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S. HRG. 110–776 

THE IMPACT OF THE CREDIT CRUNCH ON SMALL 

BUSINESS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

AND ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

APRIL 16, 2008 

Printed for the use of the Committee on Small Business and Entrepreneurship 

( 

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


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(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JOHN F. KERRY, Massachusetts, Chairman 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOSEPH I. LIEBERMAN, Connecticut 

MARY LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

EVAN BAYH, Indiana 

MARK PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JON TESTER, Montana 

OLYMPIA J. SNOWE, Maine 

CHRISTOPHER S. BOND, Missouri 

NORMAN COLEMAN, Minnesota 

DAVID VITTER, Louisiana 

ELIZABETH DOLE, North Carolina 

JOHN THUNE, South Dakota 

BOB CORKER, Tennessee 

MICHAEL B. ENZI, Wyoming 

JOHNNY ISAKSON, Georgia 

NAOMI BAUM, Democratic Staff Director 

WALLACE HSUEH, Republican Staff Director 


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(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Kerry, The Honorable John F., Chairman, Committee on Small Business 

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

Thune, The Honorable John, a United States Senator from South Dakota ....... 27 

Snowe, The Honorable Olympia J., a United States Senator from Maine ......... 30 

WITNESS TESTIMONY

Mishkin, Frederic S., Board of Governors of the Federal Reserve System, 

Washington, DC ................................................................................................... 4 

Preston, Steven C., Administrator, U.S. Small Business Administration, 

Washington, DC ................................................................................................... 18 

Kirk, Carolyn A., Mayor, Gloucester, Massachusetts ........................................... 37 

Bornstein, Samuel D., Professor of Accounting and Taxation, School of Business, Kean University .......................................................................................... 43 

Blankenship, Cynthia L., Vice Chairman and Chief Operating Officer, Bank 

of the West, Irving, Texas ................................................................................... 52 

O’Connell, Daniel, Secretary, Executive Office of Housing and Economic Development, Boston, Massachusetts ..................................................................... 65 

Mitchell, Robert L., Founder and Chief Executive Officer, Mitchell and Best 

Homebuilders LLC, Rockville, Maryland ........................................................... 78 

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

Pennsylvania ........................................................................................................ 90 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bornstein, Samuel D. 

Testimony .......................................................................................................... 43 

Prepared statement .......................................................................................... 46 

Responses to post-hearing questions from Senator Kerry ............................ 119 

Blankenship, Cynthia L. 

Testimony .......................................................................................................... 52 

Prepared statement .......................................................................................... 55 

Responses to post-hearing questions from Senator Kerry ............................ 116 

Kerry, The Honorable John F. 

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

Post-hearing questions posed to: 

Cynthia Blankenship ................................................................................ 115 

Samuel Bornstein ...................................................................................... 118 

Marilyn Landis .......................................................................................... 136 

Robert Mitchell .......................................................................................... 137 

Frederic Mishkin ....................................................................................... 138 

Daniel O’Connell ....................................................................................... 141 

Steven Preston ........................................................................................... 143 

Kirk, Carolyn A. 

Testimony .......................................................................................................... 37 

Prepared statement .......................................................................................... 40 

Landis, Marilyn 

Testimony .......................................................................................................... 90 

Prepared statement .......................................................................................... 93 

Responses to post-hearing questions from Senator Kerry ............................ 136 

Levin, Carl 

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


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IV 

Mishkin, Frederic 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 6 

Responses to post-hearing questions from: 

Senator Kerry ............................................................................................ 138 

Senator Snowe ........................................................................................... 139 

Mitchell, Robert 

Testimony .......................................................................................................... 78 

Prepared statement .......................................................................................... 80 

Responses to post-hearing questions from Senator Kerry ............................ 137 

O’Connell, Daniel 

Testimony .......................................................................................................... 65 

Prepared statement .......................................................................................... 67 

Responses to post-hearing questions from Senator Kerry ............................ 141 

Preston, Steven C. 

Testimony .......................................................................................................... 15 

Prepared statement .......................................................................................... 18 

Responses to post-hearing questions from 

Senator Kerry ............................................................................................ 143 

Senator Snowe ........................................................................................... 151 

Snowe, Olympia 

Opening statement ........................................................................................... 30 

Post-hearing questions posed to: 

Governor Frederic Mishkin ...................................................................... 139 

Steven Preston ........................................................................................... 151 

Thune, John 

Opening statement ........................................................................................... 27 

COMMENTS FOR THE RECORD

National Small Business Association (NSBA) 2008 Survey of Small and 

Midsized Businesses ............................................................................................ 160 


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(1) 

THE IMPACT OF THE CREDIT CRUNCH ON 

SMALL BUSINESS 

WEDNESDAY, APRIL 16, 2008 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP, 

Washington, DC. 

The committee met, pursuant to notice, at 2:41 p.m., in room 

428–A, Russell Senate Office Building, Hon. John F. Kerry, chairman of the committee, presiding. 

Present: Senators Kerry, Cardin, Snowe, and Thune. 

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, 

CHAIRMAN, SENATE COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP, AND A UNITED STATES SENATOR 

FROM MASSACHUSETTS 

Chairman KERRY. This hearing of the Small Business Committee 

will come to order. I apologize for being a little late. We had a vote 

on the floor. Senator Snowe, the Ranking Member, is introducing 

a nominee at one of the other committees, but as soon as she is 

done, she will join us. 

I want to thank Governor Mishkin from the Federal Reserve 

Board and our friend, SBA Administrator Preston, and all of our 

witnesses for coming here today and taking time to share with us 

their thoughts about the current situation facing small businesses 

with the credit crunch. 

Needless to say, the effort of this hearing is to really try to focus 

on—both to learn to what degree from small businesses there is an 

impact and also to draw attention to what is increasingly in the 

eyes of the members of the committee a problem that we are facing 

back home in all of our communities. 

Yesterday, I was visiting with the members of the Real Estate 

Roundtable over here in town, major hotel developers, commercial 

real estate developers, home builders, others, and we will hear 

from home builders in our next panel, but the evidence of the credit 

crunch and its downstream implications is mounting. 

Yesterday on the front page of the New York Times, right-hand 

column, there was a major story about the fallout in retail in 

America today, and as I talk to people and try to figure it out, it 

is very, very clear that what began on Wall Street and what was 

focused in many ways on sort of the bigger picture of the 

securitization and the portfolios that held subprime loans has really spread way down into Main Street America in very significant 


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ways, and the spillover of this impact just can’t be disregarded. It 

can’t be taken lightly. 

I am hearing more and more evidence of a broad-spread credit 

crunch. I think the real estate folks yesterday indicated to me that 

last year, there was something like $300 billion of deals that were 

consummated within that entire year. So far this year, in the first 

quarter, there is a total record of something like $9 billion, perhaps, and that is being generous, and some say if you looked under 

the nine, you might find it sort of questionable to what degree. 

Well, obviously if you extrapolate out, you know that is $36 billion 

versus $300-and-some billion on a year if it holds that way. Nobody 

can—I can’t tell you whether it will or won’t. 

What I do know is that many people in business are telling me 

that both the combination of the fear and the inability to gauge 

risk is causing people to just pull back and has stopped 

transacting, that people can’t necessarily get a price. They can’t get 

a sense of what is in the value and therefore it is very hard to be 

able to make those deals. 

In the most recent survey of banks, the Federal Reserve found 

that almost one-third of the nation’s lenders have tightened their 

lending standards for small business loans, and today, the National 

Small Business Association released the results of its annual survey, which showed that 55 percent of small businesses surveyed 

said they face difficulty in obtaining a loan due to the credit 

crunch. 

The continuing decline in home values has obviously made matters worse. Approximately 30 percent of all small business owners 

rely on home equity loans in order to finance their small business 

operations. But as home values decline, many of those small business entrepreneurs have to find an alternative financing source. 

Some of them will use high-rate credit cards, while others will simply delay or even cancel a planned investment. So that means 

missed opportunities not only for small business, but for all of the 

job growth in the ailing economy, which has already shed over 

230,000 jobs since January. 

Theoretically, the SBA loan program ought to be one of the key 

players in the effort to fill the gap left by the tightening credit market, but evidence indicates that that may not have occurred this 

time around. SBA loan activity is down program-wide. Activity in 

the SBA’s 7(a) loan program, the largest single source of long-term 

capital for small businesses, appears to be in a free fall. The number of 7(a) loans approved by SBA lenders has decreased by about 

18 percent compared with the same period last year. In terms of 

dollars, the 7(a) program is down by over $641 million, which is a 

decrease of almost ten percent. That sharp decline suggests that, 

whether temporary or permanent, we may want to consider some 

changes that might help stimulate that lending and provide more 

small businesses with financing they need. 

Now, in fairness, if you are looking at the inability to measure 

risk that I just talked about and you are looking at the sort of lack 

of an end in sight to the devaluation and the spiraling, it is difficult. It is complicated—I am going to acknowledge that up front— 

to be able to say that you have confidence in putting more money 

out into something where that person may not have the returns on 


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that investment that, in fact, qualify that loan. So this is a delicate 

balance and it really mandates both large and small approaches. 

Over the past few months, the members of this committee have 

proposed several measures to try to provide stimulus to lending 

programs. In January, I introduced the Small Business Stimulus 

Act of 2008, which was cosponsored by Senators Levin and 

Landrieu, and that bill would have boosted 7(a) loan activity by reducing the lender and borrower fees charged by the SBA, and that 

would provide, I think, much-needed support for the micro loan 

program. 

In February, I introduced a modified stimulus bill which added 

provisions aimed at increasing loan activity in the 504 loan program. I also joined my colleagues, Senators Landrieu and Coleman, 

in cosponsoring a bill introduced by Ranking Member Snowe which 

included changes to the tax code that would have benefitted small 

businesses. 

The President’s budget for next year reduces SBA funding and 

raises lender fees to the maximum amount allowed, which may, in 

fact, be contrary to what we need at this particular moment in time 

because it could have been used to reduce the newly imposed oversight fees for SBA lenders. 

We have a question whether or not the SBA has refused to take 

appropriate action in responding to the needs of this credit crunch 

and we would like to explore today sort of what the difference 

might or might not be between the Fed, which has taken some 

bolder moves but which obviously may have greater facility in 

doing so. 

We are going to hear the testimony from Governor Mishkin on 

the Fed’s latest actions and how they affect the state of small business in the country, especially the credit markets. 

Our second panel of witnesses is going to share with us firsthand accounts of the tightening market for small business loans, 

and I also hope they will share with the committee the steps they 

believe ought to be taken to stimulate that activity, because we 

hope to draft legislation coming out of today’s hearings if, in fact, 

it is warranted and can be effective. 

I believe this hearing and the legislation that grows out of the 

testimony we hear today have the potential to provide some additional kick at levels of our economy where it really needs it, and 

I look forward to working with Ranking Member Snowe and Administrator Preston to figure out what the best ways are we might 

be able to do that. Hopefully, we can arrive at a baseline of understanding of what is happening and what might or might not make 

that difference. 

As I mentioned, Ranking Member Snowe will be joining us in a 

little while, so we are going to go straight to you, Governor 

Mishkin, and then to you, Administrator Preston, and we appreciate both of you being here. Thank you. 


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STATEMENT OF HON. FREDERIC S. MISHKIN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, 

DC 

Mr. MISHKIN. Chairman Kerry and members of the committee, I 

am pleased to appear before you on behalf of the Board of Governors of the Federal Reserve System. 

Small businesses play a critical role in the U.S. economy and access to credit is essential for their success. My remarks today will 

address the unusual stress imposed on credit markets in recent 

months and how that stress appears to be affecting small businesses. So let me turn to small business access to credit in the current financial market turmoil. 

As we all know, financial and credit market conditions began to 

deteriorate rapidly in August. Since that time, credit supply conditions for small businesses have continued to tighten. For example, 

in the Board’s most recent Senior Loan Officer Opinion Survey, 

conducted in January, a net one-third of the domestic banks surveyed, a larger fraction than the October survey, reported they had 

tightened their lending standards on commercial loans to small 

firms over the previous three months. Significant net fractions of 

banks also indicated that they had tightened price terms on commercial loans to small firms. Actual loan pricing data from our 

quarterly survey of terms of business lending are broadly consistent with the qualitative data from the Senior Loan Officer 

Opinion Survey. 

Despite tighter credit conditions and loan terms, growth in the 

dollar amount of commercial loans at U.S. banks was quite well 

maintained in the first quarter of 2008. Particularly noteworthy 

from the point of view of small businesses is the fact that after 

growing almost 20 percent in the first quarter of 2007, commercial 

loans to small banks continued to expand at a rate of almost 12 

percent in this year’s first quarter. 

Another source of information about small business credit supply 

conditions is the monthly survey of the National Federation of 

Independent Businesses. The results of their most recent survey 

suggest that credit supply conditions for small businesses have 

held up fairly well over the past several months. For example, over 

the past few quarters, only about three percent of survey respondents have reported that financing conditions and interest rates 

were the main business concern. 

On a less positive note, in recent months, the net percentage of 

survey respondents that reported credit was harder to obtain over 

the previous three months and the net percentage that expected 

credit conditions to tighten over the next three months have been 

at the upper end of their ranges observed over the past few years. 

Similarly, in the Duke University CFO Magazine Global Business Outlook Survey conducted most recently in March, about onethird of the survey’s chief financial officers of small businesses said 

credit was more costly, less available, or both as a result of the 

credit market turmoil. This proportion is up slightly from last September. 

Looking forward, many small businesses use real estate assets to 

secure their loans. Continuing declines in the value of their real esVerDate Nov 24 2008 05:06 Apr 10, 2009 Jkt 044801 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HR\OC\A801.XXX A801

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tate assets clearly have the potential to substantially affect the 

ability of those small businesses to borrow. 

In addition, declines in the value of real estate assets held by 

banks and other lenders could affect their willingness and ability 

to supply loans, as real estate losses use up capital that could otherwise be used for making new loans. Banks across all size groups, 

including community banks, have recently experienced a sharp deterioration of credit quality, mostly within loans secured by real estate. Moreover, if banks continue to place on their balance sheets 

some assets they had expected instead either to place off their balance sheet or to sell to investors, such actions could crowd out 

loans to some small businesses. 

On a more positive note, the vast majority of U.S. banks remain 

well capitalized. Going forward, this should help these banks to 

maintain their lending capacity. 

So let me conclude. In conclusion, since last fall, credit supply 

conditions have almost surely tightened for the vast majority of 

small businesses. On balance, however, credit appears to be generally available, but at a higher cost. Thank you. 

[The prepared statement of Mr. Mishkin follows:] 


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Chairman KERRY. Thank you very much, Governor. 

Mr. Administrator. 

STATEMENT OF HON. STEVEN C. PRESTON, ADMINISTRATOR, 

U.S. SMALL BUSINESS ADMINISTRATION, WASHINGTON, DC 

Mr. PRESTON. Thank you, Chairman Kerry. Thank you also, Governor Mishkin, for coming. I also just want to thank the members 

of the second panel. You have put together a good group of people 

who do a lot of good work for small businesses. 

I think as we look at this situation right now, clearly over the 

past several years we have seen a very strong period of economic 

growth, a period of low unemployment, and a period of very good 

broad economic conditions. Most recently, however, in the fourth 

quarter, we saw GDP growth fall to 0.6 percent, and if you are a 

small business owner, we are looking at higher prices at the pump, 

higher prices in the supermarket, and home prices are down. Those 

are all factors which clearly affect the cost of running a small business and the markets for many of their products. 

In June, the President signed the bipartisan economic growth 

package which will inject $152 billion into the economy. The package will support not only consumer and business spending, but it 

is also going to provide important tax incentives for businesses to 

make investments in new equipment this year with the depreciation and expensing benefits. We hope that the boost from the stimulus package will help buoy the economy in the coming months, 

but also very importantly give small businesses an incentive to invest back in their business because of those cash benefits. 

Confidence in the economy is particularly important for small 

businesses. In deciding whether to invest in expanding a business, 

which may require taking on new debt, it is very important that 

business owners have that confidence in the economy and that the 

customers will be there to justify those investments. 

I think a lot of us have seen a number of surveys out there by 

NFIB and NSBA and the Chamber. All of those indicate that confidence among small businesses has declined in recent months, and 

I think it also shows that general concern about the economy has 

increased. 

In addition, what I think is real important for our group, is it 

shows that small businesses’ intention to hire and intention to invest back in expansion of their business has also declined. Those 

are very much the kinds of decisions which drive the need for capital which our programs support. That is very consistent with what 

we have heard from our lenders and our borrowers. 

We have had hundreds of outreach meetings with lenders to discuss what is going on in the marketplace. Many of the lenders have 

indicated they have seen this uncertainty and it has resulted in 

less demand for credit in the small business community. Many 

lenders have actually indicated that they are having some challenges putting good capital to work right now in the marketplace. 

That is also supported by the Fed January 2008 Senior Loan Officer Opinion Survey, which shows one-fourth of both large and 

small domestic banks saw weaker demand from small firms. However, demand is not the only factor, but it is an important one. 


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The survey also found that some domestic institutions have 

tightened their standards, as Governor Mishkin said. That is consistent with what Secretary Paulson stated when he commented recently that he believes the sentiment has swung to risk aversion. 

It is also consistent with my own conversations with lenders. 

Many of our lenders have experienced a significant increase in 

credit losses in their portfolios and they have responded by tightening credit standards. We see a reflection of this in our own portfolio. Clearly, the greatest declines that we are seeing in our portfolio are in areas where we see the greatest risk. 

In addition, small businesses who are facing challenges due to 

the economy or who have less collateral because their home values 

have declined, no longer are able to meet the same credit standards 

that they were before. So they don’t look as good on paper as they 

might have a year ago when a bank is considering a credit decision. 

That flow of capital between banks and small businesses is obviously critical for growth. We have been working very diligently 

with lenders to ensure that capital is available to those small business owners who want it and need it. We have held roundtables 

in cities around the country, major lending centers, smaller communities, as well. We have held very in-depth relationship review 

meetings around the country in our field. We have had—in just the 

last month, we have had over 800 meetings in our field to sit down 

with lenders to talk about their strategies, to talk to them about 

the quality of their portfolios, to encourage them to expand the use 

of SBA product where it is appropriate, and to make sure we understand if there is anything that we need to do to support them 

to expand the use of our program. Those sessions have given us a 

great opportunity to both articulate the value of our guaranteed 

lending and also to discuss the issues that they have that are of 

concern to them. 

Beyond that, I would like to emphasize that we conducted very 

extensive lender outreach in late 2006 and early 2007 to make sure 

we understood before any of this happened how to expand our presence in the lending community. We are addressing many of the 

issues we heard from lenders where they told us—when they explained to us what was inhibiting their participation in our programs back then, and we have gotten great feedback on the 

progress we have made. 

We are purchasing their loans much more quickly. We had some 

terrible backlogs in our guaranteed purchasing operations. We are 

turning those very quickly. We are providing much better on-site 

bank support for our field network. We have simplified our policies. 

We have just rolled out a whole new set of policies last month. We 

are moving away from paper to electronic transactions and we are 

rolling out new programs, like Patriot Express and Rural Lender 

Advantage. 

Much of the industry, especially the small banks, were very disappointed when Low-Doc was discontinued. We lost over 400 active 

lenders from 2005 to 2006, most of them small lenders. Since then, 

we have piloted something called Rural Lender Advantage to bring 

back those lenders into the programs. Based on the pilot, we are 

making some adjustments to simplify that program based on the 

industry feedback. But effectively, it provides lenders with a simVerDate Nov 24 2008 05:06 Apr 10, 2009 Jkt 044801 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A801.XXX A801

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plified application. It is electronic. We turn around the decisions 

very quickly. We provide them with a lot of customer support. We 

give them the same guarantee structure as the old Low-Doc. We 

actually increased the maximum from 150 to 350 thousand, but it 

allows us to ensure that we have got consistent underwriting 

standards so that the program is more viable than the Low-Doc 

program was. 

So, like you say, SBA is working very hard on a number of fronts 

to support the lending community in a very hands-on way, but in 

a more structural way, as well. Certainly we stand ready to handle 

an increase in volume, whatever this committee and Congress and 

the President decide to do. We certainly would look forward to that, 

and I would also like just to thank you for the opportunity to share 

our thoughts on this important topic. 

[The prepared statement of Mr. Preston follows:] 


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Chairman KERRY. Well, thank you very much, Administrator. 

Let me see if we can sort of flesh out a few of these things here, 

if possible. Mr. Mishkin, what in your judgment—obviously, the 

Fed has moved in a lot of different ways. Some people have suggested the Fed may have already exhausted the remedies available 

to us. Do you think that is accurate? 

Mr. MISHKIN. I think that that is not quite correct. Clearly, the 

nature of the shock to the financial system is actually very major 

and there are aspects of this that, in fact, are out of our control, 

in particular the fact that people are having trouble valuing assets. 

The credit risk has gone up to a major extent. 

However, monetary policy is effective in dealing with these—— 

Chairman KERRY. Can I just stop you there for one quick second 

before we go on. I want to get back to the rest, but—— 

Mr. MISHKIN. Sure. 

Chairman KERRY [continuing]. How do you get, then, to this 

point? Do you just have to wait until the market settles that you 

are suddenly able to measure this risk, or are there steps that 

could be taken that could help to eliminate this imponderable, this 

fear factor and get people to being able to value things more effectively? 

Mr. MISHKIN. I think that there is part of the risk that we can’t 

do anything about. In fact, the way I have thought about this is 

there are two elements of this risk. One is what I call valuation 

risk—the fact that you have to figure out the value of these underlying assets—and that can be very difficult to do. But there is also 

an element of macroeconomic risk, which is that there is a feedback 

between what happens in terms of the overall economy and the 

credit markets. So if people are very concerned that the economy 

will get into real trouble, that means that they are actually going 

to say there is more risk and, in fact, it is even more difficult for 

them to value assets. 

Chairman KERRY. Right. 

Mr. MISHKIN. So part of our job at the Federal Reserve is, in fact, 

to reduce this macroeconomic risk, and there are two elements of 

this. One is monetary policy, which we have aggressively eased 

from what was going on before August, and, improvement in the 

functioning of financial markets, particularly in terms of liquidity 

facilities. And both of those have been important steps in this direction. 

Chairman KERRY. But there are some limits, I assume, as to how 

far the Fed can go on the monetary piece. 

Mr. MISHKIN. Well, clearly, you can’t get interest rates below 

zero, so, in fact, we call that the zero lower bound on interest rates. 

But we actually have interest rates at two-and-a-quarter percent 

and clearly there is some room to lower them if it is needed. 

Furthermore, we are continually looking at steps to make the 

markets function better and I think we have been quite creative in 

the steps that we have taken so far. But, in fact, we will continue 

to look at everything that can take to getting the financial markets 

back to a more normal situation. 

Chairman KERRY. Do you see specific steps which either the Fed 

or the FDIC or the Congress could take at this point that would 


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more rapidly get capital into—that would begin to allow that capital to move more rapidly into people’s hands and ease the crunch? 

Mr. MISHKIN. Well, there clearly are issues that the Congress is 

looking at—such as whether they can make, the housing market 

work better—which we encourage you to do and would clearly have 

an impact on credit markets. 

Chairman KERRY. In your testimony you talked about a tightening of credit standards, higher rates, higher costs for credit, and 

the decline in the use of real estate assets as collateral in order to 

do that. So you have got these three elements. Is there one that 

is more important than another as to most affecting the access of 

a small business to credit? 

Mr. MISHKIN. Well, it is hard to say which of these is more important. I think the most important issue affecting small businesses is what will happen to the overall economy and the availability of credit. In fact, there has been more difficulty in their access to credit, but the situation is not dire. Credit is still being 

issued and small businesses are able to get access to credit. 

What I think is a bigger concern for small businesses is whether, 

in fact, they are going to have demand for their products. So in 

that sense, a key issue for the Federal Reserve and a key role in 

terms of helping us to promote small business is to make sure that 

the economy stays on an even keel. 

Chairman KERRY. So in thinking about responses to this, how do 

you deal with the sort of sense that at one moment, we are cruising 

along. People are borrowing. People are investing. Small businesses 

have their contracts, their sales. The outlook is relatively decent. 

And then you have this uncertainty in one particular part of the 

market, the subprime, the real estate, where a bunch of folks aren’t 

too sure what is in their portfolios, what the values are and so 

forth, and you sort of pull the rug out from under all these other 

assumptions that are being made. 

To what degree are we now trapped in a self-fulfilling prophecy 

syndrome, where because people are looking out there, the interest 

rates what they are still, and the market has a bubble, then everybody says, well, I can’t tell. Therefore, I am not borrowing, or I am 

not lending, and you just cascade downwards. 

Mr. MISHKIN. Well, clearly, one of the things that happened is 

this disruption—in terms of the subprime market—has actually 

spread much wider and—— 

Chairman KERRY. Why has it? A lot of people don’t understand 

that. 

Mr. MISHKIN. I think the reason it has spread wider is because 

it actually revealed that the securitization model, which is a key 

part of providing funds to the capital markets nowadays, actually 

is flawed. And the subprime lending was frequently driven by the 

fees that the originators were getting, and not worrying about 

whether, in fact, the ultimate holder of the loan would get that 

back—— 

Chairman KERRY. Subprime is a nice word, term of art, for describing loans that shouldn’t have been made. 

Mr. MISHKIN. I think I would differ with you on this in the following sense—— 


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Chairman KERRY. Wasn’t the whole concept of subprime that 

people get credit where they wouldn’t otherwise qualify for the 

credit? 

Mr. MISHKIN. I think that the issue is that there clearly is a lot 

of subprime lending that should not have been done, and in that 

sense, I agree with you completely. There is an issue about the 

quality of information in the marketplace, basically through technology, which actually may allow people who previously were not 

able to get credit to get credit if it is actually underwritten to them 

properly, so—— 

Chairman KERRY. Let us flesh that out a little bit. 

Mr. MISHKIN. So in this episode, the problem is not so much that 

all of the subprime borrowers were bad borrowers. But many of the 

lenders actually lent to people who, in fact, should never have gotten the loans. As I said, some of the reasons this happened was because the incentives of the originators of these loans were not always in the interest of either the person who eventually held the 

loan or even in the interest of the borrowers. 

The problem then is that then revealed there are similar kinds 

of problems elsewhere in the capital markets in terms of 

securitization, where people were assuming that the credit rating 

agencies were going to get it right and weren’t doing due diligence 

on their own. It then actually spread much wider, creating some 

problems in terms of bank capital, because banks, in fact, owned 

portfolios of these assets and had losses as a result. This ate into 

some of their capital. So that have actually resulted in some of the 

credit restrictions that you talked about at the very outset, which, 

in fact, has created a problem not only for the real estate sector, 

but actually for the small business sector, as well. 

Chairman KERRY. And do you agree that the small business sector winds up getting caught up in that psychology—— 

Mr. MISHKIN. Absolutely. I think that, first of all, small businesses are a key element of the strength of the economy in this 

country. I actually come from a small business background. I 

worked for several years in my father’s small factory in Manhattan; 

they used to have them there. And we know that a lot of the 

growth in the U.S. economy and a lot of the very rapid growth in 

entrepreneurial activity has actually occurred in small businesses. 

So clearly, what started in one part of the economy, which had 

really very little to do with small businesses, has ended up creating 

problems for small businesses for the economy as a whole. Clearly, 

one of the key missions for the Federal Reserve is to try to keep 

the macroeconomic risk in the economy reduced so that, in fact, we 

can have recovery of activities for small businesses and for businesses in general. 

Chairman KERRY. But a significant part of that recovery, by your 

earlier testimony and by what we have discussed here, is the inability to be able to actually value, correct? 

Mr. MISHKIN. Absolutely. 

Chairman KERRY. Is there a way for the Fed or even the SBA 

to create some protocol that begins to establish how one does value 

at this point or to create value at this point? 

Mr. MISHKIN. I think—— 

Chairman KERRY. The Fed has more ability to create the value. 


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Mr. MISHKIN. Right. I think that what much of this in terms of 

valuation has to be done by the markets. What the Federal Reserve 

can do is—by restoring confidence in what will happen to the economy in the future—help make it easier for the markets to do their 

job. But the reality is that the financial markets have to figure out 

what the value of assets are, where the losses are, and the Federal 

Reserve—— 

Chairman KERRY. Are they being too cautious in doing that? Is 

there a way to break the cycle? 

Mr. MISHKIN. I don’t know if the right word would be cautious, 

but clearly it is a very difficult issue for them to sort out. Clearly, 

having more transparency in the system would be helpful to them 

in doing this. So there are issues in terms of whether the financial 

systems can be made to work better in this regard. 

Chairman KERRY. As you know, the next loan officers’ survey 

from the Fed is going to come out next month. Based on what you 

have seen thus far, do you anticipate that the trend towards tighter lending standards is going to be sustained? 

Mr. MISHKIN. Well, unfortunately, I don’t have any information 

yet about what is going on in that survey, so I really can’t comment 

on what—— 

Chairman KERRY. Do you have any anecdotal or—— 

Mr. MISHKIN. I think the only anecdotal information we have 

been hearing in some of these other surveys is that small businesses are facing more uncertainty in terms of their ability to get 

credit. 

Chairman KERRY. So what do you do about the frustration of a 

small business person who has got contracts, product, workers, but 

they can’t get the working capital to continue to do what they know 

they can do? 

Mr. MISHKIN. Well, unfortunately, we can’t directly help small 

businesses, but, in fact, if we fulfill our mission of both maintaining 

price stability and sustainable employment, then it can happen. So 

it is indirect, but I still think important. 

Chairman KERRY. What indicators are you going to be looking for 

to get a sense of whether or not you should take stronger steps in 

terms of—I mean, small businesses are 98 percent of our businesses. They are obviously going to be impacted by macro forces 

over which they have no control. What are you going to be looking 

for here? 

Mr. MISHKIN. Well, we actually look at a whole range of information to make assessments about what is going on in the economy, 

including, by the way, talking to small businesses. The Federal Reserve Banks have committees where they meet with small businesses. When I was at the Federal Reserve Bank in New York 

about ten years ago, we had periodic meetings with an advisory 

committee from the small business and agricultural sector, and 

that was very helpful to us in providing information about those 

sectors. 

Of course we look at the national statistics. We very much look 

at what is going on in credit markets so that we are not just looking at where the real economy is now, but at information in financial markets which may tell us something about where the economy may be heading in the future. So we do use a lot of science, 


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but there is also a lot of art to monetary policy and we actually use 

both very extensively. 

Chairman KERRY. What would your message be to small business owners listening today as to what they might look to as potential options that could change the view for them? 

Mr. MISHKIN. Well, I think that they have to, first of all, most 

importantly, look to their own markets, and in looking to their own 

markets make an assessment so that they have a good feel for 

what will happen. One of the strengths in the economy in recent 

months has been the export sector. And, in fact, small businesses 

do a lot of exporting. So looking for new markets is something that 

they can also do to improve their profitability and their ability to 

invest. 

Chairman KERRY. You have seen both the stimulus package and 

the housing package that have been, one passed and the other 

being worked on here. Are there steps, other steps that might be 

more constructive by the Congress than those you have seen? 

Mr. MISHKIN. Well, I think at this stage, it is, I think, worthwhile to see exactly how well the packages that have been passed 

work. The stimulus package is not going to kick in for a couple of 

months. We are hopeful that it will help the economy get through 

this period of slow growth. And I think when we see what happens 

there, then we will have a little bit better idea what we might need 

to do in the future. 

Chairman KERRY. Administrator Preston, I will just ask you a 

question and then I will turn to Senator Cardin and then come 

back, but there is a chart over here that indicates the—and maybe 

we can get the chart up—that indicates the decrease in the number 

of 7(a) loans approved by the lenders, about 18 percent down from 

the same period last year. I mentioned that represents about $641 

million. Do you have any judgment to offer the committee about 

whether or not the fees have been a factor in that downward trend? 

Mr. PRESTON. I certainly don’t think it is the primary factor or 

even an overwhelming factor. What we have consistently heard—— 

Chairman KERRY. But a factor? 

Mr. PRESTON. I think on the margin, any additional fee has an 

effect. But what we have consistently heard from the lenders is either demand is down or we stretched too far and we have had a 

pull-back. And when we look at where our loans have declined, it 

is almost all smaller unsecured lines of credit, mostly through sort 

of credit-scored products. And if we look at the lenders where the 

decline happened, about 70 percent of the decline came from three 

lenders that have pulled back very dramatically, in the number of 

loans. The dollar value, decline is a little bit less dramatic than 

that, but it is also heavily concentrated. 

So, you know, the other thing we are hearing, and I know we are 

talking about kind of broader macro issues to an extent, but what 

we have seen very clearly is it is not a one-size-fits-all behavioral 

adjustment on the part of banks. Many of them had different practices in using our programs. Many of them were a lot more aggressive than others. A lot of lenders are saying they haven’t changed 

their credit standards one bit and they are pushing hard to find 

good value. Others have said, we got so far ahead of ourselves, and 


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we are pulling back dramatically and figuring out what we need to 

do. 

So I think it is important to understand where it is pocketed and 

where it is not, and we do see, continued, I wouldn’t say strength, 

but a much lesser decline in larger loans, certainly any loans that 

have collateral in them, among most institutions since a handful 

are driving the decline. 

Chairman KERRY. Senator Cardin, are you ready to go? I will 

come back afterwards if you are set to go. 

Senator CARDIN. Thank you, Mr. Chairman. 

Chairman KERRY. Do you want to press your button there? 

Mr. PRESTON. I had that same problem a minute ago. 

Senator CARDIN. Thank you for turning me on, Mr. Chairman. I 

appreciate it. 

Chairman KERRY. It is my job. 

[Laughter.] 

Senator CARDIN. Let me first thank our witnesses. To Administrator Preston, my staff has shared with me the letter that you 

sent back to me in response to the question from the prior hearing 

dealing with minority participation in our loan programs. I haven’t 

had a chance to absorb all of this, but clearly, it looks like the 

trend lines are favorable and I thank you for supplying the specific 

information for the country and for Maryland. I look forward with 

you in making sure that opportunities are provided, particularly to 

minority businesses in this country, in the most effective way, and 

I thank you for that response. 

I just want to follow up on the Chairman’s point, if I might just 

for a moment. One of my concerns is that small business owners, 

the statistics sometimes don’t really reflect what is happening 

there. We see the statistics, but business owners are proud people 

and they are in real trouble today and they are trying to figure out 

a way to stay afloat. When there is a credit crunch, they still need 

credit, and in many cases, they go to much more expensive credit 

sources. They use their credit cards and pay a much higher rate, 

which is only going to cause a greater difficulty for them being able 

to keep their business afloat. 

So I am just interested as to whether you are seeing trends with 

small businesses today where they are substituting some of this 

credit for more expensive credit, which could really affect their 

ability to stay in business. 

Mr. PRESTON. Yes. I think that is a great question and it actually 

dovetails well with another question that I wanted to comment on 

that Senator Kerry had asked. I think we kind of lump small business into one big chunk, but I think the surveys are kind of showing us that the somewhat larger small businesses that have a little 

bit more balance to them continue to have good relationships with 

banks. Their markets are impacted, their sales are impacted economically, but the credit as I see it and from what I have read, and 

as I have listened to people, that doesn’t seem to be as much where 

the squeeze is. 

When you go further down to the smaller small businesses, that 

is where you see a lot more people financing off of credit cards, a 

lot more off of home equity lines. A lot more people, if they are 

going to go to the bank they need that home equity as a source of 


wwoods2 on PROD1PC60 with HEARING
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collateral for a bank loan. And my concern is it is more at that end 

of this spectrum that we are beginning to see some more of the 

challenges. And to the extent that bank credit is not available for 

those people, you would expect them to go to credit cards. I don’t 

have any empirical evidence to tell you that it is happening, but 

we see the logic behind that. 

And so if you match that with my earlier point that not all banks 

are behaving the same way, that is why it has been so important 

for us to get out there and meet with hundreds of banks to say, 

let us look at what is happening in your portfolio. Let us look very 

individually, bank by bank, how you are lending to small businesses, how you use our programs, and how you can expand your 

capital to small business by working more closely with us, because 

they all use our programs differently, too. 

You know, just like lending is one business at a time, our relationship with those banks is similar. So we are really trying to get 

out there and work that issue, but I think your concern is very 

real. And I know you are going to be talking to some people from 

the building industry afterwards. We are seeing the impact in our 

portfolio much more heavily in construction and in hospitality and 

a few industries that seem to be getting harder hit. 

Senator CARDIN. I know that Chairman Kerry has legislation 

that he is advancing that will try to make the tools more readily 

available to small businesses during these economic problems. I 

would just urge us all to really think beyond maybe traditional 

thinking here, because I really do think the economic conditions 

here are different than we have seen in past recessions. We know 

that we rely upon small business for economic growth. I am just 

worried that we might be missing the problems that small businesses are currently facing and I think the Chairman’s approach 

is an excellent approach to try to provide greater help from the 

SBA and from the Federal sources removing some of the perhaps 

obstacles for small businesses taking advantage of these tools. 

But I would just urge you to try to get as much information as 

possible about what is happening out there and whether small 

businesses are using alternative sources for credit that really could 

be causing a serious problem for their future stability and growth 

and making it more difficult for us to come out of this economic 

downturn. 

Thank you, Mr. Chairman. 

Chairman KERRY. Thank you very much, Senator Cardin. I appreciate that. 

We have been joined by the Ranking Member. Senator Thune, if 

you don’t mind, I am going to turn to her, or you guys fight it out. 

It is your side. [Laughter.] 

Senator SNOWE. We never fight on our side. [Laughter.] 

OPENING STATEMENT OF HON. JOHN THUNE, A UNITED 

STATES SENATOR FROM SOUTH DKAOTA 

Senator THUNE. Thank you, Mr. Chairman and Senator Snowe. 

Thank you for holding the hearing, and I want to thank our panelists for coming today, as well. 

This is a critically important issue and I think my State is probably no exception. When you look at the impact of small businesses 


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on the economy across the country and where the jobs are created, 

you see they are created in small businesses. So making sure that 

we have got a good strong small business sector of our economy 

with the availability of capital and liquidity is really critical. So examining this issue in greater detail and identifying what some of 

the problems and issues are and then trying to fashion some solution to those, I think this too is extremely important. So I want to 

thank you for holding the hearing and I want to thank you for 

sharing your insights. I know we are going to hear from a panel 

of business owners and people who are directly impacted by the 

credit crisis in a little bit. 

Dr. Mishkin, have you noticed any trends as to what areas of the 

country or what business sectors are most affected by the credit 

crunch? 

Mr. MISHKIN. Well, clearly the sector of the economy that has 

been most affected is the housing sector. We have seen a very, very 

dramatic stop in housing starts. There is still a lot of inventory of 

houses on the market, which is a drag on that sector. 

Chairman KERRY. Is your mike on? 

Mr. MISHKIN. Yes, it is lit. 

Chairman KERRY. Pull it a little closer. Thank you. 

Mr. MISHKIN. So clearly, this sector has really been quite an important drag on the economy. Last year, it basically lowered economic growth by about one percentage point. So that is really the 

sector that has been most heavily impacted by what has happened. 

But clearly, there are other sectors of the economy that have also 

weakened. Household spending has been quite weak in the last 

couple of months, and so there have been spillovers elsewhere, as 

well. 

Senator THUNE. How about areas geographically? 

Mr. MISHKIN. Well, geographically, we concluded there are big 

differences in different parts of the country. So if you are, for example, growing corn, you are doing quite well right now, so many of 

the agricultural States are doing quite well. If you are pumping oil, 

you are also doing quite well. But on the other hand, if you are 

manufacturing goods and you can’t sell as many of them, that is 

a real problem for you. 

So there are certain parts of the country, clearly, that have suffered more than others. The Midwest clearly has some serious 

problems, besides the fact that their weather is not so great. But 

in general, in any kind of a situation where there has been a slowing of growth, some parts of the country get hit worse than other 

parts of the country. Small businesses actually have to look to their 

local market as well as the national market. 

Senator THUNE. I think one of the concerns with the mortgage 

crisis as it relates to small businesses is that home values have decreased and many small businesses rely on home equity for credit. 

Can you explain how this affects the small business credit crunch 

and does that problem spill over into other areas of the country 

which are not being as directly affected by the mortgage crisis, at 

least not presently? 

Mr. MISHKIN. Yes. The issue of what happens in the real estate 

sector is very important to small businesses because frequently the 

collateral that they use to back up the loans and therefore get 


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lower interest rates is, in fact, tied up to real estate. And if the 

value of that goes down, either the lender is not as sure that they 

will pay them back and therefore will actually charge them a higher rate, or they will have access to less credit, and this is clearly 

an issue in the current environment. 

And then, also, many of the small businesses are involved in producing goods that are used in the real estate sector. So if you are 

in a part of the country particularly that has problems in that regard, it is actually a much tougher environment for you as a small 

business. 

Senator THUNE. But do you see this being a problem which certainly is more intense in certain areas of the country, sort of being 

nationalized? Obviously, if you are a small business in an area 

where you are really experiencing this mortgage crunch, your availability of credit if you use home equity as a way of financing some 

of your operations is a problem. But is that starting to impact others, trickling out or having a domino effect—— 

Mr. MISHKIN. Yes. It is a national problem—think about the 

household. The household also has lost collateral when the value 

of their housing goes down, and that means that there is likely to 

be less spending. Even when households spend, they don’t just 

spend in their own community. 

Senator THUNE. Right. 

Mr. MISHKIN. They actually spend on goods throughout the country. So indeed, you are exactly right that the problems which started just in one small part of the financial sector have actually 

spread much more widely in both the financial system and also in 

terms of the overall economy. 

Senator THUNE. Administrator Preston, I know some of the witnesses on the second panel are going to discuss their personal experiences on the subject, but can you tell me what you have heard 

at the SBA from lenders about the demand for loans? 

Mr. PRESTON. Demand is down very noticeably and certainly 

there are a number of factors we think are driving it. Some of the 

surveys would indicate that there is a lesser propensity to hire 

right now, a lesser propensity to invest back in the business. Those 

are the kinds of things that typically give rise to borrowing needs, 

and certainly in a slowing economy that is not as surprising. 

The other thing I would tell you is we have taken a look at our 

loan programs back in the early 1990s and from 2000 and 2001, 

the last couple of times where we have seen a real economic downturn. In both cases, we saw a fairly significant downturn in our 

lending, which is very much in line with what we are seeing right 

now. That doesn’t mean it is good, but certainly some people have 

commented anecdotally they thought we were sort of countercyclical and we sort of came into our own. But certainly when we 

have gone back and looked at the evidence, that is not the case. 

Senator THUNE. It has been suggested that there be a lowering 

of fees as one solution to the credit crunch. Can you tell what effect, if any, lowering of fees on SBA loans has had on loan demand 

in the past as you have looked at your portfolio over time? 

Mr. PRESTON. Our portfolios had very consistent fees for many, 

many years other than the 2003 and part of 2004 time frame, when 

there was a shorter-term reduction in fees. Our loan volume actuVerDate Nov 24 2008 05:06 Apr 10, 2009 Jkt 044801 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A801.XXX A801

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ally grew throughout that period of time. But when the fees went 

up, our loan portfolio continued to grow. So it was sort of in the 

middle of a longer-term growth period and so when the fees went 

up, the loan volume did not go down. It continued to go up. 

We are overwhelmingly hearing from lenders it is either credit 

or demand. Now, there are certainly people on the margin who I 

am sure would like us to lower fees, and obviously it makes them 

economically somewhat more attractive, but we don’t think it is 

going to have a major impact on volume for a number of reasons. 

Senator THUNE. I am sure my time has expired, Mr. Chairman. 

Thank you. 

Chairman KERRY. Thank you very much, Senator Thune. 

Senator Snowe. 

OPENING STATEMENT OF HON. OLYMPIA J. SNOWE, A UNITED 

STATES SENATOR FROM MAINE 

Senator SNOWE. Thank you, Mr. Chairman. Thank you for holding a very critical hearing that is most timely, given what is taking 

place in our economy. I appreciate your efforts here today to discuss the credit crunch and the impact it is having on small business and I want to welcome our panelists. Administrator Preston 

and Dr. Mishkin, thank you very much for offering your views at 

a crucial time for our nation’s economy. 

Obviously, small business is an essential and crucial aspect of 

our well-being economically. It is disconcerting when you see the 

evidence out there that this downturn is going to be most pronounced on small businesses. I certainly want to make sure that 

we are doing everything that we can, whether through the Small 

Business Administration or through Congress. We must work on 

the issues that we can address and remedy with respect to the use 

of the loan guarantee programs in easing the restrictions, the lender oversight fees, the process, streamlining it more so it makes it 

user friendly, and customer friendly. 

The other part of this problem right now is in respect to lenders, 

and that there are so many that are not participating. We see the 

drop-off in the 7(a) program, more than 368 over the last two years, 

and a decline in the Express program. It is significant. It illustrates that we have some challenging problems that we could remedy now. 

Certainly, the legislation Senator Kerry, and I, and everyone 

here on the Committee supported would help small business borrowers. This legislation, pending before the Senate, would streamline the process. We would like to execute the Small Business 

Lending Reauthorization Improvements Act. There are a number of 

provisions in there that could help and benefit small businesses. 

We have been trying to negotiate an agreement to get it through 

the full Senate even though it has passed this Committee unanimously. 

I hope the SBA could further streamline their process, and could 

we not suspend lender oversight fees? These are huge barriers to 

small businesses accessing the programs and loan guarantees rather than relying on credit cards and home equity loans, which we 

see as a continuing rise in that direction. It is problematic when 

you are given the cost and the risks associated with using credit 


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cards and home equity loans. There is no question that this type 

of business borrowing is going to be far more costly. And it is, given 

what credit card companies are charging these days and all the different practices that are out there that drive up the costs. 

So I would like to explore with you, first of all, Administrator 

Preston, what could be done immediately. Let us just take the time 

frame of 45 days in terms of what could be done within your agency, one, to streamline the process, because that is a problem for 

lenders, and also small businesses trying to use these programs. If 

you are seeing a drop-off, it could be a number of reasons, but obviously it is the barriers, such as the SBA’s excessive paperwork. 

The second part this is the lender oversight fees that are also a 

barrier, which I know have been raised recently. The one on the 

7(a) annual lender fees going up to 0.55 from 0.49, and then, of 

course, the other one is charging lenders $9 million for lender oversight fees in the 7(a) program. That is going to drive people out of 

this program. It is just going to make it that much more prohibitive in terms of using SBA loans. 

So is there something that could be done now, within 45 days, 

that you could execute? I mean, we have our job to do on this side, 

there is no question, in getting these bills passed and I think it 

would help to raise the loan limits and so on. We have tried to expedite that process. Is there anything we could be doing, or you 

could be doing? 

Mr. PRESTON. Well, yes. We are doing a number of things right 

now which I think are going to be helpful. One of the things we 

are pushing very hard on is to expedite the roll-out of a highly-simplified process for rural lenders. In fact, we just finished piloting 

it in Senator Thune’s State and five contiguous States. 

Many of you recall the Low-Doc product a number of years ago. 

When Low-Doc was discontinued in 2005, we lost over 400 banks 

in 2006 in our active lenders. So when you look at when we actually lost lenders, it was from 2005 to 2006 and most of those were 

Low-Doc lenders. And the reason is clear, it was a simple application and it was easy to do. It wasn’t, to your point, difficult to comply with. The problem was it had very high credit losses and was 

driving costs up in the portfolio. 

So what we have done is we said, well, what worked about LowDoc and what didn’t. And we have piloted this program—we call 

it Rural Lender Advantage, even though it is for any community 

bank—which is a very simplified form. They can do it electronically. We commit to a very rapid credit decision, turn-around. We 

have a customer help desk in place, so any small lender who isn’t 

familiar with our programs who doesn’t know how to fill it out, we 

will get on the phone with them. We have trained our entire field 

network on how to help lenders with their lending program. So 

they can call our field office for help. And we commit to a quick 

turn-around. 

So we piloted it in that area of the country. We got a lot of feedback from lenders. We had a lot of outreach. They told us how we 

could make it better. Right now, it is in internal clearance. As soon 

as it comes out of internal clearance, we are going to do a nationwide roll-out and we will have a very active process to engage 

small lenders back into our programs. 


wwoods2 on PROD1PC60 with HEARING
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Senator SNOWE. So when would that take place? 

Mr. PRESTON. I would hope that—we are pushing very hard to 

begin adding regions of the country early next month. Like I said, 

right now, literally, it is in internal clearance, so I am pretty hopeful it is going to be a good recruiting tool. 

The other thing I would mention is—— 

Senator SNOWE. So that would be the pilot program? 

Mr. PRESTON. The pilot—— 

Senator SNOWE. Is that completed yet? 

Mr. PRESTON. The center part of the United States is finished—— 

Senator SNOWE. It is finished, so then you would execute it nationally? 

Mr. PRESTON. We want to roll it out much more broadly. And so, 

you know, Low-Doc was roughly speaking, ten percent of the number of loans we did. 

The other thing is, and I mentioned it before you came in, is last 

month, we reached out and had sit-down detailed relationship 

meetings with over 800 lenders to begin to work them through how 

to use our products more broadly and to get out there and expand 

what we can do for them. 

You have talked about streamlining. I think you are familiar 

with some of the challenges we have had in our guaranteed purchasing operations, very long backlogs. We are turning those in 22 

days. It is a big part of getting people back in our programs, because when they send us a purchase, they want us to honor it. 

All across the agency, we are going more to electronic interactions. We are simplifying our processes. We are making our agency much easier to work with, and we have trained about 1,000 people in the field to be better at working with people locally, some 

of whom are banks. So I really think we are putting shoulder to 

the wheel to push our programs out. 

Senator SNOWE. And have you been able to get any lenders back 

on board? 

Mr. PRESTON. As we closed 2007, we had an increase in lenders. 

Now that we have finished this round of outreach, once we have 

this Rural Lender Advantage tool, we are going into very active recruiting mode. So as of the end of last year, yes, not dramatic—— 

Senator SNOWE. Can you tell us how many? 

Mr. PRESTON. I think it was—yes, I can, but if you ask your next 

question, I will have it to you probably in a second. 

Senator SNOWE. Well, I guess the point is we have a very targeted and directed program to enlist lenders back on board, addressing some of the issues that are within your capacity to do so. 

That is critical. We don’t want a fall-off at this crucial point because you can lose small businesses, you can lose jobs. You really 

have to make a concerted effort to try to get them back on board, 

because obviously there are problems, and that is what we are 

going to hear in the second panel, that there are serious problems 

with the program, not to mention the lender oversight fees, which 

are a barrier. Can you suspend those fees? 

Mr. PRESTON. Those fees, very roughly speaking, right now are about $10 million a year. I am less concerned about the impact of 

those—not all—the smaller banks don’t pay those fees, don’t pay 


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the on-site fees. We don’t do on-site reviews unless a bank hits a 

certain size, and so it is not a big cost for the larger banks. It is 

not a cost at all for the smaller banks. 

I will say there is a tier of banks that are small-ish, and I can give you kind of the size—maybe that have to $10 to $25 million 

in guarantees from us—that I think it is a cost for, and we are 

working on a project right now to understand if there is a way we 

can soften the blow for that tier of banks, because the issue is once 

we have to go on-site and do a review, it becomes expensive. But 

as you know, we have been working very hard to increase significantly the quality of oversight we do, and as a result, we are going 

to banks a lot more. We are doing a lot more reviews of their portfolios because, as we have talked in the past in these hearings, it 

is important for us to make sure we are doing the right kind of 

oversight. 

Senator SNOWE. Do you support the legislation that we are trying to get through in the Senate that passed unanimously from this 

Committee and has been pending since September? The Small 

Business Lending Reauthorization. It goes to the heart of all the 

lending programs. 

Mr. PRESTON. Ma’am, I would have to look—— 

Senator SNOWE. It increases the maximum loan size for the 7(a) 

loans to $3 million, allows 7(a) bonds to be traded in the secondary 

market, increases liquidity, simplifies size standard requirements 

for the 7(a) program, makes it easier for 504 developers to make 

loans in low-income communities, and addresses a number of other 

issues. I won’t go through them all. But it really would be helpful 

here to—— 

Mr. PRESTON. I would be happy at any time—— 

Senator SNOWE [continuing]. Break the deadlock, I mean. I don’t 

know, is there resistance from the administration on this issue? 

Mr. PRESTON. I would be happy to come over at a moment’s notice and go through all those provisions with you. I think it has 

some very good stuff in it and we would love to—— 

Senator SNOWE. It is too bad that it is an all-or-nothing proposition, that we can’t get this legislation through. It is a moment in 

time where we have to do everything we can to support these programs, boost the economy, help small businesses create jobs. There 

is no reason for this to be languishing. I know that there are some 

concerns in the administration, but we ought to be able to work 

them through and get this done. I mean, it has been languishing 

since last September. 

Mr. PRESTON. Right. I apologize—— 

Senator SNOWE. In the meantime, so many things are happening 

out in the economic landscape that are so pivotal to the well-being 

of small businesses and to their existence. And here is a good example of that. It passed unanimously out of this Committee. That 

is illustrative of the support that it has. So I just don’t understand 

why we can’t get this through. Is there a way of working that out 

sooner rather than later? 

Mr. PRESTON. Like I said, I am not—honestly, I don’t know the 

state of play on the bill and I would be happy to meet with your 

staff and work through it. 

Senator SNOWE. Well, can we—this is important. 


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Mr. PRESTON. Yes. 

Senator SNOWE. I think we really should. Let us get it done. Let 

us show the ‘‘can do’’ spirit. That is my feeling here. You know, 

there are so many things going on out there. People need support 

and help and there is no reason, with a bill that has passed out 

of the Committee unanimously, that has broad support, that if 

there are some issues here, we shouldn’t be able to address them. 

But it shouldn’t be just, hanging in limbo because the administration has some concerns. We ought to be able to work it through. 

Mr. PRESTON. Yes. Frankly, I didn’t—I am not sure that our 

staffs have fully gotten together on it and I am committed to do 

this—— 

Senator SNOWE. You will as of today? 

Mr. PRESTON. Yes, absolutely. 

Senator SNOWE. Well, my staff says you have gotten together 

multiple times, so—— 

Mr. PRESTON. All right. 

Senator SNOWE [continuing]. Whatever it be, let us change it 

today. 

Mr. PRESTON. Can I just mention one other thing? 

Chairman KERRY. Mr. Administrator, can I just say to you, we 

passed this bill. When you were up here previously I asked you 

about this. Your staff has never, ever communicated to us any 

issue whatsoever with the bill. So if you have an issue, we have 

got to know what it is, and I would like to have an agreement, if 

I can, with Senator Snowe. We are at Wednesday now. Why don’t 

we say by next Monday, if you have got an issue, would you tell 

us what it is? 

Mr. PRESTON. Yes, absolutely. 

Chairman KERRY. Otherwise, you are going to support it, correct? 

Mr. PRESTON. We will go through it with you chapter and verse 

in terms of what we understand the administration’s position to be 

and where we need to go with it. 

To your earlier question, Senator Snowe, we had 200 lenders 

make a loan in the first half of 2008 that did not make loans last 

year, in the first half of last year, and at the end of 2007, we saw 

a two percent increase in our lenders. So it is not dramatic, but it 

is after a period of decline. 

Senator SNOWE. Thank you. Thank you, Mr. Chairman. 

Chairman KERRY. Can I follow up on that, if I may? I am really 

concerned about the trend line. You know, since 2005, you have 

lost 390 lenders. And then for 2008, the pace as we look at it now 

is about 100 more lenders are on tap to have been lost for the third 

straight year. 

Now, when we talk to these folks, one of the principal reasons 

that they give us for dropping out of the program is because of the 

increased fees, lender oversight fees, and the unduly burdensome 

paperwork. Those are the three things we hear from these banks. 

We have lost many more participant banks than we have gained. 

So that is not a great trend line for an entity and a program that 

ought to be growing and appealing to more and more people. 

I think a lot of us feel very strongly, Mr. Administrator, that 

these fees—you know, when the economy gets tight like this and 

we all take a look at somebody who is going to be foreclosed—a few 


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weeks ago, Mayor Menino and I hosted a weekend event at the 

Roxbury High School where, for the first time, we had a whole 

bunch of home owners who were able to come into a room and we 

got the ten major lenders and sat them down in private rooms. Everybody was screened. They brought their paperwork with them. 

And they literally negotiated right there in this high school and 

people walked out smiling because they were able finally to get 

somebody on the phone and not have a punch two to go to six, to 

go to five, and punch one and you don’t get anybody. They talked 

to somebody who actually negotiated. 

And the result is they are staying in their home because they are 

able to afford a fixed-price mortgage at the revalued price that 

doesn’t reflect the predatory practice that—I mean, one of these 

women was paying a 13 percent mortgage. You tell me any of your 

friends who are paying 13 percent. Others are paying 9.25 and so 

forth and about to go up. And these are people, both members of 

the family working, hard working, playing by the rules, $5,000 a 

month for their mortgage, and they are about to get kicked out of 

their home because of the lack of reasonableness. 

Now, for those people, the difference between the ARM that 

would have taken them up and the fixed rate was the difference 

in their ability to stay in the home. That is true of a lot of small 

business people who are looking at the potential of taking out a 

loan or maybe following through with an expansion, but if they 

look at the fees and they look at the additional fee and things they 

sort of back off. 

And it seems to me in this moment, in the mood we are in where 

we have got to—we have got to kind of change the psychology of 

the country. I agree with Senator Snowe. It is a time for people to 

say, we have got to break this cycle and the way to break it is to 

restore confidence, and the way to restore confidence is give people 

a sense that you are on their side and working with them to facilitate their ability, if they have got a going concern and they meet 

all the other creditworthy issues, that they can stay in there. 

So I would ask you to think carefully about this issue of whether 

or not these fees and other things don’t make a difference, particularly since you are losing lenders at a greater rate than you are 

gaining them and they are telling us the reason they are dropping 

out is because of the increased fee. 

Mr. PRESTON. Let me make a couple of points. I wouldn’t underestimate Senator Snowe’s point of being an entity that is easy to 

do business with and streamlined. I would be amazed if any lender 

group came forward and said over the last year and a half that we 

hadn’t made tremendous strides in being more sensitive to the industry, simplifying our policies. We hadn’t updated our policies in 

over 15 years. They are all updated. They are simplified. Responsiveness to banks that we are purchasing loans from, clarity 

around how we do business, much greater customer support, much 

higher quality training of our people to go to banks and help them 

through their issues. On the side of being an effective, easy-to-use 

partner that provides great support, I think we have made incredible progress. I really do. 

And on the fee side, granted our fees were somewhat lower in 

2003 and 2004. I guess the question to think about is when we look 


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at sort of order of magnitude, and generally when we talk about 

an impact on our fees, we are looking at reducing our up-front fees 

by a half to one percent. So moving from two points to one point. 

And the question is, how much is that actually going to drive borrowing behavior with people—how much does that make it affordable to them, by going from two points to one point. 

I actually think what we are going to see is a lot more conventional loans coming into our portfolio, many of which lenders would 

do otherwise. And I have talked to many lenders about this issue 

and I think that is a very likely outcome of this. 

I will say on the lender oversight fees, to your point, Senator 

Snowe, I do think there are a group of lenders for whom this is a 

challenge and I think it is kind of the small to medium-sized and 

I do think we have to look at that. We are reviewing alternatives 

right now on how we can either make those on-site reviews less frequent or reduce the fees somewhat. But for the small lenders that 

don’t get hit with it and for the large lenders, I think it mostly gets 

absorbed into the size of their portfolio. 

I don’t think this is going to be an overwhelming driver of volume, though. I really don’t. I think it is going to be engaging the 

banks by being a good partner and getting the banks to see that 

our programs help them to make credit decisions that they are not 

making right now. I think it is a credit issue. 

Chairman KERRY. Well, I hear you. I hear what you are saying, 

but I am not sure that the realities of the marketplace say that 

that is accurate or that experience does. Let me just refer you. In 

2001, after the tax in New York and here, Senator Bond and I 

pressed and passed legislation after 9/11 to reduce the lender fees 

by 50 percent because of the jarred economy, et cetera. We had a 

50 percent increase in the number—excuse me. We cut by 50 percent. There was a 23 percent increase in lending and SBA did 

about $2,900,000,000-and-some worth of lending under that guise. 

I think we went up from 2001, from nine, up to 12 in the next year, 

and then it was 11 the year after that. 

So I think that the evidence is that it makes a difference, and 

I think when you add it to the other piece, it is problematical. We 

can argue about it. Obviously, you have a different point of view. 

But I think the evidence indicates that when money is tight and 

cash flow is tight and working capital is tight and the economy is 

uncertain, those fees can make a big difference. 

Senator Snowe, do you have any—I want to leave the record 

open. I want to get the other panel on, and we have some things, 

so I think it is important to do that. 

Mr. PRESTON. Okay. 

Chairman KERRY. So I would like to leave the record open for a 

couple of weeks, if we can, and other colleagues can submit questions. 

We are very appreciative to you for taking the time to be here, 

both of you. I know it is important. 

Do you have anybody from your shop, particularly SBA, who are 

going to stay here? 

Mr. PRESTON. Yes, and we will also reach out to your staffs on 

the bill. 

Chairman KERRY. Great. Thank you. 


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Mr. PRESTON. So I apologize if there has been a disconnect there. 

Chairman KERRY. That is terrific. I appreciate it. 

If we could ask the second panel to come forward and just take 

seats and we will get you arranged with names. 

Meanwhile, let me just say, this second panel is larger than we 

usually have and the reason is we really want to get a comprehensive picture of the credit crunch impact on small business. So we 

are going to hear from Marilyn Landis, who is the President of 

Basic Business Concepts; then from Robert Mitchell, the founder 

and CEO of Mitchell and Best Homebuilders; Daniel O’Connell, 

Secretary of the Massachusetts Office of Housing and Economic Development; and then we will hear from Cynthia Blankenship, Vice 

Chairman of the Bank of the West; then from Professor Sam 

Bornstein from Kean University in New Jersey; and finally from 

the Mayor of Gloucester, Massachusetts, Carolyn Kirk. 

We are very appreciative to all of you for your patience and for 

your distance traveled and for coming here to share with us. I 

think it is important testimony, and we would like to remind you 

that if you could try to summarize in about the five minutes, all 

of your written testimony will be placed in the record as if stated 

in full. 

Mayor, do you want to start off? 

STATEMENT OF HON. CAROLYN A. KIRK, MAYOR, 

GLOUCESTER, MASSACHUSETTS 

Ms. KIRK. Sure. Chairman Kerry, Ranking Member Snowe, I 

thank you for inviting me here today to testify about the impact 

of the credit crunch on small business. My name is Carolyn Kirk. 

I am the Mayor of the City of Gloucester, Massachusetts. You may 

know of Gloucester. The city of about 30,000 residents is located 

north of Boston and we are America’s oldest fishing port. Chartered 

in 1623, the city has a long and storied history of providing fresh 

fish throughout the country and beyond. In our 385-year history, 

Gloucester has lost over 10,000 men to the Atlantic Ocean. The 

names of those known as lost at sea are painted on a mural on the 

main staircase at City Hall and also on a memorial on Stacy Boulevard. I invite you all to come and visit our beautiful city if you 

haven’t already. 

In Gloucester, the fishing industry has sustained the community 

and its backbone has been small business. From the ice company 

that supplies ice to the fishing boats to preserve their catch to the 

shoreside services that perform boat repair, provide fuel or dockage, small business is the engine that has driven our economy. 

With the drastic measures taken by the Federal Government in an 

effort to rebuild fish stocks, the economy in Gloucester is at a crossroads, but it is still driven by small business. 

To give a city like Gloucester or any American working-class city 

whose economy is in transition a fighting chance to survive and 

thrive, we need your help. Today, I am here to testify about the impact of the credit crunch on small business. The impact is significant and appears in many different forms throughout small businesses in Gloucester. In preparation for my testimony, I asked 

small business owners in Gloucester to contact me with examples 


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of how the credit crunch is impacting them, and this is a sampling 

of what I heard. 

A number of small business owners state that their customers 

pay more slowly. An owner of an oil delivery company reports that 

the vendors that supply oil to him demand immediate electronic 

payment. However, the homeowners to whom he delivers the oil 

are slow to pay, leaving him with a cash flow issue, making it difficult to keep enough money in the bank to keep the business 

going. 

A small business owner just starting out financed equipment and 

materials for the business on credit cards, and the credit card companies are shortening their payment cycle to 22 days. But her clients are slow to pay, or even if they are on a 30-day term, it makes 

the business owner late in her credit card payments. She says it 

is a constant battle with the credit card companies and they are 

the only ones making any money. 

Another small business owner cites other factors which are impacting his business, such as inflation. Three years ago, eggs cost 

seven cents. Now, eggs are 21 cents, which is a 300 percent increase. His monthly electric bill runs an average of $1,000 per 

month. The impact of his higher costs ultimately result in higher 

retail prices to the consumer. Across the board, small business 

owners are feeling the effects not only of the credit crunch, but increases in cost such as utilities, health insurance, or in my city, the 

cost of water and sewer services, which are skyrocketing. 

As I said, Gloucester was chartered 385 years ago. Today, when 

my engineers replace water lines underground, many of the pipes 

they pull up are stamped 1902. My city has an aging infrastructure. A catastrophic failure in our drinking water system or our 

sewage treatment plant could cripple the city and bankrupt our 

citizens, and we are under a Federal consent order to separate our 

sewage from the storm water. This project is costing the city tens 

of millions of dollars and the rate payers, who are also our small 

businesses, are footing the bill. This is simply not sustainable for 

our local economy. Gloucester is committed to the Clean Water Act, 

but we need Federal relief in the form of direct grants. It bothers 

me to hear about infrastructure investments our country is making 

around the world when my own city is crumbling around me and 

my residents and small businesses are tapped out. 

I ask that when you deliberate about how to address the impact 

of the credit crunch on small business, that you look at all of the 

factors that are making it difficult for small businesses to survive. 

When the Congress passes a mandate that is unfunded, it is the 

small business owner and the taxpayer that picks up the slack. Unfunded mandates in education have caused my city to divert spending to mandated education programs. We don’t spend any money 

on athletic programs. Rather, the students and the parents turn to 

the small businesses for donations, auction items, and money. 

Successful small businesses are resilient. Many can survive the 

credit crunch. But they are also dealing with inflation. They are 

dealing with the more expensive municipal services because of 

spending on infrastructure and the increased costs of delivering 

those services. They are dealing with schools who have their hand 

out, always looking for money. And my observation when I look at 


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it is that we are creating private wealth and public squalor and 

many small business owners are just caught in the middle. We 

need to create wealth, jobs, and opportunities for our small businesses and reinvest and rebuild the domestic economy. 

I applaud the work of this Senate committee and I want to just 

let the record show that I support the initiatives that you are trying to push through this Congress. I urge you to continue your 

dedicated work towards reinvesting in America’s economy and to 

keep in mind the overall impact of the fiscal condition facing our 

cities and towns, which is how a citizen experiences this country, 

as you make your decisions in the 110th Congress. 

Thank you for the opportunity today. 

[The prepared statement of Ms. Kirk follows:] 


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Chairman KERRY. Well, thank you, Mayor. That was a very 

graphic and important, eloquent description of the problems that 

you face and I am happy to report I have enjoyed that wonderful 

City Hall, which is really very beautiful and very moving. I was 

there for the dedication of the memorial, so it is nice to be reminded of both. 

Senator Snowe, I know, has a huge affinity for everything you 

are talking about because she has great fishing ports and villages, 

too, so we are happy to welcome you. 

Ms. KIRK. Thank you. 

Chairman KERRY. Have you been to Gloucester? I have been to 

Camden. [Laughter.] 

Senator SNOWE. Look at that. He set me up for that one. [Laughter.] 

No, but I will visit there. 

Chairman KERRY. There you go. 

Professor Bornstein, thanks. I have to step out, incidentally. I am 

going to be able to hear you outside, but I have got to join a conference call for a few minutes, but just continue on. Senator Snowe 

will chair and we will continue through. You can go ahead. 

STATEMENT OF SAMUEL D. BORNSTEIN, CPA, MBA, BME, PROFESSOR OF ACCOUNTING AND TAXATION, SCHOOL OF BUSINESS, KEAN UNIVERSITY, UNION, NEW JERSEY 

Mr. BORNSTEIN. My name is Sam Bornstein. I am a Professor of 

Accounting and Taxation at Kean University. Good afternoon, 

Chairman Kerry, Ranking Member Snowe, and members of the 

committee. Thank you for inviting me to discuss the credit crunch 

and its impact on small business. 

For the past 30 years, I have been a professor of accounting and 

taxation, as well as a CPA and consultant in public practice. This 

unique combination of experience as an educator and a practitioner 

has given me an interesting perspective and insight into this topic. 

Since 2000, I have researched the small business failure phenomenon. In recent years, my research has evolved into the impact 

of the subprime mortgage crisis on small business. 

The credit crunch can trace its beginnings to the inception of 

subprime mortgages. During the period of mid–2002 to September 

2005, when interest rates were exceptionally low and there was a 

booming real estate market, we experienced the biggest refinancing 

boom in history. Loan underwriting standards were often ignored. 

Even the least credit-worthy borrower had access to this easy 

money. Loans were made regardless of bad credit histories and low 

or no documentation of income. Small business owners were drawn 

into subprime mortgage financing by the ease in which they could 

access cash to quench their continuous need for capital. 

Studies showed that small business owners often used their 

homes as collateral on small business loans. For many small business owners, refinancing their homes was the easiest way to meet 

their cash flow needs. Small businesses chose this option over other 

traditional sources of financing, such as regular commercial or 

SBA-guaranteed loans, because home equity loans did not require 

the same level of cumbersome paperwork, including financial statements, income documentation, and an established credit history. 


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With the subprime mortgage crisis, the resulting credit crunch, 

and the slowing economy, small business owners were hit hard 

when home equity financing dried up. Credit cards became the 

number one source of small business financing. Credit cards facilitate easy access to capital, especially at the inception of a business. 

But, there is a downside! In a 2007 study of the bankruptcy filings 

of small business owners, there was a striking level of credit card 

debt for small businesses in bankruptcy. The average outstanding 

credit card debt for small business owners in bankruptcy exceeded 

$55,000, while for small business owners not in bankruptcy, it was 

only $17,000. 

Although credit card usage can be an effective means by which 

to acquire capital, managing this type of debt requires careful planning. There are risks involved which the small business owners are 

not prepared nor financially knowledgeable to handle. Too much 

debt is the major cause of small business bankruptcy. 

In the course of my research, I discovered a connection between 

small business failure and the subprime mortgage crisis, which was 

confirmed by a 2007 study of the bankruptcy filings of small business owners. The study found that in bankruptcy, small business 

owners had approximately $200,000 more total debt than wage 

earners. This can be attributed to their home equity refinancing 

during the subprime mortgage era. As many as 80 percent of Americans refinanced their homes during that time, included in this statistic are small business owners who cashed out the equity in their 

homes to capitalize their newly-created or existing businesses. 

A landmark study of consumer bankruptcy concluded that small 

business failure was the cause of personal bankruptcy of one-in-five 

individuals, and they accounted for more than half of all debts in 

bankruptcy. The Federal Reserve Bank of Cleveland research study 

found that there was a disturbing correlation between bank failures and small business failure. 

In business, you can’t manage if you can’t measure. The antidote 

to small business failure is the knowledge and understanding of 

practical accounting and its tools and techniques, which provide 

the business owner indications of where the business has been, 

where it is, and where it is going. 

In a nationwide survey of approximately 1,000 small business 

owners and managers, whose businesses failed, when asked as to 

why their small businesses failed, more than half of the individuals 

interviewed said that ‘‘lack of financial management expertise’’ was 

the primary cause. 

In conclusion, credit alone does not guarantee small business 

success. With the availability of credit, there is an urgent need for 

financial literacy education. Small business plays a significant role 

in our economy. In this time of tight credit and economic downturn, 

it is important not only to facilitate access to capital, but financial 

literacy education should also be recognized as vital to the survival 

of small business. The Small Business Administration is in the best 

position to consider new and innovative approaches to deliver effective financial literacy education to small business. With the proper 

understanding and knowledge of accounting and its tools and techniques, small businesses will avoid the greatest threat to their survival, insolvency and bankruptcy. 


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[The prepared statement of Mr. Bornstein follows:] 


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Senator SNOWE [presiding] Very compelling Thank you, Mr. 

Bornstein. 

Mr. BORNSTEIN. Thank you. Thank you very much. 

Senator SNOWE. Ms. Blankenship. 

STATEMENT OF CYNTHIA L. BLANKENSHIP, VICE CHAIRMAN 

AND CHIEF OPERATING OFFICER, BANK OF THE WEST, IRVING, TEXAS 

Ms. BLANKENSHIP. Thank you. Mr. Chairman, Ranking Member 

Snowe, and members of the committee, I am Cynthia Blankenship. 

I am Vice Chairman and Chief Operating Officer of Bank of the 

West in Irving, Texas. I am also Chairman of the Independent 

Community Bankers of America. I am pleased to appear today on 

behalf of ICBA and its nearly 5,000 members nationwide to present 

the views of community bankers on the credit markets and small 

business lending. 

Bank of the West is part of a two-bank holding company with as- sets of $250 million. We have eight locations in the Dallas-Fort 

Worth area and serve the small business community with a strong 

focus on SBA lending. Bank of the West has been a long-time partner with the Small Business Administration and is strongly committed to helping small businesses and our communities by using 

the 7(a) and 504 loan programs. Bank of the West has more than 

$8 million in loans in its portfolio and it services these loans. This 

represents nearly five percent of our total loans. 

Credit availability is the lifeblood of our economy. Unfortunately, 

the broad credit markets are still sorting out problems caused by 

the subprime meltdown and toxic investments made by many of 

the largest financial institutions. The current turmoil in our economic and financial markets nationwide raises genuine concerns 

about the availability of much-needed capital for small business. 

While much focus has been on helping the housing sector, policy 

makers must also focus on the needs of the small business sector 

during this economic slowdown. 

At a time when the economy is faltering and credit is becoming 

more difficult for small business, a sharp decline in the number 

and dollar amount of SBA loans is troubling. The SBA loan program should act to bolster small business credit in economic 

downturns. Instead, the number of SBA loans being made is plummeting. Against the long-term protest of the community banking 

sector, increased SBA loan fees, reduced staff budget funding, 

elimination of the successful Low-Doc program, and increasing regulatory burdens have all hobbled the SBA’s viability when it is 

needed most. 

Simply stated, costly and negative changes to the SBA loan programs have forced hundreds of community banks to drop out of the 

SBA programs while a handful of the nation’s largest banks further 

dominate SBA lending. The number of lenders making at least one 

SBA 7(a) loan has dropped almost in half, from 5,288 in 2001 to 

less than 2,700 today. While there are more than 8,500 FDIC-insured banks, just ten banks were making 60 percent of all SBA 

loans. The top 25 banks were making two-thirds of all SBA loans. 

This gross imbalance has come home to roost. Many of these 

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vestments and subprime lending. Consequently, they have been 

forced to pull in their lending across the board, which includes 

small business and SBA lending. 

Conversely, despite media dominance about a credit crunch, common-sense community bank lenders are very much alive and well, 

with capital to lend to small businesses. However, the high fees 

and other SBA program obstacles must be reversed to preserve the 

affordability for SBA loans for banks and small business borrowers 

alike. 

Now, more than ever, it is vital that the SBA program is robust. 

During this challenging economic climate, the ICBA respectfully offers several recommendations to help boost SBA programs. These 

recommendations include: Offering a super-SBA 7(a) loan program 

for one year as an economic stimulus to help business access needed capital; restoring a reasonable budget appropriation of $250 million to help lower the sharp fee increases on both 7(a) lenders and 

borrowers; enacting the pending SBA reauthorization legislation; 

enacting the Small Business Lending Stimulus Act of 2008, S. 

2612, that would lower SBA loan fees similar to what was done to 

help small businesses post–9/11; permanently reinstating the successful Low-Doc program. 

The ICBA believes these recommendations will reinvigorate the 

much-needed SBA lending to boost our economy. GDP growth 

slowed to a minuscule 0.6 percent in the fourth quarter of 2007. 

Unemployment has jumped 5.1 percent, and small business optimism is plummeting. Soaring energy costs are further challenging 

many small businesses. Changing economic times call for policy responses that will address not only Wall Street, but also small businesses on Main Street. 

In conclusion, many of our nation’s small businesses are facing 

difficult economic times and obtaining credit is getting more problematic. Boosting small business activity is exactly what is needed 

to turn the economy around. Community banks, like Bank of the 

West, are well positioned and prepared to help. However, we must 

ensure that lenders’ and borrowers’ SBA program fees are reasonable. 

ICBA sincerely thanks you for the opportunity to testify. 

[The prepared statement of Ms. Blankenship follows:] 


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Senator SNOWE. Thank you very much. That is very constructive 

testimony. 

Mr. O’Connell. 

STATEMENT OF DANIEL O’CONNELL, SECRETARY, EXECUTIVE 

OFFICE OF HOUSING AND ECONOMIC DEVELOPMENT, BOSTON, MASSACHUSETTS 

Mr. O’CONNELL. Good afternoon, Chairman Kerry and Ranking 

Member Snowe. My name is Dan O’Connell. I serve as Secretary 

of Housing and Economic Development for the Commonwealth of 

Massachusetts. The Secretariat oversees the Departments of Business Development, Housing and Community Development, and 

Consumer Affairs and Business Regulation. 

I commend you for scheduling this timely hearing to discuss the 

impact of the disruption of the credit markets on small business financing. The importance of small business to the national economy 

is well known. Small businesses continue to play a key role in the 

Commonwealth’s economy, as well. 

As of September of 2004, there were over 200,000 small businesses in Massachusetts employing over 2.4 million people. Our 

smallest businesses, those employing 20 individuals or less, employ 

28 percent of our total workforce in the State. The continued emergence of new small business as well as the healthy growth of existing business is critical to our economy and is a significant source 

of new jobs. 

Small businesses are feeling the effects of the credit crunch. The 

Massachusetts Business Development Corporation, which works 

closely with our Secretariat, informs us that small business loans 

that they have closed in the first three months of this year are up 

from $1,750,000 a year ago to $6,125,000 for the same period this 

year. Small businesses typically turn to the Business Development 

Corporation when bank loans are not available, so this increase is 

direct evidence of the tightening of bank credit. 

BDC’s Massachusetts Small Business Capital Access loan guarantees are also up 12 percent from a year ago, offering further evidence that banks are requiring credit enhancement before agreeing 

to grant credit to many small businesses. 

As I have traveled around the State of Massachusetts from Holyoke to Lawrence to Fall River in the last month, I have been 

meeting with small business groups and community bankers. The 

story is the same throughout the State. The balance sheets of the 

community banks are relatively healthy. They didn’t get drawn 

into the subprime lending business as much as some of the larger 

banks and financial institutions did. But there is a crisis of confidence. They don’t know where the bottom is. They don’t know 

where the pricing is. And so they are hesitant to make loans to 

long-term customers, and those customers are suffering because of 

this. 

The Massachusetts Association of Community Development Corporations, which we regularly partner with and are the key source 

of micro loans in the Commonwealth of Massachusetts, are seeing 

an increase in applications for owners who would have typically 

tapped the equity in their homes, either through a refinancing or 


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through a home equity line. These credit sources do not seem to be 

available in the same way they were even a year ago. 

The Massachusetts Small Business Development Center Network 

reports that lenders are pressing their clients, small business owners and entrepreneurs, for greater cash reserves or collateral for 

their loans, shorter repayment periods, and more cautious estimates of projected revenue when evaluating loan applications. All 

of these trends have picked up in the past one to three months as 

the national economy has slowed. 

At the State level, the Commonwealth of Massachusetts has two 

significant programs designed to address credit needs of small business. The Massachusetts Small Business Capital Access Program 

has been very active and is currently working with over 100 banks. 

The Massachusetts legislature recently gave approval to recapitalize our CAP program with $5 million in additional funds. 

We also have a program called the Massachusetts Banking Partners Small Business Loan Program. This partnership program is 

run by our mainly local and community banks and provides credits 

to them for their Community Reinvestment Act efforts. That program is focused on the needs of very small businesses located in 

low- and moderate-income census tracts. 

Despite these efforts, and perhaps more than ever before, the 

SBA loan and Technical Assistance Program are essential to the 

success of small business across America. The legislation that has 

been proposed by this committee reducing fees, increasing funding 

for micro loans, and making availability of refinancing of debt at 

lower rates, are very important and critical to the health of small 

business. 

Again, thank you for calling today’s hearing. As we continue to 

work our way through our current economic difficulties, small businesses will continue to face increasing credit challenges. It is these 

small businesses that can play a significant role in our economic 

recovery by adding new and sustainable jobs. Thank you. 

[The prepared statement of Mr. O’Connell follows:] 


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Chairman KERRY [presiding]. Thank you very much, Mr. Secretary. I appreciate it. 

Mr. Mitchell. 

STATEMENT OF ROBERT L. MITCHELL, FOUNDER AND CHIEF 

EXECUTIVE OFFICER, MITCHELL AND BEST HOMEBUILDERS 

LLC, ROCKVILLE, MARYLAND 

Mr. MITCHELL. Thank you, Chairman Kerry, Ranking Member 

Snowe, and members of the committee. My name is Bob Mitchell. 

I am Chairman and CEO of Mitchell and Best Homebuilders, a 33- 

year-old home building firm located in Rockville, Maryland, and a 

past President of the National Association of Home Builders, 

NAHB. Thank you for the opportunity to be here today to talk 

about the impacts of the credit crunch on the small home builder 

businesses and potential solutions for the Congress to consider. 

A pricing-induced housing downturn that began in 2005 has been 

exacerbated by the credit crunch that started in mid-2007. This 

will continue to be the most significant factor affecting the home 

building industry into the foreseeable future. That means depressed home prices, more deterioration in mortgage credit quality, 

sharply reduced credit availability, and much tighter credit standards for those who can still qualify. 

Home builders all over the country are experiencing a negative 

shift in terms of availability on loans for land acquisition, land development, and home construction, commonly known as AD&C 

loans. In addition, builders with outstanding AD&C loans are facing additional challenges as lenders receive appraisals reflecting 

lower values on lots and homes. Lenders are asking builders to 

fully or partially pay down the outstanding loans while in extreme 

cases denying requests for loan extensions. Most small home building companies don’t have the resources to survive in such an environment for any extended period of time. 

Let me share a few observations from my own personal experience in this area. Home building requires a longer planning and 

approval process. The cycle is much longer than in most other industries. That means we are investing in today for tomorrow. 

There is currently a dislocation in the housing market where 

entry-level home buyers cannot access mortgage credit to purchase 

a home. In turn, home owners higher up the ladder cannot sell 

their current home. I call it the food chain of housing. They cannot 

sell their current home in order to make their next home purchase. 

Thus, the credit crunch shuts down the normal progression of home 

selling and home buying that we experienced in America. 

When the credit markets break down in the midst of a housing 

dislocation, home builder investment is extremely difficult to maintain. For me and for many home builders, the housing downturn, 

as I said, began two years ago and the credit crunch we are now 

experiencing is a significant additional problem. I have exhausted 

my company’s resources and am now forced to take more extreme 

measures to keep afloat. For example, I have laid off 40 percent of 

my employees and tapped my personal assets to maintain solvency. 

My lenders are being as flexible as they can. However, if the housing market does not stabilize soon, they and I will eventually run 

out of options. 


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Avoiding excess regulatory restrictions on federally insured 

banks, which are currently the predominant source for our AD&C 

loans, is an urgent priority. However, the difficulty of builders in 

obtaining housing production financing during this time also vividly highlights the need to develop additional sources of AD&C 

credit. My written statement includes a number of specific recommendations for increasing the range of suppliers of housing production credit. 

The Senate has taken several steps to ease the financial losses 

that home builders like many small businesses are facing during 

this economic downturn. I cannot overstate how important it is for 

business owners to have the ability to claim and carry back net operating losses deductions to years when significant taxes were 

being paid. NAHB applauds the Senate for approving a temporary 

expansion of the NOL carry-back period as a part of the Foreclosure Prevention Act of 2008, and I would especially like to thank 

Senators Snowe and Kerry for their leadership on advancing an expanded NOL carry-back. 

As Congress continues to look for additional ways to ease the 

credit crunch on small businesses, they should consider policies 

that stimulate home purchases in the immediate future. A temporary home tax credit would reduce excess inventory and relieve 

pressure on falling home prices by ending the waiting strategy of 

some potential buyers who are taken out of the market. An effective home buyer tax credit would restore confidence in the housing 

market for home owners, home buyers, and financial institutions, 

mitigating some of the factors responsible for the current credit 

crunch. 

NAHB appreciates, and I do, also, the efforts by Congress to address the problems related to small businesses and the credit 

crunch and we look forward to working with legislators on the most 

effective way to help America’s small businesses during this time. 

Again, thank you for the opportunity to testify today, Senators. 

[The prepared statement of Mr. Mitchell follows:] 


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Chairman KERRY. We are delighted. Thank you very much. 

Ms. Landis. 

STATEMENT OF MARILYN D. LANDIS, PRESIDENT, BASIC 

BUSINESS CONCEPTS, INC., PITTSBURGH, PENNSYLVANIA 

Ms. LANDIS. Chairman Kerry, Ranking Member Snowe, thank 

you for inviting me here today to discuss the impact of the credit 

crunch on America’s small businesses. My name is Marilyn Landis 

and I am the Chair of the National Small Business Association. I 

also am the owner of Basic Business Concepts, a consulting and financial management company that provides temporary chief financial officer, CFO, assistance to other businesses, primarily in Pennsylvania and Ohio. 

Even in the best of times, access to capital is one of the largest 

impediments facing America’s small businesses, hindering both aspiring and thriving entrepreneurs. This perennial problem is exacerbated during troubled economic periods. According to a national 

survey of small and mid-sized business owners recently commissioned by the NSBA and unveiled today, and I would ask that it 

be read into the record, please, 55 percent of small and mid-sized 

small business owners have had difficulty securing credit in the 

last six months, and this finding is consistent across firm size and 

firm revenue size. 

One of the biggest barriers to small business financing is requiring debt be secured by equity and fixed assets. Many small businesses lack the kind of equity necessary for traditional bank loans. 

This gap in debt-equity financing especially hinders growing businesses, as these entrepreneurs typically do not have the assets necessary to acquire sizeable loans. 

Aggravating this state of affairs is the recent tightening of lending standards by banks. Even for those small business owners fortunate enough to qualify under the tightened standards, there is 

bad news, as banks are raising the cost of their credit lines and the 

premiums they charge for higher-risk loans. In addition to tightening their lending standards, more and more banks simply are 

dropping out of the lending programs offered by the SBA. 

While insufficient access to capital has long been a lament in the 

small business community, the current capital vacuum has created 

a new predicament for small business owners, the use of credit 

cards. According to the NSBA survey, credit cards are a primary 

source of financing for America’s small businesses. In fact, 44 percent of small business owners identified credit cards as a source of 

financing that their company has used in the previous 12 months, 

more than any other source of financing, including business earnings. 

Banks require business borrowers to have either equity in hard 

assets or historic cash flow to support their loan requests. Rapidly 

growing service or technology companies that are not traditional 

brick and mortar, like mine, have neither. We are forced to use 

bank credit lines, which if not secured with equity in a home, are 

increasingly credit card accounts. I can personally attest to this 

phenomena. Two banks recently offered me a credit line and sent 

me a credit card. 


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Unfortunately, the credit card industry’s underwriting practices—— 

Chairman KERRY. Zero APR, no doubt. 

[Laughter.] 

Ms. LANDIS. Wait, I will go on. Unfortunately, the credit card industry’s underwriting practices and their reliance on risk analysis 

are an imperfect answer for small business access to capital needs. 

For example, I have an American Express—I have been an 

American Express customer since 1989. In January of 2007, American Express increased my credit line based on my responsible 

credit history. They increased it to $7,000. Later that year, they increased it to $11,400. This increase was helpful, as I spent most 

of 2007 trying to expand my business. I hired two more people and 

opened two more offices. I also began expanding the zone of my 

business into New England and began traveling regularly—and exhaustively—to the region. As a result of my increased traveling, I 

began to run much higher monthly balances on my Bank of America credit card that I was using for business. I still paid on time, 

mind you, I just gradually was increasing the monthly balance, 

paying it off, but increasing it each month. 

Despite being told by American Express that my credit line was 

valid as long as my credit was in good standing, I received a letter 

earlier this year informing me that as a result of the review of my 

account, my American Express line of credit had gone from $11,400 

to $4,200. I was informed that this action was taken for the following consumer agency reporting reasons: Too many accounts 

with balances, too many inquiries the last 12 months, too many accounts recently opened, and the proportion of balances to the credit 

limit. There was no mention, as there is no history, of slow or nonpay. 

Further, in December of 2007, I received a similar letter from another unrelated credit card informing me that effective January of 

2008, my annual interest rate had skyrocketed from the promotional 3.99 percent to 27.99. This increase was attributed to information obtained from a major credit reporting agency. Again, 

keep in mind, I had no record of slow pay or non-pay. I am being 

penalized for growing. 

America’s small business owners think there are a number of 

steps that Congress could take to help to help alleviate the effects 

of this credit crunch. One is strengthen the SBA’s lending programs and other federally backed loan programs for entrepreneurs. 

The fee the SBA charges both lenders and borrowers must be reduced and the lending process must be streamlined. 

Second, reform the practices of the credit card industry. In order 

to address the practices that are making a small business increasingly difficult and hindering the economic development of the nation’s small businesses, NSBA supports the credit card reform initiatives going forward. NSBA also urges Congress to remain vigilant of any unintended consequences arising from the enactment of 

credit card reform. There is a provision in a recent bill before Congress that would make it detrimental for small businesses to use 

credit cards in an attempt to protect the consumer. While the provision may make sense when applied to seniors or other consumers, 


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it would wreak havoc on the 44 percent of entrepreneurs in this 

country that rely on credit cards to finance their business. 

NSBA appreciates the recent efforts to boost the nation’s sagging 

economy. America’s small business owners are convinced, however, 

that the effort to ward off financial ruin on Wall Street should be 

equal to the effort to stave off the economic disaster on Main 

Street. 

We thank you for your time to address that and we welcome your 

questions. 

[The prepared statement of Ms. Landis follows:] 


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Chairman KERRY. Well, thank you all very, very much. It is a 

pretty stark picture you all draw in the conglomerate. It is very important testimony and very helpful testimony. 

Can I just ask you a question. I mean, you are a business president and owner. Did you know that that rate could go up to 27 percent? 

Ms. LANDIS. No. One of the most difficult parts—obviously, working as a CFO, I counsel my clients on the wise use of credit or no 

credit at all is better. You don’t want to be over-leveraged with 

your business. I spent 30 years as a banker. I understand the credit risks. One of the most difficult parts about credit card debt is 

that you are subject to the volatility of the terms and conditions 

of payment and interest rate change. 

Chairman KERRY. But they reserve the right to essentially raise 

it whenever they want. 

Ms. LANDIS. Correct. 

Chairman KERRY. Without an understanding of what that might 

be or terms, correct? 

Ms. LANDIS. Correct, and what was significant, particularly with 

the credit line decrease, I got the letter announcing an increase to 

$11,400 on the seventh of January and the decrease on the eighth 

of January. 

Chairman KERRY. Mr. Mitchell, what do you do in this situation? 

You are sort of the prisoner, in a sense, of forces over which you 

don’t have control that we were talking about earlier with the Governor of the Fed. Do your lenders sit with you and kind of give you 

a sense that they are willing to hang in there with you or are they 

putting pressure on you in this circumstance? 

Mr. MITCHELL. Senator, I have been through four of these 

downturns and I learned a long time ago in making my way 

through them that you go to your lender as soon as you realize that 

conditions are such that they could worsen or you could be in trouble. And so that has been going on for a number of months. And 

I will tell you that I think the lenders with whom we are dealing 

today have been really as cooperative as they could and they are 

trying to work with us. 

However, as I pointed out, this downturn has been going on for 

such a lengthy period—we are over 30 months in the downturn 

that started in 2005—that interest reserves are running out and 

the term of the loans are running out, and if they go back to renew 

their loan then the appraisers are saying, well, the property values 

are going down and they are asking for equity to meet the regulator’s standard. 

So it is a difficult situation and you only have but so much capital and my objective is to pay them all in time, which is the solution, but also to keep my business, which as I said has been going 

on for 33 years. 

Chairman KERRY. It has been going on for 33, but it sounds like 

if you are laying off 40 percent of your employees, and what was 

the other figure? Forty percent of your employees and—— 

Mr. MITCHELL. I am not sure there was another. Well, I said I 

have tapped my personal resources. I am putting capital back in 

the company. 

Chairman KERRY. How long can you do that? 


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Mr. MITCHELL. It is questionable, but my suggestion is that we 

have probably got anywhere from six to nine months before we 

would be in dire straits. 

Chairman KERRY. Secretary O’Connell, you said in your testimony the community banks are suffering a crisis of confidence and 

they are afraid to make a long-term loan. You have been through 

this a lot under various incarnations, but how do you break that 

at this point? Can public policy—is there something that we can do 

that kind of gives them, okay, it is okay to go out and do this now, 

or is it going to have to happen because the market has kind of 

bottomed out, people know it, and they suddenly see the demand 

for housing growing so fast because there is a lot on the market 

and it is cheap and all of a sudden the psychology turns? Which 

is which? Is there a chicken and egg situation? 

Mr. O’CONNELL. I think the actions you have taken, Senator, on 

the foreclosure issue are a step forward in easing that crisis. We 

need to see what happens in the House now and how the eventual—— 

Chairman KERRY. You are talking about the mortgage revenue 

bonds and put cash out there so people can actually make the loans 

and so forth. 

Mr. O’CONNELL. Yes, sir. I think the feeling is that that will help 

to find the real pricing, which is what needs to happen for that confidence to be restored, and I think these smaller and community 

banks, fairly small staffs. I was talking to one. Five members of the 

total banking staff, two of whom do nothing but Federal and State 

paperwork. It is a tough time and they are worried about increased 

regulatory oversight and making mistakes that would cause them 

to endanger their institutions. 

So bringing back a level of support, signs like the legislation you 

have proposed involving simplifying some of that paperwork, dealing with some of the fee issues, providing more capital to back up 

their efforts, all of that will help to ease the crisis, I believe. 

Chairman KERRY. At the State level, have you convened groups 

of or all of these lenders at some point in time and kind of had a 

discussion with them where you try to do some of this and restore 

that? 

Mr. O’CONNELL. One of the things I have found, and I am sure 

you do it already, Senator, is that Massachusetts is not one economy, it is a series of regional economies—the South Coast, the 

Western part of the State, the older mill cities. And the solutions— 

one size does not fit all in our State. So what we have tried to do, 

the Governor and I both, is reach out and meet with roundtables 

and banking and business groups in the various regions. It is something you have done in the past that you have suggested in the 

foreclosure are. And we are finding that that is the most effective 

way to deal with really our local concerns and issues, which vary 

around the State. 

Chairman KERRY. I know you also mentioned in your testimony 

the tightening that you have perceived with respect to student 

loans among these. Since we have about 140 colleges and universities, that is a big base for us. To what degree is that really being 

experienced or felt out there? 


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Mr. O’CONNELL. We are deeply concerned. It is our second-biggest industry in Massachusetts after health care, education. It is 

a key to the economy. It is one industry where we have been growing jobs over the last year, last 15 months. And if student loan 

availability tightens as we think it will—it is just beginning to happen—MEFA, Massachusetts Education Finance Authority, announced yesterday that they will no longer be doing federally-guaranteed loan activity because the secondary market for those loans 

has dried up—it could be a crisis in one of our key industries if 

drop-off of five percent of the students who thought they would be 

there in the fall but can’t put the loan package together to meet 

the needs. 

Chairman KERRY. You also mentioned the CAP program, the 

Massachusetts Small Business Capital Access Program. Would you 

liken that to the SBA’s 7(a) or do you draw distinctions? 

Mr. O’CONNELL. No, I think it is quite similar. It has been a 

great leveraging opportunity. We have seen—— 

Chairman KERRY. And what kind of fees do you charge in comparison with what the SBA does? 

Mr. O’CONNELL. I think the fees average about a third of what 

the SBA does. CAP’s fees to the borrower average approximately 3 

percent of the loan amount, which is slightly less than the SBA’s 

for loans in the $150,000 to $700,000 range. However, CAP’s fee is 

one time and paid at the loan closing. For loans that exceed 

$700,000, the SBA’s fees increase; they also charge a servicing fee 

for each year the loan is open, so over the life of the loan, their 

cumulative fees to the borrower can be significantly higher than 

those of CAP. 

Chairman KERRY. A third of the SBA. 

Mr. O’CONNELL. Of course, we have had to recapitalize that program and both the legislative houses in Massachusetts have approved a $5 million recapitalization of the program. 

The Capital Access Program is designed to help small businesses with less than $5 million in revenues throughout Massachusetts 

obtain loans from participating banks. Using cash collateral guarantees from a loan loss reserve fund, this program enables banks 

to make loans they might otherwise be unable to grant. The Business Development Company administers the CAP program on behalf of the Commonwealth of Massachusetts. 

Accessing the CAP program is very simple and requires no extra 

work on the part of the borrower; there is no application form to 

fill out. When a business applies to a participating bank for a commercial loan, the bank will determine whether the loan requires 

credit enhancement and then it is the bank which submits an enrollment form to CAP. The enrollment form is less than a page in 

length and the bank negotiates all loan terms with the borrower 

directly, including pricing and the level of guaranty premiums required. It is also the bank that commits and funds the loan, following its own procedures within its timeframe. The borrower only 

has to deal with his/her bank, thus making the process very simple 

and easy. 

Chairman KERRY. Ms. Landis, I meant to ask you, in terms of 

the tightening of the credit impacting your business, what have you 

not been able to do as a consequence of that? 


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Ms. LANDIS. I haven’t been able to expand. I have—— 

Chairman KERRY. You were planning to? You were about to? 

Ms. LANDIS. I was planning to expand into Michigan. I am actively expanding into New England. I have had inquiries for my 

business here in the D.C. area and up in Michigan. I am just unable to invest in the additional people, computers, and travel to do 

that. 

Chairman KERRY. And why will an SBA loan not fill that gap? 

If you are able to do that, why won’t that work? 

Ms. LANDIS. An SBA loan would perhaps fill that gap if I felt I 

had a confident way to repay that and I planned it carefully. However, I don’t have any equity in my home. I had a fire and I used 

the equity in my home to rebuild my home, so I have no equity to 

use to borrow against, so that option is not out there for me. 

Chairman KERRY. I see. I see. So you have got to get the capital 

just through your revenue stream and go report back in, or find 

some kind of investment—— 

Ms. LANDIS. Well, the other thing that has hurt me, as I mentioned with the credit card increase, when I am increasing travel 

to New England, the client pays for my travel. So that is not necessarily an expense of my business. Those credit card balances that 

have been growing are repaid monthly as my client pays me for my 

invoices. So it is simply the growth of my business and the cash 

flow of that business that has caused me to be impacted with my 

one credit card being cut and the other one the rate being increased. The economic model that is out there was looking at a 

credit score based on use, not the underlying business principle 

that was causing my business to have more revenue, more profit, 

and more opportunity. 

Chairman KERRY. What would make the greatest difference to 

you now? What would change this playing field as you are currently on it? 

Ms. LANDIS. An opportunity to have the community bankers and 

other bankers have access to the business plan that I have, the 

cash flow that I have, the underwriting that I have, instead of relying on a credit score model that offered me an unsecured loan only 

based on credit scoring. 

Chairman KERRY. So if you had a different way of judging your 

creditworthiness, you believe you could meet a viable standard by 

which they would be repaid and they could make a loan? 

Ms. LANDIS. Thirty years ago, I was with a commercial lender for 

30 years, and I know there are also a lot of loans that should not 

have been made because the credit scores look good and the underlying business plan and the opportunity to repay that with cash 

flow from the business wasn’t there. 

Chairman KERRY. Now, Ms. Blankenship, sort of picking up on 

that, in your testimony, you say that lenders, community lenders 

are ready to lend, but you say the bank regulators are going to insist on a tightening of that standard, not looking perhaps to a different standard like Ms. Landis is talking about, right in the middle of the economic slowdown. Are you seeing that tightening? 

Ms. BLANKENSHIP. I believe that our community banks are seeing that tightening. 

Chairman KERRY. The regulatory tightening? 


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Ms. BLANKENSHIP. The regulatory tightening—— 

Chairman KERRY. Is that not wise for them? I mean, don’t they 

have a responsibility to take a look and say, whoa, we may not get 

repaid here. We can’t have another S&L crisis. 

Ms. BLANKENSHIP. I think that it is a reaction from the 

subprime, basically the subprime meltdown. 

Chairman KERRY. Does it, in your judgment, have a relationship, 

a nexus to the realities of the economy and the creditworthiness? 

Ms. BLANKENSHIP. Yes, I believe it does, and that is why I think 

it is so important for the SBA program to be more friendly for the 

community banks to use, because right now in this downturn of 

economic time, we live by our small business customers. Community banks survive by small business. They are partners in the 

community and we have to have the tools to be able to provide 

more capital. And the fact is that we can’t make the terms on some 

of the loans that we could under the SBA guidelines, the extended 

terms, and that is when the small businesses need those terms are 

in times of economic downturn. And it also provides us, by using 

SBA, the ability if we desire to sell the guaranteed portion, obtain 

more liquidity, therefore we have more funds to turn around and 

loan back to other small businesses. 

Chairman KERRY. If the fees were reduced, say by half, or you 

put a moratorium on the fees for six months or so, would that be 

an incentive, in your opinion? 

Ms. BLANKENSHIP. I believe it would be a huge incentive for both 

the banks and the—— 

Chairman KERRY. Is SBA here? 

Ms. KIRK [continuing]. Small business. 

Chairman KERRY. You believe it would be? 

Ms. BLANKENSHIP. I believe it would certainly. 

Chairman KERRY. Do you believe this discussion we had with the 

Administrator is legitimate with respect to fee impact? 

Ms. BLANKENSHIP. I certainly do. I had a similar conversation 

with him before the hearing began, because we have been an SBA 

preferred lender since the late 1980s, but we have seen a decrease 

in our program just because of the fees and the paperwork. We are 

a small community bank. We are committed to the program. But 

if we can’t make it work, other community banks can’t make it 

work. 

Chairman KERRY. Secretary O’Connell, do you agree with that? 

Mr. O’CONNELL. I fully agree. The evidence I have heard as I 

have traveled round the State suggests that the fee impact is significant and the paperwork impact, as well. The Low-Doc program 

that was talked about, a return to that kind of program, I think, 

would have an immediate upturn—— 

Chairman KERRY. I helped start that program when I was on the 

Banking Committee. We started the Low-Doc program and I saw 

the impacts of that immediately. It was terrific, a simple way to 

get the credit to move. 

Why is your bank still doing this, given that? I mean, we have 

had all these banks drop out. You haven’t. 

Ms. BLANKENSHIP. The reason that our bank still uses SBA is because it is a viable answer for small businesses and we have 

even—— 


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Chairman KERRY. You believe in it? 

Ms. BLANKENSHIP. I believe in it, and it affords us the ability and 

opportunity to provide capital that fits that small business—their 

model, their business model, when they need long-term financing 

for cash flow and inventory, which we couldn’t necessarily do because under regulator guidelines, we would fall under certain criticism. 

Chairman KERRY. Mayor Kirk, I know this is affecting property 

values, and therefore it affects your revenues, and therefore that 

can affect your choices with respect to school and infrastructure 

and police and fire. Those are your options. But my question to you 

is, in what ways is it affecting the city’s cash flow itself, other than 

that? Is the credit crunch directly impacting your ability to do some 

of the things that you have laid out in your budget? 

Ms. KIRK. The tax policy in Massachusetts, as you know, is a cap 

on property value, and the rest of the budget is driven through 

growth, housing and commercial development. So what we have in 

my city is a structural deficit where revenues are flat, or just increase on a very slow glide, and the expenses are far outpacing. So 

we are in this constant cycle of cutting budgets. We closed an elementary school last year. We have closed fire stations. We have— 

the skyrocketing water and sewer rates impact small business who 

have to pay that bill, as well. 

So the credit crunch is prohibiting these small businesses from 

doing the improvements to their property or expanding their commercial base, if they are in that mode, which has a direct impact 

on the bottom line, because the balance of the revenues for the city 

is either off what we can capture in the property tax increase, 

which is only two-and-a-half percent under our tax policy, and all 

the rest is from new growth. So we have a very dismal economic 

picture in my city in Massachusetts. 

Chairman KERRY. So leaving aside the direct Federal grants for 

water treatment and/or some of these specialized programs that we 

passed that you benefit from, i.e., some of the education money and 

some of the other areas, transportation and whatever it is—leaving 

those aside, what do you think at this point the Federal Government might do or could do that would have the most impact on 

your ability to maintain the quality of life and meet your responsibilities? 

Ms. KIRK. I think the direct grant piece on the infrastructure is 

very, very important. 

Chairman KERRY. I agree, but leaving that aside, is there something else you see? I mean, obviously, whatever earmark we could 

get within the appropriations process that is authorized and appropriate—— 

Ms. KIRK. Right. Well, I mean, this gets to be a very local scenario where we are a port city and we have a number of infrastructure assets and we have an open harbor and we have a lot of demands placed on us through Homeland Security and we are cast 

in a region that is suburban and we really should be considered as 

an urban port. And so we don’t have the capacity to really take on 

the protection of the harbor and the assets that we have in our city 

as an urban center through proper staffing of public safety. I mean, 

we are really severely depleted in those areas. So—— 


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Chairman KERRY. I just want you to know, I have sent a letter 

to the Secretary of Homeland Security, Secretary Chertoff, on that 

subject based on a conversation we had previously, so we are trying 

to see if there is some leeway there. 

Ms. KIRK. Yes. So I am a big believer in earmarks, because that 

kind of an earmark would absolutely help Gloucester specifically. 

The other things are just to look at the unfunded mandates, because again, when you talk about education, we divert funding 

away from things that enhance the quality and bring joy, basically, 

to education to the mandated programs and to keep those other 

programs in our schools, we turn to the community. We fundraise. 

We have auctions. And that is all small business. We have 800 

small businesses in our Chamber of Commerce and they are 

bombarded with the public schools and different organizations who 

have their hand out. It is just not sustainable. We are trying to 

patch together some solutions. 

So I think unfunded mandates have an impact on the overall picture, and that is why I say in my testimony to, when you look at 

the credit crunch, really evaluate all of the fiscal impacts, because 

any one of them, a resilient small business could overcome, but because they are stacking up, it leads to that sort of downward spiral. 

Chairman KERRY. Well, thank you. That is helpful. I know it is 

a bleak picture. It is a tough picture, but it certainly underscores 

and helps to bring home here the interrelatedness of all of this. 

We are going to have to wrap up in a couple of minutes because 

I have a meeting with Senator Levin and Senator Boxer, but let 

me just, Dr. Bornstein, come back to you for one second. Very interesting observations about valuation and the home equity piece, 

which I think is really important, and we have heard it hear from 

Ms. Landis and others. The New York Times had the very interesting article over the weekend about this issue of home valuation, 

et cetera, and we see a whole bunch of small businesses that are 

facing a shrinking of their credit line even where the value of the 

home has not declined, or even where the value of the homes 

around the home have gone up. What can we do about that? How 

do we—is there a solution that can help get these banks to not 

treat this thing in a broad-based swath? 

Mr. BORNSTEIN. Actually, based on the six years of research that 

I have done, I have come to various conclusions, again, related to 

small business failure and related to personal financial literacy. 

There is a lack of confidence in the American consumer and the 

small business community because of the small business failure 

rates, which many people recognize and we see through the documentation. If we can somehow make a dent and indicate to the 

banking community and the small business community that we 

have an opportunity here to make you operate smarter, that will 

increase confidence. I have spoken to a subprime conference in September 2007 and I basically told them that in the securitization industry, risk has drawn the value of all the securities down. 

If we can somehow show that small business and individuals can 

be made smarter through financial literacy education to avoid making the wrong moves and stay on the right track, that will generate 

a greater confidence, I think, in the small business person’s ability 

to succeed, and the individual’s ability to meet those payments and 


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avoid foreclosure. Those resets are going to be on for the next two, 

two-and-a-half years. We still have a chance to help these small 

business owners and, by the way, they are also individuals, because 

we see them in bankruptcy, a lot of those supposedly personal 

bankruptcies were actually small business owners who were part 

of the bankruptcy problem. 

So, what I am suggesting is that we have this opportunity to basically turn it all around, but the problem is, unfortunately, we 

have been giving financial literacy education which I view as almost like a vitamin supplement to a cancer patient. It has to be 

specific, effective financial literacy education. The research that I 

have done basically was three-fold. It was a discovery process. It 

was a discovery of content and also delivery. How can we deliver 

financial literacy education? 

So in answer to the question, I think a gaining of confidence by 

the banking community and the individual and the small business 

community that they will be able to stay on track and be able to 

make those payments, that, I think, will go a long way. Again, it 

is all about confidence, isn’t it? 

Chairman KERRY. Well, it is, I think. A lot of it is confidence, 

anyway. Some of it is sort of the practical steps you can take to 

instill that confidence, but it is. 

Do you survey your folks about the bankruptcies, Ms. Landis? Do 

you survey or not? 

Ms. LANDIS. I don’t know that we have done that recently within 

our survey. It was not in the results I looked at this morning. It 

is something we could look at, and if we have it, we will get it to 

you. 

Chairman KERRY. Well, let me just say to all of you, boy, this is 

crunch time in every respect, and I am so concerned and disturbed 

to see a kind of double-talk going on. On the one hand, the White 

House and the administration and other people in public life bemoan the lack of confidence and the impact and sort of acknowledge there are effects here of psychology. On the other hand, they 

don’t do anything to break the cycle or to adequately intervene. 

I was not enormously enamored by the stimulus package that we 

passed here, which gave people sort of a quick hit cash inflow but 

did very little to create jobs, and I argued vehemently that anything we did then should have dealt with the housing crisis. We 

won that in the Finance Committee, got it onto the floor, and it 

was lost on the floor due to some of the partisanship that got 

wrapped up, and ideology, in the Social Security/LIHEAP and other 

things, and I understand some of the restraints people felt about 

the breadth. But the bottom line is, none of the underlying factors 

were really addressed and we are still struggling now. 

We have got a housing bill that has passed here, the Foreclosure 

Act, as it is called. It has got too many goodies in it for some of 

the folks who created the problems and hopefully we can work that 

out. But this has got to get out to you. I mean, it has got to get 

out there fast and I don’t sense that urgency somehow in the response. 

I know it has got to be frustrating for you, particularly, Mr. 

Mitchell, somebody like you, or Ms. Landis, where you are sitting 

there and it is your hide and your bank account and your home 


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and your family and your workers that are on the line in a very 

real way. So I am very sympathetic. Or, Mayor, your small businesses, the 800-plus that you are struggling with. 

So we have got to somehow move this. I think your testimony 

here has been helpful. I know there are some folks from the SBA 

sitting here. I am confident—I hope they will report to the Administrator, and I look forward to following up with him personally on 

not just the legislation we have that Senator Snowe and I have 

talked about, but also on how we might sort of proactively try to 

address some of these things in a coordinated way. This shouldn’t 

be partisan and it shouldn’t be lost in any politics. So I hope we 

can do that. 

So thank you for taking the time to be here. Thanks for caring. 

Thanks for fighting back. Hopefully, we can join you in that effort 

and get the job done. I appreciate it. 

We stand adjourned. 

[Whereupon, at 4:55 p.m., the committee was adjourned.] 


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