U.S. GOVERNMENT PRINTING OFFICE

60–813 WASHINGTON : 1999

PROPOSED AMENDMENTS TO THE 7(a)

AND 504 LOAN PROGRAMS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JUNE 24, 1999, WASHINGTON, DC

Serial No. 106–21

Printed for the use of the Committee on Small Business

(

(II)

COMMITTEE ON SMALL BUSINESS

JAMES M. TALENT, Missouri, Chairman

LARRY COMBEST, Texas

JOEL HEFLEY, Colorado

DONALD A. MANZULLO, Illinois

ROSCOE G. BARTLETT, Maryland

FRANK A. LOBIONDO, New Jersey

SUE W. KELLY, New York

STEVEN J. CHABOT, Ohio

PHIL ENGLISH, Pennsylvania

DAVID M. MCINTOSH, Indiana

RICK HILL, Montana

JOSEPH R. PITTS, Pennsylvania

MICHAEL P. FORBES, New York

JOHN E. SWEENEY, New York

PATRICK J. TOOMEY, Pennsylvania

JIM DEMINT, South Carolina

EDWARD PEASE, Indiana

JOHN THUNE, South Dakota

MARY BONO, California

NYDIA M. VELA ́ZQUEZ, New York

JUANITA MILLENDER-MCDONALD,

California

DANNY K. DAVIS, Illinois

CAROLYN MCCARTHY, New York

BILL PASCRELL, New Jersey

RUBEN HINOJOSA, Texas

DONNA M. CHRISTIAN-CHRISTENSEN,

Virgin Islands

ROBERT A. BRADY, Pennsylvania

TOM UDALL, New Mexico

DENNIS MOORE, Kansas

STEPHANIE TUBBS JONES, Ohio

CHARLES A. GONZALEZ, Texas

DAVID D. PHELPS, Illinois

GRACE F. NAPOLITANO, California

BRIAN BAIRD, Washington

MARK UDALL, Colorado

SHELLEY BERKLEY, Nevada

HARRY KATRICHIS, Chief Counsel

MICHAEL DAY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on June 24, 1999 ............................................................................... 1

WITNESSES

Hochberg, Fred P., Deputy Administrator, U.S. Small Business Administration ........................................................................................................................ 4

Giegel, John, Vice President, Congressional Relations, National Association

of Development Companies ................................................................................. 8

Wilkinson, Anthony R., President & CEO, National Association of Government Guaranteed Lenders, Inc. .......................................................................... 10

Faulk, Donna, Vice President, Prudential Securities ........................................... 14

APPENDIX

Opening statements:

Talent, Hon. James M. ..................................................................................... 32

Prepared statements:

Hochberg, Fred P. ............................................................................................. 34

Giegel, John ...................................................................................................... 61

Wilkinson, Anthony R. ..................................................................................... 69

Faulk, Donna .................................................................................................... 75

(1)

HEARING ON PROPOSED AMENDMENTS TO

THE 7(a) AND 504 LOAN PROGRAMS

THURSDAY, JUNE 24, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC.

The committee met, pursuant to call, at 10:07 a.m., in room

2360, Rayburn Building, Hon. Jim Talent (chairman of the committee) presiding.

Chairman TALENT. Good morning, ladies and gentlemen, and

welcome. Thank you for joining me this morning to examine the

proposed changes to the 7(a) and 504 loan programs. I am certain

that by working together we can continue to improve these vital

programs and make them even more responsive to the needs of

small businesses and lenders alike.

The proposed changes to the 7(a) program merit a brief description. It is suggested that the maximum guarantee amount on a 7(a)

loan be increased to $1 million from the 1988 limit of $750,000 in

order to keep pace with inflation. A parallel proposal exists for the

504 program. Another proposal suggests the removal of the provision which reduced SBA’s liability for accrued interest on defaulted

loans since the provision’s intended savings have failed to materialize.

The 7(a) program is now facing a problem of early repayment of

large loans which is jeopardizing the subsidy rate. The proposal before the committee seeks to remedy this problem by assessing a fee

to the borrower or for prepayment within the first five years of a

loan with a term in excess of 15 years. Another proposal seeks to

stabilize the subsidy rate for the 7(a) program at 11⁄4 percent by

requiring the administrator to adjust program fees.

This is similar to the current stabilization process for the 504

program. I am especially interested in hearing our witnesses comment on these two proposals. They seem to me to have merit but

I hope that the committee focuses on them and asks any questions

that members may have. Also, there is a proposal to modify 7(a)

rules which prohibit loans for passive investment. When we last reauthorized the 504 program, we modified a similar restriction in

order to permit the financing of projects where less than 20 percent

of its space will be rented out when the small business in question

will occupy the remaining space. We need to discuss providing

similar options to 7(a) borrowers.

Allow me to also briefly describe the proposed changes to the 504

program. It is suggested that the maximum debenture size for public policy debentures be increased from 1 million to 1.3 million, and

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that women-owned businesses be owned to the categories qualifying for these debentures. Currently the 504 program levies fees

on the borrower, CDC and the participating bank. The bank pays

a one-time fee whereas the borrower and CDC pay a percentage of

the outstanding balance annually in order to provide operational

funding for the 504 program.

These fees sunset on October 1, 2000, and it is proposed that we

continue them through October 1, 2003. Additionally, it is suggested that we grant permanent status to the preferred certified

lender program which will otherwise terminate at the end of Fiscal

Year 2000. Finally to address the problem of low recovery rates on

defaulting 504 loans, it is proposed that a permanent program be

created to handle the liquidation of those loans. This would replace

a pilot program created in 1997 and gives qualified and experienced CDCs the authority to handle the liquidation of loans with

the approval of the SBA.

We have a number of witnesses, and I will introduce them later.

First, of course, I will turn to my distinguished colleague, Ms.

Vela ́zquez for any opening comments she would like to make.

[Mr. Talent’s statement may be found in the appendix.]

Ms. VELA ́

ZQUEZ. Mr. Chairman, first let me thank you for holding this hearing to examine proposed changes to the general business loan guarantee or 7(a) program and the 35 development company or 504 program. What we are doing today is updating and improving the 504 and the 7(a) loan programs to insure that they are

run in a reasonable and thoughtful way. And today’s hearing will

present the committee with an opportunity to hear from the Small

Business Administration, as well as the participants from each program on how to best accomplish this.

7(a) and 504 are two of the most important small business loan

programs administered by the SBA. They represent access to capital for America’s small businesses and access to capital means access to opportunity. Although SBA administers numerous programs

that provide financial and technical assistance to small firms, the

7(a) program is the agency’s flagship loan program. It is far and

away the agency’s largest and most important both in terms of

number of loans and program level supported.

Under 7(a) loan guarantees are provided to small businesses that

have been unsuccessful in obtaining private financing on reasonable terms. The profits from a 7(a) loan may be used for virtually

any business purpose and have made the difference for countless

entrepreneurs. Additionally, under 7(a) loans up to $100,000 are

guaranteed up to 80 percent and loans over $100,000 are guaranteed up to 75 percent with the average guarantee being close to 76

percent. Nearly 7,000 banks and non-bank lenders are now approved to participate in the program.

Since the program’s inception, SBA has made or guaranteed

more than 600,000 7(a) loans totaling close to $80 billion. The 7(a)

program addresses the financing needs of small firms that are

often not met in the private capital markets. The reason for this

is that commercial lenders often do not provide loans for the purposes in the amounts and with the terms required by small business borrowers.

3

Equally important, the 504 program serves economic development. Since 1980 more than $20 billion in fixed asset financing for

over 25,000 small business concerns has been arranged by 35 development companies under 504. This represents $7.4 billion in

CDC debenture authorizations and $12.6 billion in private sector

and other financing. Currently the 504 program is supported completely by its fee system, and, therefore, requires no direct appropriations from Congress.

It is my hope that we can work together to maintain the zero net

subsidy level for the 504 program. I can attest to the fact that the

504 program works. Just this week I visited a 504 loan recipient

in my district. This business, an automobile dealership, will use the

504 loans to construct a new service center. This will enable the

dealership to better meet the needs of its customers, and as a result expand its business, and it will also bring up to 50 new jobs

to the community. This is why it is so crucial.

The businesses have access to the capital they need. When a

business is able to expand everyone benefits. Although authorization for the 7(a) and 504 programs does not expire until October

1, 2000, it is important that we begin the process of reviewing

these two programs now. The reason is that both lenders and potential borrowers need to have some assurance that the programs

will continue to be authorized after October of 2000 and that it will

be authorized at an adequate funding level. Therefore, this hearing

is timely.

Mr. Chairman, I look forward to working with you as we move

to reauthorize these two vital loan programs, programs that should

be held out as an example of programs where taxpayers can see

their dollars doing effective work. Thank you, Mr. Chairman.

Chairman TALENT. I thank the gentlelady as always. We have

one panel today, and I do hope that members will focus, as I am

going to have to leave for a few minutes, but these are important

proposed changes and I would just really appreciate the members’

attention to them. Our first witness is the Honorable Fred

Hochberg, the Deputy Administrator for the Small Business Administration. It is a pleasure to have Mr. Hochberg with us, and

before he testifies, I do feel I have to put something on the record.

We have had a pattern of problems from the agency with regard

to the committee’s rules regarding submissions of statements 48

hours before committee hearings. I am, as members know, the farthest thing from a stickler for formality. At the same time we do

have to assume, and this may be more an abstraction than a reality, but we have to assume that somebody here might actually

want to read the statement before we have a hearing, and we can’t

do that if we get it the night before.

This is a 26-page statement that we received I think at 8:00 last

night. So I know this is well below your pay grade and everybody

needs to know Mr. Hochberg came up and apologized to me beforehand. So I would just ask the agency, if in the future, if it could

get these statements in, and at least give us 24 hours if not the

48, and I would be grateful for that and you could redeem yourself

considerably, Mr. Hochberg, by summarizing your 26-page statement.

4

And I do appreciate your willingness, members need to know

that Mr. Hochberg agreed to be on a panel with others and that

was really for our convenience, so that we would not have to have

two panels and two rounds of questioning.

Mr. Hochberg, it is a pleasure to have you here, sir.

STATEMENT OF HON. FRED P. HOCHBERG, DEPUTY

ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION

Mr. HOCHBERG. Thank you, Mr. Chairman. Congresswoman

Vela ́zquez and members of the Committee, and I do want to apologize for the lateness of our testimony. It was inexcusable and we

will do better next time. Thank you for the opportunity to discuss

the credit needs of America’s small businesses. In my oral testimony I would like to touch briefly on some of the program initiatives SBA has developed to meet these needs.

I will also discuss the legislative proposals the Committee is considering. Both are addressed at length in my written testimony

which I ask to be inserted into the record. The current budget environment makes it especially important that the agency operate in

the most efficient and cost-effective manner possible. In its 7(a) and

504 programs, SBA is now delegating greater authority to its lending partners than ever before.

Today, with 19 percent fewer employees than in 1992, we rely on

the credit decisions of our lending partners for about 75 percent of

our loan approvals. This means that we must have the oversight

tools necessary to ensure that we can better monitor the performance of our lending partners to protect the taxpayers’ dollars. To

this end, SBA’s Fiscal Year 2000 budget request includes $8 million

to continue the systems modernization efforts SBA began in Fiscal

Year 1998.

When completed, we expect the system will enable us to better

identify and manage portfolio risk. While improving the efficiency

of the products we deliver is vital, we must also ensure that our

products are tailored to meet the needs of the nation’s small business community. One way that SBA has attempted to address this

challenge is by expanding the range of equity vehicles and loan

products and services. As you know, SBA has developed products

from Microloans to LowDoc to SBA Express to increase the availability of smaller sized loans.

And of course our traditional 7(a) and 504 products are available

to meet the larger capital needs of small businesses. SBA is constantly seeking new ways to make it faster and easier for small

businesses to gain access to capital, yet small businesses, particularly newly established companies, tell us that the type of credit

that continues to be the most difficult to get is in small amounts,

typically up to $150,000.

Since 1953, SBA’s mandate from Congress has been to fill credit

gaps and to remove the barriers to entry faced by America’s small

businesses. Recently, Federal Reserve Chairman Alan Greenspan

noted serious gaps still exist in access to capital for small businesses, especially for minority loan applicants. While the SBA has

a very good overall record of increasing access to capital, I am convinced that we need to do more, especially for minority and womenowned firms.

5

To this end, SBA has been proactively reaching out to these constituencies. We have over 80 partnership agreements in place with

business groups across the country designed to increase access to

SBA’s programs for all segments of society. Despite these best efforts, the percentages of SBA lending to these communities is simply not adequate. To remedy this, in the Fiscal Year 2000 budget,

the President announced his New Markets initiative.

The initiative is a sweeping new public/private partnership designed to boost business opportunities and to meet the unmet

needs of small businesses. One of SBA’s proposed New Markets initiatives is a limited, New Markets Lending Company pilot program. Under this pilot, SBA will approve a small group of lenders

to provide loans specifically focused on the New Markets small

business segment.

Chairman Greenspan also noted that increased access to loans is

not the sole solution to meeting the capital needs of small businesses. In various stages of development, many small businesses

are not bankable. In many circumstances, small businesses need

more patient capital in the form of equity or subordinated debt. To

address this problem, SBA’s Fiscal Year 2000 budget includes a

number of proposals developed in consultation with venture capital

experts to make it more attractive for Small Business Investment

Companies and specialized SBICs to invest in distressed rural and

urban areas.

The low and moderate income investment initiative compliments

our existing SBIC program by offering a special Low-and-Moderate

Income (LMI) debenture. The new tool allows SBICs to defer interest payments on LMI debentures for five years. To expand equity

investments in LMI areas, technical assistance may also be needed.

To do this, the SBA is proposing the creation of New Market Venture Capital Companies that will target investments in the range

of $50,000 to $300,000. Modeled on existing SBIC programs, the

New Markets Venture Capital Companies will form a new and separate venture capital network. The program will offer venture capital solutions along with hands-on technical assistance in low and

moderate income areas.

Now let me turn to the proposed legislative changes to the 7(a)

and 504 program. We are interested in the proposed legislative

changes to the 7(a) and 504 programs provided that capital is made

available to all small businesses, especially those smaller-sized

businesses that are just starting out.

We are concerned that the proposals being discussed today appear to be directed towards the businesses and loans at the larger

end of the spectrum. First, it has been proposed that the loan size

be increased for both 7(a) and 504 programs. For 7(a) the proposal

increases the maximum amount of loans that SBA can guarantee

from its current $750,000 limit to $1 million. Coupled with this

change would be the establishment, for the first time, of a maximum loan size of $2 million.

We feel that it is critical that consideration of any increase in

loan size be coupled with the incentives we have proposed to encourage lenders to increase the availability of funds to smaller borrowers.

6

Chairman TALENT. Fred, you, or if you have staff here who would

prefer to have them do it, tell us what the average guarantee rate

is now and what the range is on these loans. Is it still about like—

if one of the other witnesses wants to jump in here. I want to frame

this for the members while this testimony is still fresh in their

minds. The average guarantee was about 75——

Mr. WILKINSON. Between 72 and 73.

Chairman TALENT. Okay, 72, 73 percent but that is an average

so some loans the government guarantees less and some it guarantees more, is that right, Tony?

Mr. WILKINSON. In the fiscal 2000 model it is 72.88.

Chairman TALENT. Okay. In some cases the government will

guarantee more, in some cases less, is that right?

Mr. HOCHBERG. Up to 90 percent.

Chairman TALENT. Okay. I say this because as Mr. Hochberg testified correctly, we are talking about a cap of $2 million and a cap

in the guarantee of $1 million, and there are cases where the government may only guarantee about 50 percent of the loan. That is

worked out between the lender and the SBA on a per loan basis,

is that how this——

Mr. HOCHBERG. On loans over $150,000 the maximum guarantee

is 75 percent.

Mr. WILKINSON. That is correct, if the loan size stops at $1 million. You can do a $1.5 million loan with a 50 percent guarantee.

Chairman TALENT. Okay.

Mr. WILKINSON. But the maximum guarantee portion cannot exceed $750,000 today.

Chairman TALENT. Okay. But the minimum, it does sometimes

go less than that obviously, a guarantee less than that. Is that

worked out on a per loan basis?

Mr. WILKINSON. Well, again there have been loans in the past

made for $3 million with a 25 percent guarantee.

Chairman TALENT. Okay. And again that is worked out on a per

loan basis.

Mr. HOCHBERG. Well, I think what Tony is saying is that on the

$750,000 we can guarantee up to $750,000 so on a $3 million loan

only 25 percent is guaranteed.

Chairman TALENT. Right. You can’t go higher than that. I see.

Mr. HOCHBERG. But we can only guarantee up to $750,000.

Chairman TALENT. I am sorry, but this clears something up for

me. I ask the committee’s indulgence. If it is a lower amount total

than the loan, will you always guarantee like around 72, 73 percent?

Mr. HOCHBERG. With the SBA Express loans, which are primarily done by preferred lenders, we only guarantee 50 percent.

The lender makes the credit decision using its own forms and processing. So we say in exchange for that expedited consideration, we

will only give them a 50 percent guarantee.

Chairman TALENT. Okay. Thank you. I appreciate your clearing

that up. You can continue.

Mr. HOCHBERG. We feel that it is critical that consideration of

any increase in loan size be coupled with the incentives we have

proposed to encourage lenders to increase the availability of funds

for smaller borrowers. Furthermore, SBA believes it is important

7

for us to assess the possible adverse impact that the proposed increase would have on the availability of 7(a) and 504 program authority for Fiscal Years 1999 and 2000. SBA continues to support

the present Fiscal Year 2000 budget which does not take into account these proposed changes.

The second proposal is the repeal of the mandate that the interest rate be reduced by 1 percent when a lender requests that SBA

honor its guarantee of a defaulted loan. SBA would welcome additional discussion of this proposal and its potential impact with this

Committee, OMB, and the lending community.

The next provision will allow the establishment of a limited prepayment penalty. While SBA understands the basis for this request, we feel if such authority is provided it should include a provision allowing SBA to repeal the prepayment penalty authority if

warranted due to a change in economic conditions. We also feel

that the Committee, SBA and our lenders should give consideration

to alternatives to the prepayment proposal under consideration.

These include for examples, making the fee optional for lenders, allowing the fee only on loans with fixed interest rates, or allowing

the borrower to elect either a prepayment penalty or an up-front

fee.

The fourth 7(a) legislative proposal is for the establishment of a

subsidy rate floor of 1.25 percent. After consultation with the Office

of Management and Budget (OMB), SBA believes that it must object to any proposal that would legislate a subsidy rate floor. The

Chief Financial Officer Act requires every Federal agency to review

its fee structure every year. If continued performance warrants it,

SBA looks forward to being able to consider fee adjustments on

their individual merits. We support the final 7(a) provision regarding the leasing out of an increased portion of the property consistent with the regulations that govern 504 loans.

Let me now turn to the provisions of the proposal addressing

SBA’s 504 program, a number of which we support. SBA supports

the first 504 legislative provision which would increase debenture

size. The second 504 proposed change is to include women-owned

business development within the 504 program. We agree with this

proposal. Furthermore, we believe veteran-owned business development should also be included among the program’s public policy

goals.

SBA agrees with the proposal to extend the sunset date of the

504 guarantee fee and the proposal to make the Premier Certified

Lender Program (PCLP) permanent with some appropriate revisions. Under the next proposal SBA would be prohibited from selling any defaulted PCLP loans in an asset sale unless the responsible Certified Development Company (CDC) consented to the sale.

SBA cannot support this. Asset sales are not intended to be distress sales. Given the critical importance of the agency’s asset sales

efforts, we do not believe that SBA should be legislatively restricted from including any class of loans in its sales.

Under the final provision, the current CDC liquidation pilot

would be expanded and made permanent. An evaluation report is

due to Congress by September 30, 1999. Preliminary indications regarding the success of the pilot are encouraging. Yet, we don’t have

the information and analysis necessary to make a definitive concluVerDate 20-MAR-2000 07:32 Apr 14, 2000 Jkt 010199 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HEARINGS\60813 pfrm02 PsN: 60813
8

sion. With that said, however, the agency does believe that it is appropriate to expand the pilot and make it permanent with appropriate safeguards.

In summary, SBA finds that many of the recommended legislative changes before this Committee have merit. We believe, however, it is important to the committee, the SBA and the lending

community to work together to ensure that the proposals appropriately address the issues before us and that they do not result

in any negative consequences.

We look forward to working with you on these issues. I very

much appreciate your invitation for me to appear before you today.

I would be happy to respond to any questions you may have.

[Mr. Hochberg’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Hochberg. Those were very

helpful comments on the legislative proposals. I appreciate that

very much. Mr. John Giegel, who is the president of the Wisconsin

Business Development Finance Corporation. I am just going to go

in order across the table.

STATEMENT OF JOHN M. GIEGEL, PRESIDENT, WISCONSIN

BUSINESS DEVELOPMENT FINANCE CORP.

Mr. GIEGEL. Good morning, Mr. Chairman, and members of the

committee. If it pleases the Chairman, I would ask that my written

statement be inserted into the record. I am John Giegel. I serve as

Vice President for Congressional Relations for the National Association of Development Companies, the trade association for SBA

504 Certified Development Companies.

NADCO represents 250 Certified Development Companies who

provided 95 percent of all SBA 504 financing to small businesses

during 1998. No other program can claim to have created over

500,000 jobs as the 504 program has done. I am also, by the way,

the president and founder of Wisconsin Business Development Finance Corporation, Wisconsin statewide 504 Certified Development

Company.

We have provided over $300 million in 504 and 503 financing to

over 1,000 businesses since 1981. NADCO would like to thank you,

Mr. Chairman, ranking member and the entire committee for your

continued support of the 504 program and the CDC industry. It has

been clear to us that the committee recognizes the value of the program to the small business community.

I come before you today with two purposes. First, we believe that

there are areas in which the 504 program can be improved and extended to provide a greater scope of financial assistance to small

businesses. Secondly, we feel strongly that action must be taken to

deal with 504 loan recovery and portfolio loss problems. NADCO

proposes to address these two issues through a legislative proposal

we have provided to the committee, and I would like to summarize

that proposal and its impact.

For the last 11 years, the maximum 504 debenture has been limited to $750,000. In 1990, 504 debentures impacting national objectives such as rural development were raised to $1 million. Given

the fact, however, that 504 is targeted to real estate and major

equipment purchases the rising cost of land, construction and maVerDate 20-MAR-2000 07:32 Apr 14, 2000 Jkt 010199 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HEARINGS\60813 pfrm02 PsN: 60813
9

chinery have impaired the ability of 504 investment to assist the

small business owner.

Across the country 30 to 50 percent price increases over the past

decade is commonplace. Therefore, we propose that the basic debenture size be increased to reflect at least the modest increase indicated by the Consumer Price Index to $1 million for regular 504

loans and to $1.3 million for projects with national objectives. Also,

one of the fastest growing sectors of the business sectors is the

woman-owned business. Many are at the stage requiring costly real

estate and equipment to achieve the next stage of development.

We ask that the committee to support women-owned businesses

by recognizing them as a national policy objective. I might also add

that we would have no objection to including veterans as a national

policy objective too. We also urge the committee to insure that adequate 504 guarantee authority and the necessary fees be reauthorized in this session, namely, $3.5 billion in FY 2001, $4 billion in

FY 2002, $4.5 billion in FY 2003. The foregoing have addressed improving and extending the 504. Now I will summarize recommendations to improve 504 loan recoveries.

As noted in SBA’s FY 2000 budget, loan defaults have dropped

from 18.9 percent to 12 percent in four years. CDCs and the SBA

are delivering an improved program and the Office of Management

and Budget is better able to forecast default rates, so costs have

declined for the small business owner. However, the same budget

also states that recoveries on 504s are in fact much less than the

44 percent previously thought and perhaps as low as 23 percent.

We believe that this trend must be addressed and reversed now.

Delay will have a serious impact on the 504 program and its availability to the small business owner. Since 1994 legislation has authorized the Premier Certified Lender Program. The program allows experienced CDCs to underwrite 504 loans without SBA provided that they reimburse SBA for up to 10 percent of any debenture loss. This program has operated for nearly six years now, reducing processing time and SBA personnel time and has not resulted in any increased losses to the government.

Chairman TALENT. Mr. Giegel, I want to emphasize something

here just so the members here understand the potential problem.

The default rate is going down but the amount that we are recovering when there is a default is also going down significantly which

means that this being pretty good economic times we are okay but

if we hit some bad economic times we are going to have to recover

something on these defaults or this program is going to be in trouble. I mean is that a pretty good summary of what you are saying?

Mr. GIEGEL. Exactly, Mr. Chairman.

Chairman TALENT. So you are saying the committee needs to figure out and the SBA needs to figure out why we are not recovering

on these defaults and we need to fix it before something happens

to the economy.

Mr. GIEGEL. Correct.

Chairman TALENT. Which we all hope, you know, we all hope the

business cycle has been repealed but none of us can count on that.

I want the members to focus on that because we need to do something about it. Go ahead.

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Mr. GIEGEL. One reason why CDCs do not participate in the program is because of SBA’s reluctance to allow the Premier Lender

to be able fully to carry out recovery efforts. Therefore, we do ask

that the committee act now to make the Premier Certified Lender

Program permanent and to direct SBA to provide comprehensive

Premier regulations within 120 days.

Finally, Mr. Chairman, in 1996 legislation mandated a loan liquidation pilot program under which qualified CDCs would receive

a delegation of authority from SBA to liquidate but not litigate loan

recoveries. CDCs recognizes that with the prospects of government

downsizing, we need to step up to safeguard the 504 program. We

recognize that SBA portfolio personnel were immensely more experienced in liquidation but even in 1996 caseloads per worker per

office meant long delays.

In liquidation time is money. CDCs have more resources for expeditious recovery and can concentrate on many fewer cases. Preliminary results are favorable and many CDCs in the pilot program

have already shown the ability to perform rapid professional workouts in asset recoveries. We strongly urge the committee to make

permanent the liquidation pilot and endow capable CDCs with full

liquidation and litigation authority.

As you can see, Mr. Chairman, there are many issues to be addressed for the 504 program if we are to both improve it and stabilize the declining loan recovery. NADCO supports the legislative

proposal provided by your staff. However, we urge you to include

in your proposal our proposed authorization levels for the succeeding three years. We strongly ask the committee to take up consideration of our legislative package during this session, and we

thank you for allowing us to come before you today to make comments. CDCs are major stakeholders in the 504 program. We want

to do everything we can to insure its long-term viability. I would

be pleased to answer any questions.

[Mr. Geigel’s statement may be found in the appendix.]

Chairman TALENT. Thank you, Mr. Giegel. When the questions

time comes, I am going to ask you to comment on Mr. Hochberg’s

comments about the proposal that we stick the agency’s ability to

sell defaulted loans. The agency is very strongly opposed to that.

Our next witness is Mr. Wilkinson, Anthony R. Wilkinson, President and Chief Executive Officer of NAGGL. Tony, go ahead.

STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF

GOVERNMENT GUARANTEED LENDERS

Mr. WILKINSON. Thank you, Mr. Chairman, Ms. Vela ́zquez, and

other members of the committee. So Mr. Hochberg does not feel

alone today, let me issue my apology as well, because my disclosure

statement was not attached to my testimony, so I thought I would

just do that verbally on the record that neither I nor NAGGL have

received any federal——

Chairman TALENT. Misery has company. That is fine.

Mr. WILKINSON. We have no federal grants or contracts. We have

signed a co-sponsorship agreement with the SBA whereby in ten

cities across the country this year we are putting on training for

lending to new markets. With that I will get into my testimony. I

11

want to thank you for holding this hearing today. I want to commend you for your efforts to move forward this year on a reauthorization bill for the SBA programs.

Earlier this year NAGGL shared with both the majority and minority staff of the committee and with the SBA our association’s

proposed legislative package and I would like to briefly go through

those. First, as has been mentioned, we are proposing increasing

the maximum guarantee on an SBA 7(a) loan from $750,000 to $1

million. The last time this number was changed was in 1988 and

just using the Consumer Price Index from the first of 1988 to the

first of 1998, that amount would have increased to in excess of

$1,050,000 and if you apply projected CPI increases to the first of

2000 we would probably get closer to a $1.1 million but our recommendation is to increase the maximum guarantee up to $1 million.

This increase in the maximum amount guaranteed would likely

result in some new loan demand and we estimate that that additional demand would be in the range of $400 million per year. We

also point out that this proposal would have a positive subsidy rate

impact since these loans are subject to the highest tier of guarantee

fee which is 3.875 and thus will generate additional cash flow into

the subsidy model hence reducing the subsidy rate.

Along with the $1 million guarantee, we propose capping the

maximum loan size at $2 million. This too should help control loan

program usage and help cover some of the demand increase that

would happen with the $1 million guarantee. Next we need to deal

with a prepayment issue. A substantial number of borrowers are

obtaining long-term SBA financing but then prepaying it during

the first few years after obtaining a loan.

NAGGL is concerned about this. We believe that if the prepayment problem continues there could be serious policy consequences.

A substantial portion of the income received by SBA on subsidy

loans comes from a 50 basis point fee on the outstanding balance

of the loan. If prepayments continue, the income to the government

declines. That means the value of that 50 basis point fee in the

subsidy model would decrease and future program users could have

to absorb higher fees or we would be asking Congress for more

money to hit a certain program level.

NAGGL believes that the cost burden of prepayments should be

borne by those who choose to prepay, not on future program users.

Our proposal is to establish a prepayment penalty. This penalty

would be payable to the SBA, not to an investor, not to the lender,

but to the SBA by a borrower who elects to make within the first

five years of the loan an excessive prepayment on a long-term loan,

and we are saying a long-term loan being a loan with an original

maturity of 15 years or more.

The phrase excessive prepayment would mean an amount in excess of 20 percent of the outstanding loan balance in any calendar

year. So a borrower could still pay down extra amounts over the

regular scheduled principal as long as they did not pay more than

20 percent in any one year. The rate of this fee would be determined by the date of prepayment, 5 percent in the first year, 4 percent in the second year, 3 percent in the third year, 2 percent in

12

the fourth year, and 1 percent in the fifth year, and then after the

fifth year there would be no prepayment penalty.

Prepayments on conventional commercial loans both fixed rate

and variable rate are common. Furthermore, we note that SBA’s

504 loan program has a prepayment penalty and that the Business

and Industry Loan Program in the Rural Development Division of

the Department of Agriculture also provides for a prepayment penalty. We believe that this proposal is a sound one. It is in the interest of the program and in the interest of future borrowers as well.

Chairman TALENT. Mr. Wilkinson, could you take a minute because this is a proposal that I want the committee to focus on. Give

us a concrete example of the kind of prepayment abuse, if we can

call it that, that you believe is now occurring. Can you do that off

the top of your head, a hypothetical situation?

Mr. WILKINSON. A typical transaction would be a borrower obtains a 20- to 25-year 7(a) real estate loan that after two to three

years another lender comes along and offers to refinance at different terms, and this is happening more often than we have seen

in the past. Before the institution of the 50 basis point fee it really

didn’t matter. Now those prepayments have an impact on the subsidy model and we need to address that.

Chairman TALENT. All right. Go ahead.

Mr. WILKINSON. NAGGL believes that it is time, as further reductions are made in the 7(a) subsidy rate, to begin to reduce program fees. Currently, there is a one-time guarantee fee imposed on

the borrower, the amount of which is determined by the size of the

loan.

Chairman TALENT. Let me jump in a second because—I am sorry

for the committee but I really want the committee to focus on this

and I want to make sure I understand it. That 50-point basis fee

is the new annual fee, not just the up-front fee, which is my question because that is already paid and gone but——

Mr. WILKINSON. 50 basis points would mean a half percent per

year.

Chairman TALENT. All right.

Mr. WILKINSON. Paid on the balance of the loan.

Chairman TALENT. And the subsidy rate is calculated on a certain amount of receipts from those basis points and when they prepay they don’t have to pay the basis points so that screws the

model up.

Mr. WILKINSON. The model assumes a certain level of maturity

in the loans and if those maturities don’t materialize and are actually shorter then the net present value of that half percent per year

is going to shrink.

Chairman TALENT. Okay. I am going to ask you what you think

of Mr. Hochberg’s suggestions for alternatives to try and control

that so be thinking about that when you finish your testimony. I

will be quiet and let you all testify. Go ahead.

Mr. WILKINSON. Back on fees, NAGGL believes it is time, as further reductions are made in the 7(a) subsidy rate to begin reducing

program fees. Currently, there is a one-time fee imposed on the

borrower, the amount of which is determined by the size of the

loan. Except for loans with guaranteed portions of $80,000 or less

which have a 2 percent guarantee fee, borrowers are required to

13

pay 3 percent on the first $250,000 guaranteed, 3.5 on the second

$250,000, and 3.875 on the amounts above $500,000 guaranteed.

In addition, as we discussed, there is an ongoing half percent per

annum fee on the outstanding balance of the loan that is paid by

the lender for the life of the loan. In recent years, the 7(a) subsidy

rate has fallen due to improved underwriting and program improvements. However, federal funding for the program has also declined and hence program participants have reaped no benefits

from an improving program, and we believe that borrowers should

receive some of the benefits and that it is time to begin to look at

reducing program fees.

Accordingly, we have proposed establishing a 11⁄4 percent subsidy

rate floor. We do not view this as legislating a subsidy rate but

rather the subsidy rate would continue to be calculated as normal

and if it fell below a subsidy rate target then the administrator at

SBA would start reducing fees so that the subsidy rate would move

back up to the 11⁄4 percent target.

If broker performance continues to improve or Congress enacts

our legislative proposals for the increased loan size or prepayment

penalty there will be additional cash flow for the government and

we believe SBA should be directed to begin a staggered reduction

in the amount of fees paid by borrowers. First, as monies would be

available, we think the rate on the first $250,000 guarantees

should be reduced to 2 percent. As more money becomes available,

that the second $250,000 guarantees could be reduced to 3.

The amounts over $500,000 at some point in time could be reduced to 31⁄2, and way down the road we could take a look at reducing the 50 basis point lender fee. These initiatives are interrelated

in that they together would help eliminate program abuse while

enhancing program use for future borrowers. We have three other

legislative recommendations. First, in 1996 as part of the changes

designed to reduce the 7(a) subsidy rate legislation was enacted to

reduce the amount of the claim against SBA in the event a loan

defaulted. We call this the default loan provision.

We thought this would reduce the subsidy rate. It has not and

very simply the cost of compliance far outweighs any benefit we are

getting and we ask that this be repealed. Second, we ask that the

7(a) program be allowed the same leasing provisions that were

passed in the 504 program in 1997. And, third, we would recommend the following authorization levels be included in your reauthorization bill, $14.5 billion in fiscal 2001, $15 billion in fiscal

2002, and $16 billion in fiscal 2003.

And we would ask you to note that we are recommending

flatlining the authorization level from fiscal 2000 to 2001 as Congress has already authorized a $14.5 billion program level for fiscal

2000. Thank you, Mr. Chairman, and I will be happy to answer any

questions.

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

Chairman TALENT. Thank you, Mr. Wilkinson. And our last witness is Ms. Donna Faulk, who is the Chair of the Government

Business and Loan Committee of the Bond Market Association,

also Vice President of Prudential Securities, and we appreciate

your taking the time to come down and give us your testimony, Ms.

Faulk.

14

STATEMENT OF DONNA FAULK, CHAIR, GOVERNMENT BUSINESS AND LOAN COMMITTEE, THE BOND MARKET ASSOCIATION

Ms. FAULK. Thank you, Chairman Talent. I appreciate the opportunity to be here this morning to discuss the possible improvements to the SBA’s section 7(a) guaranteed loan program. I am the

Chair of the Government Business Loan Committee of the Bond

Market Association. This association represents both banks and

dealer firms who are active participants in the bond markets. Our

particular committee, the Government Business Loan Committee,

is composed of representatives from firms that are active in the

secondary market for loans guaranteed by the SBA section 7(a)

program and for the securities that are backed by these loans.

We believe the 7(a) program continues to accomplish its intended

goal of providing long-term financing for the small businesses who

otherwise will not be able to find or qualify for term financing. The

program generally operates efficiently and soundly. An active and

robust secondary market in 7(a) loans has been and remains a key

contributor and facilitator to the success of the 7(a) program.

As long as investors continue to view 7(a) loans as sound investments, they will continue to provide capital to the program at attractive terms for borrowers. As well as the 7(a) program functions

there is always room for improvement. We strongly support the

draft legislation containing proposed changes in the 7(a) program.

We especially support the proposal for modest graduated prepayment charges on the 7(a) loans.

We believe that the prepayment proposal would strengthen this

program and bring it more in line with Congress’ original intent.

The main beneficiaries for this prepayment proposal would be the

small business borrowers whom the program is designed to assist.

In a program like 7(a) prepayments can in some cases be a sign

of success. If a small business meets with unanticipated success it

may be in a position to repay its debts earlier than expected.

However, we are seeing an alarming rate of prepayments in the

7(a) loans that suggest not success but misuse. It is becoming increasingly common for 7(a) borrowers to pay off 15 to 25-year loans

in the first few months, not the first few years, the first few

months, of their terms. This is directly counter to the intended

goals of this program. These prepayment patterns also threaten the

program’s efficiency and viability for borrowers by raising risks for

loan investors.

As investors perceive the 7(a) loans as subject to extraordinary

prepayment risks, they will demand higher rates of return as compensation. In the end, small businesses will suffer through higher

financing costs. The prepayment proposal contained in this draft

legislation would provide several benefits. First, it would discourage early prepayments on 7(a) loans without penalizing the true

small business borrower who as a result of his success will be able

to prepay his loans later in their terms.

Second, it would help insure that Congress’ intent in reauthorizing the 7(a) program to provide long-term financing for the needy

small business is met. Third, it would in the end, reduce costs for

small business borrowers. We have seen this effect in most lending

markets when prepayment charges are introduced, interest rates

15

on loans fall because investors perceive the loans as less risky. Finally, the prepayment proposal will help address the most troubling aspects of SBA’s treatment of premium warranty refund payments.

We believe the prepayment proposal contained in the draft legislation would be a reasonable and welcome improvement to the 7(a)

program. We urge this committee to adopt the proposal. Thank you

for the opportunity to hear me today. I would be happy to answer

any questions.

[Ms. Faulk’s statement may be found in the appendix.]

Chairman TALENT. All right. I thank the witnesses. Let me just

ask a couple questions before recognizing the ranking member.

Fred, I know you are concerned about with regard to the increase

in the guarantee amount to keep pace with inflation, that it may

have a tendency towards encouraging larger loans which is moving

in the opposite direction than the agency wants, and I agree.

Now how does the cap on the total size of the loan affect your

consideration, and that seems to me to be kind of a reasonable

trade-off. We increase the amount that can be guaranteed but cap

the total amount at $2 million because right now there are loans

above $2 million so at least we get rid of those big real estate loans

and that sort of thing. What is your feeling about that as a tradeoff?

Mr. HOCHBERG. Well, Mr. Chairman, the cap of $2 million certainly is a help and a move in the right direction.

We don’t have a real objection to the $1 million level. Our concern is whether it can be coupled with enough incentives to assist

smaller borrowers. Our proposal to help smaller borrowers with

credit amounts up to $150,000 would reduce the fee to these borrowers by $1,000 and would reduce that ongoing fee we talked

about from 50 basis points to 30. It would also reduce the ongoing

fee to the bank by about $300 in the first year.

So as long as we have provisions to assist those seeking to get

these more difficult to obtain smaller loans, we don’t have an objection provided it is within our budget proposal for this year. Our

projections of how much we need for Fiscal Year 2000 did not take

into account doing $1 million loans.

Chairman TALENT. Sure. That is a very reasonable concern.

What about that, Mr. Wilkinson? I mean, first of all, is a possible

solution to that to postpone implementation of the increase until

after this Fiscal Year so that we don’t have those concerns? Do you

think that is necessary, number one. Number two, what about Mr.

Hochberg’s statement regarding incentives for the smaller loans as

part of this? Do you want to comment on that?

Mr. WILKINSON. We would be happy to delay implementation

until the first of the next Fiscal Year. NAGGL has been front and

center in each of the discussions to talk about incentives for small

loans. I would be remiss if I didn’t take the opportunity to say one

of the biggest barriers we have in coming up with incentives on

small loans is our subsidy model, and the overestimate of default

that it wouldn’t be as continually used.

And I will take us back to 1997 where we started out with a subsidy rate estimate of 1.93 and a default rate of in excess of 15 percent. That default estimate is now already down to 10 or below and

16

the subsidy rate is now predicted to be .44. So we have got the

OMB side of the Administration taking money away from us at a

time when we are trying to come up with incentives. So our concern about the Administration’s proposals is that they are very expensive. It would take the subsidy rate from 1.16 percent up to

1.51 and without additional appropriations would shrink the program size.

Chairman TALENT. Yes. Well, you know——

Mr. WILKINSON. We would rather look at ways to provide incentives that are a little less costly.

Chairman TALENT. We are all victims of OMB. It is just terrible.

And there is a point at which I am going to—we need to revolt here

and maybe we need to contact Budget Committee staff because

that is the block here and maybe have a joint hearing or something. I want them to protect the ‘‘fisc’’. I think we all do. This consistent overestimation just inhibits the goals that we share on both

ends of Pennsylvania Avenue about getting these loans to smaller

borrowers.

Fred, you will take back to Ms. Alvarez our desire to help out

with that. I know you all are sort of caught in the middle, but just

year after year we get this and it is a concern. And we really ought

to try and do something to apply some pressure. Mr. Hochberg, on

prepayment, what do you—are you all trying to develop any regulations and maybe, Ms. Faulk and Mr. Wilkinson might want to comment on this too, do we need to do anything statutorily? Can we

do this by regulation?

Mr. HOCHBERG. I will have to ask Jane Butler, who is our Associate Deputy Administrator for Financial Assistance, whether we

can do this.

Ms. BUTLER. I am Jane Butler, the Associate Administrator for

Financial Assistance. Our Office of General Counsel believes legislation would be required because all of the 7(a) program fees exist

because of legislative authority.

Chairman TALENT. Okay. Ms. Faulk, they are repaying this in

months, a matter of months——

Ms. FAULK. That is correct, sir.

Chairman TALENT. So this is obviously a deliberate thing. I mean

they are borrowing this money with the intention of prepaying.

Ms. FAULK. That is why we call it a misuse.

Chairman TALENT. And what is it about the market that is permitting that, whereas, it didn’t permit it a few years ago, or are

they just awakening to this possibility now? What has changed so

that they can do this now?

Ms. FAULK. In terms of the early prepayment?

Chairman TALENT. Yes. Is it the interest rate change or something that is making this financially attractive to these borrowers

or what is it?

Ms. FAULK. I think that is part of the problem or the solution

that the economy has been good. There is flush cash among the

banking institutions. But it is also a situation where the lender,

who is going to refinance the existing SBA borrower, is not going

to do the start-up operation, is not going to do the credit quality

review to get the SBA guarantee. He is going to cherry pick that

loan after it has been done through the SBA program.

17

Chairman TALENT. Also they are saving on some transaction

costs. They let the SBA lender——

Ms. FAULK. And that is due in part to this good economy and

then the borrower is also, we consider it misusing the program for,

as we say bridge or construction financing that if he is repaying in

two to three months because he has found a buyer for his startup operation is complete.

Chairman TALENT. Okay. So he gets the buyer and then he gets

the cash to prepay.

Ms. FAULK. He gets the construction complete and he gets the

buyer take-out. And he is flipping the property.

Chairman TALENT. Okay. I will recognize the gentlelady from

New York.

Ms. VELA ́ZQUEZ. Thank you. Mr. Hochberg, during this committee’s hearing on SBA FY 2000 budget, the agency was asked

whether publication of the 7(a) borrower information on the Worldwide Web for Freedom of Information Act reasons was contributing

to the 7(a) prepayment problem. What have you found out?

Mr. HOCHBERG. Congresswoman Vela ́zquez, data on loan approvals is public information, and as a result, it is my understanding

that it does not come under the Freedom of Information Act. Therefore, we have a policy that all public data is made available either

by writing to request it from the agency or accessing it via the

Internet.

Ms. VELA ́ZQUEZ. Let me ask you, do you need to publish all information, all the borrower information, you currently publish or

could the agency modify this information and help alleviate this

targeting by conventional lenders?

Mr. HOCHBERG. It is my understanding we need to make all public information available. I would be happy to look into that to see

if it can be modified in some way so that it is not as fully disclosed.

Ms. VELA ́ZQUEZ. One of my concerns is that I want to see the 7(a)

program continue to offer smaller loans to small businesses that

really have no other borrowing alternative. If the committee were

to support the proposal to increase the amount of the maximum exposure for 7(a) loans from the current 750 to $1 million, what suggestions would the agency make without increasing the 7(a) subsidy rate that might induce lenders to make more smaller loans?

Mr. HOCHBERG. Any time we offer an incentive it does cost

money. There is no way to offer an incentive without any cost. Our

proposal for Fiscal Year 2000 reduces the fees to the borrower on

$150,000 as much as $1,000 and reduces the ongoing fee the bank

would pay by $300 in the first year. It does have an impact on the

subsidy rate, but that has already been incorporated into our proposal for this year. So there is no additional cost.

Ms. VELA ́ZQUEZ. In response to a question that I sent to your

agency as a follow-up to this committee’s hearing on the SBA FY

2000 budget, the agency replied we are pleased that the subsidy

rate and offsetting fees for the 504 program have decreased over

the past several years. In the future we will continue our efforts

to reduce purchases and increase recoveries to further drag down

program costs. We are supporting the 504 pilot liquidation program. What SBA specific efforts to reduce purchases and increase

recoveries?

18

Mr. HOCHBERG. That is going to be the lion’s share of it in terms

of reducing those kinds of fees. We are also hopeful that under the

Premier Certified Lending Program that we can achieve more efficiencies and we can provide each CDC with more authority as we

have done on the 7(a) side.

Ms. VELA ́ZQUEZ. Is the 504 liquidation and recovery a stipulated

priority for SBA district offices?

Mr. HOCHBERG. We have the CDC liquidation pilot on which we

will be giving a full report to Congress at the end of September.

The results have been very positive. Notwithstanding the fact we

don’t have the full report, we are ready to go forward and give that

authority over to the CDCs.

Ms. VELA ́ZQUEZ. Mr. Giegel, are you and your colleagues seeing

any improvement in the Small Business Administration loan liquidation and recovery efforts and specifically what is your assessment of the pilot liquidation program?

Mr. GIEGEL. CDCs, particularly those who have volunteered to

participate in the pilot liquidation program, have had some excellent preliminary results. Our CDC just obtained a 100 percent recovery on a project that we have had in the pilot liquidation program, and we worked very closely with the agency in maximizing

recoveries. I will say in our district the two senior portfolio managers have retired in the last couple of years and the liquidation

staff has not been increased.

So the case load per worker per liquidation officer has increased

in our district and that naturally this is a concern that there are

not going to be more liquidation personnel from SBA, that their

case loads will increase and that we can discern no particular priority for 504 recoveries. And, in fact, being in the second position

often there is more difficulty in recovery that they perhaps don’t

get the attention they could deserve.

Now CDCs and our own included, we have very few cases, fortunately, and that is pretty representative industry wide and we can

devote more resources at a very early stage in these recoveries and

recover faster.

Ms. VELA ́ZQUEZ. Would you make any changes to these programs? Would you recommend any changes?

Mr. GIEGEL. Well, the primary improvement is to allow CDCs,

capable CDCs, to litigate as well as liquidate. Right now we do not

have the authority to litigate. And in states such as Wisconsin, we

have to literally turn over all documentation when we get to that

point to the SBA to litigate. And that becomes an involved process

with the federal attorney and priorities slip even further. So we get

time lines a year, 18 months, in which recoveries become smaller

and smaller.

Ms. VELA ́ZQUEZ. Mr. Hochberg, would you like to comment on

that?

Mr. HOCHBERG. SBA’s district directors give an equal priority to

liquidation. There is no priority put on one type of loan versus another. In fact, on a quarterly basis they review all liquidations that

are over 180 days old.

We are also trying to change our standard operating procedures

to give field offices far more flexibility to handle liquidations. And

again as I mentioned, we want to go forward with this pilot and

19

make it permanent which would in some way take care of this

problem entirely.

Ms. VELA ́ZQUEZ. Thank you. Mr. Wilkinson, if this committee

were to support the proposal to increase the maximum SBA exposure from $750,000 to $1 million, what proposal would you be willing to accept to make sure that the larger loan size does not consume the program level?

Mr. WILKINSON. Well, first of all, the $1 million guarantee, in

and of itself, should reduce the subsidy rate and a lower subsidy

rate in turn would create more program levels so part of the increase in the demand would come from the reduction in the subsidy

rate. Second, the $2 million loan cap will cover a significant portion

or a good portion of the increase in loan volume. And, third, we

would just need to watch volume.

It is really difficult to predict exactly how much loan volume we

would have, and if we started to have significant problems we

would sit down and come up with some kind of solution maybe,

defer that side of the guarantee until there is enough loan authority.

Ms. VELA ́

ZQUEZ. Mr. Hochberg, I have a last question and it is

regarding the new market initiatives, and I hope that soon we will

be able to announce it. Will the investment of this company be focused only in the areas designated as LMI?

Mr. HOCHBERG. The New Market Lending Company proposal,

the LMI debenture program, and the New Market Venture Capital

initiative are focused on low and moderate income areas.

Ms. VELA ́ZQUEZ. What is the percentage of that? What would represent the percentage?

Mr. HOCHBERG. I am not sure I understand the question.

Ms. VELA ́

ZQUEZ. In terms of low income areas, how much of this

new market venture capital will be invested?

Mr. HOCHBERG. Our proposal for Fiscal Year 2000 is for $100

million for this program.

Ms. VELA ́ZQUEZ. Tell me 80 percent, 90 percent, 100 percent in

low and moderate income areas.

Mr. HOCHBERG. I am not sure I have the answer to that question. I am going to have to get back to you on what portion needs

to be invested in LMI areas.

Ms. VELA ́ZQUEZ. With that answer will you please include what

is the rationale for it?

Mr. HOCHBERG. Certainly.

Ms. VELA ́ZQUEZ. Thank you.

Chairman TALENT. Along those lines, Fred, let me ask you, are

you getting consulted by Treasury in development of this New Markets initiative?

Mr. HOCHBERG. Are we being consulted by them?

Chairman TALENT. Yeah. I mean is the Treasury—are you all

having a lot of input into how this thing is being developed?

Mr. HOCHBERG. The three pieces that we really have responsibility for, the Low and Moderate Income Debenture program, the

New Markets Venture Capital Program, and the New Markets

Lending Companies are all SBA initiatives.

Chairman TALENT. That is your deal?

20

Mr. HOCHBERG. That is our deal and we have experience in every

one of those.

Chairman TALENT. Yeah, that is true. Okay. I just was concerned

because——

Mr. HOCHBERG. The only one that we don’t have is the Americas

Private Investment Companies (APIC), which is HUD’s program.

Chairman TALENT. Okay. I recognize the other gentlelady from

New York, Ms. Kelly, one of the other gentleladies.

Mrs. KELLY. Thank you very much, Mr. Chairman. Mr.

Hochberg, I am interested in a piece of information, that I really

was rather unaware of that I read in Ms. Faulk’s testimony, and

that is the premium refund question. I was unaware that the premium refund payments that are paid back to the SBA are diverted

to the master reserve fund. I want to know why you decided in the

case of the premium pools that any premium refunds paid by the

lender should not be passed on to the investors. Can you give us

an explanation for that?

Mr. HOCHBERG. I am going to ask Jane Butler to give me a hand

on that one.

Ms. BUTLER. The documents for the individual loans sold in the

secondary market include a specific provision whereby the refund

would go directly back to the investor. The documents related to

the pooled loans don’t discuss at all any premium refund. All they

promise is that the pool holder will receive principal and interest

on a timely basis whether the borrower makes payments on time

or not. So the practice is in concert with the way the documents

read.

Mrs. KELLY. Who would have wrote the documents?

Ms. BUTLER. This was done in consultation between the industry

and SBA. This provision was actually added in 1984. We received

legislative authority, but the legislation specifically directed that

the pool program be established at no cost to the government. The

premiums that SBA receives from prepayments on pooled loans are

included in, but do not represent a large portion of our account but

they do help to keep the costs of the program at a zero rate. If we

did refund the premium, one of the issues has always been how to

make such distributions on pooled loans to the multiple investors

that may be involved.

And also an issue is that there are special benefits that come to

a pool investor, and then there are some things that are not as

beneficial, so they receive some benefits by being an investment

pool as opposed to an individual purchase.

Mrs. KELLY. Ms. Faulk, would you like to address that?

Ms. FAULK. Yes. I would. First of all, we do not believe that the

contractual obligation of the 1086, SBA 1086 contract for the single

loan going into the pool security negates the refund of that premium to the premium investor. We are confused, as well, regarding

the SBA’s position that if I didn’t put it in a premium pool but I

put it in a par pool and the premium exposure is in IO holder has

a certificate that has no language, as well, that says that they are

privy to the return of the premium.

Mrs. KELLY. So it sound as though there needs to be a better

writing in that documentation. Is that correct?

21

Ms. FAULK. We believe that the funds should flow back to the

premium investor, as well as to the IO holder of a single IO or to

the multiple strip holder of a certificate that as well does not have

any language giving them provision for the return of the premium.

Mrs. KELLY. I would like to have some clarification, a further

clarification, from the SBA on how that situation could be rectified.

I tend to agree with Ms. Faulk. I think that there needs to be

something in the language so that these investors have some understanding. If it is not printed in the document, then perhaps it

should be printed in the document that this is actually what is

happening, so that the investor understands up front fully in writing.

The other thing I am interested in, I am wondering if the solution on this whole prepayment problem could lie within the structuring of banking laws and not with one more law of prohibition

coming out of with regard to the Small Business Administration.

I am not sure, but I am concerned about that, because when you

talk about the way it works with the business needing to get the

money, the banks are often loathe to loan the money to a NAASA

business given a number of other situations with regard to their inspectors and so forth.

Once there is a loan made anywhere, then there is a credit established. Then that person who has gotten that loan can go out and

get something that the banks will feel comfortable about securing.

I have heard repeatedly from small businesses in my district that

this is one of their problems. I understand, and I am in general

agreement on the prepayment problem, but I have a concern about

that.

I also am concerned, which is a fact that I have also heard from

my small businesses, about the fact that the SBA people are telling

my small businesses that it is easier for them to make a half million dollar loan. It is just as easy for them to do that as it is to

make a $50,000 loan on a program or for these security things.

I am very concerned that if we raise the limits that we are not

going to stay with our really small beginning businesses, because

that is where the money needs to stay focused, so there is two main

areas that I have of concern here, not necessarily related, but I

would like you, Mr. Hochberg, to kind of address those.

Mr. HOCHBERG. Well, I share your concern about the smaller

sized loans. That is why we have worked hard to come up with a

proposal that would give a greater incentive to both individuals

and banks to make smaller sized loans. The transaction cost is not

that different in terms of preparing a loan for $100,000 to $150,000

to $500,000. There is an inherent fixed cost and that is why we

have been trying to reduce it for the smaller sized loans.

In terms of prepayment, an SBA borrower pays substantial fees

up front. I am sure there are cases where borrowers prepay in a

few months, but they have already just paid what could be a fee

as high as 3.875 percent, so there is some disincentive against prepayment. I should just add this point for the Committee to consider. When businesses can use conventional financing instead of

SBA guaranteed loans, that isn’t all bad. There is some advantage

when the small business community does not have to rely on the

22

SBA. Ultimately we hope that business can move to a reliance on

conventional financing.

Mrs. KELLY. Ms. Faulk, do you want to respond to any of that?

Ms. FAULK. Yes. Again, the major problem that we see when that

small business borrower takes out that long-term debt and prepays

it in a relatively short time, and I am talking three to six months,

the bottom line it hurts the true needy small business borrower because we are allocated precious few guaranteed dollars. This is a

small program of $10 billion.

When that borrower misuses these term dollars and prepays

quickly that is not going back into the coffer for the needy small

business borrower when he needs it. It is gone. It is dried up. And

that small business borrower abused the program, and if we have

statistics from Cost Colsin Services Corp., the SBA transfer agent,

and looking particularly at that large loan, that 500 to 750,000

guaranteed loan, that in fiscal 1998 the loans in that range in the

first six months $24.5 million prepaid in those large loans. So that

says to me there is a propensity for the larger loan to prepay that

is clearly signaling a scare in our community.

Mrs. KELLY. Thank you very much. Thank you, Mr. Chairman.

Chairman TALENT. I am going to have to go. I want to just ask

one question and then recognize Mr. Davis. Discuss a little bit, Mr.

Giegel, the agency’s concerns about giving CDCs the ability to veto

SBA asset sales, please.

Mr. GIEGEL. Thank you. Well, CDCs I think are very cognizant

about losing money as well as a 7(a) lender might be who can now

exercise that prior consent. We are asking really for no more than

a 7(a) lender capability of being able to look at the overall situation

and indeed a CDC certainly doesn’t want to lose any money but if

they perceive that recovery might be worked out in a different

manner other than an asset sale, we would certainly like the opportunity to work that out, and this is no more than what a 7(a)

lender would have the authority to do.

Chairman TALENT. Fred, you want to be able to respond? It

sounded like this was the proposal that you objected the most

strongly to. Is that a fair statement?

Mr. HOCHBERG. That is a fair statement. My understanding, and

I am going to have my staff correct me if I am wrong, my understanding is that 7(a) lenders can simply not agree to participate,

but they can cherry pick and decide which loans they will let be

sold and not be sold.

Ms. BUTLER. Actually it is slightly different than that. At this

point in time under the contract with which 7(a) lenders operate

with SBA, they can refuse to allow a loan to be sold at an asset

sale. However, we are revising that contract, and under the terms

of the new contract the lender could refuse to have its portion of

the loan sold, but it could not refuse to have the loan sold at all.

SBA could still sell its portion.

Chairman TALENT. So their rights are not statutory at this point.

They are under a contract with the agency.

Ms. BUTLER. That is exactly correct.

Chairman TALENT. Well, it does sound like at least you would be

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23

ing a consultation or something like that. That sounds like something the agency would be more open to.

Mr. HOCHBERG. Our overriding objective is to continue asset

sales so we can focus our resources on helping small businesses

and not be involved in the liquidating and servicing of loans. That

is the direction that Congress and the Administration have set for

SBA. We are just trying to keep moving in that direction as best

we can, but of course we will look at any alternatives to improve

it.

Chairman TALENT. Do you want the last word, Mr. Giegel?

Mr. GIEGEL. Well, we are all prudent lenders, I think here, and

an asset sale we regard as absolutely the last resort. I think we

can all be reasonable here if that is what we perceive if that is the

best solution we can agree to that. But we obviously would like to

say in certain instances that more standard recovery might be a

better solution.

Chairman TALENT. Well, I haven’t conferred with the ranking

member on it, but my initial reaction is, if the agency feels that

strongly about it, maybe we ought not to give you an absolute veto

but perhaps some requirement of consultation. As you say, we all

are out for the same thing. So if we have some kind of regular

working procedure, I would think we could protect your interest

that way. I haven’t closed my mind on it, and I haven’t talked with

Ms. Valezquez about it but that is my initial reaction. Okay. I will

recognize Mr. Davis.

Mr. DAVIS. Thank you, Mr. Chairman. Mr. Geigel, could you give

me a profile of the typical 504 borrower?

Mr. GIEGEL. Well, the typical 504 borrower certainly can run the

gamut of any and all small businesses out there. We have, for instance, done everything from custard stands to industrial buildings.

They tend to be though entrepreneurs who have several years of

activity, established a business and reached a point where they

may be in leasing a building or leasing machinery, and it comes to

a point where prudently they need to either make an expansion to

meet an established market need, or they need to acquire some

major pieces of equipment to meet this next expansion.

So, generally, these are clientele, which for a variety of reasons,

don’t meet traditional lender requirements particularly from the

collateral point of view, but which the 504 in its second position

can help the lender make a decision to make the loan. These initial

loans are generally on the smaller side in these early deals. We are

looking probably at debenture sizes in the $200,000 to $350,000

range, total project perhaps in the $600,000 to $700,000 range.

What is crucial though is that we have been doing this since

1981 that there are subsequent expansions. Perhaps a couple of

years after that initial expansion they need additional machinery.

They still don’t have quite that track record, particularly on things

like machinery with the heavy discounts imposed on machinery to

make these types of loans. So we are often involved in second and

third involvements with these small businesses as they continue to

make expansions.

Mr. DAVIS. What would you consider to be the biggest problem

that the program has if you had to cite a problem?

24

Mr. GIEGEL. It is hard to know where to begin actually but the

one biggest problem, I think it is a matter of, if you will, communication to getting out to the small business community to the

small business owner about the advantages of the 504 program.

CDCs, whether they are local, city wide, county, multi-regional or

even statewide, usually have fairly small, if you will, advertising

budgets. I don’t know of any CDC that takes out TV ads talking

about that there is a 504.

So it is very difficult for the CDC industry to get down to individual small businesses. I mean we undertake seminars, talk with

chambers and all the regular, shall we say, low cost marketing avenues, but it is still hard to reach all those small business entrepreneurs about the particular advantages of a 504 program. I think

if we had that ability to better penetrate the marketplace, we

would probably be back here asking for more appropriation authority to be able to meet the demand that we think is out there.

Mr. DAVIS. Thank you. Mr. Hochberg, let me first of all just express my appreciation to Administrator Alvarez through you for the

strong presence that the SBA had had in the mid-West especially

in the Chicago region. Any number of times, I can recall opportunities that have existed where the New Initiatives Program and

other activities and Y2K and the whole business has been articulated many, many times in an effort to make sure people are in fact

aware.

It seems to me that defaulted loans especially from a lender’s

perspective is some concern and consideration. Could you explain

to us the process of selling those?

Mr. HOCHBERG. I just want to make sure I understand your

question, Congressman. Our asset sales regarding 7(a) loans, is

that what you mean?

Mr. DAVIS. Right.

Mr. HOCHBERG. We have a portfolio approximately in the range

of $8 to $9 billion worth of loans to sell. About $1.5 billion are either old loans that were direct loans from the SBA or loans that

we have taken back from the banks. The balance are disaster loans

that SBA still makes on a direct basis. Our first asset sale is scheduled for August. We are hopeful that is going to go successfully,

and based on the result of that sale, we expect to continue asset

sales over the next few years. By selling off those assets, we will

be better utilizing our people to perform more oversight work instead of the commercial work such as servicing loans.

Mr. DAVIS. Are those targeted or skewed in any particular direction? Do you try and convince any particular purchasers to buy

those?

Mr. HOCHBERG. In this first sale there will be a somewhat smaller pool, so that small investors can bid if they are interested.

Mr. DAVIS. Thank you. Mr. Wilkinson, do you think that the

process of recovery, the effort towards liquidation and recovery

have much to do with lenders decisions whether or not to participate in these programs? I mean are they deterrents currently, are

there ways that we can perhaps improve them?

Mr. WILKINSON. From a servicing and liquidation perspective in

the 7(a) program things really run quite smoothly because the

lender would follow SBA standard operating procedures, but they

25

would actually conduct the liquidation activities. So it is a standard

piece of business that lenders do every day, so I would not view

that as a deterrent to getting into this program. I think if anything

it would be for a new lender the fear of learning all the new regulations, the standard operating procedures, but what we are finding

once engaged lenders are not having much trouble with it.

Mr. DAVIS. And, finally I guess, my last question is for Ms.

Faulk. Could you think of ways, we are talking about changes, to

me all changes are designed to be productive, that is to make

things better to increase, improve, do better than whatever it is

that you are doing. How do you view the changes that we are proposing right now in terms of the overall abilities for people to make

use of the SBA programs, especially the two that we have singled

out?

Ms. FAULK. I see them as extremely beneficial to the small business borrower and that is our objective and that is the mission of

Congress is to provide the long-term financing to the small business who has no alternative for term debt in the conventional market and I think the prepayment charges that the draft legislation

is recommending is warranted and I think will be protective to the

ongoing success of this program.

Mr. DAVIS. Thank you very much and I thank you, Mr. Chairman.

Mr. MANZULLO. Thank you, Mr. Davis. I am intrigued with apparently there is some dispute regarding the mission of the 7(a)

program. More particularly, Ms. Faulk, you made the statement,

which at first blush I would agree with, that people who got the

7(a) loans in the first place and were able to repay within a matter

of a short period of time could have obtained the loans through conventional financing. Would that be a correct statement?

Ms. FAULK. In part, yes. With the liquidity in the marketplace,

there was or is an alternative for a different loan for their project

other than SBA financing, but the flip side to that coin is that the

conventional lending community is still adverse to lending to a

small business borrower. So it is easy to sit on the sidelines and

let this borrower and a lender go through the credit quality approval of getting the term SBA loan, and then after the start-up

is complete, offering a refinancing loan in the first three to six

months that is attractive to the borrower versus his term loan in

the SBA program.

Mr. MANZULLO. So maybe we need, as a prerequisite to get a 7(a)

loan, that the potential borrower be turned down by conventional

financing, which is the way SBA started.

Ms. FAULK. I think that was the initial mission of SBA, back in

the ’70s, when we were beginning that the rule was you had to be

turned down by two banks before you could go—and this is when

SBA was still doing some direct financing as well but early in the

’70s in the inception of the secondary market that was the benchmark, that you had to be turned down by two conventional lenders

before you could approach a lender and use the SBA program.

Mr. WILKINSON. If I might jump in. One of the things it did create was a very hardship for a borrower to go face a lender and get

a no letter, hand it to them. The second point would be, we need

to take a look at what was the number of loans that prepaid in the

26

first few months that we are talking about in relation to the 45,000

loans that were made last year. It is a very small, small percentage. We are not talking about a vast majority of the portfolio. We

are talking about a couple handfuls of loans.

Mr. MANZULLO. What is it, 9 percent, Ms. Faulk?

Ms. FAULK. It was 9 percent just in fiscal ’98 and only on the

$500,000–$750,000 loan. That is not the whole universe of that.

That is only the loan sold in the secondary market. We cannot even

address the total picture of what was not sold in the secondary

market. The statistics are not available.

Mr. MANZULLO. What bothers me is the purpose of the SBA is

to extend credit to people who would otherwise have a difficult time

getting credit. If there is a need for short-term credit, which there

may be, I think we are making certain assumptions here. I have

been in small business my entire life and banks want to see a track

record. Even if it is six months, then perhaps we should be addressing some legislative changes and higher fees, maybe in the

terms of prepayment penalties as you are suggesting.

But the problem I have when you talk about prepayment of penalties is that some people would be stuck with high interest rates.

We had a hearing about two years ago about people who wanted

to pay off their 504 loans were stuck with 18 percent interest, and

then they couldn’t do it. They were stuck with that, and I don’t

have the answer to it. In Illinois it is illegal to have a prepayment

penalty on a residence. It is obviously different on a commercial enterprise, but I think we ought to be taking a look at examining

where the need is in the market. And if there is a need for shortterm financing, some interim financing until a start-up company as

you say can show a record, then the interest rate should be perhaps even higher than the conventional market.

Ms. FAULK. We have suggested to the SBA as an alternative a

possible short-term program and we would clearly promote with

Congress that if you wanted to cut out a certain portion of the allocated dollars for this particular interim financing to prohibit the

misuse of those who really need the term debt and we would advocate it.

Mr. MANZULLO. When you use the word misuse, what you are

saying is that potential borrowers are simply looking at the SBA

loan as one of a series of things that they could do to get start-up

capital, even if they planned somewhere down the line, at the time

they are signing the document to get the SBA loan, they are really

going to take out another loan in three to six months. I just think

we need to do some work on that, because if we are not serving

a need in the community that is not being fulfilled then we have

to question our existence.

I have a question here for Mr. Wilkinson. In your testimony you

recommend a floor subsidy rate of 1.25 percent. If the subsidy rate

drops below that then fees to borrowers are reduced, I would like

to see a zero subsidy rate for the 7(a) program because then Congress would not have to appropriate money for the program. What

do you think about this?

Mr. WILKINSON. Well, one of the purposes of our recommending

a subsidy rate floor was to get into the whole discussion of what

is the role of government in this program. What kind of congresVerDate 20-MAR-2000 07:32 Apr 14, 2000 Jkt 010199 PO 00000 Frm 00029 Fmt 6633 Sfmt 6602 E:\HEARINGS\60813 pfrm02 PsN: 60813
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sional support are we going to get? There is nothing magical about

a 1.25 percent, maybe it is 1 percent, but we have a fear based on

the gyrations we have seen coming out of the OMB subsidy model,

that in one year we could get a big spike in the subsidy rate estimate that would require huge fees. And if we had not been on the

appropriation radar screen, it is going to be tough to get money for

what would appear to be a new program even though it has been

around for many, many years.

So we are reluctant to move to a zero subsidy rate. That said,

it appears that looking through the re-estimates in the subsidy

model from ’96, ’97 and ’98, we are on our way to in fact having

been at a zero subsidy rate and the money is flowing through to

the benefit of the Treasury, so that borrowers are actually paying

fees higher than they would have to today that based on the reestimates we probably were already at a zero subsidy rate, but the

money is coming out of borrower’s pockets and flowing to Treasury.

Mr. MANZULLO. Ms. Tubbs Jones.

Ms. TUBBS JONES. Actually I will give my time to Ms. Napolitano

who has been here longer than I have, so I will yield to her.

Mr. MANZULLO. Ms. Napolitano.

Ms. NAPOLITANO. Thank you, Mr. Chair. There are several issues

that, as I was listening to your testimony, have kind of rattled

around in my head in regard to women-owned business loans. And,

specifically to Mr. Hochberg, what outreach or how can you quantify loans that have been made to women-owned businesses? We

discussed veteran-owned businesses. Right now my concern is

women-owned businesses specifically because in California we have

a large—we heard today it is an increasing segment of the business

population, women-owned business. How are we providing the

attractiveness to assist a lot of the new entrepreneurships?

Mr. HOCHBERG. Thank you for asking that question. We track

our loans to women-owned businesses, as we track our loans to minorities and veterans, on a weekly basis.

Ms. NAPOLITANO. By area or by——

Mr. HOCHBERG. We track it nationally and we also can track it

by congressional districts. Our outreach efforts are supported

through our Women’s Business Centers. They offer hands-on counseling on how to write a business plan, how to acquire more economic literacy, and other basics. We also use our Microloan program as a way of helping startups and home-based businesses.

Ms. NAPOLITANO. Only through your women SBDCs?

Mr. HOCHBERG. Through the Women Business Centers, and the

Small Business Development Centers (SBDCs). In addition, we

have signed over 80 agreements with organizations around the

country, such as national organizations of business owners, Hispanic Chamber of Commerce, the African American chamber of

commerce, to try and make sure that their membership is fully

aware of the programs and services we have available.

Ms. NAPOLITANO. I have a reason for asking, because I have gotten some of the statistics from SBA in regard to the centers in the

area and those that do outreach to small business. I have one in

my area. And I am concerned because we don’t seem to be putting

an emphasis on that particular segment of business. And I don’t

know what your statistics may show in regard to the default statisVerDate 20-MAR-2000 07:32 Apr 14, 2000 Jkt 010199 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HEARINGS\60813 pfrm02 PsN: 60813
28

tics on women-owned business, whether or not it is working out,

whether or not they need assistance. Where does that lead to? Are

they being successful? Are we assisting them to achieving the goals

of becoming the new entrepreneurs that are going to be in business

ten years from now.

In the end I am looking for the jobs that they are providing. That

said, I need to know how much is actually being focused on women

and women-owned business systems.

Mr. HOCHBERG. We just authorized grants to fund another 24

Women’s Business Centers this month so that will certainly help

increase the number we have across the country.

Ms. NAPOLITANO. Okay. But are you targeting them to specific

areas where the greatest need may be found, and if so how are you

looking at that targeting?

Mr. HOCHBERG. I would encourage any organizations within your

district to apply. We would like to look at them when we open the

program up again for grants next year. We are always looking to

expand this outreach and to find more intermediaries to help us in

this area. One of the things we also want to do is to make much

clearer the connection between our loan products and micro-lending, so that it is not just handholding, but it is really helping them

start and grow a business.

Ms. NAPOLITANO. That was one of my questions. The second one,

we keep talking about the debt that SBA has not recovered. You

mentioned a figure of the current funding that we are now being

shorted because it has not been repaid. How much was that

amount?

Mr. HOCHBERG. I am not sure I understand the question.

Ms. NAPOLITANO. Well, how much debt is out there that has been

defaulted?

Mr. HOCHBERG. I referred to about $8 to $9 billion in debt that

we hold. That is not all defaulted debt.

Ms. NAPOLITANO. I am looking at what is the default amount.

Mr. HOCHBERG. Let me check.

Ms. BUTLER. We will have to get back to you.

Mr. HOCHBERG. Yes, I have to get back to you with that amount.

Ms. NAPOLITANO. Can you give me a ballpark figure?

Ms. BUTLER. It is a very small percentage over time. It is less

than 10 percent.

Ms. NAPOLITANO. Okay. Then possibly you have a recovery rate,

even though it may be slow in coming back. Is that correct?

Ms. BUTLER. That is correct.

Ms. NAPOLITANO. Okay. You are willing to sell a portion of that

or some of it, right?

Mr. HOCHBERG. Yes.

Ms. NAPOLITANO. And which portion is this that you are willing

to sell? I am trying to figure out which is the one that pays you

back on a regular basis even though it is late, well, some of it may

be late, and which one is really defaulted that you are going to

have collectors go after them.

Mr. HOCHBERG. Our asset sales program includes both those who

are paying us back on time and those who are not.

Ms. NAPOLITANO. Okay. That explains it. Okay.

29

Mr. HOCHBERG. It includes both. I should add, interestingly, as

we have talked to the borrowers about perhaps selling their loans,

many of them have immediately become current or paid the entire

loan off.

Ms. NAPOLITANO. Okay. Then the other question has to do with

the—okay, so much for that.

Mr. MANZULLO. I would like to go to Ms. Jones Tubbs, at this

point, so we can get in at least five minutes on her part.

Ms. TUBBS JONES. Thank you, Mr. Chairman. Thanks, Gracie.

For the record, that is Congresswoman Napolitano. I am going to

try to make my questions kind of short. I have one for each of you.

Ms. Faulk, do you have any other proposals to address the prepayment issue whether or not loans are increased?

Ms. FAULK. Well, again, proposals——

Ms. TUBBS JONES. That we haven’t given you the opportunity to

speak to.

Ms. FAULK. No, ma’am. We have made a similar recommendation

back in September to the Oversight Committee as an alternative

for the short-term borrowing abuse that SBA considered creating

as a short-term financing program.

Ms. TUBBS JONES. Okay. Thank you very much. Good morning,

Mr. Hochberg. How are you, sir?

Mr. HOCHBERG. Good. Good to see you.

Ms. TUBBS JONES. I want to, for the record, express my thanks

for the support the SBA has given me as I have worked my way

through learning what it means to be a member of the Small Business Committee and the attendance at our event in Cleveland,

however long ago it was. I am losing track of days. But I have one

particular question I would like to ask. In your statement you say

that we rely on the credit decisions of our lending partners for

about 75 percent of our loan approvals.

We place greater reliance on the experience and expertise of its

lending partners to perform. Do you have any information that

would distinguish between what types of loans you are giving now

under that setup as compared to the loans that were being administered or given out when SBA was responsible for this process,

and you don’t have to give that to me today, but if you could give

me some comparisons down the line I would like to have it.

And I also would like to know has it changed the face of the borrower, meaning are there more minority loans, less minority loans,

more women’s loans, less women’s loans, anything that you could

tell me the impact this had. I am just curious as to whether or not

it may be a good practice and then maybe it may be something we

need to assess one way or another. So that was my question for

you.

For you, Mr.—let me get your name correct. I am sorry. Mr.

Wilkinson, you stated that you need a better way of penetrating

the 504 market in order to let people know what is available under

that program. Is that correct?

Mr. WILKINSON. That is one of—a major problem, yes.

Ms. TUBBS JONES. It is a major problem. Can you tell me who

are the members of your group that exist in the 11 congressional

districts of Ohio? You don’t have to give them to me today but I

would like to have them because I would like to assist them in my

30

district in getting information out about 504 opportunities. And I

would suggest that you might make use of other members of Congress that are on SBA committee to help you do that.

And it is not—so it is real clear for the record, it is not for political purposes. It is in our best interest to have small businesses in

our districts to do a good job, and if there are programs available

to them, then we need to get on the stick and do what we need to

do to let those programs be known about. So do you want to get

that for me, please? Thank you.

My last question, Mr. Geigel, in Mr. Hochberg’s statement he references a statement by Federal Reserve Chairman Alan Greenspan

as follows. Some of the studies have found discrepancies in the

turn-down rates by minority-owned small business applicants and

that not all of the cited differences could be readily explained by

income, balance sheet factors or credit history.

To the extent that market participants discriminate consciously

or more likely unconsciously credit does not flow to its most profitable uses and the distribution of output is distorted. In the end

costs are higher, thus real output is produced and national wealth

accumulation is slowed. By removing the noneconomic distortions

that arise as a result of discrimination we can generate higher returns to human capital and other productive resources, and it goes

on and on and on with that.

But my question to you representing the National Association of

Government Guaranteed Lenders, what is it that you are willing

to do or your group is willing to do to assure that the loans—that

you are more responsible for now than ever that SBA has given

that responsibility to you go to women and minority-owned businesses when you can’t even—sometimes it is not even documented.

Mr. WILKINSON. Sure. I would be happy to answer that. First of

all, Mr. Hockberg started off I believe earlier today with the number that SBA has 19 percent fewer employees today than they had

in 1992. At the same point in time, the program has grown fourfold, so for the agency to be able to get the money in the hands of

small businesses, they had to rely on the private sector.

Ms. TUBBS JONES. Understood. I don’t have any question about

that.

Mr. WILKINSON. I am just trying to answer part of his question.

Now what we have done over the last year with the agency, we

have entered into a memorandum of agreement. We are engaging

in training exercises all over the country on lending to new markets. We have—Mr. Davis will enjoy this. We have Dick Turner

from South Shore Bank in Chicago was our lead instructor who

helped us put the class together.

We are doing 25 lender sites. We are also doing ten intermediary

sites where SBA is our co-sponsor, and those are underway and the

last few have been very well attended. So beyond that we are willing to sit down and look at a whole host of possibilities. One of the

things we have tossed out is perhaps on smaller loans we can go

back to a 90 percent guarantee. We don’t think that would cost

very much on a subsidy front and would be an incentive to get

down into the $150,000 and less loans. Beyond that, again, we are

willing to sit down and talk as to what we can do to make this

work.

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Ms. TUBBS JONES. A quick follow-up, Mr. Chairman, I am

hosting a small business seminar in my community on September

24 of this year. Could you let me know who the people are in your

organization in the 11 congressional districts in Ohio, so I can call

upon them to participate in that workshop. Thank you, Mr. Chairman.

Mr. MANZULLO. Thank you. We thank you for coming to us this

morning. We got everybody’s questions in, and hopefully everything

answered. We have to go and vote. This committee is now adjourned.

[Whereupon, at 11:55 p.m., the committee was adjourned.]

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