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40–411 PDF 2008

SUBCOMMITTEE HEARING ON

IMPROVING THE SBA’S ACCESS

TO CAPITAL PROGRAMS FOR OUR

NATION’S SMALL BUSINESSES

SUBCOMMITTEE ON FINANCE AND TAX 

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 5, 2008

Serial Number 110-76

Printed for the use of the Committee on Small Business

(

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

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Bean, Hon. Melissa .................................................................................................. 1

Buchanan, Hon. Vern .............................................................................................. 2

WITNESSES

PANEL I: 

Zarnikow, Honorable Eric, Associate Administrator for Capital Access, U.S. 

Small Business Administration .......................................................................... 4

Crawford, Mr. Christopher, President and Chief Executive Officer, National 

Association of Development Companies ............................................................. 6

Mercer, Mr. Lee, President, National Association of Small Business Investment Companies ................................................................................................... 8

Betancourt, Mr. Daniel, President and Chief Executive Officer, Community 

First Fund, on behalf of the Association for Enterprise Opportunity ............. 10

Wilkinson, Mr. Anthony, President and Chief Executive Officer, National 

Association of Government Guaranteed Lenders .............................................. 12

APPENDIX 

Prepared Statements: 

Bean, Hon. Melissa .................................................................................................. 27

Buchanan, Hon Vern ............................................................................................... 29

Zarnikow, Honorable Eric, Associate Administrator for Capital Access, U.S. 

Small Business Administration .......................................................................... 30

Crawford, Mr. Christopher, President and Chief Executive Officer, National 

Association of Development Companies ............................................................. 34

Mercer, Mr. Lee, President, National Association of Small Business Investment Companies ................................................................................................... 39

Betancourt, Mr. Daniel, President and Chief Executive Officer, Community 

First Fund, on behalf of the Association for Enterprise Opportunity ............. 45

Wilkinson, Mr. Anthony, President and Chief Executive Officer, National 

Association of Government Guaranteed Lenders .............................................. 48

(III) 

(1)

SUBCOMMITTEE HEARING ON IMPROVING 

THE SBA’S ACCESS TO CAPITAL 

PROGRAMS FOR OUR NATION’S SMALL 

BUSINESSES 

Wednesday, March 5, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 2:00 p.m., in Room 

2360 Rayburn House Office Building, Hon. Melissa Bean [chairwoman of the Subcommittee] presiding. 

Present: Representatives Bean and Buchanan. 

Also Present: Representative Vela ́zquez. 

OPENING STATEMENT OF CHAIRWOMAN BEAN 

Chairwoman BEAN. Calling this hearing to order. Today the 

Committee will examine the SBA’s lending and investment programs and what steps the agency is taking to strengthen these initiatives. 

This hearing is timely given concerns about the economy, particularly the tightening of credit availability following the subprime 

mortgage fallout. The access to capital is critical to small business, 

investment, growth, and competitiveness. 

The current down turn, rising loan foreclosures, and a falling 

housing market have caused financial institutions to tighten their 

credit standards. As a recent Federal Reserve survey confirms, 

more than 30 percent of lenders are raising their lending criteria 

for small firms. 

For entrepreneurs, the rising cost of capital can cause many to 

forego important purchases or expansion. This dampening effect 

has the potential to reduce entrepreneurial activity in the short 

term and further hinder economic growth over the long term. 

In this environment, the SBA’s lending and investment programs 

played their most vital role as there was an opportunity to provide 

capital to businesses who can no longer access affordable private 

alternatives. 

Small businesses are the nation’s largest employer and create 

roughly 80 percent of domestic job growth. Today’s hearing seeks 

to determine what steps the SBA is taking to meet the needs of our 

nation’s small businesses, making access to their loan programs 

easier. 

Recently, instead of providing crucial financing for small businesses, challenges facing the agency have resulted in reduced lendVerDate 0ct 09 2002 14:41 May 01, 2008 Jkt 033615 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40411.TXT LEANN
2

er participation, lower loan volume to small businesses, and rising 

costs. 

As we will hear today, many of these developments are in the 

agency’s flagship 7(a) loan program, the dollar amount of 7(a) loans 

are decreasing, and the number of financial institutions participating in the program have been declining. A new 7(a) oversight 

fee has been added. And even more fees are proposed for next year. 

These new costs come at a time when small businesses can least 

afford them. 

Last year the House took action to address these concerns by 

passing H.R. 1332, a bill that I sponsor. At the same time, the 

agency’s seed capital initiative, the SBIC’s, participating securities 

program remains closed with little help of seeing new life. This program is critical to small business growth as sources of equity investment dry up quickly in economic down turns. 

Small high-growth entrepreneurs are left with fewer options for 

financing. Again, there are solutions on the table, including H.R. 

3567, which creates a new start-up financing program that passed 

the House by a strong bipartisan vote. 

Further restricting access to capital, the administration proposed 

this year to increase the interest rates borrowers pay for 

microloans. This will have the effect of raising the cost of loans for 

low-income borrowers at a time when other options are not available. 

H.R. 3020, which was sponsored by Ranking Member Chabot, 

takes steps to modernize the program without raising the costs for 

low-income borrowers. This bill has also passed the House this session. 

While the Committee is working to advance these proposals in 

the Senate, several new laws have recently been enacted to provide 

low-cost small business loans for veterans and energy-efficient 

technologies. These types of initiatives show great promise to get 

capital in the hands of entrepreneurs. And we look forward to the 

SBA’s near-term implementation of them both. 

It is clear that SBA’s lending and investment programs are an 

important tool for small businesses, particularly in a faltering economy. As businesses face challenges securing affordable financing, 

the commitment to modernize and strengthen these initiatives will 

provide necessary alternatives. Our hearing will call attention to 

the challenges facing these programs so that Congress can act 

quickly to provide the resources and reforms needed for the growth 

and expansion of our community businesses. 

I want to thank all of our witnesses who are here today in advance for your testimony and subject matter expertise and now recognize our ranking member for his opening statement. 

OPENING STATEMENT OF MR. BUCHANAN 

Mr. BUCHANAN. I want to thank the Chair for yielding and for 

calling this hearing today on a matter important to millions of 

Americans. I would like to also extend my thanks to our witnesses, 

who have taken time out of their busy schedules to provide this 

Subcommittee with testimony today. 

Today too many small business entrepreneurs find themselves 

struggling in this volatile economy. They’re entangled in governVerDate 0ct 09 2002 14:41 May 01, 2008 Jkt 033615 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40411.TXT LEANN
3

ment red tape, victimized by excessive frivolous litigation, or burdened by high cost of health care. But all of this is made worse 

when small businesses cannot access the capital it needs to start 

or expand an enterprise. 

The SBA 7(a) and the 504 lending programs are vital for the success of our nation’s small businesses. It is evident that the number 

of lenders on the SBA financing program has decreased. And, of 

course, some of that decrease is attributable to the continuing consolidation of the banking industry. 

While the SBA is trying to increase participation in this program, it also has taken steps that make it tough by raising fees to 

lenders. This is one of the areas that I hope we can discuss a little 

bit more today. 

The good news is we have made important strides in this Committee over the past year. Chairwoman Bean sponsored and I support bipartisan legislation aimed at reducing lending fees and increasing small business access to capital. 

H.R. 1332 improves and strengthens the SBA program, successful program 7(a) and the CDC loan programs. This pivotal legislation enables the SBA financing programs to operate without subsidy. And that is important. Should tax dollars be appropriated, the 

bill would require these additional funds to be used to reduce borrowing fees. 

And, finally, regarding the SBA investment program, obviously a 

small business in short supply of needed capital is faced with the 

choice of either accumulating more debt in forms of loan or reducing its control of the company by selling stock to investors, but the 

SBA program in attracting investment are tough cases that are unclear and helpful. The business owners can be hit with enormous 

tax penalties if it sells its equity where small business investment 

can itself tax the public treasury if unforeseen loopholes are allowed to escape scrutiny. 

The SBA was created to help small business compete in good 

times and survive in tough times. The essential purpose of these 

hearings is to determine whether existing programs are as constituted fair to both the borrower and the lender and determine 

whether the cost of possible reforms do not unduly penalize the 

American taxpayer. 

I look forward to working with Chairwoman Bean to ensure that 

the SBA financing program operates as efficiently and as effectively as possible. Thank you, and I yield back. 

Chairwoman BEAN. Thank you. 

We will now move to testimony from our witnesses. Witnesses 

will have five minutes to deliver their prepared statements. The 

timer begins when the green light is illuminated. When one minute 

of time remains, the light will turn yellow. The red light will come 

on when time is up. 

Our first witness is the honorable Eric Zarnikow. In November 

of last year, Mr. Zarnikow was appointed as the Associate Administrator for SBA’s Office of Capital Access. Prior to his appointment, 

he worked for Service Master back in Illinois, where we are both 

from, as the Senior Vice President, Chief Risk Officer, and Treasurer. 

Thank you. And you may now proceed. 

4

STATEMENT OF THE HONORABLE ERIC ZARNIKOW, ASSOCIATE ADMINISTRATOR FOR CAPITAL ACCESS, ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION 

Mr. ZARNIKOW. Chairwoman Bean, Ranking Member Buchanan, 

thank you for inviting me here today to testify about the U.S. 

Small Business Administration’s fiscal year 2009 budget for capital 

access programs. As you know, I am the Associate Administrator 

for Capital Access. 

The budget request for 2009 reflects the President’s commitment 

to America’s small businesses and supports Administrator Preston’s reform agenda. Since 2001, the SBA programs have continued 

to grow while we have worked to streamline processes, make technological improvements, and develop tools that increase our effectiveness. 

The SBA continues to reach more small businesses through our 

loan programs and doing so at no subsidy cost to the taxpayer. In 

fiscal year 2007, the SBA provided funding to 89,400 small businesses in the 7(a) and 504 loan programs. 

We look forward to continuing to work with the Committee to 

continue to improve access to SBA’s services by the small business 

community. Our goal is to implement improvements that are employee-enabled, efficient, transparent, and effective. 

We are also focused on lender outreach and retention. We will 

continue to ensure capital access products and services are accessible to entrepreneurs in the nation’s most under-served markets: 

those with higher rates of unemployment and poverty and lower 

rates of economIC progress. 

The President’s fiscal year 2009 proposal will support a total of 

$28 billion in lending authority for small business financing. The 

proposal requests authorizations of 17 and a half billion for the 7(a) 

program, 7 and a half billion for the 504 program, 3 billion for the 

SBIC debenture program, and 25 million for the microloan program. 

In 2007, we served more small businesses than ever before. In 

our two major loan programs, the numbers of gross approvals increased by 123 percent from fiscal year 2001 to over 110,000 loans 

in fiscal year 2007. 

A recent Urban Institute study found that loans under the 7(a) 

and 504 programs were more likely to go to minority-owned, 

women-owned, and start-up businesses, as compared to conventional small business loans. 

Zero subsidy policy in the 7(a), 504, and SBIC programs has allowed the agency to provide record levels of lending without the 

need for taxpayer-provided credit subsidy appropriations while 

maintaining fee rates consistent with historical levels. This policy 

has provided certainty and stability for the 7(a) loan program, 

which both borrowers and lenders agree is critical for this widelyused program while also reducing taxpayers’ costs. 

In fiscal year 2007, more than 2,000 small businesses benefited 

from over 700 million in SBIC investments. The SBA is working to 

increase our outreach efforts by participating in a number of forums to heighten the visibility of SBIC programs within all market 

segments. 

5

Effectively managing agency resources devoted to SBA lending 

activity is another key priority, centralized 7(a) loan guaranty purchase and liquidation functions as well as 504 loan processing. 

Centralization allows for more consistent application of SBA’s processes and procedures. 

Despite record growth in 2007, there is a decline in SBA lending 

year-to-date approvals for fiscal year 2008, constantly monitoring 

loan levels and working with lenders and small businesses to ensure that we continue to meet the needs of the small business community. 

And we are conducting a number of lender outreach and retention efforts. In fact, this morning we had an outreach event at the 

White House with lenders and senior administration officials. And 

we appreciate your agreeing to change or changing the time of this 

hearing. 

Additionally, we have provided lenders with new loan products 

to help them reach specific sectors of the small business community 

and will continue to work with lenders to find better ways to serve 

small businesses. 

We want to continue to strengthen and support lender oversight 

and risk management functions of the agency. The SBA has increased its on-site review of lenders from 55 in 2006 to 80 in 2007. 

And we currently plan to do over 200 on-site reviews in 2008. We 

have also made improvements to our lender portal that is a key 

oversight tool used to monitor the lender portal or portfolio. 

Earlier this year we launched the pilot of the rural lender advantage initiative as a way to work with community lenders that are 

key to providing lending to economically distressed rural areas. 

This initiative simplifies application procedures and expands assistance to banks that do not regularly work with the SBA. 

Another product that we are very proud of is the Patriot Express 

loan initiative. This product of our 7(a) program provides capital to 

veterans, members of the National Guard and Reserve and their 

spouses. This was launched in June of last year. We have seen over 

$100 million of loans provided to veterans for this program. 

To expand capital to certain sectors of our economy in underserved communities, the agency has also proposed a change to zero 

subsidy for the microloan program. By changing the rate at which 

intermediaries borrow from the SBA from about 3.8 percent to 

about 5.92 percent, intermediaries will continue to receive betterthan-market rates of interest, and the SBA will be able to offer 

more loans to eligible intermediaries. 

The SBA also proposes shifting microloan technical assistance to 

our extensive network of existing resource partners. That has the 

potential of tripling the number of outlets available for micro enterprise lenders. In addition, we are in the process of rolling out online technical assistance for availability. 

Over 300 million of U.S. exports, about 30 percent of U.S. exports, are originated by small businesses, generating thousands of 

jobs and billions of dollars of income. 

International trade exposes American small businesses to new 

ways of doing business and from a technology and a management 

perspective making them more competitive. We have widened our 

6

staff with the Commerce Department to provide services to small 

businesses seeking exports. 

Chairwoman BEAN. If you could wrap up—

Mr. ZARNIKOW. Sure. 

Chairwoman BEAN. —because you are a little over time and 

votes have been called? 

Mr. ZARNIKOW. In conclusion, 2007 was a year of significant accomplishments for the capital access programs. And with this budget request, we look forward to continuing to build on those successes. We would be glad to answer any questions that you have 

today. 

[The prepared statement of Mr. Zarnikow may be found in the 

Appendix on page 30.]

Chairwoman BEAN. Thank you for your testimony. 

We are being called for a vote. So the Committee stands at recess 

subject to the call of the Chair. And then we will resume. Thank 

you. 

[Brief recess.] 

Chairwoman BEAN. We will call this hearing back to order and 

move to testimony from our next witness, which is Mr. Christopher 

Crawford, who is President and CEO of the National Association 

of Development Companies. NADCO was formed in 1981 and provides legislative and regulatory support for the SBA’s 504 program 

on behalf of member-certified development companies, or CDCs. 

Thank you for being here. 

STATEMENT OF MR. CHRISTOPHER CRAWFORD, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION 

OF DEVELOPMENT COMPANIES 

Mr. CRAWFORD. Thank you, Madam Chair. 

As you indicated, my name is Chris Crawford. I am the President 

of the National Association of Development Companies. NADCO 

represents some 260 certified development companies and another 

200 affiliates. Together they provide more than 98 percent of all 

504 lending. 

I want to thank the Subcommittee for inviting me to comment 

on access to capital for small businesses. Given the credit crisis our 

country is now engulfed in, I can think of no better time than now 

to consider what our industry feels we need to, number one, get 

small businesses growing jobs again; and, number two, get SBA on 

the right track to help, rather than hinder, lenders. 

First I want to thank the Committee for its support for the last 

20 years. With your help, we have been able to grow the program 

from under $200 million per year in 504 loans to this year something probably north of $6.5 billion with another $8 billion in generally bank-originated first mortgages to go in our projects. 

First I would like to talk about the authorization level. 504, as 

you know, is flat year to date, which, given the slide in loan demand for this country, is really pretty good. I expect loan volume 

to be a bit under 7 billion by the end of this fiscal year. 

SBA has asked for 7.5 billion for fiscal year 2009, which leaves 

504 with too little expansion room if borrowers begin to utilize 504 

more due to the existing and the continuing credit crunch. I ask 

7

this Committee to provide an authorization level of at least 8.5 billion for fiscal year 2009 or I believe we risk running out of money 

during that year. 

Five-o-four is a zero subsidy program. So there is absolutely no 

cost for adding loan authority to the President’s budget. And I urge 

you to do so in fiscal year 2009. 

I would like to talk about fees. SBA decreased the annual borrower fee to zero for fiscal year 2009 but still placed 504 in what 

is called a negative subsidy situation. That is, the program’s other 

fees will be putting more money into the U.S. Treasury than 504 

is actually projected to cost during ’09. Even though it is only a 

small amount according to SBA, it is about $1.4 billion that small 

businesses could use to add jobs or buy equipment. 

Frankly, NADCO is appalled that SBA would needlessly take 

fees from small businesses during a recession. And we ask Congress to pass legislation to adjust our fees to exactly zero subsidy, 

not a negative subsidy. 

I would like to address CDC lender oversight. SBA issued a proposed regulation on lender oversight. And NADCO was one of 

many organizations to express concerns over this proposal. No one 

wants accurate, consistent oversight of 504 more than the CDC industry. 

We believe that to maintain low fees, SBA must ensure that 

CDCs meet the lending, servicing, and liquidation standards required of a zero subsidy program. However, this oversight process 

has one potentially fatal flaw: its reliance on an unproven database 

that attempts to identify potential defaulting borrowers years before they might possibly default. That is kind of like predicting the 

weather in Washington. 

SBA is currently seeking to renew this contract for this database. 

We urge this Congress to step in and demand an unbiased outside 

verification of this forecasting system by firms with both credit underwriting and financial modeling expertise. Two lending industries should not be held hostage and regulated through such an 

unproven process. 

I would like to touch on liquidation. Our default rate right now 

is about four percent, and our loss rate is barely two percent. However, as in previous recessions, defaults appear to be rising a bit. 

We obviously want to avoid what you might call a subprime scenario for 504. And that means there must be skilled personnel involved in liquidations and workouts. 

Unfortunately, SBA has, I believe, not hired a sufficient number 

of staff to work liquidations internally after having laid off virtually all of their liquidation staff approximately four years ago. 

Today SBA is not complying with the intent of the 106th Congress or even its own regulations by handling liquidations and reimbursing CDCs for their liquidation efforts. It appears that SBA 

has not budgeted for these funds for either this year or next year 

to reimburse CDCs for this cost. The result is going to be there are 

going to be very few people, industry people or SBA people, to perform liquidations on defaulted 504s. I ask the Congress to pass legislation to require the SBA to allocate funds from increased recoveries to enable CDCs to handle liquidations. 

8

A recent study by the California State University has concluded that 504 returns $94 for every $1 of SBA administrative costs for 

504. This is an incredible benefit ratio, but it works only if the program has accurate and consistent oversight and can recover its 

loan defaults that occur in the portfolio. 

NADCO asks the Committee to support these program needs and 

to quickly pass legislation to keep 504 on the right track. Thank 

you very much. 

[The prepared statement of Mr. Crawford may be found in the 

Appendix on page 34.]

Chairwoman BEAN. Thank you for your testimony. 

Our next witness is Mr. Lee Mercer, who is President of the National Association of Small Business Investment companies. 

NASBIC has represented the SBIC industry since Congress established the program in 1958. 

STATEMENT OF MR. LEE MERCER, PRESIDENT, NATIONAL 

ASSOCIATION OF SMALL BUSINESS INVESTMENT COMPANIES 

Mr. MERCER. Thank you, Madam Chair, Mr. Buchanan. Thank 

you for the opportunity to appear today to give NASBIC’s recommendations for improving the SBA’s access to capital programs. 

I have provided some background on the SBIC program in my written testimony but will jump immediately to our recommendations. 

First, improve the debenture SBIC program as it runs at a zero 

subsidy rate. The House Small Business Committee, the full Committee, has lead the way by securing passage by the full House of 

H.R. 3567, the Small Business Investment Expansion Act of 2007. 

The bill contains two provisions, sections 101 and 105, that are 

very important to both greater growth in the program and greater 

potential for each individual SBIC to help every small business in 

which it invests. Both provisions would make the program more attractive to private investors and to private management teams, 

thus leading to greater growth in the program. Neither provision 

has been opposed by the administration. 

Unfortunately, the counterpart Senate bill, S. 1662, is bogged 

down because of a hold place on the bill by a single Senator opposed to the SBIC program as a whole. We hope this can be remedied prior to the adjournment of this Congress. 

Second recommendation, revive the participating security program. Warren Buffett said this week, ‘‘By any common sense definition, we are in a recession.’’ That fact will make the availability 

of equity capital even more important to America’s small businesses. Equity capital is the foundation upon which every company 

is built. 

As outlined in my testimony, the participating security program 

has been a great success in providing that equity capital, having 

provided 14 billion in equity investments since 1994. 

Yes, the government will lose money on the program, a result of 

losses from the 2000 recession, when all investors lost money and 

SBICs no more than most. But the losses will be substantially less 

than projected by OMB. 

OMB says that the recoveries from participating security SBICs 

in liquidation will only be 35 percent. In fact, recoveries for fiscal 

9

year 2006 and fiscal year 2007 ran at 64 percent, 83 percent more 

than forecast by OMB. Over $600 million was recovered in just 2 

years. 

What is debt? The Credit Reform Act of 1990 does not define the 

word ‘‘debt.’’ Absent a definition within the statute, words are subject to the Supreme Court-promulgated plain meaning rule of statutory construction. Words must be given their ordinary meaning. 

The word ‘‘debt’’ is defined in many ordinary contexts: a duty or 

obligation to pay money, a note or bond which represents an 

amount owed, a liability on a claim. Based on these definitions, 

both Generally Accepted Accounting Principles, GAAP, and SBA’s 

own SBIC regulations require that participating securities be listed 

as debts on the financial statements of all participating security 

SBICs. How can the government have it both ways? 

Section 303 of the Small Business Investment Act makes it clear 

that a participating security is a debt for subsidy scoring. Section 

303(g)(1) states, ‘‘Participating securities shall be repaid not later 

than 15 years after their date of issuance.’’ The section creates an 

unambiguous obligation to pay money on the claim created by the 

security. 

Section 303(g)(5) states, ‘‘The only debt other than leverage a 

company issuing participating securities may have outstanding 

shall be temporary debt.’’ The phrase ‘‘only debt other than leverage’’ is unambiguous. Congress considered both participating securities and debentures to be debts. 

Finally, 303(j) states, ‘‘All fees, interest, and profits received by 

the administration under this section shall be included in the calculations made by the director of OMB to offset the cost as defined 

by the Federal Credit Reform Act of 1990 to the administration of 

purchasing and guaranteeing debentures and participating securities.’’

Section 303(j) makes crystal clear the congressional intent that 

the securities issued under the program qualify for subsidy scoring. 

Only if qualified could receipts be used to offset costs. Since the 

Federal Credit Reform Act was passed eight years prior to the legislation creating the participating security program, it must be assumed, it has to be assumed, that Congress knew the law. If it did 

not intend participating securities to be debts for the purposes of 

the Federal Credit Reform Act, it would not have made the receipts 

deductible from costs in under 303(j). 

With OMB so wrong and so intransigent, a simple legislative 

change would revive the participating securities program. I have 

provided the language for that change in my testimony. It is very 

simple. It just says in the enabling act, ‘‘Participating securities 

guaranteed under this subsection shall be considered debt securities for all purposes related to the Federal Credit Reform Act.’’

Amending the Small Business Investment Act as suggested 

would correct the erroneous unjustifiable holding by OMB and 

CBO and again make the participating security program a very effective partner in providing scarce equity capital to America’s small 

businesses. 

Thank you for your consideration. 

[The prepared statement of Mr. Mercer may be found in the Appendix on page 39.]

10

Chairwoman BEAN. Thank you for your testimony. 

Next is Mr. Daniel Betancourt from the Community First Fund, 

established in 1992. It is a nonprofit community development financial institution serving a 13-county region in central Pennsylvania. Mr. Betancourt is also testifying today on behalf of the Association for Enterprise Opportunity. AEO’s nearly 500 members are 

serving the needs of micro entrepreneurs. 

Thank you for being here. 

STATEMENT OF MR. DANIEL BETANCOURT, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, COMMUNITY FIRST FUND, ON 

BEHALF OF THE ASSOCIATION FOR ENTERPRISE OPPORTUNITY 

Mr. BETANCOURT. Thank you, Chairwoman. Thank you, Ranking 

Member Buchanan. 

As you said, I chair the Association for Enterprise Opportunity. 

We have over 600 members. We are a leadership organization for 

micro enterprise. And many of our members have the SBA 

microloan program. 

I am also a practitioner. Our organization is a micro lending program in Pennsylvania. 

Thank you for the opportunity. I wanted to talk about the differences between the microloan program and the 7(a) and other 

SBA programs. Clearly the private sector, the banking is not serving the entrepreneurs as it relates to lending. The SBA microloan 

program is a very unique program. The 7(a) program, as I said, 

and the CommunityExpress do not serve this group. 

The unique thing about the program, as you know, it combines 

the business accounts and the technical assistance along with the 

lending. The thing that is interesting about this program is that 

the way that it works with organizations like ours, it provides our 

time to work with the entrepreneur to help them borrow the money 

from our organization, organizations like ours, as well as provide 

training at a low-cost capital. In other words, the money that we 

borrow and the money that is granted to us allows us to do both 

of those things, training and to lend and re-lend. 

What we find is when banks try to lend to entrepreneurs that 

we lend to they get into trouble pretty quickly because you don’t 

spend the amount of time or banks don’t spend the time with these 

entrepreneurs. So it’s critical to provide that time to them. 

Many of these businesses would not even be able to get financing. They wouldn’t be able to get off the ground. The interesting 

thing is that the demographics of these entrepreneurs, 90 percent 

of our borrowers are low-to-moderate-income borrowers. 

We are probably very unique, Community First Fund, in that we 

also have the 7(a) program, probably one of the few organizations 

in the country that offers the SBA microloan as well as a 7(a). And 

what we find is that our 7(a) borrowers are not low-to-moderateincome individuals. They’re higher-wealth individuals, many of 

which have high credit scores, they have collateral, and they really 

don’t need that type of program. 

As I said, this program, the SBA microloan, does provide that 

low capital to us. We are able to also—as you know, the requirement of the programs that we have to provide, a 15 percent match, 

11

for loan loss reserves, I think and we think, the AEO thinks it is 

a good use of federal dollars. It has the lowest default rate of any 

SBA program, one percent default rate. Our organizations when we 

borrow, we pay back, even if our borrowers don’t pay us because 

of that reserve fund that we have. 

The entrepreneurs are well-prepared to borrow from us. We 

spend that time with them with the technical assistance. And I 

think that is one of the key strengths of this program. 

And I really want to talk to you about the President’s proposal 

here. He is recommending through the budget to eliminate the 

technical assistance portion as well as raising the rates the second 

year in a row. We think that this is unworkable. 

Organizations like ours, some of our borrowings are two to four 

percent. And we have to add a loan loss reserve rate to that. It 

would be a pretty high rate. You would have to raise the cap rates 

for us to be able to lend at the same rates. So that is going to be 

a burden to an organization like ours. We think it is going to be 

a burden to entrepreneurs. 

I want to say this for the record. We would have to pass those 

costs along to the entrepreneurs. And we think that this is going 

to be a real hardship on the entrepreneurs. We think this increased 

capital is going to provide less jobs. less people will use the program. 

The President, as I said, is also recommending to eliminate the 

technical assistance. Quite frankly, we don’t know how we can just 

lend to entrepreneurs without providing that type of assistance. We 

don’t think that it would work. 

I think there is a myth out there that if you find another technical assistance provider to provide technical assistance to our clients, that it will get paid back. 

This is a very important point. We have had in our own community,—and I won’t mention names—we have had other technical assistance providers try to get us paid back. It just doesn’t work. 

They don’t have an incentive to get us paid back. Our money is out 

in the street. We are putting the risks out there. So we are going 

to do everything we can to get our money back. 

So I think that is a real myth to think that another organization 

can try to get our money back. I don’t think a bank would ever. 

Well, they can outsource things, but, quite frankly, their incentive 

is to get paid back. 

The 7(a) program I think is a very good program. As I said, we 

have that. It’s a different demographic. The microloan program in 

our particular case serves—at least our borrowers are 50 percent 

rural, 50 percent urban. Half of our clients are folks of color. Half 

are women. It is a very unique program. It is serving the population that you intended when you passed this. 

So I just wanted to say that we appreciate your support in the 

past. We are looking forward to working with you in the future. 

And thank you for this opportunity to talk with you. Thank you. 

[The prepared statement of Mr. Betancourt may be found in the 

Appendix on page 45.]

Chairwoman BEAN. Thank you for your testimony. 

12

Mr. Anthony Wilkinson provides our last testimony before we go 

to questions and answers. Mr. Wilkinson is the President and CEO 

of the National Association of Government Guaranteed Lenders. 

NAGGL advocates for the interest of the small business lending 

community that utilizes SBA and other government-guaranteed 

loan programs. 

STATEMENT OF MR. ANTHONY WILKINSON, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF 

GOVERNMENT GUARANTEED LENDERS 

Mr. WILKINSON. Thank you, Chairwoman Bean, Ranking Member Buchanan. I appreciate the opportunity to testify today. 

NAGGL is a trade association. We represent approximately 700 

banks, credit unions, non-depository lenders and service providers 

who participate in SBA’s loan programs. 

Our membership generates approximately 80 percent of all of the 

7(a) loan volume annually and a majority of the 504 first mortgage 

loans. But these are difficult times for participants of SBA loan 

programs. Lenders and small business owners are facing uncertain 

economic conditions, decreasing profitability, and rising expenses. 

Small business owners need access to capital to succeed. And the 

SBA offers the primary vehicle for delivering that much needed 

long-term capital. 

However, SBA loan volume is declining. The pool of active, participating lenders is shrinking. And lender fees and costs continue 

to rise. 

Unfortunately, the budget cuts for the SBA over the last few 

years have resulted in a shifting of the delivery cost to the small 

business owners and SBA’s lending partners. So, instead of promoting capital access, the SBA’s recent actions are exacerbating 

the problems for many small businesses and lenders. 

It has long been known that SBA through its loan programs is 

the single largest provider of long-term loans for our nation’s small 

businesses. Recent independent reports show that these loans are 

a vital economic development and financing tool. 

The GAO recently did a report at the request of Senator Coburn. 

And the report found that we lend to minorities at three times the 

rate of conventional lending. 7(a) loans were larger and for longerterms than conventional loans. Half of our loans were in underserved markets. Twenty-five percent of our loans went to start up 

in the year that they looked at. Today those are up over one-third 

of our loans are now to start-ups. And they also found that SBA 

and the Office of Management and Budget have overestimated our 

program subsidy costs. 

Another report was from the Urban Institute. This one was commissioned by SBA. And they found that SBA programs are more 

effective than conventional loans in reaching minorities, women, 

and start-ups. SBA loans are a key financing tool to credit-worthy 

borrowers that, nevertheless, do not meet conventional underwriting standards. And SBA loans in under-served areas represent 

more than 36 percent of total loan approvals during the period reviewed. 

13

Even though the GAO and the Urban Institute independently 

confirmed the importance and the benefits of the 7(a) program, 

loan volume is declining at an alarming rate. 

With each passing week of this fiscal year, the problem has been 

getting worse. And in my testimony, there is a chart that shows 

the decline and how the decline is accelerating since the start of 

the fiscal year. October the 1st through February the 15th, we are 

down almost 15 percent in the number of loans and over 7 percent 

in the dollar of loans. 

NAGGL has been actively communicating our concerns to the 

SBA regarding the declining loan volume and decreasing lender 

participation. Attached to my testimony are three letters. The first 

is dated December 17th and addresses our concerns about the excessive costs and effectiveness of SBA’s lender oversight system. 

And I would like to add that I need to correct that testimony. As 

of this morning, I was hand-delivered a response to that letter from 

the SBA. So my testimony recites that I have not received one, but 

as of this morning I have. 

Our second letter is dated February the 25th and summarizes a 

survey of the NAGGL membership. NAGGL members clearly stated that the decline in 7(a) loan volume and lender participation is 

a result of decreased profitability of SBA lending due to lender fees 

and costs. SBA continues to state that fees are not an issue, even 

though their highest-volume participants say that fees are the top 

problem. I have not gotten a response to that letter yet, but that 

letter is only a week or so old. 

Our third letter is dated February the 25th also and addresses 

our concerns relating to the proposed rule on lender oversight that 

was published in the Federal Register. We provided comments relating to the technical components of the proposed rule as well as 

overall concerns as to the effectiveness of the oversight program. 

We are strong supporters of a strong lender oversight program. 

It needs to be accurate, beneficial, and cost-efficient for both SBA 

and its lending partners. And without mutual accountability and 

support, the mission of the SBA for America’s small businesses 

cannot be provided through the lending community. And each of 

these three letters, again, is included in their entirety. 

There are many factors involved with the decreasing profitability 

of 7(a) lending, lifted many of those on-site fees, off-site fees, delays 

in processing, lender purchase requests, lenders now being required 

to liquidate before they can request a guarantee being purchased. 

And the list goes on. 

Without reasonable profits, lender participation in the program 

will decline, as is now happening. In addition, lenders’ ability to reinvest in their outreach efforts to small business owners and expand their infrastructure to meet communities’ capital needs is severely diminished. 

At the very time the Federal Reserve is attempting to forestall 

a recession by reducing interest rates and by injecting liquidity in 

the banking system in an effort to persuade lenders to make credit 

available, the SBA’s small business lending policies are being counterproductive. 

My five minutes are up. I will save the rest for another time. 

14

Chairwoman BEAN. If you want to just do a concluding statement, that’s fine. 

Mr. WILKINSON. Well, we have some concerns about lender oversight. And we can get into those in more details. I would say that 

our portfolio, even given our concerns about the oversight function 

at SBA, our portfolio is performing quite well. 

The loss rate in the 7(a) portfolio is running at about a half percent per year. We can find from the FDIC in their quarterly banking profile reports that that is what commercial lending, commercial loan loss rates are running right now. So our loss rate is comparing favorably, but we would still like to see a more cost-effective, efficient, transparent lender oversight system at SBA. 

[The prepared statement of Mr. Wilkinson may be found in the 

Appendix on page 48.]

Chairwoman BEAN. Thank you for your testimony. 

I would actually like to start with Mr. Crawford with the first 

question that I have. As you know, the SBA has contracted with 

Dun and Bradstreet and Fair Issacs to create a loan-monitoring 

tool that forecasts the performance and/or risk of the portfolio. Can 

you tell us if this is how most financial institutions would monitor 

risk in their own portfolios? 

Mr. CRAWFORD. That question might also be addressed to my esteemed compatriot Mr. Wilkinson since he is a banker. I suspect 

that that is not the case having talked to a number of banks with 

my own banking background way in the past. We did not attempt 

to forecast defaults in that manner. 

Especially using a database like Dun and Bradstreet, my concerns about D&B are—and I have owned two small businesses, and 

I have had personal experience with reporting to D&B or not reporting to D&B, as may be the case. 

When I got the D&B letter once a year, I generally threw it in 

the trash. I wasn’t about to report my own financials to Dun and 

Bradstreet. There was no incentive to do that. 

I know that D&B collects a lot of data on tax payments. I know 

they collect a lot of data on utility payments. I would not suggest 

that that database is on a par with just the financial data that my 

own certified development companies maintain on our borrowers 

where they are required, actually, through SBA regulation to get 

certified financials each and every year. That seems to be probably 

a better way to keep track of the likelihood of repayment of a debt 

through actual financials. 

Chairwoman BEAN. All right. Thank you. And I guess I will do 

a follow-up with Mr. Wilkinson to get your perspective and also ask 

what sort of limitations you think that kind of system would have, 

particularly for larger SBA loans. 

Mr. WILKINSON. Well, one of the problems we have with the current system—and I don’t mean to pick on D&B. It’s whatever contractor would happen to be sitting there—is the information is not 

transparent. 

The SBA’s lending partners were not included or asked input 

when the current system was established. And our big problem is 

we don’t know what’s in the model We don’t know how the model 

15

was developed. We don’t know what inputs are going into the 

model. 

We are hearing that a lot of FICO scores are used. And, for my 

membership, they tell me FICO scores are fairly reliable up to loan 

sizes of about 150,000. Well, there is a significant number of our 

loans that are over 150,000. 

And I believe Mr. Crawford’s near entire portfolio would exceed 

that number, which leads you to a conclusion of, well, how reliable 

is this information. But without transparency, it’s really hard to 

know. 

I would also add that it is a very expensive system. This is a system that commercial banks do this kind of stuff all the time at a 

much, much lower cost. 

Chairwoman BEAN. Thank you. 

If I can ask you one other question? You talked about the survey 

of your members. And 67 percent of respondents stated that their 

institutions have tightened credit underwriting standards and 61 

percent said they are seeing a decline in borrower loan demand. Is 

that what you would have expected or would you have expected the 

programs to pick up when the conventional market dries up? 

Mr. WILKINSON. Well, typically what happens, we are somewhat 

counter-cyclical. So as difficult economic times hit, conventional 

lenders, you know, rein in their credit box. They shrink it down. 

And so there are more borrowers who would then fit into the SBA 

program. So in the past, we typically have an increasing loan volume at this time. 

Chairwoman BEAN. I am going to ask one question of each of 

you, and then I am going to turn it over to my good friend from 

Florida. You have made a number of substantive recommendations 

to Mr. Zarnikow, who is endeavoring to make sure he can provide 

all the resources and tools for you. 

But if I could ask you to just as sort of the top take-away, the 

number one thing you would most like to see him address, what 

would that be? We will come right on down. And then we can go 

to you and let you respond to that. 

Mr. WILKINSON. Start down here? 

Chairwoman BEAN. Yes. We will start with you. 

Mr. WILKINSON. Boy. There are a number of items that we have 

shared with Mr. Zarnikow and his staff. But having recently done 

the survey, I can fall back on the responses of my members. And 

their number one response is that all fees, not just borrower fees, 

not just lender guaranty fees, but all fees associated with the program are too high. And it’s hindering their participation. 

Chairwoman BEAN. Okay. Thank you. 

Mr. Betancourt? 

Mr. BETANCOURT. I would just say maybe an acknowledgement 

that the program is going well. And I think the six years in a row 

of trying to eliminate a program that is meeting the target, in fact, 

and trying to raise the rates when we know that is going to be 

passed along to the borrowers and, quite frankly, an acknowledgement that the technical systems portion is really the key to getting 

paid back so that we can ultimately pay back the SBA. 

Chairwoman BEAN. Thank you. 

Mr. Crawford? 

16

Mr. CRAWFORD. Interestingly, 504 doesn’t have a rate issue with 

the SBA. That may be surprising, but I repeatedly argue with the 

CFO that our rates may, in fact, be a little too low. And I worry 

about that. 

But if I were to ask Mr. Zarnikow for a couple of things, one, in 

spite of the comments I made about lender oversight, I believe it 

is absolutely vital that we have a solid lender oversight unit for the 

504 program. 

We have no FDIC. CDCs are regulated, are overseen by only the 

SBA because we are a creature of the SBA. So I say a strong lender 

oversight is a must. Our greatest crisis today because we are in a 

recession according to Mr. Buffett is probably the lack of resources 

committed to liquidations and recoveries. 

Our liquidations clearly are going up. Our delinquencies are 

going up. If we don’t get it under control and keep it under control 

at zero subsidy, you are going to see our fees begin to skyrocket. 

And next year I will complain about fees. 

Chairwoman BEAN. Thank you. 

Mr. Mercer? 

Mr. MERCER. Thank you. 

Well, Mr. Zarnikow represents the administration. The administration has refused to ask for authorization of the participating security program because OMB, the administration, has held that a 

participating security is not a debt for the purposes of the Federal 

Credit Reform Act; whereas, the administration, represented by 

Mr. Zarnikow, says it is a debt and requires participating securities 

to list it as a debt on their financial statements. How can they have 

it both ways? 

I would point out that in the last recession, all venture capital 

shrunk by about 80 percent during—we’re talking about equity investments shrunk by about 80 percent, I think, if I remember from 

my testimony correctly, during the recession; whereas, the participating security investments shrunk by I think 35 percent. I mean, 

it was the most constant source of equity capital during a recession, which we are now going into according to Mr. Buffett. 

So I guess I would say, how can the administration do what it 

is doing with a straight face? It just is intellectually dishonest. 

Chairwoman BEAN. So you would like to see some reconciliation 

of that. Thank you. 

Hold on one second. 

[Pause.] 

Chairwoman BEAN. Okay. I think it is only fair to let Mr. 

Zarnikow respond. Most of this was obviously in the testimony that 

had been provided to you in advance, but I thought to maybe summarize a couple of things that you could respond to would be a 

good way to go. 

Mr. ZARNIKOW. Sure. I mean, I think as we look at our priorities, 

there are probably three areas that I would look at and address. 

One is lender outreach, where we want to make sure that we are 

communicating with lenders, getting input from them. We have 

held a number of roundtables, go out and meet with lenders to try 

and encourage them to utilize our programs, and also to get input 

from them on how we can be better partners in utilizing our programs. We have held a number of roundtables, including the one 

17

this morning, and have six to eight planned across the country over 

the next 60 days or so. 

I would also say one of my highest priorities is lender oversight 

and making sure we do have proposed regulations that are out 

there. We have gotten input from our industry trade partners, our 

trade associations. We are going to be going through our process 

of evaluating that input. 

I would say on the lender oversight system, that there are definitely some misconceptions about that. That system was really designed as an oversight tool for the SBA, not for a tool for individual 

lenders to manage their portfolio. 

These are all lenders who have other loans. The SBA typically 

is a small portion of their portfolio. And they have other tools to 

actually monitor their overall portfolio. 

The lender oversight system is really designed to as we focus on 

our oversight efforts and provide that balance narrow the universe 

of the thousands of lenders we have to those where we see the 

highest risk in the program. 

So I think there are some misconceptions about the system, although we are in the process of reprocuring as well. Clearly our 

centers are very important to all of our operations, whether it’s 

loan origination, servicing, or liquidation. We are working on strategic plans related to each of our centers. 

We are looking at each of the functions. What are the staffing requirements of those functions as we look at anticipated volume 

going out into the future? 

We are also working on how can we be more effective and efficient as an agency utilizing technology, looking at policy changes 

or process changes, to make sure that we are appropriately staffed 

in our centers. 

Chairwoman BEAN. I guess sort of following their summaries to 

you on the technical assistance, is that something that you will be 

addressing? And what about reconciling that definition of debt? 

Mr. ZARNIKOW. On the microloan program, we are supporters of 

the microloan program. We do believe that it should be done on a 

zero subsidy basis. And that is what we are proposing in the 2009 

budget. 

As we look at technical assistance, we believe that there is a lot 

of technical assistance through our resource partners. And they 

service more than a million entrepreneurs each year. When you 

look at the microloan program, there are about 2,500 microloans 

that are made each year. So we believe that the resource partners 

that are out there provide appropriate ways to deliver technical assistance to the micro borrowers. 

The microloan program with the technical assistance is a very 

expensive program. It costs over 85 cents on the dollar for each dollar that’s loaned. We believe that there is a more efficient way to 

deliver that but support the program. 

Chairwoman BEAN. You do think you can move back to a zero 

subsidy versus negative subsidy? 

Mr. ZARNIKOW. Well, the microloan program actually we believe 

would be zero subsidy. The negative subsidy is on—

Chairwoman BEAN. That was the 504. That’s right. 

18

Mr. ZARNIKOW. —the 504 program. And as we look out, it is a 

very minor negative subsidy, about seven basis points. And, to put 

that into perspective on the average 504 loan, which is about a half 

million dollars, that negative subsidy is about $21 a year. 

So we don’t believe that that’s a significant impact to the borrower. As was mentioned earlier, we are seeing increases in delinquency in that portfolio. And as we look out over time and to the 

2010 budget, we would expect that that negative subsidy would go 

away. I believe it is important to have stability of that program. 

Chairwoman BEAN. Thank you. And on the reconciling the different definitions within the administration? 

Mr. ZARNIKOW. My understanding of that is that CDO and OMB 

have both made that determination, that it requires a 100 percent 

subsidy. 

I am not an expert on federal budget law. I will let others address that further. We would say, though, that the participating securities program as it was in the past we think had some fundamental flaws in the structure of that program. 

As was mentioned earlier, it did result in some pretty significant 

losses for the SBA. There were situations where investors made 

significant returns while at the same time the SBA lost money. So 

we think that the structure of that program was fundamentally 

flaws. 

Chairwoman BEAN. Thank you. 

Ranking Member Buchanan is now recognized for five minutes of 

questioning. No. You are up for as long as you want to question. 

Mr. BUCHANAN. Thank you, Madam Chair. 

Mr. Wilkinson, tell me a little bit of the profile of your association, the size banks? A billion assets or what’s the typical profile? 

Where is the concentration of banks in general? 

Mr. WILKINSON. The best way to explain that would be the makeup of my board. Let’s see if I can remember this off the top of my 

head. We are eight small banks, five large banks, two CDCs, two 

service providers. I think I covered them all, but it runs the gamut. 

We have the small community banks or small lower community 

banks that tend to be the largest concentration of members and 

then large institutions, the Wells Fargos, the JP Morgan Chases; 

and all of the small business lending companies that would participate in the program as well. 

Mr. BUCHANAN. Do you have any community banks? Did you 

mention that? Do you have—

Mr. WILKINSON. Yes. That’s the largest single membership category is community banks. 

Mr. BUCHANAN. Okay. And you are mentioning today that just 

your volume is down. Decreased lender participation. What is driving that? I mean, I know one thing. Being in Florida, a lot of banks 

are also under a lot of pressure, their capital. And they are having 

to shrink a lot of things that they are doing. I’m just wondering 

how much of that is where they are looking at really their whole 

portfolio in general or asset portfolio. I am just wondering how 

much of that is—

Mr. WILKINSON. It would be a whole list of things. 

Mr. BUCHANAN. Yes. 

19

Mr. WILKINSON. You know, there are much more costs being 

passed on to lenders and borrowers today than in the past. It is 

a more difficult economic time. Lenders have pulled in their range 

and have a little tighter credit standards. And there have been 

issues in the marketplace, such as an inverted yield curve, that has 

made lending more difficult. 

And there is a whole host of things that seem to have converged 

at one point. But clearly the fees and the costs are a major contributing factor. 

Mr. BUCHANAN. You were talking about their lending criteria, 

tighter lending criteria. How much of that? How much of a proponent is that in what you said, do you think? 

Mr. WILKINSON. Well, it probably shows up in the 7(a) program 

most in the SBA Express program, which is primarily a creditscored product. And lenders as times became tough immediately 

changed their minimum credit score requirement to get conventional loans and for SBA loans. 

So you will see that as a subset of the 7(a) program, our SBA 

Express program is down quite a bit, quite substantially, in terms 

of numbers of loans, about 20 percent. 

Mr. BUCHANAN. What about lenders giving to established franchise companies? Is that a big part of the business, a small part 

so you’ve got someone that comes to you that—

Mr. WILKINSON. It’s some. I do not know off the top of my head 

volume of lending to franchises. That is not a subprogram number 

I have seen in quite some time. 

Mr. BUCHANAN. But you don’t know if they are aggressively lending to people interested in buying a franchise? I was just curious. 

Mr. WILKINSON. Well, each lender has their own business plan 

as to the types of businesses they would like to finance from community banks that tend to be financed, all of them, to sometimes 

we have specialty lenders that would gear their program towards, 

say, a franchise operation. I know that there are some SBA lenders 

with franchise lending divisions. But I don’t know what kind of volume franchise lending would total in the program. 

Mr. BUCHANAN. I was just curious. 

Mr. Crawford, the CDC mentioned, what is the trend line on 

lending there? I think you covered it a little bit, but in terms of 

CDCs? 

Mr. CRAWFORD. Well, we are—you mean for long-term? 

Mr. BUCHANAN. Yes. 

Mr. CRAWFORD. As I indicated, we are flat this year, which is 

kind of surprising. I have been through probably—I don’t know—

tony?—3 recessions in the last 18 years. I would have thought lending would still be running higher because, as Tony indicated, we 

are tending to be a counter-cyclical program. 

The banks will turn to an enhancement vehicle like 504 fairly 

rapidly because they can lend 50 percent and still have a first lien 

position. 

I suspect we are in the early stages of recession if you want to 

call it that. And I suspect that there are a lot of small businesses 

that are sort of pulling back their horns to wait and see how their 

own businesses, their own revenue streams are going to go. And 

20

then I think that we will probably see some resumption of some 

small business lending later in the year. 

So I have real high hopes. That’s why I indicated that I believe 

that we are going to run close to seven billion this year. And I am 

very concerned about next year because I think then our program’s 

historic balance will kick in. 

And I think you will see banks turn to 504. And I don’t want to 

be sitting there with $7 and a half billion in authority. It would 

be pretty rough for us. I assume that the SBA would have to cut 

off lending at some point. 

So I have high hopes that the program will get back on its historic growth pattern of 8 to 15 percent. 

Mr. BUCHANAN. Mr. Mercer, on the SBICs, what has been the 

success rate in, say, the last five or six years of the SBICs? 

Mr. MERCER. In terms of—

Mr. BUCHANAN. Venture funds, venture funds, small businesses. 

Mr. MERCER. You’re talking about the participating security 

funds? 

Mr. BUCHANAN. Yes. 

Mr. MERCER. Well, they stopped issuing licenses in 2004. So the 

program is ramping out of existence. There are about 160 funds 

still in existence. Fewer and fewer are being put into liquidations, 

ones that have gone into liquidation are the ones that had problems associated with the 2000 recession. 

What will happen after September 30 of this year is anybody’s 

guess because the funds that were licensed in, say, 2002, 2003, 

2004 were given at least the implicit, if not explicit, promise of leverage equal in most cases to two times their private capital. 

That leverage is going to be cut off, through no fault of those licensed SBICs, as of September 30 of this year. And no new leverage is being supplied. So it is really anybody’s guess right now as 

to how those SBICs will be able to complete their business plans. 

Many of them are seeking private sources of capital and trying 

to negotiate and have in many instances negotiated with SBA to 

buy out SBA’s positions. Others will probably be unable to do that. 

And whether they will fail or succeed for the lack of capital they 

will be faced with, it is too soon to tell. 

Mr. BUCHANAN. Mr. Betancourt, do banks do many of these loans 

that you do in the microloans or is there a reason why they don’t 

do them or are they just too high-risk or what has been your history with that? I mean, people have come to you compared to using 

a conventional bank. 

Mr. BETANCOURT. If I can just expand upon the subsidy issue 

that the administrator talked about? Quite frankly, the reason why 

banks are not doing this is because you can’t money off these loans. 

You are going to spend $4,000. 

In our case, every loan we spend 3-4 thousand dollars of our 

technical assistance time. We may earn $1,000 in interest. The 

loans are under 35,000. So if you have a $10,000 loan, you don’t 

make enough interest to cover your costs. 

Hence, this partnership with the SBA of trying to not subsidize 

but invest monies so we can help this entrepreneur, so that’s number one. The economies just don’t work for banks. 

21

Number two, you have to help the client. There is a lot of work, 

credit repair, to understand the type of collateral that you need to 

use helping them with their business plan, et cetera, et cetera. 

And the other thing is I think—and the SBA did this research 

a number of years ago, I haven’t seen it in a couple of years—that 

there are borrowers that don’t go to banks because of their fear of 

being turned down. And so there is a psychological factor that we 

have to work through. Again, you are not going to see it in any bottom line. 

Mr. BUCHANAN. And you are just talking about that one thing. 

I didn’t realize until I started looking at some of this. I think 50 

percent of people that are looking for loans, banks or car loans, 

don’t qualify for conventional financing. There are probably different numbers, but it’s the number I’ve heard. 

What percentage of the people you work with have where they 

can’t probably go to a bank, you know, or can’t get conventional finance would come to you or let’s bad credit? I know that means a 

lot of different things. There is bad, and there is real bad. Your 

sense of—

Mr. BETANCOURT. The average credit score in our program a 

bank wouldn’t even consider giving a loan. So I would say 90 percent of the loans a bank wouldn’t even consider. 

And we actually had a banker come in and say, ‘‘We want to buy 

your portfolio. We want to buy your loans.’’ When they went 

through our portfolio, they saw all of our loans were being paid. 

But when they looked at the profile, given the credit score and the 

collateral that we were holding, they weren’t interested. We get 

that every once in a while. 

So that’s more anecdotal, but I think that they just don’t have 

the time, don’t make enough money, and don’t understand this type 

of lending. It’s a real niche-type lending. 

Mr. BUCHANAN. What has been your success rate in lending in 

the microloans area? 

Mr. BETANCOURT. Our particular program is 97 percent payback. 

I would say nationally might be a five or ten percent charge-off. 

And, again, it’s a one percent default rate because we put that reserve fund. The organizations are on the hook for any losses, not 

the SBA. 

Mr. BUCHANAN. So you’re saying of all the loans that you originate, you have a—what is the default rate? 

Mr. BETANCOURT. Ninety-seven percent. 

Mr. BUCHANAN. So you get 97 percent of people that pay the 

loans back? 

Mr. BETANCOURT. I would say because, I mean, we look at 

microloan—

Mr. BUCHANAN. Security? What are they putting up, security 

or—

Mr. BETANCOURT. We’re holding car titles, a second loan or a lien 

against their home, business assets. We pretty much do what a 

bank would do except the numbers and the economies are not as 

great. The equity might be zero, might be 100 percent financing 

that way. You might have equipment that’s really not worth anything. But psychologically you tie them in. You help them. 

22

One thing that I found interesting is that when our borrowers 

don’t pay the bank if there’s a problem, they’ll pay us because we 

have a very tight relationship. We spend a lot of time with them. 

So there is a real relationship that we build with that entrepreneur. And then we obviously encourage them to pay the bank 

as well. 

Mr. BUCHANAN. Thank you, Madam Chair. 

Chairwoman BEAN. Thank you. 

I am pleased to note Chairwoman Vela ́zquez has joined us. And 

we recognize her. 

Ms. VELA ́ ZQUEZ. Thank you, Chairwoman, and thank you for 

holding this important hearing. 

Mr. Zarnikow, welcome to this position. And welcome to the 

Committee. I am glad that you were able to make it. So I would 

like to address my first question to you. 

You may know that Congress enacted two laws that created reduced-fee 7(a) programs. One was to promote energy-efficient 

projects. And the other was to assist veteran entrepreneurs. 

When the administrator came before the Committee on the budget, he said that the SBA is not implementing these provisions because he claims they need an appropriation. 

I have a copy of the two laws here. And I will ask if you can tell 

me, where is this, in any of these two laws, that there is an appropriation required to implement these two programs. 

Mr. ZARNIKOW. My understanding is that that has been looked 

at and reviewed within the administration. And because these 

would be separate loan cohorts, there would be a subsidy that 

would be required in order to enact that portion of the bills. 

I would say that we are moving forward to implement the other 

provisions of bills. 

Ms. VELA ́ ZQUEZ. But that would not require an appropriation? 

Mr. ZARNIKOW. The other portions, that’s correct. 

Ms. VELA ́ ZQUEZ. My question to you—and I have to say that 

when the administrator said that it required an appropriation, i 

was really shocked because I thought that he didn’t read the language of the law. In these two laws, there is no requirement for 

an appropriation. 

So even when you say that there is no funding and when I am 

saying that there is no funding required written into the law and 

you’re maintaining that they need funding, my question is, given 

the fact that—and I think that you know that—the agency has the 

ability to transfer up to ten percent from a budgetary account to 

another account, my question is, will the SBA be willing to transfer 

up to ten percent from one of these accounts to another account, 

let’s say, for example, the travel budget to partially fund the reduced fee loan program for veterans? 

Mr. ZARNIKOW. You know, that is something that I would have 

to confer with my colleagues in the administration to be able to address. And we would be glad to respond back to your office. 

Ms. VELA ́ ZQUEZ. You know, we here in Congress, we go to the 

floor. And we are always saying how grateful we are for the men 

and women in uniform. Those men and women are returning back 

home from Afghanistan and Iraq. We passed this law to help them. 

Mr. Buchanan worked quite hard on this legislation. 

23

So I hope that you will get back to us on that. And I will suggest, 

strongly suggest, that I think for the SBA, it should be more important to put money into the hands of veterans, rather than providing money for SBA’s staff to go to conferences. 

Mr. ZARNIKOW. We would be glad to respond to your question. I 

would also point out that last year we did roll out our Patriot Express product, which is specifically targeted towards veterans, reservists, and their spouses. And we have seen over 1,000 loans, 

made in that program for over 100. We do believe in supporting the 

people who are serving our country. 

Ms. VELA ́ ZQUEZ. I want to follow up on a point that was made 

by Mr. Crawford in his testimony. He stated that the SBA has not 

compensated any CDCs for their work liquidating defaulted 504 

loans, even though the agency is supposed to do so. 

Can you explain why your agency hasn’t paid one single invoice 

from a CDC for their liquidation costs? 

Mr. ZARNIKOW. We are in the process of working through an 

issue related to the 504 liquidation costs. We actually brought this 

to NADCO’s attention in one of our many sessions that we worked 

together. 

I would say that we are committed to paying the CDCs for the 

work that they have done in connection with liquidations that they 

have already completed related to liquidations. We are working 

through internally an issue. And we have committed to get back 

and have a response to that issue and how we are going to run that 

going forward. 

Ms. VELA ́ ZQUEZ. Did you request any money in the budget to do 

this? 

Mr. ZARNIKOW. I would have to—

Ms. VELA ́ ZQUEZ. No. So there wasn’t any money requested by 

SBA to do this. My question to you is, if you didn’t request any 

money, how do you think you could pay it back? 

Mr. ZARNIKOW. I think, once again, as I mentioned, we are in the 

process of working through this issue internally and expect to have 

it resolved within the next couple of weeks. 

I would also point out that we do have 504 liquidation staff in 

our Fresno and Little Rock centers who do work on 504 liquidations. And the delegated liquidation program really represents 

around ten percent of the CDCs. It’s a subset of the liquidation effort. 

Ms. VELA ́ ZQUEZ. Mr. Crawford, I don’t want to put you on the hot 

seat here, but when any of your members go through the process 

of liquidating and then go to the agencies and to the SBA and they 

don’t get any money back, how do you think that will help your 

members? 

Mr. CRAWFORD. Well, as you know, my members are small notfor-profit organizations generally. We have a couple of large CDCs 

but most are small. And they recognize that you can’t have a loan 

program without having a recovery program to go with it. 

And so they have stepped up to the plate. They worked with the 

106th Congress. They worked with you. They worked with SBA 

and agreed that they would shoulder the labor burdens of doing 

these recoveries because the SBA, as you know, four years ago laid 

off all their portfolio management staff. So there was no one to liqVerDate 0ct 09 2002 14:41 May 01, 2008 Jkt 033615 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40411.TXT LEANN
24

uidate and recover on 504s other than a few people that were left 

over in some of the field offices. 

Now, the SBA has since added, whether the number is five or it’s 

ten people, to the two liquidation centers. That is not the same as 

feet on the ground. If you have a default in Kansas City, someone 

that’s in Fresno, California is not going to liquidate that loan. It’s 

got to be somebody in Kansas City to do it, to go to the courthouse 

steps, to make the bid, to make sure the grass gets mowed, to 

make sure the locks get changed. 

And so you have got to have a local presence to do that. And we 

have been trying to convince the agency for—I don’t know—six 

years that that was needed. And we are willing to step up to the 

plate and do it. 

But the servicing fees that CDCs make now are to service those 

loans. They are not to provide liquidations, workouts, and recoveries. And I will guarantee you that the whole industry cannot do 

this for free. There just isn’t enough money. And so they have got 

to somehow be reimbursed for their direct costs or for their contractors. Otherwise the whole thing grinds to a halt. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Crawford. 

Do you have any comments after that? 

Mr. ZARNIKOW. I think I would repeat what I have said, which 

is this is an issue we are working through internally and developing a response. 

Ms. VELA ́ ZQUEZ. Mr. Zarnikow, when vendors go to the members 

to get paid, what do you think they are to going to tell them? 

Mr. ZARNIKOW. I think I mentioned that we have committed to 

pay whatever has already been incurred through this process. 

Ms. VELA ́ ZQUEZ. Let me ask you. You mentioned how important 

lender outreach is for you. And, in fact, you held an average roundtable this morning, a lender roundtable this morning. And I was 

surprised to learn that you did not invite the National Association 

of Government Guaranteed Lenders to the roundtable. Can you explain to me why not? 

Mr. ZARNIKOW. The lender roundtable was to work directly with 

some of the largest lenders around the country and some of our 

largest lenders. We have a very—

Ms. VELA ́ ZQUEZ. Is it the National Association of Government 

Guaranteed Lenders? 

Mr. ZARNIKOW. We have regular dialogue with the National Association of Government Guaranteed Lenders. 

Ms. VELA ́ ZQUEZ. What was the reason to exclude them if you are 

going to have a discussion about lending? 

Mr. ZARNIKOW. We invited—

Ms. VELA ́ ZQUEZ. Mr. Wilkinson, do you believe that you could 

have provided the SBA with some useful input if you were invited 

to that roundtable? 

Mr. WILKINSON. Well, I don’t know the entire content of the discussion today, but we do represent a large number of lenders. We 

do make a significant majority of their 7(a) loans and a majority 

of their 504 firsts. 

I would say that I’m not aware of the attendee lists, although I 

am aware that two of the attendees that were there were on my 

board. I don’t know who the other ones were. 

25

Ms. VELA ́ ZQUEZ. I think that it would be useful for the next 

roundtable that you conduct that you invite as many people, stakeholders so that you hear what you want to hear but also the critiques and contributions that could be made in terms of making the 

programs more efficient. 

Thank you, Madam Chair. 

Chairwoman BEAN. Thank you, Chairwoman Vela ́zquez. 

I wanted to just come back to Mr. Zarnikow. We talked a lot 

about the economy and the faltering economy and how the timing 

is really important. And so in your new job, you have tremendous 

priorities to address. 

Given that there has been the credit crunch that we have heard 

about and tightening up of lender standards, have you given your 

lenders particular guidance on how to adjust their own criteria for 

SBA loans? 

Mr. ZARNIKOW. A couple of things I would say relative to that are 

that you keep in mind as you look at the larger picture, although 

the number of loans year to date in the 7(a) program are down 

about 15 percent, the dollars are down about 6 percent compared 

to last year. Two thousand seven was a record year for lending in 

the 7(a) program. The year-to-date volume we are seeing is higher, 

really, than any year the past two years, which were record years. 

So, to put it in perspective, we are seeing a slight decline in lending volume coming off of record years. 

As we talk with lenders out there, we hear a number of things, 

one of which is demand for loans is down. And we hear that as a 

very common theme as we talk to lenders, that they have seen 

fewer applications. The demand for loans is down. 

As we talk to lenders, some of them have tightened credit standards. Others we talk to indicate they have not tightened credit 

standards. Where we have seen the biggest drop in volume in our 

program is in the smaller SBA Express program, which is primarily a credit-scored program. And what we have heard from 

some of the lenders in that program is that they have raised the 

bottom of their credit score box because what they found was the 

defaults were higher in that than they anticipated and, as a result, 

needed to adjust their credit standards. 

As you know, our programs or our loans are really all made 

through lending partners. So we don’t actually establish or set 

their lending criteria. We do monitor them from an oversight perspective, but they actually set their own credit policy. 

Chairwoman BEAN. Okay. And, Mr. Wilkinson, did you want to 

comment? 

Mr. WILKINSON. Yes, I did. I wanted to comment on the loan volume statistics. While it is true that 2007 might have had a slight 

number of loans on the increase, our dollar volume has slid steadily 

since fiscal year 2005, where we peaked with 15.2 billion in approvals down to 14.53 down to 14.29. And we probably at the pace we 

are on will be well below 14 this year. So we have had a steady 

decline now for four years in the dollar volume of lending. 

Chairwoman BEAN. Thank you. 

As you probably heard, the bells are ringing. Votes have been 

called again. I had just one last question for the SBA, and then we 

26

can adjourn. And I appreciate all of your efforts and your testimony. 

The new lender oversight that you have talked about and to recoup the cost of monitoring the programs, you have added new fees. 

What do you think this new fee accomplishes for the SBA? And 

how does it benefit the portfolio since there has obviously been 

some rejection from others to that concept, and it is certainly limiting growth. 

Mr. ZARNIKOW. Right. You know, obviously as we look at the mission of the SBA, it’s to get capital to small businesses. And we balance that providing capital or getting capital to small businesses 

with having a healthy loan portfolio, which is important. So, therefore, we need to have an appropriate level of oversight. 

We are increasing the amount of on-site visits that we are doing 

as part of that oversight responsibility and to be able to increase 

the number of oversight visits to over 200 this year really needs—

we need to charge the on-site fees as well as to recoup the cost of 

the off-site monitoring that we do. 

We did structure the fees so that over 80 percent of our lenders 

don’t pay any fee at all. And over 90 percent of our lenders don’t 

pay an on-site fee. So we have tried to manage that cost in a way 

that we call it a risk-based approach, where we have taken a look 

at where do we think the biggest risks are in our portfolio, where 

can we appropriately spend oversight dollars to manage that risk 

and provide a balance because we do understand that costs and 

fees are important. 

Any time you have fees, nobody likes to pay fees or wants to pay 

fees. So that those are important. So we have tried to structure the 

program on a risk-based approach to really address where we see 

the biggest areas of risk in a portfolio. 

Chairwoman BEAN. All right. Well, I thank you for your testimony and to all of you for weighing in on this important subject. 

I ask unanimous consent that members will have five days to 

submit statements and supporting materials for the record. Without objection, so ordered. 

This hearing is now adjourned. 

[Whereupon, at 3:51 p.m., the foregoing matter was concluded.]

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