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38–987 PDF 2008

S. Hrg. 110–605 

SMALL BUSINESS ADMINISTRATION: IS THE 7(a) 

PROGRAM ACHIEVING MEASURABLE OUTCOMES? 

HEARING 

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, FEDERAL SERVICES, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

NOVEMBER 1, 2007 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

BARACK OBAMA, Illinois 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

SUSAN M. COLLINS, Maine 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

PETE V. DOMENICI, New Mexico 

JOHN WARNER, Virginia 

JOHN E. SUNUNU, New Hampshire 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, 

FEDERAL SERVICES, AND INTERNATIONAL SECURITY SUBCOMMITTEE 

THOMAS R. CARPER, Delaware, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

BARACK OBAMA, Illinois 

CLAIRE McCASKILL, Missouri 

JON TESTER, Montana 

TOM COBURN, Oklahoma 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

PETE V. DOMENICI, New Mexico 

JOHN E. SUNUNU, New Hampshire 

JOHN KILVINGTON, Staff Director 

KATY FRENCH, Minority Staff Director 

CLAUDETTE DAVID, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Carper ................................................................................................. 1 

Senator Coburn ................................................................................................. 3 

WITNESSES 

THURSDAY, NOVEMBER 1, 2007 

William B. Shear, Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office .............................................................. 5 

Grady Hedgespeth, Director of Financial Assistance and Office of Capital 

Access, U.S. Small Business Administration ..................................................... 7 

Veronique de Rugy, Senior Research Fellow, The Mercatus Center at George 

Mason University ................................................................................................. 9 

Anthony R. Wilkinson, President and Chief Executive Officer, National Association of Government Guaranteed Lenders ...................................................... 10 

ALPHABETICAL LIST OF WITNESSES

de Rugy, Veronica: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 60 

Hedgespeth, Grady: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 57 

Shear, William B.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 33 

Wilkinson, Anthony R.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 81 

APPENDIX 

GAO Report, July 2007, titled ‘‘Small Business Administration, Additional 

Measures Needed to Assess 7(a) Loan Program’s Performance ....................... 90 

(1) 

SMALL BUSINESS ADMINISTRATION: IS THE 

7(a) PROGRAM ACHIEVING MEASURABLE 

OUTCOMES? 

THURSDAY, NOVEMBER 1, 2007 

U.S. SENATE,

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT,

GOVERNMENT INFORMATION, FEDERAL SERVICES,

AND INTERNATIONAL SECURITY, 

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:05 p.m., in Room 

SD–342, Dirksen Senate Office Building, Hon. Thomas R. Carper, 

Chairman of the Subcommittee, presiding. 

Present: Senators Carper and Coburn. 

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. The hearing will come to order. Welcome one 

and all. 

I am pleased to see all of our witnesses. I am especially pleased 

to see William B. Shear, who I once tried to introduce at another 

hearing as the one and only Billy Shear. The hearing was canceled. 

We had to stop the hearing because we then needed unanimous 

consent on the Senate floor to have Committee hearings that day 

and so we had to postpone it. It is going to be a pleasure introducing you today, and we are all glad that you are here. 

I especially want to say thanks to Dr. Coburn for suggesting that 

we return to this issue. As it turned out, it is one that a fair 

amount of work has been done, is being done, and legislation even 

introduced, we just learned today, that further attempts to address 

some of these issues. 

I am not sure who it was, I think it was Vince Lombardi—at 

least I always attribute it to him—who used to say—or the famous 

football coach of the Green Bay Packers—who used to say, ‘‘Unless 

you are keeping score, you are just practicing.’’ I have used that 

quote at a couple of hearings before and I think it certainly applies 

today. 

I approach this hearing—I am happy we are having it. I talked 

to one member of our staff who didn’t get all juiced up about this 

particular hearing. I love this issue as a recovering governor. One 

of the things I focused on for 8 years was economic development, 

job creation, and job retention. Part of the ability of companies to 

get started, to be successful, to grow, to provide jobs, to provide emVerDate Aug 31 2005 14:14 Nov 18, 2008 Jkt 038987 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 P:\DOCS\38987.TXT SAFFAIRS PsN: PAT
2 

ployment opportunity, and give back to the community, was access 

to capital. So this is something that I have thought a little bit 

about and am very much interested in. 

Part of what we want to do is just if it isn’t perfect, make it better. We have a program, the 7(a) program, that is, I think, a pretty 

good program, not perfect. There are some ways we could make it 

better and we hope to maybe walk out of here with some ways to 

do just that. 

People measure success in different ways. I believe this program 

has been successful. If you look at some of the testimony here, I 

think there are about 100,000 loans that have been made. Some 

$14 billion were guaranteed through the program just this last 

year alone, a lot of money. If I wanted to, I could spend a whole 

lot of time here in my statement reading through some of the 7(a) 

success stories that we have seen in Delaware, just that I literally 

saw last week and around the country over the years. 

But unfortunately, as we will all hear today, we don’t always 

know how all the businesses receiving these 7(a) loans fared. If we 

look at the default rate for the program, it is clear that most succeed, but there are certainly some that do not. 

In order for the Small Business Administration and the lending 

community to better do their jobs, we probably need more information on the many successes and occasional failures among the 7(a) 

loan recipients. This information will tell us a good deal more than 

we know now about the effectiveness of the program. It will also 

help us to learn from our mistakes. 

It is my hope that with better performance data on the 7(a) program, something I believe that all of our witnesses agree is needed, 

and I know one of our witnesses is not convinced we actually need 

the program, and we welcome that input, as well, but I think all 

the witnesses, in reading through your testimony, agree that we 

don’t do an especially good job—we measure inputs pretty well, but 

we don’t necessarily measure outputs very well. I always like to 

say, when I talk to people about whatever they are doing in life, 

I say, how do you measure success? I think that is a great question 

to ask with respect to this program. 

So it is my hope that with better performance data on the 7(a) 

program, something that I believe all of our witnesses here today 

think is needed, we can better target loans to those businesses that 

need help and better ensure that what we are doing here is in their 

interest, and even more importantly, in the taxpayers’ interest. 

I will just close by noting that I think that government does have 

a role in this area. When I was governor, one of the things we did, 

we looked at Delaware’s economy, and we are blessed with big companies, big, successful companies, a lot of big financial institutions, 

big chemical companies, science companies like DuPont and Hercules and others, auto assembly plants and so forth. One of the 

areas we are not especially strong in is new start-up for new businesses and job creation that flows out of those new businesses. 

One of the things that we did in my little State was we put 

Small Business Development Centers in all of our counties, storefronts where people could walk into, find out how to get it incorporated, how to develop a business plan, a marketing plan, access 

to capital issues, all kinds of stuff like that. 

3 

We also created with a partnership with the banks something 

called Capital Access, which reminds me a little bit of this program 

but it is a bit different. When businesses would want to go to a 

bank for a loan, they would just say they wanted to borrow, let us 

say $10,000. They put a very small fraction, a small percentage of 

the loan into a reserve fund. I think the bank would have to put 

a small portion into a reserve fund. The idea was the reserve fund 

would grow, and if we ever had one of the loans go bad, then there 

was the money to make good on the loan. So this is something that 

we have thought a whole lot about and worked on, and that is providing access to capital. 

I look forward to this hearing. I am delighted, Dr. Coburn, that 

you suggested it to bring us together and let us get the show on 

the road. You are recognized, my friend. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Well, thank you. I appreciate Senator Carper 

agreeing to have this hearing. This isn’t about eliminating the SBA 

program but it has everything to do with making sure the SBA program operates within the law, and today I see that it doesn’t follow 

GPRA. It doesn’t use the alternative credit or credit elsewhere formulas properly. And in terms of measurement, it doesn’t measure 

outcomes, it measures outputs, and outputs are not outcomes. 

The GAO spent a year looking at this and here is a quote from 

their statement. ‘‘All of the 7(a) program’s performance indicators 

are output measures.’’ What that means is we are measuring how 

much we are sending out the door, but we are not measuring what 

the effects of what we send out the door. 

The thing I am having trouble with is either we don’t want to 

measure it because we already know what the answer will be, or 

we just blindly don’t want to manage in a way that helps guide us, 

and that is not to question anybody’s motive. I am not trying to do 

that. But I am convinced after reading the GAO’s report, and I 

have tons of questions today for both GAO and the SBA, is how is 

it that we are not following GPRA? How is it that we are not using 

credit elsewhere and we are not measuring it and don’t have the 

tools to measure it to comply with the law? It is the law. It is not 

what Senator Coburn wants or Senator Carper wants, it is the law. 

And how do we know whether or not we are having an impact 

other than the amount of money going out of the door? 

The other thing that I am concerned about is that the focus is 

on how much money we can move out the door, not on how many 

actual jobs are created, how many small businesses new capital formation, and whether or not those new jobs or that new capital formation could have been accomplished outside of the 7(a) program. 

So I think there are a lot of questions. I appreciate so much that 

the GAO was so thorough in what they do. They know the law and 

they are an honest broker. They are not partisan, and I think we 

can trust where to ask the questions. That is what this hearing is 

about, is where to ask the questions and to find out what we are 

going to get accomplished in terms of outcome measurement, what 

we are going to get accomplished in terms of following GPRA, and 

what we are going to get accomplished in terms of alternative credit availability in terms of qualifying for 7(a) loans. 

4 

So I appreciate everyone’s attendance and their statement. I 

have a full statement I would like to enter into the record and I 

would ask unanimous consent for that. 

Senator CARPER. Without objection. 

Senator COBURN. And again, thank you all for being here. 

Senator CARPER. All right. I am going to take just a moment and 

introduce our witnesses. 

Our first witness today, made famous in an album released 40 

years ago this year, ‘‘Sergeant Pepper,’’ the one and only Billy 

Shear. I love it whenever he comes before us as a witness and it 

reminds me of my youth. But we are delighted that you are here. 

We are really appreciative of the work that GAO has done. 

Senator COBURN. Were you at Woodstock? 

Senator CARPER. No, I was in the Navy. I was in Southeast Asia. 

Senator COBURN. You were tied up, as well. 

Senator CARPER. Fortunately, I was not tied up with John 

McCain. 

Dr. Shear is Director of Financial Markets and Community Investment at GAO. He has directed the work addressing the Small 

Business Administration, the Federal Housing Administration—I 

may have a question on FHA for you here, too, as we look toward 

reauthorization of FHA—the Rural Housing Service, and Community and Economic Development Programs. Dr. Shear received his 

Ph.D. in economics from the University of Chicago, formerly served 

on an adjunct basis as a lecturer in city and regional planning at 

the University of Pennsylvania, just north of where my family and 

I live in Wilmington. 

Our next witness, and I am going to see if I get your name right, 

Hedgespeth? 

Mr. HEDGESPETH. Hedgespeth. 

Senator CARPER. Hedgespeth. I will practice that a couple of 

times. Thank you. He was appointed SBA’s Director of Financial. 

Has anyone ever mispronounced your name? 

Mr. HEDGESPETH. Oh, I wish I had a dollar for each time. 

[Laughter.] 

Senator CARPER. All right. He was appointed SBA’s Director of 

Financial Assistance in the Office of Capital Access in May 2007. 

Mr. Hedgespeth is a former Secretary of Economic Affairs in Massachusetts and was the founder of the first bank-owned urban investment bank. Mr. Hedgespeth’s work led to six consecutive outstanding Community Reinvestment Act ratings for his institution— 

congratulations—and to it receiving the Ron Brown Award for Corporate Social Responsibility. Before coming to the Small Business 

Administration, Mr. Hedgespeth served as CFO and Senior Vice 

President at the Structured Employment and Economic Development Company, called SEEDCO, where he has led the implementation of a financial accounting system and the creation of a new loan 

fund strategy. 

I want to say Veronique de Rugy, is that right? 

Ms. DE RUGY. [Nodding head.] 

Senator CARPER. Welcome. We are delighted that you are here. 

I understand you are a Senior Research Fellow at the Mercatus 

Center at George Mason University. I understand that you were 

previously a Resident Fellow at the American Enterprise Institute, 

5 

1The prepared statement of Mr. Shear appears in the Appendix on page 33. 

a policy analyst at the CATO Institute, and a research fellow at the 

Atlas Economic Research Foundation, and—— 

Ms. DE RUGY. I am trying them all. 

Senator CARPER. Oh, good. And your research interests include 

the Federal budget, homeland security, tax competition and financial piracy issues—privacy issues—probably piracy issues, too. Ms. 

de Rugy earned an M.A. in economics from the University of Paris– 

Dauphine and a Ph.D. in economics from the University of Paris– 

Sorbonne. 

And finally, we have Anthony Wilkinson. There is a name I can 

actually pronounce without a huge amount of problem. He is President and CEO of the National Association of Government Guaranteed Lenders, the only national trade association that represents 

the Small Business Administration 7(a) industry. Mr. Wilkinson 

has served on both the SBA’s National Advisory Council and Investment Advisory Council. He also has served on the Small Business Advisory Council. And prior to joining his association, Mr. 

Wilkinson spent 13 years with Stillwater National Bank. Where is 

Stillwater National Bank? 

Mr. WILKINSON. Stillwater, Oklahoma. 

Senator CARPER. All right. Have you ever been there? 

Senator COBURN. Sure. 

Senator CARPER. Once or twice? 

Senator COBURN. I graduated from there. 

Senator CARPER. Okay. He served as Senior Vice President responsible for the bank’s Small Business Administration lending activities. He is the past recipient of the Small Business Administration’s National Financial Services Advocate of the Year Award. 

With all those introductions under our belts, again, we are delighted that you are all here, appreciate your preparing for this important hearing, and we look forward to your testimony and to having the opportunity to ask questions once you have spoken. 

Your whole statement will be included in the record, and if you 

can wrap it up in about 5 minutes, we are not going to keep a real 

tight clock on you, but about 5 minutes would be fine, and then we 

will finish up and then ask questions. 

Mr. Shear, the one and only. 

TESTIMONY OF WILLIAM B. SHEAR,1 DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. SHEAR. Mr. Chairman, Dr. Coburn, and Members of the Subcommittee, I am pleased to be here today to share perspectives 

with the Subcommittee as it considers the extent to which SBA’s 

7(a) program is achieving measurable outcomes. 

The 7(a) program guarantees loans made by commercial lenders, 

mostly banks, to small businesses for working capital and other 

general business purposes. The program is intended to help these 

businesses obtain credit that they cannot secure at reasonable 

terms in a conventional lending market. 

My testimony today is based on a report we issued in July that 

examines the 7(a) program. Specifically, my testimony addresses, 

6 

first, the 7(a) program’s purpose and the performance measures 

SBA uses to assess the program’s results; second, evidence of any 

market constraints that may affect small business’s access to credit 

in a conventional lending market; third, the segments of the small 

business funding market that are served by 7(a) loans and the segments that are served by conventional loans; and fourth, the 7(a) 

program’s credit subsidy cost and the factors that may cause uncertainty about the program’s costs for the Federal Government. In 

the interest of time, in this oral statement, I will summarize our 

results for the first three objectives. 

First, as the program’s underlying statutes and legislative history suggest, the loan program’s purpose is to help small businesses obtain credit. The program’s design reflects this legislative 

history, but the performance measures provide limited information 

about the impact of the loans on participating small businesses. 

The underlying statutes and legislative history of the program help 

establish the Federal Government’s role in assisting and protecting 

the interests of small businesses, especially those with minority 

ownership. 

The program’s performance measures focus on indicators that are 

primarily output measures. For instance, they report on the number of loans approved and funded, but none of the measures look 

at outcomes such as how well firms do after receiving 7(a) loans. 

As a result, the current measures do not indicate how well the 

agency is meeting its statutory goal of helping small businesses 

succeed. 

With respect to these findings, we made a recommendation to 

SBA. We recommended that SBA complete and expand its current 

work on evaluating the program’s performance measures. As part 

of this effort, at a minimum, SBA should further utilize the loan 

performance information it already collects, including but not limited to defaults, prepayments, and the number of loans in good 

standing to better report how small businesses fare after they participate in the 7(a) program. 

Second, we found evidence, while limited, from economic studies 

suggesting that some small businesses may face constraints in accessing credit because of imperfections such as credit rationing in 

a conventional lending market. The studies we identified that empirically looked for evidence of this constraint within the conventional U.S. lending market generally provided some evidence consistent with credit rationing. Some studies showed, for example, 

that lenders may lack the information needed to distinguish between creditworthy and not creditworthy borrowers, and this could 

ration credit by not providing loans to all creditworthy borrowers 

in small business lending. 

Third, we compared the share of 7(a) loans that went to small 

businesses with certain characteristics to the share of conventional 

loans that went to such businesses. We found that a higher percentage of 7(a) than conventional loans went to minority-owned 

and start-up businesses. However, more similar percentages of 7(a) 

and conventional loans went to other segments of the small business lending market, such as women-owned firms and those located 

in distressed neighborhoods. These results may be useful to SBA 

7 

1The prepared statement of Mr. Hedgespeth appears in the Appendix on page 57. 

2The GAO Report appears in the Appendix on page 90. 

as it considers how it administers the program, including how it 

oversees participating lenders. 

Mr. Chairman, Dr. Coburn, this concludes my prepared statement. I would be pleased to respond to any questions that you or 

other Members of the Subcommittee may have. 

Senator CARPER. Thank you, Dr. Shear. Mr. Hedgespeth, you are 

recognized and please proceed. 

TESTIMONY OF GRADY HEDGESPETH,1 DIRECTOR OF FINANCIAL ASSISTANCE AND OFFICE OF CAPITAL ACCESS, U.S. 

SMALL BUSINESS ADMINISTRATION 

Mr. HEDGESPETH. Thank you very much, Mr. Chairman, Chairman Carper, Ranking Member Coburn. Thank you for inviting me 

to testify about the Small Business Administration’s flagship loan 

guarantee program, the 7(a) program. I appreciate the opportunity 

to respond to the Government Accountability Office’s July 2007 report on the 7(a) guarantee program.2

My name is Grady Hedgespeth and I am the Director of the Financial Assistance and Office of Capital Access at the SBA, where 

I oversee $65 billion of the agency’s loan programs. I joined the 

SBA in May of this year, bringing 30 years of public and private 

sector experience, including serving most recently as CFO and Senior Vice President at the Structured Employment and Economic 

Development Company (SEEDCO), following 20 years in banking 

and the financial services industry and a stint as the Secretary of 

Economic Affairs of Massachusetts. Based on my experience, I 

bring a unique knowledge of the lending industry to the SBA and 

the effect of the SBA programs in that industry. 

The 7(a) loan program, guarantee program, was established by 

Congress in 1953 to provide small businesses with the necessary 

capital that they cannot obtain in the commercial lending market. 

To be eligible for an SBA guarantee, the borrower must be a forprofit small business located in the United States and be unable to 

obtain credit elsewhere. 

It is important to note that the SBA does not directly make 

loans. Rather, the SBA works with commercial banks, guaranteeing between 50 percent and 85 percent of the loans. The precise 

amount of the loan guarantee depends on the size of the loan and 

the paperwork requirements associated with the application. 

Analysis by the GAO finds that, when compared to non-7(a) 

loans, the SBA’s 7(a) loans serve a greater percentage of women 

and minority-owned firms, and historically, these categories of entrepreneurs have faced more difficulty gaining access to capital. 

While the 7(a) program is not designed to provide a preference for 

historically underserved borrowers, the fact that they are receiving 

SBA assistance at greater proportions again demonstrates the program’s importance in reaching underserved businesses. 

Given the 7(a) program’s success, it is also important to keep in 

mind what the program does not do. The 7(a) program is not intended to compete with the conventional lending market. Rather, 

the program supplements this market by providing incentives for 

8 

lenders to provide loans to firms that may not otherwise qualify for 

traditional lending products. For banks to obtain a 7(a) guarantee, 

they must apply this credit elsewhere standard and certify that 

they would not make the loan without the SBA guarantee. 

According to the GAO report, there are a variety of reasons why 

small firms have trouble obtaining commercial loans and thus meet 

the standard. These factors include lack of information about the 

borrower, lack of a previous relationship with the borrower between the borrower and the lender, and lack of collateral, and I 

would also observe that from my personal experience, insufficient 

net operating income is a critical factor in this credit elsewhere test 

being met. 

The SBA continues to work to ensure that the 7(a) program carefully administers taxpayer resources. In the fiscal year 2005, the 

SBA restructured the 7(a) program into a zero-subsidy program. 

This approach adds stability and independence to the program 

while ensuring that the lending process is not hampered by the appropriations shortfall, such as those that occurred in 2003 and 

2004. 

Aside from having a zero-subsidy rate, another safeguard for taxpayers is that the 7(a) program is not liable for the guarantee if 

the lender does not comply with the program requirements. In addition, SBA continues to streamline and automate its loan processing function to reduce administrative cost. 

In order to measure our progress, SBA consistently collects and 

reviews data on the 7(a) loan program. While these measures provide useful data, we are also looking for new ways to better measure our work and identify areas of improvement. Therefore, SBA 

appreciates the GAO’s recommendation that SBA establish additional performance measures specifically to evaluate the effectiveness of the firms in the 7(a) program. 

To this end, the SBA commissioned a study from the Urban Institute to analyze the SBA loan programs and to determine the 

market for small business loans and whether SBA is serving that 

market. In brief, what we learned is that there are a substantial 

number of creditworthy businesses that cannot find financing 

through the commercial lending market, and of those businesses, 

the SBA is serving a substantial number. 

We are encouraged by this data and we believe that it provides 

insights that allow us to further the Congressionally-mandated 

mission of the guarantee program. 

In response, SBA is reviewing its performance measures to determine how best to measure outcomes in terms of the 7(a) loan program. Data is needed to be able to identify and measure the sustainability of small businesses receiving SBA loans and how the 

agency’s loan programs benefit the small business economy. The 

agency is evaluating whether the data currently being collected 

provides adequate information to make these decisions. This review 

will assess past performance, test new methodologies that can assist in setting future benchmarks. 

Specifically, SBA is trying to determine how best to measure the 

effect of SBA assistance on the firms that receive it. Understanding 

the agency’s impact on the small businesses receiving SBA loans 

will allow us to further tailor our loan programs and the guarantee 

9 

1The prepared statement of Ms. de Rugy appears in the Appendix on page 60. 

program to ensure the greatest value for the taxpayers while continuing to fill a key gap in the financial market that allows small 

businesses to grow. 

I would again like to thank the Chairman and Ranking Member 

Coburn for the opportunity to testify, and of course I will welcome 

your questions. Thank you. 

Senator CARPER. Mr. Hedgespeth, thank you very much for your 

testimony and we look forward to asking some questions here in a 

minute. 

Dr. de Rugy, you are recognized and thank you for joining us. 

TESTIMONY OF VERONIQUE DE RUGY,1 SENIOR RESEARCH 

FELLOW, THE MERCATUS CENTER AT GEORGE MASON UNIVERSITY 

Ms. DE RUGY. Chairman Carper, Ranking Member Coburn, Members of the Subcommittee, it is an honor to appear before you today 

to discuss whether the SBA’s 7(a) loan program is achieving measurable outcomes. 

I would like to commend this Subcommittee for recognizing that 

outcome measurement is a crucial part of judging the success of a 

program, particularly as I am sure that this Subcommittee understands that outcome measurement is only useful to the extent that 

it triggers consequences if the Subcommittee finds that the 7(a) 

loan program under-performs or is unnecessary. 

Encouraging lending to small businesses is one of the primary 

purposes of the 7(a) loan program, which works on the underlying 

assumption that inefficiency in the capital market caused lenders 

to pass over a large number of small businesses that, if given 

loans, would generate untapped economic growth. 

Is there, in fact, a market failure that justifies government intervention via the SBA? My work concludes that there is no significant failure of the private sector to allocate loans efficiently. The 

literature that does refer to a market failure that Mr. Shear mentioned is grounded in old research that doesn’t take much under 

consideration the tremendous developments in information technology that have reduced the high cost of access information about 

small business creditworthiness. Lending relationships and credit 

scoring techniques have changed the face of small business lending. 

The result, says Dr. Chad Moutray, Chief Economist for the Office 

of Advocacy at the SBA, is a financial market that tends to efficiently allocate capital to small businesses. 

Another way to assess the relevance of the 7(a) loans is to analyze its role in the market. If there is a serious need for these loans 

and if the SBA is doing a good job meeting these needs, then the 

SBA’s lending share should be quite large. But looking at the flow 

of 7(a) loans, we find, first, the SBA is largely irrelevant in the capital market. In a given year, roughly one percent of small business 

loans are SBA loans. The private sector finances most loans without government guarantee. 

Second, there is no shortage of firms or new start-ups in America. The data suggests that even if the 7(a) loan program did not 

10 

1The prepared statement of Mr. Wilkinson appears in the Appendix on page 81. 

exist, entrepreneurs would start new businesses at the same rate 

they do now. 

Third, in 2004, 29 percent of 7(a) loans went to minority business 

owners, but SBA distributed loans to only 3 percent of all minorityowned firms that got loans that year. The same trend is true for 

women-owned firms. 

I have been criticized for looking at small business lending as a 

whole. I am told that long-term borrowers are the real target that 

SBA hits upon, not every small business out there, but a company 

that needs long-term financing. 

First, where in the SBA mission does it say that long-term borrowers and not small businesses as a whole are its target? Well, 

it is easier to redefine targets rather than address my charges. 

Even in SBA’s artificially-defined market of long-term loans, the 

private sector provides 60 percent of such loans without the Federal guarantee. 

Second, the literature on the topic indicates that the length of 

the loan doesn’t really matter. A small business that wants a longterm loan will get a loan with shorter maturity and then get it renewed as many times as it takes to meet its long-term need. If conventional and SBA lending provide the same result, it does not 

matter if the loans are successive short-term ones or a single longterm loan. On the other hand, a fairness issue clearly arises. 

To conclude, all of the evidence points in one direction. The 7(a) 

loan program is not having a significant positive effect on the market. To prove me wrong, SBA advocates should measure the performance of the 7(a) loans based on outcome. It should include an 

analysis of their effect on economic growth and a comparison of the 

benefits of the program to its long-term cost, all of its cost, whether 

it is oversight, default, all of its cost. What it should not include 

is a count of the number of jobs created. The mere creation of jobs 

is not an appropriate economic policy objective because you can add 

jobs to an economy, yet it creates no value. 

Measuring the performance of SBA loans should also include 

looking at who are the true beneficiaries of the program. My research points at 10 of America’s biggest banks, not small businesses. 

Entrepreneurship is one thing that Americans definitely know 

how to do without the government’s help. Small businesses are 

doing a great job and will continue to do so with or without the 

SBA. Thank you. 

Senator CARPER. Thank you, Dr. de Rugy. Our final witnesses is 

Mr. Wilkinson. Mr. Wilkinson, you are recognized. 

TESTIMONY OF ANTHONY R. WILKINSON,1 PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF 

GOVERNMENT GUARANTEED LENDERS 

Mr. WILKINSON. Thank you, Mr. Chairman and Senator Coburn. 

I appreciate the opportunity to testify today. You do have my written testimony. I would like to include, if SBA has not already, a 

copy of the Urban Institute report on the 7(a) and 504 programs. 

Senator CARPER. Without objection, it will be included. 

11 

Mr. WILKINSON. Thank you very much. I would like to state some 

facts about the 7(a) program, many of which are highlighted in the 

GAO report. 

First, the SBA 7(a) and 504 programs annually provide the small 

businesses over 40 percent of their financing needs with maturities 

of 3 years or greater. This makes SBA the single largest provider 

of long-term credit to small business in this country. 

Another fact is that SBA programs are not meant or designed to 

replace all other forms of credit to small business. From the Urban 

Institute report: one, they have a definition of the SBA market segment as small businesses that have a demand for a loan; two, met 

the credit elsewhere requirement; and three, were as creditworthy 

as other firms that receive small business loans. 

It is simply incorrect to argue that the program is not doing its 

job or meeting a specific need. The examples of SBA’s program successes are innumerable and range from small local companies like 

Eskimo Joe’s, that Dr. Coburn knows well, to large conglomerates 

like Nike and Columbia Sportswear. Each of these companies is an 

example of SBA programs helping companies provide stable employment, improved technology, and national productivity. 

Next, the small business capital market cannot be considered to 

be well-functioning as segments of creditworthy businesses are denied access to credit on reasonable terms and conditions. The SBA 

programs provide credit to minority-owned businesses at a rate 

that is three times that of conventional lending. This fact is supported by the GAO report and the recently published Urban Institute report. In addition, 25 percent of 7(a) loans went to small business start-ups, while the overall lending market served almost exclusively established firms. Also, 49 percent of 7(a) loans made in 

fiscal year 2006 went to geographic areas that SBA considered underserved by the conventional market. 

Next, according to CBO and SBA, since the beginning of credit 

reform in 1992, borrowers and lenders have paid well over $1 billion more in fees than was required under the Federal Credit Reform Act. That Act assures that the taxpayer has no estimated liability for 7(a) loans. 

With respect to the concern that 7(a) loans have an inordinately 

high default rate, it should be noted that according to the President’s fiscal year 2007 budget submission, the repurchase rate on 

7(a) loans is projected to be 6.96 percent for the entire life of the 

cohort, less a 52 percent recovery rate. The annual default rate for 

conventional loans is typically in a 0.25 to 0.5 percent range. While 

there appears to be a significant disparity between the repurchase 

rate and the conventional default rate, it should be noted that it 

is an inaccurate comparison. The 7(a) repurchase rate represents 

the life of the lending pool while the commercial default rate is for 

one year. 

So to make an apples-to-apples comparison, the effective life of 

a 7(a) cohort is about 7 years, making the 7(a) annual loss rate, 

using the banker method, of less than 0.5 percent per year. This 

compares favorably to the conventional small business loss rate 

and is far better than the credit card loss rate that annually runs 

4 percent or greater. 

12 

One frequently overlooked fact is that the program mandates 

that all lenders, whether they sell loans or not, are responsible for 

prudent loan making and prudent loan servicing. SBA’s guarantee 

is a contingent guarantee, which means that if a lender fails to 

fully meet its responsibilities, SBA can and does reduce the amount 

of the guaranteed payment to lenders. Therefore, the very nature 

of the guarantee relationship serves to assure that lenders engage 

in quality lending. 

Last, I would like to read the conclusion from the Urban Institute report, two short paragraphs. The SBA loan programs are designed to enable private lenders to make loans to creditworthy borrowers who would otherwise not be able to qualify for a loan. As 

a result, there should be differences in the type of borrowers and 

loan terms associated with SBA guaranteed and conventional small 

business loans. Our comparative analysis shows such differences. 

Overall, loans under the 7(a) and 504 programs were more likely 

made to minority-owned, women-owned, and start-up businesses, 

firms that have historically faced capital gaps, as compared to conventional small business loans. Moreover, the average amounts for 

loans made under the 7(a) and 504 programs to these types of 

firms were substantially greater than conventional small business 

loans to such firms. These findings suggest that the 7(a) and 504 

programs are being used by lenders in a manner that is consistent 

with SBA’s objective of making credit available to firms that face 

a capital opportunity gap. 

Mr. Chairman, that concludes my remarks and I would be happy 

to answer questions. 

Senator CARPER. Good. Thank you very much, Mr. Wilkinson. 

I think it was Harry Truman who used to say the only thing that 

is new in the world is the history we never learned. I want us just 

to go back to the beginning of this program, which I believe had 

its genesis in 1953, and I am not sure who to ask to respond, but 

just explain to us why the program was created, the 7(a) program, 

what purpose it sought to meet, and then just share with us some 

of the major changes that have occurred in the program, most recently, I think, in 2005, and I think legislation may have been introduced today by Senators Olympia Snowe and John Kerry that 

would make some further changes in the program. 

If somebody can share with us a brief outline of those changes, 

I would appreciate that. But let us just have a little bit of a sketch 

going back. What was this program supposed to accomplish in 

1953? How has it changed over the years, Dr. Shear? 

Mr. SHEAR. Sure. Nineteen-fifty-three, when the Small Business 

Administration was developed, it had an overall mission of helping 

support the small business sector. So I will just start with that 

mission of the overall agency, and I think it is relevant to this 

hearing because some of the objectives, based on the legislative history, what we tend to focus on, let us say they kind of differ a little 

bit across the table here. I will put it that way. But the overall was 

to support small business and its role and its vibrancy in the national economy. 

The 7(a) program, when it was created, the objectives are a little 

bit more specific. I am not quite sure exactly when the specific objectives that we are addressing in our report came into being, but 

13 

it became more toward trying to serve borrowers that couldn’t get 

credit at suitable terms elsewhere. So I think that has been around 

for a long time. I don’t know if it goes back to 1953. 

I will jump forward to more current history. In the 1990s, one 

thing that happened at SBA that was typical of Federal loan insurance and guarantee programs, and for that matter—and I will stick 

to those, was that for efficiency reasons and because of technology, 

government agencies started delegating authority to lenders to 

make decisions that the Federal Government used to make in 

terms of approving loans and the whole loan process. 

Much of our work over the years, like through the 1990s, was 

looking at when SBA delegated this authority to lenders, it did 

not—it forgot the lender oversight part and it has been largely 

since 1998 that SBA has made inroads in terms of lender oversight. 

And I think it is relevant to this hearing because when you have 

the Federal Government at risk, it is important to make sure that 

the Federal Government’s risk exposure is limited and also that 

the mission of the program, because they serve a public mission, 

and you have this delegated authority to lenders, is being followed. 

Now, more recently, going into recently, it used to be what is 

called the subsidized program, that based on credit reform, which 

came in in the 1990s where you are in a world of estimates, and 

that is one of the other topics that is in our report—Mr. Wilkinson 

talked about it—is that starting in 2005, it went from a program 

with a positive subsidy to a program with a zero subsidy—— 

Senator CARPER. Starting when? Two-thousand-and-five? 

Mr. SHEAR. Two-thousand-and-five was the first year of zero subsidy. 

Mr. WILKINSON. That is correct. 

Mr. SHEAR. Now, part of the question here is that it is probably 

going to change the dynamic of how SBA serves borrowers and 

even begs the question even further, how can SBA, when it 

changes the programs, when it introduces new elements of the program, which is how is it going to affect the borrowers that ultimately are going to be served? How are lenders going to react to 

that? And how is SBA going to measure how well it is serving its 

mission, specifically to serving borrowers that can’t get credit elsewhere in the conventional market? So it is kind of a new paradigm 

with some of the new programs, with the zero subsidy, and the 

whole question of the credit elsewhere test becomes more important than it has been in the past. 

I hope I didn’t sound too much like a college professor. 

[Laughter.] 

Senator CARPER. Does anyone want to add or take away from 

that history? 

Mr. WILKINSON. Well, fortunately, I can say that I have not been 

around since 1953. I have been active in the program since 1986 

and I think Mr. Shear did a very nice job of explaining where this 

program has come from. 

Loan volumes did not pick up in this program until the late 

1980s and then into the 1990s when SBA embarked on what it 

called its quality lending era and really tried to clean up underwriting issues and the program has blossomed since then. And over 

the last 15 years or so, SBA every year seems to come up with a 

14 

way to streamline loan processing, and they are getting better and 

better every year, and that has helped attract lenders to the program. 

As Mr. Shear talked about being on appropriations, that was an 

annual fight to go get money that ultimately, as you look at the 

reestimates in the budget every year, we were fighting for money 

that we sent back to Treasury. Everybody finally figured that out 

and we have gone to a zero subsidy. 

Senator CARPER. Was that in 2005? 

Mr. WILKINSON. That would have been part of the omnibus appropriation bill that was signed into law in December 2004, so for 

fiscal year 2005—— 

Senator CARPER. All right. 

Mr. WILKINSON. [continuing]. Was the first year we went to zero 

subsidy. Before that, we were subject to all kinds of program stops 

and program restrictions. We capped loan sizes, all kinds of things 

that forced lenders away from the program and left many borrowers where they could not get any financing at all. Since going 

to zero subsidy in December 2004, we have not had any stoppages 

or caps and we have been able to lend at the authorized level. 

Senator CARPER. All right. How do you measure success? I asked 

something about whether it is a government program or something 

outside of government, a lot of times I will ask people, how do you 

measure success in what you are doing, and how do we measure 

success with respect to the 7(a) program, and how should we measure success? 

Mr. HEDGESPETH. Well, we currently measure success—and I 

think this is a point we will agree to—in many ways in terms of 

measuring not outputs, but, in fact, the building block to outputs, 

that we measure things like new loans approved to start-up businesses, loans funded to start-up small businesses, the number of 

loans approved to existing small businesses, the number of loans 

approved to small businesses facing specific opportunity and competitive gaps, such as has been testified to as women-owned, minority-owned firms. 

We also do track jobs and we track jobs with the firms our borrowers themselves reporting to the banks, some 300,000 of them 

since the program’s inception on the jobs that they are adding as 

a result of the funding that SBA provided. In 2006—I am sorry, in 

2007, that number was 206,600 jobs. This year, our numbers are 

going to come in somewhere around 300,000 for the fiscal year that 

just ended. That is substantial economic activity proving the success of this program. 

Now, we have tried in the Urban Institute data study to stretch 

that out to what happens in successive years and those are measures that we are going to continue to look at to see that we can 

track small businesses. It is very difficult data to obtain and our 

consultant, the Urban Institute, had trouble in the process themselves. But we are committed to continue to try to track our firms. 

Senator CARPER. All right. Let me just basically ask, and I would 

ask you to be brief in responding, but how should we measure success in this program? Mr. Hedgespeth has been good to run 

through a variety of—but how should we? Let me just start with 

Dr. Shear. 

15 

Mr. SHEAR. Okay, thank you. We recommended at a minimum 

that now that SBA has technologically, through Dun and Bradstreet, the ability to look at how well the borrowers are doing and 

how long they stay in business, at a minimum, you measure success by those borrowers that you are reaching. Are they successful 

at staying in business? Are they defaulting on their loans? Are they 

prepaying after a period of time, which could be a success of the 

program that you would say that these firms that have been helped 

have been able to kind of graduate to conventional credit? So at a 

minimum, we would look at that. Some of the other measures 

would probably require some reference to the conventional lending 

market, and I will stop my answer at that for now. 

Senator CARPER. All right, thank you. Dr. de Rugy, how should 

they measure success? I realize that in your testimony that this is 

not a program that you are especially enamored with, but if we are 

going to have this program, how should we measure success? 

Ms. DE RUGY. We certainly shouldn’t measure it the way the 

SBA is measuring it. Everything I have heard is, in fact, a way to 

count something, but it is not counting success, like counting the 

number of jobs that were created in a given year. If we don’t know 

what is happening the next year, it is not very useful. 

What we need to know, considering what I understood to be the 

goal of the 7(a) loans, which is to give credit to people who are 

overlooked by commercial banks and who, in fact, could be creditworthy, or are creditworthy even though they don’t look creditworthy, and to see how much economic growth—I mean, the reason 

why we want to give money to these people is because we are told 

they can generate economic growth, so that is what we need to 

measure. And it is really hard, but this is what outcome measuring 

is about. It is not just like looking at—there is one job created this 

given year and so we need to have first a much more dynamic perception of what is being created. 

But more importantly, we need also to measure, to actually take 

this benefit of the program and measure it against the cost of the 

program, and that means the cost of the default, which now supposedly are covered by this zero-subsidy fee and the lender fee, but 

also the cost of the oversight of the program. We need to take 

under consideration what happens if the economy tanks, which is— 

I mean, I am in the United States because I believe this is a country where that will not happen, but if it does happen and all or a 

vast majority of SBA borrowers default at the same time, right at 

the moment where the Federal Government is going to have to pay 

a higher unemployment benefit and things like this, I mean, we 

need to take under consideration this cost. It is not only about 

measuring what has been spent, it is also about measuring it 

against what it cost. 

Senator CARPER. Thank you. We can go back in time, I think, to 

2001 where most people say the economy tanked pretty low. 

Ms. DE RUGY. Yes. 

Senator CARPER. It would be interesting to look back at the data 

and see what happened. 

Ms. DE RUGY. Actually—— 

16 

Senator CARPER. My time is expired and I am on Dr. Coburn’s 

time, so let me just ask Mr. Wilkinson to respond and then I will 

give it to Dr. Coburn. Thank you. 

Mr. WILKINSON. I think it would be helpful to know exactly what 

it is we are looking for, as well. I hear the term, what the effect 

is on economic growth. I am not quite sure what we are after. The 

SBA has all kinds of data. I know I can tell you today what our 

currency rate is, what our repurchase rate has been, what our loss 

rate has been going back in time. We know a lot of this information. Where we are supposed to operate in terms of inside that information, I have asked several times for, like what is a target delinquency rate? Some would argue that today we are already too 

low, that we are missing some borrowers that we should be helping. 

But that said, one of the measurements of success for us as lenders is we have borrowers who are paying their loans on time, and 

the vast majority of 7(a) borrowers are paying their loans on time. 

And I can tell you another measurement of success for us would 

be the number of start-ups that we finance because we are able to 

use the SBA program that we simply cannot do under a conventional basis. So there are a whole bunch of start-up businesses that 

are out there today that would not be there if we did not have a 

program like the 7(a) to help them out. 

Senator COBURN. Let me jump in on that for a second. 

Senator CARPER. Yes, jump right in. 

Senator COBURN. If they are creditworthy—under the law, they 

are supposed to be creditworthy—why can’t you finance them? Is 

it that you choose not to or that you choose only if you have got 

a government guarantee to finance them? And if that is the only 

reason you are financing them, then you have violated the law in 

terms of creditworthiness. We have been talking about the wrong 

things here. The SBA program is very clear in what it is supposed 

to do and the measurement of outcomes, as the GAO has said, are 

not there. 

You are talking about outcomes measurement if you are doing 

business in the SBA and the SBA is talking about how many loans 

they do and how fast they do them and how easy it is to process. 

That is not the outcomes that we are looking at and talking about 

in this hearing. 

Mr. WILKINSON. What outcome are we looking for? 

Senator COBURN. There is a Federal law. It is called GPRA, and 

it requires every agency—this agency has known about it for 15 

years—to develop outcome measurements. Now, what the law says 

is we are to be creating through SBA loans to people who are creditworthy who are missed by conventional lenders. That is what the 

purpose of the SBA is. That is what the statute says. The statute 

also says under GPRA, which is the Government Performance and 

Results Act, is every agency will develop outcomes. There is no outcome that has been developed by SBA. 

That is why we are having the hearing. It is not that we don’t 

want to do SBA loans. It doesn’t have anything to do with it. It has 

to do with you cannot manage what you don’t measure, and if you 

measure something that is not an outcome but is just a performance indicator of how far you do outputs, you wouldn’t loan money 

17 

to any business in Oklahoma that was doing that because you 

would be saying they are measuring the wrong thing. 

So the purpose of the hearing today, and I thank you for the history because I think it tells a whole lot of why we are not in compliance. We are not trying to shoot anybody here. We are trying to 

make sure every branch of the Federal Government and every 

agency understands that because of the tremendous impact of dollars that are going to be coming our way in terms of the baby 

boomers under entitlement spending, every agency has to be able 

to manage what it does well. The testimony from the GAO says 

that there is not one performance outcome measure that meets 

GPRA done at the SBA, and I don’t think that—am I stretching 

that? 

Mr. WILKINSON. Mr. Shear just said one of the performance 

measures he would like to see is how well borrowers are doing. 

What does that mean? I can tell you how current they are. 

Senator COBURN. No. What it means, in light of what the goals 

of the program are, how well are we doing filling the need for those 

people who are creditworthy but yet can’t get financed, and that is 

the goal. If you look, this is a real revealing chart in the testimony 

by GAO. It shows creditworthiness and then it shows versus comparable conventional credit and you see a shift towards a lower 

creditworthiness in SBA lending. But the law says and the intention of SBA is to loan money to people who are creditworthy who 

can’t get conventional credit. 

So what we are asking for, and the whole purpose for trying to 

have this hearing is to try to get SBA to say, yes, we don’t have 

an outcome measurement that we are using every month in complying with the Government Results and Performance Act to say, 

here is how we can know what we are doing. What that measurement is, is we know we are loaning more money, we know maybe 

the performance rate on it is better. We know we are probably 

helping more people than what we were. But the purpose—what 

has to be measured is what is the sphere of people who are creditworthy who cannot get money. That is the goal. So you have to 

measure the results against that goal. 

There is no question the SBA has done a good job of improving 

a lot of things inside SBA. They have done a good job. All the bankers in Oklahoma tell me that. That is not what I am trying to get 

to here today. I am trying to get us to a point where we are measuring so we know what we are doing within the confines and direction of what the SBA is supposed to be doing with its 7(a) loan program, and that is loaning to people who are creditworthy who cannot get loans. 

Mr. WILKINSON. The default teste that we would use is if I am 

a borrower who could get conventional financing without the SBA 

guarantee, I would do so because I don’t have to pay a SBA guarantee fee. If I can’t get financing conventionally, then I would accept—— 

Senator COBURN. So then how do you explain the risk curve that 

is shown here by the GAO? 

Mr. WILKINSON. I don’t know—which page are you on? 

Senator COBURN. It is page 29 of their report. What they do is 

compare the percentage of loans made based on creditworthiness. 

18 

Mr. HEDGESPETH. If I may, Dr. Coburn, the interesting thing 

about the way the GAO used that report and those statistics, I 

would actually agree with you to say that is justification that, in 

fact, we are serving that niche that is just beyond conventional financing but wouldn’t qualify using regular bank tests. The GAO 

looks at that same data and says there is no difference between the 

SBA data and conventional lending data. So I would absolutely 

agree with you. 

And what is important about that, and really to the heart of your 

question, how do you know you are meeting the credit elsewhere 

test and lending to creditworthy borrowers? Because the standard 

SBA term is longer than the conventional term, it actually makes 

more deals work. So you have a borrower—I mentioned in my testimony where net operating income is a critical measure of whether 

or not a loan is approved, and these are constraints that are put 

on banks by their regulators. 

Senator COBURN. Okay. So here is a measurement. The law says 

the Small Business Act prohibits anyone from getting a 7(a) loan 

who can get credit from another source, right? That is the law. It 

is what it says. How does SBA make sure that provision is followed 

and that lenders are not giving loans to businesses who can get 

some credit somewhere else? Are there no businesses who have gotten a 7(a) loan this last year who don’t have a credit elsewhere that 

they would have qualified? Where is the measurement on that? 

Mr. HEDGESPETH. I agree that is something that we absolutely 

have tried to do and tried to measure within the Urban Institute 

study to establish a baseline—— 

Senator COBURN. But the Urban Institute study doesn’t count. 

Under GPRA, you have to say what your outcome measurements 

are and then you have to report and perform on what those outcome measurements are. You can’t just have a study and say, here 

is what the Urban Institute says. You have to, under the law, set 

that up. 

When is SBA going to set up a set of outcome measurements that 

coincide with what SBA’s legislative intent is and then manage it 

based on the measurement of those outcome measures? 

Mr. HEDGESPETH. Well, again, I am somewhat the new kid on 

the block—— 

Senator COBURN. I know you are, and my frustration isn’t with the SBA. My frustration is we know we have $250 billion of waste, 

fraud, abuse, or duplication just in the discretionary portion of the 

budget, and so I am working hard in every area at every level to 

make sure—not to go after agencies, just to say are you measuring 

and are you managing based on what you are measuring? Every 

bank does that. Every business does that. And we ought to have 

every aspect of the Federal Government doing that. And besides, 

it is the law and SBA has been in noncompliance for 15 years 

under GPRA. 

Mr. HEDGESPETH. Well, I know that the Urban Institute study, 

the discussion of it started in 2003, and the intent of commissioning the study was to allow us to have a baseline so that we 

could, in fact, then look at which performance measures made 

sense. We had them investigate a number of different possible scenarios to try to see where we could have a methodology that is reVerDate Aug 31 2005 14:14 Nov 18, 2008 Jkt 038987 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 P:\DOCS\38987.TXT SAFFAIRS PsN: PAT
19 

peatable and where we can, in fact, put a goal for ourselves that 

you could hold us accountable for. 

We absolutely are not resistant to that, and as Director of the 

Office of Financial Assistance, it is going to be my responsibility to 

help the agency think through this report and to establish measures that we can feel that we can be held accountable. 

Senator COBURN. See, the question that somebody like Dr. de 

Rugy would ask is if you look at measuring credit elsewhere, if you 

are not looking at that, you don’t know if the people in the market 

need the SBA or the banks need the SBA. You won’t know. And 

so do we have the SBA as a program for banks or do we have the 

SBA as a program to truly meet that part of the capital need for 

creditworthy individuals who are passed over by the banks? 

And what has happened, good steps have moved to try to change 

that. How do we measure credit elsewhere worthiness, and is that 

a performance measure, and how do you set, here is what we want 

it to be, here is what the law says the requirements of SBA loaning 

are, and how are we going to compare how we are doing every year 

to that? 

It is not how much money we loan. The real deal is how much 

capital formation came out of a SBA loan? That is what the real 

deal is. And it is not jobs. It is how much long-term capital formation, how much innovation created capital came out of that. Jobs 

are a measure of that. But what we are really getting to is what 

do we do in terms of growing our economy in terms of capital formation, because that is the ultimate measure. 

Does everybody in the lending community ascertain and certify— 

I know they certify, but do they actually do the work on credit elsewhere? 

Mr. WILKINSON. Well, they have to certify on the application that 

they would not make that loan under the similar terms and conditions. 

Senator COBURN. Okay. But does that mean credit elsewhere or 

just for that one lending institution? In other words, if we have one 

lending institution that—— 

Mr. WILKINSON. One lender couldn’t certify what another lender 

might or might not do. 

Senator COBURN. Okay. So we are really not talking about credit 

elsewhere. We are talking about credit at the one person that is applying for the SBA loan, which is the whole point. If you go back 

to what the statute says, it talks about you have to determine that 

there is no credit available elsewhere, not just at the one lending 

institution. The one lending institution has an obvious bias. They 

are going to get a loan to somebody that they otherwise wouldn’t 

loan to without the SBA, right? 

Mr. WILKINSON. So how many institutions should a small business be forced to go—— 

Senator COBURN. I don’t know, but—— 

Mr. WILKINSON. [continuing]. To establish that fact? 

Senator COBURN. That is the question that SBA should set up to 

establish whether it has met the goals of the legislation. That is 

the outcome measures. And how are we ever going to know if we 

are not looking at that? 

20 

I am not critical. I know a lot of positive—you listed lots of anecdotal evidence of companies in Oklahoma that have grown mightily 

because of an SBA loan. That does not prove the fact that they 

might not have gotten one somewhere else. They just didn’t. 

Mr. WILKINSON. Well, I can tell you as a lender, there are several 

that were not going to get any financing if it were not for the SBA. 

Senator COBURN. Okay, and I don’t dispute that, and I am not 

saying that anecdotally that doesn’t say that. But where is the 

measurement of all those that are successful versus all those that 

aren’t and what has been the overall impact in terms of capital formation? So we are asking the agency, there is a Federal law that 

says you have to do this. One, you are out of compliance on that. 

GAO says that. You all know you are out of compliance on GPRA 

and you have been, even though you got a PART score, which I 

talked to OMB, how did they get a PART score if they are out of 

compliance on GPRA, which that tells you that maybe the PART 

program has a hole in it, as well. Would you like to comment on 

that, Mr. Shear? 

Mr. SHEAR. I really can’t—— 

Senator COBURN. You don’t want to—— 

Mr. SHEAR. [continuing]. Comment specifically. No, that is specifically about how PART assesses the SBA program and whether— 

I know that when PART goes in and takes a look generally at programs, it looks for performance measurement. But specifically, the 

PART assessment on SBA, I am just not equipped to react to it. 

Senator COBURN. Okay. 

Ms. DE RUGY. Can I ask a question? 

Senator COBURN. Sure. 

Ms. DE RUGY. In terms of measurement, I think—of the outcome, 

I think it is one thing to be able to prove that the people wouldn’t 

be able to get credit elsewhere, but I think what is also very important is to prove that this person who really couldn’t, that it was 

cost effective for taxpayers to take that risk with that person. 

Senator COBURN. Well, that is fine, but if we do a performance, 

they are supposed to be creditworthy, right? 

Mr. WILKINSON. Yes. 

Ms. DE RUGY. But my question is—while I am listening to all 

this —what is the mechanism that makes a bank suddenly, because there is a guarantee, capable of assessing the creditworthiness of a person while they weren’t before, because the theory, 

right, is that this person is going to be overlooked as 

uncreditworthy or not worth taking a risk, and that is an information problem. What explains that suddenly you are capable of making this assessment that this borrower is creditworthy? I am absolutely confused. 

Senator COBURN. Well, no, the difference there would be is we 

believe that we will take this credit risk because we have got some 

help in sharing the risk of it. 

Mr. WILKINSON. Correct. 

Senator COBURN. I mean, that is the calculation. 

Ms. DE RUGY. But then the question is not that we weren’t able 

to identify that this person was creditworthy, so we were before but 

we were not willing to take that risk. 

21 

Senator COBURN. The difference, and here is the difference, and 

maybe Director Hedgespeth can comment on it. Sometimes banks 

will take a risk but at an interest rate that kills the viability of 

the project. So that is where the calculation comes in, is at 12 percent when the prime rate is 6 percent, is it a viable business loan, 

versus at a rate of 9 percent when the prime rate is 6 percent with 

a government guarantee, you now have something that is capable. 

So you raise a real question about what do we mean by creditworthy. Creditworthiness changes depending on the risk and the 

loan rate in terms of payout and carrying the interest. Can you 

carry this at 12 percent? No. But if you got an SBA loan, you can 

carry it at 9 percent, and the bank is ready to move you down. 

That is why we see so much go into it, because the mix of the payment goes down and makes it affordable. So I am not having any 

real problems with that. 

I just want to get back. Does the SBA under your new Director 

have plans to put outcome, not output, outcome measures in at the 

levels for performance for 7(a)? 

Mr. HEDGESPETH. I absolutely hope that during my tenure we 

are going to absolutely do that. The Urban Institute study is something we want to digest and look at the pieces that make sense in 

terms of having a repeatable, sound methodology that will give you, 

as well as the rest of the Members of Congress, a confidence that 

we have an outcome measure that is not subject to misinterpretation or manipulation, as is required by the PART, and that gets to 

the heart and soul of what our mission is. That is absolutely our 

desire. 

Senator COBURN. As I look at the Urban Institute study and read 

that, I think what it shows is you are reaching your intended market. I don’t think there is any question about it. 

Mr. HEDGESPETH. Thank you. 

Senator COBURN. But what it doesn’t say is whether or not you 

are actually having a positive impact. There is no assessment in 

that Institute study on a positive impact, especially if you use it 

in terms of long-term capital formation, and that has to be our 

goal. And it is going to take creative people in your agency to say, 

and good economists to say, how are we going to measure whether 

or not this is really having an impact? There is no question in isolated instances we have a tremendously positive impact on longterm capital formation, but how is the program doing as a whole? 

And that is our job up here, is to look at programs and make 

sure we have performance measures and outcome measures so that 

did we accomplish what we intended to accomplish when we put 

the American citizens at risk. I mean, that is what it is really 

about. 

Over what period of time should the SBA be required to come 

back and have outcome measures? 

Mr. HEDGESPETH. I am not sure I have a good or adequate response because we want to make sure that we have both measures 

that work and that you will be comfortable with, and also knowing 

that it took us since 2003 just to get this first baseline, I don’t 

think waiting another 4 years is going to be acceptable to you. 

Senator COBURN. No, sir, it is not. 

22 

Mr. HEDGESPETH. And so that is something that I would hope 

that you would allow us to respond more fully in follow-up remarks 

to this Subcommittee as we have had a chance to digest it. 

Senator COBURN. Fine. And, see, I don’t want us to have to have 

another Subcommittee hearing on this. What I would like is for us 

to have an agreement that the SBA is going to, like on an every 

3-month basis, give Senator Carper and I, here is where we are, 

here is where we are going, here is what our goal is, and here is— 

in other words, put some performance measures on outcomes on 

getting to that. Design it, put the metrics on it, and say here is 

where we are going and here is how we are doing. 

Mr. HEDGESPETH. Well, I think you know this Administrator is 

very fond of metrics that hold the agency accountable and that 

seems totally within the spirit of his leadership. 

Senator COBURN. Thank you, and I have gone way over my time. 

Thank you, Mr. Chairman. 

Senator CARPER. Mr. Wilkinson, talk to us, if you will, about 

some of the things that your members working through the 7(a) 

program are doing to help business. Just give us some examples. 

Mr. WILKINSON. Well, again, we are lending it to new business 

start-ups and to early stage companies at a far greater rate than 

the conventional market is, so we are—— 

Senator CARPER. Quantify that for us, if you will. 

Mr. WILKINSON. Quantify that? 

Senator CARPER. Yes. 

Mr. WILKINSON. Minority lending is about three times greater in 

the 7(a) program than it is in the conventional market. About 25 

to 35 percent of our 7(a) loans are going to new business start-ups, 

and in the conventional market, that is almost non-existent. A very 

small percentage of conventional lending goes to a new business 

start-up and SBA uses new business start-up to mean a brand new 

business up to 2 years, so a very early stage company. 

So we are helping the youngest firms get off the ground, a wide 

variety of industries, from service to retail, you name it, we will do 

it. And the SBA guarantee provides that extra credit enhancement 

that allows a lender to make a deal, and we think we have done 

a fabulous job. We think we are making all kinds of loans to small 

businesses that are generating jobs and creating capital formation 

and we welcome the opportunity to—— 

Senator COBURN. We just don’t know that, though. 

Mr. WILKINSON. Right, but we will welcome the opportunity to 

work with you and the SBA to come up with how we would measure that. I know SBA has Tax ID numbers on every business we 

finance, and I don’t know whether they can access tax return 

records, etc. 

Senator COBURN. No, they can’t. 

Mr. WILKINSON. But let me just say, we are happy to work with 

you on coming up with outcome measurement. 

Senator CARPER. Okay. Let me just ask those of you who run 

these 7(a) programs from the banking side, what do you offer that 

the conventional market cannot offer? 

Mr. WILKINSON. A loan. Typically, they cannot find—— 

Senator CARPER. No. My guess is that folks can get a loan in a 

lot of cases, but the interest—— 

23 

Mr. WILKINSON. Well, sometimes what—— 

Senator CARPER. [continuing]. And my guess is—— 

Mr. WILKINSON. The other part of that answer would be we 

would finance a long-term asset with a long-term loan as opposed 

to making a borrower come back every 30 days and renew a loan. 

And for those of us that have lived through the 1980s in Oklahoma, 

we know a lot of small businesses got clipped because they had 

loans with maturities, loans that did not match the term of their 

asset, and so even though they had a long-term asset, they had a 

short-term loan and they couldn’t get it renewed by any lender in 

the State. What the SBA program does is finance a long-term asset 

appropriately with a long-term loan. 

Senator CARPER. Okay. Dr. de Rugy argued in her testimony at 

one point that many small businesses, including some who receive 

these 7(a) loans, I presume, have the ability to obtain credit really 

from conventional lenders. She mentions credit cards as one option. 

As an aside, we have a new recycling program in the City of Wilmington, curbside recycling. We put all the recyclables into a single 

stream. Containers are picked up every week. They are actually 

picked up and the folks who do the pickup who used to just pick 

up trash to go to the landfill, now once a week they pick up the 

recyclables. They have device barcoding. They measure how much 

weight is in everybody’s can, if you will, and barrel and they credit 

back to the individual residents points, something like a frequent 

flyer system, and you earn points which can be used for restaurant 

discounts, theater tickets, all kinds of stuff. It is actually a very 

clever program. The folks who actually collect the recyclables sell 

them and actually make money now with better prices for commodities. 

But the guy who started the part of the business where they do 

the incentives for folks to recycle, he actually started his business 

with a bunch of credit cards and that is how he got started. It is 

interesting. I have talked to any number of entrepreneurs who got 

started and get all these credit card applications in the mail. Most 

people just throw them away or shred them, and some people save 

them and they use them, as you know, to start small businesses. 

But Dr. de Rugy mentioned credit cards as one option. She also 

says that potential borrowers might have better luck over time if 

they build a relationship with their bank, and I would just ask for 

our other three witnesses, what are your thoughts with respect to 

that argument? What steps does the Small Business Administration and lenders that it works with take to make sure that businesses that truly don’t need 7(a) loans don’t get them? 

Mr. SHEAR. Grady is looking at me. I will start. 

[Laughter.] 

One of the most, if you just go back to what we cite in the paper, 

Stigletz and Weiss which deals with what economists call asymmetric information, lack of information in the marketplace that 

might cause the market imperfections, lack of credit, it would be 

start-up businesses. It is probably one of the most logical places to 

look first if you want to have a credit guarantee program such as 

this. 

But one of the reasons to kind of follow how well do those businesses do and what is the track record here is the question of 

24 

whether businesses are kind of graduating when you would expect 

them to rather than them using the loans as like bridge loans and 

things like that. So some of it is just looking at the portfolio. 

But one of the important things of credit elsewhere here is coming up with a working definition. Over all the years we have been 

looking at lender oversight issues, we have failed to see a really 

transparent credit elsewhere test, ever since going back to the 

early 1990s when they just said, come in with three lenders that 

you were denied a loan. Well, the world is a little more complicated 

now, so part of this is getting a focus. What is the expectation from 

lenders to make sure that it is credit that really supplements what 

is going on in the marketplace and trying to identify, what niche 

are you trying to serve and what evidence do you have that businesses might need that help and be able to graduate from that help 

over time versus businesses that might just say, well, the bank 

doesn’t want to give them a 10-year loan with a 10-year maturity 

without a guarantee. Well, it might be what types of businesses 

can do well maybe with shorter-term credit. 

So this is the type of evaluative approach that we are trying to 

get at, and if nothing else, we would like more transparency in how 

the credit elsewhere test is being applied. 

Senator CARPER. Would anyone else want to respond to the comments on this point by Dr. de Rugy? 

Mr. HEDGESPETH. I definitely would like to speak to this credit 

elsewhere and creditworthiness test. I mean, the very fact that the 

overall balance of the SBA portfolio pays back really pretty close 

to the overall pay-back rate of conventional lending strongly suggests that these are creditworthy borrowers. 

Senator CARPER. What is the default rate, about 7 percent? 

Mr. HEDGESPETH. That is the repurchase rate, but as the overall 

long-term default rate, at least right now, I have it running at 2.49 

percent, but that is over the entire life of the loan, and as Tony 

testified, when you look at banks, they are doing it on a year-byyear basis. So either you accumulate their stuff up to a total or you 

take our total and work it back in terms of one-seventh of the 

amount that we have as a default rate and you get to be very close 

in terms of payout history. 

But this issue of can you overcome the lack of willingness for a 

bank to lend under their conventional standards by somehow getting to know the bank better and to develop a relationship, I can 

tell you from my experience in Boston in helping to open up inner 

city markets to Bank Boston, to Bay Banks, to Fleet Boston, that 

they had a friend at the bank. They had me. But it took a partnership with the SBA to get our credit folks comfortable with making 

deals, and we did a number of them only because we were able to 

share that risk and apply less of the capital of the bank to underwrite the deal and to basically shore up the profitability because 

there was a belief that it would not pay as well. 

And so SBA, I have seen in just institution after institution, becomes a way for the credit establishment of those banks to get comfortable with the kind of lending that conventional wisdom said 

they can’t do. 

25 

When I was coming up in undergraduate school, Gary Becker, 

the economist from the University of Chicago, was very famous for 

saying—— 

Senator CARPER. Just yesterday or the day before he was awarded, I think, the Presidential Medal of Freedom. 

Mr. HEDGESPETH. Very much so. He stated that in a market with 

perfect information, there can be no discrimination. But growing up 

in what you would consider, sir, a slum, I considered my neighborhood in Norfolk, Virginia, I can tell you, there was a lot of discrimination in lending institutions and I have spent my entire career 

trying to make Gary Becker right, and it has taken a lot of effort 

to move institutions beyond what they were comfortable in doing 

to move to new markets, to move to lending to more women-owned 

businesses, minority-owned businesses, inner city businesses. And 

the SBA was an absolutely critical partner in my 20 years of banking experience in doing that, and I did it at each one of my institutions profitably, but if I didn’t have that partnership, we would 

have never gotten started. 

Senator CARPER. All right. Mr. Wilkinson, did you want to say 

anything, and then I will yield to Dr. de Rugy. 

Mr. WILKINSON. Well, I would just—small businesses that are relying on credit card debt, that is really an unstable source of financing. They really need to establish a relationship—— 

Senator CARPER. Pretty expensive, too. 

Mr. WILKINSON. It is pretty expensive. But that said, 7(a) loans 

aren’t cheap, either. The fees that we have to pay into SBA for the 

guarantee, if I am a borrower that can find financing without paying that fee, I would probably go that direction. So I think there 

is a built-in safeguard for businesses that could find conventional 

financing elsewhere not coming to the 7(a) program because they 

would be reluctant to pay the high fees. Some of our fees are as 

high as three-and-a-half, three-and-seven-eighths points on the 

loan. So it is pretty expensive financing on the highest-end borrowers. 

Senator CARPER. Dr. de Rugy. 

Ms. DE RUGY. I wanted to go back to this idea of the relevance 

of the 7(a) loans. I mean, I am confident that there are some borrowers out there who are, in fact, creditworthy and don’t necessarily look to commercial lenders without the guarantee. However, I think we should not overlook the fact that the commercial 

banks are doing a tremendous job, and the reason why they are is 

because, in fact, they have a lot of those credit scorings and there 

is a relationship. 

This is the reason why 53 years ago, I might not have been here 

saying that there wasn’t a need for the SBA lending programs because, in fact, we didn’t have all these ways to create relationships 

and to lower the cost to have access to information. Now we do, 

and when we look at what commercial banks are doing, they are 

a tremendous help to small businesses. In fact, they are so much 

so that according to the GAO report with the latest data, the 7(a) 

loans only represent 1.3 percent of all loans to small businesses, 

and I think this should not be overlooked. I mean, I think it is a 

very important point. 

26 

In the same way, I am amazed to hear some of the members of 

the panel say that without the 7(a) loan, there wouldn’t be any 

start-ups in the United States. I think we are losing track of what 

we are talking about. Are we actually saying here that without the 

7(a) loan, there would be no business starting? No. There is no way 

we can be saying that. In fact, the data that I looked at, and granted it was for fiscal year 2004, says exactly the opposite. In fact, 7(a) 

loans make a very small difference, if any difference at all. I think 

the scale of things is important. 

My concern today, and I have looked a lot at the bank, I mean, 

we are talking about the fact that, yes, the bank issuing 7(a) loans 

is more expensive and that supposedly is a guarantee that borrowers would not accept to get 7(a) loans if they could get credit 

elsewhere. I am sorry. I am a woman with no experience in lending 

and borrowing and things like this and recently I had to actually 

go borrow money for my house, buy a car. I knew nothing about 

it. I had to rely on the honesty of the bank to tell me what I could 

do. It hasn’t let me to acquire all this information, and I rely on 

the specialist that I go to deal with. 

What guarantees me, because my research has actually led to 

show that banks, very few banks who are issuing 7(a) loans are 

making huge profits, and I want to state for the record that I am 

not at all against big banks making profits. It appears that it is 

actually a very profitable business for SBA lenders to issue loans 

for the one who can overcome the cost of actually jumping through 

the hoops issuing SBA loans. How do we know that these banks, 

in fact, are not steering away from conventional loans that would 

be less expensive or a small segment of borrowers and they are not 

steering them towards a loan that is way more profitable for them? 

And this is the reason why if, honestly, if the car I just bought 

on Tuesday—I felt I was so hopeless, I had to rely on the people 

I dealt with. I had no choice. I didn’t know very much. I have to 

assume that they informed me correctly, and the truth of the matter is I wouldn’t know if they didn’t. If it were so huge, maybe I 

would know. But when we are in this very gray area, how do you 

know? And if banks have such—a small amount of banks who are 

the biggest banks in America have such a financial incentive to actually steer you away, the fact that SBA loans have a higher rate 

and cost more is not to me a guarantee that we are issuing SBA 

loans to the right people. 

Senator CARPER. Let me yield back to Dr. Coburn. Thank you. 

Senator COBURN. I think, Mr. Chairman, it has been a great exchange. The point is, and the thing I would like to hear from the 

SBA is that we have got a time line on when we are going to have 

a definition of credit elsewhere and a significant test as a measurement on that and full compliance with GPRA. The problem with 

GPRA is there are no teeth. It is a great law, but if an agency like 

SBA chooses to ignore it, there are no consequences. Well, there 

are going to be in terms of the next appropriation bill, the next authorization bill, if we don’t get there. 

So what I will do is submit my questions for the record. I think 

we have had a great exchange. I thank everybody’s input. 

I had an experience, a very unsatisfactory experience with buying a business that had an SBA loan. If you are not normally used 

27 

to dealing with SBA requirements and come in and take over a 

business that has an SBA loan, it is no fun, and I paid it off. I got 

out of there. I didn’t want that over-regulation. 

Final point I would make, as the GAO has said, if you don’t have 

metrics to measure true outcomes, not outputs, you don’t know 

whether or not you are accomplishing your stated purpose, and we 

all know that. We all use that in whatever we do, whether it is in 

a banking business or in a manufacturing business or at the GAO 

they actually measure their own output. I know, I have talked to 

their boss and they have metrics. 

So the point is, is to move the SBA to get it to the point where 

it is compliant with the law and has good definitions so that they 

can create good metrics so we can really know the difference. And 

Dr. de Rugy may be right, may be wrong, but nobody knows until 

we start accurately measuring, and that was the whole point of me 

requesting the GAO study in the first place. Until we get metrics, 

we can have anecdotal stories, it can be great business for some, 

but we don’t really know. We know that there are a lot of people 

that have benefited from it, including the banks, but we don’t know 

if they might not have benefited without it. 

So the whole goal is not to undermine SBA, it is to get the 

metrics so we can say, hey, atta boy. The ‘‘atta boys’’ we have now 

is on output, not outcomes, and there is no question—and let me 

compliment SBA. They have made great strides—— 

Senator CARPER. They have. 

Senator COBURN. [continuing]. In terms of improving, and so that 

should not be lost in it. 

Mr. Chairman, I thank you for having this hearing. I will submit 

some questions for the record. I would love a concurrence that we 

will get about an every 3-month update on what you are doing on 

this rather than having to make you come down here and testify 

and prepare for it. 

Mr. HEDGESPETH. Yes, Senator. 

Senator COBURN. All right. Thank you. 

Senator CARPER. I don’t know if anybody has anything else you 

want to briefly add. I have maybe one or two more questions and 

then we will wrap it up. 

Mr. Wilkinson, I don’t know if you want to go back and make a 

comment. One of the things that came to mind as Dr. de Rugy was 

talking about bank profitability, she doesn’t have anything against 

big banks making money. Neither do I. But how profitable is this 

business to banks and are they making a bundle off of it? 

Mr. WILKINSON. Well, each bank would have their own costs that 

they would have to deal with, but one of the issues that we in SBA 

are looking at now is the shrinking number of banks participating 

in the program. We are down to 2,500, I think, that are actively 

participating, and taking a look—— 

Senator CARPER. Out of about how many banks, 10,000? 

Mr. WILKINSON. I think we are down in the 9,000s now, something like that. But, if a bank can’t make a profit at this line of 

business, they are going to get out of it. It is a more difficult business because SBA has got a pile of rules and regulations that you 

need to know and understand, so there is a learning curve up front. 

But again, each bank would have their own cost issues. 

28 

I did want to comment on Ms. de Rugy’s piece that the banking 

environment, at least the one that I am involved with, is a highly 

competitive marketplace, and if you try to drive a small business 

into a higher-priced loan than they can get, or they can get it 

cheaper somewhere else, they are going to the lowest-cost source as 

long as it makes sense in terms of the payment plan. 

The other part of this is on the credit scoring she brought up. 

That is a classic example of credit elsewhere, in my opinion. Many 

of the numbers of loans today are approved by institutions who use 

the SBA Express product and they have internally a minimum 

credit score, so if you score, for instance, a 690, we will do you conventionally. At 680, you default down into the SBA product. I 

mean, they draw the line, this is what we do conventionally. If you 

can’t get to that number, you have got to go down and get an SBA 

guarantee to enhance it. 

And a significant number of the number of loans in the 7(a) program are done through credit scoring. So I think we are up 65, 70 

percent of those numbers are done through the credit scoring process, that by definition, they can’t qualify conventionally inside 

those institutions. 

Mr. HEDGESPETH. I just have a couple of observations. When you 

look at what the SBA does in practice, the system that we have 

really in partnership with our lending institution partners kind of 

provides working capital, venture capital for the average Joe 

Businessperson in Main Street, America. They don’t have big boutique private equity firms looking to put capital behind those businesses, yet it is the businesses that the SBA supports at the edge 

and the niche that we operate that supports a tremendous number 

of start-up businesses that create a lot of the jobs in this economy. 

In fact, small businesses create the majority of the jobs in this 

economy even though they are a very small percentage of it. 

And we must be doing something right, because, Senator, the 

rest of the world is trying to copy our SBA model. We had the Deputy Administrator visit Africa recently. The Administrator was 

talking to the head of the EU who was looking at how do they create a program like this to basically spur their small business economy. 

So I would say that the fact the rest of the world is looking at 

our model ought to give us pause about doing anything now that 

would curtail that. 

Ms. DE RUGY. Can I add something to that? 

Senator CARPER. Dr. de Rugy, please. 

Ms. DE RUGY. Very quickly, there was actually a very interesting 

article in the Economist this week showing exactly that, in fact, the 

conclusion that the EU is starting to reach while looking at how 

entrepreneurship in the United States is is that where it works 

really well is where the government is not involved. I would be 

happy to actually submit that for the record. 

Senator CARPER. All right. Thank you. As someone who was born 

and raised in France, you may want to tip those French people off 

to watch themselves as they get into this, or wade into this water. 

Ms. DE RUGY. Yes. 

Senator CARPER. Dr. Shear, is there anything you want to add? 

29 

Mr. SHEAR. Let me just make one point about the credit scoring. 

The private market develops mechanisms to address asymmetric 

information. I think the question here for this Subcommittee from 

a market standpoint is to what degree does the private market 

through credit scoring or through the role of venture capital firms 

kind of serve that niche, and I think that let us compare here, compare it with the hearing room two floors up when we start talking 

about housing finance. 

The credit scoring models here that are used in the small business arena, they have been around for about a decade, but they are 

not at the level that you have in the small business lending market. So it still is—it is not quite the same type of issues we have 

in housing finance, and to compare with housing finance, no matter 

what you think of the different mortgage institutions, including the 

FHA, there is more of an evaluative approach to saying, what is 

the role of each of these entities, including the FHA, that has been 

there a long time. And in a sense, you could think about that might 

be relevant to looking at SBA now. It seems like SBA is moving 

in that direction and we certainly hope that they move in that direction. 

Senator CARPER. All right. Thank you. Let me just wrap up here. 

From listening to the testimony of all of you, it sounds like the 7(a) 

program, the program that we have today is a good deal different 

than what we started out with many years ago and over time, it 

has improved, and it has improved as recently as 2005. For the last 

couple of years, it sounds, if I heard this right, that we no longer 

appropriate money to cover these loan defaults as they occur but 

the monies are actually collected during the course of business and 

running the program. 

While it sounds like the percentage of small business loans that 

the 7(a) program comprises is fairly small, there are quite a few 

start-up businesses that rely on the 7(a), especially those that are 

looking for credit beyond a couple of months or even a year or so. 

But when you get into multiple years, it sounds like this is where 

a number of start-up businesses go for their financing for sort of, 

I call it intermediate terms, time. 

Do I understand that the amount of loan, the percentage of the 

loan that the SBA guarantees is at least 50 percent and it can be 

as high as 85 percent? 

Mr. HEDGESPETH. That is correct. 

Senator CARPER. One of the questions I wanted to ask is how do 

you determine whether or not it is going to be 50 percent or 60 or 

70 or 80 or 85 percent? How is that determination made? I presume it has something to do with risk, risk as it is perceived by 

the banks. 

Mr. WILKINSON. The type of program and size of the loan. 

Mr. HEDGESPETH. Yes. 

Senator CARPER. I am sorry? 

Mr. WILKINSON. The type of program used and size of loan. So 

if it is a loan made in the SBA Express program, that is where 

lenders can use their own forms. It comes with a 50 percent guarantee. The other guarantee percentages are based off the size of 

the loan. So if it is a loan of $150,000 or less, it could have an 85 

30 

percent guarantee, and if it is over $150,000, it would be a 75 percent guarantee up to a maximum loan size of $2 million. 

Senator CARPER. All right. And I understand that the amount 

above prime that can be charged for these loans differs, as well. 

Can somebody tell me what the range is and how the determination is made as to what the—— 

Mr. WILKINSON. The interest rate is capped at prime plus twoand-three-quarters. The average interest rate, I believe, is running 

a little under prime plus two. 

Senator CARPER. For some reason I was thinking it was more 

than two-and-three-quarters—— 

Mr. WILKINSON. On the smallest loans, there can be an interest 

add-on. So I believe it is $25,000 or less, you can go up to prime 

plus—— 

Mr. HEDGESPETH. Four. 

Mr. WILKINSON. Prime plus four? 

Senator CARPER. The rationale for that is because—— 

Mr. HEDGESPETH. Because smaller loans are more costly, more 

costly to book. 

Senator CARPER. All right. 

Mr. WILKINSON. Can I just comment briefly on the percentage of 

7(a) loans? The banking industry is set up to do the 90-day 

financings, the 6-month financings. The Federal Reserve study 

shows that of the billions and billions of dollars that bankers make 

conventionally to small businesses, they are typically 150 days, on 

average, maturity. So banks get in there, they do the contract financing or the seasonal inventory financings. That is what banks 

are set for. They take their short-term deposit base and they are 

good at converting that into short-term lending. 

What SBA does is the longer-term lending, financing the longterm assets that way. So I don’t think it is fair to say that we are 

one percent of all small business financing, because that 7(a) is not 

supposed to be out there making the 90-day loans. That is not what 

we are about. Lenders need to figure out how to handle that conventionally. But what the 7(a) program does is address the longterm end of the market, and there we are a significant part of that 

market. The 7(a) by itself is a third of all long-term lending to 

small businesses. I mean, this is the number one source. 

Senator CARPER. All right. 

Ms. DE RUGY. One-third, so that means that the private sector 

provides two-thirds. 

Mr. WILKINSON. Well, there would be some that can get financing 

conventionally. 

Ms. DE RUGY. Can I ask a fairness question? 

Senator CARPER. Please. 

Ms. DE RUGY. I mean, this is the issue I have with the unlevel 

playing field that the SBA introduces. So if long-term financing is 

what you are after, this is what probably is going to really increase 

the probability of your business becoming successful. Why is it, 

then, that without much trouble, firms, small businesses cannot 

prove to a commercial bank that they would be creditworthy, or 

cannot prove what all the other borrowers are proving or passing 

the test for? Then they have access to a better term. They have acVerDate Aug 31 2005 14:14 Nov 18, 2008 Jkt 038987 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 P:\DOCS\38987.TXT SAFFAIRS PsN: PAT
31 

cess to something that is going to drastically improve the probability of them surviving. Why is it that—— 

Mr. WILKINSON. I think if you looked at the terms—— 

Ms. DE RUGY. [continuing]. Because in the first place, they were 

unable to get a conventional credit, why then would they be in the 

end really better off? It is really unfair to the people who actually 

pass the test of creditworthiness and it creates an unlevel playing 

field. 

Senator CARPER. Any responses, please? 

Mr. WILKINSON. Page 33 of the GAO report shows that the average conventional small business borrower is about borrowing at 

prime, so they are getting a better deal. 

Senator CARPER. As opposed to a prime plus two or three? 

Mr. WILKINSON. Correct. 

Senator CARPER. Or four. 

Ms. DE RUGY. But in the long-term, that doesn’t address the 

long-term issue. 

Mr. WILKINSON. I can tell you as a commercial lender, if there 

was a borrower who could qualify for a prime, we might be willing 

to do a shorter maturity with a longer amortization if they could 

qualify. 

Ms. DE RUGY. But you are selling 7(a) loan as a great program 

because it actually provides firms with long-term loans which then 

increase the probability of them staying in business. So this is either an important factor or it is not, and what you are saying is 

that people can have access—who have access to commercial loans 

and have proven themselves and passed the test, they can’t have 

access to that, and they don’t. I mean, they usually don’t. And 

there are more hurdles for them who are worthy in the first place 

and it is unfair. 

Senator CARPER. All right. Well, I don’t know if people would call 

this a lively hearing or not, but for Dr. Coburn and I, and I think 

for our staffs, it is a very interesting one, and for a couple of Senators who are very much interested in job creation and being able 

to build a strong economy, raise GDP, it is very pertinent and germane. 

Can somebody tell me the nature of the legislation that I think 

was introduced today by Senator Snowe and by Senator Kerry? 

Ms. LE. I can tell you. 

Senator CARPER. I am going to ask you to just come up and 

maybe pull up a chair and tell us. Identify yourself for the record, 

please, your name and your affiliation. 

Ms. LE. My name is Linda Le. I work for Senator Snowe on the 

Small Business Committee. 

Senator CARPER. Oh, good. Welcome. 

Ms. LE. Thank you. The legislation that was introduced today 

with Senator Snowe and Senator Kerry addresses quite a few recommendations in this GAO report and in a previous GAO report. 

Specifically, it tries to put in place measurements of economic outcomes. It looks at, or we ask for the number of jobs created, the 

number of employees, the assets the businesses create, their taxes 

paid, firms that go out of business, firms that prepay their loans, 

if the loans are in good standing, and then if they generate any 

new businesses that are related to the loan they originally took. 

32 

So that is part of what the legislation does. It has some other 

lender oversight factors, as well, but this was done in direct response to the GAO study. I also talked to Senator Coburn’s staff 

about it and Ms. de Rugy and the banking as we tried to formulate 

what to track. 

Senator CARPER. All right. Is it just a coincidence that the legislation was introduced today? 

Ms. LE. No. 

Senator CARPER. All right. 

[Laughter.] 

I will think about that. Well, I hope our staffs continue to talk 

with you, and who would be your counterpart with Senator Kerry? 

Ms. LE. It is Kevin Wheeler. 

Senator CARPER. Is Kevin here? 

Ms. LE. Yes, she is. 

Senator CARPER. Is your first name Kevin? 

Ms. WHEELER. Yes, it is. 

Senator CARPER. Hi, Kevin. I could barely see your lips moving 

when Linda Le was speaking up here, so that is good. Well, thank 

you both for coming and thank you for jumping up here and taking 

a mike, and Dr. de Rugy, thank you for sharing your seat and your 

microphone with Linda Le. 

I think that pretty well takes us to the end of the line here. One 

last question of Mr. Hedgespeth. What is the commitment you have 

made on behalf of SBA to Dr. Coburn and me? Would you, in your 

own words, tell us what it is? 

Mr. HEDGESPETH. As I understand our commitment, what I 

agreed to was a quarterly report to you on our progress with institutionalizing measures of our performance that are outcome-based. 

Senator CARPER. I think that is the way I understood it, as well. 

All right, folks. We will leave the hearing record open for a couple of weeks, give others a chance to maybe ask some questions in 

writing. If you could respond in a timely way, we would much appreciate it. 

Thank you all for coming. Some of you have come across the 

ocean to participate in this hearing, it is great to spend this time 

with you and we appreciate your input. 

We have come a long way with this program. It is a lot better 

than it used to be. There are obviously things we can do to make 

it better. If it isn’t perfect, make it better, and let us just aim for 

perfection. Thank you all very much. 

And with that, this hearing is adjourned. 

[Whereupon, at 3:44 p.m., the Subcommittee was adjourned.] 

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