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28-334 PDF 2006

S. HRG. 109–512

REAUTHORIZATION OF SMALL BUSINESS ADMINISTRATION FINANCING AND ENTREPRENEURIAL

DEVELOPMENT PROGRAMS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

APRIL 26, 2006

Printed for the Committee on Small Business and Entrepreneurship

(

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

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED NINTH CONGRESS

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY L. LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK L. PRYOR, Arkansas

WESTON J. COULAM, Staff Director

NAOMI BAUM, Democratic Staff Director

(III)

CONTENTS

OPENING STATEMENTS

Page

Snowe, The Honorable Olympia J., Chair, Senate Committee on Small Business and Entrepreneurship, and a United States Senator from Maine .......... 1

Prepared statement .......................................................................................... 5

Levin, The Honorable Carl, a United States Senator from Michigan ................. 11

Prepared statement .......................................................................................... 15

Isakson, The Honorable Johnny, a United States Senator from Georgia ........... 17

Thune, The Honorable John, a United States Senator from South Dakota ....... 29

Kerry, The Honorable John F., a United States Senator from Massachussetts,

prepared statement .............................................................................................. 70

WITNESS TESTIMONY

Barreto, The Honorable Hector V., Administrator, U.S. Small Business Administration .......................................................................................................... 17

Prepared statement .......................................................................................... 20

Alford, Harry C., President and CEO, the National Black Chamber of Commerce ..................................................................................................................... 38

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

Baird, James, Executive Director and CEO, Bay Area Development Company,

Walnut Creek, California .................................................................................... 43

Prepared statement .......................................................................................... 45

Maxwell, James A., 504 Statement Manager, Granite State Economic Development Corporation/New England Business Finance ....................................... 51

Prepared statement .......................................................................................... 53

Morrissette, Mark, Managing Director, North Atlantic Capital .......................... 59

Prepared statement .......................................................................................... 61

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Alford, Harry C.

Testimony .......................................................................................................... 38

Prepared Statement ......................................................................................... 40

Almeida, Ann Marie

Prepared statement .......................................................................................... 124

Baird, James

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

Prepared Statement ......................................................................................... 45

Responses to follow-up questions .................................................................... 86

Barreto, the Honorable Hector V.

Testimony .......................................................................................................... 17

Prepared Statement ......................................................................................... 20

Bianca, Zulman

Prepared statement .......................................................................................... 121

Bond, the Honorable Christopher S.

Prepared statement .......................................................................................... 82

Clark, Dr. Redmond

Prepared statement .......................................................................................... 98

Coleman, the Honorable Norm

Prepared statement .......................................................................................... 83

Fleming, A. V.

Letter ................................................................................................................. 120

Isakson, the Honorable Johnny

Page

IV

—Continued

Testimony .......................................................................................................... 17

Kerry, the Honorable John F.

Prepared statement .......................................................................................... 70

Levin, the Honorable Carl

Testimony .......................................................................................................... 11

Prepared Statement ......................................................................................... 15

Maxwell, James A.

Testimony .......................................................................................................... 51

Prepared Statement ......................................................................................... 53

Morrissette

Testimony .......................................................................................................... 59

Prepared statement .......................................................................................... 61

Responses to follow-up questions from Senator Kerry .................................. 90

O’Connell, Daniel W.

Prepared statement .......................................................................................... 102

Biography .......................................................................................................... 106

Preston, Susan L.

Prepared statement .......................................................................................... 108

Redding, Mark A.

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

Biography .......................................................................................................... 97

Snowe, the Honorable Olympia J.

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

Prepared Statement ......................................................................................... 5

Thune, the Honorable John

Testimony .......................................................................................................... 29

Wilson, Donald

Prepared statement .......................................................................................... 131

(1)

REAUTHORIZATION OF SMALL BUSINESS ADMINISTRATION FINANCING AND ENTREPRENEURIAL DEVELOPMENT PROGRAMS

WEDNESDAY, APRIL 26, 2006

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 10:35 a.m., in room

SR–428A, Russell Senate Office Building, the Honorable Olympia

J. Snowe (Chair of the Committee) presiding.

Present: Senators Snowe, Thune, Isakson, and Levin.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, CHAIR, SENATE COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MAINE

Chair SNOWE. Good morning. The hearing will come to order on

the reauthorization of the Small Business Administration’s financing and economic development programs.

I want to say that my colleague Senator Kerry was going to be

here today, but he had a personal commitment that detained him.

He just wanted to express the fact that he very much wanted to

be here today and regrets that he was unable to do so.

Administrator Barreto, I noticed the smile on your face today. Is

it perhaps because this is your last hearing before this Committee?

[Laughter.]

Chair SNOWE. Well, I want to thank you very much for being

here today as we examine the SBA’s priorities and responsibilities

and goals for the future. As this may be your last appearance, I

want to extend my personal appreciation, on behalf of the Committee as well, to you for your service to this country.

As you prepare to move on from your position as the second-longest serving administrator since the SBA was created by President

Eisenhower and Congress in 1953, you have very been a strong

voice for small businesses and for the Small Business Administration. You have served the President and our Nation exceptionally

well in leading this vital agency.

You have been a very strong voice for small businesses in America. We truly appreciate the service that you have rendered to our

country, and I just want to wish you very best wishes for your future endeavors.

Mr. BARRETO. Thank you very much, Senator.

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Chair SNOWE. Thank you, Administrator.

Indeed, today, when we look at the entrepreneurial spirit of our

25 million small businesses, it dates back to our Nation’s founding.

Small businesses are the cornerstones of economic growth and job

creation, representing 99 percent of all employers, creating nearly

3⁄4 of all net new jobs, and employing over 50 percent of the private

sector workforce.

From family firms to software development, small businesses are

the foundation of our economy and the linchpin for the innovation

that moves our country forward. Americans who assume the risks

and responsibilities inherent in owning and operating a business

deserve our praise, admiration, and unwavering support.

The Small Business Administration plays a vital role in the economic growth and well-being of our Nation by providing entrepreneurs with the capital they need to start and grow small businesses. SBA’s programs have had a tremendous return on investment, helping to create or retain over 5.3 million jobs since 1999.

In 2005, SBA programs disbursed record-breaking totals of loans

to small businesses both in numbers of loans and total dollars provided to small businesses. During the last fiscal year, the SBA

guaranteed over $24 billion in loans and venture capital for small

businesses, the highest level of capital ever provided.

I have long sought to expand the power and reach of the SBA’s

financial and business development tools, which are used by millions of aspiring entrepreneurs and small businesses across the

United States. We must continue to strengthen the core SBA programs because they have proven invaluable in aiding the efforts

and dreams of America’s entrepreneurs.

I am committed to supporting our Nation’s small business community by increasing its access to capital. For entrepreneurs and

other aspiring small business owners, a self-evident truth since the

founding of our country is that it takes money to make money. We

are here today to make that goal a little easier for all Americans.

The SBA’s entrepreneurial development programs demonstrate

how Congress can play a positive role in enhancing private sector

financing for startup companies. SBA loan investment programs

have produced success story after success story, which include assisting the founders of Intel, Staples, Federal Express, Outback

Steakhouse, Ben & Jerry’s, Calloway Golf, as well as thousands of

other successful businesses.

My plan is to build upon these successes and to capitalize on the

reauthorization process to make the SBA’s programs even more effective. Today marks the beginning of this process. The Committee

will conduct hearings, examine the oral and written testimony, and

evaluate the performance of SBA programs. I hope that this reauthorization process will lead to a renewed SBA that is wholly dedicated to fostering small business ownership in America.

The reauthorization process began with three of the bills that I

have introduced. The first is the Small Business Lending Improvement Act that streamlines the process to help small businesses obtain the capital they require to compete. It brings fundamental and

long-awaited reforms to the operation of the Preferred Lender Program.

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Rather than mandate 71 separate applications, the PLP program

lenders would only be required to complete one application. This

would create a national Preferred Lenders Program that will remedy the inefficiencies in the cost of applying for PLP status in each

district.

Currently, in the 7(a) program, a small business’s eligibility to

receive a loan is determined by a confusing multi-page chart that

has different size standards for every industry. This chart is nothing more than a bureaucratic impediment, and this bill will address that particular problem.

The second bill reforms and enhances the Small Business Investment Company Program. SBICs use their own capital, combined

with funds borrowed from other private investors and supported by

an SBA guaranty, to make equity and debt investments in qualifying small businesses. The structure of the program is unique and

has been a model for similar public/private partnerships around

the world.

This bill creates a new SBIC program that would be a zero subsidy program with no Federal appropriations necessary that would

also provide financing to small businesses. Additionally, the new

program would prevent financial losses to the Government by increasing its share of SBICs’ profits.

The third bill is the Local Development Business Loan Program

Act, which improves the 504 program by streamlining the lending

process and providing small businesses with greater opportunities

to obtain affordable financing. The statutory purpose of the 504

program is to create new jobs and strengthen the local impact of

the 504 loan program.

To reflect that, the legislation that I have introduced, along with

many other changes, renames the 504 program the Local Development Business Loan Program. This new name will help borrowers

understand the intent, and many of the small business owners

have told the Committee that the name ‘‘504 program’’ was neither

clear nor indicative of the program’s purposes.

I plan to advance these bills and move toward a successful rejuvenation of the SBA. That goal includes rejecting any attempts to

eliminate the SBA’s Micro Loan Program, which provides loans up

to $35,000 and technical assistance to new and growing small businesses. This relatively inexpensive program helps entrepreneurs

start and grow small businesses throughout our Nation.

In my own State of Maine, almost 90 loans have been made in

the program over the last 2 years for a total of over a million dollars. It has a proven record of helping small businesses that could

not otherwise get financing, and yet the administration regrettably

proposes to eliminate this crucial source of small business growth.

Today, I want to make clear this Committee’s opposition to the

SBA’s plan to charge additional fees on small businesses in the

7(a), 504, and SBIC programs. As I have already described, these

are highly successful programs. None receive appropriations to subsidize its loans.

Now the administration proposes to increase fees on small businesses to raise $7 million in revenue, which will be used for SBA’s

administrative costs. Increasing fees paid by small businesses is

not the way in which to reduce the budget. These small businesses

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are already paying fees and taxes to fund the agency. Let us not

make it more costly for them to access financing.

I believe that the Congress must do everything possible to sustain economic growth and job creation. The American economy requires a strong and vibrant Small Business Administration. Toward that end, this Committee is here to help the Administrator

and the agency to improve SBA’s programs in any conceivable and

possible way.

Finally, while today’s hearing is dedicated to the entrepreneurial

development and finance programs, rather than the disaster program, I still remain deeply troubled by the SBA’s Gulf Coast recovery efforts. I am particularly concerned as to whether or not the

SBA has adequately planned for a new hurricane season, which begins in just a month.

I strongly urge the SBA and all Federal employees to work to rebuild the area, to redouble their efforts, and obviously, we will

make an assessment of the progress that has been made to date

and what has been done, what further needs to be done, and also

whether or not the agency has a comprehensive approach to address any future disaster response.

[The prepared statement of Senator Snowe follows:]

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With that, I will recognize Senator Levin.

OPENING STATEMENT OF HON. CARL LEVIN, A UNITED

STATES SENATOR FROM MICHIGAN

Senator LEVIN. Madam Chair, thank you for calling this hearing,

and thank you for your ongoing strong commitment to the SBA and

its programs and your determination that we build on those programs and that we resist efforts to cut back those programs or to

weaken those programs.

I want to focus, Madam Chair, on just one program today, given

the time restraints that we have. Basically, I want to urge the SBA

to work with you and our Ranking Member and other Members of

this Committee to revive the SBIC Participating Securities Program, which has been, unfortunately, dropped, and which has provided so many important investments to small businesses across

this country that would otherwise not have been available to them.

This program provides small businesses with venture capital by

investing in promising small companies in exchange for stock in

those companies. This type of venture capital or equity investment

is known as ‘‘patient capital.’’ It gives companies the time, typically

5 years or more, to get established before having to give investors

a return on their investment.

This program, this SBA Participating Securities Program, fills

some important needs that are not met by other venture capital

funds. The SBIC Participating Securities Program makes equity investments in smaller amounts, between $1 million to $5 million, a

size geared more to small business needs. It makes investments in

areas of the country that are less likely to be served by non-SBIC

venture funds. It serves a more diverse segment of small businesses than non-SBIC venture funds, including investing in manufacturing sectors.

Unfortunately, this very wonderful program has been shut down

for the past 18 months since the administration ruled that under

the Federal Credit Reform Act that it must be considered as equity

by OMB and, therefore, requires an annual appropriation.

Now, workable solutions have been identified to modify the program so it can be scored at a zero subsidy. So far, the administration has not been willing to accept these solutions and has instead

said that the program is not necessary.

Well, I hope that the administration will reconsider their position

and make a serious effort to find a workable solution to restart the

Participating Securities SBIC Program so that important venture

capital investments can flow again to the small businesses that depend upon them for growth, expansion, and job creation.

Finally, I also would hope that an amendment of mine that previously passed the Senate to create the Small Business Intermediary Lending Pilot Program will be included in our authorization bill for the SBA again, Madam Chair, and would ask relative

to my major point here that the following documents be included

in the hearing record—the Participating Securities SBIC portfolio

companies in Michigan and their investments.

Chair SNOWE. Without objection, so ordered.

[The documents follow:]

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Senator LEVIN. Again, I thank you for convening this hearing

and for your tenacity in support of SBA and its programs. I join

you in welcoming the administrator, Mr. Barreto, and thanking

him for his, I guess, almost record-setting tenure at SBA. I guess

you are No. 2 and try harder.

[Laughter.]

Senator LEVIN. Thank you.

Chair SNOWE. Thank you, Senator Levin.

[The prepared statement of Senator Levin follows:]

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Senator Isakson, do you have any comments?

OPENING STATEMENT OF THE HONORABLE JOHNNY ISAKSON,

A UNITED STATES SENATOR FROM GEORGIA

Senator ISAKSON. Thank you, Madam Chairman.

I will waive any opening statement, except to thank you for your

leadership and to thank Administrator Barreto for his service at

the SBA. I understand he will be going to greener pastures or other

pastures. Being a small businessman, they look green, but they

aren’t always green. I remember that.

Thank you for all you have done. I appreciate your leadership at

the SBA and I look forward to your testimony.

Chair SNOWE. Thank you.

You may proceed. Thank you.

STATEMENT OF THE HONORABLE HECTOR V. BARRETO, ADMINISTRATOR, UNITED STATES SMALL BUSINESS ADMINISTRATION

Mr. BARRETO. Thank you very much.

First, let me start by saying I am truly grateful for the comments

that have been made, and I appreciate very much the support that

I have received from the Chair and from this Committee.

Chair Snowe and Senator Isakson, thank you for inviting me to

testify on reauthorization of the Small Business Administration

and its program. Over the past 4 years, SBA has dramatically increased its services to the small business community, providing billions in funding for small business and increasing Government contract amounts awarded to small businesses to an all-time high.

Those are examples of what the SBA has accomplished while, at

the same time, showing fiscal restraint and responsibility.

Our reauthorization proposal reflects our commitment to continuing that success. In general, the administration proposes a few

technical changes, the repeal of duplicative or unused programs,

and a 3-year reauthorization of SBA programs. Legislation has

been proposed to improve oversight and penalties to harmonize the

status for clarity.

However, SBA has proposed several significant items that I will

discuss in detail. First, the administrative fees for loans over a million dollars. SBA has proposed an administrative fee for loans over

$1 million, which would affect only a small percentage of loans, and

that would offset $7 million in the loan-making costs. The fee proposal would apply to the 7(a), the 504, and the SBIC debenture

programs.

With regards to the secondary market fee, SBA has proposed the

authority to impose a secondary market fee to cover future costs of

the ‘‘prompt payment’’ guaranty under Section 5(g) of the Small

Business Act. SBA does not anticipate charging this fee in either

fiscal years 2007 or 2008. However, this authority will enable SBA

to cover the future subsidy cost of the guaranty.

With regards to the CDC review fee and the 504 program, SBA

has proposed a conforming change for the 504 program, authorizing

a fee to offset the cost of examinations and oversight. This same

authority already exists in the 7(a) program.

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With regards to disaster loans, as I testified several weeks ago,

SBA is proposing a change in disaster loans. Absent legislative action, the cost of disaster loans will rise 20 percent in fiscal year

2007. This is largely due to the rising interest rates, a factor that

SBA cannot control.

The proposal would continue to offer deeply subsidized interest

rate for the first 5 years of a disaster loan and then adjust the rate

to a Treasury security-based rate, still well below a market rate.

SBA is also exploring changes to our delivery system. The Office

of Disaster Assistance has done an outstanding job approving nearly $9 billion in loans and processing over 300,000 applications.

Nevertheless, we can always strive to do better. We must do better.

SBA issued a request for information to solicit suggestions from

the private sector on how the SBA can better respond, particularly

in extraordinary disasters like Hurricane Katrina.

With regards to legislative proposals, Madam Chair, SBA has reviewed certain pending Senate legislation. Unfortunately, we have

not had a chance to review all of the bills. I would like to summarize our comments about several of the bills. Of course, we will be

happy to work with this Committee on the details.

With regards to S. 1603, 7(a), SBA has reviewed your bill,

Madam Chair, and we have the following comments. SBA supports

the proposed National Preferred Lenders Program. We have been

working on a similar model through administrative efforts. This

will relieve our lending partners, who often operate in several

States, of the burden of duplicative applications.

SBA also has no significant objection to an increase in the authorization level of the 7(a) program. With zero subsidy, the program has the potential for growth, and such an increase may be

prudent.

SBA also has no opposition to applying the alternative size

standard to 7(a) loans, as proposed in S. 1603. This has been used

successfully in the 504 and SBIC program for several years.

SBA has some concerns regarding the proposal to increase the

gross loan amount to $3 million. The administration has striven to

expand the use of the 7(a) program by smaller borrowers, increasing our loans under $200,000 dramatically. At the same time, while

loans over $1 million are a small percentage of the 7(a) portfolio,

roughly about 3 percent, they represent 20 percent of the dollar

volume.

Some argue that lower loan sizes have a negative effect on recovery rates and reduced fee income. That argument cuts both ways.

An increase in large loans creates an equivalent potential for a

negative effect. It requires far fewer larger defaults to create a significant increase in our losses.

SBA still has only limited information on the performance of

larger loans in our portfolio. More study and analysis should be

done. With more experience with the performance of large loans,

we can determine the feasibility of increasing the gross loan

amount.

With regards to S. 2162 with the CDCs, SBA is generally supportive of S. 2162 and its goals. It provides a helpful definition of

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certified development companies, or the CDC’s, and clarification of

the local development aspect of the program.

SBA supports authorizing CDCs to liquidate loans or to use an

approved contractor. This will provide more efficient liquidation actions and assist SBA in portfolio management. We look forward to

working with the Committee to clarify and define some of the details.

However, SBA is concerned with permitting persons to hold directorships on the boards of CDCs in different areas. As S. 2162

emphasizes, this is a local development program, and SBA believes

that CDC directors should participate locally. SBA would also like

a clarification on the application of Section 7 regarding public policy goals.

Finally, SBA has reservations about the provision permitting refinancing. SBA is concerned that refinancing of existing SBA loans

with new SBA loans, which is currently prohibited, would be allowed under this provision.

S. 1923, the SBICs, SBA has also reviewed S. 1923. We agree

with the Congressional Budget Office that this legislation would be

a debt program under Federal Credit Reform Act. We also agree

with the CBO that it would have a significant subsidy rate. SBA

has not created a subsidy model for the proposed program, but we

believe the CBO estimated rate of 20 percent to 25 percent is reasonable.

In order to achieve the zero subsidy rate specified in the legislation, the program would require significant upfront fees. Restricting the program to one tier of leverage would reduce the subsidy

rate, but we cannot accurately estimate that effect.

Finally, the administration believes that there is a significant

amount of private sector equity financing available. For example,

VentureExpert reports that in 2003 through 2005 over $9.5 billion

was placed in investments for fiscal year 2003 through 2005 in that

$500,000 to $5 million range.

Madam Chair, thank you again for inviting me to testify. Obviously, SBA’s reauthorization covers the full spectrum of our many

responsibilities, and I have only touched on a few points. I look forward to your questions. Again, thank you very much for your support and your passionate advocacy on behalf of small business.

[The prepared statement of Mr. Barreto follows:]

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Chair SNOWE. Thank you, Administrator Barreto, and I appreciate your testimony here this morning.

First, on the disaster situation, because I know that there are

several issues that are pending. One of which, of course, is the necessity of having additional funding through the supplemental. I

understand that the disaster loans would basically be gone by the

date May 19th. Is that true?

Mr. BARRETO. Well, we are looking at that very closely. We had

a meeting on this yesterday, and we are fine right now. Obviously,

we want to work with the Committees to get that supplemental approved. We think that that is very important. It is important for

a lot of reasons. We are measuring this every single day.

You know, the number, the date, the actual date could change a

little bit depending on the size of the loans that we are seeing right

now. As you know, we have processed now well over in excess—I

want to say 93 percent—of all of the applications. I think we are

down to about 25,000 applications. Of course, we have had some

stragglers come in because of the extensions of the due date.

We believe that we are going to be good until probably the third

week, maybe the last few days of May. It is critically important for

us to get that supplemental approved. Obviously, we will be reporting back to this Committee on a daily basis as to where we are on

that.

Chair SNOWE. Well, I appreciate it because that will be an ambitious schedule, given the standards of Congress with respect to

supplementals.

Mr. BARRETO. Sure.

Chair SNOWE. We are beginning that debate, obviously, this week

here in the U.S. Senate. Do you have a plan in the event this is

not passed by the end of May for any——

Mr. BARRETO. Sure.

Chair SNOWE. You know, because that is going to be critical in

the final analysis if all of the funding has been depleted.

Mr. BARRETO. Right now, we are estimating—and again, this

number could go up. We are estimating that we have 25 days of

lending left, 25 days of lending ability left. Of course, that depends

on the activity.

One of the things that we have mentioned is we are not going

to stop processing these loans. We are going to be underwriting

these loans. We are going to be processing these loans. We will not

stop.

The key issue here is that if on the 27th day we get the supplemental, or the 28th day, and we have been processing those loans,

we can fund those loans immediately. Of course, we will continue

to be in very close coordination and communication not only with

this Committee, but with our Appropriations Committee to make

sure that we can get that done as soon as possible.

Chair SNOWE. You mentioned that 93 percent of the applications

have been processed. Yet only about 13 percent of the money has

been disbursed. Why the disparity?

Mr. BARRETO. Well, in actuality, we have partially or fully disbursed approximately 40 percent of the loans that have been approved. When you talk about the net dollars that have been disbursed there are two reasons for the disparity.

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One is, as you know, that most of these loans are construction

loans. Those loans are drawn down as construction is completed.

We believe that a very important number to us is the number of

loans that have been approved and that have been partially or fully

disbursed, and I have said that number is closer to 40 percent.

The other thing is, and you have probably seen some of this in

the media, there are folks now that have been approved for loans

that still have not made a final determination of whether they are

going to take that loan. There are still—and we have all talked

about this for many months now—a lot of very difficult conditions

on the ground of whether or not certain areas will be rebuilt and

whether businesses can make a go of it with as much as 50 percent

of the population still gone, difficulty in finding workers for their

businesses, difficulty in finding contractors and building materials

for these businesses.

There are a lot of decisions that are still in flux. One of the biggest challenges is, as we have said before, is that we still have

many of these folks that have been approved for loans spread out

over 40 different States. They are still determining if they take the

loan, how do they come back? Do they come back just with one of

the family members while the rest of the family stays behind?

A lot of very challenging decisions. We are doing everything that

we can from our standpoint to get that money out as soon as possible. We are in constant contact with those borrowers who have

been approved about what they want to do. Of course, you know

that we also give them, once they are approved, 60 days to make

a determination.

Chair SNOWE. Do you have enough personnel——

Mr. BARRETO. We do.

Chair SNOWE [continuing]. For verification offices?

Mr. BARRETO. I have re-allocated some of the folks that we had,

you know? As we have gone through this process—you know, the

processing, the underwriting, the inspection—wherever possible, we

have moved more people into the closing aspect. We are continually

bringing on more people with the specialization for doing closing

types of activities.

Chair SNOWE. OK. With respect to the Small Business Investment Company Program, the SBICs, and I know you referred to it

and the concerns about maintaining zero subsidy. You know, the

administration back in 2005 had provided a $4 billion authorization for this program, and now we are down to not even agreeing

to any authorization. How do we go from $4 billion to $0 and say that the participating

securities dimension of the SBICs is non-essential, when, frankly,

I find it of value because it really does help in many instances to

bolster the manufacturing sector of our economy, which we desperately need. Otherwise, this capital would otherwise not be available to so many industries. It plays a pivotal role.

I understand about the problems of the past and the years in

which they experienced losses because of the downturn in the stock

market. You obviously have to lessen the risk. That is why my legislation moved toward a zero subsidy, which, in that case, obviously

it doesn’t represent a cost to the Government, but also provides the

available capital that is essential that I think we need.

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Mr. BARRETO. Well, first of all, let me say that we agree with you

wholeheartedly that the SBIC program has been an important program to small business. It has accomplished some great things. I

am not sure that we have ever said that it was unnecessary or unimportant because we believe that it is. Of course, we are very

proud of some of the incredible success stories.

Of course, we also want to state emphatically that we still have

a venture capital program. It is the debenture program that we

have, and we are still honoring all of the commitments that we

have made on the Participating Securities Program.

Our challenge has been and remains how can we get to a completely self-sustaining program? This is a challenge that we still

have with the losses that the program has taken. We know right

now that we have experienced $2.4 billion in losses. We also know

that we have $3.6 billion in potential exposure. We know that some

of that is going to turn into losses.

One of our biggest responsibilities that we have is to make sure

that we balance the program, that we manage the program, that

we try to minimize any additional losses in the future. One of the

things that we are concerned about, is the fact that if we are not

able to get the zero subsidy, this program is not going to be competitive.

The upfront fees that would be required—as you know, the CBO

has already come back and said that they believe that the cost of

the program will be anywhere from 20 percent to 25 percent. We

believe that that is probably an accurate figure from the experience

that we have had before.

What we want to continue doing, what we will do is continue

working with you and the industry to come up with a solution. We

haven’t been able to come up with something that we feel is workable to make this program completely self-sustaining, to make it

competitive in the marketplace, and to deal not only with the losses

that we have already experienced, but with the losses that we

know that we may have in the future.

Chair SNOWE. Well, do you think this program is necessary? If

you do, what would you propose as another means of providing this

particular part of it?

Mr. BARRETO. Sure. Well, a couple of things. One is, as I mentioned, that we do have a venture capital program. We still have

an SBIC program. We are still making venture capital investments

through our debenture venture capital program.

The other thing that we mentioned is—and it wasn’t always this

way—we now know that there are other participants in the marketplace. I mentioned a statistic that there was $10 billion that

went to these kinds of venture capital investments to companies

between that $500,000 and $5 million investment range.

I guess what I am saying is that before it may not have been this

way. There is capital available in the marketplace for small businesses that are interested in that kind of investment.

Again, from our standpoint, we just want to make sure—you

know, it has always been presented as a self-sustaining program,

a zero subsidy program, which wasn’t going to cost the taxpayers

anything. Well, it has already cost the taxpayers $2.4 billion. We

have got $3.6 billion still sitting out there.

27

I think it would be irresponsible for us to come if we didn’t have

a good solution. We haven’t given up on this. We want to continue

working toward that end. We just haven’t been able to figure a way

to get there.

Chair SNOWE. Well, the Tuck School of Business at Dartmouth

last year conducted a study on the SBIC program and indicated

that it really did serve a very important niche in the marketplace.

Especially in several ways, one of which was to address capital financing in underserved areas. I do think it is crucial that we work

through this.

Mr. BARRETO. Sure.

Chair SNOWE. To make sure that it is there, especially for the

small manufacturer that we are losing. Those are basically the sort

of mom and pop operations in rural America. I know that is true

in my State.

Mr. BARRETO. Sure.

Chair SNOWE. We are losing so many important industries. Are

we going to see a retrenchment of rural areas and underserved

areas in America because we are unwilling to take those risks so

that they have the available capital to succeed? And they very well

could.

I have seen a lot of small industries in my State right now, what

they are doing in the global marketplace on a small basis is creating a niche. We need to help them.

We want to go to a zero subsidy on this question, but I think we

have got to figure it out. I hope that you will share your analysis

to suggest whether this program isn’t necessary or what we can do

to get to the zero subsidy in a way that gives a comfort level to

the administration.

Mr. BARRETO. OK.

Chair SNOWE. Senator Isakson.

Senator ISAKSON. Thank you, Madam Chair.

In your testimony, I think I heard you say that the agency had

approved $9 billion in disaster loans in applicants from 40 States?

Mr. BARRETO. No. Well, yes. I want to preface this. We are responding to—those $9 billion and most of that is Katrina-related.

You are talking about Louisiana, Mississippi, Alabama. Most of it

is in Louisiana.

What I said is a lot of the residents, former residents of Louisiana, are spread over 40 different States. That is one of the

things that has been really challenging for us, trying to close these

loans and set up appointments with folks that aren’t in the State

anymore.

It is one of the things the Chair asked me—what one of the challenges are in making sure that these monies are disbursed. Because we have approved the money. It is available immediately

subject to closing. We haven’t disbursed all of it. We have disbursed about 40 percent of the loans that we have approved, partially or fully. There are a lot of folks spread all across the country

that still haven’t decided what to do.

Senator ISAKSON. Yes. A lot of them are in Georgia, which begs

the question now to justify my ignorance on the subject. Of the disaster loans that you are approving that are Katrina-related, are

28

they limited to investments in Alabama, Mississippi, and Louisiana?

Mr. BARRETO. That is a very good question, Senator. Sometimes,

and we do this kind of on a case-by-case basis, somebody who is

approved for—remember, what started it was they had a business

or a home in the affected disaster area. OK, that is the first requirement. You have got to be in the declared disaster area.

Once they go through that process, some of the times they will

come back to us and say, ‘‘You know what, I am not going to be

able to rebuild in my area.’’ They have decided that they are not

rebuilding in that area or, ‘‘My business isn’t sustainable anymore.

I depended on a large traffic flow. Fifty percent of the people are

gone. What I would like to do is take that money and invest it in

a different area.’’

In the past, that has also been problematic because sometimes

local officials will say, ‘‘Look, we don’t want any money that is approved for businesses or homes in our area going anywhere else.’’

Sometimes there have been prohibitions from doing that. We look

at that on a case-by-case basis.

I don’t believe that we have received a lot of those requests so

far, but I would be happy to investigate that.

Senator ISAKSON. Well, I may be totally off here, but I think

sometime in the past, we also had some fraud problems when people applied for the deeply discounted disaster loans based on a disaster that they ended up really not being hurt in. They were just

trying to take advantage of the program. Is that not correct?

Mr. BARRETO. Yes. That is absolutely correct. There has been

some writing about this. The New York Times has written a story

about this, and there has been some other writing.

We have found instances of that. Not to assume any mal intent,

but sometimes what will happen is people don’t know what a declared disaster area is. They will apply for a loan, and then we will

go back to them and say, ‘‘You know what, your property is not in

the declared disaster area. You are not eligible for a loan.’’

We have had instances like that already. Those loans are immediately withdrawn. That is part of that whole, when you look at the

funnel, 400,000 applications at the top, that is what came in. So

far, what has been approved is about 130,000 of them.

There are a lot of reasons why the rest of the folks didn’t get approved. Sometimes because of what you just said. Sometimes it is

because they didn’t want a loan in the first place. They actually

wanted a FEMA grant, and they had to go through our process and

get turned down before they could go to FEMA for the grant.

Senator ISAKSON. Last question on that subject. If an applicant

is approved, and they determine they are not going back to Louisiana or Mississippi because of a drop in population or not rebuilding the area or whatever, is it going to be a case-by-case basis as

to whether or not the money can go with them somewhere else?

Mr. BARRETO. That has been our practice. A case-by-case basis

unless something happens to change our authority. That has happened in the past, where a legislator from a particular State will

say, ‘‘I don’t want any disaster money leaving my State.’’

By the way, we saw this a little bit in New York after 9/11,

where a lot of the elected officials were very concerned not about

29

them necessarily leaving the State, but just leaving the area. In

other words you were a business that was by the World Trade Center. You had 100,000 people walking past your front door. They are

not there anymore. So you decide to move to one of the other boroughs. We saw that after 9/11.

So, yes, right now, on a case-by-case basis unless anything has

changed to our authority.

Senator ISAKSON. Thank you.

Chair SNOWE. Senator Thune.

OPENING STATEMENT OF THE HONORABLE JOHN THUNE,

A UNITED STATES SENATOR FROM SOUTH DAKOTA

Senator THUNE. Thank you, Madam Chair.

I commend you for holding this hearing on SBA’s financing programs. With the reauthorization upon us, it is fitting that as committee of jurisdiction that we review the programs that strengthen

our Nation’s small businesses.

I would also like to take this opportunity to congratulate and

thank Administrator Barreto for his service at the SBA.

Mr. BARRETO. Thank you very much, Senator.

Senator THUNE. You have served as administrator since President Bush took office. During that time, America’s small businesses

have had a strong and faithful advocate. Thanks to your leadership, our small businesses have better access to capital, and improved Federal procurement opportunities. Your presence at the

agency will be sorely missed.

I want to wish you all the best in your future endeavors and

thank you again for your service to our country and to America’s

small businesses.

Mr. BARRETO. Thank you very much, Senator.

Senator THUNE. I would like to address my brief remarks this

morning to one of the major issues confronting the Committee, and

that is whether SBA’s equity financing program should continue.

In 1994, Congress rightly determined the financing needs of

startup or early stage companies in States like South Dakota were

simply not being met by traditional venture capital firms. Accordingly, the Congress enacted the Participating Security Program

within the Small Business Investment Corporation. This program

is designed to provide patient risk capital to main street manufacturing and other underserved businesses.

Since that time, over $10 billion has been invested in these types

of companies and with the deal sizes ranging from about half a million dollars to $3 million.

Now, while traditional venture capital firms are flush with cash

to invest, they continue to focus on deals over $10 million and with

more mature, sophisticated companies. The Participating Security

Program has helped to fill that gap. Unfortunately, the program

has suffered like the rest of the economy after the effects of the

dot.com bubble burst and the attacks of 9/11. Some now believe

that it would be best to abandon the program.

For the past 18 months, no new licenses have been granted in

the Participating Security Program. This hiatus is unacceptable

and could have negative economic consequences down the road,

30

which is why I am pleased to co-sponsor Senate bill 1923, a bill to

revive and restructure the Participating Security Program.

I am concerned that if we fail to act on S. 1923, a vital source

of venture capital to smaller firms will be lost. Companies like

Bright Planet Corporation, located in Sioux Falls, South Dakota, a

leader of deep Web research, and J.M. Precision, Inc., a manufacturing company located in Madison, South Dakota, have both received SBIC investments slightly over a million dollars. Thanks to

this program, an infusion of capital has come into South Dakota,

resulting in economic growth and job creation.

It is my hope that the Administration can work with the Committee and find a workable compromise that meets the needs of

private investors and protects the interests of the taxpayers. I believe this can be achieved if realistic economic assumptions are

used when calculating the program subsidy rate.

In summary, the imperfections in the venture capital markets

that caused Congress to act on 10 years ago continue to persist, especially in the middle of the country. We must not let this public/

private partnership that has provided billions of dollars in equity

investments in small businesses wither away.

I look forward to working with the Chair and other Committee

Members to enact legislation that reduces SBA’s risks and maintains the needed incentives to attract private investors.

Administrator Barreto, I would, as I mentioned earlier, I want to

follow up with just a question, if I could?

Mr. BARRETO. Yes, sir.

Senator THUNE. I believe that this is a program that we need to

keep functioning in some form. You mentioned in your testimony

that you believe there is a good chance the reform program would

require a subsidy even though the legislation aims for it not to

have one.

I guess my question is, do you believe there is a compromise out

there that is more likely to carry a zero subsidy, and would the administration support that sort of a compromise?

Mr. BARRETO. Well, as I mentioned before, we are very open and

interested in finding a solution. If we can find that solution—and

I have to be very frank with you. We haven’t seen a proposal yet

that gets us to completely zero subsidy without any cost to the taxpayers, or a program that would be attractive to future participants

in the SBIC program because of what would probably be required—

some very, very large upfront fees.

In fact, in conversations that we have had with folks trying to

encourage them to be more involved in the venture capital program

in the past, many times folks said to us, ‘‘Look, if the fees go up

too high or if you are going to tack on a big subsidy rate onto this

that is going to affect us, there is no way that we can participate

in this program.’’

Our job really is to balance both of those concerns. How are you

able to have a Participating Securities Program that functions well,

that does not experience the kind of losses that we have had for

most of the program’s existence, and that it protects the American

taxpayer going forward?

We can’t do anything about all of the investments that didn’t

work out for us before the $2.4 billion that we already have on the

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books and the exposure that we have on $3.6 billion more. Can’t

do anything about that.

We need to be able to continue managing the program that we

have. Obviously, we are honoring the commitments that we have

made. Those participating securities funds that we currently have

can still draw down on capital. We are going to honor all of those.

Our big challenge is going forward. We haven’t come up with a

formula to do that, and we are more than willing to continue working with you, the Chair, this Committee, the industry, to keep

working on that. We will be the first ones to take that proposal,

a workable proposal and go back and really enroll the administration to it.

Nobody has said that the program is unnecessary or that it

should go away or that it hasn’t done good things. Our challenge

is just to find a way for us to be responsible with both of our responsibilities not only to the small businesses that need this capital, but also to the American taxpayer who funds these programs.

Senator THUNE. I appreciate that. Madam Chair, look forward to

working with you and Members of the Committee and with the

agency.

There are those out there, I think, who are involved in this area.

Regarding the debt financing piece of this, the SBA has done a terrific job filling that. I also believe that there, as I mentioned, companies like some of these small companies in my State that have

benefited from the equity investment that has come to the program. I understand and hear what you are saying about making

sure we do this in a fiscally responsible way, but I hope that we

can continue the dialog and work constructively to try and find

that solution.

It does seem, I think, that much of what is fueling the growth

in the economy are these types of small businesses, and I realize

that there have been some experiences after 9/11 and with the dotcom bubble bursting that have created some issues out there. It

certainly seems that this is something that we ought to try to figure out a way to continue to maintain as a resource that is available to small businesses in this country.

I thank you for your testimony again, for your great service to

the agency, to the small businesses in this country. Thank you.

Mr. BARRETO. Thank you very much, Senator.

Chair SNOWE. Thank you, Senator Thune. I’m looking forward to

working with you on that particular question.

Hopefully, the administration can share with us some financial

data to help us to examine some of these issues so that we can get

to a point of solving this problem with the SBICs because it does

provide significant venture capital to areas that otherwise would

just—companies and areas that otherwise would not be served with

access to this type of funding.

It really is important to support our economic base in underserved and rural areas similar to what Senator Thune is speaking

of in his State of South Dakota, similar to Maine. These areas are

part of the country that need that access to $500,000 to $5 million,

whatever. It really is absolutely vital. It is a lifeline.

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Mr. BARRETO. We completely agree, and I mean this sincerely.

We will work in earnest with this Committee to come up with viable solutions.

I did want to mention one thing, that we have been working on

a Rural Business Investment Company Program. That was something that was part of the Farm Bill. It is a Department of Agriculture program, but we have been asked to put that program together because of our prior expertise.

That is exactly what those funds will be used for—for small businesses in rural areas. And I am not saying that that will solve all

of the necessity for venture capital. I just want to say that that is

another tool that we may be able to depend on in the future.

Chair SNOWE. Well, it just seems to me, though, that under the

SBA, wouldn’t it be better to consolidate these issues? It creates a

lot of confusion.

It seems to me it is simpler, more streamlined to incorporate,

build upon the programs that have already been working to some

extent. I understand the losses that have occurred. We obviously

have to address those risks, but somehow try to maintain the zero

subsidy feature of this important dimension to the SBICs.

I think that is what essentially it is all about. We have got to

strive to do that because, otherwise, I just think it serves to create

a lot of confusion. It is great to have another program, but I think

we ought to build on this program if it is at all possible. We need

to just work it through if we can.

Mr. BARRETO. OK.

Chair SNOWE. Just a couple of more issues here. On the fees for

the 7(a), the 504, for example, and as well as the SBIC, of course,

you are recommending additional fees for these programs. They are

already zero subsidy programs. Now the administration is proposing new fees for any loans more than a million dollars.

That is going to create, I think, some financial difficulties for

companies who are trying to have access to this capital. Now we

are charging them fees for a zero subsidy program, and there is a

wide variance in the fees.

There is 7(a), where the increase would be $623 per loan, to the

504, it would be up to $11,000 for a loan of the maximum $10 million allowed under the program. Then, under the SBIC, as you

mentioned, an average of $45,360.

They are already paying for the loan guaranty costs. Now we find

we are going to add additional costs. Exactly what is the purpose?

I know you are saying to cover the administrative fees. I think

that, ultimately, you are going to reduce—we are already talking

about an industry that already is sensitive. Otherwise, they are not

going through the conventional lending process. They are going

through SBA.

Now you are adding additional fees. It just creates an element

of risk for their economic future survival.

Mr. BARRETO. Yes. I believe that we might have referenced this

in our prior testimony on the budget. I want to first state that we

are talking about 3 percent of the portfolio right now. That is the

only loans that we are doing over a million dollars in the 7(a) portfolio.

33

The other thing is, is that as we have looked at it, the differential in the payment here is pretty negligible. You are talking about

something like $14 a month difference on the 7(a) side. I think $31

difference on the 504 side on the million dollar-plus loans.

This is something to help offset some of the administrative costs,

some of the additional costs on us to provide these loans. I mentioned also that these loans also take up more than 20 percent of

the dollars of the portfolio.

When we have talked to our lenders and when we have talked

to small businesses, their key priority is that there be enough lending authority in the program. Of course, we have good news about

that. Next year, we will have a total of $25 billion of lending authority should our budget proposal pass.

They also want to make sure that there are no caps on the loans.

We have had to put caps on the loans in the past. Now that we

are at zero subsidy, we don’t have to do that anymore because we

are not subject to the appropriation, and we don’t run out of funds

the way that we used to.

The lenders are saying to us, ‘‘Look, we need a continuous program. That program can’t even be shut down for one day because

we dedicate millions of dollars to SBA lending, and we have thousands of employees.’’ That is what they have told us are their main

priorities.

This differential in the payment is not significant enough to prevent these kinds of loans being made. The other thing is that many

of the small businesses that are able to get million dollar loans

have more capacity. They have other options. Small business people are very discerning purchasers. If they feel that a loan program

doesn’t serve them, they have other options. They have other opportunities, especially at that million-dollar range.

We have asked for this slight increase in fee to offset what is becoming increasing administrative costs for us to provide the loan,

and we think that it is a fair compromise, if you will, and will afford us the ability to be able to provide a healthy program for years

to come.

Chair SNOWE. Do you have data that would demonstrate that

this will not be a problem for companies? I mean that this would

be a negligible impact? Is there any basis for making that because,

obviously, this is going to be something that would be a departure

and a new approach.

Mr. BARRETO. Sure. Well, some of the data that we have is the

anecdotal data of business people and lenders telling us this. In

other words, what they basically say is, ‘‘Look, $14 a month on a

million dollar loan is not going to prevent us from taking the loan

if we need it.’’ It is still competitive. In some cases, it makes the

best sense for us.

If they felt differently, they would probably choose another option. Remember, small businesses that can qualify for a million dollars are usually your businesses that have been around for a while,

have a good track record, have more capacity and, because of that,

have more options.

Chair SNOWE. Well, I know one of the witnesses in the second

panel would say on, for example, the 504 program, that it raised

about $300 million in excess fees.

34

Mr. BARRETO. Well, the 504 program, we are very happy and excited with the progress in that program. We have had a banner 2

years.

You remember that a couple of years ago, we were doing about $2.5 billion in those loans. Last year, we did $5 billion. We may

surpass $5 billion this year. We have budget authority next year

for $7.5 billion. That program is up 30 percent this year.

I mean——

Chair SNOWE. Why do we need to raise additional fees in the 504

then?

Mr. BARRETO. Again, what I think has happened——

Chair SNOWE. If they are already very successful and obviously

raising $300 million more——

Mr. BARRETO. Remember what we said is that what we are doing

here is offsetting the cost of being able to provide this great program slightly on the administrative side. It is not going to be anything that is going to affect the zero subsidy. One of the reasons

that we feel that that program and the 7(a) program are successful

is simply because we can offer it at a zero subsidy.

Chair SNOWE. The same is true with respect to the SBA’s proposal to increase interest rates for disaster loans. Here again, we

are changing the requirements for disaster loans. Instead of having

a fixed rate over the 8-year period, whatever, they are now going

to cap it after the first 5 years.

This is going to create some serious problems for people who are

at a very vulnerable stage in their lives and requiring disaster

loans. Why are we changing their provisions?

Mr. BARRETO. Well, the primary reason that we are doing that

is because—and this is not something that we have control over.

Interest rates have been going up over the last couple of years. We

have all seen it, and people that are refinancing their properties

have seen it. The interest rates have gone up. That interest rate increase has created a $41 million deficit for

the SBA. For us not to offer some kind of a solution, and I am not

saying that this is a popular solution. What we basically have done

is we have tried to again balance this. We have said, ‘‘Look, for the

first 5 years of a disaster, those are the critical years, we are going

to continue to subsidize that interest rate, deep subsidy.’’

After 5 years, after people are back on their feet, businesses are

going well again—values have started to come back—what we

would like to propose is that that interest rate track a Treasury instrument which will still be below market rates.

One of the things that we found out when we went back and

looked at our disaster loan portfolio is that we, right now, have a

pretty good number of people that prepay their loans in those first

5 years. Something like 25 percent of borrowers prepay those loans.

Chair SNOWE. In the first 5 years?

Mr. BARRETO. During the first 5 years.

Chair SNOWE. How many use the 8 percent or the 4 percent?

How many in each of those categories?

Mr. BARRETO. Well, most of those loans are at the 4 percent. We

have very few of those loans that really go into that higher interest

rate because of the credit elsewhere test. Most of the loans, like 90-

plus percent of the loans, are in that lower interest rate.

35

The reason that we are proposing this is, again, we know and we

have to be responsible, especially when we are in front of this Committee, is to tell you what our reality is. Our reality is, is that we

are dealing with higher interest rates the way that everybody else

is. That the net effect of those interest rates will be a $41 million

gap.

The way that we propose to offset that is to present this proposal

to allow interest rates after 5 years, after those first critical 5

years, to trend up with Treasury instruments, which, again, will be

below market interest rates. It will still be a better situation than

they could have gotten on their own, if they could even get a loan

from——

Chair SNOWE. Well, what are you estimating that the Treasury

rates will be at that point, do you know? What will you get, if you

say it is going to be much below. Obviously, you have a basis for

making that statement.

Mr. BARRETO. Well, I am saying that, as you know, interest rates

go up and down. It could be lower than what we see today.

Chair SNOWE. Well, I know. But what are you estimating? Obviously, you would surmise that it is going to do better. I would assume that that is true generally. It may well do better, I don’t

know. How would you know, based on the 8 percent or the 4 percent currently?

Mr. BARRETO. Remember, it is going to track with a U.S. Treasury instrument, which is always going to be lower than what a

market interest rate is going to be because the market interest rate

will add on the fees and the profit that private lenders have to

earn.

It will still be lower than what we are going to be seeing. The

private sector is not going to make loans less than what the Treasury rate is.

Chair SNOWE. You are incorporating another element of risk in

that point for people who are very vulnerable. You know, economically. They are already facing significant challenges. They have lost

a lot, and now having to take out an additional loan. They have

already had losses. Perhaps their insurance doesn’t cover all of

those losses.

Now getting out to an additional loan. Now after that 5 years,

you are saying, ‘‘Well, it is going to leave it open to the market,’’

really, basically what the Treasury is——

Mr. BARRETO. It will track up to a Treasury instrument.

Chair SNOWE. It is just, OK, you are incurring something.

Whether or not you decide you are going to have a variable interest

rate on your mortgage or have a fixed rate. It is that whole uncertainty that you can’t predict, especially for those disaster victims.

We are not talking about just in general. We are talking about

people who have already been exposed financially and are taking

on additional debt, who may have incurred other debt, and that

way they can’t be repaid through insurance. It is a combination of

things.

Mr. BARRETO. One of the items that will mitigate some of that

uncertainty is the fact that at closing, they will know what that

Treasury rate is going to be. In other words, they will be able to

36

make their decision knowing what that interest rate would be after

that 5 years.

As we have already said, the Treasury rate is always going to be

below the market interest rate. Again, we see this for any disaster.

We have a lot of people, even to this day, saying, ‘‘I don’t want a

loan. I already got a loan. I don’t want a loan.’’

If the only chance that I have for rebuilding my home or my

business is a long-term disaster loan from the SBA, then I at least

want it to be better than what I could get in the private market,

if I could get it in the private market. This will still accomplish

that.

Chair SNOWE. OK. Finally, on the micro loans. My last question

is I notice its the third consecutive year the SBA administration

has proposed eliminating the Micro Loan Program. It has been extremely valuable to my State, but I know in other parts of the

country as well.

It is hard for me to understand because these are the startups

that most certainly need to depend upon this type of program that

has proven to be very effective and valuable. What is the problem

with it?

Mr. BARRETO. There is no problem. Micro loans, as I go around

the country and talk to people, the whole concept of micro loans,

doing smaller loans. Helping startup businesses. Helping the

emerging markets. People are very, very passionate about that, as

I am.

I think that we never say and we don’t say here that micro loans

are unimportant, that we shouldn’t have micro loans, that people,

those folks that are in those communities don’t deserve to have

these kinds of micro credits. We agree with that 100 percent.

What we are saying, and maybe we are not saying it very well.

Obviously, I haven’t said it very well the last 3 years, and I am

not confident that I will be able to say it any better here. The

SBA’s Micro Loan Program is a very small program that touches

very few small businesses.

I am not saying that the small businesses that it touches in

Maine, in rural communities, and places around the country aren’t

important. They are important. For us, it is a little over 2,000 of

those loans every single year.

What I am saying is that SBA has gone through a radical transformation over those 4 years. We now do 60,000 small loans, small

loans like those micro loans, under $35,000. We do them in our

flagship loan program. We do them in the 7(a) portfolio. A third of

those loans go to minorities. Many of those loans go to women, and

they go all around this country.

What we have also said is that we know that SBA now is not

the only provider of a Micro Loan Program. We know because we

have investigated. There are 400 private sector micro lenders

spread across the United States who offer micro loans much less

expensively than the SBA program.

We have also said that we don’t feel that we are as effective or

as cost efficient as we should be on that program because that program literally costs us about a dollar for every dollar that we loan

out.

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What we have said is micro loans are important. There are a lot

of micro lending going on there. SBA does small loans now where

it never used to. When I first joined the SBA, the average size SBA

loan was almost a quarter of a million dollars. Average size loan

now is about mid-150’s. The reason for that is that so many more

of those small loans happen.

Sixty percent of the SBA portfolio now is in the SBA Express

Program. The SBA Express Program was a pilot program who

never had that kind of traction. I want to be clear that I am not

saying that micro loans are bad. I think micro loans are good. I am

just saying that SBA’s Micro Loan Program really doesn’t have the

reach or the breadth that it would need to to be an effective national program.

I know that this Committee has disagreed with that, and we respect this Committee’s decision over the last couple of years. We

continue to implement the Micro Loan Program. If Congress decides that we will implement this program next year, we will. We

shall.

Chair SNOWE. Well, I appreciate that because, obviously, there is

a lot of support, including I think many Members of this Committee, most certainly. In fact, it has demonstrated its effectiveness

and success. I know I can speak in Maine, where more than 90

loans have been made. Otherwise, companies who have no previous

history cannot have access to this type of financing, and they have

been very successful.

We want to encourage startup entrepreneurs. We will obviously

proceed, and hopefully, we can work with you. I think that there

is no question it will be restored in the reauthorization. I appreciate it.

Well, thank you, Mr. Barreto. Thank you again for your service.

Mr. BARRETO. Thank you very much, Chairman Snowe.

Chair SNOWE. Thank you.

Mr. BARRETO. I want you to know that I will always remain committed to the small business community, and if there is ever anything that I can do for you or for this Committee, it would be my

honor.

Thank you very much for the opportunity to serve.

Chair SNOWE. Well, thank you. No, thank you. Thank you for

your service, and we wish you well in the future.

Thank you. We applaud your leadership. Thank you.

OK. The second panel will begin with Harry Alford. Mr. Alford

is the present chief executive officer of the National Black Chamber

of Commerce, a nonprofit, nonpartisan organization dedicated to

the economic empowerment of African-American communities.

Secondly, we have Jim Baird from the Bay Area Development

Company. Bay Area specializes in providing 504 financing to small

and mid-sized companies throughout northern California.

Next is Jim Maxwell, the manager of Granite State Economic

Development Company/New England Small Business Finance,

which is a certified development company. It is one of the fastestgrowing certified development companies. It has played a leading

role in doubling SBA 504 loan assistance to Maine small businesses.

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Mark Morrissette, who will testify on behalf of North Atlantic

Capital, an SBIC in Maine. Mr. Morrissette’s capacity is managing

director. He works to identify promising small businesses in which

to invest in order to help them grow and prosper.

We welcome each and every one of you. If you can summarize

your statements in 5 minutes, and I know there may be some votes

at 12 o’clock or so. We will proceed and get to questions.

Thank you very much for being here and for your patience today.

Mr. Alford, we will begin with you. Thank you.

STATEMENT OF HARRY C. ALFORD, PRESIDENT AND CEO,

THE NATIONAL BLACK CHAMBER OF COMMERCE

Mr. ALFORD. Madam Chair, Mr. Ranking Member, and other distinguished Members of the Senate Committee on Small Business

and Entrepreneurship, thank you for inviting the National Black

Chamber of Commerce to speak before you today regarding the reauthorization of the Small Business Administration credit and

counseling programs.

We are faced with challenges in this global economy, and it must

be emphasized that small business will continue to be the life blood

for economic growth and job creation within this great Nation of

ours.

According to records for SBA lending comparing fiscal year 2001

to fiscal year 2005, African-American participation has not been

growing at any appreciable rate. The share of 7(a) loans remained

constant at 3 percent. 504 loans were also constant at 2 percent,

while the number of micro loans fell from 21 percent to 18 percent.

In terms of dollar volume, 7(a) loans rose from 4 percent to 7 percent. 504 loans remained constant at 2 percent, while micro loans

fell from 29 percent to 21 percent. As the black population in this

Nation is 13 percent, the participation levels for the 7(a) and 504

programs are, frankly, anemic.

With the ‘‘low doc’’ program being canceled, the future growth for

these programs is suspect, and that should give us all cause for

concern.

According to the U.S. Census Bureau, the number of AfricanAmerican businesses between 1997 and 2002 grew at a rate of 45

percent in numbers and 23 percent in volume. This is the fastestgrowing segment in the Nation. The demand for capital access in

the African-American community is going to surge, and it is important that the SBA vehicles for capital access gain in exposure and

utilization within the targeted community.

We are excited that this Committee has generated some bills to

address the above predicament. S. 2595 improves the SBA 504 loan

program. One aspect is increasing the lending limits for businesses

that are owned by veterans, minorities, and women.

In this global economy, our Members are growing and meeting

a new and broader customer base, which means more equipment,

infrastructure, et cetera. We encourage the entire Senate to support this legislation.

Another key bill coming out of the Committee is S. 2594, which

improves the 7(a) lending program. One key component is the establishment of the Office of Minority Small Business Development

in the SBA with an annual budget and requirements to monitor

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the outcome of SBA’s programs and ensure the SBA’s State offices

have money to market to minorities.

While this has relevance to the lending side of the SBA, it is established to address the need in all of SBA’s programs—i.e., credit,

counseling, and contracting—to reach more minorities. This office

needs this broader jurisdiction, funding to back it, and more access

and autonomy than the current minority offices at the SBA that

focus on contracting.

The timing of S. 2594 is appropriate as African-American businesses grow at record numbers and are creating a great demand

for more counseling as well as lending possibilities.

We are very pleased that our Nation’s business schools are starting to understand the need to teach entrepreneurship as opposed

to readying students for the corporate world. Business schools, such

as that of Syracuse University, require students to form an active

business as a requirement for graduation.

Historically Black Colleges and Universities have recognized the

importance of entrepreneurship also. This is why the NBCC is

quite excited about S. 2586, or the Minority Entrepreneurship and

Innovation Pilot Program. This program is relevant to counseling

and entrepreneurial development. It will fund HBCUs and other

minority-populated institutions up to $1 million each for 2 years to

establish entrepreneur development programs, and there will be 24

awards granted.

If this bill becomes legislation, we will partner with various institutions and compete for these grants. We could create a strong resource pool for business incubation and equip our future leaders

with skill sets that ready them for this very competitive world.

Such new entrepreneurs will become job creators with their innovation and acumen.

The number of field workers, boots on the ground, for the SBA

has been greatly reduced over the years. When the Federal marketplace was nearly half the size it is now, there were 73 procurement

center representatives. Today, there are only 58. Likewise, the

number of commercial marketing representatives has been decreased to only 34.

We need more of these representatives to provide more counseling to the fast-growing number of our businesses. Also we need

more representatives who provide full-time service, not the sharing

of additional duties. In essence, it is imperative that we have a

very strong SBA and equipped to provide the demands of a fastgrowing small business population.

In sum, we support all of these efforts that will enhance the opportunities for lending and counseling. Our Nation is enjoying appreciable growth in small business creation, and that growth must

be met with programs that will ensure development through improving skill sets and providing ‘‘fuel,’’ i.e., capital, for entrepreneurs.

Thank you, Madam.

[The prepared statement of Mr. Alford follows:]

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Chair SNOWE. Thank you, Mr. Alford.

Mr. Baird.

STATEMENT OF JAMES BAIRD, EXECUTIVE DIRECTOR AND

CEO, BAY AREA DEVELOPMENT COMPANY, WALNUT CREEK,

CALIFORNIA

Mr. BAIRD. Thank you.

Good morning. I am Jim Baird, the executive director of the Bay

Area Development Company from the San Francisco Bay area. As

one of the original CDCs in the 504 program, I am here to represent our CDC and to provide the perspective of an experienced

CDC operating out in the field.

I would like to thank the Chair and the Committee for giving me

the opportunity to provide my remarks on the SBA 504 program.

Moreover, I would personally like to thank the leadership of this

Committee for continually and steadfastly championing small business issues, including those of the 504 program, and for introducing legislation that, for the first time in 25 years, would define

in statute the specific legislative framework as to how our industry

should best be structured and best operate.

Bay Area Development Company was founded in 1981. In the

last 25 years, we have provided assistance to over 1,100 entrepreneurs, representing SBA 504 funds of over $600 million, which

is leveraged to over $1.8 billion in total private sector funds and

investment. That activity has resulted in our clients creating over

12,000 jobs during that period of time.

In addition to our 504 economic development activities, in the

last 5 years, our CDC has provided our communities with well over

a quarter of a million dollars of economic development, sponsorships, and grants to a host of community development organizations. We also donate hundreds of hours each year serving on the

boards and advising and assisting those organizations.

The SBA 504 program is operating in an environment of great

change, including the introduction of universal statewide and

multi-state competition and nationwide centralized processing of

504 loans.

The question has been asked is, is change good or bad for the 504

program? My opinion is that, to date, change has been very good.

The year-to-year growth in the 2.5 years since these changes

were first implemented are between 20 percent and 30 percent in

numbers of loans and dollars of program assistance, and that I believe it is developing 504 capacity in areas that are historically underserved, including regions and States that are now beginning to

develop 504 capacity that didn’t previously have it. The initial results, in short, are more loans for more businesses in more communities.

The change also has potential pitfalls. We need to be aware that

it could cause CDCs to do badly structured projects, which would

result in higher losses and higher rates for businesses. It could

cause CDCs to neglect their economic development responsibilities.

Also we need to keep in mind the challenges of growth and success, and this includes the need to continue to maintain adequate

staffing of the centralized processing and servicing centers so that

we will have a workable turnaround time for our loan applicants,

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so that we can maximize recoveries on SBA defaulted loans, and

in order for the SBA to have the resources to oversee a substantially larger program.

There have been issues raised about CDCs as nonprofits, and

there are several points I would like to make on this as I believe

that CDCs and their nonprofit role is not well or widely understood.

Basically, as nonprofit corporations, CDCs are mission driven,

and this is critical to the role of CDCs in three different ways. The

first is that, as nonprofit corporations, we are able to provide 504

at an extraordinarily low cost to the Nation’s small businesses.

The second is that CDCs play a critical role in balancing the interests of the small businesses, the Small Business Administration,

and the community on each and every project. CDCs’ boards, staff,

loan committees, et cetera, all serve to provide the internal guidance and local knowledge and input that is necessary to operate in

this manner. This is absolutely critical to the success of the 504

program, and my question would be if CDCs, as nonprofits, didn’t

do that, who could?

The third point is that CDCs, as I mentioned before, significantly

re-invest in their communities as set forth by the SBA and by Congress. It is basically the combination of these three major characteristics—being low-cost service providers; as being able to effectively balance the interests of small businesses, the SBA, and the

local community needs; and in implementing significant non-504

economic development—that represents the true hidden value of

CDCs.

With that, I will conclude my remarks and, again, would just like

to thank you for the honor of being able to testify before you. I hope

that we are able to work closely together in the furtherment of

your legislative package.

[The prepared statement of Mr. Baird follows:]

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Chair SNOWE. Thank you, Mr. Baird. Appreciate that.

Mr. Maxwell, welcome.

STATEMENT OF JAMES A. MAXWELL, 504 STATEMENT

MANAGER, GRANITE STATE ECONOMIC DEVELOPMENT

CORPORATION/NEW ENGLAND BUSINESS FINANCE

Mr. MAXWELL. Madame Chair, thank you for inviting me today

to talk about the 504 program.

My name is Jim Maxwell. I have been a hands-on 503/504 practitioner for 25 years, starting in 1981 with the city of St. Louis. I

have been active in CDC management and underwriting, loan processing, credit underwriting for that period of time.

I am currently the State 504 manager for Maine. The Granite

State Certified Development Company/New England Business Finance, which came in as a local expansion area, local economic area

in 2003, and it went statewide in 2004. Has now become one of the

region’s fastest-growing certified development companies.

After being started in 1982, Granite State Development Corporation expanded statewide in New Hampshire in 1987, and again, we

became statewide in Maine in 2004. We are now in seven counties

in the State of Massachusetts as a local expansion area. We have assisted 1,700 companies, providing about $600 million of SBA 504 financing and leveraging that with about $975 million

of bank participation. On a per capita basis, we are the highest per

capita lender in the SBA 504 program in the Nation.

We are a rural area. Most of the towns that we deal with are

5,000 people or less. Our debenture size is probably on the smaller

end of the portfolio, and we have a currency rate of about 96.5 percent. We are, at this point with the expansions, doing about one of

every three deals in the New England region.

Our mission has been and we are responsible for this delivery of

this very powerful program. The program came about by the formation of local development companies under the Small Business Act,

and we believe that not only in the spirit and practice, we perform

that duty every day. We talk to bankers, small businesses, chambers of commerce. We are there. We are kissing babies. We are

doing everything that we have to do to get out there and talk to

people about what needs to be done.

As you know in the State of Maine, you can wake up in the

morning to have a meeting. You can drive 8 hours and still not be

there. As I was telling your staff before, I could have driven to

Washington faster than I could have gone to Presque Isle from

where I live.

We are local, and our deals are smaller. Our companies are

smaller. The needs of our companies are terrific, but we still need

access to financing, and we get out and do that on a regular basis.

I would just concur with what Jim had to say about the size of

the program. I think we are doing a great job. I think that the

changes with centralized processing have been terrific. It is a

standardized program, a national program. We know what we are

doing when we get there. They know what they are doing when

they get our package. The turnaround time has been great.

I think another important strategy has been the creation of local

economic areas and multi-state expansions. I think that bringing

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expertise into areas, especially areas in our part of the country

where it is very rural. When I was with the city of Boston, I could

walk 5 minutes and make all the loans I wanted to. Now I have

to drive 3, 4, and 5 hours. We deliver those into those States that

are underserved.

I will say that there are a number of things in your legislation

that I consider to be very positive. I think the legislation that includes liquidation, finally bringing that down to the CDC level is

a great thing. We have more control. I think we will have a higher

recovery.

I think that assistance to low-income areas is a public policy

goal. We have had that in the State of Maine every day, every

week. I know I was talking last week about one of the mills had

closed. We create low-income areas when mills close, and we need

to find ways to help those companies.

I like the combination of the 504 and the 7(a) because some companies start with a 7(a), and then they need money to build or buy

a facility. If they are maxed out on 7(a) exposure, then we can’t

help them.

Refinancing I think is a good thing. I think that it can be done

reasonably, and I think that it is a positive step to assist companies and also helps our collateral position and helps access funds,

more funds at a lower interest rate.

I am against any fees that are unfounded. I think as you were

saying earlier today, I think we need to see why we need higher

fees. I am against fees.

Use of excess funds in the area. I think your legislation was right

on with the proposal. I think it is terrific.

Loan committee participation. It helps make a CDC operate more

efficiently. Aggregate accounting is another one of those that just

make sense proposals.

Again, I thank you. I am proud to be from the State that you represent, and I will be more than happy to answer any questions.

[The prepared statement of Mr. Maxwell follows:]

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Chair SNOWE. Thank you very much, Jim.

Mr. Morrissette, welcome, too. Thank you.

STATEMENT OF MARK MORRISSETTE, MANAGING DIRECTOR,

NORTH ATLANTIC CAPITAL

Mr. MORRISSETTE. Thank you. Thank you very much, Senator

Snowe.

It is an honor to be here from Falmouth, Maine, today, and I appreciate the chance to have the opportunity to appear before the

Committee to present our views on the issues pertaining to the

SBIC program.

The SBIC program has been a major success since its 1958 inception in providing venture financing so critical to growing U.S. small

businesses that are not likely to find financing from other sources.

As you noted in your opening remarks, the program has been a

model for governments around the world.

Today, the SBIC program is at a crossroads. The decisions made

by this Committee this year will determine the face of the SBIC

program for years to come. The question the Committee must answer is will there be an SBIC program that provides equity capital

for early stage and growth financing? My oral testimony will focus

on that issue.

The administration says ‘‘no’’ when asked this question. The administration says there is no demonstrated need for an equity program and that it is not aware of any studies on the issue. The administration says the Government guaranteed loan programs,

among them the debenture SBIC program, are sufficient to meet

all venture capital needs of U.S. small businesses.

That position ignores the 2005 Tuck School of Business at Dartmouth College study on the equity capital gap faced by small businesses. It ignores the 2005 House testimony by Susan Preston, an

expert on angel investing, and it ignores the testimony of Daniel

O’Connell, the director of the University of Illinois Golder Center

for Private Equity.

It ignores the views of the National Venture Capital Association,

whose members have no interest in a government program that impedes in their own areas. The only fact that the administration

cites is data from a PriceWaterhouseCooper study, saying that

there was $9.5 billion of investments made in the years 2003

through 2005 in the $500,000 to $5 million range.

That is the range that is addressed by the Participating Securities SBIC Program. That fact is not offered as a statement for what

the market need is. It is just a fact.

If we explore that fact a little further, we find SBIC participating

security investments in that range actually totaled $4.1 billion for

the same 3-year period. That $4.1 billion is included in the $9.5 billion. It is 43 percent of the investment capital in the target range

during the period.

We think it is clear that eliminating 43 percent of the equity financing available to small companies is something that will have

a negative impact on the economy and on the creation of jobs. True,

certain high-tech companies and certain buzz industries and certain geographies will always attract a certain amount of investment capital. The main street companies, the small manufacturing

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businesses, the businesses located in diverse geographic areas like

Maine all depend on that 43 percent of capital that the administration believes is unnecessary to America’s well-being.

Whether the administration is right or wrong is what this Committee must decide. If you decide the administration is right, there

is nothing more to do. The Participating Security Program will

ramp down quickly over the next few years to zero equity investments.

However, if you decide the administration is wrong, there is work

to be done, and we stand ready to help however we can. S. 1923 is

a good bill, and NASBIC supports it. The bill rebalances the interests of all stakeholders in the current Participating Securities Program in a manner that will ensure the continuation of the SBIC

equity capital investments in U.S. small businesses at no cost to

the taxpayers.

I would like to end my testimony by speaking of costs and benefits. The administration continually raises the issues of cost when

discussing the Participating Securities Program, claiming that its

current negative cash position of approximately $2 billion will end

up a program loss when the books are finally closed on the program 7 or 8 years from now.

The fact is we don’t know if that is true or not. After all, for the

first 6 years of the program, the administration was running a

positive cash position in the program. What we do know is that a

lot of money was invested by the Participating Securities Program

in the 3 years leading up to the market crash and recession of

2000. It is not surprising a lot of that money was lost.

However, the need to support small businesses did not end with

the crash. To the contrary, it became more important to the country, as always depending on the small business sector to lead the

country out of recession.

In that regard, the Participating Security Program was a shining

example. During the critical early recovery years of 2000 to 2003,

all venture capital investments fell by 83 percent. The participating

securities investments fell by just 23 percent. The Participating Security Program was more active and more effective when small

businesses needed it most.

In fact, the $10.8 billion in participating securities investments

made since the program’s 1994 inception have led to the creation

of an estimated 300,000 new jobs and $51 billion in revenue for the

small businesses that were financed.

While no one wants to see the SBA lose money—we lose money

when they lose money—these gains cited more than offset the current costs. We hope the Committee will focus on these positive facts

when considering S. 1923. The mission has not changed, and the

need is still there.

We look forward to working with you to make sure the SBIC program continues as a program that makes a very positive difference

for growing U.S. small businesses in search of scarce equity capital.

Thank you again.

[The prepared statement of Mr. Morrissette follows:]

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Chair SNOWE. Thank you. I want to thank you all. I appreciate

it very much.

First, since Senator Kerry was unable to attend this hearing

today, I would like to include his entire statement without objection in the record.

[The prepared statement of Senator Kerry follows:]

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Chair SNOWE. Let me just—you heard the administrator here

today, in some of the areas that he spoke to, and of course, on the

SBICs, and you addressed some of those issues here today. What

is your response to this whole question?

Mr. MORRISSETTE. Well, I think that the administration thinks

that the debenture program is a venture program, and it is not.

Debt lending is not the same thing as equity lending. I think that

is one really key and important factor.

The other is, as I said in my testimony, they focus a lot on the

fact that there was a large amount of money invested in this small

size range. Those dollars count the SBIC funds that were invested,

and most or something like 43 percent of the dollars invested were

from SBICs.

I know from my own experience that the dollars that we have invested have brought in other venture capital funds as well. We

have led investments that non-SBICs have come in and invested in,

in businesses in small towns and in rural areas across the United

States.

The equity programs, they also seem to want to focus on the fact

that they can’t find a way to make an equity program profitable.

We wouldn’t be in business if equity programs couldn’t be profitable. I know they can be profitable. I am sure there is a way, and

I think that S. 1923 is a very good step in that direction.

Chair SNOWE. I appreciate that.

Mr. Alford, you were talking about, excuse me, procurement center representatives. There used to be 73. We are now down to 58

at a time when the market for Federal contracts has doubled, more

than doubled in size.

I know just from my own experience in Maine, where I have been

working with these representatives to, for example, just on the

‘‘hub zone’’ program, to enhance the eligibility so that small businesses, especially in disadvantaged areas, can have more access to

Federal contracts.

We have limited capacity, and it is that kind of financing and assistance that becomes so useful for businesses to participate in the

$300 billion worth of Federal contracts that are issued on an annual basis.

What do you think are the implications of having fewer rather

than more?

Mr. ALFORD. You won’t find a more demoralized individual than

a PCR rep. I have interviewed some. For their stress levels and the

amount—I was in Los Angeles, and the guy literally broke into

tears. It appeared he was just on the verge of a nervous breakdown

because there were so many opportunities out there, but there is

only 24 hours in a day.

I saw this coming back in the 1990’s, when they started stripping

it down. We need more people trained, qualified, to give counseling

out there in the field. The SBA is just fading away.

The SBIC is fading away. It is gone in the black community. It

is gone. It is funny in New Orleans, where we are using French

money and Belgian money and Russian money for business loans.

We have got Israeli money servicing the black churches in the Gulf.

That is kind of sad.

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Chair SNOWE. Yes, that is a sad commentary on where we are

standing today.

Well, we know that SBA could have been on the front lines and

showcasing, and it has been unfortunately all the problems that

evolved. I appreciate what you are saying and sharing that sad

story as well about a procurement representative having to feel so

much stress.

I agree there is so much need out there and demand to be able

to connect small businesses with Federal contracts. That is why I

included in the Senate budget resolution an amendment increasing

them to 100, and I am urging them to continue that in the Appropriations Committee as well. Hopefully, it will be part of the next

year’s budget. I will certainly make sure to make that happen.

I mean that is just one opportunity where you could make small

businesses expand, create jobs, or retain the ones that they have

and particularly in underserved areas that have been hard hit by

closures.

Mr. ALFORD. Appreciate your concern.

Chair SNOWE. Also in New Orleans, I agree. I couldn’t agree with

you more. We are going to do everything we can to get to the heart

of that problem because it is really regrettable and tragic that we

have had so many difficulties in distributing these kind of funds so

that you can rebuild the local economy, which is almost wholly dependent on small business.

Mr. ALFORD. Yes, ma’am.

Chair SNOWE. Mr. Baird and Mr. Maxwell, 504s. What do you

think specifically the Committee should address in the reauthorization?

Mr. BAIRD. I think that there are a number of items in the draft

legislation or the introduced legislation that have already been addressed, including raising the reauthorization level from what the

administration had proposed to a level proposed by the Committee

that is adequate to fund the program at a zero subsidy over the

next 3 years, I believe.

I think also that you are exactly right in your description of the

504 program with a zero subsidy model. The administration is proposing to additionally fee the program at the same time that the

subsidy model is estimated to be funding $300 million of surplus

into the Treasury, and I think that opposition to those fees is essential and not just for the current proposed fees at the current

level.

Moreover, I would be concerned about what happens next year

and the year after that and the other programs.

I also think that the legislation has included a critical aspect of

mandating CDC participation in liquidations. I think that CDCs,

many of them have the resources or all of them could hire the resources to much more effectively deal with defaults and maximize

recoveries, and I think those are just critical.

Chair SNOWE. Appreciate that.

Mr. Maxwell.

Mr. MAXWELL. Well, I second many of the things that Jim just

addressed. Again, being a practitioner, I am the guy who is sitting

across the table from somebody when I tell them about a new fee

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or they ask me to explain what it is for. Sometimes I kind of get

lost in the description.

I think that this is a zero subsidy program. I think that the fees

are high enough right now. If somebody can explain to me reasonably why they should be higher and I can explain it to them because, ultimately, it is the small business that pays them.

I think access to financing to a great extent, I know that the administrator talked about over a million dollars. In our State, to

have somebody invest over a million dollars, we have to pull them

from the South some place and blindfold them to come up. I think

that having more fees at whatever level is not a good thing. Especially if it is to fund some staffing-related issue at the SBA, it just

doesn’t make any sense to me.

Additionally, I echo liquidation. Liquidation is an important aspect of our job. We are responsible for doing everything else in this

program with the oversight of the SBA. We think we do that very

well. We do it very ethically.

On the other side, when it comes to the times when we have a

96.5 percent currency rate in our portfolio, we have had a couple

of clunkers in there. It would have been a lot easier for us to do

the liquidation than to have it go through some out of area process.

Those are the couple of things that I focus on.

Chair SNOWE. I appreciate that. Well, I think, in your testimony

you indicated that SBA had raised $300 million more in fees, in excess fees, as a matter of fact. I don’t know why they would move

in a direction to increase those fees or to now impose fees in programs that otherwise wasn’t the case.

I agree, you know? I think that it is going to have, I think, an

adverse impact at a precarious time in our own economy. For those

who otherwise wouldn’t have access to financing and incurring another additional cost of doing business. They have overestimated,

obviously, the default rate by charging these fees if they have

raised more than $300 million.

We will obviously get to the heart of all that, but I think my intent is clear, and hopefully, we will get a majority to agree as well

on many of these questions that I think are so important.

I appreciate your testimony. I wish I could spend more time with

you. Again, I do want to thank you for your patience. Also, and

most especially, in working through this reauthorization process to

make sure that we continue to get your input and insights as to

how best to craft some of these provisions.

I have laid out some markers with respect to my provisions and

bills, but we certainly want to get your input as we move forward

in trying to shape the best legislation possible for the future and

making sure that it is going to suit small businesses and actually

bolster small business at a time we desperately need it.

To help, that you were mentioning Mr. Alford, down in New Orleans in the disaster areas, that we really need to step up to the

plate here and get this done and get it done right. It should have

been done a while back. We are going to continue to fight that effort.

Again, I want to thank all of you for your patience and your time

and your contributions. Thank you very much. Thank you.

80

The record for this hearing will remain open for an additional 2

weeks until noon on May 10th. In addition, any written questions

for the administrator must be submitted to the Committee by noon

on April 28th. We will forward them to Mr. Barreto for written responses.

Again, thank you for this hearing. This Committee hearing has

adjourned.

[Whereupon, at 12:14 p.m., the Committee was adjourned.]

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