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94–650 2015

IMPROVING CAPITAL ACCESS PROGRAMS WITHIN 

THE SBA 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND 

CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MAY 19, 2015 

Small Business Committee Document Number 114–011 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

STEVE CHABOT, Ohio, Chairman 

STEVE KING, Iowa 

BLAINE LUETKEMEYER, Missouri 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

TOM RICE, South Carolina 

CHRIS GIBSON, New York 

DAVE BRAT, Virginia 

AUMUA AMATA COLEMAN RADEWAGEN, American Samoa 

STEVE KNIGHT, California 

CARLOS CURBELO, Florida 

MIKE BOST, Illinois 

CRESENT HARDY, Nevada 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

YVETTE CLARK, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRENDA LAWRENCE, Michigan 

ALMA ADAMS, North Carolina 

SETH MOULTON, Massachusetts 

MARK TAKAI, Hawaii 

KEVIN FITZPATRICK, Staff Director 

STEPHEN DENNIS, Deputy Staff Director for Policy 

JAN OLIVER, Deputy Staff Director for Operation 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

Hon. Judy Chu ......................................................................................................... 1 

WITNESSES 

Mr. Rich Bradshaw, President, Specialized Lending, United Community 

Bank, Greenville, SC, testifying on behalf of the National Association of 

Government Guaranteed Lenders (NAGGL) ..................................................... 3 

Ms. Barbara Vohryzek, President and CEO, National Association of Development Companies, Washington, DC ..................................................................... 5 

Mr. Brett Palmer, President, Small Business Investor Alliance, Washington, 

DC .......................................................................................................................... 7 

Mr. Brandon Napoli, Director of Microlending, Valley Economic Development 

Center, Van Nuys, CA ......................................................................................... 9 

APPENDIX 

Prepared Statements: 

Mr. Rich Bradshaw, President, Specialized Lending, United Community 

Bank, Greenville, SC, testifying on behalf of the National Association 

of Government Guaranteed Lenders (NAGGL) .......................................... 25 

Ms. Barbara Vohryzek, President and CEO, National Association of Development Companies, Washington, DC ..................................................... 31 

Mr. Brett Palmer, President, Small Business Investor Alliance, Washington, DC ..................................................................................................... 34 

Mr. Brandon Napoli, Director of Microlending, Valley Economic Development Center, Van Nuys, CA ........................................................................ 44 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

Friends of the SBA Microloan Program .......................................................... 47 

SBREP-219 with DISTILLER

SBREP-219 with DISTILLER

(1) 

IMPROVING CAPITAL ACCESS PROGRAMS 

WITHIN THE SBA 

TUESDAY, MAY 19, 2015 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND CAPITAL ACCESS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

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

the subcommittee] presiding. 

Present: Representatives Rice, Chabot, Hanna, Huelskamp, Brat, 

Chu, and Hahn. 

Chairman RICE. Good morning. Call to order this meeting of the 

Subcommittee on Economic Growth, Tax, and Capital Access of the 

Small Business Committee of May 19, 2015. Thank you all for 

being with us today. I call this hearing to order. 

As a result of the Great Recession, lending to small firms declined, and only recently have we started to see signs of growth. 

For small businesses, access to capital is often the deciding factor 

if a business will expand or close its doors. Since the Small Business Administration’s creation over 60 years ago, the agency has 

been tasked to administer programs that help entrepreneurs receive capital. In doing so, the SBA oversees four primary lending 

programs: The 7(a) Guaranteed Loan Program, the Certified Development Company Loan Program, the Small Business Investment 

Company Program, and the Microloan Program. 

Each of these programs, as we will hear today, serves a unique 

purpose and aims to fill a gap in the commercial marketplace. Although this is a great oversimplification of the process, the Small 

Business Administration does not directly provide funds to small 

businesses through any of these programs. Instead, the Administration guarantees the repayment of credit and the equity issued 

by private-sector partners. These industry partners are vital to the 

success of the programs and ensuring that small businesses have 

access to the capital they need to grow. 

Today, we are fortunate to have an industry witness here from 

each program to shed light on the assistance they provide, and 

share with us their thoughts on how they can better their respective programs. I look forward to hearing your recommendations, 

and thank you all for taking the time to be here. I now yield to 

the Ranking Member for her opening remarks. 

Ms. CHU. Thank you so much, Mr. Chair. And I thank all the 

witnesses for being here today. I have been looking forward to this 

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2 

hearing, especially since I know how valuable your programs are. 

And today’s hearing will provide even greater insight into these access-to-capital programs and what potential improvements could be 

made to help these initiatives reach their full potential. 

Our small business sector is back at the heart of job creation 

after one of the worst economic downturns in history. Small firms 

with less than 50 employees have averaged 106,000 new jobs per 

month for more than a year, and that is a good sign. As the economy continues to strengthen, more entrepreneurs will be seeking 

capital to start a new venture or expand an existing business. And 

the Small Business Administration’s loan programs fill critical gaps 

in the lending market for small businesses that cannot access traditional lending sources. 

For more than 50 years, the SBA has been assisting America’s 

entrepreneurs and small business owners through a myriad of capital programs, including 7(a), 504/CDC, microloans, and the SBIC 

Program. Last year, it channeled more than $30 billion in assistance to over 58,000 small firms under these programs. And for 

2015, SBA is on track to provide over $25 billion in capital to small 

businesses. 

Each program here fills a distinctive, specific need in the market. 

The 7(a) Program, SBA’s flagship access-to-capital initiative, has 

made an impressive $19 billion in capital available to small businesses in 2014. This number has continued to improve over the 

past few years; however, more must be done to encourage lending 

the small-dollar loans, as well as to increase lending in underserved markets—and particularly for women, minorities, and veterans. Small-dollar loans used to account for 25 percent of all dollars approved, but today, that figure is just 10 percent. 

The 504/CDC Program provides long-term, fixed-rate loans to 

help small businesses obtain key fixed assets to expand or modernize—such as in real estate, land, or equipment. Since 1990, the 

program has provided $64 billion through more than 120,000 loans. 

In my home state of California, 504 loans have added over 500,000 

jobs to the economy, and benefitted over 20,000 entrepreneurs; 

however, the program faced challenges during the economic downturn to the nature of real-estate-heavy programs. 

Despite these setbacks, the program is recovering, and this year 

will mark the first time in seven years that SBA has not requested 

a subsidy. I hope this upward trend continues, and I look forward 

to learning more about what changes we can make to ensure the 

504 Program preserves the 504/CDC Economic Develop mission, 

and increases its lending volume. 

The Microloan Program is unique in that it is designed to provide small-dollar loans, under $50,000, to entrepreneurs that cannot access capital through traditional bank loans—and it is required to provide education and training to its borrowers. And 

often, these borrowers are women and minority-owned firms. 

In 2014, SBA Microloan intermediaries provided nearly $56 million in microloans to small businesses, and created or retained 

15,000 jobs. That is a big impact. 

Additionally, this year, SBA has requested a 30-percent increase 

in funding for the Microloan Program, which is expected to support 

about $75 million in loans to small businesses; however, there are 

SBREP-219 with DISTILLER

3 

many technical changes that could be made to make the program 

run more efficiently and allow intermediaries to provide the kind 

of assistance that borrowers need. And I look forward to hearing 

more about those changes. 

And when small businesses are looking for more than a conventional bank loan but are not yet ready for private equity, they can 

turn to the Small Business Investment Company Program to fulfill 

their capital needs. In 1958, Congress created the SBIC Program 

to fill this lending gap. And last year alone, the program provided 

over $5 billion to startups and high-growth companies. 

The SBIC Program faces its own unique set of challenges, such 

as limits to the amount of leverages available to them, as well as 

issues with the licensing process for established firms. 

Whether it is a working capital loan, a mortgage, a microloan, or 

an equity investment, capital is the lifeblood of every small business. Without it, most firms cannot make the improvements or hire 

the people that they need to succeed. SBA has been there for thousands of small businesses over the years, and it is the responsibility of the Committee to ensure that it continues to operate to its 

maximum potential. 

With this in mind, I am looking forward to hearing from today’s 

witnesses on ways to improving the agency’s lending programs. 

And I would like to thank all the witnesses for being here today. 

Thank you, and I yield back. 

Chairman RICE. Thank you, Mrs. Chu. If additional members 

have an opening statement prepared, I ask they be submitted for 

the record. 

I would also like to take a moment to explain the timing lights 

to you. You each have five minutes to deliver your testimony. The 

light will start out as green. When you have one minute remaining, 

it will turn yellow. Finally, it will turn red at the end of your five 

minutes. I ask that you try to keep it to that time limit, but I will 

be a little lenient if you need to close, all right? 

Our first witness is Rich Bradshaw, who serves as the President 

of Specialized Lending at United Carolina Bank in Greenville, 

South Carolina—my home state. Mr. Bradshaw is testifying on behalf of the National Association of Government Guaranteed Lenders (NAGGL). At NAGGL, Mr. Bradshaw chairs the Public Policy 

Committee, tracking and assessing SBA’s current lending initiatives. Previously, Mr. Bradshaw served in the United States Air 

Force and Navy, and I want to thank you for your service to our 

country. We look forward to hearing your testimony. Please begin. 

STATEMENTS OF RICHARD BRADSHAW, PRESIDENT, SPECIALIZED LENDING, UNITED COMMUNITY BANK; BARBARA 

VOHRYZEK, PRESIDENT AND CEO, NATIONAL ASSOCIATION 

OF DEVELOPMENT COMPANIES; BRETT PALMER, PRESIDENT, SMALL BUSINESS INVESTOR ALLIANCE; BRANDON 

NAPOLI, DIRECTOR OF MICROLENDING, VALLEY ECONOMIC 

DEVELOPMENT CENTER 

STATEMENT OF RICHARD BRADSHAW 

Mr. BRADSHAW. Good morning, Chairman Rice, Ranking Member Chu, and distinguished members of this Subcommittee. I am 

SBREP-219 with DISTILLER

4 

grateful to have this opportunity to testify before you and discuss 

the impact of the Small Business Administration’s 7(a) Program on 

both lenders and the small business community. 

As Chairman Rice said, my name is Rich Bradshaw; United 

Community Bank. I am the President of Specialized Lending. We 

are headquartered out of Blairsville, Georgia, and I work out of the 

regional headquarters in beautiful Greenville, South Carolina—and 

also representing NAGGL, which is the SBA 7(a) trade association. 

I have had the unique experience of running SBA divisions at very 

large national institutions, as well as community banks, and I am 

also a proud veteran. 

Let me give you an example of why I think the 7(a) Program ex- ists. If you were a manufacturer, and you are doing about $3 million in annual revenue, and you have 25 employees, and you are 

looking to buy a new CNC lathe, it is going to run you about 

$400,000. Conventional financing—we are going to set the interest 

rate at six percent. It is typically going to be five years, in terms 

of the term. Under the SBA, we will have that same interest, but 

it will be 15 years. The cash flow savings for that borrower will be 

in excess of $50,000. 

Now I know in Washington, $50,000 is not a lot of money, but to a company doing $3 million in revenue, it is all the money in 

the world. And it allows that owner to focus on margins, and market share, and hiring that next employee, and not being so concerned about making payroll on Friday. And I think that is really 

the strength of the program. 

To put it simply, think about your main streets back home. How 

difficult is it for your small businesses and your constituents to get 

these loans in a heavily-regulated environment, especially given 

the post-2007 era that we find ourselves in. I am sure that you all 

hear this all the time in your districts. 

The 7(a) Program annually supports over 45,000 small businesses. These 45,000 small businesses take their loans, and are 

able to hire an additional 500,000 people on an annual basis. It is 

also important to note at this time that the 7(a) Program does not 

cost the taxpayers anything. It is a very important point. 

In addition, since 2010, the program has returned over $500 million to the Treasury. Quite frankly, in the current financial climate, 

the SBA loan programs are the only game in town for long-term 

financing on any kind of interest rate or terms that would be accepted to a small business. 

So, what is the one thing that Congress can do to help the 7(a) 

Program run more effectively and touch more small businesses? It 

is make sure that we do not shut down. It sounds simple, I know, 

but it is a looming threat we faced last year, and we face again this 

upcoming year and the year after. 

Potential shutdown of the program happens because we constantly lend up to the authorized spending cap. This is a good problem to have. It means small businesses are obtaining capital, and 

the program is working. But as the bank executive who gets to 

speak to our Board on the updates on the SBA division, it is very 

difficult to discuss the running out of funding concept. It is also 

very difficult to discuss that with our borrowers, and we want and 

need private institutions’ support to reach more small businesses. 

SBREP-219 with DISTILLER

5 

And they need to know that Washington is behind them; they need 

to know that you are behind them. 

As members of Congress, you are probably all too familiar with 

having to explain to constituents the ups and downs of funding in 

Washington. What I want you to know is that—7(a) lender—I am 

there with you every day, and I am having to do that, as well, and 

I know we have that experience in common. For Fiscal Year 2015, the current authorization is $18.75 billion, 

but we project finishing Fiscal Year 2015 around $20.5 billion. If 

Congress does not act now, we will simply stop SBA lending, potentially in the August timeframe. 

If you are asking yourself why this program is going so quickly, 

think back to your constituents back home, and some of the challenges they run in obtaining capital and hearing the word ‘no’ from 

the conventional lenders, because it is just too risky for them, and 

because the profiles of the banks have changed since the 2007 Recession. 

What this results in is the boxing out the bulk of small business, 

in terms of getting and obtaining long-term financing. And if we do 

not keep running into this problem, it is important to make sure 

that Fiscal Year ’16 is also properly funded. The President’s request for the 7(a) Program for ’16 was $21 billion. NAGGL forecasts the industry will lend up to $23 billion in Fiscal Year ’16. Our 

ask is that the House and Senate Small Business Committee authorize, with the Appropriations Committee, $23 billion. 

I also want to, in closing, make sure that the Committee understands that NAGGL is very focused on the underserved markets. 

I cochair the Public Policy Program. And in Fiscal Year ’12 to ’15, 

African-American lending was up 93 percent. In the same periods 

for veterans, it was up 88 percent. I have been the leader in terms 

of growing the initiatives within NAGGL, and have a great committee that we work with really focusing on veteran initiatives. 

And with that, I will thank you for letting me speak, and open 

it up for any questions. 

Chairman RICE. Thank you, sir. We will have questions after everybody has testified. 

Our next witness is Barbara Vohryzek, who serves as the President and CEO of the National Association of Development Companies, NADCO. NADCO represents SBA-certified development companies and other lenders which deliver SBA loans and financing for 

small businesses. 

Thank you for being here today. You have five minutes, and you 

may begin. 

STATEMENT OF BARBARA VOHRYZEK 

Ms. VOHRYZEK. Chairman Rice, Ranking Member Chu, and 

other distinguished members of the Committee, thank you for inviting me to testify, and I look forward to an exchange of ideas 

today with you on ways we can work together. 

My name is Barbara Vohryzek, and I serve as President and 

CEO of the National Association of Development Companies, a.k.a. 

NADCO. And we represent more than 90 percent of the 263 certified development companies, also known as CDCs. These CDCs 

are mostly nonprofit entities that provide small businesses with the 

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504 Loan Program, while often also participating in other federal, 

state, and local economic development programs. 

This is familiar territory for me. I founded and ran California 

Statewide CDC for over 21 years. The 504 Loan Program is a financing tool for economic development, and provides small businesses, as Ranking Chair said, with long-term fixed-rate loans to 

help them acquire equipment. And so I do not have to restate, 

which you also said—and I appreciate that—that, last year, we 

did—since 1990, we have provided $64.3 billion in financing over 

120,000 loans. 

So, by law—and the reason that we are really here is, we are here to create jobs. And we have to create one job per $65,000, and 

we have to meet a public policy goal. And we have several. 

Economic development is the watchword, though, for many of 

NADCO’s members. While 504 was designed to be the larger SBA 

loan and have a strong community impact, many CDCs also serve 

entrepreneurs who need smaller loans through programs such as 

the SBA’s Community Advantage Pilot Program, which provides 

loans under $250,000, and SBA’s Microlending Program, which provides loans under $50,000. Incubators, CDFIs, and EDA revolvingloan funds are all represented by multiple CDCs in our community. 

And these are just a sample of the broader that is being done by 

CDCs nationwide; however, it is the 504 Loan Program that unites 

us all. 

The program has had, as was previously mentioned, challenging 

years, as many others did during the Great Recession. But I am 

pleased to report, as you all know, that we will be back to zero subsidies, self-funded with no appropriation, October 1st of this year. 

I recommend that during the 114th Congress, the Subcommittee 

focus on several long-term modifications, as well as some immediate fixes to a few current challenges that the industry and the 

program face. 

First, the 504 Program lacks definition. It is SBA’s Economic Development Loan Program, and CDCs are economic development entities. However, no definition is currently in statute or regulation 

for the economic development or CDC. I recommend that we work 

together, as we have been doing with SBA, to formalize these and 

other definitions, so that there are clear metrics for the program 

to fulfill its mission. 

Second on the list of long-term program modifications, I recommend that the successful debt refinancing with the 504 Loan 

Program be restarted permanently. This temporary refinance program made available to small businesses precious working capital, 

which otherwise would have been spent on either high interest 

rates or—worse yet—balloon payments. This request is quite timely, as well. Over 4,000 small-balance, commercial, mortgage-backed 

security loans will mature in the next three years. Borrowers will 

need to refinance out of what is being called the wall of maturities; 

yet, many banks that handled small-balance loans prior to the financial crisis are no longer in the market or in business. This is 

a gap for small businesses that could be filled by this debt refinancing program. 

Third and finally, the franchise agreements review process needs 

to be addressed. NADCO recommends that SBA adopt procedures 

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to streamline the review and approval of franchise and license 

agreements. 

While these long-term challenges will strengthen the 504 Program for future small-business borrowers, several pressing matters 

are preventing CDCs from best serving their communities today. 

The first is that of adequate levels of staffing at SBA. Recent retirements and other departures mean that a single SBA staff member may be handling the work of two, three, or even more personnel. This scarcity slows our ability to support small business entrepreneurs seeking 504 loans, and increases the concern and lack 

of confidence within the small business and banking community 

about our ability to deliver loans in a timely fashion. We hope this 

Subcommittee advocates for adequate resources for the budget and 

appropriations process for SBA to manage this situation. 

The other challenge which concerns the industry—and is taking 

me over five—is a move by some in Congress to institute fair-value 

accounting. If the small business community is consulted on these 

budgetary changes, I urge you to oppose them. 

Thank you again for the opportunity to share NADCO’s thoughts, 

and I look forward to your questions and a vibrant discussion about 

America’s entrepreneurs. 

Chairman RICE. Thank you. Our next witness is Brett Palmer, 

who serves as the President of the Small Business Investor Alliance. The SBIA is a national organization of lower-middle-market 

funds and investors, primarily small business investment companies whose members provide capital to small businesses. 

Welcome, Mr. Palmer. You may begin. 

STATEMENT OF BRETT PALMER 

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

Chu, and members of the House Small Business Subcommittee on 

Economic Growth, Tax, and Capital Access. Thank you for holding 

this hearing today to examine the effectiveness of the capital access 

programs, including the Small Business Investment Company Debenture Program. The Small Business Investor Alliance represents 

investors in domestic small business, including nearly all of the 

SBICs. 

I would like to make several points with my testimony. First, the 

SBIC Program is an effective and important program for enhancing 

access to capital for domestic small businesses. 

Second, the SBIC Program works primarily because at its core is 

a market-driven effort that serves the public by growing domestic 

small business and does so while operating a zero subsidy. Legislation to increase the family of funds limit is the most important 

issue faces us today, and we encourage you to pass it immediately. 

The cosponsors of the bill, many of whom are here today, thank 

you for supporting HR 10–23. Its passage will ensure that the best 

small business investors will continue to invest and grow domestic 

small businesses. 

Improvements can be made to the SBIC Program, because it is 

operating in a way that is certainly adequate, but there is a lot of 

room for improvement. And more improvement can help us serve 

more small businesses and more people in this country. 

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8 

The SBIC Program exists because, structurally, what was true in 

1958 is still true today. It is much harder for small businesses to 

access capital than it is for their larger brethren. That will always 

be true. 

The SBIC Program helps mitigate this. It will never replace that 

problem and fix that problem entirely, but it helps significantly. 

The importance of SBIC capital was made abundantly clear in the 

financial crisis and the recession that followed. While most financial institutions were cutting off capital to small business and recalling loans, SBICs were throttling up and filling the capital void. 

Demand for capital from SBICs has grown dramatically since the 

financial crisis and continues to grow. From Fiscal Year 2011 to 

present, SBICs have made $17 billion in investments in about 

5,500 small businesses in nearly every state. This activity saved 

businesses and grew jobs. In 2004, the SBIC Program had only about $5 billion in assets. Today, it has grown to over $21 billion. Not only did the Debenture 

Program not take losses during the time of economic turmoil, it ran 

a small surplus. In the face of economic calamity, this program 

worked both for small businesses and the taxpayers. This growth 

is not driven by government directive, but by the market needs of 

small businesses and the opportunities being recognized by private 

investors. 

These investments do create jobs—and lots of them. A recent 

Pepperdine study found that private-equity-backed businesses grew 

jobs at a rate 257 percent faster than the economy at large. We 

need more of that. With the continued support of Congress, the administration, and the private sector, this program will continue to 

grow, and serve more small businesses, and create more jobs. 

The program works differently than many other programs. To become an SBIC, a potential SBIC must pass two important filters— 

and they are both critical. The first one is the private market filter. 

If the private sector will not trust a fund manager with their manager, why should the SBA? It should not. But if they are able to 

raise that private capital, then they must survive a rigorous licensing process that the SBA runs, and many applicants cannot get 

through this process. Only about 25 percent of the funds that first 

approach the SBA about forming an SBIC are able to get through 

the process. 

Assuming they are able to get through the private sector filter 

and get through the government filter, they are able to access an 

SBA-backed credit facility—able to lever the fund at a 2:1 ratio. So, 

what that does is, it takes $50 million in private capital and turns 

it into $150 million of small business capital at no cost to the taxpayer. 

Unlike many other government programs that I know of, there 

is no guarantee on any of the individual investments. In fact, the 

private sector is at first-loss position for all the investments. SBA 

guarantees the investors and the credit facility, but not the SBIC 

or its individual investment. This means that there is 100-percent 

private sector skin in the game, and in the interests of the private 

sector and the public, protections are aligned. This is a key reason 

why the Debenture Program has gone so many years, running at 

a small surplus and maintaining a zero subsidy. 

SBREP-219 with DISTILLER

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The family of funds limit is important to us in this program because the family of funds limit only limits successful small business 

investors. The only funds that can hit the limit are funds that have 

repeatedly come back as SBIC funds in raising private capital 

money and going for the licensing process. Underperforming funds 

cannot hit this limit, because they cannot raise another fund. We 

ask that you pass HR 10–23 to raise this limit, to make sure that 

the successful small business investors can continue to do so. 

There are a number of improvements that the program needs. 

There are a lot of good things that are happening, but there are 

some improvements, too, that are needed. The licensing process is 

extremely slow and it is expensive. We have testified for years, the 

licensing process blocks qualified applicants, and unnecessarily limits diversity in the program—both geographic and other diversity 

forms. We ask for your help in pushing the SBA to reform its licensing process, and speeding it up, and making it less expensive. 

In summary, the SBIC Program is working—and working well. 

Raising the family of funds limit will increase small business investing, and help many small businesses grow and access more 

capital. An SBI needs more operational oversight to help make 

data reforms. 

And with that, I turn back the floor and be open to any questions 

you might have. 

Chairman RICE. Thank you, Mr. Palmer. 

I yield to Ranking Member Chu to introduce her witness. 

Ms. CHU. It is my pleasure to introduce Mr. Brandon Napoli, 

who is joining us today all the way from Van Nuys, California— 

Southern California—my area. Mr. Napoli serves as the Director of 

Microlending for Valley Economic Development Center—or the 

VEDC—and is here to testify about his experience with the SBA 

Microloan Program. VEDC is an SBA Microloan intermediary, and 

it was named one of the top 10 SBA intermediaries in the country, 

approving over $1 million in microloans for 2014. 

Prior to joining VEDC, Mr. Napoli served as a Community Loan 

Program Officer at the CDC Small Business Finance in San Diego, 

California. He is a graduate of Point Loma Nazarene University 

and San Diego State University. 

Welcome, Mr. Napoli. 

STATEMENT OF BRANDON NAPOLI 

Mr. NAPOLI. Chairman Rice, and Ranking Member Chu, and 

members of the Subcommittee, thank you for the opportunity to 

submit testimony about a crucial component of a vital American 

business community. 

My name is Brandon Napoli. I am the Director of Microlending 

at VEDC, located in Los Angeles. We are one of the nation’s largest 

SBA microlenders. We provide real money to real people, creating 

real jobs. 

Microlending is foundational to the economy, and VEDC is committed to helping entrepreneurs like Maria Martir secure 

microloans to foster healthy, sustainable community. Ms. Martir 

had saved $40,000 to launch a business, but her request for a 

$10,000 loan was declined by local, traditional lenders, because 

there was no outside collateral or existing cash flow. Ms. Martir 

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turned to VEDC, who offers access to capital, as well as free technical assistance, for entrepreneurs unable to secure traditional 

bank financing. Three years after receiving a $10,000 loan and help with writing 

her business plan, Ms. Martir’s De Todo Un Poquito Cafe ́—A Little 

Everything—has expanded next door, hired on her four children, 

and is now looking to expand elsewhere. 

Her experience illustrates what we in the industry have known 

from years of experience: Hands-on technical assistance, coupled 

with need-based financing, greatly increases a small business’s 

chance of success. 

Microlending reaches entrepreneurs who are outside the economic mainstream, who are very much a part of the economic fabric of this country. Ms. Martir’s cafe ́ is one of 25 million businesses—or 88 percent of all business—in the United States considered a micro-business—a business with five or fewer employees and 

less than $50,000 in startup capital. These businesses generate 

$2.4 trillion in receipts, account for 17 percent of U.S. GDP, and 

employ more than 31 million Americans. 

Micro-businesses are everywhere—the farmer at the Saturday 

Market, the trucker who works those long hours on the road, the 

contractor who built your home, the beauty salon or barber shop, 

your favorite neighborhood restaurant that you always want them 

to commercialize the barbecue sauce, and the miniature golf course 

you worked at as a kid. Think of the business you frequent, and 

I am sure that you encounter many micro-businesses you call your 

own. 

Ms. Martir’s De Todo Un Poquito Cafe ́ and other microloan businesses could not do what they do without the support they get from 

SBA Microloan intermediaries, such as VEDC. Since 1998, VEDC 

has lent over $11 million and 1,000 SBA microloans. Thankfully, 

there are many others like VEDC around the country. For example, 

the Economic and Community Development Institute in Ohio that 

provide a one-stop shop where a business owner can secure flexible 

financing, as well as individual business assistance throughout the 

life of a loan. 

The proposed Fiscal Year 2016 budget provides continued opportunities for American entrepreneurs to start their own business 

and become successful, independent, and self-reliant. To keep the 

American dream a reality for millions of micro-businesses, Congress needs to increase the effective investment it has made in 

SBA Microloan from $24.8 million to $28.3 million, and make the 

programmatic changes suggested by the current intermediary 

micro-lenders. 

Increasing lending and easing some of the SBA Microloan Program restrictions will help to further the American dream, one 

microloan business at a time. Since the Microloan Program was authorized in 1991, intermediary lenders have borrowed over $414 

million, of which they have been able to lend $629 million to small 

businesses that help create or retain 185,000 jobs at the cost to the 

federal government of around $2,000 per job. 

During this time—and since launch of the SBA Microloan Program—intermediaries have realized that several well-intentioned 

policies now serve as barriers to gains and efficiencies. The most 

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restrictive barrier is the statutory restraint of utilizing 75 percent 

of the technical assistance post-funding and only 25 percent 

prefunding. 

As Ms. Martir and the majority of micro-enterprises, the need for 

intense technical assistance before receiving financing ensures that 

the small business is loan-ready. 

In closing, every day, VEDC and microloan lenders across America seed hardworking people like Ms. Martir who want to and can 

build businesses, create jobs, and strengthen communities. The 

greatest investment we can make is in people who create jobs. The 

returns go far beyond dollars paid back. 

Thank you for this opportunity to share Ms. Martir’s and the industry’s story, and I look forward to your continuing support of the 

programs designed to promote job creation, especially those with 

proven track records, such as the Microloan Program at SBA. 

Chairman RICE. Thank you, Mr. Napoli. I have a lot of questions 

for you, but I want to start out by saying that, in my opinion, there 

is nothing more important than American competitiveness and 

jobs. We cannot have a strong country without a strong economy, 

and I think you guys are on the frontline, and I cannot thank you 

enough for what you do—providing access to capital. I think that 

is one of the foundations, one of the bricks in the foundation of the 

prosperity of this country. And I am so impressed listening to how 

you perform your duties and how you grow jobs in this country. 

I have so many questions with respect to what areas—where are 

the gaps here that are not being filled? You know, you have 

microloans. You have the 7(a) loans. You have the CDC/SBIC. Who 

is falling through the cracks here? It sounds like you have got the 

small business area pretty well-covered. Are there broad classes 

that are not being covered? Mr. Palmer, I will start with you. 

Mr. PALMER. Sure. I think that one of the classes that has not 

been covered and not really discovered is the early-stage equity 

side—and a lot of businesses to start up that are smaller businesses, that are not necessarily tech and biotech in Silicon Valley, 

really do have a real challenge in figuring out how to get, you 

know, early-stage equity investing when you are not cash flowing, 

and you are not going to be cash flowing in the very near-term, to, 

you know, pay an interest payment on a debt structure. So, I think 

that is an area that really is lacking in the economy right now. 

Chairman RICE. Mrs. Vohryzek, you said something that intrigued me earlier. You said we need to restart the refinance program—and why did you say that? 

Ms. VOHRYZEK. There are a couple of reasons, but the large 

reason coming is what is known as the wall of maturities. So, these 

small-balance loans that were done prior to the recession—a lot of 

small businesses are in these pools and these mortgage-backed securities. And so as they mature and they come out of the pool, then 

the houses—the larger investment houses—do not do loans under 

$2.5 million. And so there is all of these owner/user small business 

types coming out of that, having to come up with other financial 

instruments. 

Chairman RICE. So, there were commercial lenders that made 

these loans before the financial crisis. 

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Ms. VOHRYZEK. They were actually pooled loans. So, Wall 

Street firms would typically be involved. Some of them—I mean, 

you know, Chase is in the room, and they act on both sides. So, 

you have a lot of banks that also have investment houses, as well. 

Chairman RICE. Here is my question: You know, certainly 

things were out of hand before the financial crisis, and certainly 

there needed to be some additional safeguards. But have we 

snapped back so far that we have taken lenders out of the market 

that were previously providing this financing? And can the SBA 

ever—because I do not think they can—can they ever respond to 

that demand? 

Ms. VOHRYZEK. Oh, boy. I am not sure—I am trying to understand the question. For some reason, I was kind of caught with the 

walls of maturity, thinking of these coming out. The comment we 

made—and I made—about ‘‘as these loans come to market’’—as you 

know, the shrinkage in the number of community banks that are 

now alive and well, versus who they were back in ’07, ’08—we have 

had a shrinkage in numbers of community banks. And very often, 

the borrowers would look to their community bank to refinance. 

Those would be where they would typically go. 

Chairman RICE. I agree that we have had a huge shrinkage. Mr. 

Bradshaw, I am going to turn to you. I agree we have had a large 

shrinkage in community banks, and I think a lot of that is because 

we have snapped back too far with regulation. And what I am concerned with—Mr. Bradshaw, do you think the SBA can ever fill 

that niche completely, or do you think we need to expand, do what 

we can to ease the regulation on community banks and get them 

back in the market? 

Mr. BRADSHAW. I think the answer is probably yes on both 

sides—meaning, can SBA fill the gap? Yes. Can it fill it all the 

way? No, but the combination of SBA and a combination of less 

regulation can get us a long way there. 

Chairman RICE. Mr. Palmer? 

Mr. PALMER. The private sector can fill a lot of gaps that we 

cannot. And the SBA is really meant to fill areas where the private 

sector cannot fill the gap, but where there is a public policy need. 

The banks, particularly the smaller banks, are feeling all sorts of 

pressure that really is hindering their lending. They are not something that we compete with. We actually augment a lot of the 

banks. But I think that is an area—certainly, there is need for regulation; do not get me wrong. But I do think that the banks that 

I talk to—and I hear from anecdotally—feel there is a lot of pressure that is hindering them from doing small business lending that 

they otherwise would do. 

Chairman RICE. Mr. Napoli, I do not know that this is really in 

your area of expertise, but I want to ask you the same question. 

Mr. NAPOLI. Can you repeat the question? 

Chairman RICE. My time is expired. Thank you very much. I 

will yield to Mrs. Chu for her question. 

Ms. CHU. Well, thank you. And I feel the same as Chairman 

Rice, in terms of all that you are doing for the small business community, in providing them the access to capital. And I am intrigued 

by your recommendations for improvement. 

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And I will start with you, Ms. Vohryzek. Last week, I introduced 

the CREED Act, which would reinstate SBA’s 504 Refinancing Program. The President has supported this initiative in his budget. 

The SBA Administrator has spoken favorably of the program, and 

the Senate has marked up their version of the CREED Act with bipartisan support from the Chairman and Ranking Member. Do you 

believe the reauthorization of the 504 Refinancing Program would 

be beneficial for the small business economy? And simply that 

while we were already in the recovery period—but can you tell us 

why right now actually is an optimal time to restart the Debt Refinancing Program? 

Ms. VOHRYZEK. Well, first of all, let me thank you for introducing the CREED Act. The industry is very thankful for that. I 

think it is a good time. I mentioned the walls of maturities that 

is coming up, and that would be an opportunity to help small businesses that are coming out of that, looking for alternative financing 

by providing them with refinancing under the 504 Program. 

I also believe that the 504 Program is a very efficient way to refinance, and I think it is good for the banks. And I will tell you why. 

When you refinance a 504—a situation where it is a 504 refi—the 

bank may be involved, and they continue to be involved. So, they 

are not taken out by another bank. So, it is an opportunity for 

many banks—and, often, community banks—to keep their customer, and then we do the second mortgage, because our loan is 

always in companion with the first mortgage lender. This is a relationship that the lender has, and we are coming in to accommodate 

them up to a 90-percent loan-to-value, which—Chairman Rice, I 

apologize. I think I now understand your question, and I guess 

what I would echo in here—but also state that I think that I am 

a Director of community bank, and I would say that the guarantee, 

whether it is a 504 second mortgage or a 7(a), allows us to do loans 

that we otherwise would not be able to do. So, it is absolutely a 

critical product—particularly now, with all of the regulation that 

has fallen on the smaller banks, we are looking for opportunities. 

I am sorry, Ranking Member; I wanted to get back to your question. But there is a great need out there for the ability to take advantage of the low rates. We see it across the board in housing 

right now so homeowners can lower their rate. And in many different cases, it is allowing them to get the working capital, when 

we speak about small businesses, for growth. And that was alluded 

to. Mr. Bradshaw alluded to the need for working capital, and how 

businesses—that $50,000 that was saved on that $400,000 equipment loan. 

When we refi, and you look at the cost savings, and you bring 

them into a low-cost interest—the first mortgage will be lower. Our 

second mortgage will be a lower interest rate. The savings over 

time provides that business the opportunity to invest in jobs, inventory, and growth. 

Ms. CHU. Okay. Well, thank you. Mr. Napoli, I was impressed 

by the success of the Microloan Program. And you emphasized this 

issue regarding technical assistance, this requirement that only 25 

percent can be used prior to the loan. Why do you believe that this 

should be changed? 

SBREP-219 with DISTILLER

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Mr. NAPOLI. Thank you for the question. Since the creation of 

the program back in ’91, a lot has changed. Micro-lenders are now 

not just micro-lenders; they also offer other types of technical assistance, or an SBA 7(a) loan, a 504 loan. A lot of times, a client 

comes in, and through that SBA technical assistance, we find that 

there might be a better fit for another product. And so we only give 

them the pre-loan technical assistance. 

Another thing is, a lot of times when a client comes to us, they 

do not have a money problem at first; they have an idea problem. 

And so to be able to frontload a lot more technical assistance in the 

frontend, and deal with that idea problem—like creating a business 

plan, or helping them with lease negotiation, or working with marketing—instead of trying to get them through the process quickly, 

and get them a loan, so then we can give them more technical assistance—will allow us to be able to really foster that time with the 

client before they just get the loan and go forward. 

Overall, just more flexibility and technical assistance would 

allow the intermediary—which was proven over the last 20 years— 

that they are able to serve the clients with customized technical assistance in their local communities. 

Ms. CHU. And also, intermediaries are limited to no more than 

25-percent contracting out, and you think that this should be 

changed. Why is that? 

Mr. NAPOLI. That is correct. Right now, the SBA says that we 

can only use 25 percent of our TA dollars for contractors, and that 

poses two limitations. The first is, it is hard to recruit talent outside of my staff. So, if I need to get a CPA, or a lawyer, or someone 

that has specific technical experience, overall, I am limited to 25 

percent of my money being used for those contractors. 

Additionally, if I want to expand in the local markets, and I want 

to have somewhat of a local presence there, again, I am limited by 

the fact that I can only do that with 25 percent of my dollars. 

Ms. CHU. Thank you. I yield back. 

Chairman RICE. Now I yield to the Chairman of the full Committee, Mr. Chabot. 

Mr. CHABOT. Thank you, Mr. Chairman, and let me begin by 

thanking you, Mr. Chairman, and the Ranking Member, Ms. Chu, 

and the other members for attending this hearing—and especially 

the witnesses for being here today. 

I think we all know that access to capital is one of the most critical challenges that is faced by small businesses in today’s environment. It has been the case in the past; probably will be in the future. But it is really important, and so addressing this in this hearing, I think, is quite important. So, thank you. 

I just have two questions. And, first of all, Mr. Palmer, I will 

begin with you, if I can. I recently introduced HR 10–23, the Small 

Business Investment Company Capital Act of 2015, which would 

increase the amount of capital available to small businesses by 

raising the family of funds cap from $225 million to $350 million. 

Do you have any data on the effect that this would have on small 

business lending—and just anything you would like to say about 

that legislation, we would be happy to hear. 

Mr. PALMER. Well, Chairman Chabot, thank you first and foremost for your support of that legislation and your leadership in this 

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15 

Committee. I would also like to thank Congressman Hanna and 

Congresswoman Chu, who are cosponsors of that bill. 

We have a number of funds that are slamming into that ceiling, 

and there are a number of funds that are going to hit the ceiling 

that may not apparent that they are going to hit it yet. They know 

it, but it is not necessarily showing them the data, because they 

are long-term investors. So, their current fund—they may not be at 

the limit, but as they are planning their next fund, they know they 

are going to slam into it, and they are considering whether or not 

they are going to do a small business fund. 

So, I think that once this gets up and running, I think it will be an increase of between $500 and $750 million a year in small business investing. Marketing conditions will dictate that, but that is 

a significant increase in small business capital that is out there at 

zero cost to the taxpayer. 

Mr. CHABOT. Okay, thank you very much. And my second question, Mr. Bradshaw, I would like to go to you, if I can. Thank you, 

first of all, for your service to our country. I greatly appreciate that. 

I am planning to introduce a bill shortly that would statutorily 

eliminate the origination fees on 7(a) loans, the express loans to 

veterans. As you know, SBA is already doing this through the Administrator’s discretion, at no cost to taxpayers. Can you discuss 

the 7(a) Expense Loan Program, and how this fee waiver benefits 

veteran entrepreneurs? 

Mr. BRADSHAW. Sure, and thank you for the support of this, 

Chairman Chabot. Veterans are my passion. And just for the Committee, I brought our brochure that we do. I know it is a long way 

to see, but we do this, and we work together as a committee with 

NAGGL. We compete with each other every day, and so we are always trying to, you know, take deals away from each other. In 

terms of veterans, we actually share our marketing ideas, and we 

work together. We electronically send things like this around. 

Speaking with some of you before—last time I sent this around, I 

had a person call me and said, ‘‘I really, really like this. Is it all 

right if I copy it?’’ I said, ‘‘Absolutely, but you may want to change 

the phone number.’’ 

So, thank you for the support of the veterans. I have been representing NAGGL—very vocal on that from day one, because several years ago, one of the biggest initiatives of SBA was the veteran push. And I was always, ‘‘Well, if we have a veteran push, 

should not we reduce the fees?’’ And we take this very seriously in 

NAGGL and in the institution I run. The fees have really made a 

difference. Sometimes, it is momentum. It has been very recent. 

This year has been the biggest year in my institution. 

Mr. CHABOT. Thank you very much, and I yield back the balance of my time. 

Chairman RICE. I recognize the gentlelady from California, Ms. 

Hahn. 

Ms. HAHN. Thank you for all of your testimony. 

You are supporting our small businesses, helping our economy, 

getting people hired. It really is so critical. And I appreciated all 

your testimony this morning. 

Last August, I held a roundtable with a lot of local women business owners in a waffle shop in San Pedro. It was a great morning, 

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and while I am always impressed to hear, like, the 7(a) Program 

were up in lending, I think, for loans under $150,000 up by 23 percent. I mean, we are hearing all these great stories about how more 

capital is getting to our small businesses. But I got to tell you, almost every one of those women owners that came that morning, 

you know, continued to complain a little bit about always being denied by banks for some of these 7(a) loans. 

And still, probably one of the biggest complaints I get from my 

small businesses in my district is still difficulty—there is a disconnect on getting some of this capital to our small businesses. 

So, I was going to ask Mr. Bradshaw, do you have a sense of 

what are some of the reasons that lenders decide that a small business is not worth the risk? What would those be, and how can we 

maybe fix that? 

Mr. BRADSHAW. I think the challenge when people look at a 

small business conventionally—probably the biggest challenge is 

collateral. So, that is probably number one. 

And then number two is, traditional, conventional lending has 

shorter terms. And those shorter terms do not allow the loan to 

meet bank debt service requirements, because it is just a shorter 

term. You are thinking about buying a car in five years versus ten 

years; the financials do not work for the company to do it on five 

years, where they would on ten years. 

And I think those are the biggest impediments. 

Ms. HAHN. Do any of the other witnesses have any comment on 

why you think some of our small business—particularly our 

women-owned—many women-owned businesses sometimes fall 

through that crack that we were talking about, of being, you know, 

not a good risk? 

Ms. VOHRYZEK. Well, I would say it is a bit out of my wheelhouse as representing the 504 industry, although a number of our 

members do a great deal of technical assistance. 

I think that the reality of banking these days is that they simply 

do not have the time to invest in what needs to happen with a 

small business in order to make them capital-ready. Mr. Napoli actually brought up a very good point I was applauding over on my 

side that much of the work needs to happen before the loan. 

And so there are networks, like the SBDC network SCORE, that 

can help borrowers—and including the micro-lending network and 

community advantage network that actually work more intensively, I would say. I do not know the women you met with, but 

I would probably, you know, speak with them about, you know, 

where they are on the capital readiness. And you are really looking 

at the continuum of capital readiness sitting at the table. But I 

think a lot of it is how they are queuing it up—you know, meaning 

how they put together their request for funding, and whether they 

qualify for conventional. And then as you go to SBA, there is obviously a greater tolerance for no collateral or high loan-to-value situations. But a lot of small entrepreneurs and businesses, they simply need hands-on in order for them to be able to get to the capital 

point. 

Ms. HAHN. Right. Thank you. And, Mr. Napoli, I would follow 

up with what you were talking about—how you offer this kind of 

assistance helping writing business plans, finding ways to finance 

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businesses that have been considered unbankable. Do you believe 

that model could also be expanded to assist small businesses that 

are being denied these 7(a) loans, so that they could also get this 

kind of financing? 

Mr. NAPOLI. Absolutely. And to go back to your original question, I know over 60 percent of my portfolio is made up by women 

and minority. So, I think what microloans do very well is actually 

reach out to those communities, and allow them to feel welcomed 

into the process. 

And one of the things is the technical assistance that we do provide, from a gamut of different services that could completely be 

relevant to more upstream 7(a) lending, as well. 

What I find is, borrowers are very competent at making widgets 

or doing exactly what they do to know. But they do have blind 

spots. I even have my own MBA, and as I was discussing yesterday, I would be frightened to start my own business because I did 

not do so well in my accounting class. And so I think, you know, 

when we are talking to business owners at any level, technical assistance is something that is absolutely necessary for them to become more successful. 

Ms. HAHN. Thank you. Mr. Chairman, I yield back. 

Chairman RICE. I now yield to the very learned Chairman of the 

Contracting and Workforce Subcommittee, Mr. Hanna. 

Mr. HANNA. Hey, thanks. Mr. Napoli, changing the 75/25 rule, 

I want to ask Mr. Bradshaw about Dodd-Frank, and commercial 

banking, and how that has changed the nature of—and you mentioned mortgage-backed securities, the wall of loans. I mean, if you 

never pay anybody back, basically you never default—which is—I 

am concerned about the wall of loans. 

But, Mr. Napoli, how would you recapture that money if you 

were to change this or eliminate it all together? Because what you 

say makes perfect sense—that people need a lot of technical assistance. They have a great idea, but no basic skill set to do this. What 

would that look like, though, and what would it cost? Because, basically, you are upfronting money before you make a loan, and you 

may decide otherwise. So, how do you navigate that? 

Mr. NAPOLI. That is a great question. I think one way you honestly navigate it is through looking at, obviously, the portfolio’s performance of what we have already done, and trusting in these 

microloan intermediaries that they are going to make the right decisions from the years of experience. And, also, you incentivize 

them to continue to stay loan-centric in their lending, so they are 

not just offering technical assistance. 

Mr. HANNA. So, what you are saying is that we should allow the 

subjective nature of the process and the people in the know to take 

advantage of their knowledge, their interaction with people, and 

give them more latitude in that ratio of 25/75 and TA assistance. 

Mr. NAPOLI. That is correct. 

Mr. HANNA. Thank you. That is helpful, because I believe that 

makes sense to me. I just do not know what it would cost. Mr. 

Bradshaw, talk to me, if you can, because you have mentioned a 

couple times about commercial banks, and how they have changed, 

and how they have walked away a little bit—that is my words. 

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How did that play out, and why did it make what you are doing 

more important? 

Mr. BRADSHAW. I think, as we are all aware, with the recession—and part of the recession that came was, banks became more 

conservative; credit became tighter to get. In addition, we became 

a little more heavily regulated. And you mentioned Dodd-Frank; 

that has been part of it. And it has not just been—in addition to 

someone looking over our shoulders, there has been a real cost associated with that, too—meaning you have to hire more compliance 

officers, you have to have more bank security officers. There has 

been a real cost associated with that. And I think that has just continued to add to tightening the credit market. And one aspect that 

does help from this, from the SBA standpoint, is, the SBA loans 

take less capital. And so by applying SBA loans, banks can take 

advantage of that attribute—that they are not using as much capital, and they are not running into the capital requirements under 

Dodd-Frank and other regulatory requirements. 

Mr. HANNA. Everybody here has referenced the fact uniformly 

that the default rate is really, really low, which makes you feel 

good about the process, and it makes people want to raise the limit, 

because—what the hell—there is no associated risk, right? We 

know that is not true, because there has to be. And I could answer 

the question, why have a limit at all? But could you talk to me 

about this mortgage wall or this lending wall, Ms. Vohryzek? Because it is interesting to me, because implicit in that is that there 

are people who will default if they are pushed up against that wall 

without the extension. Is that fair? 

Ms. VOHRYZEK. What would happen, just for the sake of this 

discussion—let us say you have an owner/user small business borrower in there that was financed through one of these security 

pools, and they are coming out with a $2 million balloon. And it 

is very tough to finance a $2 million balloon payment. Basically, 

you are looking to refi, so you are coming into the commercial market or the SBA market, saying, ‘‘I need to refinance this $2 million 

balloon.’’ 

Mr. HANNA. And how long have they been in business, do you 

think? 

Ms. VOHRYZEK. You know, that would require that I would 

know what was sitting in those mortgage-backed pools back in ’05, 

’04. You know, I would imagine that if they got into the pool in the 

first place, my guess would be that they were a relatively seasoned 

business, because in the pooling process, they would be vetting if 

it were a known user—— 

Mr. HANNA. Thank you. That is helpful. So, if they are a relatively seasoned business, they took out a balloon mortgage, which 

can be foolish on its face, right? They knew that. They are facing 

that. They are a relatively mature business. What do they need 

with us? 

Ms. VOHRYZEK. What was available to them in ’05—let us say, 

for instance, they were financed in ’05. They are upside-down on 

that commercial building in Brooklyn. Well, maybe not Brooklyn. 

Maybe they are upside-down in that commercial building in Oklahoma City or, you know, wherever things flipped. And California 

was one of them, but we are recovering. So, their loan-to-value is 

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compromised—or they are at 90 percent if they try to get $2 million, whereas under a normal amortization, they may have been at 

70, which would be financeable pretty easily through the banking 

markets. But 90 is absolutely an SBA product. 

And so I want to differentiate. In SBA lending, under our program, the 504, we are looking to provide working capital—free up 

working capital for these businesses to grow. And in the case of refinance, this is so that they have the funds in order to expand their 

business and not be taken down by the inability to get a 90-percent 

loan-to-value. We are not looking at businesses that if they had the 

financing available would default. We are looking at a market gap. 

And so these could be healthy businesses coming out, but they are 

still at a high loan-to-value. 

Mr. HANNA. Thank you. That clarifies everything for me—because, really, you are not trying to push out the inevitable; what 

you are trying to do is help people who inevitably will succeed, in 

your view. 

Ms. VOHRYZEK. And to remember that there have been many 

times in our history in lending where balloon payments were absolutely the market. When I first started in the ’80s, five-year miniperms was kind of a standard on commercial product, and it then 

stretched to ten. Even to get banks to go to 10 years, given capital 

requirements and liquidity issues—10 years can be tough. So, it 

just depends where we are in the market in lending. 

Mr. HANNA. My time is way over. I thank the Chairman for indulgence. Thank you. 

Ms. VOHRYZEK. Oh, I apologize. 

Mr. HANNA. Oh, no, it is my fault. Thanks. 

Chairman RICE. I want to just ask a couple more questions. 

Mrs. Vohryzek, this wall of refis is just a curious thing. Is a part 

of that because the capacity of lending has declined? You know, we 

are hearing there are fewer community banks today than there 

were eight years ago. And there is also, for the first time in seven 

years, there has been less business startups than there have been 

businesses going out of business. And I am not sure that those 

things are not very closely related, because access to capital is one 

of the keys to our competitiveness. 

So, what I am asking you—because I am concerned that the 

SBA, although you are doing great work, can never fill the void— 

that commercial lending is going to have to be where this solution 

is found—do you think it is because of lack of capacity? Has the 

pendulum swung too far, and are we regulating these community 

banks out of business, and, therefore, we have this wall of refis 

coming that presents this big problem? 

Ms. VOHRYZEK. I think that things have swung quite to the opposite direction, as has been mentioned several times. It is costly 

to run a bank now—I do not care if you are large or small—with 

all the regulations. And, really, you know, things that are in place 

that they want to avoid another disaster—I understand why they 

are there. But, as you said, the swing is quite strong. Can SBA fill 

the gap? 

When you are looking at programs—at least three of the four 

here—that are paying for themselves through zero appropriation, it 

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20 

is a heck of a deal for the taxpayer and for our communities, as 

we are at zero subsidy. 

And so, yes, we are filling a really important gap. And as you 

have seen in the 7(a) program, the growth is there. And in 504, you 

know, we have been a little challenged, and we will come back 

roaring. But, you know, we have had times right now that our volume is not as high as it could be. But we still are zero subsidy. 

And so we fill a gap, and we fill a gap at no cost to the taxpayer. 

And so for that reason, I would say that we can grow, and we can 

be important to fill what you are speaking about. 

Chairman RICE. Mr. Palmer? 

Mr. PALMER. I guess what I would add to that is, you know, 

Dodd-Frank existed because we clearly had gotten, you know, overboard, and there were real problems that had to be addressed. But 

one of the challenges of a Dodd-Frank is that it does not scale. You 

know, if the big banks are screaming about the costs and the regulatory compliance problems, the little guys—it is 10 times worse. 

We are seeing that in the private equity space, as well, where the 

big private equity funds can deal with all this SEC compliance, and 

the little one are getting creamed. 

I mean, you know, with all good legislation, you have to go back 

and review it. I think if that ever does get reviewed, I think it is 

worthwhile to look at the scaling challenges of the smaller lenders 

and the smaller investors, versus the largest, as far as how they 

can handle the compliance costs on the backend. 

Chairman RICE. I think community banks should be exempted, 

but that is just my opinion. Mr. Bradshaw? 

Mr. BRADSHAW. I like that, sir. And to your point, Chairman 

Rice, I mean, my institution is a large community bank, and we are 

just under $10 billion. And in Dodd-Frank, going over $10 billion, 

there becomes essentially a regulatory tax. And so you do not go 

to $11 billion; you go from just under $10 to $14 or $15, because 

you have to pay for that additional cost. You just do not go right 

over it. And so, you know, it is a very real thing in our world. 

Chairman RICE. Yeah, I have spoken to community banker after 

community banker. Community bankers have come in here. The 

owner of the only minority-owned bank in Washington, D.C. was 

in here last year, saying that if we cannot find some relief for him, 

that Dodd-Frank will put him out of business. And I hear that over 

and over again, and access to capital is just so incredibly important. I worry that we really need to go back and review some of 

that. I yield to Mrs. Chu, if you have any additional questions. 

Ms. CHU. I do. Thank you, Mr. Chair. Mr. Bradshaw, last year, 

the 7(a) Program faced a funding shortfall, and Congress had to include a billion-dollar allocation for the program in the continue resolution to prevent the program from shutting down. 

For 2015, the 7(a) Lending Program is potentially facing another 

shutdown in a few months if loans continue to follow these projections. How critical is it for Congress to appropriate and authorize 

adequate funding for the program? And what would be a real-life 

example of what consequences would be if there is a potential shutdown of the program? 

Mr. BRADSHAW. Thank you, Congresswoman Chu. Yes, we feel 

that the program will run out of money this year. We talked about 

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21 

in my testimony that within—probably in August. And what that 

would mean in terms of real life is, you could have a customer that 

you are working with. They are acquiring a business, or a piece of 

real estate, or both. They have a purchase-to-sale agreement, so 

they have committed hard money to this purchase-to-sale agreement, and we cannot process their loan, because we have run out 

of money with the SBA. 

Ms. CHU. Thank you. Mr. Palmer, I certainly heartily support the idea of lifting the cap from $225 million to $350 million. And 

I understand there is also another issue, which has to do with the 

licensing of the family of funds, and that it is taking longer and 

longer. Could you talk about that issue and what needs to be done? 

Mr. PALMER. Sure. Thank you very much. The licensing process 

for the SBIC Program is for the frontline of taxpayer protection, in 

that they are making sure that only qualified people are getting 

through, and those standards need to be high. 

However, the licensing process is really long, and this administration actually did a very good job for several years getting that 

licensing process down to about five months. The official numbers 

are around nine or ten months. That does not include a month of 

the magic mailroom, where the documents do not get processed and 

some other stuff. So, it really is running over a year for repeat licensees. 

And for a repeat licensee, you are talking about someone who 

has raised the private capital, gotten licensed with the SBA, invested successfully, gone out to the market again several years 

later, raised private capital, has been compliant, and then it is taking them another year—potentially even longer than it did the first 

time. That does not make any sense. 

And so they have got a process that the standards need to be 

high, but it has got this multitiered process that really can be consolidated, and sped up, and maintaining taxpayer protections that, 

really, right now is causing people’s, you know, vein in their forehead to pop out, out of frustration, but it is also slowing things 

down, adding costs, and there really is not any benefit to it. We 

would really like to get that reformed, and I think probably the 

SBA would, too. They just kind of need a little push to make it 

happen. 

Ms. CHU. And it makes total sense to differentiate the repeat licensee versus the new one. 

Mr. PALMER. And I think there is an added benefit to that, 

too—because if you put your resources to the first-time funds that 

are really more unknown, it gives you more opportunity to reach 

out to geographies that you have not touched before or that you 

have not done the outreach for. It also lets you do a deeper dive 

on the backgrounds of the people that are coming in, so you can 

get more diversity of fund managers that are coming in—because, 

right now, you know, they are treating everyone exactly the same, 

even if you have been on your fourth or fifth license. And dedicating those resources there, where you really have a whole new 

generation of, you know, investment managers, and women, and 

minorities, and doing different strategies. They cannot get the time 

of day, because they are not in such a tight band. And I do not 

think that helps the program or the country at large. 

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Ms. CHU. Mm-hmm. Mr. Napoli, you had a third reform that you 

were discussing, which is this 1/55th rule. And the SBA has requested to adjust this cap for the 1/55th rule in the 2016 budget 

request. Can you tell us what this is, and what you think the adjustment should be on this? 

Mr. NAPOLI. Yeah. So, currently, there is a rule called the 1/ 

55th rule. And what it means is that the amount of funding for 

lending for SBA micro intermediaries is divided equally between 55 

states and territories. That is the case, even when several of those 

territories or states do not even have an intermediary actually located there—or, a lot of times, they do not even need that much 

actual lending capital, but other intermediaries do. 

And so what happens for the first two quarters or six months of 

the federal year, funds are just sitting at the SBA until they are 

able to open up to these other intermediaries in other states that 

actually have a demand that has been waiting for the last six 

months. 

What it can look like is just actually look at eliminating that all 

together, and allow for those intermediaries that actually have demand to show that, and for the SBA to make loans that are targeted to those intermediaries that make sense for the demand that 

they have. 

Ms. CHU. Thank you. And if I could ask another question—it is 

about the SBA requesting a 30-percent increase in funding for the 

microloan intermediary lending authority, which would be expected 

to support about $75 million in loans to small business. Do you 

think this increase is enough for the level of demand that you encounter? 

Mr. NAPOLI. Well, as I stated, you know, 88 percent of small 

businesses fall under micro. It is a huge amount of businesses. But 

I also know that that is a completely digestible demand that we 

can meet this next year. So, yes, absolutely, that is something I 

think that we can—I can come back in a year from now, and show 

the amount of jobs created, the fact that we have gotten the money 

out, made quality loans, and then the next year, pose the exact 

same good problem to have. 

Ms. CHU. Thank you. I yield back. 

Chairman RICE. Mr. Hanna? 

Mr. HANNA. Does anybody—Mr. Bradshaw, Mr. Palmer—we 

have a situation which I think Chairman Rice rightly identified, 

and that is, this kind of dragnet thing that Dodd-Frank did caught 

up a lot of commercial banks that were doing just fine, added millions to their cost of doing overhead in small communities, limited 

their—increased their overhead, limited their ability to make local 

loans, and do the things that you four do so well. 

And I saw you nod your head, Mr. Bradshaw. You would eliminate, at some point—maybe on a sliding scale—the requirement for 

commercial banks to fall under some of those rules or those—how 

would you change that? What would you do differently? 

Mr. BRADSHAW. Well, I am going to respectfully agree with 

Chairman Rice. I like the thought process of looking at the community banks first. And if you look at—we announced an acquisition 

about 30 days ago of a $1.3-billion bank, and in the press release, 

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the CEO of that bank said one of the reasons he was selling was 

because the regulatory pressures were just too hard on it. 

Mr. HANNA. Yeah. Well, I guess what I am suggesting implicitly—and Mr. Palmer or anybody—is that in doing that, we actually made it more necessary for the SBA to do all those things, because we interrupted the marketplace in a place that arguably 

maybe we did not need to or did not need to do as much as we did. 

So, the whole nature of loans from commercial banks has become 

more strict, more difficult, more onerous for people to go to. So, 

therefore, you have more need for what you all do, which it is good 

that you are filling the need, but maybe we can work up the food 

chain and down the food chain. 

Mr. BRADSHAW. I would like to comment that, you know, in a 

commercial loan environment, you do have a credit approval process. And I can tell you that the credit officers have not forgotten 

about 2007 and 2008. So, I do not know that all the additional regulation is necessary in that regard. 

Mr. HANNA. Mr. Palmer? 

Mr. PALMER. Well, the growth in the SBICs has been driven by 

a couple things, but one of which is just the awareness of the SBIC 

Pogram. And, frankly, it has been run well. It really had some 

struggles before the financial crisis, just from management issues 

and very few licenses were getting out there. 

So, as the SBIC product has become normalized, they have 

partnered with a lot of banks, which they had done before to a certain degree, but not to the extent they do. So, they are backfilling 

and allowing banks to do lending that they otherwise could not do, 

because they are often coming in with subordinated debt where the 

bank comes in with the senior, but the condition of the business 

itself would not otherwise be eligible for a loan. So, you know, they 

go hand-in-glove. 

But to your point, I do think we need a healthy banking structure generally, and let the banks, you know, operate in an appropriate and prudent way to fill the market needs. And then where 

the gaps are, where public policy should be applied, let it be applied. 

Mr. HANNA. Sure. And if they are not allowed to assume any 

risk, then there is more and more demand on what you all do. 

Mr. PALMER. Well, the challenge—there is a real perception, 

whether fair or unfair, in the market that risk is trying to be, you 

know, really stripped of every investment and every loan in the 

universe. And without a downside risk, there can be no upside risk. 

And I think at some point, we need to, you know, establish, what 

is the appropriate level of risk we are willing to live with as a society? 

Mr. HANNA. Mr. Napoli, you could probably speak to that better 

than anybody here, since you do microloans. Do you think a lot of 

people could be successful that just do not fill the bill for you? Do 

you think, like, there are opportunities out there that take greater 

associated risk for microloans, and ultimately grow what it is you 

are out there growing as businesses, and create jobs, and all of 

that? 

Mr. NAPOLI. Absolutely. As I said before, one thing micro-lending does is definitely address the minority and women-owned marSBREP-219 with DISTILLER

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kets better than any other lending tool. But one of the trends I see 

right now is the increase of younger entrepreneurs that is not 

being addressed by the market—talking about, you know, people 

coming out of college, even young 30s. And a lot of times, these are 

held down by the amount of student loans they have. It is a huge 

factor. But I think that is one thing that we could definitely target 

and do a much better job. 

Mr. HANNA. Thank you. My time has expired again. Thank you, 

Chairman. 

Chairman RICE. That was a great hearing. Thank you all for 

participating today. I truly appreciate you taking time out of your 

hectic schedules to provide the Committee with suggestions for improving SBA’s lending programs. These ideas will be instructive as 

the Committee works to ensure small firms have access to capital 

which is vital to their success, and necessary for the United 

States’s continued economic growth. 

I ask unanimous consent that members have five legislative days 

to submit statements and supporting materials for the record. 

Without objection, so ordered. The hearing is now adjourned. 

[Whereupon, at 11:20 a.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

Chairman Rice, Ranking Member Chu, and distinguished Members of this Subcommittee, I am grateful to have this opportunity 

to testify before you to discuss the impact of the Small Business 

Administration’s 7(a) loan program for both the lending and small 

business communities. 

I wear many hats as I testify this morning—the lender who has 

worked at both a large, national bank and in my current position 

at a community bank; the member from NAGGL, the national 

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Insert offset folio 25 here 94650.001
26 

trade association for 7(a) lenders; and a proud veteran. I hope that 

all of these perspectives that I bring to the table will help create 

a productive conversation with this Subcommittee about the 

strengths, the challenges, and some of the possible misperceptions 

about the 7(a) loan program. 

The 7(a) program annually supports over 45,000 small businesses 

and over 500,000 jobs with partnership from more than 2,600 participating private-sector lenders. And we do all of this at no cost 

to the taxpayer. In fact, in many years, the program’s subsidy rate 

has been reestimated down the road to be far less than originally 

estimated, resulting in over $530 million returned to the Treasury 

since FY 2010. 

The 7(a) borrower is a small business that cannot find the same 

terms in the conventional market because the banking industry, 

continues to remain cautious with its capital and heavily regulated 

in this post-Recession, post-Dodd-Frank environment. The bulk of 

conventional loans are made for 3-year terms of less. This means 

that the majority of small businesses who typically need long-term, 

competitively priced loans can only find these terms through the 

SBA loan programs, which offer loans up to a term of 25 years, 

with average terms for the 7(a) program of 16 years. 

In a Basel III world, banks avoid tying up their deposit base in 

long-term loans. A larger, short-term deposit base is meant to keep 

the bank afloat in the event of a recession, allowing the institutions 

to stay nimble enough to shrink their loan portfolio when necessary. For any bank to tie up a significant portion of their deposits 

in long-term loans would be a funding mismatch and regulators 

would raise red flags. The 7(a) loan program provides a way for 

banks to make these long-term loans that, in today’s financial climate, are virtually impossible to obtain by small businesses conventionally. Simultaneously, borrowers are just coming out of the 

shadow’s of the Recession, dramatically increasing the pool of 7(a) 

applicants. It is no wonder that annual new loan originations have 

grown from $16 billion in FY13 to what industry anticipates will 

be $23 billion in new loan originations in FY16. 

Therefore, the single-most pressing issue that threatens the 7(a) 

program year in and year out is constantly hitting the lending cap 

set by Congress. On the one hand, this is a good problem to have— 

it means that the program is growing beyond what Congress expected and that the program’s private sector lenders are pumping 

more and more loans out into the small business economy than 

ever before. In fact, the program volume in dollars increased on average 22% ahead of last fiscal year as of the first week of May. On 

the other hand, it means that like last year, the program is once 

again facing a potential eleventh hour threat of shutting down in 

this fiscal year and potentially not receiving enough room to grow 

in FY 2016. 

If there is one thing that Congress can do to help the 7(a) program run more effectively and serve more small businesses, it is 

to make sure that the authorizing committees and the appropriations committees in both the House and Senate work together 

every fiscal year to set a cap for the program that gives the portSBREP-219 with DISTILLER

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folio enough room to grow without the looming fear of shutting 

down. The consequences of not setting an appropriate cap are dire 

for the program. 

Washington stop-and-go funding patterns are a complete mismatch for how the rest of the world operates outside the beltway. 

Small business owners and lenders alike need assurance that the 

7(a) program will be a reliable resource. The 7(a) loan goes to small 

businesses that incorporate this capital into their business models 

months in advance for new hires or long-term expansion plans. 

Quite simply, the small business and lending communities will stop 

turning to the 7(a) program as an answer to capital access if they 

feel its existence is uncertain. Believe me—this issue is difficult to 

explain to the board of directors of a community bank. In addition, 

participating lenders diligently watch the volume of the program 

and their anticipated pipelines, and if it seems the program will 

come close to the authorized cap at the end of the fiscal year, lenders will start to change lending behavior as early as June. If the 

most important thing in finance is market fears and perceptions, 

the always precarious nature of the 7(a) authorization is undoubtedly the weakest part of the program. 

For Fiscal Year 2016, the President’s budget request for the 7(a) 

program was $21 billion. NAGGL is anticipating that the 7(a) program will actually lend about $23 billion in FY16. We are asking 

that the House and Senate Small Business Committees work together with their respective Appropriations Committees to give the 

program what it needs to simply allow for the natural increase in 

small business lending, a trend I know this committee would 

strongly applaud. I understand and respect Congress’ need to justify every dollar spent. But Congress cannot encourage small business lending on the one hand, and yet on the other hand, keep the 

lenders and borrowers in constant fear of shutdown for simply 

robustly participating. 

Even more pressing is the potential authorization shortfalls this 

fiscal year. For the past three fiscal years, loan volume in dollars 

has on average increased by 27% in the second half of the fiscal 

year from the first half of the fiscal year. And I am confident that 

trend will remain true for FY 2015, putting us easily at around $23 

billion gross and $20.5 billion net, if not more. While that level of 

lending is encouraging, it is also disastrous since the industry only 

has $18.75 billion in authorization from Congress. That is akin to 

giving a car with no brakes a full tank of gas but only giving it 

a little bit of road. What is the car supposed to do when it runs 

out of road? 

Last year, in FY14, we had this same funding shortfall and Congress included a $1 billion anomaly in the Continuing Resolution 

in September 2014 to save the program from shutting down. And 

we certainly would have shut down without that additional authorization—the 7(a) program made loans totaling $19.2 billion gross 

and $17.7 billion net, given an original $17.5 billion in authorization. That net figure would have been even greater had the additional funding come earlier than the last week of the fiscal year 

since lenders begin to change their lending behavior at least four 

SBREP-219 with DISTILLER

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months in advance of the end of the fiscal year. I know personally 

that many lenders slowed down their own lending early last fiscal 

year in anticipation of a shutdown. No lender wants to tell a small 

business borrower that its loan was delayed. In real world terms, 

that means the small business can’t make those additional hires or 

has to find a way to stall construction on a new expansion. That 

is the opposite direction we want the small business economy to be 

moving toward. 

We hope that either Congress or the SBA can work with us to 

address this looming issue for FY15. Otherwise, the program could 

shut down and the 7(a) program’s reputation as a reliable resource 

for small businesses will be damaged. And more importantly, small 

businesses will not receive the access to capital they so badly need 

in this economic climate. 

As a lender, I can tell you that most people do not understand 

the 7(a) loan program. This program is not a subsidy for small 

businesses—it’s a loan made with a private financial institution to 

small businesses that are paid back in full and treated as any 

other conventional market loan. The program is the very essence 

of a public-private partnership, allowing government to stand out 

of the way of what banks know how to do best. 

Perhaps the most critical part of the program to highlight is that 

I know for a fact that without the 7(a) program, the loans I make 

would never be made. That does not mean the small businesses receiving a 7(a) loan are failing or unable to repay their loans. Many 

believe that a mission statement of helping small businesses find 

capital that they could not find elsewhere means that these small 

businesses are somehow subprime—that is false. These small businesses are not subprime; rather, the current conventional market 

is unavailable to satisfy the majority of small business needs. As 

lenders participating in the SBA programs, we have to abide by 

many parameters, including making sure the borrower is in sound 

financial health and credit worthy. As bankers, we never want to 

see a risky loan on our books to open us up to potential losses or 

criticism from our regulators. The 7(a) program ensures we have 

skin in the game with the lender standing to lose 25%–50% of the 

loan in the event of default, as well as heavy oversight measures 

that would affect our reputation as financial institutions. 

As an active part of NAGGL, I co-chair the association’s Public 

Policy Committee, which focuses solely on the public policy goals of 

the 7(a) program. The 7(a) program is inherently connected to a 

larger mission—to lend to small businesses that cannot find credit 

elsewhere. Over the years, this has come to mean not only small 

businesses that cannot find a conventional loan, but also underserved markets and minority populations. This public policy portion of the program is a critical mission for NAGGL and the 7(a) 

industry, and we have already begun the task of creatively addressing the gap in lending to certain demographics. Veterans and 

African-Americans are two of the most underserved populations 

within the SBA lending programs. It is important to note, according to SBA’s weekly lending statistics as of the first week in May, 

when comparing May 2015 to May 2012 year to date, 7(a) lending 

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to African-Americans has increased by 93%. Similarly, when comparing May 2015 to May 2012 year to date, lending to veterans has 

increased by 88%. Let me caveat this good news with some sobering reality—these increases are augmented by the fact that the 

pool for each of these underserved demographics is so small in the 

first place. These are steps in the right direction, but we have 

much more we can do as lenders. 

In response to this, the 7(a) lending industry is reaching out into 

the communities to attack this challenge in a personal, hands-on 

way. For example, the SBA and the industry have learned over the 

years that it is not a matter of lenders not choosing minority borrowers. Rather, it is a matter of minority borrowers not being credit ready and aware of SBA opportunities. In response to this educational need, NAGGL recently partnered with the SBA to create 

an entrepreneurial education toolkit for minority communities that 

will be translated into Spanish and taught through faith-based and 

local community organizations. This educational initiative, called 

the ‘‘Business Smart Toolkit,’’ is being rolled out this year. I’m 

looking forward to seeing the results of this terrific partnership. 

Additionally, NAGGL has been crisscrossing the country to honor 

minority small business borrowers who have received a 7(a) loan 

and subsequently revitalized their neighborhoods. During Black 

History Month of this year, NAGGL hosted an event to honor 

James Hamlin, an African-American entrepreneur in Baltimore on 

Pennsylvania Avenue, the epicenter of the most recent protests 

have been centered. With the help of a 7(a) loan, Mr. Hamlin 

opened The Avenue Bakery and turned around a small corner of 

his community that is currently under the microscope of the world 

when it comes to underserved segments of the population that have 

been left behind. Mr. Hamlin’s bakery was spared from any recent 

violence that occurred in the city and he is a beacon of hope when 

it comes to how we communicate with younger generations about 

how to make a better life. Mr. Hamlin will also tell you that at the 

end of the day, struggles in minority communities are all about economics. We hope that the 7(a) loan is a way to inject these underserved markets with the power of economic sustainability and success. 

As a veteran, I acutely see the challenges we’re facing in the 

portfolio to lend to veterans, as well as other underserved markets, 

in a very personal way. I feel compelled to be a part of the answer 

to help the SBA loan programs become more accessible to minorities. As a young man, I attended the Air Force Academy and subsequently served five years active duty in the Air Force. Following 

my service, I entered the Naval Reserve and for sixteen years 

working in Naval Intelligence, until finally retiring in 2005. Now, 

in a new chapter of life, for the last two years I have served on 

Senator Lindsey Graham’s Academy selection boards, interviewing 

prospective applicants. 

One of the most rewarding parts about my alternate life as a 

banker is that in the SBA 7(a) program, I actually have the rare 

ability to merge my two worlds and help veterans achieve economic 

empowerment when they return from the battlefield. I helped creSBREP-219 with DISTILLER

30 

ate and chair NAGGL’s Operations Veterans Access Subcommittee 

focused on bringing veterans into the 7(a) program. I was encouraged by so many of my peers committing to NAGGL that they 

would increase lending to veterans by 5% over the course of the 

coming year, but we need to do more. Some of my favorite moments 

of my job is seeing that a loan on my desk is going to a veteran 

and calling them up personally to thank them for their service. 

Now, as the industry continues to hone in on underserved markets 

like veterans, I hope that those calls become more and more frequent. 

Once again, thank you for this opportunity to testify. I’m encouraged by being here today that Congress and industry can work 

closely together to address some of the program’s challenges and 

encourage our strengths. I look forward to discussing the 7(a) program more with you and happy to take your questions. 

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Representative Rice, Representative Chu, and other distinguished members of the committee: Thank you for inviting me to 

testify before the subcommittee. I know you all share the goal that 

I do, which is to ensure American small businesses have the access 

to capital necessary to grow and, in doing so, help their local communities flourish. I look forward to the exchange of ideas today on 

ways we can work together towards that vision. 

My name is Barbara A. Vohryzek and I serve as President and 

CEO of the National Association of Development Companies, or as 

we’re commonly known, NADCO. In that role, I represent more 

than 90% of the Certified Development Companies in the country. 

These Certified Development Companies, or CDCs, are mostly nonprofit entities that execute the financing for SBA’s 504 loan program, while often also participating in other federal, state, and 

local economic development programs, including the SBA Microloan 

program and the SBA Community Advantage Loans program. This 

is familiar territory to me—I founded and ran California Statewide 

CDC for over 21 years. 

The 504 loan program is a financing tool for economic development that provides small businesses with long-term, fixed-rate 

loans to help them acquire major fixed assets for expansion or modernization of their businesses. These loans are most frequently 

used to acquire land, buildings, machinery, or equipment. Eligibility for 504 loans is linked to job creation. By law, each $65,000 

in financing must create or sustain one job, or meet one of several 

public policy goals. Our loans are closely linked with our local government and local communities so we can help them grow. A loan 

which includes a 504 guarantee portion can be over $13 million, 

which allows the CDC community to contribute to impactful economic development work. 

The 504 loan program had challenging years during the economic 

downturn. As a real estate-heavy program, it experienced losses 

and, in directly tracking with the real estate market, took a while 

to recover. I am pleased to report though that this October, it is 

back to being self-funded with no appropriation, as it had been 

since the program went to self-funding in FY1996. Now that we are 

on firm footing, we must turn to where the 504 program and the 

CDC industry must go next. 

I recommend that during the 114th Congress, the subcommittee 

focus on several long term modifications as well as make some immediate fixes to a few current challenges that the CDC industry 

and the 504 loan program face. 

First, the 504 loan program lacks definition. It is SBA’s economic 

development loan program and CDCs are economic development 

entities. However, no definition exists in statute or regulation for 

‘‘economic development’’ or for ‘‘CDC.’’ I recommend that we work 

together, as we have already started to with SBA, to formalize 

these definitions so that there are clear metrics for this program 

to fulfill its mission and be respectful stewards of the taxpayer’s 

guarantee. This will be an opportunity for us to delve into many 

important topics, such as making the Community Advantage loan 

program permanent and increasing outreach to minority borrowers. 

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Second, I recommend that the successful debt refinancing with a 

504 loan program, a program that was in place several years ago, 

be restarted permanently. When this program was active from mid2011 through September 2012, the peak of the economic downturn, 

more than 2,300 small businesses refinanced over $5 billion in capital. This returned to their business the many tens of thousands of 

dollars a year previously spent on high interest rates or saved 

them from balloon loans. Small businesses who participated in the 

refi program were required to reinvest the savings in their businesses, creating jobs and opportunity for them and into the wider 

community. SBA estimates that this program would operate at a 

zero subsidy cost, so no appropriation, if restarted. In fact, this 

year’s subsidy reestimates for the programs show that existing refis 

have operated at a negative subsidy rate, meaning that they have 

actually made money for the government. A program with such a 

strong track record should be available again to our small businesses. 

This request is timely as well over 4,000 small balance commercial mortgage-backed security loans will mature in the next 3 

years. Most of these borrowers will need to refinance yet many 

banks that handled small balance loans prior to the financial crisis 

are no longer in the market or no longer in business. This will be 

a gap for small business owners which must be filled. Refinancing 

these conventional loans with the 504 loan program can do that. 

Third, last year the committee introduced H.R. 5600, which clarified SBA franchise and affiliation rules. NADCO would welcome 

passage of a similar bill to address this confusing issue. 

While these long term changes will strengthen the 504 program 

for future small business borrowers, several pressing matters are 

preventing CDCs from best serving their communities today. Most 

timely is a recent SBA procedural notice which states, for the first 

time in the program’s history, that the Anti-Deficiency Act prevents 

504 loans with open-ended indemnities from closing without onerous waivers, costly attorney fees, and many hours of red tape for 

small business owners and CDCs. When this unprecedented policy 

was first issued, NADCO surveyed our members and discovered 

that a billion dollars in financing had been delayed or canceled 

from this change. And that was only as of October 31, 2014. More 

perplexing yet, this policy was issued despite the fact that, according to the SBA, not one single loan has caused any loss of taxpayer 

dollars due to this issue. While fixing this problem is within SBA’s 

regulatory authority, the Agency has not, as of yet, found a solution 

that is workable for small businesses. I hope we have the opportunity to discuss this complex issue during your questions. There 

is no issue more critical in the 504 program and, in my opinion, 

in the government lending arena, since it seems that this policy 

logically extends to the many other SBA and federal government 

loan and guarantee programs that have real estate as collateral. 

A final challenge that the CDC industry faces is a challenge that 

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folios previously managed by 2, 3, or even more staff members. 

This result of this change is both a slowing of our ability to support 

small business entrepreneurs seeking SBA 504 loans, and an increasing concern and lack of confidence within the business community about our ability to deliver 504 loans in a timely fashion. 

Our small business borrowers deserve to have access to capital that 

is unconstrained by the vacancy of these SBA positions that are so 

critical to our ability to deliver this high value loan program. We 

hope this subcommittee provides adequate resources through the 

budget and appropriations process to hire and train strong SBA 

employees. 

Thank you again for the opportunity to share NADCO’s thoughts. 

I look forward to your questions. 

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1Survey of Business Owners and Self-Employed Persons, conducted by the U.S. Census Bureau in 2007 and 2008. 

Brandon Napoli, Director of Micro lending at VEDC 

Statement for Record for the Subcommittee on Economic Growth, Tax and 

Capital 

Access of the House Small Business Committee 

U.S. House of Representatives 

May 19, 2015 

Chairman Steve Chabot and members of the sub-committee, 

thank you for the opportunity to submit testimony about a crucial 

component of a vital American business community. My name is 

Brandon Napoli and I am the Director of Micro Lending at VEDC, 

located in Los Angeles. VEDC is one of the largest SBA micro lenders in the nation. We provide real money to real people who are 

creating real jobs. 

Micro lending is foundational to our economy, and VEDC is committed to helping entrepreneurs like Maria Martir secure 

microloans that foster healthy, sustainable communities. Maria, 

who started her own business at age 12 in Mexico, is the proud 

owner of De Todo Un Poquito Cafe (A Little of Everything) in Los 

Angeles. Raising the funds to start her own business was not easy; 

Maria saved what she could out of every paycheck she received. 

Three years later and with $40,000 in savings, she approached several banks for the last $10,000 to provide a working capital cushion 

for the first several months of operation. Maria was turned down 

several times for traditional financing. She had no existing cash 

flow and no outside collateral. Maria turned to VEDC, which offers 

access to capital for entrepreneurs unable to secure traditional 

bank financing as well as free technical assistance. 

Three years after receiving a $10,000 loan along with help writing her business plan, Maria’s original cafe ́ has grown to occupy 

the vacant space next to her and has created jobs for her four children. She is now looking to expand elsewhere. Maria’s experience 

illustrates what we at VEDC know from years of experience— 

hands on technical assistance, coupled with need-based financing, 

greatly increases a small business’s chances of success. 

Micro lending is not just about making small loans, though. It is 

about reaching entrepreneurs who are outside of the economic 

mainstream and helping them start and sustain a business that 

eventually creates jobs, adds to the tax base, and after a few years, 

becomes bankable. 

All those micro-businesses add up to big numbers. These busi- nesses generate $2.4 trillion in receipts, account for 17% of U.S. 

GDP, and employ more than 31 million Americans.1 Maria Martir 

owns one of the 25 million businesses, or 88% of all businesses, in 

the United States considered a micro-business—a business with 

SBREP-219 with DISTILLER

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five or fewer employees and start-up capital of under $50,000. 

Microbusinesses are everywhere—the farmer at the Saturday market, your neighbor who runs the local childcare center, the trucker 

who works long hours on the road, the contractor who built your 

home, the beauty salon or barber shop, your favorite neighborhood 

restaurant that you always suggest needs to commercialize their 

barbecue sauce, or the miniature golf course you worked at as a 

kid—think of the businesses you frequent and I am sure that you 

encounter many microbusinesses you call your own. 

The proposed FY2016 SBA Budget provides continued opportunities for American’s entrepreneurs to start their own businesses and 

become successful, independent, and self-reliant like Maria. To 

keep the American Dream a reality for the millions of micro-business owners, Congress needs to increase the effective investment it has made in SBA Micro Loan Program from $24.8 

million to $28.3 million and make the programmatic changes 

suggested by current intermediary micro lenders. 

Increasing this funding would have a positive impact on a current market trend that is siphoning the cash flow out of small businesses today. Today, we hear about online lenders and how they 

are addressing the financial needs of small businesses. But a lender that provides short term, high-interest rate products without 

transparency in their pricing is not what small businesses need. 

The good news is that there are initiatives like microloan.org and 

SBA LINC, both new gateway referral programs for small business 

owners. These efficiencies are being built, through automation, yet 

staying committed to the long-term, relationship-based lending that 

has been the driver behind high performing portfolios and the successful borrowers who have benefited from them. 

Maria’s De Todo Un Poquito Cafe and other microbusiness could 

not do what they do without the support they get from SBA micro 

loan intermediaries like VEDC. Since 1998, VEDC has lent over 

$11 million by providing over 1,000 SBA micro loans, as well as 

pairing business technical assistance with the loans. Thankfully, 

there are many others like VEDC around the country. These participating intermediary lenders, like CDC Small Business Finance 

in California, Lift Fund which lends in over five Southern States, 

Common Capital in Massachusetts, Community Investment Corporation in Connecticut, Entrepreneur Fund in Minnesota, Wisconsin Women’s Business Initiative Corporation, and the Economic 

and Community Development Institute in Ohio provide a ‘‘one-stopshop’’ where a business owner can secure flexible financing as well 

as the individualized business assistance as needed throughout the 

life of their loan. This model forges a unique dynamic between the 

lender and the business owner that has enabled intermediary lenders to maintain healthy and growing loan portfolios while financing 

businesses deemed ‘‘un-bankable’’ by conventional lenders. And unlike the growing trend of the online lenders, these community 

based lenders offer affordable capital with longer terms, and lower 

interest rates. 

The SBA Microloan Program reclaims the American Dream, one 

micro-business at a time. Intermediaries work with every day enSBREP-219 with DISTILLER

46 

trepreneurs to harness their innovative ideas and creativity and 

empower them to become their own bosses. Our micro entrepreneurs work hard to become self-sufficient. They hire locally, pay 

taxes, and, in other ways, give back to their communities. It is our 

responsibility to make sure they have the access to capital they 

need. 

Since the Microloan Program was authorized in 1991, intermediary lenders have borrowed $414 million from the SBA and 

have used those funds to originate more than $629 million in loans 

to small businesses that have created or retained 185,800 jobs at 

a cost to the federal government of less than $2,228 per job. After 

24 years, the cumulative default rate on SBA loans made to intermediary lenders is 1.8%. This is due largely to intermediary lenders having ‘‘skin in the game’’ in terms of having to pay back the 

SBA, and therefore a vital interest in their borrower’s success. 

There are currently 137 active intermediary lenders participating 

in the program, and, in 2014 alone, these lenders made 3,917 loans 

totaling $55.5 million to small businesses supporting 15,880 jobs. 

Overall, intermediary lenders have proven that this is an efficient 

model to make smart investments in our local communities. 

After 24 years, these intermediaries have also realized that several of the, well-intentioned policies, originally placed by cautious 

policy makers, now serve as barriers to gains in efficiencies. The 

most restricting barrier is the statutory restraint of utilizing 75% 

of the technical assistance post funding and only 25% pre funding. 

As with Maria, and the majority of micro entrepreneurs, the need 

for intense technical assistance before receiving financing ensures 

the small business owner is loan ready. Additionally, micro lenders 

now offer a continuum of services; including, technical assistance, 

microloan, the SBA 7(a), small business loan, or a 504 loan, that 

support a business until they are bankable. When they speak to 

one of the hundreds or even thousands of pre-loan clients, the need 

identified through the pre-loan technical assistance provided, may 

result in the client being better suited with one of these other products. In other words, technical assistance is provided to all clients, 

regardless of the loan they end up, but that is not known at the 

start of the process. 

We are all cognizant of the current budget situation. However, 

programs designed to promote job creation—especially those with 

proven track records such as the Microloan programs at SBA—require continued support. 

In closing, every day, VEDC and micro lenders across America 

see good, hardworking people like Maria who want and can build 

a better country, contribute to society, and create jobs. The greatest 

investment we can make is in these people, in your people who create jobs. The returns go far beyond the dollars paid back. Thank 

you for the opportunity to share Maria’s story and for your continuing support of microloans. 

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1This testimony is submitting on behalf of the Friends of the SBA Microloan Program, including: Roberto Barraga ́n (VEDC), Wendy K. Baumann (Wisconsin Women’s Business Initiative 

Corporation), Robert Boyle (Justine Petersen Housing & Reinvestment Corporation), Mark 

Cousineau (Connecticut Community Investment Corporation), Grace Fricks (Access to Capital 

for Entrepreneurs), Brett Gerber (Impact Seven), Dave Glaser (Montana Community Development Corporation), Luz Gutierrez (Rural Community Development Resources), Clint Gwin 

(Pathway Lending), Gina Harman (ACCION The US Network, Inc.), Edmundo Hidalgo (Chicanos Por La Causa), Peter Hille (MACED), Inna Kinney (Economic and Community Development), David Kircher (Wisconsin Business Development), Sandy Lowell (Northern Community 

Investment Corporation), Lisa Macioce (Bridgeway Capital), Ceyl Prinster (Colorado Enterprise 

Fund), Jeff Reynolds (Center for Rural Affairs), Nelly Rojas-Moreno (LiftFund), Chris Sikes 

(Common Capital), Kevin Smith (Community Ventures Corporation), Namoch Sokhom (Pacific 

Asian Consortium in Employment Business Development Center), Jennifer Sporzynski (CEI), 

Robert Villarreal (CDC Small Business Finance), Birdie Watkins and Jerry Rickett (Kentucky 

Highlands Real Estate Corporation), Shawn Wellnitz (Entrepreneur Fund), Dennis West (Northern Initiatives), and Karl Zalazowski (California Coastal Rural Development Corporation). 

Friends of the SBA Microloan Program 

————————————————————————————————————

Friends of the SBA Microloan Program 

Statement for the Record for the Subcommittee on Economic Growth, Tax 

and Capital 

Access of the House Small Business Committee 

U.S. House of Representatives 

May 19, 2015 

Mr. Chairman and Members of the Subcommittee, thank you for 

the opportunity to submit testimony to the Small Business Committee of the U.S. House of Representatives on the Small Business 

Administration (SBA) Microloan Program on behalf of the Friends 

of the SBA Microloan Program.1

The Friends of the SBA Microloan Program is an informal working group of nonprofit SBA Microloan Intermediaries. Its members 

provide small-dollar loans up to $50,000 and business development 

resources to help women, low-income, veteran, and minority entrepreneurs successfully create and grow sustainable businesses. In 

doing so, its members support economic opportunity for underserved entrepreneurs in rural, suburban, and urban communities 

across the nation by increasing access to the resources and services 

necessary to create wealth and build assets through business ownership. 

The Impact of the SBA Microloan Program 

The Friends of the SBA Microloan Program strongly supports the 

SBA Microloan program as a critical tool for our nation’s small 

businesses. Under the Microloan program, the SBA provides loans 

to nonprofit intermediary lenders who, in turn, lend the funds—in 

addition to state and local resources—in amounts of $50,000 or less 

to the smallest of small businesses. Microloan program intermediary lenders also receive grants to help fund the cost of providing business-based training and technical assistance to small 

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business borrowers and potential borrowers. The fusion of capital 

and training helps shore up the capacity of these small businesses 

to help them turn a profit, improve operations, grow the business, 

and create jobs. 

Since the program was launched in 1991, SBA Microloan Inter- mediaries have borrowed $414 million from the SBA and have 

made over $629 million in loans to small businesses that have created or retained 185,800 jobs at a cost to the federal government 

of less than $2,228 per job. According to SBA’s Fiscal Year 2014 

(FY14) Financial Report, the cumulative loss rate to the SBA on 

the Microloan Program is exceptionally low at just 1.88 percent. 

In FY14, the SBA approved 36 loans—amounting to $26.5 million—to Microloan Intermediaries. By the end of the fiscal year, 

these Intermediaries leveraged an additional $29 million to provide 

$55.5 million in microloans to 3,917 small businesses. These businesses created or retained 15,668 jobs in local economies. 

SBA Microloan Program 

FY14 Performance Metrics 

Small Businesses Assisted With 

Microloans 

Jobs Supported by 

Microloans 

Loan Amount Approved by SBA to 

Microlenders 

Loan Amount Approved by Lenders to 

Microborrowers 

Small Businesses 

Counseled 

3,917 15,880 $26.5 million $55.5 million 15,668 

Support for Increased FY16 Appropriations 

The Friends of the SBA Microloan Program strongly supports the 

funding recommendations included in the House Small Business 

Committee’s FY16 Views and Estimates of the SBA Microloan Program. Specifically, we support the Committee’s call for a modest increase in funding for Microloan Budget Authority and Technical 

Assistance grants. 

In its assessment, the House Small Business Committee voiced 

its support for an additional $800,000 in Budget Authority for the 

SBA Microloan program which would allow for an additional $10 

million in microlending authority. If enacted, this would increase 

the program’s Budget Authority to $3.3 million and its program 

levels to $35 million. The Committee noted that its support for increased funding—also proposed by the Administration in the President’s FY16 Budget Request—was due to ‘‘the effectiveness of the 

Microloan Program in job creation.’’ 

Likewise, the Committee supports the Administration’s request 

of $25 million in FY16 for SBA Microloan Technical Assistance 

grants, which represents an increase of $2.7 million. Calling the 

program the ‘‘keystone of the Microloan program,’’ the Committee 

agreed that Technical Assistance grants are both ‘‘valuable and irreplaceable.’’ 

Recommended Legislative Proposals 

The SBA Microloan Program was established in 1991 as a pilot 

program. Since that time, the program has grown to 137 active 

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intermediary lenders who made more than $55 million in loans to 

almost 4,000 small businesses across America in 2014. 

While the program has grown in size, scope, and success, many 

of the original provisions of the pilot program remain in effect. 

These provisions create a paperwork burden for Microloan Intermediaries and the SBA. Moreover, these provisions have been in 

statute since the inception of the microloan program and are no 

longer appropriate. 

Proposal 1: Limitations on Prospective Borrowers 

Section 7(m)(4) of the Small Business Act (15 U.S.C. 636) establishes a grant program to help SBA Intermediaries provide marketing, management, and technical assistance to address the small 

business concerns of prospective and current borrowers. Under current law, up to 25 percent of the total grant funds may be used to 

provide highly targeted technical assistance and business counseling to prospective borrowers. This provision is known as the ‘‘75/ 

25 Rule.’’ By providing these services, SBA Intermediaries can help 

prospective borrowers prepare to become microloan borrowers in 

the future. 

Moreover, implementation of this rule has limited the ability of 

intermediaries to counsel and underwrite prospective borrowers 

and has created a high administrative burden, as grants must meet 

the 25 percent limitation on a quarterly basis. Rural organizations 

indicate that given that time to travel to meet with business, this 

limitation has made their efforts especially difficult. With a loan 

loss rate of less than 2 percent, intermediaries have proven their 

ability to service their loan portfolios. Limiting their ability to work 

with new or prospective borrowers is no longer necessary. 

The Friends of the SBA Microloan Program recommends that 

Congress eliminate Section 7(m)(4)(E). Specifically, it proposes the 

following language: 

Section 7(m)(4) of the Small Business Act (15 U.S.C. 

636(m)(4)) is amended— 

(a) by striking subparagraph (E)(i); and 

(b) by redesignating subparagraph (E)(ii) as subparagraph (E)(i). 

This language is similar to a provision of the Women’s Small 

Business Ownership Act of 2014, as introduced by Senator Cantwell in July 2014. 

Proposal 2: Minimum State Allocations 

Section 7(m)(7)(B) of the Small Business Act (15 U.S.C. 636) establishes the minimum state allocation of microloans to SBA Intermediaries. It states that ‘‘the Administration shall make available 

to each state an amount equal to the sum of (I) the lesser of (aa) 

$800,000; or (bb) 1/55 of the total amount of new loan funds made 

available for award under this subsection for that fiscal year.’’ The 

statue goes on to provide that in the 3rd quarter of the year, the 

Administration may collect and redistribute any funds that are unlikely to be made available. 

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With 137 borrowers across the country, this provision—which 

was designed to promote geographic diversity—is no longer necessary. 

The Friends of the SBA Microloan Program recommends that 

Congress eliminate the ‘‘1/55th Rule.’’ Specifically, it proposed the 

following language: 

Section 7(m)(7) of the Small Business Act (15 U.S.C. 636(m)) 

is amended— 

(a) by striking subparagraph (B). 

Proposal 3: Third-Party Contracts 

Under current law, no more than 25 percent of technical assistance grants may be used for contracts with third parties. This provision makes it difficult for organizations with small grants that do 

not have enough money to hire full-time staff and may be better 

able to fulfill grants obligations with consultants. 

The Friends of the SBA Microloan Program recommends that 

Congress eliminate the limitation on third-party contracts. Specifically, the Friends Network proposes the following language: 

Section 7(m)(4) of the Small Business Act (15 U.S.C. 

636(m)(4)) is amended— 

(a) by striking subparagraph (E)(ii). 

Conclusion 

Over nearly 25 years, the SBA Microloan program has proven to 

be a successful tool for assisting small businesses in rural, urban, 

and suburban communities across the nation. Despite its success, 

there are a number of provisions that were included in the original 

authorizing legislation that are no longer appropriate and which 

limit the ability of Intermediaries to serve small businesses. In 

light of the program’s proven track record, the Friends of the SBA 

Microloan Program recommends that Congress eliminate these burdensome and unnecessary provisions. 

Æ 

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