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S. HRG. 111–1136 

REAUTHORIZATION OF SBA FINANCE PROGRAMS 

AND THE IMPACT OF THE SMALL BUSINESS 

PROVISIONS IN THE RECOVERY ACT 

ROUNDTABLE 

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND 

ENTREPRENEURSHIP 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 1, 2009 

Printed for the Committee on Small Business and Entrepreneurship 

( 

Available via the World Wide Web: http://www.fdsys.gov 
(II) 

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP 

ONE HUNDRED ELEVENTH CONGRESS 

MARY L. LANDRIEU, Louisiana, Chair 

OLYMPIA J. SNOWE, Maine, Ranking Member 

JOHN F. KERRY, Massachusetts 

CARL LEVIN, Michigan 

TOM HARKIN, Iowa 

JOSEPH I. LIEBERMAN, Connecticut 

MARIA CANTWELL, Washington 

EVAN BAYH, Indiana 

MARK L. PRYOR, Arkansas 

BENJAMIN L. CARDIN, Maryland 

JEANNE SHAHEEN, New Hampshire 

KAY HAGAN, North Carolina 

CHRISTOPHER S. BOND, Missouri 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

MICHAEL B. ENZI, Wyoming 

JOHNNY ISAKSON, Georgia 

ROGER WICKER, Mississippi 

JAMES E. RISCH, Idaho 

DONALD R. CRAVINS, JR., Democratic Staff Director 

WALLACE K. HSUEH, Republican Staff Director 
(III) 

C O N T E N T S 

OPENING STATEMENTS

Page 

Vitter, Hon. David, a U.S. Senator from Louisiana .............................................. 14 

Landrieu, Hon. Mary L., Chair, and a U.S. Senator from Louisiana .................. 21 

WITNESSES

Mills, Edward, Democratic Senior Policy Adviser for Banking and Finance, 

Committee on Small Business ............................................................................ 1 

Zarnikow, Eric, Associate Administrator, Office of Capital Access, U.S. Small 

Business Administration ..................................................................................... 2 

Wojtowicz, Jean, Executive Director, Indiana Statewide Certified Development Corporation and Chair, National Association of Development Companies ........................................................................................................................ 2 

Fruge, P. Andre, President and CEO, Louisiana Capital Certified Development Company, Inc. ............................................................................................. 2 

West, Dennis, President, Northern Initiatives ...................................................... 2 

Garvin, Marianne, President and CEO, Community Development Corporation ........................................................................................................................ 2 

Moncrief, Ray, Chief Executive Officer, Kentucky Highlands Investment Corporation ................................................................................................................. 2 

Wasser Gish, Joan, Principal, Policy Progress ...................................................... 2 

Wheeler, Kevin, Democratic Deputy Staff Director, Committee on Small Business ........................................................................................................................ 2 

Lucas, Chris, Republican Counsel, Committee on Small Business ..................... 2 

Walker, Matt, Republican Deputy Staff Director and Counsel, Committee 

on Small Business ................................................................................................ 2 

Heath, Michael, Owner, Ramunto’s Brick Oven Pizza ......................................... 3 

Palmer, Brett, President, National Association of Small Business Investment 

Companies ............................................................................................................ 3 

Harris, Glenn, Counsel, Office of the Inspector General, U.S. Small Business 

Administration ..................................................................................................... 3 

Crispen, Fred, Executive Vice President, Borrego Springs Bank ........................ 3 

Wilkinson, Anthony, President and CEO, National Association of Government 

Guaranteed Lenders ............................................................................................ 3 

Clarkson, Greg, Executive Vice President, BBVA Compass Bank ...................... 3 

APPENDIX MATERIAL SUBMITTED

Clarkson, Greg 

Testiminy .......................................................................................................... 3 

Crispen, Fred 

Testiminy .......................................................................................................... 3 

Fruge, P. Andre 

Testiminy .......................................................................................................... 2 

Garvin, Marianne 

Testiminy .......................................................................................................... 2 

Harris, Glenn 

Testiminy .......................................................................................................... 3 

Heath, Michael 

Testiminy .......................................................................................................... 3 

Landrieu, Hon. Mary L. 

Opening statement ........................................................................................... 21 

Prepared statement .......................................................................................... 23 
Page

IV 

Lucas, Chris 

Testimony .......................................................................................................... 2 

Mills, Edward 

Testimony .......................................................................................................... 1 

Moncrief, Ray 

Testimony .......................................................................................................... 2 

Prepared statement .......................................................................................... 56 

Palmer, Brett 

Testimony .......................................................................................................... 3 

Shay, Matthew 

Prepared statement from House Committee on Small Business on October 14, 2009 ................................................................................................... 83 

Vitter, Hon. David 

Testimony .......................................................................................................... 14 

Walker, Matt 

Testimony .......................................................................................................... 2 

Wasser Gish, Joan 

Testimony .......................................................................................................... 2 

West, Dennis 

Testimony .......................................................................................................... 2 

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

Wheeler, Kevin 

Testimony .......................................................................................................... 2 

Wilkinson, Anthony 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 64 

Wojtowicz, Jean 

Testimony .......................................................................................................... 2 

Prepared statement .......................................................................................... 72 

Zarnikow, Eric 

Testimony .......................................................................................................... 2 
(1) 

REAUTHORIZATION OF SBA FINANCE PROGRAMS AND THE IMPACT OF THE SMALL 

BUSINESS PROVISIONS IN THE RECOVERY 

ACT 

THURSDAY, OCTOBER 1, 2009 

UNITED STATES SENATE, 

COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m., in room 

SR–485, Russell Senate Office Building, Hon. Mary L. Landrieu 

(chair of the committee) presiding. 

Present: Senators Landrieu, Vitter, and Risch. 

Staff present: Ed Mills, Kevin Wheeler, Matthew Berger, Chris 

Lucas, and Matt Walker. 

OPENING STATEMENT OF EDWARD MILLS, DEMOCRATIC SENIOR POLICY ADVISER FOR BANKING AND FINANCE, COMMITTEE ON SMALL BUSINESS 

Mr. MILLS. Good morning, everyone. Senator Landrieu will be 

joining us at approximately 11:00 a.m., and considering we have a 

pretty robust agenda, I would like to start and get this underway. 

My name is Edward Mills. I am the Senior Policy Adviser for 

Banking and Finance on the Senate Small Business Committee 

here. The title of this morning’s roundtable is ‘‘Reauthorization of 

SBA Finance Programs and the Impact of Small Business Provisions in the Recovery Act.’’ What I would first like to do is explain 

the agenda and then we will begin. 

The record for this roundtable will be open for 2 weeks, until October 15th, so if any of our participants have anything to add to 

the official transcript, please submit that to the Committee. 

We will start off by going around the dais and having introductions. For the introductions, if you can, please limit it to your 

name, organization, and title. 

What we would like to do for the roundtables, it is a pretty informal conversation. We would like to get as robust of a conversation 

as possible, and the goal of this particular roundtable is to build 

a record for the reintroduction of legislation to reauthorize a number of the finance programs at the SBA. 

To do this, we will be building on the legislation that the Committee has considered in previous Congresses, including S. 1256, 

which was the Small Business Lending Reauthorization Improvement Act of 2007; S. 2920, the SBA Reauthorization and Improve-
2 

ment Act of 2008; as well as the child care lending pilot that was 

offered by Senator Kerry and the intermediary lending pilot offered 

by Senator Levin; and, obviously, a big part of these discussions 

will also include initiatives that were introduced this Congress, including S. 1615, the Next Steps for Main Street, introduced by Senator Snowe. 

In addition to a reauthorization bill, one thing that we would like 

to build the record for is the possibility of crafting legislation which 

would serve as a next steps bill for the Recovery Act. 

After introductions, after we go around, I will start by introducing each topic, and I will call the subject matter expert we have 

here as well as representatives from the SBA and the IG’s office. 

I know a number of participants around the dais are well versed 

in more than the program that they are officially representing, so 

we very much welcome you to participate in as much of the conversation as possible. To do that, what I would ask you to do is if 

you do want to talk, just put your sign up like this; and if you 

could, please place it where your name is facing up here so I can 

actually read it, or when the Senator arrives, she can read it. Also, 

if everyone could put their placard up here so we can see your 

names. 

During our discussion I will also be turning to my colleagues on 

Senator Landrieu’s and Senator Snowe’s staff to ensure that they 

have the opportunity to ask any questions they may have. And, finally, when Senator Landrieu arrives, we will be turning it over to 

her. She will make some brief remarks and run the roundtable at 

that point. 

If we could start with introductions, and we will start down here 

with Eric Zarnikow. 

Mr. ZARNIKOW. I am Eric Zarnikow. I am the Associate Administrator of the Office of Capital Access at the U.S. Small Business 

Administration. 

Ms. WOJTOWICZ. I am Jean Wojtowicz, Executive Director of Indiana Statewide Certified Development Corporation and the current 

Chair for our trade association, the National Association of Development Companies. 

Mr. FRUGE. I am Andre Fruge. I am President of Louisiana Capital Certified Development Company, Lafayette, Louisiana. 

Mr. WEST. I am Dennis West. I am President of Northern Initiatives, and we are based in northern rural Michigan. 

Ms. GARVIN. Marianne Garvin, President and CEO of Community Development Corporation of Long Island. 

Mr. MONCRIEF. My name is Ray Moncrief. I am Chief Executive 

Officer of Kentucky Highlands Investment Corporation, and I manage an SBIC, a new markets venture capital program, and a rural 

business investment company. 

Ms. WASSER GISH. Good morning. My name is Joan Wasser Gish. 

I am Principal of Policy Progress. 

Ms. WHEELER. Kevin Wheeler, Democratic Deputy Staff Director 

for Senator Landrieu. 

Mr. LUCAS. I am Chris Lucas. I am Counsel to Ranking Member 

Snowe. 

Mr. WALKER. I am Matt Walker, Deputy Republican Staff Director and Counsel for the Committee. I want to express that Senator 
3 

Snowe, although this is a staff-led roundtable, always attempts to 

make an appearance to committee events. However, today, as I am 

sure most of you are aware, the Finance Committee is tied up on 

health care amendments, and that is where she is. So she apologizes for personally being unable to attend this roundtable. 

Mr. HEATH. My name is Michael Heath. I am the owner of 

Ramunto’s Brick Oven Pizza in St. Johnsbury, Vermont. 

Mr. PALMER. My name is Brett Palmer. I am the President of the 

National Association of Small Business Investment Companies. 

Mr. HARRIS. Glenn Harris, Counsel to the Inspector General, 

SBA Office of Inspector General. 

Mr. CRISPEN. Fred Crispen, Executive Vice President, Borrego 

Springs Bank. I manage the Small Loan Division. 

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

CEO of the National Association of Government Guaranteed Lenders. 

Mr. CLARKSON. I am Greg Clarkson. I am Executive Vice President, BBVA Compass Bank, and SBA Division Manager, as well as 

the Chairman for the National Association of Government Guaranteed Lenders. 

Mr. MILLS. Great. Thank you very much. 

So the first item on our agenda this morning is the 7(a) program. 

Obviously, this is a flagship program of the SBA. A number of provisions were included in the Recovery Act, and I would like to start 

off with a brief update from Eric Zarnikow from the SBA on how 

Recovery Act programs are going, especially as they relate to 7(a), 

and I will then move on, starting with Greg Clarkson, to get a 

lender perspective as well as some ideas for reauthorization. 

So, Eric. 

Mr. ZARNIKOW. Well, first I would like to thank the Committee 

for holding this roundtable. I think is a very important forum to 

really discuss what is going on in small business and supporting 

small business lending activity. And when you think about the 7(a) 

and the 504 program and you think back a year ago, we really had 

the credit crunch that hit last fall in the marketplace. We saw a 

significant decline in SBA lending volume in both 7(a) and 504. 

When the Recovery Act was passed in February, there were a 

number of important elements that helped support the 7(a) and 

504 program. We had the fee reductions or eliminations for borrowers and lenders in the 504 program, fee reductions for borrowers in the 7(a) program, and also the 90-percent guarantee in 

the 7(a) program. 

We have really seen a very significant impact from the Recovery 

Act as we see our lending volume in SBA. And if you look at that 

period immediately prior to the Recovery Act being signed, the period from the beginning of the calendar year until the Recovery Act 

was signed in mid-February, and you look at our weekly average 

loan volume and then you compare our weekly average loan volume 

subsequent to the passage of the Recovery Act, we have seen that 

our loan volume has increased by more than 60 percent when you 

look at 7(a) and 504 combined. 

So we have seen a very significant rebound in lending tells us 

that the Recovery Act really hit the mark as far as what was needed in the marketplace at that time. 
4 

Also, one of the important elements of 7(a) lending is the secondary market; 40 to 50 percent of the Government guaranteed 

portion of 7(a) loans each year is sold into a secondary market. 

Last fall, with the credit crunch, we did see a freezing of the secondary market where secondary market sales volumes were down 

by 70 to 80 percent in some cases, and we saw a substantial reduction in premiums. 

The good news is there has been a very significant recovery in 

the secondary market. Part of that we believe is coming TALF and 

the inclusion of SBA loans as part of TALF, as well as the announcement from TARP that was done in March where TARP has 

committed to support up to $15 billion—or provide up to $15 billion 

of support for SBA secondary market loans. And we have seen over 

the last 4 to 5 months the secondary market loan volume has recovered. It is actually back to the point where it is exceeding the 

levels prior to the credit crunch, and in addition, the premium levels that are seen in the market have also recovered, and we think 

that is a very big supporter of SBA lending, particularly 7(a) lending. 

In addition, we have seen lenders return to the marketplace. 

Since the Recovery Act was passed, we have over 1,000 lenders, 

who had not done a loan since the beginning of the fiscal year, 

have done a Recovery Act loan, and more than 500 of those lenders 

are people who had not done a loan in the SBA program since at 

least 2007. So we think getting additional lenders into our program 

is really a critical part of supporting access to capital for small 

businesses. 

The obvious question is what is really next for small businesses 

as we think about the next phase of the recovery, what really is 

needed. So I am very interested to hear the discussion here today, 

hear the ideas that come out of this roundtable and what is really 

needed to help support small businesses in the next phase of the 

recovery. 

Thank you. 

Mr. MILLS. Thanks, and if we could have some comments from 

Greg Clarkson. 

Mr. CLARKSON. Thanks, Ed. One of the things I am seeing out 

in the marketplace is that the borrowers and small business owners continue to have a desperate need for access to capital. I think 

that that need is not only for capital acquisition, capital expenditures, but there is a great need for working capital. That working 

capital is not only to grow their business, but to sustain what they 

have lost over the last couple of years during the economic issues 

that we have been experiencing. 

So a borrower’s needs are greater, and I think that that borrower’s needs are greater in a time when banks are constricting 

their lending standards. And one of the things in looking at a 

bank’s analysis for identifying qualified borrowers, they are not 

only looking at historical performance, but also looking at the information available as it relates to geographic diversity, industry diversity, and spending more analysis or determining whether that 

borrower can not only continue to pay but grow the business as 

they continue to succeed. And we are seeing that it is critical that 

we have programs that support the small business’ needs. We are 
5 

also seeing that the needs are greater. The size of the loans, the 

size of the requests are expanding, especially in light of the ability 

for small businesses to continue to meet conventional lending 

standards. So we are seeing a need for larger loans as one item. 

One of the things that I have noticed also is just making sure 

that borrowers, as they are looking for additional capital, they have 

access not only to the SBA programs throughout our institution, 

but also through other institutions. Very excited that the information that Eric gave with regards to increased participation. We 

want that as an industry to continue to expand and grow and have 

more lenders participating, because that does create more opportunity for small businesses to obtain capital. 

One of the things from the SBA perspective that I look at is ensuring that the requirements of the SBA program can be met and 

that the guarantee that we are relying on as a lender is a good 

guarantee and we can use that as an opportunity to diversify our 

risk in any individual lending situation. 

So the 90-percent guarantee has greatly assisted us in being able 

to reach more small businesses. I do have a concern, as the stimulus money and provisions expire, what is going to happen to lending and to capital access for small businesses once those provisions 

expire and the economy has not recovered enough to be able to sustain continued access for small businesses. 

Mr. MILLS. Thanks. And we will get into that a little bit more, 

but before we do that, I just wanted to call on Michael Heath. He 

is a small business owner who has received a 7(a) loan, and I 

would like to ask him to explain his experience with the program. 

Mr. HEATH. Yes, if it was not for the 7(a) loan, I do not think 

we would have been able to purchase the business. It was awesome. With the fee reductions and things, it left us enough capital 

to sustain operations and keep growing. 

Mr. MILLS. Prior to applying for it, did you know that there were 

going to be some fee reductions or that—— 

Mr. HEATH. I had no idea, starting into the process, that there 

was even this program out there. Our banker led us in the direction and helped us along in the process. 

Once everything came out in the wash and we realized what was 

going to be happening as far as finance goes, they really made it 

clear that if it was not for the program, it probably would not have 

been able to go. 

Mr. MILLS. So if you had to pay the fees, would you have been 

able to afford the loan? 

Mr. HEATH. Probably not. 

Mr. MILLS. Great. And one thing I would like to talk about here 

is that there are some concerns out there in terms of this Recovery 

Act authorization going through September 31, 2010; however, the 

funds that have been put in to support the higher guarantees and 

the lower lender fees are scheduled to run out maybe as early as 

September. I just wanted to get—maybe we can have some crossconversation about what would happen if in December it does run 

out, what you think might happen to loan volume and access to 

capital for small businesses. I would love to hear from the SBA 

about some steps that it anticipates making to ensure that there 
6 

is an orderly wind down if there are not any additional funds available to continue those guarantees and fee reductions. 

I do not know who wants to start. 

Mr. WILKINSON. May I? 

Mr. MILLS. Sure, Tony. You can start and then we will go to 

Marianne. 

Mr. WILKINSON. Well, we are definitely concerned what is going 

to happen when the stimulus funds do run out. The 90-percent 

guarantee and the borrower fee reductions have clearly helped 

drive loan volume. We are just now getting back to the same daily 

loan volumes we had last year. I think we are pretty close on a 

daily loan volume in September as we were in September of 2008. 

But to get there, it took quite a bit of stimulus. It took the 90-percent guarantee. It took the borrower fee reductions—the fees being 

waived. So we would anticipate that, as the funds run out, we 

would see a softening in loan demand. 

The 90-percent guarantee is important to the banker community 

today. It is no secret that banks have capital issues, and this is a 

way that we can leverage the limited capital that is out there and 

still serve the small business community. So the extension of the 

guarantee in our opinion is critical. 

I do know that the SBA has been guesstimating an end-of-thecalendar-year running out of funds. Our guess is that the closer we 

get—or the farther we get into this last quarter, the faster those 

funds are going to get utilized. And I would not be at all surprised 

if our funds are used up by Thanksgiving. 

Mr. MILLS. Marianne. 

Ms. GARVIN. I wanted to make a comment about Mr. Heath’s remarks. He is a small business owner, and as a practitioner in the 

field that makes capital available to businesses, what his experience was is what I see, which is a business needs capital. They 

come to a source. They do not know the programs. They do not 

know that there is a micro loan program or a CDFI or a 7(a) program. And so there needs to be this range of products out there, 

and it is not really necessary or important for the business to know 

which bucket they fit into. But that kind of flexibility of products 

and capital access is important for us to be able to then respond 

to all the different types of businesses that come to us and the different types of capital needs that they have. And I think, given the 

range of programs that this roundtable is going to be responding 

to, I just thought that highlighting Mr. Heath’s comment was important. 

Mr. MILLS. Thank you. 

Eric. 

Mr. ZARNIKOW. Sure. When we rolled out the fee reductions and 

the higher guarantees back in March, we estimated at that time 

that we would expect that the money would run out sometime 

around the end of the calendar year, but also recognizing that, depending on loan volume, that date could either move up or be 

pushed back. 

At this point I would say, based on the volumes we are seeing, 

that it is likely that 7(a) would run out late November or early December; 504 would maybe run out mid-December to late December. 
7 

Obviously, that can and will change depending on what happens 

with loan volume. 

As we talk with lending partners, there have been concerns expressed that as we get closer to that date, we will see a surge of 

volume and that that might cause that date to move in closer. 

At SBA we do have a team and have had a team for a while 

working on how do we thoughtfully wind down the fee reductions 

and the higher guarantees. And, obviously, when you think about 

the structure out there, we have over 2,500 lenders who make an 

SBA loan in any given year. They work with small businesses. 

Clearly, communications of that is going to be a critical item in figuring out a thoughtful plan and how to wind down the program in 

a way that makes sense and can be communicated out to our lending partners and to small businesses as critical. 

We do have a team working on that and are hoping to be able 

to announce that here in the next weeks or a month to be able to 

communicate that out to the community on how we are going to 

wind down the fee eliminations and the 90-percent guarantee. 

Mr. MILLS. Thanks. I know, Greg, you have your card up. We 

have a couple more minutes that we can spend on 7(a). We do have 

a pretty ambitious agenda. If I could ask you to talk a little bit 

about if we do move a reauthorization bill when we are looking for 

reintroductions, what are some of the key points you think that we 

need to address, especially loan size, and if you have any ideas in 

terms of what loan level in the 7(a) program you would like to see? 

Mr. CLARKSON. Sure. In response to Marianne, it is about 

choices. As a lender, I want to have choices to give to you as a 

small business owner. Whether it is a conventional loan, whether 

it is a 504, 7(a), or any other loan, I want to have choices for you, 

and based on your risk tolerance, based on your needs, for you to 

be able to make an informed decision. 

Anytime that we limit participation in any of the programs, it 

makes it more difficult for you to have a wide range of options, and 

conventional lending is constricted by the requirements of a bank’s 

lending policy, but then also regulatory. And then if we have loan 

limitations, size limitations, anything of that nature, with regards 

to some of the other guaranteed programs, then we have limited 

your choices. 

So in regards to the reauthorization bill, one of the things that 

is important, in my opinion, is increasing the loan size, and increasing that—I had originally thought that $3 million was the 

right size, and the reason why I thought that was because that 

would take into account inflationary activity, rises in real estate 

costs, things of that nature, just normal business. But what I am 

seeing recently is not only the need for the capital expenditures 

which bring them up to the larger loan size, but also businesses 

needing not only to take care of their capital asset requirements, 

but then also the working capital is becoming very important—not 

for start-up businesses—I mean, it is important for start-up businesses, but the size that we are talking about, having the larger 

loan for existing job preservation businesses, job creation businesses, really the things that drive the economic recovery. 
8 

So, in my opinion, looking at a $5 million loan size to be able to 

accommodate the borrower’s needs in this economy is important. 

That is one of the most important things that I see. 

Mr. MILLS. Thanks. And at this time, I want to turn it over to 

Senator Snowe’s staff to have an opportunity to ask a few questions, then I am going to see if Kevin has any questions before we 

move on to the next topic. 

Mr. WALKER. Sure. I just wanted to follow up on that because 

the increased loan size is something that has been a priority of 

Senator Snowe’s for quite some time now, and something she has 

been pushing for. She believes that many small businesses are, unfortunately, priced out of the SBA’s lending market because the 

loans just are not ones that will suit their needs, given the type 

of business that they do. 

I am going to ask a question that I believe I already know the 

answer to, but I still want to ask it in this sort of a format, so that 

we continue to get the response on the record. That is, isn’t it true 

that in the SBA’s portfolio, the higher loans are actually better-performing loans with a lower default rate? 

Mr. ZARNIKOW. In the 7(a) program, we do see that the larger 

loans tend to perform better than smaller loans. In the 504 program, it is actually the opposite. The larger loans do not perform 

quite as well as smaller loans. 

Mr. WALKER. So relative to the 7(a) loan program, would it then 

be presumed that the subsidy rate would be lowered, if higher 

loans were allowed? 

Mr. ZARNIKOW. You know, based on the information we have in 

our existing portfolio, that would be correct. Obviously, the unknown question is when you go to a higher loan limit above $2 million, will those loans perform similar to the larger loans in the existing portfolio or not, and that is obviously a question we cannot 

answer until we actually get some experience with it. 

Mr. WALKER. Okay. 

Mr. LUCAS. Also, I had an additional question. One of the things 

that you touched on was that you were not aware of the 7(a) lending program. And it is a wonderful program, yet I think one of the 

problems is that people do not always look at it when they look at 

their lending options. 

One of the provisions that Senator Snowe has in her Next Steps 

Bill is an online lending platform, and I just wanted to ask Mr. 

Wilkinson and Mr. Clarkson what your thoughts are about an online lending presence. In the general perspective, is it a good idea 

to raise the visibility of the 7(a) program, so that when borrowers 

are considering their options, the 7(a) program is something that 

they consider? 

Mr. CLARKSON. Well, I think anything that gets the word out on 

the program to small businesses is a good thing. I think if it provides information as it relates to what lenders are actively participating in the program, that is a good thing. I think if it includes 

what lenders—I do not know that you can do it the same way you 

would interest rates as far as mortgages or something like that, 

but give the small business the opportunity to direct their focus, to 

direct their opportunity to go to a lender that is participating in 
9 

the type of loan that they need, the type of—whether it is geographic, industry, anything of that nature, to be able to do that. 

So I would be in favor of any sort of informational process that 

gets the word out. 

Mr. LUCAS. Great. Thank you very much. 

Ms. WHEELER. I just want to ask a few questions. Eric, the answer to the question on the record is that raising the 7(a) loan limit 

from $2 million to, say, $5 million does not have a cost and it could 

even have savings? 

Mr. ZARNIKOW. Yes, what I would say what we see in our existing portfolio is larger loans tend to perform better than smaller 

loans. We obviously do not have any experience in our portfolio, or 

limited experience, for loans about $2 million. 

Ms. WHEELER. Okay. To the industry, what are the industries 

that you are seeing that need these larger loan sizes or the areas 

of the country? Is it limited to certain areas of the country? 

Mr. WILKINSON. I would say that small businesses throughout 

this country are finding it difficult to access conventional credit. 

The conventional credit window, while it is still open, is not open 

very much, and that we are seeing many more small businesses 

whose really only option to get financing is through the SBA programs. And we are seeing a whole host of industries that could 

benefit from a much larger loan size. For instance, the Automobile 

Dealers Association, you know, the $2 million limit today really 

does not satisfy many dealers’ needs. A $5 million loan size would 

help, and there is a whole list of industries that could benefit from 

the increased loan size. 

Ms. WHEELER. And for the SBA, have you found that that is one 

of the obstacles to the lenders using—or even the borrowers 

using—the floor plan financing that you put through? 

Mr. ZARNIKOW. We have received feedback from lenders that the 

$2 million loan limit that we have currently is a barrier to their 

use of the dealer floor plan loan from a couple standpoints. One is 

many of the national dealer floor plan lenders tend to have a $5 

million minimum that they do on a dealer floor plan. Then, obviously, many dealers have a need that would be greater than $2 

million. 

Ms. WHEELER. So then we would fill that gap if we were to raise the limit from $2 million to $5 million. If we were thinking about 

this change, it would be very appropriate to do it as part of a follow-on targeted recovery piece, separate, because it needs to move 

faster than, say, regular reauthorization? SBA is seeing that need? 

We received a letter from ten associations in support of the 

change. Many of them are associated with automobile dealers and 

vehicle dealers, in addition to trade associations, like the National 

Small Business Association and the Chamber of Commerce. 

That is what we are hearing from the Committee, but it sounds 

like you are hearing that at SBA, too. 

Mr. ZARNIKOW. We have definitely heard from lenders that there 

is a need for larger loans. We have seen in our portfolio that the 

percentage of loans in excess of $1.5 million has been increasing 

over time. However, you would keep in mind that 80 percent of the 

dollars are for loans less than $1.5 million, and our average 7(a) 

loan is about $200,000. 
10 

So I think it is important to be thoughtful about, you know, how 

does that fit into the overall lending market, making sure that as 

a Government we are not pushing out the private sector, that we 

are supporting access to capital for small businesses. So I think 

that is an important thing to consider. 

Ms. WHEELER. Along those lines, there was a question raised 

about whether this would crowd out the businesses needing smaller 

amounts of capital, the smaller businesses. Would anybody like to 

answer that? 

Mr. WILKINSON. I do not believe it would. 

Ms. WHEELER. I know we are not near the program level, but 

does anyone have an answer as to why it would not crowd them 

out, aside from the fact that we are not exhausting the program? 

Mr. CLARKSON. Well, I think from a lenders’ perspective, we look 

at all borrowers, look at all types of loans, and, you know, it gets 

back to just having another option. 

With regards to the large loans, here is a prime example, a really 

quick example. I have a borrower that I looked at just this week 

that needs $2 million on a debt refinance of their existing real estate for their manufacturing plant. They also have a line of credit 

to the same lender for a million and a half. The lender is not willing to take those loans and refinance them, renew them under favorable terms. So they are asking that borrower to move their 

loans, and without the SBA program, there is really not an option 

for that borrower. And since their need is greater than the $2 million, you cannot do one or the other in that instance, and we are 

seeing that with several of those types of borrowers that have 

never considered SBA in the past. 

Ms. WHEELER. Okay. Thank you. 

A last question for SBA. How much money would we need if we 

were to do the 7(a) piece to continue the guarantee or to do the 

loan fee waivers? Do we have numbers on those? 

Mr. ZARNIKOW. We can provide you those numbers. I do not have 

them here with me, but we can provide those to you. 

Ms. WHEELER. If we did not have money, is there anything we 

could do within the program that might help keep lending together 

without touching it, for example, I know we do not like it and it 

has high defaults, but changing the Express program, would that 

be an alternative if we did not have money? 

Mr. WILKINSON. You know, we have had a pretty long wish list 

of things that would be helpful to the program, and to their credit, 

the SBA has been checking them off, the things that they could do 

through their own regulations. Interest rate indexes, we have been 

after them; today they have got a new fixed rate index that is going 

to be very helpful. And they have already taken a lot of those steps. 

Absent an appropriation to continue the 90-percent guarantee 

and the fee waivers, you know, I would say we do need the larger 

loan size. I think that is critical to a number of borrowers. And 

then, you know, we need to be prepared that there probably will 

be some slackening of demand. But from there, the other issues 

would be to focus on the lender oversight functions that we still 

find problematic and expensive and inefficient. And then some of 

the repair and denial issues that have driven a lot of lenders away 

and that will not be back regardless. I think that is something that 
11 

we need to keep in mind that as we do some of these things, that 

we have—yes, we have got 1,000 new lenders that have not made 

loans in the last year or two. We have lost a lot of lenders for a 

whole variety of reasons, and oversight in denials and repairs are 

a big part of those. And I can tell you that the institution I used 

to work at has left the program and they will not be back. I think 

they have closed their division. And there are other institutions out 

there just like that. 

Mr. MILLS. We will get into lender oversight in just a little bit. 

I do want to stay to the schedule as much as possible, so are you 

okay or did you want to make one quick comment? 

Mr. MONCRIEF. I would like to make one quick comment to Greg 

about the size of the SBA 7(a) loan. I have several companies that 

exactly fit the format of just what you said. They heretofore had 

been borrowers from large regionals, had a line of credit, had fixedasset financing through real estate, et cetera. And all of a sudden, 

because of capital requirements at the large banks, the companies, 

because of the downturn, had had marginal years, and all of a sudden they are not a viable part of that portfolio. 

So what is happening, they are coming to practitioners that are 

doing 7(a)s or people who can originate 7(a)s, and it would be absolutely critical for that loan limit to rise above that $3 million— 

above the $2 million to perhaps the $5 million, because there are 

a host of small manufacturing concerns that employ 200 to 250 

people in rural environments that are desperate for that type financing. So I echo you and support that greatly. 

Mr. MILLS. Next is the Community Express Program. This program has been around for a while as a pilot. Some of the conversation has been: is it time to move it beyond a pilot or is it time to 

keep it as a pilot in any reauthorization? This is a program that 

has had some concerns raised about it due to the high default rate. 

To start off this discussion, I would like to call on Fred. 

Mr. CRISPEN. I definitely think it needs to be continued, preferably as a permanent program, for several reasons, the first of 

which would be it is hard to get your board to commit assets to invest in infrastructure, people, systems, to do a small loan program 

when it is still a pilot program. You do not know if it is going to 

be here today or tomorrow. So I think by making it a permanent 

program, I think you will actually get more lenders involved in the 

program from that standpoint. 

Under today’s current economic conditions, without a doubt there 

is a drastic need for the program. We are seeing more and more 

every day existing borrowers along the same lines you are talking 

about that have been cut off by their large regional bank, and they 

are coming to us under the Community Express Program for small 

working capital loans. 

One of the other things I think we need to do is to raise the limit 

that encompasses everybody. Right now anybody in the country is 

eligible for a loan up to $25,000. Above $25,000 it is a targeted 

market. Now, I understand targeted markets, but in today’s environment, that base rate needs to be raised to at least $50,000 or 

higher so that we can make working capital available to borrowers 

out there in the community. 
12 

Mr. MILLS. If I could call on Glenn with the IG’s office, if you can 

express your thoughts on this? 

Mr. HARRIS. Sure. And for those of you who do not know, the Office of Inspector General is a statutorily created independent office 

whose mission is to deter and detect waste, fraud, abuse, and inefficiency. And we have a team of criminal investigators and auditors, so we look at all aspects of all of SBA’s programs, including 

the 7(a) and 504 and financial assistance programs. 

Community Express I think is a program that potentially has a 

lot of merit, and I think it helps SBA to move to more of a qualitative type of lending rather than quantitative; in other words, not 

just looking at the quantity of loans that are made, but also looking 

at, you know, targeting loans to underprivileged areas that really 

need that lending assistance. So I think theoretically it has a lot 

of potential merit. 

We have concerns about a pilot program that has now been in 

existence for, I think, about a decade and that some decision should 

be made either way, either to make the program permanent or not. 

I think what would be necessary is some kind of analysis, which 

I believe SBA is doing, to determine whether this program is really 

working. They have given it a lot of thought. They have recently 

reengineered the program. But I think before they make a decision 

whether it is permanent or not, they have to be able to do that 

analysis and say this program is really working as it is supposed 

to do to try to provide the assistance to these needy borrowers. 

We are currently conducting an audit. It is not done. We have 

not briefed the agencies so I really cannot get into the details of 

that. But, generally speaking, you know, we do have some concerns 

with the way the program is being administered, and we do have 

some concerns with the technical assistance requirements and 

whether those are, in fact, effectively providing borrowers with the 

assistance they need to be successful. 

Ms. WHEELER. Glenn, when we looked at this last time in the 

Committee, we wrote to the IG and asked what would be its recommendation. The recommendation came back as—it is premature. 

Is that still the position of the IG, that it is premature? 

Mr. HARRIS. I think it is; at least, you know, we would certainly 

like to have our audit be completed and have the recommendations 

that result from that audit for the agency to consider that. I guess 

if you do not mind, Eric, I would like to see if I can ask him a question as to whether, you know, SBA has undertaken that analysis. 

We were told when the program was going to be reengineered that 

SBA was going to look at whether this program was really effectively reaching this borrower. So if that analysis is close to completion, hopefully, I would say that it is premature until that analysis 

has been done. But I do not have any independent information as 

to where they are. 

Ms. WHEELER. Do you want to give us the status of the analysis? 

Mr. ZARNIKOW. Sure. Let me talk just quickly on Community Express. It is really a program that is intended to match financial assistance, the loan, with technical assistance and is focused on serving underserved communities. 

We did a pretty major revamp of the program about a year ago. 

Our thought was make changes to the program. We will see how 
13 

the program does. We had goals also to increase the number of 

lenders in the program, to broaden out the diversification of lenders because we saw a high concentration of loans being made in 

Community Express by just a handful of lenders. 

Obviously, the revamp that we made to the program coincided 

with a big credit crunch in the marketplace, a very deep recession, 

so the changes to the program we have not really seen how they 

work in kind of a normalized lending environment and a normalized economy. 

So at this point, we feel as an agency that it is probably premature to make a decision about Community Express. Our plan 

would be to extend it again, recognizing that it is a pilot program 

that has been around for a long time, but feeling that it is premature at this point given the changes we made to the program. 

We had actually asked for the audit that Mr. Harris referred to, 

so we are interested in seeing those results as we think about, you 

know, how does the program fit into our overall portfolio and the 

effectiveness of the program. 

Ms. WHEELER. Which leads me to a question: Would it be acceptable to the IG and to the SBA if we were to do a targeted recovery 

bill to just give it a year authorization? I know that that is tantamount to permanency, but not giving it a long leash. 

Mr. ZARNIKOW. I guess our thought has been to extend the pilot 

program for another year, which would give us additional time to 

get information about the performance of the program and then 

look at that point to finish the analysis and make a recommendation about whether to make it permanent or not. 

Ms. WHEELER. Are these Community Express lenders hitting 

their caps right now? Last year, the concern was that they could 

not do as much as they wanted. Is that problem still here since the 

regular program is back up and 10 percent proportionately creates 

a lot more latitude? 

Mr. ZARNIKOW. We have been managing the loan volume, and 

what we did is we set loan caps on the largest lenders to allow also 

room for additional or new lenders to come into the program or to 

expand. We have found really that only one of the large lenders 

has been hitting their loan caps, so the other lenders, it has not 

been a constraint. 

Ms. WHEELER. Mr. Crispen, did you want to comment on that? 

Mr. CRISPEN. Yes. We have a much higher actual loan volume in 

our program. We are averaging right now around $38,000 per loan 

made. So right now today I do not have a problem with a cap, although this month we funded like 95 loans with an average balance of around $38,000. So it really is going to depend on where 

that loan cap goes to. Right now it has been raised to 200 a month, 

but that was through the end of the year. So what happens today? 

Does it revert back to 100 loans per month? If that is the case, 

then, yes, I am bumping close to the cap because my volume continues to go up as we continue to push the program. 

Mr. ZARNIKOW. We expect that as the year begins to continue at 

the 200 level. We will obviously have to monitor that as we see 

what happens with our overall 7(a) volume and the Community Express volume, but we would expect to retain that cap going into the 

fiscal year. 
14 

Mr. CRISPEN. And one other comment I would like to make regarding technical assistance, because Glenn touched on that a second, we use strictly what I consider the SBA partners—Small Business Development Centers, SCORE Chapters, and Women’s Business Centers—as our technical assistance (TA) providers for the 

most part. There are a few municipal-backed nonprofit organizations that are approved by individual districts that we would consider using, but our go-to, our main TAs are the three partners. 

And I would like to see the program tweaked to the standpoint— 

right now we are required to have a separate TA provider agreement with those SBDC or SCORE Chapters or Women’s Business 

Centers that I think is totally unnecessary. If we are using those 

partners, I think that could be eliminated, because if we run into 

a problem, most of the SBDCs are associated with colleges and universities. Trying to get a TA provider agreement through their 

legal counsel at the university level is a nightmare. I think it is an 

unnecessary burden. 

Ms. WHEELER. But will changing that TA—yes, I want to recognize Senator Vitter of Louisiana. Did you want to make some comments? 

Senator VITTER. Why don’t you finish the discussion? Then I will 

jump in. 

Ms. WHEELER. This program has a very high default rate, higher 

than the other programs. My question is: Do we know why it has 

a higher default rate? 

Mr. CRISPEN. I think part of that is you have got to look at the 

public policy initiative that got us into the program to begin with. 

Look at the market we initially targeted and went after. It is an 

underserved market. 

Now, is that the case generally today? Yes, we are still pushing 

that underserved market. But right now today we have a huge demand for loans from just the general business community, because 

they have been cut off from loans by their local banks and by their 

regional banks. They need access to working capital more today 

than they have at any time in the past. 

Ms. WHEELER. Glenn, before I turn to you, I just want to say one 

thing. It was interesting to the Committee that when we looked at 

the data from one of the largest lenders in this program, their average credit score for borrowers was 710. To me that is not the targeted market that we were trying to get to, and I do not see if that 

average credit score is so high—in my mind, that is a pretty good 

credit score—why the default rate is almost—what—double what 

the regular program is? Does that make sense? 

Mr. CRISPEN. I think once again you have got to look at the market and look at the economic conditions we have been through for 

the last year, 2 years really—it started a couple of years ago—and 

look at the targeted market initially so that that loan base was in 

a tough market. 

Ms. WHEELER. I think there would be more agreement that this 

program was meeting its mission if it was really digging down in 

that credit box, but that is a pretty high credit score. 

Mr. CRISPEN. Well, we use the Fair Isaac small business credit 

scoring model, which is a model that SBA is familiar with. I think 

they use it as well. And I would sit here and tell you right now 
15 

today our average credit score is not 710, because that model looks 

at a broad perspective. And it is looking at more than just personal 

credit scores. It is looking at industry. It is looking at percentage 

of revolving available to that borrower, how long they have been 

in business. There are a lot of things that go into that scoring 

model, and I think it is a very fair model. 

But, I mean, you know, if you want to tweak the program, if you 

want to tweak lenders, give us some additional guidelines as to 

where you want to see default rates, and we can make adjustments 

within the model. But when you do that, tell us what you are going 

to do. You are going to cut out a broad spectrum of people that are 

looking for capital. And a lot of them are existing. Two years ago, 

if you had asked me what the percentage of my portfolio was startup, I would have told you probably around 65 percent. Right now 

today, I would tell you that 65 percent or more of our borrowers 

are existing borrowers. A lot of them have been in business 10, 15 

years, and they got cut off by their local bank. They need working 

capital. That is why we need to keep this program and why we 

need to really increase the base on it to allow me to be able to 

reach out to more borrowers. 

Ms. WHEELER. Okay. Thank you. 

Did you want to turn to Glenn for one last comment? 

Mr. HARRIS. Just very quickly, I think that you would expect the 

higher default rate given the nature of the borrowers in this program. The question that I have is: Is this default rate consistent 

with the riskier borrower base or are there other explanations for 

this default rate? We are concerned about the high historic default 

rates in this program, and part of that has been that there is a concentration of lenders who are making these types of loans. But I 

would hope that that would be part of the analysis that SBA would 

undertake. 

And what we have said for all of these pilot programs is consistently come up with benchmarks as to what the expectations are, 

then evaluate the program against those benchmarks, and to make 

a determination whether the pilot program should be extended as 

a permanent program or not. And, frankly, and with all due respect, we have not really seen that type of program implementation 

analysis going on. 

So we would like to see that, and we would like to see an analysis that shows that this is a justifiable program before the decision is made whether to make it permanent. 

Mr. MILLS. Thank you very much. We do want to move on to the 

next topic. Did you have any final questions? 

Mr. LUCAS. No. 

Mr. MILLS. My understanding is that Senator Vitter and Senator 

Risch wanted to have a conversation related to the certified development companies and the 504 loan program, so I will turn it over 

to Senator Vitter for that. 

Senator VITTER. Thanks very much, Ed. Thanks to all of you for 

being part of this roundtable. This is really important for us, and 

I think it is a lot more relaxed and flexible mechanism to get a lot 

of good input and ideas from the real world versus a formal hearing. So thanks for being here. And a special welcome to my friend 

Andre Fruge from Louisiana, which is a great way to turn to the 
16 

504 program because Louisiana Capital that Andre heads is the 

most active 504 lender in Louisiana. 

I wanted to hear Andre’s and everyone’s comments about that 

program, what do you see in it during this recession, and I know 

there are two key proposals out there: one, to increase the lending 

limit; and, two, to use the USDA rural definition versus the presently used rural definition. So I particularly wanted to hear what 

those changes would do to the usefulness and effectiveness of the 

504 program. 

Andre, do you want to start us off? 

Mr. FRUGE. Thank you, Senator. I also want to extend my thanks 

to Donald Cravins for inviting me up here today, to Kevin Wheeler 

and Ed Mills and all of the staff of the Senate Small Business 

Committee. I am happy to be here. 

I have a list of things that I was going to comment on, but thank 

you for that segue opportunity. Really, there are three real important issues for us as an industry—reauthorization, of course. I believe and my colleagues believe that, you know, hopefully we are 

on the threshold of coming out of this recession. We believe that 

we are going to be—small business is going to be a driving force 

behind that recovery. For that reason, we need to be reauthorized, 

number one. And we have presented our ideas about reauthorization levels. We believe that level should be at the recommended 

level because, as things do get better, we are going to need a higher 

reauthorization. 

A second big issue is we would like, as Tony mentioned, to extend the Recovery Act fee assistance. Statistically, it has been big 

for our business. 

And, thirdly, as Senator Vitter mentioned, we would like to have 

an opportunity to have a larger debenture size. You know, there 

are several reasons—and earlier, when Eric was talking about default levels and how 7(a) and 504 worked opposite relative to the 

larger loan size, I think, you know, the fact that 504 larger loans 

have had statistically in the last couple of years maybe a worse 

performance than the smaller loans I do not think is inherent— 

there is no inherent idea about greater default just because the 

loan size is bigger. I think it is inherent what we do. We do commercial owner-occupied real estate. And we are in an environment 

where real estate, as all of you know, has taken some big hits in 

value. So that has a lot to do with larger loans having higher default rates. 

But, importantly, we need a larger loan size so we can do a couple of things. Number one, the million and a half on our side is not 

enough. I mean, we can go up to 2 million if we meet SBA public 

policy goals. Well, Senator Vitter, let me give you a couple of examples of names that you might recognize or industries certainly that 

you might recognize, one being the Don’s Seafood people. We have 

been involved in two projects so far with that family, their restaurants, and we are maxed out on our limit with them. They have 

had just kind of cursory talks with us about another deal, but we 

cannot do it. We cannot help them expand. I do not think there are 

a lot of conventional loans out there for restaurants these days, 

particularly these days. So that is one reason, some repeat busi-
17 

ness. I mean, and they are good-paying folks. We have had a good 

history with them. 

Another piece of repeat business, a guy by the name of Joel 

Broussard, who is the offshore vessel business, and he is a solution 

provider in the Gulf of Mexico, done a 504 loan for one of his supply vessels. And it was a maximum debenture from the get-go. He 

about 8 months ago had a contract with an oil company to do—it 

was like a 4-year contract that was going to provide plenty of cash 

flow for us to do this deal. But, again, we are maxed out. 

I guess what I am saying is that in today’s world our loan size 

is too small, and certainly those two examples are some of America’s—— 

Senator VITTER. Just to take those two examples, is there a huge 

need there specifically because of the credit crunch in this recession? Or would there be that need under more normal times? 

Mr. FRUGE. I think there would be that need always, obviously 

because we did these loans before the credit crunch, but even more 

so today. I mean, banks’ credit has tightened. There are many 

banks that are not looking for new deals. They are certainly not 

looking for conventional deals in higher-risk industry like the restaurant business, you know, like the commercial offshore oil and 

gas vessel business. So they need our assistance, and we cannot do 

that for them if we cannot make a larger loan. 

You know, I think repeat business in any business is what you 

look for, and we would like to be able to accommodate those customers, particularly those that have a history of paying us. 

Senator VITTER. Just in your business, what percentage of the 

504 activity do you think is ‘‘rural’’? And do you know what sort 

of positive impact it would be specifically to move to the USDA definition, which most people seem to think is more accurate? 

Mr. FRUGE. I could not give you a percentage. If I had to guess, 

it would probably be somewhere along the lines of 20 percent, 

maybe 25 percent. But, yes, I mean, it would help us to be able to 

meet that SBA public policy goal, which would then allow us to 

make from $1.5 million to a $2 million loan. 

I am trying to think of an example of who we had, and it is not 

that important. I am just in my own mind. But I do know that the 

definition that we use today of what defines a rural area is a lot 

more cumbersome than that that the USDA uses, and it would benefit us. 

Senator VITTER. Does anyone else have any comments to those 

same topics or questions? 

Mr. MILLS. If we could also hear from Jean, who is also here representing the 504 loans. 

Ms. WOJTOWICZ. Thank you, and actually a wonderful segue as 

we look at that rural definition specifically, and my CDC is in Indiana. And I would say probably 40 percent of our portfolio is in 

rural areas. 

As we look at the potential to go to the USDA definition, if nothing else, it gets rid of some of the confusion. What is so difficult 

when we work with our bank partners to provide solutions to small 

businesses is when you have multiple programs that all have different definitions. Something like ‘‘rural’’ should be a pretty standard definition, and we certainly think going to the USDA definition 
18 

would eliminate some of the confusion and make it easier to market and to provide that assistance to small businesses. 

A couple of other points I just wanted to make on these topics, 

both specific to the Recovery Act provisions as well as the reauthorization. 

First, let me say we are so hopeful that we will get a reauthorization bill this year. We have many improvements suggested in 

our draft legislation that we think would be significant assistance 

to small businesses, knowing, again, that small businesses are 

going to drive that recovery. And in our case, because the 504 program is specifically an economic development program, we track 

jobs, we actually over the period of this program have created over 

2 million jobs. That is huge. All we hear about are job losses, and 

this program actually tracks and verifies employment increases 

that have occurred as a result of the financing that we provide to 

those small businesses. 

As we look at the Recovery Act provisions specifically, we are 

very concerned that with the fee relief that we expect to run out 

before the end of the calendar year, we are going to see a significant drop-off. These businesses are kind of stepping out, willing to 

take some additional risk as they expand their businesses, and the 

fee relief has really helped them gain some confidence to go forward. Difficult to give them fee relief on the one hand when today, 

October 1st, we are hitting them with an increase in fees because 

of the subsidy rate. 

So if there is consideration at the appropriation level to actually 

get some funds appropriated to extend fee relief, we would certainly like to see that coupled with an appropriation to cover that 

increased subsidy cost, at least temporarily until we get this recovery on a little more stable footing. 

The other item I would like to mention—and we have had a lot 

of difference here about it—is the possibility of increasing the loan 

size. As Andre pointed out with some very good examples—and 

every 504 company you would talk to would have more examples 

in their portfolio—it is not so much that we want to go out and do 

the next very large single plant expansion. Those are nice. But the 

real benefit of our program is that we have multiple expansions in 

multiple communities that do not have the kind of risk associated 

with a single plant expansion for those communities. 

So I have a borrower that is in the cheesecake manufacturing 

business. I have done four loans for them. I cannot do their fifth 

and sixth. And because it is fairly specialized equipment, lenders 

are not very interested in continuing to help them expand. They 

are a very large employer in a very small community. 

So we have lots of anecdotal stories about why the larger loan 

size would be important to this part of the business. 

We also think there are some opportunities to not only allow borrowers to access the maximum amount of 504 lending, but separate 

and apart access the maximum 7(a) participation. We should not 

have to aggregate those to have a single loan limit when there are 

very different needs and uses for those capitals. Growing businesses obviously have growing working capital needs as well, and 

we need to help those businesses continue to expand. 
19 

As we have studied business ownership in this country, we also 

know that there are going to be even more business ownership 

changes occurring over the next decade. We would like to see in the 

504 business the expansion to be able to finance stock purchases 

where the stock prices are supported by specific fixed assets. It just 

makes sense to give businesses the flexibility to structure a transaction that makes the most sense for them in the way that they 

need to structure their business for long-term benefit. 

Mr. MILLS. Jean, I want to also include a conversation about the 

child care lending program, but before we do that, one question we 

have is: Is there a dollar amount on the higher loan limit that you 

want to recommend? 

Ms. WOJTOWICZ. We think a $5 million limit on the normal debenture makes sense, and then with appropriate increases for public policy and manufacturing that we have had in the past. 

Mr. MILLS. So you can wrap up, and then we are going to turn 

to Joan to discuss the child care lending pilot program. 

Ms. WOJTOWICZ. That would be fine. I did want to comment; 

there were some discussions about higher default rates perhaps in 

larger 504 loans. I think if you really dig down and look at some 

of the specifics there, a 7(a) loan is liquidated and collected by the 

local lender, feet on the street, access to information, and we think 

that has a huge effect on what your recovery rates are. 

In the 504 business, we are relying on the central liquidation efforts of the SBA, which are doing a great job. But we in our legislative package have asked that CDCs actually not only have the opportunity but be required to be active in that liquidation process. 

I certainly have a better idea of how to collect that loan down 

the street than somebody half a country away. Coupled with I cannot liquidate a loan if I do not have access to information. And once 

a loan is repurchased in the 504 business, our access to that data 

is gone. 

So if I wrestle a borrower to get a payment or if I find a buyer 

for that piece of equipment or that real estate, I cannot even get 

him a payoff number that day. It may take multiple days. And so 

our legislation requires—it has a recommendation that we require 

that that loan accounting continue to be done through the central 

servicing agent so that I can pull it up at midnight if I need to, 

if I am negotiating on a sale of fixed assets. 

Mr. WILKINSON. Thank you. And we have now been joined by the 

Chair, Senator Landrieu. We are going to start with going to Joan 

to discuss the child care lending pilot, and if you can do that, and 

then we will turn it to Senator Landrieu. 

Ms. WASSER GISH. Thank you, and good morning. I want to 

thank Chairwoman Landrieu, Ranking Member Snowe, Senator 

Kerry, and Senator Vitter for the opportunity to make the case for 

inclusion of the child care lending pilot program in the SBA reauthorization bill. 

My name is Joan Wasser Gish, and I come from a family of small 

business owners, and I own and operate my own small business 

known as Policy Progress. I am also an attorney and a former senior product adviser to Senator Kerry, and that is basically why I 

am here. 
20 

While working with Senator Kerry, I spearheaded a child care 

small business initiative. We assembled a statewide advisory committee, which included representatives of the small business community. These were the U.S. Small Business Administration’s Massachusetts District, the Massachusetts Small Business Development Centers, Massachusetts Association of Community Development Corporations, Seed Corporation, the Center for Women and 

Enterprise, lenders such as ACCION USA, and the Western Massachusetts Enterprise Fund. 

The advisory committee also included a cross-section of stakeholders in the early education or child care industry. These representatives reflected the array of service delivery providers spanning the economic sectors: sole proprietor home-based child care 

providers, for-profit centers, and also nonprofit providers. 

Senator Kerry charged this group with making recommendations 

to better connect entrepreneurial resources with child care providers, many of whom are women and minority business owners, 

in order to strengthen the local economy and improve the overall 

quality of child care programs. 

One of the central conclusions reached by this advisory committee was the dearth of lending and other financial resources 

available to nonprofit child care centers, which disproportionately 

serve low-income children while their parents or guardians are 

working. Nonprofits, even during times of free-flowing credit, have 

barriers to accessing loans through traditional lending institutions. 

They operate on slim financial margins and often lack the capacity 

to make a sizable downpayment for capital investments. 

Advisory committee members noted that this lack of access to 

capital had broader economic implications because of the direct relationship between child care, economic growth, community development, and work availability and productivity. It was the recommendation of this committee that Congress extend the 504 loan 

guarantee program to nonprofit child care facilities, which is the 

purpose of the child care lending pilot program. 

This program is consistent with the purposes of the 504 loan 

guarantee program because it meets three core goals: 

First, it helps to maintain and strengthen the overall economy. 

Nonprofits comprise 35 percent of all child care establishments 

with employees and provide care that allows millions of parents to 

work in our Nation’s 6 million small businesses with employees. In 

Louisiana, for example, the child care services sector cares for the 

children of 136,000 working parents. 

Second, it supports community development. Nonprofit child care 

centers typically locate in low-income urban and rural areas. In 

many communities they are the sole source of center-based early 

education and care. They play a vital role in helping low- and moderate-income workers participate in the labor force. In Massachusetts, for example, where I am from, 90 percent of subsidized child 

care purchased by the State is from nonprofit providers, and in 

York County, Maine, about half of all subsidized child care is provided through nonprofits. 

Thirdly, nonprofit child care centers promote job creation, worker 

productivity, and job retention. Nonprofits, as I mentioned, comprise 35 percent of all firms that hire, but they actually hire dis-
21 

proportionately 50 percent of all child care workers. The Bureau of 

Labor Statistics seasonally adjusted employment numbers are 

turning upwards since June of 2009 and are significantly exceeding 

hiring levels in both 2006 and 2007. Job growth in the industry is 

projected to be 21⁄2 times that of the national rate. 

In regards to worker productivity, it is estimated that break- downs in child care arrangements cost American businesses $3 billion annually. Studies have shown that availability of quality child 

care can reduce employee turnover by 37 to 60 percent. They also 

reduce absenteeism, tardiness, and enhance productivity. Moreover, 

child care is a needed corollary to economic recovery. Parents cannot work or look for work without child care for their children. 

These benefits accrue across the Nation, and so as this reauthorization bill is considered, I respectfully recommend that you remove 

the limitations for eligibility to the 18 States represented on this 

Committee and instead allow the 7-percent cap on loans and other 

lending criteria to more appropriately limit the pool of eligible entities. 

In general, thanks to the able work of this Committee, there are 

numerous safeguards in place to ensure that the integrity and purpose of the 504 loan guarantee program is preserved through the 

child care lending pilot program. And with these safeguards in 

place, I respectfully urge the inclusion of the child care lending 

pilot program in the SBA reauthorization bill, and I welcome any 

questions that you might have. 

Chair LANDRIEU. Thank you so very much for that wonderful 

presentation, and I thank all of you for joining us today. I apologize. I was chairing another meeting earlier this morning, so I was 

just available to get here at 11:00. I really appreciate the staff and 

the good work of Ed Mills and Kevin Wheeler for leading this discussion. I thank Senator Vitter for coming, and I understand Senator Risch was here as well, and I really thank you all. And, particularly, it is wonderful to see you, Andre. I know Senator Vitter 

introduced you already. And also, Ray, I understand you are a Louisiana Tech graduate. 

Mr. MONCRIEF. I am, Senator. 

Chair LANDRIEU. Good. So we are going to adopt you anyway, 

even though you are from Kentucky. 

[Laughter.] 

Or you are now in Kentucky. I just want to say how important 

the reauthorization of these lending programs is. We have been delayed for several years in their official reauthorization. They are 

ongoing programs that are generally broadly supported. But, obviously, there are some issues because we have been unable to resolve getting them reauthorized. This roundtable is part of an effort to really flesh out what some of those obstacles or challenges 

might be, as well as to hear from you all broadly about how they 

can be strengthened. 

I know that Administrator Mills and President Obama and his 

Administration feel very, very, very strongly about strengthening 

access to capital for small business in America. And while I do not 

speak directly for the President, or for the Administrator, I will 

speak for myself—and I have heard them say basically the same— 

the recession we are all painfully experiencing will be brought to 
22 

an end when small businesses can step up and start hiring, because it is going to be the small, innovative entrepreneurs. And so 

getting access to capital and to financing is critical. It is critical 

year in and year out, but it is very, very critical now. Through the 

programs of the SBA, we think that we play a significant—not controlling, but a significant role in that. 

That is why we are spending some time reviewing possible 

changes. I know that Kevin and Ed have led a very robust discussion, so I do not want to interrupt it, and we will be able to stay 

for a few minutes more before having to leave for another meeting. 

Let me sit back and listen to questions and comments, and I 

think maybe we will continue on the subject that we are now visiting. Thank you all so much. I will submit my full statement for 

the record. 

[The prepared statement of Chair Landrieu follows:] 
23 
24 
25 
26 
27 

Mr. MILLS. If we could do some questions on the child care lending program. Do you know—if I could ask this to Joan as well as 

the Eric—if the SBA allows any other nonprofits to receive loans? 

Ms. WASSER GISH. Do you want to take that? 

Mr. ZARNIKOW. I do not believe that SBA does lending to nonprofit organizations other than potentially in our disaster loan program. 

Mr. MILLS. How about the intermediaries in the micro loan program? 

Mr. ZARNIKOW. We do make loans to nonprofit intermediaries as 

part of the micro loan program, so that is sort of a fundamental 

piece of that program as our delivery mechanism is through nonprofit micro loan intermediaries. 

Mr. MILLS. And then do we know if there has been a CBO scoring on this provision? 

Ms. WASSER GISH. There has. CBO has scored it at nothing. 

Mr. MILLS. You know, we have some 504 lenders here, and, obviously, this pilot could have an impact on your program. Could we 

get some comments from you in terms of your kind of—— 

Ms. WOJTOWICZ. We have reviewed the language that was put 

into a couple of the prior reauthorization bills, and as an industry, 

we would certainly have no objection to the pilot as it is proposed. 

Ms. WHEELER. May I just add for the record, in fact, we worked 

very closely with NADCO to address any underwriting concerns so 

that it would have all the integrity of the regular loans. Senator 

Kerry has not reintroduced the bill, but it is my understanding 

that he would retain all of those protections. 

Joan, could you please state again for the record what the need 

is for child care in states like Louisiana and Massachusetts and 

how the 504 program helps address access to quality child care? 

Ms. WASSER GISH. Sure. Thank you. Fundamentally, within the 

child care industry, there is a need for both for-profits and nonprofits to serve countless numbers of children who are waiting, and 

there are certain States that maintain wait lists that effectively try 

to capture what the gap is between supply and demand. 

In Massachusetts today, there are 20,698 children on a waiting 

list in Massachusetts. In Maine, it is estimated that only one child 

care slot is available for every four children who need it so that a 

parent can work. And according to the American Community Survey of the U.S. Census Bureau, we are able to get sort of a rough 

estimate. We know, for example, that there is a gap of about 

250,000 between the number of children who we believe are in 

need of care and the availability both—across all sectors in the 

child care industry. In New York, that gap is about 166,000. In 

Louisiana, the gap is more than 30,000 children who are in need 

of space. And in South Dakota, the gap is about 3,800 children. 

So we know that undoubtedly there is pent-up demand, and if 

that demand continues, the real challenge is that families are having a harder and harder time purchasing it. And both for- and nonprofits are going to play a very important role in supporting families in heading back to work. 

Chair LANDRIEU. Joan, let me ask you this, because I have been 

on this Committee for quite some time and now chairing it, I am 

interested in this discussion. Is there some fundamental reason 
28 

why the SBA has not traditionally lent to nonprofits? Is it just the 

nature of the way the agency was created and we are making a 

reach here? Does anybody know? 

Kevin. 

Ms. WHEELER. Well, SBA’s regulations define small business as 

a for-profit business, but as was noted, there is precedent for doing 

it. In the disaster loan program, they do it, and in the micro loan 

program, there is a program that was put in place for welfare-towork which said that micro loans could go to nonprofit child care 

providers. So it was not only to the intermediaries, to expand upon 

what Eric said; it was specifically for child care providers. 

And this issue first came to the Committee in about 2000. A 504 

lender from Texas named Julie Cripe, I believe—I do not know if 

she is still with OMNIBANK—brought this to us. It was the only 

way that they could get financing for a child care center in an African American community in Houston. A church would do it. And 

we went to the SBA, and it was not allowed. Years later Senator 

Kerry did a study in Massachusetts that identified a need for capital to child care centers, and the committee has been working on 

this bill since 2002. 

Chair LANDRIEU. I want to say I think it is a very smart idea, 

and I would argue to my colleagues, both Democrats and Republicans, that using the entrepreneurialship model more for trying to 

have Government programs be successful is something that I think 

both parties actually really can support. Republicans—and I am 

not going to speak for them, they speak for themselves—but they 

generally want things to be more efficient, more business-oriented, 

and Democrats like the idea of reaching out and getting the job 

done. 

I would like to really pursue this, and I would love to talk with 

Senator Snowe about it—and also the particular business of 

daycare—because it supports and undergirds small business everywhere. Many business owners and their employees are parents, 

whether they are the wife or the husband, and they cannot do a 

real good job at their business if they do not have quality daycare. 

I think from that perspective, I would love to hear some feedback. The other thing that is coming up to be a big issue here in 

Washington is this whole new focus of social entrepreneurship. The 

President is very focused—and it is really very bipartisan as well— 

on this whole new concept of social entrepreneurship. There are 

business models that are being directed to solving major social 

problems, but in a different way than government-run programs— 

you run them more through a business model. It is attracting a lot 

of broad-based support around the country, and in thinking about 

it, the SBA is in a potentially good neutral position because we are 

not the Department of Health or the Department of Agriculture. 

We are a neutral agency in that regard. Matt, has Senator Snowe 

ever made any general recommendations or suggestions to you? 

Mr. WALKER. We have not yet. We still want to find out a little 

bit more about the public policy considerations that may have been 

in place at the time it was originally formulated. Certainly one can 

envision concerns of the Federal Government getting into the aspects of what happens if there is a default on these loans. For instance, if the Federal Government would now be in the position of 
29 

going into churches, to try to take over property that secured a 

loan. Similarly, if the loan was for the disabled or the blind or others, the perception behind that would certainly be a very serious 

public policy concern. 

So we just need to delve a little bit further into it to find out 

what those public policy concerns were when they initially did not 

allow nonprofits to participate in the program. And, Eric, I would 

be very interested to hear if you could find out a little bit more 

about that. 

Chair LANDRIEU. Okay. It would be definitely worth pursuing, 

and I think particularly this idea of nonprofits for daycare. But it 

could potentially be expanded. 

Do any of the lenders want to comment about this, either positively or negatively? Or do you have nonprofits coming in to see 

you regularly trying to solicit for loans and they are doing good 

work in the community, I am assuming? Go ahead. 

Mr. CLARKSON. Yes. We actually as a full service bank—thank 

you for asking. We do look at all types of businesses, for-profit, 

nonprofit, and I think it gets back to an earlier point of giving the 

small businesses choices. And if we have limited a small business 

based on their profit status, then we have limited their access to 

capital. So the more choices that we have, the more ability we will 

have to reach into the industry and being able to make specific 

loans to specific borrowing needs. 

Chair LANDRIEU. Greg, you are absolutely right. From a banker’s 

perspective, if you can make money on the loan—that is the bottom 

line. You are going to lend to a creditworthy for-profit or not-forprofit. It would be interesting to get—I do not know if the staff has 

the employment numbers for nonprofits. It is a huge employer in 

America. When Americans look at jobs, if they can work for a nonprofit as a good job, they can for a for-profit company as a good job, 

and perhaps we should be in our reauthorization thinking a little 

bit more broadly about this. The bottom line is about choice, freedom, jobs, and that is what we want to stay focused on. 

Anybody else? Any other lenders who have a similar or maybe 

different perspective? This would be a great time to speak up or 

hold your piece. 

[No response.] 

All right. 

Mr. MILLS. I think at this time we would like to move on to the 

intermediary lending pilot program. We have Dennis West here regarding this issue. This is a proposal that has been put forth by 

Senator Levin for several years now. It has passed the Committee 

at least twice. It is set up to fill the gap between the maximum 

loan amount that a micro loan lender is allowed to do, which is 

right now at $35,000, and below the level that a typical 7(a) lender 

might be able to do. It would provide grants to intermediaries and 

have that paid back at 1 percent over a number of years. 

At this time I would like to turn it over to Dennis for a little bit 

better description and some thoughts. 

Mr. WEST. Okay. Thank you very much. To think about the context of how we brought this proposal to Senator Levin, when we 

think about rural places generally, the Global Entrepreneurship 

Monitor suggests that about 11 percent of Americans have the atti-
30 

tude and aptitude to run a business. And as we are trying to develop our rural economies, it is important that we try to get as 

many of that minority who possibly can start a business to be oriented towards starting a business, because as you are quite aware, 

we have a lot of challenges in terms of maintaining and growing 

small businesses in many of our rural communities. 

So the way that we try to think about this is that we are involved in the character lending process. We are typically dealing 

with people who often have cash deficiencies, collateral deficiencies, 

and we are focusing on—and sometimes credit challenges, and the 

credit challenges come from being in rural communities where it is 

sometimes hard to maintain quality jobs. 

So we are working in that space of trying to help build a bridge 

to our community banks. So our portfolio of micro loans has a lot 

of churn in it. We would typically see our loans go out maybe 3 to 

5 years, at which time it is in our interest to work with our borrower to get them into a community bank. 

When we started working with Senator Levin, the problem we 

were trying to solve was that sometimes the start-ups that we are 

trying to build upon are larger in need for equipment or value than 

what would be available in the micro loan program. So we propose 

building this second tier which would solve two problems: either 

the capital requirement or the capital and time requirement that 

would associate with getting someone to their community bank. 

So sometimes it is a matter that you have got to introduce more 

capital or have more capital to work patiently with the customer 

to be able to get to a community banking relationship. 

An example that I can tell you about is a small business that 

was purchased in a community in Upper Peninsula. It is a chiropractor business, so it was taken from a man who is retiring to a 

new person. The new person who is buying the business was not 

in a position to be able to go to a conventional bank because of student loans, and so we are in a position to help get that business 

to stay in this community and help this person get started and 

grow. 

Another example is a gun sight manufacturer, also in the Upper 

Peninsula. In this case, the gentleman was maxed out with their 

community bank, had a chance to get a large contract from an 

OEM, and needed equipment to improve processes so that the quality would meet the standards of the OEM. So he needed to make 

an equipment purchase. So it is above the micro loan limits. It is 

in that space that is important because of other credit issues. And 

it helps takes someone who has got 20 jobs with benefits and helps 

them to be able to grow that business and to be in a position to 

work with a substantial OEM. 

So Senator Levin was helping us to think about that space of 

working with start-ups, and the big question is more capital and 

more time that are sometimes required to be able to work with 

intermediaries. 

The idea was modeled after the very successful intermediary relending program that has been done through the USDA. That program has done about $1 billion and has had no defaults. So it is 

a successful model off of which to build. 
31 

In this case, how would this proposal be different from the USDA 

program? Well, first of all, the USDA program is limited to rural 

places, so this would be a program that would open up to more 

communities throughout America who are involved in the micro 

lending program. The USDA program is highly targeted, so you get 

additional points for limiting the number of counties in which you 

work. So as we are trying to work in 44 rural counties through 

northern rural Michigan, when we go in and we get an intermediary relending program through USDA, we have to limit the 

number of counties in which we can work. So that makes us unavailable to many of the people that we would be trying to work 

with. 

The third challenge with the IRP program is it is dramatically 

oversubscribed, and it has about 33 million a year that is available 

to help grow the credit and capital needs that we are looking at. 

It was an important piece. 

So what Senator Levin helped us propose is a program that 

solves capital issues, solve capital and time issues, and serves as 

a bridge to be able to work further with community banks. 

Mr. MILLS. Thanks, and I would like to start with Senator 

Snowe’s staff. Any questions? 

Mr. LUCAS. Thank you. I had a couple of questions. One of the 

things that Associate Administrator Zarnikow pointed out was that 

the average 7(a) loan is around $200,000, so actually we are talking about small loans. When we consider standing up a new program, what is the interplay going to be between a micro lender program that is a little bit larger that might actually stray into the 

7(a) space? I wondered if I could get your thoughts on this and 

what the interplay would be with the 7(a) program. 

Mr. ZARNIKOW. Well, as you mentioned, our average 7(a) loan is 

a little over $200,000, and I think one of the things we would like 

to understand better or look at is what is that interplay with our 

regular 7(a) loan program. Is this replacing that, or is this really 

a market gap or need that is here? 

Now, I mentioned earlier today that I was really glad to be part 

of this roundtable to do a lot of listening to the new ideas and have 

a chance to go away and evaluate those. 

Mr. LUCAS. Excellent. Thank you. And maybe when we are finished—— 

Mr. MILLS. Dennis, did you have a response? 

Mr. LUCAS. Oh, I am sorry. 

Mr. WEST. Well, we would clearly see this as a market gap issue, 

and in some of our rural communities, there are not any lenders 

doing 7(a), is one issue, and we often find ourselves working with 

7(a) lenders as a complement where they see collateral challenges 

and things of that nature. 

Mr. WALKER. Just a quick follow-up on that as well, Eric, I would 

appreciate it, if you could also look at what the different requirements are for 7(a) as opposed to these. Obviously, different loan 

levels have different requirements in terms of what needs to be 

produced for paperwork, for oversight and for other requirements. 

We want to ensure that we have the information needed to limit 

potential defaults. 

Mr. ZARNIKOW. We would be glad to take a look at that. 
32 

Mr. WALKER. Thank you. 

Ms. WHEELER. And before I turn to Marianne, I want to ask one 

question of Dennis. Right now, I believe that the legislation as it 

was passed in the last two Congresses, makes CDCs, certified development companies, the 504 lenders who are here, eligible to 

apply for the pilot program as envisioned. Right? 

Mr. WEST. That is correct. 

Ms. WHEELER. Okay. 

Marianne. 

Ms. GARVIN. So I just wanted to add that in a market like Long 

Island, which is not rural, this program would be very valuable to 

me and other lenders. I have a very recent example. I just approved a loan yesterday for $150,000 to a minority-owned business, 

an attorney, who got a $1.2 million 7(a) loan to acquire and renovate the inside of a building in a low-mod census tract. But he 

also wanted to do a facade improvement, and so he came to me 

from my facade program, which is capitalized by a line of credit 

from one of my lender partners. 

Unfortunately, that lender partner and many of my lender partners are eliminating loans to CDC of Long Island, reducing our 

lines of credit, which is also happening in the wider environment 

to for-profit businesses—and I am not-for-profit business. And so I 

just had $150,000 left, and that is it. My capital is gone, and I have 

no other place to get it except I am a CDFI so I get some money 

from Treasury. But I use most of that money for my residential 

lending programs, my second mortgages, my downpayment assistance, my rehab lending to home buyers or homeowners. 

And so when I look at the range of products that I try to offer 

in my community development lending operation, I need more options to kind of mix and match and offer the products that are 

needed for the businesses that are coming to me and have that 

need, and it is primarily targeted to the low-mod census tracts. 

So I just want to put in a plug that this would be valuable for 

perhaps more reasons than you might think. 

Mr. MILLS. Thank you. And in the interest of trying to get back 

onto schedule, I would like to move the conversation to lender oversight. To lead off this conversation, I am going to call on the IG’s 

office, Glenn Harris. 

Mr. HARRIS. Okay. Thank you. Well, I think on the issue of lender oversight, you have to sort of put it a little bit in perspective, 

and I think the agency has made a lot of progress in developing 

a lender oversight program. The IG’s office had a management 

challenge, which went back to 2002, to the agency to establish a 

lender oversight program. 

Since then, as I said, I think they have made a lot of progress. 

They have established an Office of Lender Oversight, now called 

Office of Credit Risk Management. They have gotten issued enforcement regulations which will help their ability to undertake enforcement actions. They have established standard operating procedures and other procedures to be able to implement the lender 

oversight process. So I do think the agency has made a lot of 

progress. 

Unfortunately, as is often the case at SBA, progress also brings 

its new set of challenges. We still have a management challenge on 
33 

this issue, and we have issued a lot of audit reports that have identified problems with the lender oversight process. 

One concern for us is, frankly, whether there is a conflict of interest between the Office of Credit Risk Management and whether 

that should be properly placed within the Office of Capital Access, 

where OCA has a goal of trying to promote loan growth, which is 

a laudable goal. But does that present a conflict in terms of having 

an effective oversight program? 

You know, I think the issue of oversight also has to be looked at 

in terms of the overall sort of the way the program works. I think 

there are three components that we see in the IG’s office to this. 

One, is there a clear set of requirements that lenders are expected to adhere to? 

Secondly, is there a process at SBA to effectively oversee whether 

lenders are, in fact, adhering to those requirements? 

And, third, is there an accountability program that is fair and 

reasonable but also effective at trying to identify lender oversight 

problems? 

And I think you could look at all three of these areas in the lender oversight arena and identify challenges that continue to exist. 

I think SBA could do a better job at promoting what the requirements are. You have got SOP 5010. Eric has done a considerable 

amount of work in trying to clarify that SOP and improve that 

SOP. It is still an extremely large document, and if that is the set 

of requirements that lenders are expected to adhere to, then do 

they fully understand what all the requirements are? Are they 

using technology, for example, to be able to clarify what is expected 

of the lenders? 

For example, having the SOP, it is online, but is it as—you 

know, does it provide as much information to the lenders as it 

could? 

We do think that SBA could be doing more in its lender oversight 

program. This is reflected in our audit reports. Some of the problems are, I think, sort of a growing pain as they evaluate the 

progress that they have made. They have sort of taken a one-sizefits-all approach. If you are a lender over a certain dollar Mauritania, you are going to have on-site reviews. There is considerable 

emphasis on the risk rating system in LLMS, and obviously lenders 

have come up with, identified a number of concerns they have with 

that program. 

I think what we would like to see is the agency to develop a more 

what I consider a holistic approach to lender enforcement. For example, look at a wide range of variables, of risk factors, and have 

an engagement program that is targeted towards higher-risk lenders. So if you are a lender that is performing well against this matrix of risk variables, maybe you would have less frequent on-site 

reviews, for example. Maybe you would have some kind of desk review or compliance reviews that would not necessarily be as expensive, would not necessarily be the same type of review that you 

might get if you were a riskier lender. 

Looking at the legislation, I have only had a little bit of time to 

look at it. I would appreciate the opportunity to be able to sit down 

with the congressional staff at some point to maybe go over some 

sort of more granular concerns we have. 
34 

But just one general point is I think we need to be careful about 

in legislation not tying SBA’s hands in a way that produces unintended consequences. I think they need to have that discretion and 

flexibility in how they implement the program so that they are 

looking at a variety of risks and have a variety of options to be able 

to address those risks. 

Mr. MILLS. Sure. Thank you. Glenn—one thing that comes up a 

lot is the concern about the reversals of repurchases years after the 

fact. There have been some proposals out there on whether or not 

there should be some sort of statute of limitations. When this has 

come up in the past, my understanding is that U.S. Code provides 

a 6-year statute of limitations, and it can be extended beyond that 

for 3 years. It is always a question of when does it start, when does 

it end. 

Could you give me some clarification as to exactly how that 

works? 

Mr. HARRIS. Sure. First of all, in the IG’s office, we do understand why lenders would be concerned if SBA has made a decision 

on a guarantee purchase request, and then there is an audit, and 

a length of time—and sometimes a considerable length of time— 

passes, and now all of a sudden they are being told that there were 

problems with the loan. 

Obviously, we understand why lenders would be concerned about 

that. But I think we have to put this a little bit in perspective, and 

that is—and our audits have identified a number of concerns with 

the quality of the guarantee purchase review process. This is another management challenge that we have, and there are a number 

of concerns as to whether those decisions are being made properly, 

whether the Herndon center is adequately staffed, whether that 

staff is adequately trained. 

And I think that from our mission, you know, it is our job to 

identify when the Government—when SBA has made a payment 

that is improper, and if there is an improper payment that has 

been made, that reflects—that is money that the taxpayers are 

paying in a credit subsidy process, or that is money that is going 

to be reflected in higher fees that are charged in a zero subsidy situation. 

So I guess just to be very quick on this, there is a statute of limitations in 28 U.S.C. which provides for 6 years for the Government 

to go and recover a claim. We would be very concerned about a proposal that somehow gave 7(a) lenders an exemption from that statute to say there was some kind of shorter period so that if an IG 

audit discovered that there was an improper payment or if there 

was fraud in a loan, that somehow we would be prevented from 

going forward with an audit to identify that improper payment or 

going forward with a criminal investigation to be able to prosecute 

that fraud. 

Mr. MILLS. Thanks, and I know that earlier Tony Wilkinson 

started off some of the conversation on lender oversight, so I wanted to turn to him and hear some of his comments. 

Mr. WILKINSON. Okay. I appreciate that. You know, I think there 

are a lot of issues that surround the lender oversight program. We 

clearly have been critics of what is going on. We are not convinced 

that the lender oversight program is efficient or cost effective, and 
35 

we continue to have concerns about post-purchase reviews that are 

happening years, some of them 11 to 13 years. And I do not see 

where it is a lender’s fault if the SBA was inadequately staffed or 

trained or that the IG decided not to get around to looking at files 

for—— 

Mr. MILLS. Can I just interrupt you? Glenn, can you explain how, 

if it is 12, 13 years after, how that actually happens? We just discussed that there was a 6-year statute of limitations. How does 

that happen? 

Mr. HARRIS. Well, I mean, I think that if SBA tried to enforce 

a claim—in other words, tried to go after a lender to recover a 

guarantee payment 13 years after the fact, I think that would be 

barred by the statute of limitations. 

Now, in terms of—sometimes we do audit, and we have recommendations that say try to recover the money. Sometimes the 

recommendations are to improve the process so that these mistakes 

do not occur. 

Mr. MILLS. Tony, in your experience, those claims 13 years later, 

have those been paid, or have those—what has been the experience? 

Mr. WILKINSON. Well, first of all, those files are typically gone, 

so that the lenders—I am hearing this through the lenders’ counsel, and I do not know how those have been finally resolved. I try 

my best not to get into individual cases and try to stay at the policy 

level. 

Mr. MILLS. That is good. 

Mr. WILKINSON. But when I am hearing from a lender that, wow, 

I am being asked for a file that was paid 11 years ago, that is an 

issue. And I think we need to understand that these kinds of 

things are what is driving lenders away from the program. So that 

we get a guarantee paid, how good was the payment? Are we going 

to have to sit here and wait for years and years and years before 

somebody comes and says, okay, well, we are going to look at this 

again? And that is having a significant impact on lender participation. 

Mr. MILLS. What type of impact? You say ‘‘significant.’’ Can you 

give us some examples? 

Mr. WILKINSON. There have been lenders leave the program due 

to extended post-purchase reviews where they have been asked to 

repay claims that they felt like was unreasonable, not timely, and, 

you know, when they write their check, they close their SBA Department. 

Mr. MILLS. And to be clear, obviously no one wants a claim to 

be paid if there was fraud involved. 

Mr. WILKINSON. Absolutely. 

Mr. MILLS. How do we draw the line to ensure that when there 

is fraud involved, the U.S. Government gets the claim paid and the 

money comes back? 

Mr. WILKINSON. There needs to be a time certain that when that 

passes, it is over. Three years ought to be sufficient for everybody 

to get all the audits done that they want to get done. 

Mr. MILLS. Why should they have 3 years when the regular code 

is 6 years? 
36 

Mr. WILKINSON. I believe it is 6 years from the last time they 

took an action, so 6 becomes 9. All of a sudden you are out there 

too far. And the OCC, I believe our file retention requirements in 

the banking world is 5 years. 

Mr. MILLS. Glenn. 

Mr. HARRIS. If I could just briefly respond to that, in the IG’s office—I just want to make it clear—we do not make management 

decisions. We do not make the decision to go after a lender to repay 

a guarantee. We make recommendations. And, frankly, it is not unusual, if we make a recommendation to try to recover a guarantee 

on a loan that is 6 or 7 years old, that the agency comes back and 

says we do not think it is enforceable and we are not going to proceed. And there have been a number of instances where that has 

occurred. That would be point one. 

Point two is I think, again, you have to look at the context. I 

know that a lot of the lender complaints have arisen from some of 

the audits we did recently. Those audits were looking at a backlog 

of thousands and thousands of loan files at the Herndon center 

that the agency was not processing. 

Again, to give credit to Eric and his predecessor, they have made 

a serious attempt to try to reduce that backlog. But—— 

Mr. MILLS. Do we know where the backlog is currently? The argument is that there was a spike because they are finally working 

through the backlog. 

Mr. HARRIS. It is a one-time—I think it is a one-time, hopefully 

a one-time occurrence and that is not likely repeated, to have these 

loans that are 10 or 13 years old. I agree with you on that. 

Mr. WILKINSON. That probably is the case. But I think we need 

to make sure—there are two separate discussions here. There is 

the post-purchase reviews. Then there is the oversight system that 

we question—— 

Mr. MILLS. Does someone want to talk about the oversight system? 

Greg. 

Mr. CLARKSON. I can. As a lender, I want effective lender oversight. I think effective lender oversight is extremely important. 

Then the question comes in: What constitutes an effective lender 

oversight program? And for me, what I would like is when I am 

examined, whether it is off site or on site, I have some reasonable 

feedback that allows me to improve my process to the point that 

I can continue to ensure that my guarantee is good, because if I 

am relying upon my guarantee, then I need to make sure that 

when I talk to my executive committee, my board, I can say with 

certainty, yes, that guarantee is good. 

Just back to Mr. Harris’ point quickly, I am the one as a lender 

that is now being asked to bear the brunt of those lags in purchase 

times, and if it was a documentation error versus a fraud, you 

know, or I did not provide sufficient documentation, then my files 

are somewhere else. So I am having to recreate something that 

should have been looked at, should have been reviewed at the time 

that that purchase was being taken care of. 

But as I go back into effective lender oversight, I think that if 

the SBA can use a system, can develop a system—they already 

have the information on my lending activity, my historical perform-
37 

ance, plus where I am lending now, they can see if there are any 

anomalies in my process and be able to address those with me directly in a timely manner. 

And then, also, one of the things that concerns me as far as effective lender oversight is the impact on the thousand new lenders 

that we have coming into the program who need to have the ability 

and the opportunity to have somebody in the SBA review their 

work and have the ability to say that their guarantees are good 

and that it is something that they can rely upon and grow their 

program, sustain their program, and can do it in a cost-effective 

manner. Right now I am not convinced that the current structure 

of the lender oversight program accomplishes those objectives. 

Ms. WHEELER. I have a question. In the interest of attracting 

lenders to the program, I spoke to the Department of Commerce’s 

Minority Business Development officers, and they said they were 

specifically having a hard time putting their clients into loans because when they tried to use the SBA products, many lenders told 

them they would not get into it because of the repurchase problems. 

So we are looking for balance here. I do not hear the lenders saying they do not want oversight. We all want effective oversight, but 

it has come back to this quality of staff. We saw it with the BLX 

fraud. The audit that came back said the reviewers in Herndon 

were not adequately trained, and they were often approving repurchases and honors on guarantees that they should not have. 

Is that under control? It seems unfair that a lender has to go 

back and give back money when it was actually a poor decision at 

the SBA staff level. It seems like the easiest way to solve this is 

to have better training. Have we made improvements on that? 

Mr. ZARNIKOW. If I could address—there are sort of three sets of 

issues that I think are going on here. One is what is happening at 

Herndon and guaranteed purchase reviews. You have sort of the 

oversight, both on site and off site, and how was that managed. 

And then you have sort of the structural issue of where does oversight reside within SBA. So let me kind of talk to those three 

pieces. 

As the head of Capital Access, you know, my view is have a responsibility to run effective programs. Our programs are intended 

to help get access to capital for small businesses, so we are interested in getting capital out. But I am also very concerned about the 

integrity of our programs and managing the long-term integrity, 

because if we do not have integrity in our programs, we will not 

have programs. So I am very focused also on appropriate oversight 

and appropriate risk management. 

In fact, as part of the Recovery Act, one of the things we implemented for the Recovery Act provisions is we developed risk management, risk mitigation plans for each of the sections of the Recovery Act. We embedded risk management in the teams that implemented the Recovery Act. And we put together plans to track 

how we are doing on risk management. Those were shared with the 

IG and really in a partnership with the IG to get their comments 

on those plans as well. 

So we do in the program office in Capital Access feel a very 

strong ownership to oversight as well as getting access to capital. 
38 

The issue with Herndon we have had is there was historically 

significant backlogs in Herndon. It was at a point where lenders— 

we were just taking a long time to pay lenders on prepurchase reviews. We were seeing that it was taking close to 280 days on average to pay lender claims. And we had a very large backlog of 

postpurchase reviews. 

The agency added significant staffing in Herndon. We did a complete reengineering of the process, and we attacked the backlogs. 

And I am glad to say at this point that, to a large extent, the 

postpurchase review backlogs have been dealt with. I am not saying they are completely done, but the big surge, if you will, or the 

big bubble has gone through, and the backlog we have there is 

much smaller. In addition, on the front end, we have redone our 

process so that if the lender sends a complete package in, we decision that package within 45 days at the center. 

We have also added and are staffing up a quality assurance function within the center to make sure that the reviews are being 

done properly and that our staff is trained appropriately, and we 

have a feedback process within the center to help assure that. I 

would not tell you that is completely done, but that has been a big 

effort as well to make sure we have the quality of the reviews. 

In some cases, in decisioning cases, it comes down to a question 

of judgment. Cases can be very complex, can be very unknown 

what really caused the loan to default, what were the factors. So 

there is clearly a judgmental part of reviewing cases where, if you 

give it to three people, you may get three very different judgments. 

So we have tried to make sure we have standards and controls in 

place to help evaluate that, and we have a process where those disagreements get adjudicated, if you will. 

So I think a lot of the problems with Herndon are behind us. I 

would not say it is completely solved, but there has been a huge 

effort by the agency, and we have made substantial improvement 

there. 

I would say, too, when we look at our repair and denial rate, it 

averages about 5 percent. So on a 7(a) guarantee, the repairs and 

denials are typically about 5 percent where there has been defects 

in what the lender did as they have gone through the process. 

As far as the oversight, we really have a system that is sort of 

a two-piece or three-piece system. One is we have what we call an 

off-site monitoring tool, which is basically a system that allows us 

to look at all of our lenders. So we have close to 5,000 lenders who 

have an SBA loan on our portfolio, and this tool really allows us 

to take those 5,000 lenders and narrow the focus of which are the 

riskiest lenders we believe to SBA to focus our oversight efforts on 

it, because it is very difficult to monitor 5,000 lenders and do onsite reviews and do effective monitoring. So the off-site monitoring 

tool really helps us focus our efforts on who do we think are the 

highest-risk lenders. 

We also have on-site reviews that we do for our largest-dollar 

lenders, and we also have a portfolio monitoring that we do that 

we monitor our overall portfolio metrics. So it is really kind of a 

three-tiered oversight system. 

I would agree with what Glenn said. I think there has been substantial improvements made in oversight, but I would also agree 
39 

there is more to do. And we look at it that this is an evolutionary 

process. We have substantially increased resources in the oversight 

area. We wanted with the on-site reviews to get sort of a baseline 

of what we were seeing with our lenders and then really look to 

see how do we evolve that process to be even more effective both 

from an oversight perspective and also from a cost perspective, so 

we continue to do that evolution. 

So it is something that I think is sort of an ongoing work in 

progress, but I think there has been huge improvements that have 

been made. 

Mr. MILLS. Thanks. Now I would like to turn to Senator Snowe’s 

staff. 

Mr. LUCAS. Thank you. I also wanted to point out that there is 

a GAO study in the works, and it was first requested by Senator 

Snowe and then Chairman Kerry and then Chair Landrieu was 

signed on, so that is one of those things where, hopefully when that 

comes out we will have a little bit more information, a little more 

knowledge, and that will help us with our decisionmaking process. 

Also, I had a quick question for Mr. Harris on the Recovery Act. 

When the guarantee was increased to 90 percent, one of the concerns was are you going to see an increase in fraud with all these 

funds going out. And I just wanted to check in and see. Have you 

seen an increase? If so, what strategies have you used? What is the 

general picture? 

Mr. HARRIS. It is too early to tell, frankly. You know, historically, 

when the guarantee rate was decreased, not so much fraud but we 

did see better performance in the programs. We do in the IG’s office have a concern with a lender with a 10-percent exposure as to 

whether they are going to exert a sufficient amount of due diligence. 

But at this point, in terms of the Recovery Act, it is really too 

early to tell. Fraud is basically a lagging indicator. Fraud is usually 

discovered after the loan defaults and the lender gets into it and 

finds out that the representations were inaccurate. So at this point, 

it is too early to tell. 

Mr. LUCAS. Thank you. 

Mr. MILLS. Great. Tony, did you want to make a final comment? 

Mr. WILKINSON. On lender oversight, I do think there have been 

substantial improvements out at Herndon. They really have 

worked hard, and that process is working a lot better. 

I did want to comment on the on-site and the off-site tools that 

SBA uses. It is something that the private sector now pays for, and 

we just do not see the benefit from that payment. 

We have issues with the on-site reviews where any lender with 

a portfolio of $10 million or over gets the exact identical same review. It cannot be statistically valid. It just cannot be. 

We hear stories from lenders who are in the same town in a big 

metroplex where their reviewers drive in, yet the other banks’ reviewers fly in because they need one more segment to get a lease 

status on airlines. Those kinds of things are totally unacceptable. 

And I would just like to—you know, again, I know the GAO review 

is out there, and we, too, want to see what it has to say. But there 

are issues like that that are just driving lenders from the program. 
40 

I know Eric says that the repair and denial rate is 5 percent. 

Well, 5 percent is a big number. The repair and denial rate used 

to be 0.5 percent. So basically what we are telling lenders is our 

guarantee is only 95 percent good today. And a lot of lenders find 

that unacceptable. 

And, yes, we have got a thousand new lenders who made loans 

under stimulus. We lost a lot of lenders who were making a hundred loans, and it is going to take a thousand lenders to, you know, 

make that back up. 

So I think we have to have oversight. It has got to be effective. 

It needs to be efficient. It needs to do its job. But it also has to realize that there is a public policy purpose, and in some instances, 

we have driven lenders away and borrowers have less access to 

capital today because of it. 

Thank you. 

Mr. MILLS. Thank you. I would like to now move on to the micro 

loan program, and I will turn to Marianne Garvin. 

Ms. GARVIN. Thank you. I want to start by thanking Senator 

Landrieu and the entire Committee for supporting and increasing 

funding for the micro loan program for 2010, and I hope that you 

are successful in that recommendation. 

Things are very tough out there on Long Island and across the 

country with lenders having to pull back because of their capital 

requirements, and we are finding small businesses coming to us 

that have been in business for a very long period of time. The most 

recent micro loan I just approved was $28,000 for a piece of equipment from a small manufacturer of magnets. He had had a banking relationship. In fact, his lender is who referred him to us. A 

credit score of 772, but was not bankable, according to the lender. 

And why was that? Very low collateral coverage and the lenders 

will not do a loan if they do not have collateral coverage. This particular business needed this $28,000 loan. The piece of equipment 

was $40,000, and he put a downpayment down and came to us for 

the rest. He did have cash to buy the entire piece of equipment outright, but he would have been eating into his working capital, and 

his receivables are coming in later than usual because the people 

who are buying his magnets are paying later. 

So it is just one small example of why the micro lending program 

is really critical right now. 

In addition to that, I have to say that our demand for—our ability to make loans like this has been challenged because the incredible demand that we are seeing for loans from start-up businesses. 

Because unemployment is so high, people are turning to the idea 

and to entrepreneurship to start a business, and they are coming 

to us for a loan, and they are not prepared to start that business 

and get that capital. And so the good thing about the micro loan 

program is that we are able to provide TA, technical assistance, to 

these borrowers and get them prepared. 

Another example. I have a tool-and-die manufacturer, and it is 

a husband and wife team, and they bought the business from their 

father, who retired, went out of business. The father gave them the 

equipment. The equipment is aging. But he also turned over to 

them the customer list, so they are going to be a very good prospect 

for a loan soon. But they just started this business themselves in 
41 

the last couple of months. So I cannot do a loan for them right now, 

but I anticipate that I will be able to. 

So what does that really mean in the big picture when you look 

at what is happening on Long Island? We are being inundated with 

requests for technical assistance, and the law as it stands now requires that only 25 percent of our effort go to businesses that do 

not ultimately get a loan. 

We cannot tell which ones are going to get a loan and which 

businesses are not going to get a loan. And so it becomes a very 

circulate kind of exercise for us when the business comes in and 

my TA providers/loan officers—because they do both functions— 

want to respond to the businesses that are coming to us and have 

to be concerned about, well, you know, what percentage is this now. 

So I think that particular piece of—as you are doing your reauthorization, that limit really does not need to be there, and I think 

it will stop us from being able to get the capital out, quite honestly. 

Mr. MILLS. Thanks. In terms of the overall dollar amount of the 

$35,000, do you have any recommendations for reauthorization? 

Ms. GARVIN. Absolutely. I think the loan limit needs to be increased. I would recommend $60,000. I know on the table is 

$50,000. But the borrowers right now with the need for additional 

working capital, with everyone’s receivables—I heard this over and 

over again. Receivables are coming in late. It is not that they will 

not get them. They will get them. But they have a larger need for 

working capital. 

So I think the loan limit needs to be increased to be more effective. Again, what happens, we get businesses that come to us; they 

need a $60,000 or a $70,000 loan, and we can only give them 

$35,000. 

Giving them $35,000 when they need $60,000 could ultimately 

hurt them, and so sometimes we have to say no, we cannot give 

you the loan because you really need more to make this work. 

Mr. MILLS. I said at the beginning that we might be considering 

a next steps bill. Are there any tweaks or technical changes to the 

Recovery Act—and this is for Marianne or Dennis or any of the 

other micro lenders—that you think should be included? 

Mr. WEST. A few other things. One would be to increase the aver- age loan size, the $35,000 in the portfolio. 

Going along with removing the restrictions on TA, we are working in 44 rural counties, so often we want to be able to use contractors to go teach people how to use QuickBooks. So whereas there 

is a limitation on being able to use outside contractors as well as 

the limitation on non-borrowers, so just removing the restriction 

would help on both sides. 

The other is to—currently, there is a 15-percent loan loss reserve 

requirement that has to be funded by outside sources. You know, 

that was probably a really great idea when this was a pilot 19 

years ago, which also we should try to make this permanent, but 

now we have a mature group of lenders. We all risk rate. We really 

do not need to have 15 percent. That is just capital that cannot—— 

Mr. MILLS. Is it you do not need the loan loss reserve or you do 

not want the requirement for kind of having that private capital 

rates that you would be willing to keep the loan loss reserve at 15 

percent if you removed the requirement for that private capital? 
42 

Mr. WEST. Well, we managed a loan loss reserve, and 15 percent 

is an extremely high loan loss reserve. 

Mr. MILLS. What level would you suggest? 

Mr. WEST. It ought to be risk rated. 

Mr. MILLS. Okay. 

Mr. WEST. It ought to be risk rated based on the portfolio, and 

if the risk in the portfolio justifies 6 percent, allow it to be 6 percent. It is just now that the program has matured, 15 percent is 

excessive. 

Mr. MILLS. Kevin, you had a question? 

Ms. WHEELER. I did. As Ed mentioned, the committee is working 

both on reauthorization and the Recovery Act provisions, and we 

really feel an alternative source of financing is needed. So, as part 

of the Recovery Act, extra money was put in for the micro loan program. But not that many dollars have gone out yet, right, Eric? 

What is the usage right now out of the $50 million that is available? 

Mr. ZARNIKOW. As part of the Recovery Act, we got $6 million of 

appropriations that supports $50 million of lending. We also had 

money from the 2009 budget that was available to make loans to 

the intermediaries as well. So we have utilized the 2009 budget 

money and have turned to Recovery Act money. At this point we 

have committed about $15 million out of the $50 million of the Recovery Act money for loans to micro loan intermediaries. 

Ms. WHEELER. Okay, because we would really like this to be 

treated as urgent. Get the dollars out as fast as possible. We were 

trying to do some tweaks to the micro loan program, and one of 

them was more flexibility in how you could use the TA. One of the 

objections that came up when we tried to do that, both on the appropriations bill and more recently on a different vehicle, was— 

that is what the prime program is for. PRIME is not tied to loan 

dollars. 

We know that there are two different missions for those programs, but can you state for the record why using prime money— 

assuming you even get it, because it gets so little money—would 

not be adequate, or would not be a replacement for the micro loan 

TA? 

Mr. WEST. I do not know that there is a prime vehicle in the area 

that we serve, so I do not think that it is universally available, 

which is a limitation that many micro lenders would find. So I 

think that is a key limitation for us. 

Ms. WHEELER. Okay, so it is availability. Thank you. 

Mr. LUCAS. Thanks. I think one of the big problems getting that 

money out is the lack of micro lending intermediaries, and there 

has been all this money put into the program, but it does not seem 

like there has been a response among the community development 

entities that would enter the micro lending program. 

I just wanted to ask Ms. Garvin what sorts of changes would 

make micro lending attractive to those types of financial institutions that we want involved in the program so we can get those 

loans out and grow this program and reach entrepreneurs. 

Ms. GARVIN. I think the fixes to the TA grant are really critical 

because micro—you cannot do these micro lending—you cannot 
43 

take the risk with the borrowers that need this capital without providing the TA. 

As I testified a few months ago, our portfolio has been experiencing a lot of delinquencies, and our not-for-profit is on the hook 

for making the payment back to the SBA. And that is a risk that 

we are willing to take. I mean, this is sort of unprecedented times 

in the economy, and so we will stand behind that. But removing 

the TA grant restrictions I think will encourage other intermediaries to step into this. 

Supporting the intermediaries who are doing lending already, 

who are experienced and know how to do this, part of the problem 

is that they have hit up against the $3.5 million limit, and so we 

cannot get the money out if we cannot borrow anymore. And so I 

think removing that restriction as well, removing that, increasing 

the loan size amount, and removing the restrictions from the TA 

grant will move the money faster in the communities. 

Mr. LUCAS. Great. Thank you very much. 

Mr. MILLS. Thank you. And we would like to go to the new markets venture capital program and Ray Moncrief. 

Mr. MONCRIEF. Thank you very much, Ed and Kevin, and to all 

the staff that has put this together. 

I appreciate the opportunity to speak about new markets venture 

capital. By way of introduction, I do run a small business investment company, I run a new markets venture capital company, and 

I run a rural business investment company. I could probably speak 

at length about each of the three programs, but I will defer to Brett 

on the SBIC program, and I am going to hold my comments on the 

RBIC program. I think I have spoken to Eric sufficiently about the 

RBIC program. 

As pertains to the new markets venture capital program, it was 

approved in December of 2000 and is a highly targeted, narrow investment vehicle that is under the Small Business Administration. 

Its purpose was ultimately to invest traditional types of investing 

in nontraditional areas, more specifically low-income census tracts. 

There were six programs authorized. There were six programs 

approved and licensed in 2003 to 2004. And those six companies 

have done quite well. 

Just some of the measurements, there were six that have invested more than $48 million in 75 companies in low-income census 

tracts. They have leveraged an additional $136 million to low-income census tracts. There are areas that are not available for investing. For example, there is indeed a venture capital food chain. 

Years ago, I heard a speech by a guy named Ray Smilor at the 

Kauffman Foundation about the food chain of venture investing. I 

did not quite understand it then because I was somewhat of a novice in the venture industry, and there most definitely is a food 

chain, of which the new markets venture capital is at the very end 

of the food chain, with large private equity funds being at the top. 

I would tell you that as a practitioner of new markets venture 

capital, new markets venture capital needs to be moved into the 

mainstream of the SBIC industry. It needs to be treated not as sort 

of a bump over here on the side that is some nuance that we are 

dealing with, but it needs to be dealt with as something that is 

real, that serves a purpose, that has an effective use. 
44 

For example, where I practice in eastern Kentucky and eastern 

Tennessee, the Appalachian counties more specifically, traditional 

SBICs do not do much work there. It is profoundly rural. It is profoundly poor, and one would think that there are not any investment opportunities in those areas. 

As a matter of fact, most of the new markets venture capital 

firms that have been licensed act indeed as segues or conduits for 

traditional venture capital into these underserved markets. So I 

would like to point out that there are several things that we should 

do. 

First of all, it should be reauthorized, most definitely. 

Second of all, I would like to see something that gave it some 

substance, like an Office of New Markets Venture Capital to be established. The traditional SBIC program has three tiers of leverage, although roughly only two are used. The new markets venture 

capital program is relegated to one and a half tiers of leverage. 

They ought to be treated as they have the competence to effectively 

invest more than that. 

The third point that I would point out is that the over-line limit 

should be congruent to that of the SBIC industry. Interestingly, I 

sat in a room similar to this 2 years ago talking about the very 

subject of over-line limits for the SBIC industry, which was inclusive of new markets venture capital, rural business investment 

companies, et cetera. Interestingly, the SBIC industry has enjoyed 

an over-line limit increase from 20 percent of private capital to 10 

percent of combined capital. I would like that same consideration 

for the new markets venture capital. 

There was interesting conversation recently that we were going 

to do this in the extension bill, but for many reasons, that was 

pushed to perhaps a technical change that would happen in later 

months. So I would certainly encourage a look at the over-line limit 

for new markets venture capital funds. 

Fourthly, back when this program was going together, there was 

a very specific timeline to raise the money. Statutorily, it was 2 

years. I shall recall that I was authorized in July of 2001, and I 

was given until September 30th of 2001 to raise my private equity. 

An undoable task, in the events, as you might recall, around 2001. 

We were successful in getting that iterationally pushed out over 

time. So we should enjoy the 2-year regulatory statutory cap that 

we have to raise the money. 

The other thing that I would say is that this new markets venture capital is highly targeted in areas of low income. The problem 

is that there is a different definition of low income. For example, 

I invested in a company in northern Kentucky, Covington, Kentucky, and, incidentally, I used the new markets tax credit program 

in part to capitalize the new markets venture capital program. I 

am the only one that used that particular program. 

I found that the new markets tax credit definition of low income 

was different from the new markets venture capital, so that needs 

to be looked at, and it needs to be harmonized together. 

And, lastly, I would point out that one of the key components of 

the new markets venture capital program is the fact that there is 

an operational assistance grant that comes from SBA. Heretofore, 

there has been the requirement that there be a match, that you go 
45 

out and raise part of or at least 50 percent of that amount to leverage the operational assistance. It is very difficult to raise soft 

money like operational assistance in today’s market in order to leverage that operational assistance from the SBA. 

I think about entrepreneurs like Mr. Heath who would love to 

have some operational assistance to do a marketing study, to learn 

how to put in an effective accounting program in his business. In 

the areas that I invest, in the low-income areas that I invest, the 

operational assistance is absolutely an incredible tool that we are 

using to get businesses off the ground, having them work, having 

them get across the finish line in a good fashion. 

I will tell you that I have invested in eight portfolio companies. 

We have had three exits. We still have five that are performing 

and expect those five to exit successfully as well. 

I think the new markets venture capital program is a worthy 

program, one that should be given strong consideration, and should 

be reauthorized. 

Mr. MILLS. Thanks, Ray. I think you have really covered the waterfront there in terms of the questions I have, but I do have two 

quick ones. Just the number of companies you believe that should 

be in a reauthorization. Originally, there were supposed to be 15 

NMVCs. Right now we have six. Do you see any number of what 

the program should be expanded to? 

Mr. MONCRIEF. I do not know what that number is, but I would 

think that in the industry that I work, there is a pent-up demand 

for a dozen to 15 more of these companies nationwide. 

I know that the person who introduced the legislation was a Congresswoman from Milwaukee, Wisconsin. She would like to see 

some diversification. She would like to see there to be a more geographic dispersion in the United States for these new markets 

funds. They are highly concentrated to the East. 

Mr. MILLS. You mentioned the match on operational assistance 

grants. Is there a dollar amount you believe should go to these 

grants? 

Mr. MONCRIEF. I do. The RBIC program, which is a rural pro- gram that came from the USDA, is run by the SBA. There is a $1 

million grant that goes with each program. And it is much simpler 

to effectively use the operational assistance as a designated grant 

than having to raise the match that goes with it. 

Mr. MILLS. Thanks. 

Kevin, do you have any questions? 

Ms. WHEELER. Is there matching for the RBIC? 

Mr. MONCRIEF. There is not. 

Mr. MILLS. So there is no matching for the RBIC. 

Senator Snowe’s staff? 

Mr. BERGER. I do have one quick question. 

Mr. MILLS. Can you use your microphone? 

Mr. BERGER. On the new markets program, all the provisions 

that you listed were in last Congress’ SBA reauthorization bill, so 

if the Committee were to essentially pass that bill again, would 

that meet your needs? Or is there something else that you would 

like to see. 

Mr. MONCRIEF. No. That would very much meet my needs, and 

I would like to see that happen. 
46 

Ms. WHEELER. May I just clarify for the record? The one thing 

that was not in there that you would like to see is a difference in 

the tier matching, right, the 1.5? Julia Sass Rubin had testified 

from Rutgers that she was seeing evidence that the match needed 

to be a little larger because the size of the funds should probably 

be a little bit larger to attract what you need to do your investments. Is that right? 

Mr. MONCRIEF. That is correct. There should be more than a oneand-half-tier leverage. You are absolutely correct. That should be 

in there, Kevin. Thank you for that. 

Ms. WHEELER. Okay. 

Mr. MONCRIEF. Most definitely. 

Ms. WHEELER. And just for the record, Ray, it was from you that 

we got the idea to change the over-line limit for MBCs, the same 

as SBICs. We fully intended that it was in the Recovery Act, and 

it was a drafting error, so we are working to correct that. 

Mr. MONCRIEF. Thank you, Kevin. 

Mr. MILLS. Thank you. And the last issue of discussion is the 

SBIC program. I will turn to Brett Palmer, please. 

Mr. PALMER. Thank you very much. I will make it quick so I do 

not stand any longer between you and lunch than I have to. 

The SBIC program is one of the oldest programs at the SBA. It 

has been around for 51 years. It has had some extraordinary successes providing growth capital to small businesses that have 

grown into American icons. It is not insignificant. It is quite meaningful. The past number of years, the SBIC program has focused 

on some challenges of its mismanagement, and it has shrunken 

pretty significantly. 

You all were very helpful last year in helping to create some incentive for staying in the program with higher leverage limits and 

family of funds limits, which we appreciate, and we particularly appreciate the flexibility that this Committee gave to the SBA to 

allow for greater investments in companies that were experiencing 

economic shock from the financial collapse last year. 

And I also want to thank the Chair and the Ranking Member for 

the letter that they wrote to the SBA to ensure that the regulations 

were put in place. Frankly, I do not think the stimulus provisions 

would have been enacted had it not been for that letter, because 

it really just is not a priority. I know that there are other, bigger 

programs that are out there. But it really was helpful, and it really 

is an important thing. 

The SBIC program really can be an important part of growth 

capital available. When I was hearing Mr. Fruge—correct me if I 

am mispronouncing your name—talk about how, you know, capital 

is unavailable for some of the investments he has in Louisiana, 

there are two SBICs in Louisiana, and they are not prohibited from 

investing in ship purchases and other asset purchases and financing with it. Many folks do not know about that. But there are way 

too few SBICs, and so we really do think there is a significant need 

for reform for the SBIC program. 

The biggest problem with the SBIC program right now is the licensing. This has been a longstanding problem, and it is a problem 

you will not hear from individual SBICs because they are afraid of 

retaliation from the people that are reviewing them, particularly 
47 

ones that are currently in the process. It is not unreasonable— 

whether those fears are rational or not—or, you know, are justified 

or not, I do not know. But there are dramatic problems with it. We 

have repeat licenses that are taking 14 and 15 months to go 

through. For people that are on their fourth license, exceptionally 

qualified funds that are just being hung up, that is nuts. I mean, 

there is a nicer way to put it, but really it should not be. That is 

just bad public policy. They are driving out good funds and repeat 

funds from being in this space. 

And to that end, we are really proposing a number of reforms 

which I submitted for the record to keep funds in the program that 

are established funds and good funds. We want an expedited relicensing process for funds that are in good standing. If you are a 

fund and you have proven yourself, you have been through the FBI 

background check, you have a history of success, you really had all 

the audits and exams and you are doing fine, after a couple of 

years, if you want to start a new fund and get a new SBIC license, 

it should not take you 14 or 15 months. It should take you a couple 

months. You should get a new FBI background check, because that 

situation could have changed. I hope it does not, but it sure could 

have. And you should have to document your private capital that 

you have raised and a couple of other criteria which I can lay out 

for you. But if the basics are in place, it really should be fairly 

automatic and consistent as long as you are investing in the same 

space. 

To that end, if we are able to get an expedited relicensing process 

and keep more funds in the SBIC space, you really need to increase 

the family of funds limit again because the family of funds limit 

increase which you put in the stimulus was very helpful for keeping a number of funds from butting up against that ceiling limit. 

But if you are going to be able to have serial funds to keep these 

funds that are really specialized in small business in the space, you 

need to be able to have one at peak, one at start-up, and probably 

one in their last wind-down phase, which means bumping it up a 

little bit. Nothing dramatic and not raise an individual fund rate. 

Just the family of funds rate, again, to keep the serial funds in the 

process. 

Mr. MILLS. It is at 225 now? 

Mr. PALMER. It is at 225 now. It is 250 if you have more than 

half your funds in an LMI area, a low- and moderate-income area, 

like Ray talks about. 

Mr. MILLS. Do you have a dollar amount you would—— 

Mr. PALMER. I think, you know, somewhere in the 300 to 350 

range would be more than reasonable. I do not think you would 

want to go into the 450. I do not think you want three funds at 

peak at a time. I think you need to manage your risk profile, but 

I think you could certainly set a number that with the next relicensing—that would be every 3 to 4 years, I would think, that you 

would qualify that you could work out that number and do something manageable. And we could work with SBA on that. 

We would also like to get more funds in the program. There is 

a real licensing—the licensing process is such an opaque, bizarre, 

and slow process that it steers people away and there are very few 

minority SBICs. There are very few women-run SBICs. The chair 
48 

of our board is a woman, but she is rare, and we would like to get 

more of them in that space. 

We would like to bring in more people from the Western United 

States. There are exceptionally few SBICs in California and the 

Mountain West, and that is really an underserved area, and we can 

provide capital in a market-driven fashion that works in quantities 

greater than some of the other programs allow. 

We would like to make sure that there are incentives for coming 

into the program and not disincentives. There are a number of regulatory compliance issues that can put a fund at a disadvantage as 

far as enforcements of warrants and as far as your co-investors, 

what places you are in. There are issues dealing with GAAP accounting versus SBIC accounting, as far as the costs associated 

with that. And there are a number of technical things that I think 

we can use to streamline the program to, again, attract people in 

that do not reduce any taxpayer protections. We want a stable, 

functioning program. And I think that would be very helpful and 

something we can do. 

Regarding the equity side of the equation, there was an equity 

program that the SBA had a couple years ago, and, frankly, it was 

structured in a way that did not work. It cost the taxpayer money. 

It did have some significant public policy benefits, but it did cost 

money, and that is a problem. 

There really is a dearth of growth capital for early stage businesses now. It is painful what is going on. And in the pipeline, in 

the continuum of the small businesses, you really have to have everything from the early stage to the buyout be healthy. And a couple of those areas really are unhealthy right now, so I think it is 

worthy of this Committee and the Administration to take a look at 

how they can, in a market-driven fashion, have a reasonable and 

taxpayer-protected equity program, and I think that is something 

that we can help you with and provide some guidance on if you are 

willing to engage on that. 

We also want to take a look at some of the areas that are in the 

energy and green space. There is an energy saving debenture and 

a renewable energy debenture—they were created in 2007—that 

still have not been implemented. That is a problem. There is also 

a technical problem with them that the only funds that are able 

to engage in those debentures, when the regulations eventually 

come out, are ones that were licensed since last year. That I think 

is a technical drafting error that we can probably work around. 

I think that there may be some new and creative ideas, and I 

have been approached by some of the funds that want to get into 

that new space, that we can apply new debentures to meet those 

needs. We want to make sure that small businesses are able to engage in that green space as well as the big multinationals, and I 

think that is fairly easily done, again, without taxpayer cost. 

The other thing we may need your help with—and this may be 

appropriate for this reauthorization or maybe, frankly, some help 

with some other committees, but SBICs do get regulated by the 

SBA, very intensely regulated by the SBA, and as regulatory reform is being looked at more broadly in the financial services sector, the proposals that are out there right now would create duplicative regulation on top of SBICs. A lot of SBICs are just, you 
49 

know, four-, five-, six-man operations, and to have that double regulatory burden on them would require them to hire another person. 

That is pretty significant, in which case the cost/benefit analysis 

might be that you just do not become an SBIC. We want to attract 

more people in the SBIC program. 

We also want to, frankly, take a look at some of the bank issues 

dealing with SBICs. Banks get credit for investing in SBICs. They 

are not required to capital charge when they invest in SBICs. And 

some of the regulatory reform proposals would actually accidentally 

wipe those away. We would like to take a look at how we can maintain those because, again, we want to make sure that there are incentives to invest in small businesses and use the money multiplier 

of the SBIC program. 

That being said, I am very pleased that the SBA has a new head 

of the Investment Division, who seems to be very competent and 

very promising, so we are looking forward to working with him. 

And we also look forward to working with you on the legislative 

fixes that are needed. 

I know I am the last one, and you guys are trying to get to lunch, 

but I would welcome any questions that you may have. 

Mr. MILLS. Thanks. 

Kevin, do you want to start? 

Ms. WHEELER. No. Go ahead. 

Mr. MILLS. Okay. Could you explain a little bit more about the 

regulatory reforms and how the capital charge could be potentially 

taken away? 

Mr. PALMER. The SBICs are, throughout Federal code and 

throughout regulation, well beyond the SBA because of the public 

policy benefit they provide, and so as the proposals exist right 

now—and it is very much in flux, and this may take some time to 

do—it would require a full holding of a capital charge for all alternative investments, including SBICs. And that is a concern for us. 

There are also issues dealing with clarifying of the Community 

Reinvestment Act. SBICs are deemed to meet the investment criteria there, and, frankly, just getting that clarified that that is a 

full dollar for dollar credit would be very helpful. 

Mr. MILLS. Can you explain a little bit more about the impact 

of the Recovery Act provisions now that there are requirements for 

investments in low-income areas? 

Mr. PALMER. Well, I think there are a couple of things in the Investment Act that were exceptionally—the Recovery Act that were 

helpful. The flexibility for raising the over-line limit was exceptionally helpful and very good. There is a lot of interest in the LMI 

area piece and the higher leverage limits associated with that. 

There are some folks who are trying to figure out how to rig their 

system in their investing structure to make that work. 

Part of the problem there is the LMI formula is complicated, and 

making sure that you match it is not the easiest thing. But there 

is some interest in doing it. Ray is a classic example of one of our 

funds who is a very strong believer in investing in underinvested 

areas. 

The other standard that was in there was the increased requirement for smaller enterprises, and that is being implemented. I 

think there are some—in the regs that were proposed, there were 
50 

some complications for certain funds that could actually kick up to 

36 percent, but that will pass through with time. And so I think 

that is a helpful requirement, and it works, and that needs to get 

fleshed out more. But I think that has yet to be fully seen, the benefits of it. But, again, part of that is the number of SBICs has 

shrunken pretty dramatically, which limits our ability to provide 

the up-side risk to the public. 

Last year, in 2008, there were six funds licensed. Last year—I 

guess it is last fiscal year, 2009, there were 11 funds licensed. Of 

those 11 funds, I think 7 or 8 of them were done by last winter. 

And the pipeline—I need to mention this—is really increasing. 

The number of funds that are looking at becoming SBICs has exploded. I have gone to meetings in Chicago, in New York, where 

there are sold-out shows. They are just basically explaining the 

SBIC program. The people in the space that help these applicants 

go through the licensing process say that they have got pipelines 

of, you know, between 30 and 45 companies that are doing it. That 

is very promising. That is very good. The problem with is, again, 

is still the licensing process is opaque. It is very subjective. And, 

frankly, there have been some recent developments regarding the 

access to leverage that you are going to be able to get that has sort 

of—the licensing process is being used to limit that. And I am concerned that it seems to be—I keep seeing these little data points 

that would indicate that SBA is actually trying to cut off leverage 

and limit leverage access, not increase it, per what the stimulus 

did. The stimulus put a cap on leverage, a dollar-figure cap and a 

tier cap, so you are not taking out 10 times as much leverage as 

you have private capital. It is a three-times limit. 

Basically, the regulations that were put forth cap it at 2 percent, 

and the analysts are giving guidance—the SBA analysts are giving 

guidance to the funds: Do not bother trying to ask for more. Yes, 

there are criteria by which you can get more. You are not going to 

get. And that is not particularly helpful. If you cannot get it, just 

say you cannot get it. But do not set that up, and that is a cause 

for concern. 

Again, it is not appropriate for every fund to get three tiers of 

leverage. There has to be a relevant-to-risk profile associated with 

it. But it is not helpful, and as the licensing process goes through, 

if they are limiting who can get it, I am curious if there is some 

guidance from senior—either OMB or wherever, with what is going 

on with the leverage access. Is there a direct intent to limit the exposure to leverage going forward for the SBIC program? Is there 

anything happening there, Eric? I keep hearing these stories from 

these SBICs, and I am getting quite concerned. 

Mr. ZARNIKOW. Yes, I think obviously in the program the thing 

you balance is getting access to capital for small businesses versus 

managing risk. So I think it is really being looked at on a case-bycase basis, depending on the performance of the individual fund 

managers. So there is no blanket direction that has been given. It 

is really being looked at on a case-by-case basis. 

My understanding is there has been very few funds who have 

come in and actually asked to get into that higher tier of leverage 

at this point. 
51 

Mr. PALMER. I will tell you what they will not tell you individually, which is they are being told, ‘‘Don’t.’’ You know, don’t try it. 

And it is that unofficial pushback, it has a chilling effect, and, 

again, you do not bite the hand that feeds. And so they do not like 

to complain about it. 

I am being much more open about it because I can be. I am not 

an actual fund. But it is something that does cause some concern 

that we want to make sure is taken care of. 

Mr. MILLS. Senator Snowe’s staff? 

Mr. BERGER. We had a number of questions—— 

Mr. MILLS. If you could use your microphone. 

Mr. BERGER [continuing]. We have a number of questions with 

respect to the licensing and relicensing issue. Eric, as you know, 

Senator Snowe spearheaded a letter with Senator Landrieu on the 

issue, and we got a response back that says that, ‘‘SBA is taking 

steps to accelerate the process, and we have set goals for processing 

new applications which should substantially reduce the time 

frames for processing. Although it is too soon to tell, our initial information indicates that we are making substantial progress in 

meeting these goals. Additionally, I have instructed the program 

managers to devise measures where we can accelerate the process 

even more for applications from existing licenses. I am hopeful that 

these new guidelines will be available by the end of the month.’’ 

Could you comment here for the record as to what specifically is 

being done with respect to the licensing and relicensing issue and 

whether or not you feel we need a legislative solution? Because the 

concern that we have is that only $650 million of the available $3 

billion in leverage is being used to help start up small businesses. 

Given that $3 billion is the current authorization level, we feel that 

amount of leverage could be used safely. Why not take advantage 

of that, particularly because it does not cost the Federal Government a penny because it is a zero subsidy program. 

Could you just let us know specifically what the SBA is doing 

with respect to the licensing and relicensing? 

Mr. ZARNIKOW. Sure. We have taken steps to look at the licensing process to try and speed that process. It is, obviously, critical 

to make sure you manage the integrity of the program and you 

have an appropriate vetting of the licensees or the potential licensees who are coming in. 

I would say, too, some of the timeline on how long it takes depends on how responsive the fund is in getting back with additional information requests. So it can be misleading to say the average time is X if it takes months for the fund to respond. But having said that, we recognize that there is a growing pipeline of people we think are going to be applying for licenses. We want to 

make sure we have an appropriate process that appropriately vets 

people in a timely manner. 

We are specifically looking at a fast-track process for second or 

third or fourth funds where the fund managers had good performance, have been in compliance with the requirements. And as Brett 

mentioned, we have recently had come on board a new Associate 

Administrator for the Investment Division who brings both a private sector background as an investor as well as a business owner 

and start-up business owner, who is really going to be focused on 
52 

the program, focused on innovation, and had really been tasked 

with looking at that licensing process and making sure that it is 

appropriate but speeding the process and providing more clarity to 

the process. 

Mr. BERGER. I absolutely agree. 

Mr. PALMER. May I add one thing? The SBIC community strongly agrees that they do not want bad actors in and that the risk 

must be maintained. I mean, they want a stable, workable program, and so we agree with that. And it is certainly fair that some 

of the delay can be because the SBIC is in that process. But in 

many cases, it has lost fingerprints five times or three times, you 

know, not getting the FBI background check for months and 

months. Granted, it is getting better, and now that there is a person in place—and, frankly, the crisis, the rest of the broader crisis 

that is facing SBA is getting better. So we are very hopeful. 

So I am not trying to beat up on anybody, but there really is a 

concern here. 

Mr. BERGER. I do not think that anybody is looking to legislate 

unnecessarily in this area, but this is something that we all recognize needs to be addressed. So is there a time frame that you could 

commit to us where you might be able to roll out one of these programs or give us a status update as to how this is going? 

Mr. ZARNIKOW. What I would like to do is maybe come back to 

you with a timeline and when a status update would be appropriate. As I said, the new Associate Administrator recently came on 

board. This is one of his very top priorities to look at quickly. I just 

want to make sure it is a thoughtful process that we can come back 

with a timeline. 

Mr. BERGER. Okay. Can you commit to coming back with a 

timeline by sometime in November? 

Mr. ZARNIKOW. Sure. 

Mr. BERGER. Okay. That would be fantastic. 

Next, I wanted to turn to this energy debentures issue because 

that is a big sector of the economy. I think we could do a lot more 

if we could roll that program out. 

Do you know what the hang-up is on getting the regulations to 

roll that out? 

Mr. ZARNIKOW. You know, we have been working on drafting 

regs on that and actually had drafted regs prior to the economic 

crisis and the Recovery Act. We have really been working with the 

Department of Energy on some of the definitions that go into that, 

and we are following up with them to try and get clarification and, 

you know, finish the regs. So it has been something we got sidetracked a bit with implementing the Recovery Act, but are turning 

back to get that program or those regulations implemented. 

Mr. BERGER. Absolutely understood. It has been, I think, close to 

18 months now since the energy bill was enacted. Is there a time 

frame that you could give us where the regs are going to be rolled 

out? 

Mr. ZARNIKOW. What I would like to do is come back to you with 

a time frame on that as well. 

Mr. BERGER. Okay. And then last but not least—and I promise 

not to stand between too many people and lunch. This question is 

for Brett. One of the issues as we tried to reauthorize this program 
53 

during the last Congress is we run up against the argument that 

you do not need SBICs; there is plenty of private capital out there 

in the marketplace; so, why are you asking the Government to get 

involved here? 

Could you, for the record, explain why you feel like your program—— 

Mr. PALMER. Sure. Absolutely. I think it is—I mean, this program was created, you know, over 50 years ago because banks 

tended to want to invest in larger companies because they were 

lower risk and higher rate of return for the amount of work they 

needed to do. That was true then. It is true now. 

This program tends to be countercyclical. I mean, right now there 

is no question a credit crunch, and this is a form of credit that is 

available to businesses for growth capital that normally in many 

cases cannot get it from banks. But yet it is required by statute 

and by regulation to manage their risk to ensure it is zero subsidy. 

So it is filling a gap in the marketplace that is real, that is there. 

That gap is actually growing, not shrinking. We now have a number of funds that are actually, you know, larger funds moving into 

the space because they see this need that they cannot fill, and so 

they are willing to take on the burden of the regulatory oversight, 

which is required and appropriate, and the costs associated with it 

and the limits on their investments because, otherwise, if they 

were in the free market, they could do whatever they want. And 

this one you have to really be honed down because they think that 

there is a need there that is not being met that they can help me 

and capital that is not showing up from the private market. 

So, again, part of this program, I think it is critical to the market 

function of it, is it maintaining itself as a market-driven program. 

It is not a handout. It is not a bailout. When money is lost in the 

debenture program, it is the private capital that is lost first, and 

then taxpayer money is at risk second. That keeps funds from gambling with other people’s money and keeps it, you know, a functional, sustainable system. And I think that is a key element that 

should be consistent with anything in the SBIC program where the 

private capital is at risk first, to make sure that prudent investment decisions are made and that this is not just some subsidy to 

prop up one industry or another. 

Mr. MILLS. Thank you very much. I think Kevin has one last 

question, and I have one question for Michael, and then we will 

end the roundtable. 

Ms. WHEELER. To Fred, we really are trying to be helpful on this 

Community Express program. So on this idea, and to the SBA, of 

a 1-year extension—if 1 year is not unacceptable, would something 

like a higher pilot limit per lender work? Would that satisfy the 

SBA need for protecting the portfolio until they can figure out how 

it is performing and then address the industry’s issues of meeting 

their borrowers’ demand and not hitting your caps? 

Mr. CRISPEN. Yes. I mean, if what you are asking is if we cannot 

make it a permanent program today, extend it for a year, but at 

the same time increase the base that allows everyone to have access to the program up to $50,000, $60,000, whatever the figure 

would be, would that be helpful? Absolutely. The biggest problem 

I have right now—and we have streamlined our program, not just 
54 

Community Express anymore. We call it Borrego Express Capital. 

But we incorporated the Patriot Express program into it as well. 

So if you have got a guy that qualifies for Patriot, he can get a 

$50,000 loan even if he is not in a low- to moderate-income area. 

But if you have got a business that is not in a low- to moderateincome area or a HUBZone and they apply for a $50,000 loan, I am 

sorry, I cannot make you that loan unless I do it as a 7(a), which 

I tried to do. But when you start getting into regular 7(a) underwriting, it is a whole different ballgame. You cannot credit score 

anymore. You have to look at collateral, and we do these unsecured 

up to 50. 

So it is a myriad of problems trying to do small loans, and it 

would be most helpful to raise the limit and extent it for at least 

a year until we can make it permanent. But it needs to become a 

permanent program. Even in good economic times, small businesses are forced in a lot of cases to use credit cards for working 

capital at a much higher and more expensive cost of funds than a 

SBA loan like we make. 

Ms. WHEELER. Okay. Thank you. 

Eric, did you want to add to that? 

Mr. ZARNIKOW. I think that is something we would want to look 

at as far as a change to the pilot limit., 

Ms. WHEELER. All right. Well, we will keep working on this. We 

want to be helpful on it, but making it permanent is really problematic for us. We are trying to find a happy medium here. 

Mr. MILLS. Thank you. And for Michael, I just wanted to document for the record, who is the lender on the loan for your 7(a) 

loan? Do you remember? 

Mr. HEATH. It would have been Passumpsic Savings Bank. 

Mr. MILLS. The what? 

Mr. HEATH. The Passumpsic Savings Bank. 

Mr. MILLS. Okay. And from your loan, how many jobs do you believe you either retained or created? 

Mr. HEATH. We had about 15 on the payroll when we started. We 

have about 21 now. 

Mr. MILLS. Great. Thank you. I believe this concludes the roundtable unless there are any final comments? 

[No response.] 

Okay. Thank you very much for everyone’s participation. I believe it has been helpful, and we look forward to getting a reintroduction of some reauthorization bill in soon. 

Ms. WHEELER. Congratulations to Michael who gets married next 

week. 

[Applause.] 

[Whereupon, at 12:44 p.m., the roundtable was concluded.] 
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