the final analysis.

This program is working very well, especially in distressed areas.

It has worked well in Maine. I know it has worked well in Missouri

and in other parts of the country and we want to make sure that

it does. So I was just wondering why it is budgeted so much less

than some of the other contracting programs?

Mr. BARRETO. Thank you, Senator, for that question.

We have learned a lot over the last couple of years. One of the

things that we know is that HUBZone programs are important.

They are very important. And they are too important to take a risk

that they are not going to be funded.

You see, over the last couple of years, we have requested funds

for HUBZones and they have been zeroed out. Now we did not zero

the HUBZone program out, because we think it is important. So we

kept managing that program, but it really put a strain on us, because we did not receive an appropriation.

So we have moved that program into where we believe it should

have been all along, inside of SBA’s program office called Government Contracting and Business Development. It is a Government

contracting program. We will continue to support that program, but

I believe that we ensure its future by moving it in there and making sure that we invest resources.

As you know, we have requested a much larger amount for our

Government Contracting Business Development program, over $2

million that will be sufficient for us to be able to support not only

the HUBZone program, but all of the other programs.

And you are right, it is currently receiving less funding than the

8(a) program. 8(a) is a very important program, too. In fact, those

programs are at parity.

One of the things that we have seen is that the number of businesses participating in the HUBZone program now has increased

dramatically since we have been on board. We have close to 10,000

companies. We think we can get that to over 13,000 or maybe

14,000 companies by next year.

36

We are also seeing other positive signs. Not just the fact that we

still have a HUBZone program, but those HUBZone programs are

doing more contracting than ever before. The most recent figures

that are available to us show that it went from about $680 million

to almost $1.7 billion in contracts. That is good, good but it is not

enough. It is nowhere near to what the 8(a) program does, but 8(a)

has been around a lot longer. It is more established.

So we think there is a lot of opportunity for us to continue growing the HUBZone program. A lot of times people do not understand

that there are many companies that are both HUBZone and 8(a)

certified companies.

So those are tools. Those programs are tools to help small businesses in historically underutilized business zones and socially and

economically disadvantaged small businesses get their access, their

fair share of the Government contracting pie. And we are very committed to that.

So I hope that you will share with my original home State Senator, Senator Bond, that the HUBZone program is healthy and its

prospects for the future are very good.

Chair SNOWE. I appreciate that. One of the issues concerning

HUBZones is the volume of contracts awarded to the HUBZone

firms. And I gather it has fallen below the 3 percent statutory goal

of .71. Why is that the case? I know in my State it is like a 39 percent decrease.

Mr. BARRETO. We are making significant increases and as I men- tioned, probably $1 billion more in the last year for which we have

information. It will be a lot more in 2003.

Again, there has been also this rapid growth in the number of

HUBZone companies. When I first came, I think there were about

4,000 HUBZone companies. There are 10,000 HUBZone companies

now, and that is going to go to 13,000 or 14,000.

The day before yesterday, I was at one of my business matchmaking events in Anaheim. I want you to know that we had over

1,000 businesses there, not just from Southern California, but from

other states, as well. Ron Newlan, the head of the HUBZone organization was there. We work very closely with him. And I was very

happy that he had a number of his HUBZone companies there, because we are thinking outside the box. We are not just waiting for

those opportunities to materialize, but we are really facilitating a

lot of those opportunities. The things that we have done with regards to contract unbundling, the changes that we are making to

our program and streamlining the process so that we can get more

people involved in there.

We know that before, it used to take somebody a long time to get

in one of these Government contracting programs. And then once

they got in, then it was good luck to you. We do not do that anymore. What we try to do is surround those small businesses with

the tools that they need to succeed. They need training and education. We are providing that. And they need real access to decision

makers.

Last year, through these matchmaking events, we set up over

11,000 one-on-one matches between small businesses and hundreds

of Government agency buyers and Fortune 500 companies. We will

do more than that this year.

37

I think we have a chart here, just to give you an example of the

growth of some of these matches that we are facilitating. These are

some of the events that we have done over the last year-and-a-half.

Cleveland, we set up 1,600 appointments; Orlando, 2,400; Chicago,

1,800; Birmingham, 749.

One in Birmingham was with the Black Chamber of Commerce

and Harry Alford’s Group. NECE, that was our national conference

last year, 1,300; Houston, 3,300. We just did Anaheim, we will do

more than 3,300.

We need to do more of that. It gives those small businesses the

confidence that we really are doing something proactive for them.

They have told us for years it is very hard to do Government contracting, and we are trying to streamline that and make it easier

and provide them with some real opportunities.

We cannot guarantee them contracts. We should not guarantee

them contracts. But we should create the right environment for

them to succeed.

Chair SNOWE. Senator Pryor, do you have any additional questions?

Senator PRYOR. I do not really, Madame Chair, except for maybe

just one. And that is you talked about zero subsidy and that is a

good thing in your mind?

Mr. BARRETO. Yes, sir.

Senator PRYOR. You are moving the SBA toward the zero subsidy

approach pretty much across the board; is that fair to say? Or you

are trying to get to zero subsidy in all the programs you can?

Mr. BARRETO. We have been at zero subsidy with the 504 loan

program, a very successful program. We have been at zero subsidy

for some time with the SBIC program. And so the 7(a) program is

just following what I believe is a positive trend. It allows us to be

able to do more loans and reach more people than we ever have

before.

And at the same time being able to save the American taxpayer over $100 million that we do not have to spend for a program that

can support itself.

Senator PRYOR. As I understand, when you talk about zero subsidy, you are talking about there are no tax dollars wrapped up in

the loan?

Mr. BARRETO. No appropriation to do 7(a) loans; that is correct.

Senator PRYOR. But do not some companies need that subsidy?

Do they not need that to help them get started? And will not the

Government get their money back fairly quickly in payroll taxes

and getting people off unemployment rolls, et cetera? Are there not

cases where some companies need a subsidy?

Mr. BARRETO. In this case the subsidy is going, because of the

subsidy rate that we have, we believe that with the improvements

that we have made, the econometric modeling that we have done

with regards to the subsidy rate, we can get that down. With the

management changes that we have made, we can improve our ability to be able to offer those funds.

What is happening is—what small businesses tell me is I do not

care what you call your program. I do not care how the watch is

built. I just want to know what time it is. And will they be able

to get these loans easier? Will there be less paperwork? Will they

38

be able to get loans at larger levels if they need to? Will there be

more money available to be able to get these loans? And in all

those issues, the answer is yes. That is what has been happening

now over the last year. It is a very positive trend. We are breaking

50-year records and will break records every single year if we continue doing the things that we have been doing.

At the end of the day, that is what is important to small businesses.

You see, when I first came on board, many small businesses said

I can take a yes and I can take a no, but the maybes kill me. Too

much paperwork, too expensive, takes too long. And so what we

have done is we have streamlined our process so that we can be

a better partner to them. We have become a more passionate advocate for the things that are more important to them and we have

definitely been more responsive to them than at any time in our

history.

So at the end of the day I think that is what small business expects from us.

Senator PRYOR. In my mind, streamlining the process is great,

but that is slightly different than zero subsidy. That is apples and

oranges.

What I am asking is if you have a zero subsidy approach to these

loan programs, are there some businesses now, because you have

gone to zero subsidy, that will not be able to get the loan, because

you have gone to zero subsidy?

Mr. BARRETO. I do not believe there is any business that can

qualify for a loan that will not be able to get a loan because we

are at a zero subsidy rate. Again, we have other successful programs that are zero subsidy that are doing more than ever before.

I think it’s because we have been able to prove that we can make

these loans more efficiently, that we are more effective at doing

them, that this is a cost-effective way of lending. That is one of the

reasons that we are able to get that subsidy rate down to zero. So

we believe that this is actually going to be a net benefit for thousands of small businesses.

Let me give you an example. This last year we did 67,000 loans

in our 7(a) loan program. 67,000 loans. That never happened before.

With this new proposal, we think we can get to 90,000 loans.

Tens of thousands of small businesses that were not getting loans

from us before will get them now. That is what I think is critically

important, more job creation, more capital where it belongs, in the

hands of small businesses.

Senator PRYOR. I am not trying to dicker with you on this, but

what I am saying is you have emphasized how you are getting efficient, less paperwork, and I understand that. What that means to

me is that there is a smaller barrier between the lender and the

borrower. If it is easier to fill out the paperwork and faster and it

is more certain, that is great. But the question I am asking is, are

we also not reaching down low in our economy with these struggling businesses that cannot qualify? They cannot go to a bank and

get a loan. They have to work with the SBA to get a loan.

So as I understand your testimony, what you are saying is it is

your belief that we are not denying anyone loans otherwise?

39

And the reason I say that is because the numbers do not mean

anything to me, because if it is easier to get it maybe there are a

lot of other companies out there that are now trying to get it that

just did not want the hassle before. But what I am worried about

is the weaker companies or the start-ups, whatever you want to

call them, that really otherwise—I mean SBA is their only way

they are going to get the resources they need.

Mr. BARRETO. Senator, I hope this will assure you. The reason

that we are going to zero subsidy is because we are reaching more

of those small businesses. Let me explain to you why.

There is no way we get to zero subsidy if we do not have an SBA

Express program. The SBA Express program allows us to get that

subsidy rate down to zero. It is a 50 percent guarantee which

moves that subsidy rate down.

And the reason that we did more loans, more smaller loans to all

of those groups that I mentioned before, minorities and women, is

because many of those loans were happening through the SBA Express program.

In other words, the exact opposite is true. We will reach more of

those struggling businesses, more of those businesses that were

never getting loans with the SBA. When I first came on board, the

average loan size was almost $250,000. That shut out a lot of those

businesses. Our average loan size last year was a little over

$160,000 and going down.

It does not mean we can not do big loans. We will do big loans.

We will do big loans in the 7(a) loan program and we will also do

them in the 504 loan program. But we will reach more of those

smaller emerging market businesses than we ever have in our history. And that is what allows us to go to the zero subsidy rate, because of the success and the effectiveness of the SBA Express program.

Senator PRYOR. Thank you.

Chair SNOWE. Thank you very much, Administrator Barreto. We

appreciate the fact that you took the time to be here today to answer our questions forthrightly, and we are looking forward to

working with you. We applaud you for what you have been doing

as an advocate on behalf of small business throughout America and

for your enthusiastic and energetic leadership on behalf of the

Small Business Administration. So many things have worked very

well.

I also appreciate the innovation that you have brought to the

Agency, as well, and to programs and thinking differently and creatively. I want to express my appreciation on the alternate work

sites, including Maine in that program now. I think it is just another example of the type of creativity and innovation that you

have brought to the Agency. And also in showing how things can

be done differently and bringing those resources to people who

need them.

So I thank you and I commend you.

Mr. BARRETO. Thank you very much, Senator Snowe, Senator

Pryor, it has been an honor to be in front of you today. Thank you

very much.

Chair SNOWE. Thank you.

40

We have a panel and I notice we have a vote. Let us bring forward the second panel. Mr. Tony Wilkinson, who is the President

and CEO of the National Association of Government Guaranteed

Lenders; Mr. David Coit, who is Chairman of the National Association of Small Business Investment Companies; Ms. Mary Mathews,

who is the former Board Chair of the Association for Enterprise

Opportunity; and Ms. Ellen Golden, was is here to represent the

Association of Women Business Centers that represents 89 Women

Business Centers across America.

I would like to have you all summarize your testimony if you

can. There is a vote on, so Senator Pryor is going to chair the Committee and I will go vote and come back. So we will ask you to

begin with Mr. Wilkinson.

Senator PRYOR. [Presiding.] Go ahead, I am ready when you are.

STATEMENT OF ANTHONY WILKINSON, PRESIDENT AND CEO,

NATIONAL ASSOCIATION OF GOVERNMENT GUARANTEED

LENDERS, INC.

Mr. WILKINSON. First of all, I want to thank the Chairwoman

and Senator Kerry, Senator Pryor, for your leadership on the 7(a)

issues that are before us today.

As Senator Snowe said in her opening, that the SBA loan programs are a critical lifeline for many small businesses and that is

absolutely correct. From bank call reports we know that there are

about $485 billion in outstanding small business loans in this country. But of that $485 billion, only about 20 percent of those loans

have maturities in excess of 3 years, which would put that at about

$95 billion.

Compare that with the outstanding 7(a) portfolio, which is about $40 billion, and you can see that the SBA 7(a) program is one of

the largest, if not the largest, single source of long-term capital for

small businesses in this country. This program is critically important to the health and vitality of the small business sector.

Yesterday there was a hearing on the House side, in the Small

Business Committee, where four small businesses testified about

the adverse impacts they have suffered under the actions the Administration has taken regarding the closing of the loan program

earlier this year and then subsequently not being allowed to resubmit their loan applications.

It is unbelievable that applicants who lived by the rules, filed

their applications on time, did everything they were supposed to

do, had the rug pulled out from underneath them and were told

simply too bad by the Agency. They have not been allowed to resubmit their applications, because these were applications that

were in excess of $750,000.

These small businesses create jobs. They needed the financing to

grow and hire new employees and to do the things that they needed to do in their communities and they have not now been able to

do so. It is a travesty and I hope that with your help we will continue to fight this issue to see that those applications that were

filed on time get processed and get approved, because there is simply no reason why the Agency is not processing those loans.

Rather than summarize my testimony, I am just going to touch

on a few things that the Administrator talked about. First of all,

41

the Administrator seemed to be a little bit selective on the information he provided regarding the industry’s estimate of loan demand.

For the current fiscal year, we had anticipated loan demand at

$12.5 billion. At the end of the first quarter we had done $3.122

billion, which puts us on pace of $12.5 billion, a pretty good estimate.

Last year we estimated $11.8 billion. We did $11.3 billion and

there was a $500,000 loan cap in place for the first 5 months of

the year. Obviously, we would have done more lending had the loan

cap not been in place, and our estimate of demand would have been

pretty close.

For 2002, we estimated $11 billion. We did $9 billion in the regular program and an additional $1.7 billion in STAR. So our estimate of demand for the last 3 years has been very good.

The Administrator also mentioned that 95 percent of the loans

made have been under $750,000. But with the loan caps in place,

both this year and last year, we have missed an opportunity to finance a lot of businesses that need financing. I can tell you that

there been businesses that have been caught in the current prices

who had made down payments on contracts, who had approval

from their PLP lender, which is a pretty good comfort factor in this

program, only to have the rug pulled out from underneath them.

They have lost down payments. I cannot tell you the number of

firms that have been financially harmed by the actions taken by

the Administration this year.

Now the Administration rolls out a new proposal that we have

not been briefed on nor have we had any discussions about it. From

our perspective, this program is not broken. It does not need to be

overhauled. It needs the support of the Administration.

The concept of a 50 percent guarantee, or excuse me, expanding

the Express program. The Express program today is primarily a

credit scored product. Major commercial banks in this country use

their credit scoring models. The average loan size in the Express

program today is $48,000. They have got the ability today to take

Express up to $250,000. There are a few loans that are made in

excess of $100,000, but not many. Most of the Express loans are

the under $100,000 variety.

So to conceptually put in place a plan that would make all loans

at 50 percent guarantee really does not seem to be reasonable on

our part.

The Administrator said the industry flooded them with larger

loans during the notification period. Well, every time the Administration announces a loan cap, the requirement for the announcement is intended to allow those applicants who have started their

processing and begun to pay fees to get the necessary documentation together time to finish their application. That is exactly what

happened. People heard the deadline. They took the steps necessary to finish the application. This is not the first time that this

has happened. Every time that there has been a loan cap announcement we get a spike in loan demand. This is nothing new.

So to say that the industry flooded them with larger loan applications, that meant that there was strong demand from small business out there who need access to capital and they were the ones

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who took the steps necessary to get their applications turned in on

time.

The Administrator also talked about a 30 percent increase in

loan authority in the fiscal year 2005 budget. Well, they needed it

this year. They needed the $12.5 billion level this year. They are

a year late to the party. All they are asking doing now is asking

for straight-line authority into next year when chances are we are

going to see continued demand on this product. So hopefully we can

work through these issues and come up to some solutions.

The Administrator also said that the industry has said we need

to get the restrictions lifted and get this program back up and running as quickly as we can. And we absolutely agree with that.

As you know, getting information from the Administration on

some of the SBA issues has been very difficult. The Administrator

said that the new proposal was going to be a savings to the taxpayer.

In the fiscal year 2005 budget, in the credit supplement page,

there is documentation that says borrowers and lenders have overpaid in the 7(a) program $1.2 billion in the last decade. And to say

now we need to take another $100 million out of the hide of small

business does not seem quite reasonable.

Now the Administration did take some steps last year, they developed an econometric model. Thanks to the leadership of this

Committee we passed legislation to allow SBA to use that model.

Before we have any further discussions about programmatic

changes, we would like to see the results of a GAO report validating that model. Is it fair and is it reasonable? Are we through

with the period of time where we are overcharging borrowers and

lenders for using this program? My understanding is that SBA has

not been forthcoming with information and it has been a struggle

for GAO to get the data necessary to validate the model. Until we

see the results of that report, it is going to be difficult for us to engage in discussion about how the program might be changed.

Senator Pryor, I would be happy to answer any questions.

[The prepared statement of Mr. Wilkinson follows:]

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Senator PRYOR. Why do not we let Mr. Coit go ahead and make

his comments and then we will take all the questions when Senator Snowe gets back. Go ahead.

STATEMENT OF DAVID COIT, CHAIRMAN, NATIONAL

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES

Mr. COIT. Thank you, Senator Pryor.

Thank you for the opportunity to appear before you today to give

NASBIC’s views about the Administration’s fiscal year 2005 budget

proposal as it relates to the SBIC program.

The major point I want to stress is that the Participating Securities Program will end on October 1st if SBA’s proposal is enacted.

We agree that legislative restructuring is required, but it must not

be done along the lines proposed by the Administration.

As the managing director of two participating securities SBICs,

my goal today is help the Committee understand why SBA’s proposal will not work and why we believe that NASBIC’s proposal

will work for all stakeholders in the program.

The Participating Securities Program is critical to the continued

success of the SBIC program. Participating Securities investments

currently represent 55 percent of all SBIC investments. Participating Securities investments have totaled $7.5 billion since the

start of the program 10 years ago. 26 of 36, or 72 percent of all new

SBIC licenses issued by SBA in fiscal 2003 were Participating Securities SBICs.

NASBIC supports SBA’s proposed $4 billion in Participating Securities leverage for fiscal year 2005. However, NASBIC strongly

opposes the restructuring proposed by the Administration. The proposal would not work for the talented management teams and

knowledgeable investors we want to have in the program. I cannot

stress that enough.

The current structure has worked because there is the potential

for substantially enhanced returns to private investors investing in

Participating Securities funds, but only if the SBIC performs above

an annual 12 percent level of profitability.

That potential for enhanced returns is required to offset the

many program negatives. Not the least of these are upfront fees

and preferred returns for SBA, capital impairment and restricted

operations regulations, SBA’s liquidation preference, and the very

real fact that private investors fare substantially worse than they

would in a non-SBIC if profitability falls below 12 percent.

SBA’s proposal would destroy the balance of the current program

by increasing the negative elements and substantially reducing the

positive elements.

SBA’s proposal will not work for knowledgeable investors. In fact,

even the existing program structure is too complex and too risky

for most sophisticated institutional investors, particularly those

with fiduciary responsibilities. As an example, the Maine State Retirement System gave strong consideration of a substantial investment in our first SBIC 10 years ago. Their review of the investment—and the Maine State Retirement System had never made a

venture capital investment in the past—it had passed review of

their Investment Committee and their Board and their Fund Adviser in Chicago. It actually got approved formally. But when the

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manager of the retirement system looked into the regulations, he

went back to the board and said this is too complex. This is already

a risky business. Adding in the complexity and the risks of the program, I think we should not go forward with our investment.

In contrast, NASBIC’s proposal is simplicity itself. Investors, private investors, and SBA would share SBIC profits and losses on a

pro rata basis. Based on the 20-year venture capital industry return statistics and average Treasury rates, adoption of our proposal

would see the subsidy rate fall to zero. In fact, all data available

indicates that the Government would actually make money as a

long-term participant in the program.

Our proposal would eliminate all of the negative elements that

most institutional investors object to in the current structure and

attract additional capital sources to the program.

In conclusion, structured as we propose, the Participating Securities Program would accomplished the mission at no cost and likely

a gain to the Government, would accomplish the mission without

distorting the operations of the private capital markets, would attract the largest possible percentage of knowledgeable private investors and quality fund managers, and would stimulate investment in U.S. small businesses to the greatest possible extent during times of scarce capital

I just want to give one example of how SBICs provide capital to

companies, particularly during a recession. There is a company in

Maine named the Diamond Phoenix Corporation. It is in Lewiston,

Maine. Diamond Phoenix is a world-class provider of warehouse

automation systems.

In fact, I do not know if you remember a company called

Webvan. This was one of the biggest dotcom companies back in the

late 1990s. It raised $1 billion to build warehouses around the

country to deliver groceries that are ordered online, and it failed.

Webvan searched the world markets for systems that would

automate their warehouses and chose Diamond Phoenix Corporation of Lewiston, Maine. They actually also invested in the company so that Diamond Phoenix would not sell its technology to

competing companies.

Obviously, Webvan did not survive and as the recession came on,

capital equipment orders across the country declined substantially.

So this company, which had world-class technology, began to suffer.

The management team did everything they could to keep the

company going. They took cuts in their salaries, they mortgaged

their homes, put money into the company. They got out themselves

into the marketplace and did selling. They did all of the right

things.

But the other element that allowed the company to survive, and

I am proud to say it is back and profitable again as the economy

is beginning to recover, is the fact that an SBIC, its only investor,

was there and willing to step in and support them financially. That

company could not get financing from the normal venture capital

community and they are there today because of this program.

So in closing, I would like to reiterate how important the Participating Securities Program is in providing capital to so many of this

country’s small businesses, many of them in underserved markets

like Lewiston, Maine.

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I urge you to continue to support the Participating Securities

Program and to consider NASBIC’s proposal to make the program

better for all its from stakeholders.

Thank you, Senator.

[The prepared statement of Mr. Coit follows:]

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Senator PRYOR. Thank you.

Ms. Mathews, we have a vote and the Chair is going to be back

any moment. But I better leave and go vote, or I am going to miss

the boat.

So why do we not take about a 3-minute recess or something like

that. I know that Senator Snowe will be right back. She is on her

way back right now, but I better race over there and vote or I am

going to miss it.

There she is. Perfect.

You are recognized, Ms. Mathews.

Chair SNOWE. [Presiding.] Proceed, please.

STATEMENT OF MARY MATHEWS, FORMER BOARD CHAIR,

ASSOCIATION FOR ENTERPRISE OPPORTUNITY

Ms. MATHEWS. Thank you, Senator Snowe. Just in time.

I want to thank you for this opportunity to appear before you

this morning to talk about the proposed termination of the SBA

Microloan program and PRIME in the President’s 2005 budget.

I am here today representing the Association for Enterprise Opportunity. I am also President of the Northeast Entrepreneur Fund

in Virginia, Minnesota. The Entrepreneur Fund is a rural microenterprise and small business development organization. We provide training, technical assistance, and financing to emerging and

existing businesses in 11 counties in northeastern Minnesota and

northwestern Wisconsin. We have been an SBA Microloan program

participant since 1992. We do grass roots entrepreneur development in rural communities.

As you know, the President’s 2005 budget terminates the

Microloan program and zero funds PRIME. The SBA contends that

the program is too expensive and that banks will use the 7(a) Express, Community Express and low doc guarantee programs to

make the kinds of loans that we make now. We strongly disagree

that these programs are capable of serving our Microloan borrowers.

The Microloan program was created in 1992 to help small business owners in need of small amounts of capital that are not yet

bankable. The program is today the single largest funding source

for microenterprise development organizations across the country

and it funds about 185 organizations.

Intermediaries since 1992 have made over 19,000 loans totaling

$213 million. Last year was a record year. We made over 2,400

loans, 2,442, as Secretary Barreto attested to earlier, totaling nearly $30 million. The program exceeded the goals that the SBA set

for it in 2003. The goals were $28 million in new loans.

Our organization’s average loan size is $9,000, considerably less

than the 7(a) average of $167,000 which does not get quite to

Microloans.

There two key issues that I would like to address. One is that

we evaluated our portfolio. Senator Pryor asked Secretary Barreto

about how deep the current SBA Express programs are reaching.

So I am going to talk to you about our portfolio as compared to the

lending criteria for Community Express, Express and low doc programs. Here is what we found.

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First, 85 percent of the loans in our portfolio do not meet the

minimum guidelines for equity injection. Two-thirds of our loans

would not meet the minimum commercial lending institutions’

creditworthiness guideline. Many of these customers show recent

bankruptcy activity or judgments. The average credit score for our

borrowers in 2003 was 561.

Over half of the loans in our portfolio the entrepreneur had no

experience in the business they started and even more lacked the

ability to manage a business in general.

The SBA’s premise for terminating the Microloan program is that

banks will use guarantee programs to make these loans. I would

ask any banker in this room if they are interested in making loans

to the people that I just described. Their answer would be no.

So what does that mean? The Secretary talked about programs

that show real results and real measurable results. Our portfolio

today, at 30 days our Microloan portfolio has a 2 percent delinquency rate. We have historically charged off 10 percent of our

loans. In the loans we have made since 1997, 94 percent of those

businesses are still in business and still operating. This is grass

roots business development. These are real measurable results.

The SBA has contended that the program is inefficient and costly. A 97 cents per dollar loan number is used. The context for those

numbers has not been presented.

This is an expensive program. Bankers say, and our experience

confirms, that is costs as much to make a small loan as it does a

large loan. If it was able to be done by banks, banks would be

doing it. But they will not, because the transaction cost for a small

loan is too expensive, in addition to the loans being high risk.

In closing, we would ask that the Committee support in the 2005 budget $15 million for PRIME, $30 million for loans to Microloan

intermediaries, and $25 million for Microloan technical assistance.

Banks using SBA loan guarantees will not fill the gap that we are

filling as organizations. The demand is currently outpacing supply.

AEO and the intermediaries have worked with the SBA for program improvements. We know that there are more program modifications that could be made and we are willing to work with the

SBA to do that and would like to have opportunity. We ask you to

fund these programs, not terminate them, because terminating

them closes the door on economic opportunity to businesses that

will not be served by any other source.

Thank you, Senator.

[The prepared statement of Ms. Mathews follows:]

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Chair SNOWE. Thank you, Ms. Mathews.

Ms. Golden, welcome.

STATEMENT OF ELLEN GOLDEN, ASSOCIATION OF WOMEN’S

BUSINESS CENTERS

Ms. GOLDEN. Senator Snowe, I would like to thank you, Senator

Kerry, and the members of the Committee for giving me the opportunity to participate in today’s hearing.

I am Ellen Golden, Senior Development Officer for Coastal Enterprises, Incorporated in Wiscasset, Maine, and I am also here

representing the Association of Women’s Business Centers.

The Association of Women’s Business Centers is a national nonprofit organization that represents Women’s Business Centers and

women business owners across the country. Coastal Enterprises is

a private non-profit community development corporation and a

community development finance institution which provides financing and technical assistance in the development of small businesses, social services, and affordable housing.

CEI has been a Women’s Business Center since 1995 and we are

currently funded under the sustainability pilot.

The Women’s Business Center program was created in 1988. It

is a leveraged Federal investment in women’s economic development that has enjoyed consistent widespread bipartisan support

from Congress, and we certainly thank you, Senator Snowe, and

the other members of the Committee for your consistent support for

this program.

The 89 centers serve a range of women, minorities, low income

women, women with disabilities, and veterans, as well as businesses at all stages of development, in all sectors and at a range

of sizes. The program has grown from a demonstration with 3-year

funding to a permanent program with an initial 5-year funding

cycle. In 1999, with the overwhelming support of Congress, the program incorporated a sustainability pilot program that allows centers to apply on a competitive basis for an additional 5 years of

funding.

In their brief history, the Women’s Business Centers have become a key SBA resource partner. Their importance is recognized

in the President’s budget request where the Women’s Business

Centers are acknowledged as a component of the SBA’s primary infrastructure, as highly effective, and as having a well developed infrastructure.

There are three points, however, I would like to make about the

President’s budget. The first has to do with the requested level of

funding. The President requests $12 million, which is less than we

received last year and it is simply not enough. The Association is

asking that funds be appropriated at a level consistent with the

current authorization, which is $14.5 million. This is what we need

in order to meet the current commitments of the program and also

to support the addition of new centers in areas that are currently

not served by the program.

The program has been flat funded at $12.5 million for the past

3 years. In reality, flat funding means a reduction in funding. In

addition to the effect of inflation and the increasing cost of operations, the sustainability centers lost between 12 and 19 percent of

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their funding last year, because there simply was not enough

money to go around.

In fiscal 2005, under the current funding model, with an appropriation of $12 million, the grants to the sustainability centers

would be cut in half. I think you can easily imagine what the impact on the program would be.

My second point addresses the goals of the Agency for the program. First, as noted, many centers have already had their funding

reduced. Their resources are stretched to the point of breaking and,

as I already said, $12 million does not cover current needs. Nonetheless, the centers are being expected to increase the number of

women served by 18 percent to an unprecedented 130,000 women.

Secondly, the goals that have been developed for the Women’s

Business Centers have been developed without any discussion with

either the Association or the centers themselves. There has been no

attempt to determine whether or not they are realistic or achievable.

For example, in the President’s request the Women’s Business

Centers are being asked to train SBA personnel on doing business

in Native American communities, to implement and evaluate pilot

technical assistance programs for Native American communities, to

generate articles for the online women’s business center, and to

host the online women’s business message board, which would be

available 24/7. All of this with less money and increased levels of

service.

Thirdly, we think it is unrealistic to imagine that the Women’s

Business Centers and the other key resource partners will absorb

the additional demand resulting from the elimination and reduction of other SBA programs such as the Microloan technical assistance grants and PRIME. These programs serve different markets.

Moreover, the current demand for Women’s Business Center

services is already so high that clients at our center in Maine have

to wait from 3 to 6 weeks in order to get services. The Women’s

Business Centers can simply not fill the gap left by the elimination

or reduction of other programs.

The Women’s Business Centers are as eager as other resource

partners to contribute to the SBA’s overall goals and to bring these

essential services to existing and emerging entrepreneurs across

America, but we need to be involved in the process of setting those

goals and making sure that they are realistic and doable.

My third point addresses the issue of sustainability. As you well

know, the SBA’s currently operating under temporary reauthorization which expires on March 15th. Without reauthorization, the

sustainability pilot will expire. Although there are some differences

between them, both the Senate and the House reauthorization bills

contain provisions for renewal grants beyond the initial funding period of what we have been calling sustainability.

We are deeply concerned that sustainability or renewal grants

have not been taken into account in the President’s budget request.

There are currently 33 centers in the sustainability pilot and at

least another 20 will be eligible to apply this year. Together, these

two groups account for nearly two-thirds of the currently funded

Women’s Business Centers. These are the more experienced centers

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that have demonstrated their ability to meet the program’s goal

and to deliver quality services.

These are the well developed infrastructure referenced in the

President’s budget. These are the very programs that the SBA is

relying on to achieve its ambitious goals and yet there is no mention made of a commitment to fund them.

The Women’s Business Centers are a well developed and highly

effective infrastructure. But if we pursue a strategy of inadequate

funding, unrealistic goals, and an unwillingness to invest in existing capacity we will quickly undermine the effectiveness of this important resource. Thank you.

[The prepared statement of Ms. Golden follows:]

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Chair SNOWE. Thank you, Ms. Golden.

I will start with you on the question regarding the funding. Obviously, it is a decrease from last year and it is flat funding over the

last 5 years, so obviously, it does represent a hardship.

What appropriation do you think would be sufficient?

Ms. GOLDEN. If we want to increase the size of the program, and

I know that this is a concern that has been brought before this

Committee in the past, and I know that there are parts of the

country that are not currently served by Women’s Business Centers, if we want to maintain current capacity as well as increasing

it, then the $14.5 million, which is the current authorized amount,

would cover all of that.

Chair SNOWE. And you feel in the Administration’s request on

sustainability centers, that is one of the crucial issues that is overlooked, obviously. And adding new ones and not obviously providing a sufficient amount for those that exist.

Ms. GOLDEN. I think you will recall that at the roundtable on entrepreneurial development programs that you held last spring, the

SBA at that particular hearing offered testimony that indicated

that they had a clear preference for opening new centers over funding the current sustainability centers.

As I said earlier, and I made the point last spring, those are the

heart of the program. Those are the centers that have demonstrated their capacity to deliver the programs effectively and efficiently. So it does not make sense to us to cut those programs out.

Chair SNOWE. There should be some kind of balance, obviously,

we need to create in this whole program. Insufficient funding it

makes it even harder. But for those who have existed and have a

proven track record, it clearly make sense to ensure that they are

supported.

So we will have to look at that particular issue, in addition to

the other issues concerning the technical assistance that are going

to be part of your program is the Native American program. I know

that you have commented on that as well.

Ms. GOLDEN. It is not that we would be opposed to taking on responsibility for additional tasks or activities, but we would like to

be compensated for it. I think the point is that at the current level

of funding we cannot assume additional responsibilities.

Chair SNOWE. Ms. Mathews, you heard the Administrator respond to Senator Pryor’s comments regarding the Microloan program. Could you address those, in terms of how you think it would

not work with respect to zeroing out the amount and having the

other programs compensate for it? Are you saying essentially that

the loans are too small, take too much time, obviously greater cost

would be required in order to process those type of loans?

Ms. MATHEWS. Yes.

Chair SNOWE. All of the above?

Ms. MATHEWS. All of the above.

Chair SNOWE. And the other programs would not be adequate to

compensate, because they are too small and take too much time?

Ms. MATHEWS. There is the question of credit quality. A bank

does not do a 561 credit score loan. They do not do that level of

loans. But yet we are producing strong growing businesses from

these targeted customers.

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The loans are small. The SBA Express Program in Minnesota in 2003 made six loans under $10,000. This year to date it has made

one loan under $10,000. So they are making $10,000 to $35,000

loans.

Our average loan size last year was $9,000. We made a number of loans at the $1,000 level. Those loans will not be made because

of credit quality and borrower capacity, because of the size, and because banks do not have the capacity or the resources to provide

any kind of technical assistance to be tied to the loan.

Chair SNOWE. And every dollar spent, do you agree with that calculation by the SBA with respect to every dollar spent costs 97

cents to process the Microloan?

Ms. MATHEWS. I do not know the context in which that number

is created. I suspect that that number also includes the cost of

training and technical assistance as part of the Microloan program.

The major cost of the Microloan program is actually the entrepreneur development process, yet it is included in the SBA’s credit

budget. So we are not sure what is included in the number. There

is no other loan program in the SBA that has all of the associated

costs for technical assistance loaded in to the cost of the loan. So

there is great comparison of apples and oranges.

I have another example of how numbers are used out of context.

In our region, for example, the small business development center

serves 800 people a year. We serve 800 people a year. In reports,

they are given credit for serving 800 clients. We made 29 loans. So

their 800 clients are compared to our 29 loans. There is no comparison of the work that we have done in the process to determine

efficiency and effectiveness.

So there is a number of ways in which the calculation does not

tell the whole story.

Chair SNOWE. I appreciate that.

Mr. Coit, I understand my staff tells me you mentioned Diamond

Phoenix and my home town area, as a successful SBIC investment.

As you know, I know you testified on your issue and I wish I had

heard your testimony as well, about the restructuring proposed by

the SBA. I would like to have you comment on that.

What concerns specifically do you have with the SBA’s SBIC proposal? Do you think it is unrealistic, the fact that obviously they

would restructure with providing the SBA a higher percent of the

profits?

I have had a chart made to compare the proposal of your association to that of the SBA and there are some fundamental differences

in terms of what currently is allowed and compared to what the

SBA is proposing.

What concerns do you have specifically and primarily? And secondly, your proposal, why do you think it would be preferable?

Keeping in mind the interest of the taxpayers, as well, because we

have public accountability with respect to these issues. And obviously, it is a riskier proposition.

And so therefore, I would be interested in your comments as to

why you think your proposal, the association’s proposal, would be

better, the National Association of Small Business Investment

Companies.

Mr. COIT. Thank you.

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We actually, before putting this proposal forward, spent a lot of

time with our industry, both the managers and members of

NASBIC to understand their preferences for this. But very importantly, also spent time with the institutional investor community,

including a group called the Small Business Investment Alliance

which represents some of the major banks that support the program, to make sure that whatever we proposed worked for them.

Of course, it has to work for the taxpayer and it has to work for

the small business community, as well.

Obviously, the taxpayer has a difficult time in the program over

the last 3 years. Anybody in venture capital has had a very difficult

time. Until 3 years ago, the industry as a whole never actually lost

money in any single year and it has now had 3 years in a row

where there have been substantial losses. So the Participating Securities Program, which started 10 years ago and grew substantially during the late 1990s, was unfortunately and uniquely positioned to participate in the very significant decline in our industry.

One of the things we did do was to try to understand the taxpayer’s position if the program had been structured the way we are

proposing over the last 10 years. The actual losses to the taxpayer,

we understand SBA has also looked at these numbers—would have

been substantially less, maybe even zero. So we think our proposal

actually protects the taxpayer by increasing their profit share in

the program without really diminishing the risk all that much. We

think the trade-off for the taxpayer is actually substantially better.

For small businesses, what this is going to do is to actually attract more institutional investor capital and sophisticated capital to

the program. As I said, the SBIA group has endorsed this approach.

I did talk while you were out about the Maine State Retirement

System, which we approached for our first—actually for both of the

two SBICs we formed. In the first instance they had actually approved an investment in our SBIC. They had gone to Ennis Knupp,

which is their advisor in Chicago. And they had approved it, in

terms of our quality as an investor.

Then the director of the Maine State Retirement System took the

next step, which was actually to look at what the SBIC regulations

were about, and then went back to the board and said we should

not do this as a fiduciary.

The point is that by restructuring the program and making it

more simple, more money both from the banking community which

has traditionally supported the industry, but also particularly from

public pension funds which have a regional interest in making investments in local venture capital funds, that this would open up

substantial amounts of additional and sophisticated capital to the

program.

That sophisticated capital will also be a screen for more sophisticated managers. So the quality of the program from the point of

view of the institutional investor supporting the program and the

managers who will be attracted to the program will be improved.

If the taxpayer is going to have a higher percentage of profits, the

taxpayer should also do better.

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For the small businesses, this just means there is going to be

more money in the program. It is going to be more competitive. It

will lower the cost and create more availability to small businesses.

Chair SNOWE. I appreciate it and obviously this is an issue that

we will have to explore, the Association’s proposal as well as the

Administration’s. Obviously, we do not want to make it less attractive to investors or make it unfeasible.

At the same time, I realize the last 3 years hopefully were an exception to the rule and not the norm, which has obviously contributed to the problems of the SBIC and venture capital in general.

Mr. Wilkinson, I know Senator Pryor wants to ask a question,

but just on the 7(a), as I said earlier, I do plan to convene a roundtable to have a more in-depth discussion of the fundamental

changes to the program and making it zero subsidy rate and changing the guarantees, prohibiting the piggybacks and so on. So I am

certainly going to want to have your input.

What is your greatest concern about this approach?

Mr. WILKINSON. Well, the greatest concern today is the number

of borrowers who had their applications in on time and had the rug

pulled out from underneath them. We have got three applicants sitting in the audience today who testified yesterday on the House

side about the financial damage their small businesses have incurred.

This is a problem that the SBA can resolve today. The applications were in on time and they can process them if they so chose

to.

By not doing so, they are, for whatever reason, making these applicants pay a punitive price. And it is just, in our opinion, a meanspirited attempt by the SBA to reduce loan volume. These applications and the others like them across the country should not be

ones paying the price for the way the funding situation was managed.

Chair SNOWE. I would agree with that. I think it does breach a

trust——

Mr. WILKINSON. It does.

Chair SNOWE. In the agency and in the program itself.

Mr. WILKINSON. And circumvented the 15-day notice requirement

in the Small Business Act.

Chair SNOWE. I agree, on three different occasions, I mentioned

earlier. But the fact is people obviously applied based on the rules

and the law.

Mr. WILKINSON. Correct.

Chair SNOWE. So I regret that and we will continue to work with

the Agency on this particular issue. There is no reason to keep in

place a cap at this point.

Mr. WILKINSON. Thank you.

Chair SNOWE. I can assure you that we will continue to work on

that matter, because I agree with you totally. I just think it is a

huge problem for anybody who anticipated irrespective and—as I

recall we had the roundtable here and it was you who expressed

the thought that we need to have a much higher level of authorization, irrespective of the previous year. Every year it is going to get

larger. The demand is going to be greater, irrespective of the fact

that is includes the STAR loans or whatever.

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All of the testimony submitted to this Committee, other than the

SBA’s, was the fact that it would be a much higher level than requested by the Agency. That is what is so regrettable about it.

Mr. WILKINSON. The agency’s 2004 budget request made the assumption that small business loan demand was going to go away

simply because a program expired and that simply was not the

case, is not the case, and there is substantial demand from the

small business sector looking for long-term capital and that is what

the SBA should be providing.

Chair SNOWE. So what you are telling me is that first and foremost we should rectify the problem with respect to this cap so that

those who have submitted their applications can be helped.

Mr. WILKINSON. Absolutely. They have not been treated fairly or

equitably. It is embarrassing.

Chair SNOWE. Senator Pryor.

Senator PRYOR. Thank you.

This is a very experienced panel with a lot of background and

years of understanding how the SBA works and how it should work

and the things that are going right and going wrong at that Agency.

I would like to ask, if I may, at the risk of sounding like a public

opinion poll, I would like to ask each of you if you think the trends

and the developments at the SBA today, in your opinion if the SBA

is going in the right direction or the wrong direction? And why?

I know that is kind of a vague question, but if you do not mind,

Mr. Wilkinson, I will let you start.

Mr. WILKINSON. I would be happy to start on that one. The actions taken in the 7(a) program, in my opinion, have been intended

to not only limit the background of the 7(a) program, but to shrink

it. It is our belief that there are those in the Office of Management

and Budget that do not believe that the Federal Government

should be in the credit program.

We disagreed. There is a sizable gap for long-term credit for

small business and that is exactly what this program does. This

program is not broken. It does not need to be overhauled. It just

needs to be supported. And the direction that we are going, I do

not believe, is the correct one.

Senator PRYOR. Mr. Coit.

Mr. COIT. There are parts of the SBIC program that work very

well. The debenture program has been around for 45 years. It has

been well vetted. There have been changes made to it. More and

more the changes are minor. Our industry is very happy with the

way it is operated by SBA. The debenture program is working. It

is not broken.

The Participating Securities Program is broken and that is why

we have put forth our proposal.

I will say that I think the relationship with SBA is constructive.

This process, we will see where we come out in the end, but right

now we seem to have a good dialogue. So I do not think the relationship is broken, but the program is clearly structurally broken.

I do have one other concern and that has to do with cuts. There

is an important part of the process of oversight that SBA has and

that is the examination process. My understanding is that the SBA

is actually going to outsource the examination process.

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This was tried on an experimental basis I think 6 years ago and

it was a dismal failure. It actually created more costs. It was very

disruptive to the licensees. My understanding also is that the current examination function actually breaks even or makes a small

profit for SBA. In other words, the fees that are charged to licensees for the exam actually cover the cost to SBA.

So the idea of outsourcing this as a way to reduce SBA’s budget

is really not going to improve SBA’s bottom line, but it is going to

dramatically, I think, decrease SBA’s ability to do functionally accurate oversight and it is going to put a big burden on our industry.

Senator PRYOR. Ms. Mathews.

Ms. MATHEWS. Obviously, since the Administration is proposing

to terminate the largest single funding source for my organization

it is hard for me to think about that being a positive direction.

When you were out of the room, Senator, I described how we

reach deeper into the economy than what the SBA loan guarantee

programs do. There is nothing about the proposed changes that,

other than a reduction in paperwork, that are going to reach deeper into the market that we serve.

The SBA has made some remarkable improvements in the efficiency of the loan guarantee programs and their ability to serve

larger numbers. We have worked with the SBA over the years and

had some good results in creating efficiencies in the Microloan program, but there are many, many more efficiencies that could be

created.

Secretary Barreto made the comment that the economy has

changed in the last 12 years and that the environment has

changed. The Microloan program, in many respects, is still operating in the 12-year-old environment. We have a system of 185 organizations that do this kind of work. If we put our minds to it we

could create greater scale and we could create greater efficiencies.

Will it outpace the 7(a) program? No, because the 7(a) program

makes the case that capital is the primary issue. The Microloan

program makes the case that capital is only necessary once the

business owner is prepared. Capital is tied to entrepreneur training

and technical assistance. That is what makes the program successful. If you separate those two, if you separate entrepreneurial development from Microloans, the program will not be successful and

it will not have the kinds of results that intermediaries are providing today.

While it is not large, it was pretty important to 2,442 people in

the United States last year. It made a difference in their lives. And

that will not happen if those programs are gone.

Senator PRYOR. Ms. Golden.

Ms. GOLDEN. Thank you.

Obviously, the Women’s Business Centers are pleased to be included as part of the key infrastructure. But we have been disappointed with the levels of funding requested by this Administration for the past 3 years. As I mentioned earlier, just an additional $2.5 million would enable this program to be fully funded and allow it to be expanded

into areas that are currently not covered. It seems like a rather

modest amount, given the return to local communities and econoVerDate 03-FEB-2003 12:37 Jul 16, 2004 Jkt 092957 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 D:\DOCS\92957.TXT SSC1 PsN: SSC1
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mies in terms of new businesses created and jobs and income tax

revenue developed through the work of the Women’s Business Centers.

The apparent lack of support for sustainability, for those most

experienced centers with a proven track record, is something that

we think is a wrong direction. So again, that is a disappointment.

It feels like that is weakening rather than strengthening the program.

Then the last point is that the Association maintains fairly constant communication with the Office of Women’s Business Ownership and we do have a good relationship. But we find it very difficult that goals are imposed on us without our being asked whether or not they are realistic and doable.

We are happy to work with the SBA to see how the Women’s

Business Centers can help them achieve what they want, but we

want to be participants in that dialogue, and not be just have goals

handed to us, particularly without additional resources.

Senator PRYOR. I would like to thank all of you for your candor

on those answers. I think those were very insightful.

Mr. Wilkinson, a few moments ago the Administrator said the

Agency could not have predicted the loan volume to avoid shutting

down the lending to small businesses. I would like to hear your

thoughts on that. Could they have predicted that?

Mr. WILKINSON. Yes, Senator, the testimony that we gave last year in February we anticipated a loan demand this year of $12.5

billion. If you go to SBA’s very own website, they will tell you that

in fiscal year 2003 they did $11.3 billion and they had a loan cap

of $500,000 in place for the first 5 months. So obviously, loan volume would have been higher than the $11.3 billion.

In addition, the last several months of fiscal year 2003, loan vol- ume was approximating $1 billion a month. October we did $1 billion for the month. November, we did $1 billion a month. So they

had known for quite some time what loan volume was trending.

Senator PRYOR. That is my impression as well.

Ms. Mathews, let me ask you about rural economic development

which is something that is near and dear to my heart since I come

from a rural State. It is very, very important to my State. My

sense, my impression, having talked to a lot of business owners

around the State, is that the SBA programs, especially the

Microloan program, is really an important element in strengthening rural America’s economy. Would you agree with that? And

what is your experience in helping businesses out in rural America?

Ms. MATHEWS. Thank you, Senator.

90 percent of the SBA Microloans in Minnesota are done in rural

Minnesota. They are not done in urban Minnesota. In the region

that I live nearly 20 percent of the workforce is engaged either in

self-employment or works in a business with four or fewer employees. Those are micro businesses. That is a huge percentage. In

some of the counties in which we serve, the percentage is as high

as 30 percent.

The services that we provide are critical to help people create a

job wherever they want to live. And there are all kinds of businesses. It is everything from hairdressers and auto repair to—we

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are working on a project with our community colleges to help train

technology workers and build technology businesses in rural Minnesota, jobs where people want to live and are living. This is where

it is going to happen.

Senator PRYOR. That is, at least in my view, one of the purposes

of the SBA is to reach out in rural communities because, as you

well know given your background and experience, in many, many

instances these rural communities do not have access to capital.

Maybe they could go to the bigger cities and go to the larger banks

and try to get loans, but it is not a very appealing environment for

a lot of these banks. They do not want to go out in the rural parts

of various States to try to loan that money.

So my sense is the SBA plays a very, very important role in

keeping the economies going across rural America.

I do not want to talk too much about the Microloan program, I

focused on that with the Administrator, but I know that one of the

great benefits of that that we have already touched on is the

Microloan program helps folks in rural America. It helps women,

minorities, it helps first-time businesspeople. It just seems to me

that it is a program that if done correctly can be a very, very smart

use of tax dollars to get out there and target weaker sectors of our

economy and strengthen those sectors with hopefully using good

business practices and being able to get a big return on taxpayer

investment out there in these communities.

One thing I was going to ask you, Ms. Mathews, is that it seems

to me unfair to compare the 7(a)’s Express program to the

Microloan and Microloan technical assistance program when this

Administration really has not funded the Microloan and Microloan

assistance programs like it should have. And then to try to compare those. That seems inherently unfair to me. Do you have any

comments on that?

Ms. MATHEWS. Like the Women’s Business Centers, the SBA

Microloan program has been either flat-funded or has seen decreased funding over the last few years. It is spread in each year

among more and more programs. So our funding has declined, yet

the numbers of Microloans has actually increased. So there is

greater efficiency every year.

It will take more money to improve and to build the program.

Senator PRYOR. One last thing, I was out during your testimony,

but I believe you gave a statistic about the average Microloan?

Ms. MATHEWS. Our average Microloan, across the Microloan program it is about $11,000. Our organization’s is about $9,000.

Senator PRYOR. And I know Mr. Barreto a few moments ago said

that the SBA Express average, I believe he said $47,000. He was

citing a lot of statistics and every time we would ask questions he

would always bombard us with statistics. But it seemed to me that

we need to differentiate these programs and the purposes of these

programs. Not all small loans are the same. There is a differentiation within that definition of a small loan.

Madame Chair, that is all I have right now.

Chair SNOWE. Thank you, Senator Pryor, and I appreciate all the

panel’s work and testimony. Obviously, we are going to be following

up with each and every one of you.

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Before I adjourn, just one general question. In all the proposals

in the respective areas in which you have testified here today, what

would you support, if anything, do you support? Is there anything?

I am turning it around, I know.

Mr. WILKINSON. I will start here. We have not seen a proposal.

We were not consulted about putting a proposal together.

Chair SNOWE. We have not either.

Mr. WILKINSON. So I do not even know what I would be commenting on.

Chair SNOWE. Except obviously we get the framework, but we

have seen the specifics of the 7(a) proposal.

Mr. WILKINSON. That is correct.

Chair SNOWE. I agree, that we have not.

Mr. Coit.

Mr. COIT. With respect to the Participating Securities Program,

we have our competing proposal, so we actually do not support the

Administration’s proposal.

Chair SNOWE. Ms. Mathews on the Microloan or PRIME.

Ms. MATHEWS. We do not support the proposals to terminate the

Microloan program. We are actually very concerned about what

happens to those existing borrowers and that existing portfolio. The

PRIME program is targeted at very low income individuals, so it

too has a specific focus and is zero funded. So we do not support

the proposal.

Chair SNOWE. Ms. Golden.

Ms. GOLDEN. I do support the Administration’s endorsement of

the Women’s Business Center program as a key component of the

SBA’s primary infrastructure, but we do not support the way that

they are proposing to support us.

Chair SNOWE. And merging technical assistance into the program, as well? That is something I gather they did not work with

you on?

Ms. GOLDEN. No, they never consulted us with that and I think

that it is an unrealistic expectation. There is a finite resource. As

I said, the Women’s Business Centers are already swamped in

terms of demand for services. If you were to expect us to take on

these additional responsibilities, it would simply displace current

customers. It does not really add any capacity.

In terms of expecting us to take on the Microloan technical assistance grant, I think it is unrealistic, because the programs have

two very different purposes. The charge, the responsibility for the

Women’s Business Center program is much broader. The majority

of our clients are not coming to us because they want help with access to capital. They are coming because they have management

issues. There is a whole range of things they needed. They are

looking for help around e-commerce or how to use the Internet, or

any one of a number of things that do not really relate to the purposes of the technical assistance component of the Microloan program.

The same would be true for PRIME which, as you know, is targeted to extremely low income individuals. It is also not targeted

specifically to women, nor is the Microloan program.

While the Women’s Business Centers do work with low income

individuals, that is not our sole responsibility. We are charged with

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working with a range of women business owners. So again, it is not

really a good fit.

I know that there are other programs that are also slated for

elimination or reduction and again I do not think it is necessarily

realistic to expect us to take on responsibility for those, as well.

Chair SNOWE. And you have identified that the level of assistance that Women’s Business Centers would be required to provide

would be 18 percent without the commensurate support or funding?

Ms. GOLDEN. Right, we served 106,000 women this past year in

2003. The goal for 2005 is 130,000 with a reduction of funding. It

is unclear to me how they expect us to be able to do that. I think

we have already demonstrated increased efficiency in our ability to

serve more and more women every year, but at some point there

is just a limit to that.

Chair SNOWE. I appreciate your testimony and your views representing your respective programs and constituencies and that

certainly will be helpful as we begin to shape and respond and explore and examine all of the programs and the programmatic

changes submitted to this Committee in the proposed budget for

the next fiscal year.

So I truly appreciate it and we will be following up with each of

you and other members of your organizations as we try to develop

a response. And obviously, it is going to be contingent upon getting

more specifics on these proposals as well.

But I really appreciate it and we are going to do everything we

can to ensure that the SBA and its resources are targeted efficiently and effectively to the people it is intended to serve. So I

truly appreciate your being here today.

The record for this hearing will remain open for an additional 2

weeks until noon on March 3rd. Certainly any written questions for

Administrator Barreto must be sent to the Committee by noon on

March 3rd and we will forward them to the Administrator at that

time with a request for response by April 1st.

So again I thank all of you for joining us here this morning and

for being so responsive.

With that, the hearing is adjourned

[Whereupon, at 12:00 p.m., the hearing was adjourned.]

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