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WHERE ARE WE NOW? EXAMINING THE POSTRECESSION SMALL BUSINESS LENDING 

ENVIRONMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

DECEMBER 5, 2013 

Small Business Committee Document Number 113–047 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Tom Rice .......................................................................................................... 1 

Hon. Judy Chu ......................................................................................................... 2 

WITNESSES 

Ann Marie Wiersch, Policy Analyst, Federal Reserve Bank of Cleveland, 

Cleveland, OH ...................................................................................................... 4 

Jeff Stibel, Chairman and CEO, Dun and Bradstreet Credibility Corp., 

Malibu, CA ............................................................................................................ 6 

Renaud Laplanche, CEO, Lending Club, San Francisco, CA ............................... 7 

Fred L. Green, III, President and CEO, S.C. Bankers Association, Columbia, 

SC .......................................................................................................................... 9 

John Farmakides, President/CEO, Lafayette FCU, Kensington, MD, testifying 

on behalf of the National Association of Federal Credit Unions ...................... 11 

APPENDIX 

Prepared Statements: 

Ann Marie Wiersch, Policy Analyst, Federal Reserve Bank of Cleveland, 

Cleveland, OH ............................................................................................... 27 

Jeff Stibel, Chairman and CEO, Dun and Bradstreet Credibility Corp., 

Malibu, CA .................................................................................................... 34 

Renaud Laplanche, CEO, Lending Club, San Francisco, CA ........................ 42 

Fred L. Green, III, President and CEO, S.C. Bankers Association, Columbia, SC ............................................................................................................ 45 

John Farmakides, President/CEO, Lafayette FCU, Kensington, MD, testifying on behalf of the National Association of Federal Credit Unions ..... 55 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

CUNA - Credit Union National Association ................................................... 67 

Lend Academy .................................................................................................. 72 

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(1) 

WHERE ARE WE NOW? EXAMINING THE POSTRECESSION SMALL BUSINESS LENDING 

ENVIRONMENT 

THURSDAY, DECEMBER 5, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND

CAPITAL ACCESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:02 a.m., in Room 

2360, Rayburn House Office Building, Hon. Tom Rice [chairman of 

the Subcommittee] presiding. 

Present: Representatives Rice, Chabot, Mulvaney, Schweikert, 

Chu, and Payne. 

Chairman RICE. Good morning. The hearing will come to order. 

Today we will examine the lending environment for small businesses. Since small businesses create over two-thirds of new jobs, 

we must make an effort to ensure capital is available for their 

growth. By comparing pre- and post-recession levels of traditional 

small business lending, and analyzing the factors affecting these 

levels, we can gain a better understanding of where we stand and 

narrow our focus on the policies that will spur economic growth 

and job creation. 

Recent data shows that banks are making more small loans in 

the past 2 years. Despite this improvement, loan levels are still 

below where they were before the recession. Economists, bankers, 

small business owners, and regulators point to different reasons to 

explain the postrecession drop in small business lending. Some suggest it is reduced demand by small borrowers, while others point 

to increasing regulatory scrutiny on banks. 

In reality, a confluence of forces has led to lower levels of lending. For instance, at the same time banks are being forced by regulators to require more from borrowers in the way of collateral and 

personal guarantees, home values, a huge source of collateral for 

borrowers, have dropped. And when the potential borrowers hear 

that it is hard to obtain bank financing, many do not seek it, thereby decreasing loan demand. 

We are fortunate to have with us a group of leaders within the 

small business financing space, from experts that analyze lending 

to those that are on the front lines making the loans. We will also 

hear from a business that offers a new source of financing that is 

becoming part of the lending environment. I look forward to learnSBREP-219 with DISTILLER

2 

ing firsthand what today’s witnesses see as the factors shaping the 

lending landscape. 

With that, I would like to thank our distinguished panel of witnesses for being here today, and I now recognize the ranking member for her opening statement. 

Ms. CHU. Good morning. 

Today’s hearing will examine the current state of lending to 

small businesses. Although in the last 2 years the lending environment has slightly improved, bank loans to small businesses remain 

below prerecession levels. Multiple factors and economic trends affect small business lending. And today we are going to receive testimony from experts and industry leaders on this very, very important matter. 

Evidence suggests that our Nation’s economy is slowly but surely 

on the mend; 7.8 million jobs have been created since the postcrisis 

low of 2010. The housing and auto industries, which were central 

to the downturn, have rebounded. The Federal Reserve’s monetary 

policy stance has remained conducive, providing market liquidity 

and supporting the resurgent stock market. The small business sector is also experiencing an uptick in hiring. 

Still, expansion expectations are below the norms seen during 

the previous economic downturns. For job growth to accelerate and 

to reach the pace that our economy needs, small businesses must 

become a bigger part of the equation. In every previous recession, 

it has been small, nimble firms that have led us back to prosperity 

by growing quickly and adding new workers. 

In order for these firms to play their traditional job-creating role, 

a number of factors must be in place. Perhaps the most important 

ingredient is the availability of capital. If, as the saying goes, small 

businesses are the economy’s backbone, then the flow of capital is 

the lifeblood. Since the great recession, the value of small business 

loans has remained at less than 80 percent of its pre recession 

level. The number of loans issued also dropped from over 25 million 

before the recess to just over 21 million in the second quarter this 

year. 

Although challenges remain, there has been progress. The 

Thompson Reuters/Pay Net Small Business Lending Index is well 

off its low, but remains below its highs. This indicates that firms 

are borrowing again, but are hesitant about the future. Fewer are 

also falling behind or defaulting on loans, suggesting they are in 

better shape to take on additional debt, and hopefully expand. 

Within this context, it is important to remember that lending 

through the Small Business Administration is always critical for 

entrepreneurs seeking affordable capital. However, during periods 

of economic sluggishness, when credit is tight elsewhere, the SBA’s 

role becomes more important. Last year, the agency made nearly 

$18 billion in 7(a) loans and made available another $5 billion in 

financing for projects under the 504 program. 

Unfortunately, while this represents a positive trend in the total 

dollars lent, the number of businesses receiving SBA loans has fallen dramatically. Compared to the agency’s high-water mark in 

2007 when over 110,000 small businesses received loans through 

this program, the total number helped has fallen by 51 percent, 

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3 

meaning that 56,000 fewer small businesses received loan assistance this year. 

And understanding what this trend means for entrepreneurs and 

what is driving it is of great concern to this Subcommittee. All of 

this is occurring against a regulatory backdrop that is changing. 

Dodd-Frank resulted in a vast array of new regulations on the financial sector and established several new government entities. 

These new powers are necessary to address the root causes of the 

financial crisis, overleverage and deceptive mortgages, to name a 

few. At the same time, we must be sure our Nation’s small banks 

and credit unions that were not the cause of the downturn are exempted. 

While regulations implemented under the act will change many 

facets of the financial industry, data indicates that the perceived 

regulatory burden has had no negative effect on small business 

lending. In fact, a consortium of the Nation’s most prolific small 

business lenders recently announced they made an additional $17 

billion in loans in the past 2 years. 

At today’s hearing, we will take the pulse of the small business 

lending environment and gain insight about how to expand small 

businesses’ financing options. And as we do so, it is important to 

remember that what makes sense for one entrepreneur might not 

work for another, and that there is a broad spectrum of capital options for small firms. Some businesses’ needs can be met with conventional loans, and for others a debt-based solution may not make 

sense at all. Equity investment might make a better fit. 

On that note, I would like to thank our witnesses for taking time 

to be here. Their views and experiences will be very valuable to the 

Subcommittee as we consider how best to meet small businesses’ 

capital needs. 

Thank you, and I yield back. 

Chairman RICE. Thank you, Ms. Chu. 

Your opening statements will be submitted for the record. If any 

Committee members have opening statements, theirs will be submitted for the record. I would like to take a moment to explain the 

timing lights to you. You have lights in front of you. They will start 

out as green. When they turn yellow, you have 1 minute. When 

they turn red, your time is up. But within reason, we will give you 

a certain amount of flexibility to finish your statements. 

Our first witness is Ann Marie Wiersch, policy analyst at the 

Federal Reserve Bank of Cleveland. Ms. Wiersch joined the bank 

in 1999, and worked in the accounting and financial management 

departments prior to her transition to a policy role in 2009. She 

has worked on several Federal Reserve System initiatives, including the projects focused on small business issues and State and 

local government finance. Ms. Wiersch holds an undergraduate degree in business administration from Bowling Green State University and an MBA from Cleveland State University. 

Ms. Wiersch, we look forward to your testimony. 

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STATEMENTS OF ANN MARIE WIERSCH, POLICY ANALYST, 

FEDERAL RESERVE BANK OF CLEVELAND, CLEVELAND, OH; 

JEFF STIBEL, CHAIRMAN AND CEO, DUN AND BRADSTREET 

CREDIBILITY CORP., MALIBU, CA; RENAUD LAPLANCHE, 

CEO, LENDING CLUB, SAN FRANCISCO, CA; FRED L. GREEN, 

III, PRESIDENT AND CEO, S.C. BANKERS ASSOCIATION, COLUMBIA, SC; AND JOHN FARMAKIDES, VICE PRESIDENT OF 

LEGISLATIVE AFFAIRS, NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS, ARLINGTON, VA 

STATEMENT OF ANN MARIE WIERSCH 

Ms. WIERSCH. Chairman Rice, Ranking Member Chu, and distinguished members of the Subcommittee, it is an honor to testify before you today on the state of small business lending. My statement 

will focus on the decline in lending to small businesses and the factors that are driving that decline. My remarks represent my own 

views and are not official views of the Federal Reserve Bank of 

Cleveland, or any other element of the Federal Reserve System. 

Recent industry and media reports provide a mix of perspectives 

on the state of small business lending. Contradictory messages 

abound and often result from inconsistent definitions of what constitutes a small business and from the absence of comprehensive 

and reliable data on small business lending. 

Banks and government agencies use a wide range of parameters 

to classify firms as small businesses. One frequently cited definition is so expansive that it includes more than 99 percent of businesses in the U.S. It should not come as a surprise then that we 

hear so many differing reports about small business conditions 

when firms of so many different sizes and industries are analyzed 

together. In addition, the considerable lack of data on small business lending and the variance in the size of firms and loans included leads to inconsistency in reporting among the data that are 

available. 

Nonetheless, we do know that bank lending to small businesses 

declined since the onset of the great recession. According to FDIC 

data, the current value of small loans outstanding is about 78 percent of its prerecession level in inflation-adjusted terms. Recent 

analysis by the Federal Reserve Bank of Cleveland concludes that 

there are a number of factors driving this trend. Fewer small businesses are interested in borrowing than in past years. And at the 

same time, small business financials and collateral values remain 

weak, depressing loan approval rates. Furthermore, increased scrutiny from regulators led some banks to boost their lending standards, resulting in a smaller fraction of creditworthy borrowers. 

Finally, shifts within the banking industry have reduced the 

number of banks focused on the small business sector. Small business lending has become relatively less profitable than other types 

of lending, dampening some bankers’ interest in this market. 

Small businesses were hit hard by the economic downturn, and 

weak earnings and sales mean that fewer businesses are looking 

to expand. Surveys show that since 2007, fewer businesses plan to 

seek credit, increase capital investment, and hire additional workers. 

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5 

Some of the subdued demand for loans may stem from perceptions that credit is not readily available. According to recent surveys, more business owners think that credit has become harder to 

get and will remain so. 

The supply of credit has also declined as lenders are approving 

fewer small business loan applications, with many firms lacking 

the cash flow, credit scores, and collateral that banks require. More 

lending is secured by collateral now than before the recession, and 

the decline in value of both commercial and residential properties 

has made it difficult for businesses to meet collateral requirements. 

At the same time, bankers have increased their credit standards, 

meaning that fewer small businesses qualify for loans than before 

the economic downturn. Banks tightened lending standards significantly during the recession, and while standards have eased somewhat in recent quarters, data show they remain stricter for small 

businesses than for large firms. 

Furthermore, there is evidence that heightened scrutiny by regulators factored into banks’ decisions to tighten standards. The research shows that elevated levels of supervisory stringency have a 

material impact on total loans and loan capacity. 

The decline in lending also reflects longer term trends. Banks 

have been exiting the small business loan market for over a decade, leading to a reduction in the share of small business loans in 

banks’ portfolios. The FDIC reports that the fraction of nonfarm, 

nonresidential loans of less than a million dollars has declined 

steadily since 1998, dropping from 51 to 29 percent. 

Consolidation of the banking industry has reduced the number of 

small banks, which are more likely to lend to small businesses. 

Moreover, increased competition in the banking sector has led some 

bankers to seek bigger, more profitable loans. The result has been 

a decline in small business loans, which are less profitable, because 

they are banker time intensive, are more difficult to automate and 

securitize, and have higher costs to underwrite and service. 

While the decline in small business credit since the great recession is evident, the causes of the decline are less clear. A careful 

analysis of various data sources suggests that a multitude of factors explain the reduction in credit. The supply and demand forces 

unleashed by the financial crisis added to longer term trends, as 

some banks had already been shifting away from the small business credit market. 

The confluence of factors makes it unlikely that small business 

credit will spontaneously increase any time soon. Given the contribution that small businesses make to employment and economic 

activity, policymakers may be inclined to intervene to promote 

greater access to credit for small business owners. When considering means of intervention, however it is important to be cognizant that multiple factors are affecting credit demand and supply. Any proposed solution should consider the combined effect of 

all the factors involved. 

This concludes my prepared remarks, and I look forward to your 

questions. 

Chairman RICE. Thank you, ma’am. 

Our next witness is Jeff Stibel, chairman, chief executive officer, 

and president of Dun & Bradstreet Credibility Corporation. Mr. 

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Stibel was previously president and CEO of Web.com, Inc., and currently sits on the boards of numerous private and public companies, as well as academic boards of Tufts University and Brown 

University. He is the author of academic and business articles, the 

book ‘‘Wired for Thought,’’ and is the named inventor of the U.S. 

patent for search engine interfaces. Additionally, he was the recipient of the Brain and Behavior Fellowship while studying for his 

Ph.D. at Brown University. 

Mr. Stibel, we look forward to your testimony. 

STATEMENT OF JEFF STIBEL 

Mr. STIBEL. Thank you, Chairman Rice, Ranking Member Chu, 

the Committee, and its wonderful staff for having me here today 

to discuss what I believe is one of the most important topics in regards to the economy today. 

As you mentioned, Chairman Rice, I am the CEO of Dun & Bradstreet Credibility Corp. We are one of the largest business credit 

monitoring companies in the United States. So I believe I have a 

unique perspective into the topic of small business lending. My 

written testimony is full of statistics that demonstrate in short that 

small businesses today are finally doing well again. Yet despite 

that fact, they are not adding jobs. 

The reason is because they need access to capital to grow their 

businesses, yet they are not able to secure sufficient loans. It is a 

small business paradox, one in which small businesses are growing 

revenues but not payroll, and that is hurting our economy and society as a whole. What we are seeing, in effect, is the smaller the 

business, the greater the revenue growth. And we are seeing this 

throughout this year. 

This is a good thing. It also means that the smaller the business, 

the greater the productivity as measured in terms of revenue output per employee. However, what we are not seeing is that the 

smaller businesses are adding jobs. And it is the jobs that really 

drive our economy forward in the long run. 

Rather than regurgitate these statistics, I would like to tell a 

story about a small business owner that I met only a few days ago. 

I believe his story, better than any statistics, will encapsulate the 

problems that we are facing. 

I met Mike Banfield on Monday of this week. He founded 

SpringStar in 1998 in Seattle, Washington, to offer organic pest 

control products. It was a huge success story almost right from the 

beginning. He grew revenues, he grew employees. He eventually 

got a bank loan, and that fueled his growth even further. Throughout the recession, Mike’s business actually thrived, and he continued to grow. 

However, as we have all seen, banks didn’t fare as well. So the 

bank ended up calling his loan. Despite the fact that this was an 

SBA-backed loan, Mike had to give a personal guarantee because 

that is still required. And when he pulled that loan, Mike’s successful business went under, and he almost went bankrupt himself, ruining his family. 

The good news is that Mike is an entrepreneur and he persevered and he ended up finding an alternative source of capital, 

SBREP-219 with DISTILLER

7 

rebuilt his business, was able to grow that business. And that business is now thriving today, with record revenues. 

However, he hasn’t added any jobs. To add jobs, he needs greater 

access to capital. The problem is that Mike has been trying for 

years and can’t get a bank loan. Now, he is just plain discouraged. 

He needs a loan, but no longer wants a loan. 

A little known fact in business is that jobs are added for future 

growth, not current demand. For current demand, people in business just work harder. Job growth is an investment, just like computers, equipment, tools, manufacturing. Investments require capital, but many companies like Mike’s aren’t willing or able to secure loans anymore. And the stats are, frankly, alarming. The 

smallest businesses have less access to capital, and the smallest 

business owners have less desire for that capital. 

We have a small business paradox, and there is an even greater 

need than there ever has before. This personally is a painful story 

to hear as a business person. A company poised for success that 

just needs access to capital. I suspect it is a painful story to hear 

for government. A company poised to impact the economy and society, but can’t unless it gets access to capital. 

But most of all, this is a painful story to hear for the unemployed. We have people who desire to contribute to society, who see 

a desperate need from a company, but a need and desire that cannot be fulfilled without access to capital. I believe that is why we 

are all here today. And working together, business, banks, and the 

government, we can all work to make a difference. So thank you. 

Chairman RICE. Thank you, Mr. Stibel. 

Our next witness is Renaud Laplanche, founder and CEO of 

Lending Club. Prior to starting Lending Club in 2006 Mr. 

Laplanche was the founder and CEO of TripleHop Technologies, an 

enterprise software company eventually acquired by Oracle. He 

was named the 2013 Ernst & Young entrepreneur of the year 

award winner for northern California and 2012 entrepreneur of the 

year at the BFM awards. Mr. Laplanche has a master’s of business 

administration from HEC and London Business School, and a J.D. 

from Montpelier University, and is a frequent guest lecturer at Columbia Business School. 

Mr. Laplanche, we look forward to your testimony. 

STATEMENT OF RENAUD LAPLANCHE 

Mr. LAPLANCHE. Thank you. Good morning. Thank you for having me. My name is Renaud Laplanche, and I am the founder and 

CEO of Lending Club, a credit platform that employs over 300 people in San Francisco and has facilitated over $2 billion in consumer 

loans this year, funded by both individual and institutional investors. And we will be launching a dedicated small business lending 

platform in the next quarter. 

My father was a small business owner. He owned a grocery store 

in a small town in France. And I spent every day of my teenage 

years, from 5 to 8 in the morning before class, helping him in the 

store. 

After having started two companies in New York and San Francisco, residing in the U.S. for over 14 years, and starting a family 

here, I recently passed my citizenship test and will soon be a U.S. 

SBREP-219 with DISTILLER

8 

citizen. Testifying before this Committee on the state of small business lending in America is a very special moment for me. 

Small businesses are not only a driving force in the U.S. economy, they are an essential part of the American dream. I believe 

it is our shared responsibility to ensure that these businesses and 

their owners have sufficient access to capital on fair terms. 

I have two points I hope to convey to you today. First, small businesses have insufficient access to credit, and the situation is not 

getting any better. Second, their credit performance as a group suggests that they should be getting more credit. 

A survey released by the Federal Reserve Bank of New York in 

August of this year was the latest to paint a grim picture of availability of credit to small businesses. Access to capital was reported 

as by far the biggest barrier to growth. Out of every 100 small 

businesses, 70 wanted financing. Of those 70, 29 were too discouraged to even apply. Of the 41 that did apply for credit, only 5 received the amount they wanted. Substantially, all of these businesses were looking for $1 million or less in capital. 

The situation has not gotten any better lately. While the overall 

volume of loans of more than a million dollars has risen slightly 

since 2008, loans of less than 1 million have fallen by 19 percent. 

The number of small businesses with a business loan fell by 33 percent from 2008 to 2011. 

The problem is worse for the smallest businesses. While businesses with 20-plus employees reported an increase in bank loans 

from 2009 to 2011, the majority of small businesses, which have 

fewer than 20 employees, reported a decline, with the smallest 

businesses suffering the steepest decline. Businesses with two to 

four employees reported a 46 percent reduction in bank loans over 

that same period. 

While traditional sources of capital have pulled back, alternatives are on the rise. Alternative lenders, such as online lenders 

and merchant cash advance providers, are the fastest growing segment of the SMB loan market, reporting a 64 percent growth in 

originations over the last 4 years. Many of these alternative lenders, however, charge fees and rates that result in annual percentage rates generally in excess of 40 percent. And without always full 

transparency, business owners don’t always understand the true 

cost of these loans. This lack of understanding can be very harmful 

to small businesses, which could find themselves in a spiral of inescapable debt service. 

Small business credit performance and loan performance, however, is doing just fine. Charge-off rates on small business loans 

have been below 1 percent since March 2012, down from a peak of 

nearly 3 percent in 2009. In contrast, charge-off rates on consumer 

credit cards peaked above 10 percent in the financial crisis. These 

figures show that absolute loan performance is not the main issue 

of declining SMB loan issuance. We believe a larger part of the 

issue lies in high underwriting costs and generally high operating 

costs for the lenders. 

SMBs are a very heterogeneous group, and therefore the underwriting and processing of these loans is not as cost efficient as underwriting consumers, a more homogenous group. Business loan 

underwriting requires an understanding of the business plan and 

SBREP-219 with DISTILLER

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financials and interviews with management that result in higher 

underwriting costs, which make smaller loans, under $1 million, 

and especially under $250,000, less attractive to lenders. By contrast, larger loans, going mostly to larger businesses, are more attractive, as they allow for underwriting costs to be amortized over 

a larger amount and longer loan period. 

We believe we have solutions to bring underwriting costs down 

and create the conditions for credit to become more available and 

more affordable to small businesses in America, and we would be 

honored to answer the Subcommittee questions in that regard. 

Chairman RICE. Thank you, Mr. Laplanche. 

Our next witness is Fred Green, III, president and CEO of the 

South Carolina Bankers Association, based in Columbia, South 

Carolina. Prior to his current position, Mr. Green served as president and COO of Sunovis Financial Corp, a five-State bank holding 

company, and before this as president, CEO, and chairman of the 

National Bank of South Carolina. Mr. Green also previously served 

on the board of the Fifth District Federal Reserve Bank, based in 

Richmond, Virginia, and on the Federal Advisory Council for both 

the Fifth and Sixth Districts. He received his B.S. and MBA from 

the University of South Carolina. Go Gamecocks. 

Mr. Green, we look forward to your testimony. 

STATEMENT OF FRED L. GREEN, III 

Mr. GREEN. Good morning. Chairman Rice, Ranking Member 

Chu, members of the Committee, my name is Fred Green. I am the 

president and CEO of the South Carolina Bankers Association. We 

are the professional trade association that has represented South 

Carolina banks for over 110 years. Our members are both large 

and small banks, and collectively they hold about 99 percent of the 

deposit market share in our State. I have been a banker for 34 

years, mostly in leadership roles in commercial banks, and for the 

last 2 years I have headed up our State association. 

This morning I am pleased to share the banking industry’s perspective on the state of the small business lending environment. 

You all know how important small business is to the national economy. Small businesses account for over half the jobs in the U.S., 

and as much as 65 percent of new jobs created over the last 15 

years. 

Banks are the primary lenders to small businesses, and their 

presence in local communities throughout our Nation is critical to 

meeting the unique needs of new and developing companies. There 

is a symbiotic relationship between the health of a community and 

the health of the banks that are located and operate there. This is 

why small business lending is an important part of every bank 

strategy and why banks today provide more than 21 million small 

business loans. 

Loan demand has improved since the recession. However, it remains at relatively weak levels, held back, I think, and we all 

think, by uncertainty about the future. Concerns over changes to 

taxes, employment costs, and regulation make small business owners less interested in expanding and incurring new debt to fund 

that expansion. Another point that reinforces the lower demand is 

the utilization of borrowings under existing committed lines is at 

SBREP-219 with DISTILLER

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a relatively low level at 50 percent. These are loans that have already been committed, the borrower can draw down to expand, but 

have only drawn up to 50 percent. 

Despite the low loan demand, banks continue to meet the needs 

of their customers. In every community, banks are actively lending 

and continually looking for lending opportunities. After declines in 

the loan portfolios since prerecession peaks, recent FDIC data 

shows that outstanding loans have been growing over the last 12 

months. 

Banks face challenges in providing loans to meet their customers’ 

needs with the most recent wave of regulations as well. The cumulative impact of hundreds of new or revised regulations may be a 

weight too great for many small banks to bear. Congress must be 

vigilant in its oversight in implementing the Dodd-Frank Act to ensure that rules are adopted only if they result in a benefit that 

clearly outweighs the burden. Some rules under Dodd-Frank, if 

done improperly, will literally drive some banks out of business. 

In South Carolina, we recognize this growing concern, and recently held a special conference of our top bank executives to address significantly stricter mortgage regulations and capital standards that will be implemented next year. Some community banks 

have already told us that they will have to stop offering certain 

products, like residential mortgages, because of the new lending 

regulations. 

For many, these community banks are the only option in their 

community, the only source of lending of this type in their community. In fact, community banks are the only physical banking presence in one-fifth of the counties in the United States. And more 

regulation means more resources devoted to regulatory compliance, 

and this means fewer resources can be dedicated to doing what 

banks do best, and that is meeting the credit needs of the local 

communities, the businesses, and the residents that are there. 

Banks are eager to serve the financing needs of small businesses. 

They understand that they play a critical role in their local economies, and no bank has or wants to stop pursuing small business 

lending. Yet small businesses remain hesitant to expand due to the 

economic uncertainty. This does not mean that banks are not making loans. Our economy is growing, although slowly, and banks are 

addressing the financing needs that exist today. 

Healthy, properly financed small businesses are absolutely critical to our communities’ economies. Banks understand their role in 

this and continue to make loans to every creditworthy borrower 

they can, despite an increasingly difficult lending environment. 

Thank you again for the opportunity to testify. 

Chairman RICE. Thank you, Mr. Green. 

I would now yield to Ms. Chu, who will introduce our final witness. 

Ms. CHU. I have the pleasure of introducing B. John Farmakides, 

president and CEO of Lafayette Federal Credit Union. Mr. 

Farmakides is the president and CEO of this credit union. He has 

been an active member of this particular credit union community 

since 1994 and was named president and CEO in 2007. Prior to 

that, he worked in investment banking, commercial real estate, and 

for the Federal Government. 

SBREP-219 with DISTILLER

11 

Currently, Mr. Farmakides holds positions on many professional 

boards and serves on the regulatory committee of the National Association of Federal Credit Unions. Mr. Farmakides received his 

BBA and MBA degrees from James Madison University and a law 

degree from the American University. 

Welcome, Mr. Farmakides. 

STATEMENT OF JOHN FARMAKIDES 

Mr. FARMAKIDES. Thank you. Good morning Chairman Rice, 

Ranking Member Chu, and members of the Subcommittee. My 

name is John Farmakides, and I am testifying today on behalf of 

the National Association of Federal Credit Unions. I serve as president and CEO of Lafayette Federal Credit Union, headquartered in 

Kensington, Maryland. 

NAFCU and the entire credit union community appreciate the 

opportunity to discuss the small business lending environment. 

Credit unions serve over 97 million people from all walks of life, 

and we are eager to provide our members the best lending opportunities, while helping to spur job creation. 

Despite regulatory and statutory obstacles to credit union business lending, a November 2013 survey of NAFCU members found 

that credit union member business lending is growing over the next 

12 months. On a scale that goes from negative 100 to positive 100, 

where zero indicates flat growth, the median growth expectation 

for credit unions was 35.6. 

Still, credit unions are hampered in their ability to help small 

businesses by an arbitrary and outdated member business lending 

cap that hasn’t been adjusted in over 15 years. Credit union member business lending is limited to 12.25 percent of total assets, with 

member business loans over $50,000 counting against the cap. This 

is counterproductive as the country continues to recover from the 

financial crisis. 

At Lafayette, we have seen increased demand from our members 

to access business lines of credit, to help meet day-to-day cash flow 

shortfalls, and manage the needs of their businesses. I have example after example of ways we have been able to help, such as a 

$125,000 line of credit we extended to a local bike rental and touring company to help manage the cyclical nature of their business. 

Unfortunately, any line of credit above the $50,000 threshold 

counts towards the cap, even if the funds are not actually extended. 

Consequently, Lafayette is forced to pick and choose which business loans will be funded even though all are creditworthy. Businesses often turn to us when they have denied lines of credit from 

other lenders. So if we can’t extend the line of credit, it is not likely 

to happen anywhere else. 

I am very proud of my staff and the level of expertise we have 

in member business lending. Just in the last year, we have been 

able to assist very small traditional companies, such as a specialty 

bakery with a single owner. At the same time, we have made loans 

to several consulting firms related to government contracting, in 

addition to a trucking delivery service, as well as an innovative 

solar energy appliance company. 

We urge members of the Subcommittee to help credit unions by 

supporting corrective legislation to modernize the cap, such as a biSBREP-219 with DISTILLER

12 

partisan bill introduced by Representative Ed Royce and Carolyn 

McCarthy, H.R. 688, along with the ideas to assist small businesses, such as adjusting the outdated definition of a member business loan from $50,000 to a new 21st century number of $250,000, 

indexed for inflation. 

The Small Business Administration loan programs also are an 

important resource that help credit unions provide capital. However, utilizing an SBA loan guarantee program requires meeting 

stringent government regulations. We are an approved SBA 7(a) 

lender, but currently have just one SBA 504 loan outstanding and 

one USDA business and industry loan outstanding. 

Part of the challenge for credit unions is determining the overall 

applicant eligibility to participate in an SBA program, which is 

nearly as important as determining the applicant’s creditworthiness. Failing to meet certain eligibility criteria may preclude the 

applicant from participating in an SBA guaranteed loan program. 

Eligibility criteria includes, among other things, size restrictions, 

type of business, use of proceeds, credit standards, and meeting a 

credit-elsewhere test. 

If Congress and the SBA were to make it easier for credit unions 

to participate in these programs, small businesses throughout the 

Nation will have greater access to capital at a time when it is needed most. A 2011 SBA study found that credit unions played an important countercyclical role to meet demands of small business 

loans while others pulled back during the recent recession. 

In conclusion, small businesses are the driving force of our economy. Credit unions play an important role in helping our member 

small businesses access the funds they need. Congress should do 

everything they can to ensure credit unions can meet the needs of 

their members. Thank you for the opportunity to testify today, and 

I welcome any questions you may have. 

Chairman RICE. Thank you, Mr. Farmakides. 

I am going to withhold my questions until the end, and work 

with the panel here. 

Ms. Chu, would you like to do the same? Whichever order you 

prefer is fine with me. 

Ms. CHU. Yes. Well, you know what, I would like to defer to the 

member as well and give him a first shot. 

Chairman RICE. Okay. I am going to start with Mr. Mulvaney 

then. Thank you. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Folks, thanks very much for participating today. In listening to 

your testimony, I harken back to a story that I heard when I was 

in Charleston, South Carolina, a couple months ago, meeting with 

one of the small community banks there, and they were telling me 

about the last visit they had from their examiner. And the examiner at the end of the process asked them how they were dealing 

with Dodd-Frank. And the bank president said, well, it is absolutely killing us. The additional paperwork has required us to hire 

three new people to do nothing but fill out the new oversight paperwork. And the examiner’s response was, well, then it is working, 

because you have created three jobs. 

I think we could leave for another day the discussion as to 

whether or not that is really jobs created or jobs simply shifted 

SBREP-219 with DISTILLER

13 

from one part of the economy to another. But it reminds me of 

something that Mr. Green spoke to, which is the impact of DoddFrank on capital available for lending. It strikes me if I have to 

hire three people to fill out paperwork, that takes money away 

from what I can lend out to my customers and so forth. 

Mr. Green, walk me through just a couple examples you think 

of how Dodd-Frank is impacting the capital available for small 

business lending. 

Mr. GREEN. Well, Congressman, first off, the example you gave 

is what we hear from all of our bankers throughout the State, and 

I would think many of our counterparts throughout the country. 

There is a shift of resources away from customer contact, bankers, 

those that might be out looking for loans and making loans, now 

to the compliance side. 

The banking industry, bankers by definition are risk averse. 

They have to understand the risk, they have to put in policies and 

procedures to manage that risk. And with the mountain of regulations that have come and been thrown on the banking industry, 

and not only the volume but the velocity, the quickness in which 

it has come in, the proposed regulations that will soon follow, the 

banks have had to go out and hire lawyers, consultants, compliance 

folks, as you indicated. And those are resources that had heretofore 

been out meeting the needs of the borrowing constituents around 

in the community. That is one example. 

The other example would be documentation, and that is a big 

one, because lending is both an art and a science. When I started 

in the banking business, we called it the C’s of credit. The science 

part of the C’s of credit are cash flow, capacity, collateral, things 

like that. 

The primary part of the C’s of credit were characters. In the larger loan opportunities the quality of the financial information is 

much stronger than it is in the smaller borrowing entities, the 

smaller companies. The quality of their financial information is not 

as robust. They don’t have as much information. They can’t predict 

the future maybe as well based on trends. So the tipping point between whether many loans are made in that smaller category falls 

to character. And that is knowing the customer, knowing the community, knowing the competitors, and the ability to maybe take 

that risk. 

Now, under Dodd-Frank and under the regulations, you have to 

document every loan opportunity. The problem there is you can’t 

document the intangibles, like I just described. As a result, we 

have had many bankers come to us and say, we would have made 

this loan many times in the past, in fact made many loans like this 

in the past, and they are good customers today, but we can’t make 

that loan today because we can’t document this intangible piece 

that is so important. So as a result, there are, we think, a lot of 

loans, primarily in that smaller category, that aren’t being made as 

a result of the regulations. 

Mr. MULVANEY. I also get the impression that the compliance requirements are driving some consolidation. There is a great deal of 

consolidation in the industry, but some of it is being driven by compliance requirements because the smaller institutions simply don’t 

have the infrastructure necessary to meet the compliance requireSBREP-219 with DISTILLER

14 

ments. And it strikes me that is also limiting availability of capital 

to small businesses. Would you agree with that? 

Mr. GREEN. I agree, yes, sir. If you think of it this way, compliance cost is a fixed cost. The larger the institution, that cost is 

spread over a larger asset base and larger earnings base. The 

smaller the institution, that is a heavier burden. 

Regulation applies to all banks, regardless of size. So the smaller 

the institution, has to dedicate more resources, more cost, and it 

has a smaller base to spread it over. So therefore, their earnings 

capacity is less. Earnings capacity is less, the future is maybe uncertain. Consolidation has occurred and will continue to occur. I 

have talked to a number of investment bankers who have told me 

that there is a tremendous amount of conversation going on now 

with smaller community banks, and a lot has to do with this increased cost structure as a result. 

Mr. MULVANEY. And there was something that Mr. Laplanche 

said—I am not going to get a chance to ask questions, maybe we 

will get a second round later on—that said that because of the 

character, the intangible nature of small businesses, that it is higher cost to lend to small business, it is harder to do, and if we don’t 

have these community-based institutions, the larger institutions 

simply aren’t going to take on that lending possibility. But I will 

maybe get a chance to ask that question later on. 

Thank you, Mr. Chairman. 

Chairman RICE. Thank you, Mr. Mulvaney. 

Mr. Payne. 

Mr. PAYNE. Thank you, Mr. Chairman, and to the ranking member. 

Let’s see. Mr. Laplanche, you in your written testimony are proclaiming to have solutions to bring underwriting costs down and 

create conditions to increase credit availability and affordability. 

Please share some of those ideas with the Committee. 

Mr. LAPLANCHE. Yes. Thank you for giving me this opportunity. 

So, first, I want to start by saying that nothing will ever get better, 

no underwriting process would ever get better than the relationship between a community banker and a small business owner. 

That is always going to be the best way to—combined with financial information and credit data—the best way to assess a small 

business owner’s ability to repay the loan and make the business 

successful. 

I think the solutions we are working on are not designed to be 

a substitute. They are really designed to fill in a void. So in the 

absence of that relationship, or in circumstances where these relationships do not lead to a successful loan application, we believe we 

can offer tools that help make these loans possible and at a low underwriting cost. 

And part of the answer here is technology. And we believe that 

technology can be applied in two different ways. One, to aggregate 

financial data and make the financial data more readily available 

to loan underwriters. And two, by looking into new, nontraditional 

underwriting data sources. 

So in the first category we are working with a number of data 

providers to help pool data about the small businesses that apply 

for a loan with the expressed consent of the small business owner. 

SBREP-219 with DISTILLER

15 

For example, we are working with Intuit Corporation, the maker 

of QuickBooks, to through an API code for a technology solution, 

essentially collect all the QuickBooks data, so the entire accounting 

of the small business, and extract that information, run analysis on 

that information, calculate ratios how that can be used as part of 

the underwriting and can be reviewed by the underwriter. 

And that data extraction, the data analysis process can make the 

job of the underwriter easier and can also lower the burden for the 

business owner to collect the data and transfer the data to the underwriter. That is one category. 

The other category is incorporating in the decision, in the pricing 

decision of the underwriting decision, data sources that are available online now through the Internet and can be used as a proxy 

of business reputation and future business performance. There are 

rating and customer satisfaction Web sites like Yelp or OpenTable 

or Angie’s List that give the opportunity to customers to rank small 

businesses and give feedback on the experience they had with the 

business. 

Our ability to collect that data, analyze that data, and use that 

data as an additional source for underwriting can be extremely 

useful, can be done in a way that is highly automated, low cost, 

and provide some insight as a complement to other more traditional sources, provide some insight into future business performance. 

Mr. PAYNE. Okay. Thank you. 

In the interests of time, I will yield back so we can possibly get 

to a second round. Thank you. 

Chairman RICE. Mr. Schweikert? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

And forgive me if this one becomes a little ethereal, but on particularly small, truly small businesses, you know, the one with 

under 25 employees that comes into an institution, and I don’t 

know if this might be from a regulator’s standpoint, if it were a 

decade ago and I am coming in for working capital, do you feel, for 

those of you on the lending side, you had more flexibility? Okay, 

you have a couple trucks that you have equity in. All right, well, 

we know you own your home. And are the regulators not allowing 

you to look at their full asset bundle, and do you get punished if 

you have done that look at the asset bundle when you have your 

auditing mechanics? 

Mr. Green. 

Mr. GREEN. Congressman, let me start with that. I do think the 

flexibility has been significantly reduced. I mentioned the regulatory scrutiny and documentation. You know, a lot of times the 

primary asset of a small business owner is their home and equity 

in their home. To be able to take that equity now as collateral requires a whole lot more cost, a whole lot more scrutiny, a lot more 

documentation than it would have before. And the same goes for 

other type assets. So, yes, sir, it absolutely has changed. 

Mr. SCHWEIKERT. On that same look on cosigners for debt, I don’t 

know how many people in the room at sometime in their life have 

had a family member wanted to start a business, and we were all 

really, really stupid or very, very loving, whatever you want to consider it, in helping cosign, you know, them to get some of their debt 

SBREP-219 with DISTILLER

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instruments to start their business. And my understanding is that 

also is one of the things we will see dramatically less of as being 

an acceptable collateral mechanic today. I mean, is what I am 

being told your experiences? 

Mr. GREEN. Yes, sir. I will just add one more comment and let 

my other panelists talk about it. 

That is important, because I mentioned earlier about character 

sometimes being the tipping point. A lot of those guarantors are 

family members. And having a family member on there, father, 

mother, that would guarantee it, a lot of times they were tougher 

on that borrower maybe than the lender would be because of that. 

Mr. SCHWEIKERT. Well, it just makes Thanksgiving really uncomfortable when you have problems. 

Mr. GREEN. Yes, sir. 

Mr. SCHWEIKERT. And forgive me, is it Wyrich? 

Ms. WIERSCH. Wiersch. 

Mr. SCHWEIKERT. Wiersch. Now, you actually, with your position, 

you actually touch probably a lot of accumulated data. Are you seeing something in the data that is sort of outside the folklore we are 

having this discussion of? You know, is it those small businesses 

aren’t walking into their credit unions or their community banks 

to even ask for a loan? I mean, what do you see really going on 

in the data? 

Ms. WIERSCH. Really, I think it is the combination of factors. Demand is definitely part of the issue. And, you know, in terms of 

some of these, the impact of regulatory scrutiny, as we are talking 

about it, it is interesting. If you look at the data, you see that the— 

and this is information that we can get in terms of why banks are 

tightening their lending standards. Regulation is less of a concern, 

in terms of regulatory policy, regulatory scrutiny, that is the side 

that we are looking at it from, it is less of a factor now. The bigger 

factors in tightening lending standards would be, you know, issues 

like their perception of the economic environment, their risk appetite, you know, those types of issues. Loan performance. You know, 

their market strategy. 

Mr. SCHWEIKERT. In that area, when I have some of my regulated entities, you know, my community banks come to me and say, 

our discussion about our buckets, I am holding too much real estate, I need to roll to this, roll to that. So there is entire silos of 

what you might have used in that cross-collateralization that, 

boom, are gone, that you can’t use. Doesn’t that ultimately, that 

mechanic have the cascade effect of, don’t come talk to us, I have 

no capacity? 

Ms. WIERSCH. You know, I would just reiterate that, you know, 

lending decisions and the decisions about portfolio composition are 

truly—these are bank decisions and bank management decisions. 

There is an influence from—— 

Mr. SCHWEIKERT. Are they truly a bank decision? I mean, I know 

that you are on the Fed side, not the FDIC side, but that is in 

many ways a regulator decision. 

Ms. WIERSCH. There is some consideration of the information the 

regulators give. And I think maybe from the bankers’ side they can 

provide a little more insight on that. From what we see in the data, 

it just shows that regulatory policy is less of a factor in deterSBREP-219 with DISTILLER

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mining, you know, the lending types of decisions. Now, in terms of 

this idea of—— 

Mr. SCHWEIKERT. And I don’t mean to cut—— 

Ms. WIERSCH. No, no, that is okay. 

Mr. SCHWEIKERT. We are over time. But this is actually a really 

interesting discussion. At some point I hope we can wrap to it. Because I am trying to mix what we get anecdotally with where we 

find actual data. 

So thank you, Mr. Chairman. Sorry for going over time. 

Chairman RICE. Thank you, Mr. Schweikert. 

Ms. Chu. 

Ms. CHU. Thank you, Mr. Chair. 

Mr. Farmakides, credit unions have expressed to the Committee 

that the barriers to entry to participate in SBA lending are too 

great, and that is why very few credit unions opt to participate. 

Now, you have a most interesting history because you worked for 

the SBA and yet you also represent the credit unions. So you have 

seen things from both sides of the fence. Other than what you have 

mentioned in your testimony about permanently exempting SBA 

loans from counting against the MBL cap, what else can we do to 

encourage credit union participation in SBA lending programs? 

Mr. FARMAKIDES. I think there has been bills presented before us 

today that basically are looking for ways to allow credit unions like 

ours to do more SBA lending. I think the key for that is changing 

the way SBA administers its program. The way that they have 

done it right now, the rules and the regulations to follow are very 

difficult and time-consuming, and quite honestly are just almost 

impossible to clearly manage the process without a full-time person 

in place. So the changing in the way that the program is administered. 

The other areas that we most definitely could hopefully spur 

more credit unions to getting involved is taking that SBA loan, the 

entire loan, and changing the cap so that way it does not go 

against a credit union’s lending cap. If you were to free that counting against the lending cap, more credit unions would be encouraged to invest the time, effort, and staff costs in order to get into 

that program. And it is, quite honestly, a time-intensive and expensive way of doing business, one that credit unions can serve in, but 

right now the way that the laws are currently written it is very 

preclusive. 

Ms. CHU. And specifically in terms of reducing the level of expense to participate in the SBA program, like what specifically, 

what would be one suggestion that you would have? 

Mr. FARMAKIDES. There is a number of suggestions. But the one 

that I think to reduce the expense that we would want to have is 

lowering the cap, just lifting the cap entirely, because then it frees 

us up to make those decisions across the board both in commercial 

real estate finance, SBA lending, then also working lines of credit 

that in essence will allow us to do a better job managing our expenses against those type of loans. 

Ms. CHU. I see. 

Ms. Wiersch, you stated in your testimony that one factor in reduced credit supply for small businesses is a decade-long shift in 

SBREP-219 with DISTILLER

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the financial industry away from this type of lending. In your opinion, what could we do to reverse this trend? 

Ms. WIERSCH. You know, the trend really, if you look at the data 

you can go back even to the 1980s, where we had 17,000 banks in 

our country, and we are down to about 7,000 now. And most of that 

consolidation has taken place in the smallest category, you know, 

the small community banks. And, you know, whether that trend 

can be reversed, you know, I am not sure I can say that I see any 

evidence that is, you know, likely or in any way possible. I am sure 

it is possible, but I mean there is just no signal that that is even 

something that could happen. 

And as I am, you know, hearing the concerns about regulation 

and the pressure that puts on community banks, I would imagine 

that that is certainly a concern. We have not done any research to 

say that, you know, there are different factors forcing the regulation—or the consolidation. Regulation, I imagine, is just one of 

many factors in that. But I don’t see any indications that the trend 

is changing. 

Ms. CHU. And, well, in terms of reversing this trend, is there any 

kind of additional Federal program that could fill the gap? 

Ms. WIERSCH. I have not looked at anything or seen anything in 

that regard. 

Ms. CHU. Okay. 

Mr. Stibel, small businesses and startups are responsible for 

nearly two-thirds of net job creation. You mentioned in your testimony that there is a large discrepancy in access to capital across 

business size, where small and microbusinesses face tougher lending standards. SBA has traditionally filled this void, but small dollar loans have steadily declined since 2007. What should be done 

to realign SBA’s lending activity with its mission to provide access 

to capital to our Nation’s smallest businesses? 

Mr. STIBEL. I think that is a great question, and one that speaks 

to the problem that Ms. Wiersch was alluding to, which is, you 

know, we keep redefining the line and definition of what a small 

business actually is. And, you know, before we can even have a cogent argument and discussion about what can be done, we have got 

to figure out what the actual problem is. 

And, you know, small businesses are the same size they were 100 

years ago. They don’t grow with inflation. Right? A start-up starts 

with zero revenues and zero employees always. The problem is we 

have redefined the boundaries what a small business is over and 

over again, on one hand. And on another, we have got different 

definitions. I mean, I am sure if we asked everyone here, each one 

of us would have a different definition for what a small business 

is. It would be a good, strong definition. But without a singular definition, I think it is very hard to start addressing the problem. 

With regards to the smallest of businesses, the ones that are 

starting and the entrepreneurs and the true Main Street businesses, the core problem here is because those definitions keep 

growing, the government and banks keep shifting towards the larger businesses, and they ignore the current and present problem, 

which is most of our employment comes from the starting of businesses and their growth. 

SBREP-219 with DISTILLER

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And, you know, I think the first and foremost thing that the SBA 

can do is take a leadership position here. Define what it means to 

be a small business or a microbusiness or a startup, and then put 

a strong emphasis on lending to those companies, and encourage 

that lending first and foremost, and don’t focus on loan size, don’t 

focus on anything other than the size of a business, from start to 

whatever the current definition of small is. 

Ms. CHU. Thank you for that. 

Mr. Laplanche, I found your suggestions on how to reduce the 

underwriting costs to be very interesting. And you are the CEO of 

Lending Club. It is a credit platform that employs over 300 people 

in San Francisco. But could you describe how you implement your 

ideas in this credit platform, the Lending Club? 

Mr. LAPLANCHE. I can. I shared some of these ideas earlier, but 

I can expand on it. Certainly looking at the, like $2 billion in loans 

that we have made this year, and these were mostly consumer 

loans, we have created what we call a credit review center that is 

essentially a technology tool that aggregates data from 25 different 

data sources. And what is interesting is now with the Internet 

there are many, many new data sources that are created on an ongoing basis, and many new things you can learn about individuals 

or small businesses. 

In the case of individuals, there are privacy issues, there are 

FCRA issues. In the case of small businesses, with the authorization of the business, that helps us be more flexible and access more 

freely some of these data sources. So I mentioned Yelp ratings, 

Angie’s List ratings. Many small businesses, Main Street businesses, whether it is a hair salon or restaurant, have a Facebook 

page. The number of likes on their Facebook page is an indicator 

of a trend in the business. The number of tweets and retweets, so 

the activity on Twitter is also an indicator of performance of the 

business. 

There are data sources that are not readily available but can be 

accessed through partnerships. So, for example, the ability to connect to UPS or FedEx and get shipping data about a business, it 

is a third-party validation of that shipping data, and get that data 

collected and analyzed automatically is another sort of indication 

of performance and a forward indicator of business activity. 

So there are all these data sources that are available either publicly or through partnerships with companies that service small 

businesses, that because we are operate online in a way that utilizes technology we can connect to and analyze quickly and incorporate in the decision. But then the very interesting things we do 

is the capital can come from many different data—very different 

sources. And we have partnerships with a number of banks. So 

now over seven community banks are investors on the Lending 

Club platform and can sort of buy loans from Lending Club this 

way. 

Ms. CHU. Thank you for that. 

And, Mr. Green, as you know, one of the provisions of the DoddFrank Act known as the Collins amendment increases the minimum capital requirements on large financial institutions, while exempting bank holding companies with assets of $500 million or 

less. This encompasses the overwhelming majority of all commuSBREP-219 with DISTILLER

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nity banks. Will this provision help to level the playing field and 

allow community banks to better compete with big banks? 

Mr. GREEN. I think, Congresswoman, when you look at all the 

regulation combined, you know, what you mentioned on DoddFrank, and then you go back to Basel III, Basel III goes into the 

larger banks, but that will ultimately come down to the smaller 

banks, there might be a window where the smaller institutions, 

below $500 million, you know, might have a slight advantage over 

the large ones as it relates to capital. But the general thought is 

that that, like most other regulations, will continue to filter down 

and ultimately impact them, and that would change as well. 

Ms. CHU. Okay. Thank you. I yield back. 

Chairman RICE. Thank you, Ms. Chu. 

Ms. Wiersch, you mentioned the decline in the number of small 

banks. In your data at the Federal Reserve, do you know what is 

the primary source of capital for small businesses? 

Ms. WIERSCH. Well, in terms of where small businesses get funding, we have some information on this. We know from an NFIB 

comprehensive survey that 85 percent of small businesses identify 

a commercial bank as their primary financial institution. Some of 

the information outside of the commercial bank area we don’t have 

a real good idea of who the borrower is. So we have limited information—— 

Chairman RICE. You mean the lender, right? You mean the lender, not the borrower. 

Ms. WIERSCH. I am sorry. Well, no, who the borrower is. Like, 

if you are looking at aggregate numbers for finance companies and 

who their—we don’t know often who they are lending to. We know 

total loan volume, for example. 

Chairman RICE. But the NFIB says 85 percent of small businesses identify commercial banks as their primary source. 

Ms. WIERSCH. That is correct. 

Chairman RICE. And would you say those would be large commercial banks or small commercial banks, or do you have any data 

on that? 

Ms. WIERSCH. There isn’t any specific breakdown on that. Now, 

what I can tell you is that there has been a shift in the commercial 

bank area where small businesses are lending from. And that shift 

has taken it from a little over a decade ago small community banks 

had a 51 percent market share of the small loan market, and that 

has completely shifted. So now the large banks have the largest 

share of the small loan market and the community banks share 

has shrunk significantly. 

Chairman RICE. Now, additional Federal regulation, whether it 

be Dodd-Frank or any other Federal regulation, increase compliance cost. Correct? 

Ms. WIERSCH. Yes. 

Chairman RICE. So that just makes it more difficult to do business. Correct? 

Ms. WIERSCH. I would say so. 

Chairman RICE. So if we are saying that, you know, small banks 

are declining, that historically they have had over half of the small 

business loans, wouldn’t it be logical to assume that additional 

SBREP-219 with DISTILLER

21 

Federal regulation is one of the reasons why they are disappearing 

and small businesses are now moving to larger banks? 

Ms. WIERSCH. I don’t have any research to definitively say that. 

But, you know, certainly those are all factors in the trends that we 

are seeing. 

Chairman RICE. Thank you, ma’am. 

Mr. Stibel, you said something that was really interesting to me. 

My primary focus is jobs and American competitiveness. And I 

truly believe that competitiveness is measured in small degrees. 

You know, we are competing around the world. It is not major 

things, it is small degrees, because everybody is trying to compete, 

and everybody tries to do the best they can. And one of our primary 

advantages historically in America has been access to capital. 

You mentioned that small businesses don’t have access to capital 

these days and that they have increased revenue, but they are not 

adding jobs because they don’t have access to capital. Is that correct? 

Mr. STIBEL. That is, yes. 

Chairman RICE. So can we translate that an increased presence 

of the Federal Government in the banking system through DoddFrank has led to a reduction in jobs? 

Mr. STIBEL. The cause and effect between I think is a bit hard 

to dissect and pinpoint on either a single piece of legislation or any 

type of regulation. You know, regulation can be good or bad. But 

I think it is causing pain points right now. And, you know, ultimately, without lending you are not going to have job growth. You 

know, as I said earlier and you saw in that written testimony, we 

have now got some clear evidence that shows that, you know, 

America’s small businesses are getting back on their feet. But 

America’s individuals, the employees, are not. 

And, you know, we are seeing this in payroll numbers, we are 

seeing this in revenue growth personally. So in terms of people’s 

income. And then we are seeing this in terms of a lack of an economic recovery on the job side, right, the jobless economy. And I 

think a lot of this does come down to the banking sector. And, you 

know, included in that is regulation. 

And, you know, we can do a lot more from that standpoint to free 

up that access to capital to the best businesses right now in our 

economy. And, you know, the irony is that it’s the smallest businesses. They are the hardest to determine. They are often the 

hardest to find when you see more and more banking consolidation. 

But they tend to be the best ones for sustained growth, for job 

growth. And ultimately, it is those small businesses that will become the next large businesses. 

Chairman RICE. And so if Dodd-Frank makes it significantly 

more difficult to comply with regulatory burdens and small banks 

go out of business, then that is just that much less access to capital 

for small businesses. Correct? 

Mr. STIBEL. If we see more and more small community banks 

and alternative sources of lending either disappearing, those banks 

going out of business, or becoming more restrictive in terms of how 

they lend to small businesses, then absolutely we will see less capital flowing into small businesses, and ultimately we will see less 

job growth. 

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Chairman RICE. Ms. Wiersch, Dodd-Frank was passed on the 

theory that we were trying to prevent what happened in the financial crisis from happening again and keeping financial institutions 

from becoming too big to fail. Correct? 

Ms. WIERSCH. Yes. 

Chairman RICE. All right. So, in your opinion, does the regulatory burden under Dodd-Frank fall disproportionately on bigger 

banks or smaller banks? 

Ms. WIERSCH. I can’t say. I mean, my research did not address 

that specifically. 

Chairman RICE. Thank you, ma’am. 

Mr. Green, under Dodd-Frank does the regulatory burden fall 

more disproportionately on larger banks or smaller banks? 

Mr. GREEN. Mr. Chairman, it does fall more disproportionately 

on the smaller banks than the larger banks. The cost, as I mentioned, is a fixed cost spread over smaller assets. The restrictive 

nature of some of the documentation, underwriting standards, all 

of those type things limit also the ability to make certain type 

loans. 

Chairman RICE. Thank you, sir. 

Mr. Laplanche, you mentioned something that was very interesting to me. You said that no underwriting process will ever be 

better than the relationship between a borrower and a community 

banker. And why is that, sir? 

Mr. LAPLANCHE. I think it comes back to the fourth C of credit, 

character. And I think especially for small businesses and for 

startups, there is just not a lot of data you can look at. 

Chairman RICE. Okay. So it comes down to I call it community 

banking or relationship banking. Hard to quantify and put in a file. 

Correct? 

Mr. LAPLANCHE. That is right. 

Chairman RICE. And the effect of the regulations under DoddFrank are to try to make every loan fit in this box. Correct? 

Mr. LAPLANCHE. That is my understanding. I am no expert 

in—— 

Chairman RICE. So you take that discretion out, you eliminate 

that discretion, and the effect of that, in my opinion, is less lending 

to small business. Would that be a logical conclusion? 

Mr. LAPLANCHE. That seems to be a logical conclusion, yes. 

Chairman RICE. Mr. Green, would you agree with that? 

Mr. GREEN. Yes, sir, I would. 

Chairman RICE. Let’s talk for a minute about, so if we are taking 

the relationship banking off the table, who does that affect? Does 

that affect more large businesses that want to borrow with high income and plenty of assets, or does that affect more small businesses that want to borrow, start ups and so forth? 

Mr. GREEN. It affects the smaller businesses. Again, the quality 

of the financial information for a smaller business is not as robust 

as a larger business. And as a result, you have to rely more on relationships, knowledge of that customer, their community, their 

competitors, things that are intangible for smaller businesses, 

smaller owners than you would larger businesses. 

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Chairman RICE. So we are penalizing small banks with this additional regulation under Dodd-Frank, we are penalizing small businesses with this additional regulation under Dodd-Frank. 

Ms. Wiersch, where do most of the jobs come from, big businesses 

or large businesses? 

Ms. WIERSCH. If you looking back to the 1970s, the highest net 

job creation rate is for among the smallest of businesses. 

Chairman RICE. Thank you very much. 

Mr. Farmakides, do you all do mortgage loans? 

Mr. FARMAKIDES. We do, sir. 

Chairman RICE. Are you familiar with these new qualified mortgage regulations? 

Mr. FARMAKIDES. I am, sir. 

Chairman RICE. How is that going to affect your mortgage lending? 

Mr. FARMAKIDES. It is going to create some significant issues for 

us. 

Chairman RICE. All right. Now, so if somebody comes in with 

high income and plenty of assets, is that going to affect the loan 

to them at all, these qualified mortgage rules? 

Mr. FARMAKIDES. No, it is not. 

Chairman RICE. But somebody who comes in with a relationship 

with you guys, that you may recognize that they might not have 

quite a 41 percent loan to whatever that number is, income to loan 

ratio, but you feel like they are good for the loan and you otherwise 

would have made that loan in the past, are you going to be able 

do that now under this Dodd-Frank? 

Mr. FARMAKIDES. Under great difficulty. 

Chairman RICE. It is going to be very difficult to do. 

Mr. FARMAKIDES. Nonqualified mortgage. 

Chairman RICE. So it is going to make it harder for you to loan 

to moderate income, middle class people, but it is not going to affect the higher income people. Is that correct? 

Mr. FARMAKIDES. It is going to make it more difficult. 

Chairman RICE. So we are penalizing small banks, we are penalizing small businesses, we are penalizing low and moderate income 

people, and we are preventing job creation. Other than that, this 

is a great law. Thank you. 

I am going to defer. 

Mr. Payne. 

Mr. PAYNE. Thank you, Mr. Chairman. 

And this is, I guess, a question any panelist could answer. You 

know, it has been stated today that there is a weaker demand for 

credit as an issue in most of your testimonies. Should we expect 

this demand to return to prerecession levels or accept weak credit 

demand and credit alternatives as the new norm or the new trend? 

Mr. GREEN. I will start out. The uncertainty in the economy limits the small business. They are more hesitant to invest in capital 

goods to expand because the future is less certain. As a result, that 

has created less demand. If there is more clarity about the future 

and elimination or reduction in uncertainty, I think you will see 

greater expansion in the economy, greater capital expansion, greater job creation, which will lead to more loan demand. 

SBREP-219 with DISTILLER

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Mr. FARMAKIDES. I just am going to give a slightly different picture here from a credit union perspective. We are in the last year 

seeing greater demand for smaller lines of credit. We are talking 

lines of credit under $250,000, more opportunity. But we are still 

not able to serve that. So we are seeing greater opportunity in 

2013. We have closed 13 loans, 10 of them to small businesses, 2 

of which were startups, small working capital lines of credit that 

currently the market isn’t providing that capital access. And because of the current caps that are in place, we are having a really 

hard time getting that money out there. So there is regulatory caps 

that we would hope could be modified in order to allow us to make 

those type of loans. 

Mr. STIBEL. And I would just add to the distinction between 

those two last comments and say I actually believe that the demand is there. And we are seeing that with the surveys that we 

are doing to the small businesses out there. It is more the desire 

that is lacking right now. 

Part of that is certainly uncertainty. A big part of that is frustration, whether it is regulatory, whether it is just the banks turning, 

you know, turning businesses down throughout the recession. But 

the demand is absolutely there. And once, you know, once businesses become more comfortable that the loans are available you 

will see lending improve. 

Mr. PAYNE. Okay. 

Yes, sir. 

Mr. LAPLANCHE. If I might add, I think that is absolutely right. 

And the supply and demand are very tightly intertwined. A survey 

from the Federal Reserve Bank of New York shows that again, out 

of 70 small business owners who wanted capital, 29 did not even 

apply. So there is a self-selection out of the process for many small 

business owners. So when they feel supply of capital will be there, 

I think we will see demand come back. 

Mr. PAYNE. Okay. 

And, Ms. Wiersch, you know, in your testimony, you point out 

the fact that more lending is secured by collateral now than before 

the great recession. Do you think reversing this trend would be 

beneficial for small business? And what could we do in our capacity 

in Congress to help support that? 

Ms. WIERSCH. You know, it is an interesting question. Looking 

at the shift in data, we do see that more banks are requiring collateral. I am not sure that there is a policy solution to alter, you 

know, the way that banks are making their lending decisions and 

setting the terms of their lending. But it is important to note that, 

you know, as property values rise that will help the collateral side 

of things so borrowers can meet bank lending standards. 

Mr. PAYNE. Okay. Thank you. 

I yield back, sir. 

Chairman RICE. Mr. Mulvaney, you have anything? 

Ms. Chu? 

Okay. Well, I just have one more question, and that is what, if 

anything, just one thing, would you guys suggest that the Federal 

Government could do to improve the small business lending situation? 

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Ms. Wiersch, I want to start with you and we will go down the 

line. 

Ms. WIERSCH. Of course our research did not attempt to make 

any policy recommendations. The one issue I would like to reiterate 

is that this is really a complex issue. There are a lot of factors at 

play. And any policy action should consider all of these factors. And 

addressing just one factor is unlikely to really move the needle on 

this problem as, you know, there are so many things happening 

here. 

Chairman RICE. Mr. Stibel. 

Mr. STIBEL. I think it is as simple as defining what a small business is. You know, if I had one thing that I would recommend 

doing, start there. 

Chairman RICE. So this is for SBA lending, is what you are talking about? 

Mr. STIBEL. I would love to see it across the board. I mean, there 

is a bill right now on the floor for small business access to capital 

where they are talking about certain businesses’ funds being upwards of $150 million in size. Puts our business in the small business category. So I think it is critically important to do that broadly, and to make sure that that is disseminated not just through the 

SBA, but through to the IRS when they are looking at small business tax credits, through to banks, both community and large 

banks, and through alternative lending sources. 

Chairman RICE. Thank you, sir. 

Mr. STIBEL. You are welcome. 

Chairman RICE. Mr. Laplanche. 

Mr. LAPLANCHE. So I focus on the data accessibility part of the 

equation, because we use so much data as part of the underwriting. 

If the government could make more data more readily available to 

lenders, I think that would help the underwriting decision. So we 

have had discussions with the Treasury on better access to IRS 

data and the ability with the business owner to easily access tax 

filings so that we can incorporate this data into the lending decision. That is one area where the government can help. 

Chairman RICE. Thank you, sir. 

Mr. Green. 

Mr. GREEN. Thank you. I think, Congressman, Mr. Chairman, 

the mountain of regulations that have been levied on the banking 

industry has had the unintended consequence of hurting most, if 

not all of the community banks. I would hope that Congress would 

maybe go back and look at some of those regulations to see if there 

is a disparity between what was originally intended and what has 

actually happened, maybe modify some of those, certainly going forward, those that are in the works to make sure that that does not 

continue. 

I will add that, maybe in closing comments, that there is a tremendous amount of capacity within the banking industry to lend 

to small businesses. The capital levels are the highest they have 

ever been. Liquidity is there. Competition is strong. There are 

nonbank competitors, like the credit unions, farm credit, others. 

I know the gentleman to my right has mentioned the cap. In our 

State, the credit union that—the percentage of business loans relative to assets at the highest level is below 5 percent. So they have 

SBREP-219 with DISTILLER

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tremendous capacity as well. In fact, I think nationally less than 

1 percent of the credit unions are at or near that peak. So there 

is tremendous capacity in the banks, farm credit system, significant capacity with the credit unions, and alternative lenders. So if 

we could find a way, again, to eliminate or reduce those unfavorable negative consequences, that would be very helpful. 

Chairman RICE. Thank you, sir. 

Mr. Farmakides. 

Mr. FARMAKIDES. The one thing for us would be to remove the 

member business lending cap and reintroduce the Credit Union 

Small Business Lending Act from the 112th Congress, which directs the SBA Administrator to establish programs for credit 

unions. I think that would be very beneficial for us. 

Chairman RICE. Thank you. 

Ms. Chu. 

Ms. CHU. If I could ask a follow-up question. 

Mr. Stibel, why is the SBA definition of small business not adequate? 

Mr. STIBEL. For a couple of reasons. Number one, there is no single definition. So the definitions right now are by category. And 

number two, and this is probably the most important thing, no one 

else is using it. And that is the real reason. What you need is you 

need a centralized definition that Bank of America is using, that 

Wells Fargo is using, that Lending Club is using, that we are using 

so that we can actually have a proper dialogue about what a small 

business is. So it is less about what the definition is. It is more 

about making sure that everyone follows that definition. 

Ms. CHU. Okay. 

Chairman RICE. I just want to thank all you witnesses for being 

here today. Your testimony has been very enlightening. Thank you 

very much for putting up with me. And this hearing is adjourned. 

[Whereupon, at 11:26 a.m., the subcommittee was adjourned.] 

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A P P E N D I X 

Statement by 

Ann Marie Wiersch 

Policy Analyst 

Federal Reserve Bank of Cleveland 

before the 

Subcommittee on Economic Growth, Tax, and Capital Access 

Committee on Small Business 

U.S. House of Representatives 

December 5, 2013 

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1The analysis presented in this Statement draws extensively from the Federal Reserve Bank 

of Cleveland publication, ‘‘Why Small Business Lending Isn’t What It Used To Be,’’ Ann Marie 

Wiersch and Scott Shane, 2013. (http://www.clevelandfed.org/research/commentary/2013/2013- 

10.cfm). 2 As reported by the Federal Deposit Insurance Corporation (http://www2.fdic.gov/qbp/). This 

report focuses on traditional commercial bank lending, as it is the most frequently utilized 

source of small business credit. According to a 2011 survey by the National Federation of Independent Businesses (http://www.nfib.com/research-foundation/surveys/credit-study-2012), 85 percent of businesses reported that a commercial bank was their primary financial institution, 

while only 5 percent has such a relationship with a nondepository financial institution (such as 

private finance companies). 

Chairman Rice, Ranking Member Chu, and distinguished members of the subcommittee, it is an honor to testify before you today 

on the state of small business lending. My testimony will focus on 

the decline in lending to small businesses and the factors that are 

driving that decline.1 My remarks represent my own views and are 

not official views of the Federal Reserve Bank of Cleveland or any 

other element of the Federal Reserve System. 

Background 

Recent industry and media reports provide a mix of perspectives 

on the sate of small business lending. Contradictory messages 

abound, and often result from inconsistent definitions of what constitutes a small business and from the absence of comprehensive 

and reliable data on small business lending. Banks and government agencies use a wide range of parameters to classify firms as 

small businesses. One frequently cited definition of what constitutes a small business is so expansive that it includes more than 

99 percent of the businesses in the U.S. It should not come as a 

surprise that we hear so many differing reports about small business conditions when firms of so many different sizes and industries are compared with one another by analysts relying on different definitions of a small business. In addition, the considerable 

lack of data on small business lending and the variance in the size 

of firms or loans included in the lending data leads to inconsistency 

in reporting among the data that are available. 

Small business lending has dropped substantially since the Great 

Recession. While some measures of small business lending are now 

above their lowest levels since the economic downturn began, they 

remain far below their levels before it. For example, in the fourth 

quarter of 2012, the value of commercial and industrial loans of 

less than $1 million—a common proxy for small business loans— 

was 78.4 percent of its second-quarter 2007 level, when measured 

in inflation-adjusted terms.2

Some policymakers are concerned that the decline in small business lending may be hampering the economic recovery. Small businesses employ roughly half of the private sector labor force and 

provide more than 40 percent of the private sector’s contribution to 

gross domestic product. If small businesses have been unable to access the credit they require, they may be underperforming, slowing 

economic growth and employment. 

Industry participants, including small business owners, bankers, 

and regulators have offered differing reasons for the decline in 

lending. However, recent analysis by the Federal Reserve Bank of 

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3Federal Reserve Survey of Consumer Finances (http://www.federalreserve.gov/econresdata/ 

scf/scf—2010.htm): Census Bureau: Income, Poverty, and Health Insurance Coverage in the 

United States: 2010 (http://www.census.gov/prod/2011pubs/p60-239.pdf). 4Wells Fargo Gallup Small Business Index (https://wellsfargobusinessinsights.com/research/ 

small-business-index). 

Cleveland shows that there is no single explanation, but rather a 

number of factors driving this trend. Fewer small businesses are 

interested in borrowing than in years past, and at the same time, 

small business financials have remained weak, depressing small 

business loan approval rates. In addition, collateral values have 

stayed low, as real estate prices have declined, limiting the amount 

that small business owners can borrow. 

Furthermore, increased regulatory scrutiny has caused banks to 

boost their lending standards, resulting in a smaller fraction of 

creditworthy borrowers. Finally, shifts in the banking industry 

have had an impact. Bank consolidation has reduced the number 

of banks focused on the small business sector, and small business 

lending has become relatively less profitable than other types of 

lending, reducing some bankers’ interest in the small business 

credit market. 

Because none of these factors is the sole cause of the decline in 

small business credit, any proposed intervention should account for 

the multiple factors affecting small business credit. 

Weaker Demand for Credit 

Small businesses were hit hard by the economic downturn. Analysis of data from the Federal Reserve Survey of Consumer Finances reveals that the income of the typical household headed by 

a self-employed person declined 19 percent in real terms between 

2007 and 2010. Similarly, Census Bureau figures indicate that the 

typical self-employed household saw a 17 percent drop in real earnings over a comparable period.3

Weak earnings and sales mean that fewer small businesses are 

seeking to expand. Data from the Wells Fargo/Gallup Small Business Index—a measure drawn from a quarterly survey of a representative sample of 600 small business owners whose businesses 

have up to $20 million a year in sales—show that the net percentage of small business owners intending to increase capital investment over the next 12 months fell between 2007 and 2013. In the 

second quarter of 2007, it was 16 (the fraction intending to increase 

capital investment was 16 percentage points higher than the fraction intending to decrease capital investment), while in the second 

quarter of 2013, it was negative 6 (the fraction intending to decrease capital investment was 6 percentage points higher than the 

fraction intending to increase it). Similarly, the net percentage of 

small business owners planning to hire additional workers over the 

next 12 months was 24 in the second quarter of 2007, but only 6 

in the second quarter of 2013.4

Reduced small business growth translates into subdued loan demand. Thus, it is not surprising that the percentage of small business members of the National Federation of Independent BusiSBREP-219 with DISTILLER

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5 2003 Survey of Small Business Finances (http://www.federalreserve.gov/pubs/oss/oss3/ssbf03/ 

ssbf03home.html). 6Survey of Terms of Business Lending (http://www.federalreserve.gov/releases/e2/default.htm). 

nesses (NFIB) who said they borrowed once every three months fell 

from 35 percent to 29 percent between June 2007 and June 2013. 

Some of the subdued demand for loans may stem from business 

owners’ perceptions that credit is not readily available. According 

to the Wells Fargo/Gallup Small Business Index survey, in the second quarter of 2007, 13 percent of small business owners reported 

that they expected that credit would be difficult to get in the next 

12 months. By the second quarter of 2013 that figure had increased 

to 36 percent. By contrast, 58 percent of small business owners 

said credit would be easy to get during the next 12 months when 

asked in 2007, compared to 24 percent six years later. 

Reduced Credit Supply 

Lenders are approving fewer small business loan applications, 

since many firms lack the cash flow, credit scores, and collateral 

that banks require. According to the latest Wells Fargo/Gallup 

Small Business Index, 65 percent of small business owners said 

their cash flow was ‘‘good’’ in the second quarter of 2007, compared 

to only 48 percent in the second quarter of 2013. 

Small business credit scores are lower now than before the Great 

Recession. The Federal Reserve’s 2003 Survey of Small Business 

Finances indicated that the average PAYDEX score of those surveyed was 53.4.5 By contrast, the 2011 NFIB Annual Small Business Finance Survey indicated that the average small company 

surveyed had a PAYDEX score of 44.7. In addition, payment delinquency trends point to a decline in business credit scores. Dun and 

Bradstreet’s Economic Outlook Reports chart the sharp rise in the 

percent of delinquent dollars (those 91 or more days past due) from 

a level of just over 2 percent in mid-2007 to a peak above 6 percent 

in late-2008. While delinquencies have subsided somewhat since 

then, the level as of late 2012 remained at nearly 5 percent, notably higher than the pre-recession period. 

More lending is secured by collateral now than before the Great 

Recession. The Federal Reserve Survey of Terms of Business Lending shows that in 2007, 84 percent of the value of loans under 

$100,000 was secured by collateral. That figure increased to 90 percent in 2013. Similarly, 76 percent of the value of loans between 

$100,000 and $1 million was secured by collateral in 2007, versus 

80 percent in 2013.6

The decline in value of both commercial and residential properties since the end of the housing boom has made it difficult for 

businesses to meet bank collateral requirements. A significant portion of small business collateral consists of real estate assets. For 

example, the Federal Reserve’s 2003 Survey of Small Business Finances showed that 45 percent of small business loans were 

collateralized by real estate. 

On the residential side, Barlow Research, a survey and analysis 

firm focused on the banking industry, reports that approximately 

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7The Office of the Comptroller of the Currency Survey of Credit Underwriting Practices 

(http://www.occ.gov/publications/publications-by-type/survey-credit-underwriting-practices-report/ 

index-survey-credit-underwriting-practices-report.html). 

one-quarter of small company owners tapped their home equity to 

obtain capital for their companies, both at the height of the housing boom and in 2012. The value of home equity has dropped substantially since 2006. According to the Case-Shiller Home Price 

Index, the seasonally adjusted composite 20-market home price 

index for April 2013 was only 73.8 percent of its July 2006 peak. 

On the commercial side, the Moody’s/Real commercial property 

price index (CPPI) shows that between December 2007 and January 2010, commercial real estate prices dropped 40 percent. While 

prices have recovered somewhat since then, the index (as of May 

2013) is still 24 percent lower than in 2007. 

Tighter Lending Standards 

At the same time that fewer small businesses are able to meet 

lenders’ standards for cash flow, credit scores, and collateral, bankers have increased their credit standards, making even fewer small 

businesses appropriate candidates for bank loans than before the 

economic downturn. According to the Office of the Comptroller of 

the Currency’s Survey of Credit Underwriting Practices, banks 

tightened small business lending standards in 2008, 2009, 2010, 

and 2011. 

Loan standards are now stricter than before the Great Recession. 

In June 2012, the Federal Reserve Board of Governors asked loan 

officers to describe their current loan standards ‘‘using the range 

between the tightest and easiest that lending standards at your 

bank have been between 2005 and the present.’’ For nonsyndicated 

loans to small firms (annual sales of less than $50 million), 39.3 

percent said that standards are currently ‘‘tighter than the midpoint of the range,’’ while only 23 percent said they are ‘‘easier 

than the midpoint of the range.’’ 

Moreover, while banks have loosened lending standards for big 

businesses during the recent economic recovery, they have maintained tight standards for small companies. The Office of the 

Comptroller of the Currency’s Survey of Credit Underwriting Practices tracks the changes in lending standards for small and large 

customers between 2003 and 2012. The net tightening of lending 

standards (the percentage of banks tightening lending standards 

minus the percentage loosening them) was slightly greater for 

small businesses than large businesses in 2009 and 2010. However, 

in 2011 and 2012, there was a net tightening of lending standards 

for small businesses, despite a net loosening for big businesses.7

While banks adjust lending standards for a number of reasons, 

there is some evidence that heightened scrutiny by regulators had 

an impact during and after the Great Recession. Recent research 

quantifies the impact of tighter supervisory standards on total 

bank lending. A study by Bassett, Lee, and Spiller finds an elevated level of supervisory stringency during the most recent recesSBREP-219 with DISTILLER

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8 ‘‘Estimating Changes in Supervisory Standards and Their Economic Effects,’’ William F. Bassett, Seung Jung Lee, and Thomas W. Spiller. Federal Reserve Board, Divisions of Research and 

Statistics and Monetary Affairs, Finance and Economics Discussion Series, no. 2012–55. (http:// 

www.federalreserve.gov/pubs/feds/2012/201255/201255pap.pdf). 

sion, based on an analysis of bank supervisory ratings.8 This research concludes that an increase in the level of stringency can 

have a statistically significant impact on total loans and loan capacity for several years—approximately 20 quarters—after the 

onset of the tighter supervisory standards. 

Longer-Term Trends 

Declines in small business lending also reflect longer-term trends 

in financial markets. Banks have been exiting the small business 

loan market for over a decade. This realignment has led to a decline in the share of small business loans in banks’ portfolios. The 

FDIC reports that the fraction of nonfarm, nonresidential loans of 

less than $1 million has declined steadily since 1998, dropping 

from 51 percent to 29 percent. 

The decades-long consolidation of the banking industry has reduced the number of small banks, which are more likely to lend to 

small businesses. Moreover, increased competition in the banking 

sector has led bankers to move toward bigger, more profitable, 

loans. That has meant a decline in small business loans, which are 

less profitable because they are banker-time intensive, are more 

difficult to automate, have higher costs to underwrite and service, 

and are more difficult to securitize. 

Conclusion 

The decline in the amount of small business credit since the financial crisis and Great Recession is unmistakable. The most recently available data put the inflation-adjusted value of small commercial and industrial loans at less than 80 percent of their 2007 

levels. While different industry participants offer different reasons 

for the drop in small business credit, a careful analysis of the data 

suggests that a multitude of factors explain the decline. 

The forces unleashed by the financial crisis and Great Recession 

added to a longer-term trend. Some banks have been shifting activity away from the small business credit market since the late 

1990s, as they have consolidated and sought out more profitable 

sectors of the credit market. Small business demand for lending 

has decreased, as fewer small businesses have sought to expand. 

Credit has also become harder for small businesses to obtain. A 

combination of reduced creditworthiness, the declining value of 

homes (a major source of small business loan collateral), and tightened lending standards has reduced the number of small companies able to tap credit markets. 

This confluence of events makes it unlikely that small business 

credit will spontaneously increase anytime in the near future. 

Given the contribution that small businesses make to employment 

and economic activity, policymakers may be inclined to intervene 

to promote greater access to credit for small business owners. 

When considering means of intervention, however, it is important 

SBREP-219 with DISTILLER

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to be cognizant that multiple factors are affecting small business 

credit demand and supply. Any proposed solutions should consider 

the combined effect of all of the factors involved. 

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UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON SMALL BUSINESS 

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

HEARING: ‘‘EXAMINING THE POST-RECESSION SMALL 

BUSINESS LENDING ENVIRONMENT’’ 

TESTIMONY OF JEFF STIBEL, CHAIRMAN AND CEO OF 

DUN & BRADSTREET CREDIBILITY CORP. 

DECEMBER 5, 2012 

SBREP-219 with DISTILLER

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1Proprietary data is composed of D&B Credibility Corp. data, and various other sources compiled by D&B Credibility Corp. for the year 2013. 

Thank you Chairman Rice, Ranking Member Chu and the Committee for inviting me to testify on this important topic. By way of 

background, I am currently Chairman and CEO of Dun & Bradstreet Credibility Corp. Dun & Bradstreet Credibility Corp. is the 

leading provider of credit building and credibility solutions for businesses. Dun & Bradstreet Credibility Corp. provides the only real 

business credit monitoring solution available to companies looking 

to monitor and impact their own business credit profile. Our leading credit monitoring products are used by hundreds of thousands 

of companies interested in helping protect their business reputation. Dun & Bradstreet Credibility Corp. additionally resells D&B 

solutions that help businesses gauge their potential risk by tracking the credit and creditworthiness of the companies with which 

they do business. 

Dun & Bradstreet Credibility Corp. is headquartered in Los Angeles, CA with offices throughout North America. 

Current State of the Economy 

Across the United States, businesses are recovering from the recession. The US GDP is expanding and the stock market is performing well. Our proprietary data shows similar progress. In order 

to effectively analyze the marketplace, we divide businesses into 

four categories by size: micro (less than $500,000 in annual revenue), small (less than $5 million in annual revenue), medium ($5 

million to $100 million in annual revenue) and large (over $100 

million in annual revenue). Across each of these categories, businesses are doing well and we are seeing strong growth in annual 

revenues. 

But when you look at the specific categories, an interesting trend 

emerges. It turns out that the smaller the business, paradoxically 

the better the performance. This is in contrast to what most people 

believe is happening. Yet, the numbers bear out the fact that the 

growth of sales are increasing the fastest in the smallest of businesses. The micro segment is performing best, followed by small, 

medium, and large. Small business growth is accelerating at a 

much faster pace than that of its larger counterparts. In 2013 

alone, micro business revenue on average grew by 2.14% while 

small business revenue grew by 1.18%. Yet medium business revenue stayed relatively flat, losing 0.2% overall. The large businesses on average in our data decreased revenue by 1.56%.1

Current State of Job Growth 

Despite the economic progress driven by business performance 

since the recession, the country has not recovered jobs at the same 

pace. Job growth, while improving, is slow by post-recession standards: The New York Times reported last year that percentage 

change in payroll, from business cycle trough to business cycle 

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2 Catherine Rampell, ‘‘Is This Really the Worst Economic Recovery Since the Depression?, New 

York Times, August 10, 2012. 3Proprietary data is composed of D&B Credibility Corp. data, and various other sources compiled by D&B Credibility Corp. for the year 2013. 4Proprietary data is composed of D&B Credibility Corp. data, and various other sources compiled by D&B Credibility Corp. for the year 2013. 5SBA Office of Advocacy Frequently Asked Questions, Published September 2012. 

6SBA Small Business Profile, Published February 2013. 

peak, averaged from all previous recessions, is 15%.2 For the current recovery it is 2%. By contrast, in an average recovery, corporate profits rise 38 percent from trough to peak. In this recovery, 

they have risen 45 percent. We have better than average profitability and much, much lower than average job growth. 

Our proprietary data supports the conclusion that on average, job 

growth has been slow relative to other recessions. As with revenue 

growth, the lack of job growth is largely a tale of two economies. 

However, for job growth, it is the smallest businesses that are suffering, not thriving. Our data show that the rate of job growth is 

the lowest in the smallest business categories. In 2013, large businesses increased employment by 5.53%, medium-sized businesses 

increased employment by 0.93%, small businesses by 0.57%, and 

micro by only 0.44%.3 It is a great paradox, an alarming problem, 

that even though small businesses are growing revenues at a faster 

pace, they are adding the fewest jobs. 

Jobless Recovery is Due to Weak Hiring at the Small Business Level 

Given that in past economic cycles, small businesses were the 

primary driver of employment growth, we can infer from our results that the disconnect between business success and job growth 

is one of the reasons for the ‘‘jobless recovery.’’ When you dissect 

the data further and analyze revenues per employee, a proxy for 

productivity, the results bear out this conclusion. Employee productivity is rising at the fastest rate for the smallest businesses, as 

measured by sales growth per employee. From January to November 2013, micro businesses experienced 1.86% growth per employee, small businesses 0.75%, medium businesses -1.14%, and 

large businesses -6.72%.4 (See attached figure.) The smaller the 

business, the greater the productivity gain on average per employee. Yet despite this gain in productivity, small businesses are 

not adding to their employment rosters at the same pace. Strong 

sales and greater productivity, without employment growth, yields 

a jobless recovery. 

Small businesses not only employ almost half of the private sector, but they are also responsible for the lion’s share of new jobs 

created. In the past 20 years, about two-thirds of all net new jobs 

were created by small businesses.5 SBA data show that small businesses (those with 500 or less employees) amount to 99.7% of all 

businesses and employ 49.1% of private sector employment.6 This 

means that small business job growth is critical after a recession. 

Of those small businesses, microbusinesses are particularly important to job growth. According to the Association for Enterprise 

Opportunity (AEO), 92% of all U.S. businesses are microbusinesses. 

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7 ‘‘Bigger than You Think: The Economic Impact of Microbusiness in the United States,’’ reported by Association for Enterprise Opportunity (AEO), 2013. 8Glenn Muske, Michael Woods, Jane Swinney and Chia-Ling Khoo, ‘‘Small Businesses and 

the Community: Their Role and Importance Within a State’s Economy,’’ Journal of Extension, 

Vol 45 (1): February 2007. 9 Joint survey with the Pepperdine Capital Access Index Survey Responses, Fourth Quarter 

2013 10 Interest rate obtained from http://www.bankrate.com/rates/interest-rates/prime-rate.aspx. 11Pepperdine Capital Access Index Survey Responses, Fourth Quarter 2013 12Pepperdine Capital Access Index Survey Responses, Fourth Quarter 2013, p20 

Despite their size, the direct, indirect, and induced effects of these 

microbusinesses on employment amounted to 41.3 million jobs, or 

31% of all private sector employment. ‘‘If one in three Main Street 

microbusinesses hired a single employee, the United States would 

be at full employment,’’ the AEO reported in 2011 and reiterated 

in a new report last month.7

The Root Problem Is Access to Capital 

We tend to equate job growth with business success but the reality is far more nuanced than that. Adding jobs is a capital investment, not a cash flow issue. Additional employees are hired for future growth, similarly to how business owners purchase computers, 

software, and other capital goods. Businesses may need to add jobs 

when revenues and profits rise but they cannot do so without a 

capital outlay. 

For large businesses, the cost of employment is relatively low, so 

this point becomes largely academic. As revenues and profits rise, 

the largest businesses simply dip into their capital reserves to hire 

more people and grow their businesses. But small businesses do 

not have reserves significant enough to support new employment 

growth. It is a far bigger investment for a small business to hire 

an additional employee than for a larger business to do so. For 

microbusinesses, the situation is even more acute: adding a single 

employee to a microbusiness—where the average number of employees is 2.34 8—would require increasing payroll by nearly 50%. 

For a small business to increase hiring, they need access to capital. 

Today, access to capital for small businesses is a significant problem. The data we’ve collected with our partners at Pepperdine University show a large discrepancy in access to capital across business size.9 (See attached figure). The largest businesses are able to 

secure financing with relative ease and on strong terms, including 

historically low interest rates—the United States Federal Funds 

Rate is currently 0.25% and the WSJ Prime Rate is 3.25%.10

As business size gets smaller, access to capital shrinks dramatically. 66% of small business owners indicate that the current business-financing environment is restricting growth opportunities for 

their businesses, while only 44% of medium sized businesses feel 

this way. 74.2% of small business owners feel it is difficult to raise 

new external debt financing, while only 45.3% of medium size business owners feel this way.11

Our data show that 28% of micro, small, and medium sized businesses sought external financing in the past three months.12 Of 

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13Pepperdine Capital Access Index Survey Responses, Fourth Quarter 2013, p24 14Pepperdine Capital Access Index Survey Responses, Fourth Quarter 2013, p23 plus Special PCA Index Survey Responses for Businesses with Annual Revenues Under $500K, p16. 15Pepperdine Capital Access Index Survey Responses, Fourth Quarter 2013, p23 plus Special PCA Index Survey Responses for Business with Annual Revenues Under $500K, p16. 16Pepperdine Capital Access Index Survey Responses, Fourth Quarter 2013, p27 plus Special PCA Index Survey Responses for Businesses with Annual Revenues Under $500K, p20. 17Federal Deposit Insurance Corporation, Statistics on Depository Institutions, June 2007 

through June 2012. 18Ty Kiisel, ‘‘65 Percent Isn’t Enough and Job Creation is Suffocating,’’ Forbes, August 13, 

2013. 

those, most (57.1%) sought a business bank loan.13 The approval 

rates vary widely but the trend is consistent with our other data: 

75% of medium-sized businesses who sought a bank loan were successful, as compared to 34% of small businesses and only 19% of 

microbusinesses.14 Even alternative sources of capital that were 

once thought of as easy to acquire are becoming difficult for the 

smallest businesses in this environment. Of those business owners 

who attempted to acquire a business credit card, for example, in 

the past three months, only 51% of microbusinesses were successful, as compared to 62% of small businesses and 75% of mediumsize businesses.15 It is alarming that almost half of all microbusinesses in our data were unable to secure a business credit 

card, traditionally one of the easiest sources of capital. 

Instead, micro and small businesses are turning to their personal 

assets to grow: our survey showed that 46% of micro business owners transferred personal assets to the business over the past three 

months, compared to 40% of small business owners and only 19.3% 

of medium business owners.16 During the recession, these assets 

were largely frozen, but with the housing market recovering and 

personal debt expanding, this is a singular bright spot to the small 

business capital dilemma. 

Ultimately, however, small businesses require business loans to 

succeed. Access to capital worsened significantly during the recession, but only for small businesses. Banks actually increased large business loans (defined by the FDIC as loans over $1 million) by 

23% from 2007 (pre-recession) to 2012 (post-recession). During the 

same time period, they decreased small business loans (defined by 

the FDIC as loans $1 million and under) by 14%.17

External data show that banks and other traditional sources are 

trying to increase their small business lending, but even here, this 

lending is geared mostly to the larger ‘‘small’’ businesses. Many big 

banks now consider a small business as having up to $20 million 

in revenues, and evidence suggests that they are lending to those 

businesses with revenues closer to $20 million than $1 million or 

less. The average SBA backed 7(a) loan in 2012 was $337,730. This 

is much more than the average microbusiness would require and 

likely greater than the needs of many smaller businesses. In fact, 

Forbes reported this year that one firm who surveyed their small 

businesses seeking loans found that 59% of them were looking for 

a loan amount of $50,000 or less.18

Even definitions of small business have changed. The problem of 

defining a small business is not a new one: the War Mobilization 

and Reconversion Act of 1944 defined a small business as either 

‘‘employing 250 wage earners or less’’ or having ‘‘sales volumes, 

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19 Robert Jay Dilger, ‘‘Small Business Size Standards: A Historical Analysis of Contemporary 

Issues,’’ Congressional Research Service, June 20, 2013. 20 Jack Fitzpatrick, ‘‘SBA Revises Small Business Size Standards,’’ USA Today, June 21, 2013. 

quantities of materials consumed, capital investments, or any other 

criteria which are reasonably attributable to small plants rather 

than medium- or large-sized plants.’’ 19 The SBA’s size standards 

were changed as recently as July 2013, when it increased the average annual revenue size standard from $7 million to $35.5 million 

for 25 industries.20 This encourages banks and other lenders to 

lend to larger firms, despite the need from the smallest segment of 

our business economy. 

Without capital, small business will not be in a position to increase employment. This explains why our data show that even 

though small businesses have increasing revenues and remain optimistic, they are still not adding jobs. Jobs require capital but it is 

the largest businesses that are having the easiest time financing 

growth, while the smallest businesses have much less access. As a 

result, we are investing in the least productive sector of our economy, which is yielding weak job growth. Improving small business 

access to capital would make the most positive economic impact. 

Solving the Problem: Reduce Lending Risks to and for 

SMBs 

The good news is that the problem is relatively clear: small business need access to capital in order to increase job growth. The solution, of course, is somewhat illusory. Previous attempts have focused on lowering interest rates but that is not the solution. Banks 

do not focus primarily on interest rate reductions in making lending decisions; they pass these costs on to businesses. Businesses in 

turn are not as focused as we might think on rates. We do not hear 

businesses complaining about high interest rates. In fact, many 

smaller businesses end up turning to alternative lending sources 

with very high rates and very high satisfaction. The solution, instead, lies with reducing risk, from both the lending side and the 

borrowing side. 

1. On the lending side, we’ve observed that banks are risk adverse. In general, the larger the business, the less likelihood of a 

complete loan default. Hence, banks tend to focus on lending to 

larger businesses. The government has tried to stem this trend 

with positive results by providing backstops through the Small 

Business Administration. The SBA currently guarantees 85% of the 

value of loans up to $150,000 and 75% of the value of loans of more 

than $150,000. While this has had a positive effect on small business lending, small business lending may benefit from having that 

distinction be focused, not on loan size, but on business size. For 

example, the SBA could guarantee 85% of the loan value for microbusinesses, 75% for small businesses, 50% for medium-sized businesses, and zero for larger companies. This would effectively tier 

the risk for banks and incentivize them to lend to the smallest and 

most productive businesses. 

2. On the borrowing side, many small business owners are hesitant to take out loans with personal guarantees. The SBA, tradiSBREP-219 with DISTILLER

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21 7(a) loan repayment terms from Sba.gov. 

tional banks, and even many alternative lenders require personal 

guarantees. For example, the SBA requires all owners of 20 percent 

or more of the equity in a business to offer a personal guarantee, 

and may even require liens on personal assets.21 When banks require personal guarantees for a business loan, that loan is essentially the same as a personal loan. In effect, our economy has no 

concept of business loans for small businesses: we only offer personal loans. The most savvy of business owners know this and it 

is why our data shows that many owners avoid business loans in 

favor of easier and cheaper personal loans that carry the same risk. 

This policy is costing the economy growth and our nation jobs. 

We believe strongly that helping small businesses access capital 

is vital to our nation’s recovery, and we have made this one of our 

missions at Dun & Bradstreet Credibility Corp. We launched our 

Access to Capital initiative in an effort to foster business lending 

and educate small business owners on the many types of financing 

that may be available to them. We have held four successful events 

in the past year, and have helped thousands of small business owners sit down for one-on-one meetings with traditional and alternative lenders, resulting in tens of millions in loan originations. We 

are also a partner in the Clinton Global Initiative, where we have 

provided over $2.5 million in free products and services to small 

businesses across the country who are in need of our credit building solutions but cannot afford them. 

The best solutions occur when government and the private sector 

work together. The government has already done a great deal for 

its part. For small businesses, the government can even further 

and profoundly influence the growth of revenues and jobs by reducing risk on both sides of the equation. 

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Testimony of 

Renaud Laplanche 

Founder & CEO 

Lending Club 

before the 

Subcommittee on Economic Growth, Tax and Capital Access 

of the 

Committee on Small Business 

United States House of Representatives 

5th December, 2013 

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My name is Renaud Laplanche and I am the founder and CEO 

of Lending Club, a credit platform that employs over 300 people in 

San Francisco. My father was a small business owner; he owned 

a grocery store in a small town in France and I spent every day 

of my teenage years from 5 am until 8 am before class helping him 

in the store. After having started two companies in New York and 

San Francisco, residing in the US for the past 14 years and starting a family here, I recently passed my citizenship test and will 

soon be a US citizen. Testifying before this Committee on the state 

of small business lending in America is a special moment for me. 

Small Businesses are not only a driving force in the US economy; 

they are an essential part of the American Dream. I believe it is 

our shared responsibility to ensure that these businesses and their 

owners have sufficient access to capital on fair terms. 

I have two points I hope to convey to you today. First, small businesses have insufficient access to credit, and that situation is worsening. Second, their credit performance as a group suggests that 

they should be getting more credit. 

1. Small businesses have insufficient access to capital and 

that situation is getting worse. 

A survey released by the Federal Reserve Bank of New York in 

August of this year was the latest to paint a grim picture of availability of credit to small businesses. Access to capital was reported 

as by far the biggest barrier to growth. Out of every 100 small 

businesses, 70 wanted financing. Of those 70, 29 were too discouraged to apply. Of the 41 that applied for credit, only 5 received the 

amount they wanted. Substantially all of these businesses (93%) 

were looking for $1M or less in capital. [NY Fed] 

This situation has not gotten better: while the overall volume of 

loans of more than $1M has risen slightly since 2008, loans of less 

than $1M have fallen by 19%. The number of small businesses with 

a business loan fell by 33% from 2008 to 2011. [NFIB] 

The problem is worse for the smallest businesses. While businesses with 20+ employees reported an increase in bank loans from 

2009–2011, the majority of small businesses, which have fewer 

than 20 employees, reported a decline with the smallest businesses 

suffering the steepest decline. Businesses with 2–4 employees reported a 46% reduction in bank loans over the same period. [NFIB] 

While traditional sources of capital have pulled back, alternatives are on the rise. Alternative lenders such as online lenders 

and merchant cash advance providers are the fastest-growing segment of the SMB loan market—recording a 64% growth in originations in the last 4 years. [Paynet] Many of these alternative lenders, however, charge fees and rates that result in annual percentage rates generally in excess of 40% and, without full transparency, 

business owners don’t always understand the true cost of the loan. 

This lack of understanding can be very harmful to a small business, which could find itself in a spiral of inescapable debt service. 

2. Small Business Loan Performance is Doing Just Fine. 

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Charge-off rates on small business loans have been below 1% 

since March 2012, down from a peak of nearly 3% in 2009. [SBFE] 

In contrast, charge off rates on consumer credit cards peaked above 

10% during the financial crisis. 

These figures show that absolute loan performance is not the 

main issue of declining SMB loan issuances; we believe a larger 

part of the issue lies in high underwriting costs. SMBs are a heterogeneous group and therefore the underwriting and processing of 

these loans is not as cost-efficient as underwriting consumers, a 

more homogenous population. Business loan underwriting requires 

an understanding of the business plan and financials and interviews with management that result in higher underwriting costs, 

which make smaller loans (under $1M and especially under $250k) 

less attractive to lenders. By contrast, larger loans—going mostly 

to larger businesses—are more attractive, as they allow underwriting costs to be amortized over a larger amount and longer loan 

term. 

We believe we have solutions to bring underwriting costs down 

and create the conditions for credit to become more available and 

more affordable to small businesses in America, and would be honored to answer the Subcommittee questions in that regard. 

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Testimony of 

Fred Green 

before the 

Subcommittee on Economic Growth, Tax and Capital Access 

of the 

Committee on Small Business 

United States House of Representatives 

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Testimony of 

Fred Green 

before the 

Subcommittee on Economic Growth, Tax and Capital Access 

of the 

Committee on Small Business 

United States of Representatives 

Dcember 5, 2013 

Chairman Rice, Ranking Member Chu, and members of the Committee, my name is Fred Green. I am President and Chief Executive Officer of the South Carolina Bankers Association. We are the 

professional trade association that has represented South Carolina’s banks for over 110 years. Our members are both large and 

small and collectively have over 99% of the deposit market share 

in our state. 

I am pleased to share the banking industry’s perspective on the 

state of the small business lending environment. 

It is well-documented how crucial small businesses are to the national economy. Studies produced by the Small Business Administration demonstrate that small businesses account for over half of 

all jobs in the U.S. and this share of total employment has been 

fairly stable over the past few decades. More importantly, small 

businesses account for as much as 65 percent of net new jobs created over the past 15 years and most new job growth during economic recoveries occurs at new and small firms. Small firms and 

start-ups promote innovation because they are more flexible and 

often more daring than larger businesses. 

Banks are the primary lender to small businesses and their presence in local communities throughout our nation is critical to meeting the unique needs of new and developing companies. There is 

a symbiotic relationship between the health of a community and 

the health of the banks located there. It is why small business 

lending is an important part of every bank’s strategy and why 

banks today provide more than 20 million small business loans. 

Loan demand has improved since the recession, however remains 

at relatively weak levels, held back by tremendous uncertainty 

about the future. Concerns over changes to taxes, employment 

costs and regulation make small business owners less interested in 

expanding and incurring new debt. Businesses simply are not willing to take on additional debt with so much uncertainty about the 

economic future they face. 

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Despite the low loan demand, banks continue to meet the needs 

of their customers. In every community, banks are actively lending 

and continually looking for lending opportunities. After declines in 

loan portfolios since the pre-recession peak, recent FDIC call report 

data shows that outstanding loans have been growing over the last 

12 months. The presence of banks in communities throughout our 

nation is critical to meeting the unique needs of small businesses. 

Historically, small business loans have been more risky than 

other loan types. Small business loan portfolios’ credit metrics are 

improving but are still below pre-recession levels. Underwriting 

standards have forced banks to secure more of these loans with collateral. The smaller loans, generally $250,000 and less, are underwritten primarily on the owner’s financial strength and personal 

assets. Since real estate is the primary personal asset for many 

small business owners, and real estate has decreased in value, this 

presents another challenge for banks. 

Banks also face another challenge in providing loans to meet 

their customer’s needs with the most recent wave of regulations. 

The cumulative impact of hundreds of new or revised regulations 

may be a weight too great for many small banks to bear. Congress 

must be vigilant in its oversight of the efforts to implement the 

Dodd-Frank Act to ensure that rules are adopted only if they result 

in a benefit that clearly outweighs the burden. Some rules under 

Dodd-Frank, if done improperly, will literally drive banks out of 

lines of business. 

This last point is very important. It is not that these regulations 

will just increase compliance costs for banks, but banks are now, 

in their strategic planning, being forced to consider the elimination 

of certain products to which customers have grown accustomed. In 

South Carolina we recognized this growing concern and held a special conference for top bank executives recently to address significantly stricter mortgage regulations and capital standards banks 

will find themselves facing beginning next year. Some community 

banks have already told us they will most likely have to stop offering residential mortgage products because of these new lending 

regulations. And as we all know, fewer participants in the market 

means fewer options for consumers. For many, these community 

banks are the only option. In fact, community banks are the only 

physical banking presence in one fifth of the counties in the U.S. 

The calculus is fairly simple: More regulation means more resources devoted to regulatory compliance, and the more resources 

devoted to regulatory compliance, the fewer resources are dedicated 

to doing what banks do best—meeting the credit needs of local 

communities. Every dollar spent on regulatory compliance means 

as many as ten fewer dollars available for creditworthy borrowers. 

Less credit in turn means businesses can’t grow and create new 

jobs. As a result, local economies suffer and the national economy 

suffers along with them. 

In my testimony today, I’d like to make three key points: 

• Demand for Business Loans Remains Weak Due to Uncertainty. 

• Banks are Making New Loans, Meeting Demand. 

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• New Regulations Threaten Banks’ Ability to Meet Customer Demand. 

I will discuss each of these in detail in the remainder of my testimony. 

Demand for Business Loans Remains Weak Due to Uncertainty 

Loan demand has steadily improved since the recession, however 

remains at relatively weak levels. Although the economy continues 

its slow recovery, there remains tremendous uncertainty about the 

future. This uncertainty, particularly relating to potential changes 

to taxes and regulation makes borrowers less interested in adding 

new debt. 

Small business sentiment has yet to recover from the recession. 

The National Federation of Independent Business’s (NFIB) Small 

Business Optimism Index remains at depressed levels, and has yet 

to surpass pre-recessionary lows going as far back as 1980. Moreover, optimism has not seen any significant improvement in the 

past two years. 

As a result, businesses are not looking to expand. In the NFIB’s 

October survey, just 6 percent of small businesses see now as a 

good time to expand. In fact, 59 percent of the respondents cited 

the economic conditions and political climate alone as the reason 

not to expand. If businesses are not expanding, they are not taking 

out loans to fund expansion. 

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In South Carolina, our banks are reporting the same—that there 

is some demand, but economic uncertainty and the political climate 

are holding businesses back from making capital investments to 

grow their businesses. 

Most bankers state that demand is low particularly from companies with stronger credit profiles. Financially strong companies are 

holding back because of the uncertainty generated by the debate on 

the budget and the debt ceiling; and over healthcare cost concerns. 

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Higher employment costs such as healthcare, taxation and labor 

are bigger issues than most realize, especially for the small-business owner. Our bankers repeatedly report speaking to companies 

that are cutting employees to get below the 50-worker threshold. 

For these businesses, that means no expansion and therefore a limited need for bank funding for expansion. One banker reported a 

common example. This banker had banked the local owners of 

seven fast-food restaurants. The owners recently refinanced all 

term debt and extended amortization to provide better debt coverage in preparation for the impact of increased healthcare costs. 

They currently have approximately 150 full time employees and 50 

part time employees. They plan to cut full time employment by at 

least 50 percent and offset that by increasing their part time staff. 

In addition, they have put all expansion plans on hold. Another 

business owner is outsourcing instead of expanding and hiring new 

employees. He cites concerns over the rising cost of healthcare as 

one thing that keeps him from growing his employment base. 

Due to this uncertainty and apprehension about the future, small 

business owners’ loan levels have decreased. This leaves bankers to 

aggressively seek what little business is available, often taking 

business from one another; rather than seeing an expansion of the 

business market to pre-recession levels due to increased borrowing. 

Even though the resulting pricing and terms from this competition 

are very favorable to borrowers, lending levels remain low due to 

the lack of confidence on the part of small business owners, not 

banks’ unwillingness to lend. 

Business thrives when there is a level of stability in the economy. The unknowns associated with providing health care to employees is just one of many concerns in what business owners see 

as a confusing and convoluted environment. 

Businesses simply are not willing to take on additional debt with 

so much uncertainty about the economic future they face. In fact, 

utilization of existing line commitments remains low at around 50 

percent. Said differently, business owners are using only 50 percent 

of the dollar loan commitments already in place. 

Banks are Making New Loans, Meeting Demand. 

In every community, banks are actively lending and continually 

looking for lending opportunities. In spite of the slowly recovering 

pace of the economy, recent FDIC call report data shows that outstanding loans have been growing over the last 12 months and that 

after several years of contraction, the overall portfolio of small 

business loans has stabilized. The presence of banks in communities throughout our nation is critical to meeting the unique needs 

of small businesses. 

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In fact, banks are meeting the majority of loan demand of small 

businesses. In the NFIB’s October 2013 Small Business Optimism 

Index, financing and interest rates were the least cited concern facing small businesses. In fact, just two percent of respondents identified this as their chief concern, a survey low. On the other hand 

a combined 41 percent of respondents cited government requirements or taxes as their greatest concern. 

Banks still continue to make loans to creditworthy borrowers, 

constantly assessing whether some businesses can reasonably take 

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on more debt in this economy. In 2012 alone, banks made $1.8 trillion in new loans and business loan volumes have grown by 10 percent in the past year alone. 

The pace of business lending is affected by many things, most 

importantly being the demand from borrowers. The state of the 

local economy—including business confidence, business failures, 

and unemployment—and regulatory pressures to be conservative 

plays important roles too. The rise in new credit means that businesses are borrowing more from banks and using that money to 

grow and improve the economy. 

New Regulations Threaten Banks’ Ability to Meet Customer Demand. 

Banks are currently contending with a wave of new regulations. 

During the last decade, the regulatory burden for community banks 

has multiplied tenfold, with more than 50 new rules in the two 

years before Dodd-Frank. And with Dodd-Frank alone, there are 


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final regulations (as of November 19, 2013). What is frightening to 

consider is that we are not even half way through Dodd-Frank’s 

398 rules that must be promulgated under the new law. 

In many cases, the cumulative impact of the last few years of 

new regulation threatens to undermine the community bank model. 

Banks certainly appreciate the importance of regulations that are 

designed to protect the safety and soundness of our institutions 

and the interests of our customers. We recognize that there will always be regulations that control our business. But the reaction to 

the financial crisis has layered regulation upon regulation, doing 

little to improve safety and soundness and, instead, increasing our 

operating costs and handicapping our ability to serve our communities. 

Community banks pride themselves on being agile and quick to 

adapt to changing environments. During the recession, banks tightened lending standards. Even though underwriting has loosened 

some, it is still tighter than before. Yet what will discourage loosening underwriting standards even further are the regulatory pressures on small community banks, the banks that make the majority of the small business loans. New laws or regulations might be 

manageable in isolation, but wave after wave, one on top of another, will undoubtedly overwhelm many community banks. Given 

that the cost of compliance has a disproportionate impact on small 

banks as opposed to large banks, it is reasonable to expect this gap 

to widen even more as Dodd-Frank is fully implemented. 

The cumulative impact of hundreds of new or revised regulations 

may be a weight too great for many small banks to bear. Congress 

must be vigilant in its oversight of the efforts to implement the 

Dodd-Frank Act to ensure that rules are adopted only if they result 

in a benefit that clearly outweighs the burden. As mentioned earlier, some rules under Dodd-Frank, if done improperly, will cause 

many banks to eliminate or drastically limit products and services 

many businesses have used for years. New rules on mortgage lending, for example, are particularly problematic. 

In dramatic illustration of this point, a 2011 ABA survey of bank 

compliance officers found that compliance burdens have caused almost 45 percent of the banks to stop offering some loan or deposit 

products. In addition, almost 43 percent of the banks decided to not 

launch a new product, delivery channel or enter a geographic market because of the expected compliance cost or risk. 

The bottom line is this—additional regulations mean more resources devoted to compliance, and dollars directed toward compliance are dollars that can’t be directed toward meeting the credit 

needs of local communities. Banks understand regulation is necessary, but they also understand that burdensome regulation ultimately means they have fewer dollars to lend, which means less 

opportunity for businesses to grow and create new jobs. As a result 

local economies suffer and the national economy suffers along with 

them. 

Conclusion 

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Banks in South Carolina and across the nation are eager to serve 

the financing needs of small businesses. They understand they play 

a critical role in their local economies and no bank has or wants 

to stop pursuing small-business lending. Yet, small businesses remain very hesitant on the whole to embrace expansion due to economic uncertainty, concerns over healthcare and the political climate. Businesses that are ready to expand, hire and invest find 

themselves increasingly apprehensive as a result of the external 

turmoil and, as a result, have held off significantly from enacting 

growth plans. 

This does not mean that banks are not making loans. Our economy is growing and banks are addressing financing needs. But 

these loans are being made to creditworthy borrowers with vanilla 

financials; businesses with financials that vary from norm, sometimes even in small measures, often finding themselves unable to 

secure financing. 

Finally, regulatory pressures on banks have slowed banks’ ability 

to provide their communities the economic financing they need. 

Regulations restrict what loans can be made and the amount of 

regulations greatly increase compliance costs, thus reducing the 

ability to lend. The bottom line is that while banks may be eager 

to lend, and business may be eager to grow, the environment that 

exists at present is hindering efforts by both to make transactions 

a reality. As such, it’s not only banks and small businesses that are 

hurt, but communities as a whole. 

Healthy, properly financed small businesses are absolutely critical to our communities’ economies. Banks understand their role in 

this and continue to make every good loan they can, despite an increasingly difficult lending environment. 

Thank you once again for the opportunity to testify. 

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Introduction 

Good morning, Chairman Rice, Ranking Member Chu and Members of the Subcommittee. My name is John Farmakides, and I am 

testifying on behalf of the National Association of Federal Credit 

Unions (NAFCU). Thank you for holding this important hearing 

today. I appreciate the opportunity to share our views on small 

business lending from a lender’s perspective. 

Currently, I serve as the President and CEO of Lafayette Federal 

Credit Union headquartered in Kensington, Maryland, a position I 

have held since 2007. Lafayette has a rich history of serving the 

greater Washington, D.C. area and was established in 1935 offering small personal loans to members. Today Lafayette has approximately 14,000 members, over 65 employees and more than $366 

million in assets. We provide a full range of financial services including member business loans through several branches in Maryland, Virginia, and the District of Columbia. I have been an active 

member of the Lafayette community for over 20 years, serving on 

the supervisory committee as chairman and as treasurer of the 

board before being named President and CEO in 2007. I also have 

experience in investment banking and commercial real estate. 

In addition to my responsibilities at Lafayette, I also currently 

sit on the Regulatory Committee at the National Association of 

Federal Credit Unions (NAFCU). As you may know, NAFCU is the 

only national organization that exclusively represents the interests 

of the nation’s federally chartered credit unions. NAFCU member 

credit unions collectively account for approximately 68 percent of 

the assets of federally chartered credit unions. NAFCU and the entire credit union community appreciate the opportunity to participate in this important and timely discussion. 

Background on Credit Unions 

Historically, credit unions have served a unique function in the 

delivery of necessary financial services to Americans. Established 

by an act of Congress in 1934, the federal credit union system was 

created, and has been recognized, as a way to promote thrift and 

to make financial services available to all Americans, many of 

whom would otherwise have limited access to financial services. 

Congress established credit unions as an alternative to banks and 

to meet a precise public need—a niche credit unions fill today for 

nearly 97 million Americans. Every credit union is a cooperative institution organized ‘‘for the purpose of promoting thrift among its 

members and creating a source of credit for provident or productive 

purposes.’’ (12 § USC 1752(1)). While over 75 years have passed 

since the Federal Credit Union Act (FCUA) was signed into law, 

two fundamental principles regarding the operation of credit 

unions remain every bit as important today as in 1934: 

• credit unions remain totally committed to providing their 

members with efficient, low-cost, personal financial service; 

and, 

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• credit unions continue to emphasize traditional cooperative 

values such as democracy and volunteerism. 

The nation’s approximately 7,000 federally insured credit unions 

serve a different purpose and have a fundamentally different structure than banks. Credit unions exist solely for the purpose of providing financial services to their members, while banks aim to 

make a profit for a limited number of shareholders. As owners of 

cooperative financial institutions united by a common bond, all 

credit unions have an equal say in the operation of their credit 

union—‘‘one member, one vote’’—regardless of the dollar amount 

they have on account. These singular rights extend all the way 

from making basic operating decisions to electing the board of directors—something unheard of among for-profit, stock-owned 

banks. Unlike their counterparts at banks and thrifts, federal credit union directors generally serve without remuneration—a fact 

epitomizing the true ‘‘volunteer spirit’’ permeating the credit union 

community. 

Credit unions continue to play a very important role in the lives 

of millions of Americans from all walks of life. As consolidation of 

the commercial banking sector has progressed, with the resulting 

depersonalization in the delivery of financial services by banks, the 

emphasis in consumers’ minds has begun to shift not only to services provided, but also—more importantly—to quality and cost of 

those services. Credit unions are second-to-none in providing their 

members with quality personal financial services at the lowest possible cost. 

Impediments to Credit Union Business Lending 

When Congress passed the Credit Union Membership Access Act 

(CUMAA) (P.L. 105–219) in 1998, it put in place restrictions on the 

ability of credit unions to offer member business loans (MBL). 

Credit unions had existed for nearly 90 years without these restrictions. Congress codified the definition of an MBL and limited a 

credit union’s member business lending to the lesser of either 1.75 

times the net worth of a well-capitalized credit union or 12.25 percent of total assets. 

CUMAA also established, by definition, that business loans above 

$50,000 count toward the cap. This number was not indexed and 

has not been adjusted for inflation in the 15 years since enactment, 

eroding the de minimis level. Where many vehicle loans or small 

lines of credit may have been initially exempt from the cap in 1998, 

many of these types of loans that meet the needs of small business 

today are now impacted by the cap due to this erosion. To put this 

in perspective relative to inflation, what cost $50,000 in 1998 costs 

$71,639 today, using consumer price index data. That is a change 

that is completely ignored by current law and greatly hamstrings 

a credit union’s ability to meet its members’ needs. 

The mere existence of an member business lending cap acts as 

a deterrent for credit unions to start an MBL portfolio knowing 

that as their program thrives they will face this arbitrary threshold 

and may have to turn members away. Furthermore, it should be 

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noted that those credit unions that do have an MBL program are 

disincentivized from offering working capital lines of credit given 

that, regardless of whether or not the line of credit is actually 

drawn, it still counts against the cap. As members of the subcommittee are aware, working capital lines of credit are critical to 

small companies as a way to meet day-to-day cash shortfalls and 

manage the needs of a growing business. 

It should be noted that the government guaranteed portions of 

Small Business Administration (SBA) loans do not count toward 

the member business lending cap, but the non-guaranteed portions 

do. This could ultimately lead to a situation where a credit union 

may be an excellent, or even preferred, SBA lender and ultimately 

have to scale back participation in SBA programs as they approach 

the arbitrary cap. This would likely hit SBA Express or Patriot Express loans first, as those have lower guarantees and thus may 

have a bigger impact on money available below the cap. As you 

know, Patriot Express loans help give our nation’s veterans more 

opportunities after they return from serving our country. The member business lending cap can deter the availability of those opportunities. 

Also, pursuant to section 203 of CUMAA, Congress mandated 

that the Treasury Department study the issue of credit unions and 

member business lending. In January 2001, the Treasury Department released the study, ‘‘Credit Union Member Business Lending’’ 

and found the following: ‘‘...credit union’s business lending currently has no effect on the viability and profitability of other insured depository institutions.’’ (p. 41). Additionally, when examining the issue of whether modifying the arbitrary cap would help 

increase loans to businesses, the study found that ‘‘...relaxation of 

membership restrictions in the Act should serve to further increase 

member business lending...’’ (p. 41). 

The 2001 Treasury study found that credit unions do not pose a 

threat to the viability and profitability of banks, but that in certain 

cases, they could be an important source of competition for banks. 

It is important to note that credit unions have a nominal market 

share of the total commercial lending universe (approximately 6% 

of all small business loans from insured depository institutions), 

and are not a threat to other lenders (who control nearly 94% of 

all small business loans from insured depository institutions) in 

this environment. 

A 2011 study commissioned by the SBA’s Office of Advocacy affirms these findings. (James A. Wilcox, The Increasing Importance 

of Credit Unions in Small Business Lending, Small Business Research Summary, SBA Office of Advocacy, No. 387 (Sept. 2011)). 

The SBA study also indicates, importantly, that credit union business lending has increased in terms of the percentage of their assets both before and during the 2007–2010 financial crisis while 

banks’ has decreased. This demonstrates not only the need for lifting the cap in order to meet credit union members’ demand, but 

also that credit unions continue to meet the capital needs of their 

business members even during the most difficult of times. One of 

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ly unaffected by changes in credit unions’ business lending. Additional analysis is the study also found that credit unions’ business 

lending can actually help offset declines in bank business lending 

during a recession. 

Bipartisan legislation to address this issue, in the form of H.R. 

688, the Credit Union Small Business Jobs Creation Act, is pending 

before the Financial Services Committee. Introduced by Reps. Ed 

Royce (R-CA) and Carolyn McCarthy (D-NY) this legislation would 

raise the current 12.25% limit to 27.5% for credit unions that meet 

certain criteria. One alternative to the approach in H.R. 688 would 

be to raise the outdated ‘‘definition’’ of an MBL from last century’s 

$50,000 to a new 21st century standard of $250,000, with an indexing of inflation to prevent future erosion. Furthermore, MBLs made 

to non-profit religious organizations, made for certain residential 

mortgages (such as non-owner occupied 1–4 family residential 

mortgages), made to business in ‘‘underserved areas’’ or made to 

small businesses with fewer than 20 employees should be given 

special exemptions from the cap. 

The ever-growing regulatory burden being placed on credit 

unions also serves to hamper the ability of credit unions to make 

business loans, as capital is diverted from lending to compliance 

costs. In early February of this year, NAFCU was the first credit 

union trade association to formally call on the new Congress to 

adopt a comprehensive set of ideas generated by credit unions that 

would lead to meaningful and lasting regulatory relief for our industry (A copy of the letter is attached to my testimony). Based on 

feedback from our membership and the strong expectation for future growth, regulatory relief on the member business lending front 

is a key component of NAFCU’s five-point plan. Another important 

aspect of this proposal is capital reforms for credit unions, such as 

establishing a risk-based capital system and allowing credit unions 

to seek access to supplemental capital. Providing regulatory relief 

on these fronts will help make sure credit unions continue to have 

the capital available to lend our nation’s small businesses. 

The Member Business Lending Environment Post Financial Crisis 

A November 2013, survey of NAFCU members found that member business lending is expected to grow over the next twelve 

months. On a scale that goes from -100 to +100 (where zero indicates flat growth), the August-October median growth expectation 

for credit unions regardless of geographic location was 35.6. Furthermore, asset quality continues to improve for member business 

loans at credit unions, with charge-offs down to only 0.38%. 

As illustrated in the graph below, the percentage of credit unions 

with member business lending programs has been rising steadily 

since the financial crisis. 

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While other lenders pulled back on business lending during the 

economic downturn, credit unions continued to lend to their small 

business members. Furthermore, as those small business members 

lost lines of credit from other lenders, they turned to credit unions 

to help meet their needs, leading to an increased demand for credit 

union business loans. 

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Member Business Lending at Lafayette Federal Credit Union 

Lafayette has seen a need arise from our small business members to get lines of credit that they have lost from other lenders. 

As a result, we have expanded our focus into this area in 2013. For 

example, we gave a $125,000 line of credit to a local bike rental 

and touring company to help with their cash flow due to the cyclical nature of their business. This loan helps them maintain their 

8–10 full-time employees in the off-season (which then grows to 50– 

60 in season). 

While our credit union proudly meets our local communities’ 

lending needs, the arbitrary member business lending cap is now 

having a direct negative impact on how well we can serve our 

members. Many small businesses come to us looking for large lines 

of credit to help them meet cyclical challenges. However, any line 

of credit above $50,000 counts toward our member business lending 

cap, even if the funds are not extended. This fact hampers our ability to meet the needs of many of our small business members. 

So far in 2013, we have done ten commercial and industrial 

member business loans averaging out at about $61,000 each, evidence that most are considered small but are still ‘‘large’’ enough 

to count against the arbitrary cap. Many of our loans in this area 

tend to be lines of credit advances aimed at financing for cash flow 

purposes or startup costs. We have also been able to assist very 

small traditional companies like a specialty bakery with a single 

employee-owner and a trucking delivery service. At the same time, 

we have made loans to several consulting firms related to government contracting as well as an innovative solar energy appliance 

company. 

It is worth noting that Lafayette takes our MBL program very 

seriously and we have recruited the appropriate personnel with the 

appropriate experience to ensure it is sound and successful. While 

others in the financial services industry may claim credit unions 

aren’t sophisticated enough or able to attract the correct personnel 

to make member business loans, this is simply a misnomer. 

SBA Lending at Lafayette Federal Credit Union 

Small businesses are the backbone of our economy and an important source of jobs for Americans. The Small Business Administration’s loan programs serve as an important resource that helps 

credit unions provide small businesses with the vital capital necessary for growth and job creation. However, utilizing any SBA 

loan guaranty program requires meeting stringent government regulations. While we are an approved SBA 7(a) lender, we currently 

have just one SBA 504 loan outstanding, and one USDA Business 

& Industry loan outstanding. 

Determining overall applicant eligibility to participate in an SBA 

program is nearly as important as determining the applicant’s 

creditworthiness. Failing to meet certain eligibility criteria may 

preclude the applicant from participating in an SBA guaranteed 

loan program. Eligibility criteria includes among other things: size 

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restrictions, type of business, use of proceeds, credit standards, and 

meeting a ‘credit-elsewhere’ test. 

If Congress and the SBA were to make it easier for credit unions 

to participate in these programs, small businesses throughout the 

nation will have greater access to capital at a time when it is needed most. NAFCU would support SBA loans being permanently exempted from counting against a credit union’s MBL cap in full. 

These suggested changes, which allow credit unions to do more to 

help our nation’s small businesses, are an important step to help 

our nation recover from the current economic downturn. 

Conclusion 

Small businesses are the driving force of our economy and they 

key to its success. The ability for them to borrow and have improved access to capital is vital for job creation. Credit unions play 

an important role in helping our nation’s small businesses get the 

access to funds that they need. We want to do more, however, we 

are hamstrung by an outdated artificial member business lending 

cap that ultimately hurts small businesses. We urge the subcommittee to support legislation to make it easier for credit unions 

to meet the business lending needs of their members and to expand 

participation in SBA programs. 

We thank you for your time and the opportunity to testify before 

you here today on this important issue to credit unions and our nation’s economy. I would welcome any questions that you may have. 

Attachment: NAFCU letter to Chairman Johnson, Chairman 

Hensarling, Ranking Member Crapo and Ranking Member Waters 

calling on Congress to provide credit union regulatory relief; February 12, 2013. 

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